10-K405

________________________________________________________________________________
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                   FORM 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.
                        COMMISSION FILE NUMBER 001-12878
 
                            ------------------------
 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                                                                                 
                     DELAWARE                                                                  13-3666692
   (STATE OR OTHER JURISDICTION OF INCORPORATION                                            (I.R.S. EMPLOYER
          OR ORGANIZATION OF REGISTRANT)                                                 IDENTIFICATION NUMBER)
 
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION              DELAWARE                       13-2922502
WARNER COMMUNICATIONS INC.                                      DELAWARE                       13-2696809
(EXACT NAME OF REGISTRANT                             (STATE OR OTHER JURISDICTION          (I.R.S. EMPLOYER
AS SPECIFIED IN ITS CHARTER)                       OF INCORPORATION OR ORGANIZATION)     IDENTIFICATION NUMBER)


 
                              75 ROCKEFELLER PLAZA
                            NEW YORK, NEW YORK 10019
                                 (212) 484-8000
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
 
                            ------------------------
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 


       TITLE OF EACH CLASS                            NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ---------------------------------              --------------------------------------------------------
                                                          
7 1/4% Senior Debentures due 2008                              New York Stock Exchange

 
SECURITIES REGISTERED PURSUANT TO 12(g) OF THE ACT:
 
                                      NONE
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [x]   No
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      NONE
 
________________________________________________________________________________






                     TIME WARNER ENTERTAINMENT COMPANY, L.P.

                               ORGANIZATION CHART


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

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

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

         TWE owns 100% of Time Warner Cable, Cable Networks - HBO and
         Filmed Entertainment - Warner Bros., and 65.2% of the TWE -
         A/N Partnership (Cable). The TWE - A/N Partnership is also
         33.3%-owned by Advance/Newhouse and 1.5% owned by TWI Cable.(3)









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

         (2) Pro rata priority capital and residual equity interests. In
addition, the Time Warner General Partners own 100% of the priority capital
interests senior and junior to the pro rata priority capital interests. (See
Note 8 to TWE's consolidated statements.)

         (3) Direct or indirect common equity interests. In addition, TWI Cable
indirectly owns preferred partnership interests.





                                     PART I
 
ITEM 1.  BUSINESS
 
TWE
 
     Time Warner Entertainment Company, L.P. ('TWE') is engaged principally in
three fundamental areas of business: Entertainment, consisting principally of
interests in filmed entertainment, television production and television
broadcasting; Cable Networks, consisting principally of interests in pay cable
television programming; and Cable, consisting principally of interests in cable
television systems. The Time Warner Cable division of TWE also manages
substantially all of the cable television systems owned by Time Warner Inc., a
Delaware corporation ('Time Warner'), and the combined cable television
operations are conducted under the name of Time Warner Cable.
 
     TWE was formed as a Delaware limited partnership in 1992 pursuant to an
Agreement of Limited Partnership, dated as of October 29, 1991, as amended (the
'TWE Partnership Agreement'), and has, since its capitalization on June 30, 1992
(the 'TWE Capitalization'), owned and operated substantially all of the business
of Warner Bros., Home Box Office and the cable television businesses, and
certain other businesses, previously owned and operated by Time Warner. Upon the
TWE Capitalization, certain wholly owned subsidiaries of Time Warner (the 'Time
Warner General Partners') contributed such businesses, or assigned the net cash
flow derived therefrom (or an amount equal to the net cash flow derived
therefrom), to TWE and became general partners of TWE. Also upon the TWE
Capitalization, wholly owned subsidiaries of ITOCHU Corporation, a corporation
organized under the laws of Japan ('ITOCHU'), and Toshiba Corporation, a
corporation organized under the laws of Japan ('Toshiba'), collectively
contributed $1 billion to TWE and became limited partners of TWE.
 
     On September 15, 1993, TWE consummated the transactions contemplated by the
Admission Agreement, dated as of May 16, 1993, as amended (the 'Admission
Agreement'), between TWE and US WEST, Inc., a Colorado corporation ('US West').
Pursuant to the Admission Agreement, a wholly owned subsidiary of US West
contributed to TWE $2.553 billion, and became a limited partner of TWE (the 'US
West Transaction'). In connection with the US West Transaction, TWE issued an
option to US West to increase its pro rata priority capital and residual equity
partnership interests from 25.51% to up to 31.84%, depending on the performance
of TWE's Cable division. Such option is exercisable between January 1, 1999 and
on or about May 31, 2005 at a maximum exercise price ranging from $1.25 billion
to $1.8 billion, depending on the year of exercise. Either TWE or US West may
elect that the exercise price for the option be paid with partnership interests
rather than cash.
 
     Pursuant to the Admission Agreement under which US West became a limited
partner of TWE, TWE has agreed to use its best efforts to complete the
technological upgrade of a substantial portion of its cable systems by the end
of 1998. As systems are designated for such upgrade and after any required
approvals are obtained, US West and TWE share joint control of those systems
through a 50-50 management committee. Substantially all of TWE's cable systems
are expected to be so designated and upgraded, subject to obtaining necessary
regulatory consents and approvals. See also 'Description of Certain Provisions
of the TWE Partnership Agreement' for additional information about the
organization of TWE.
 
     Following the admission of US West into TWE, each of ITOCHU and Toshiba
owned a 5.61% pro rata priority capital and residual equity interest in TWE and
certain related interests. On September 5, 1995, and October 2, 1995, ITOCHU and
Toshiba, respectively, each exchanged its interest in TWE and the related
interests for, in the case of ITOCHU, a total of 8 million shares of two new
series of convertible preferred stock ('Series G Preferred Stock' and 'Series H
Preferred Stock') of Time Warner and, in the case of Toshiba, 7 million shares
of a new series of convertible preferred stock of Time Warner ('Series I
Preferred Stock') and $10 million in cash (the 'ITOCHU/Toshiba Transaction').
 
     As a result of the ITOCHU/Toshiba Transaction and the US West Transaction,
subsidiaries of Time Warner and the Time Warner General Partners collectively
own general and limited partnership interests in 74.49% of the pro rata priority
capital ('Series A Capital') and residual equity capital ('Residual Capital') of
TWE and 100% of the senior priority capital ('Senior Capital') and junior
priority capital ('Series B Capital') of TWE.
 
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The remaining 25.51% limited partnership interest in the Series A Capital and
Residual Capital of TWE are held by a subsidiary of US West.
 
     In 1995, TWE formed a cable television joint venture with the
Advance/Newhouse Partnership ('Advance/Newhouse') known as the TWE-A/N
Partnership to which Advance/Newhouse and TWE contributed cable television
systems (or interests therein) serving approximately 4.5 million subscribers, as
well as certain foreign cable investments and programming investments. TWE is
the managing partner of the TWE-A/N Partnership. See 'Recent Events,' below.
 
     On October 10, 1996, Time Warner completed the acquisition of Turner
Broadcasting System, Inc. ('TBS'), thereby acquiring the remaining approximately
80% interest in TBS that Time Warner did not already own (the 'TBS
Transaction'). TBS is not a part of TWE; however, as a result of the acquisition
of TBS, certain portions of TBS's filmed entertainment businesses are managed by
the Warner Bros. division of TWE. As a result of the TBS Transaction, a new
parent company with the name 'Time Warner Inc.' replaced the old parent company
of the same name and the old parent company, which changed its name to Time
Warner Companies, Inc. ('TWCI'), and TBS became separate, wholly owned
subsidiaries of the new parent company. The assets of TWCI consist primarily of
investments in its consolidated and unconsolidated subsidiaries, including TWE.
For convenience, references to 'Time Warner' in this report refer to both the
old and new parent company and collectively to the parent company and the
subsidiaries through which its various businesses are conducted, unless the
context otherwise requires.

     For financial information about TWE's industry segments and TWE's and WCI's
operations in different geographical areas with respect to each of the years in
the three-year period ended December 31, 1997, see Note 12, 'Segment
Information,' to the consolidated financial statements of TWE and Note 11,
'Geographical Information,' to the consolidated financial statements of the Time
Warner General Partners beginning at pages F-35 and F-76, respectively, herein.
 
THE TIME WARNER GENERAL PARTNERS
 
     At the time of the TWE Capitalization, thirteen direct or indirect wholly
owned subsidiaries of Time Warner contributed the assets and liabilities or the
rights to the cash flows of substantially all of Time Warner's Warner Bros.,
Home Box Office and cable television businesses to TWE for general partnership
interests. During late 1993 through 1994, nine of the thirteen original general
partners were merged or dissolved into the other four, and in 1997 two
additional companies were merged. As a result, as of December 31, 1997, Warner
Communications Inc. ('WCI,' a subsidiary of Time Warner) and American Television
and Communications Corporation ('ATC,' a subsidiary of Time Warner) are the two
remaining general partners of TWE. They have succeeded to the general
partnership interests of all of the other former general partners.
 
     The principal assets of the Time Warner General Partners currently include,
in addition to their interests in TWE: WCI's ownership of substantially all of
the Warner Music Group ('WMG'), which produces and distributes recorded music
and owns and administers music copyrights; WCI's 50% interests in DC Comics, a
New York general partnership which is 50% owned by TWE ('DC Comics'); WCI's
37.25% interest in Time Warner Entertainment Japan Inc., a corporation organized
under the laws of Japan ('TWE Japan'); certain securities of TBS which in the
aggregate represent an equity interest of approximately 10.6% in TBS; and 7.66%
of the common stock of TWCI. TWE does not have any ownership interest in the
businesses or assets of the Time Warner General Partners.
 
RECENT EVENTS
 
     In early 1998, TWE and Time Warner, through wholly owned subsidiaries,
contributed or beneficially assigned to the TWE-A/N Partnership additional cable
television systems serving approximately 650,000 subscribers, subject to
approximately $1 billion of debt, in exchange for common and preferred interests
in the TWE-A/N Partnership. In addition, TWE contributed or beneficially
assigned to the TWE-A/N Partnership its interest in cable television systems
serving approximately 500,000 subscribers formerly owned by Paragon
Communications in satisfaction of certain commitments made by TWE to the TWE-A/N
Partnership at the time of its formation. Following these transactions, the
common equity of the TWE-A/N Partnership is owned approximately as follows:
33.3% by Advance/Newhouse, 65.2% by TWE and 1.5% indirectly by Time Warner.
 
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     In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags Entertainment Corporation ('Six Flags') to Premier Parks
Inc. ('Premier'), a regional theme park operator, for approximately $375 million
of cash and $100 million of convertible preferred stock, before transaction
costs. Under the terms of the transaction, Premier will continue to license the
use of Warner Bros.' and DC Comics' cartoon characters at the Six Flags parks,
and the license will be extended to Premier's other parks in the United States
and Canada. Subject to the satisfaction of certain conditions, the closing of
the transaction is expected in the second quarter of 1998.
 
     In September 1997, Time Warner, TWE, the TWE-A/N Partnership and a
subsidiary of Tele-Communications, Inc. entered into a letter of intent to form
two new cable television joint ventures in Texas that will be managed by TWE,
expand an existing joint venture in Kansas City, and exchange various cable
television systems to enhance clustering of properties. These transactions,
which are each subject to execution of definitive agreements and customary
closing conditions, are expected to close periodically during 1998.
 
     In June 1997, TWE, Advance/Newhouse and the other partners of Primestar
Partners L.P. ('Primestar') agreed to restructure the business of Primestar by
contributing, in a series of transactions, the separate Primestar direct
broadcast satellite distribution business of each of the Primestar partners
together with their partnership interests into a new corporation. Subject to
regulatory approval, the restructuring is currently expected to close on or
about April 1, 1998. In a separate pending transaction which is also subject to
regulatory approval, the new Primestar would acquire certain high power
satellites and FCC permits from MCI Communications Corporation and The News
Corporation Limited.
 
                                 ENTERTAINMENT
 
     TWE's Entertainment businesses produce and distribute theatrical motion
pictures, animation, television series and films and other programming through
an expanding variety of media and markets, operate a television network, license
rights to TWE's characters, operate retail stores featuring consumer products
based on TWE's characters and brands and also operate international theme parks
and motion picture theaters.
 
                              FILMED ENTERTAINMENT
 
     TWE's filmed entertainment business includes the production, financing and
distribution of feature motion pictures, television series and mini-series,
made-for-television movies, first-run syndication and cable programming and
animated programming for theatrical and television exhibition, the ownership and
operation of The WB national broadcast television network and the distribution
of video product for the home video market. TWE's filmed entertainment business
is principally conducted by the Warner Bros. divisions of TWE. Warner Bros. is
also, among other things, engaged in product licensing and merchandising, the
ownership, operation and franchising of retail stores, international movie
theaters and theme parks.
 
                      FILMED ENTERTAINMENT -- WARNER BROS.
 
WARNER BROS. FEATURE FILMS
 
     Warner Bros. produces feature films both wholly on its own and under
financing arrangements with independent motion picture producers in which Warner
Bros. is generally the principal source of financing. Warner Bros. also acquires
for distribution completed films produced by others. Acquired distribution
rights may be limited to specified territories, media and/or periods of time.
The terms of Warner Bros.' agreements with independent producers and other
entities are separately negotiated and vary depending upon the production, the
amount and type of financing by Warner Bros., the media and territories covered,
the distribution term and other factors. In some cases, producers, directors,
actors, writers and others participate in the proceeds generated by the motion
pictures in which they are involved.
 
     Feature films are licensed to exhibitors under contracts that provide for
the length of the engagement, rental fees, which may be either a percentage of
box office receipts, with or without a guarantee of a fixed minimum, or a flat
sum and other relevant terms. The number of feature films that a particular
theater exhibits depends
 
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upon its policy of program changes, the competitive conditions in its area and
the quality and appeal of the feature films available to it. Warner Bros.
competes with all other distributors for playing time in theaters.
 
     Warner Bros. has entered into distribution servicing agreements with Morgan
Creek Productions Inc. and its affiliates ('Morgan Creek'), pursuant to which,
among other things, Warner Bros. provides domestic distribution services for all
Morgan Creek pictures through June 1998, and certain foreign distribution
services for selected pictures. It is expected that the agreements with Morgan
Creek will be renewed. Under this arrangement, Warner Bros. released 'Wild
America' in 1997 and anticipates releasing 'Wrongfully Accused,' 'Incognito' and
'Major League 3,' among others, in 1998. An affiliate of Warner Bros. is a party
to co-financing and distribution agreements with Monarchy Enterprises C.V. and
its affiliate, Regency Entertainment U.S.A. (collectively 'Monarchy/Regency').
These agreements expire in 1998 and will not be renewed. Among the remaining
Monarchy/Regency productions to be distributed by Warner Bros. in 1998 are
'Dangerous Beauty,' 'Goodbye Lover' and 'The Negotiator.' It is anticipated that
'City of Angels' will be released as a co-financed picture in l998.
 
     In July l997, an affiliate of Warner Bros. and an affiliate of Canal Plus
formed a joint venture to co-finance on a 50/50 basis a total of approximately
20 to 25 motion pictures over a five-year period. Warner Bros. acquired all
distribution rights in the U.S. and Canada and substantially all international
distribution rights to these pictures. Warner Bros. will advance marketing and
distribution costs and will receive a distribution fee in connection with the
exploitation of the pictures. It is anticipated that 'Message in a Bottle' will
be released under this arrangement in 1998.
 
     Warner Bros. and one of its affiliates have reached an agreement in
principle with Village Roadshow Pictures and certain of its affiliates ('VRP')
to co-finance under a cost sharing arrangement the production of up to 20 motion
pictures over a five-year period. Approximately 50% of the production costs of
those pictures will be provided by Warner Bros. and its affiliate, and the
balance will be provided by VRP. Warner Bros. will acquire all distribution
rights in the U.S. and Canada and substantially all international distribution
rights to the co-financed pictures. Warner Bros. will advance marketing and
distribution costs and will receive a distribution fee in connection with the
exploitation of the pictures.
 
     Warner Bros. and Polygram Filmed Entertainment ('Polygram') have agreed to
co-finance on a 50/50 basis the production of motion pictures developed and
produced by Castle Rock Entertainment ('Castle Rock') through 2000. Warner Bros.
and Polygram will each acquire distribution rights in the U.S. and Canada to
half of the Castle Rock pictures and international distribution rights to the
other half on an alternating picture-by-picture basis. Warner Bros. and Polygram
will each advance marketing and distribution costs and will receive distribution
fees in connection with the exploitation of the Castle Rock pictures. Among the
Castle Rock releases anticipated for l998 are 'Mickey Blue Eyes,' which Warner
Bros. will distribute in the U.S. and Canada, and 'The Last Days of Disco,' to
be distributed by Warner Bros. internationally.
 
     During 1997, Warner Bros. domestically released 25 motion pictures for
theatrical exhibition, of which 11 were produced by or with others. In addition,
Warner Bros. released ten motion pictures in foreign markets, all of which were
produced by others. The following motion pictures released in 1997 produced
substantial domestic gross theatrical receipts: 'Contact,' 'Batman and Robin,'
'Conspiracy Theory,' 'Devil's Advocate' and 'L.A. Confidential.' During 1997,
approximately 54% of film rentals from Warner Bros. theatrical distribution were
generated in the United States and 46% in international territories.
 
     During 1998, Warner Bros. expects to release domestically approximately 28
motion pictures, of which 14 are expected to be produced by or with others.
During the first quarter of 1998, Warner Bros. released 'U.S. Marshals' and
'Sphere.' Other 1998 releases include 'The Avengers,' 'Lethal Weapon 4,' 'You
Have Mail' and 'Quest for Camelot,' the first fully animated feature film
produced by Warner Bros.' feature animation division.
 
TELEVISION
 
     Warner Bros., through its various divisions, is the leading supplier of
television programming in the world. Warner Bros. both develops and produces new
television series, made-for-television movies, mini-series,
 
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animation programs and reality-based entertainment shows, and also distributes
television programming for exhibition on all national networks, syndicated
domestic television, cable syndication and on a growing array of international
television distribution outlets. With the TBS Transaction, the distribution
library owned or managed by Warner Bros. grew to more than 6,000 feature films,
28,500 television titles, l0,000 animated titles plus l,500 classic animated
shorts. The acquisition reunites the entire Warner Bros. film and animation
library and adds classic MGM and RKO titles, and animation from Hanna-Barbera
and MGM. Warner Bros. acts as distributor of the programming owned by
subsidiaries of TBS.
 
     Warner Bros.' television programming is produced by Warner Bros.
Television, which produces dramatic and comedy programming, and Telepictures
Productions ('Telepictures'), which specializes in reality-based and
talk/variety series, and also by Witt-Thomas-Harris Productions, an independent
company which has an exclusive, long-term feature film and television production
and distribution agreement with Warner Bros.
 
     During the 1997-1998 season, Warner Bros. Television successfully launched
several new network primetime series, including 'Veronica's Closet.' Returning
network primetime series included, among others, the top-rated series 'ER' and
'Friends' (both in their fourth season); 'Murphy Brown' (in its tenth and final
season); 'Family Matters' (in its ninth season); 'Step by Step' (in its seventh
season); 'The Parent 'Hood' and 'The Wayans Bros.' (each in its fourth season);
'The Drew Carey Show' (in its third season); and 'Suddenly Susan' (in its second
season).
 
     Telepictures launched in 1996 the syndicated daytime television hit 'The
Rosie O'Donnell Show.' Telepictures also produces for syndicated television such
popular series as 'Jenny Jones' (in its seventh season) and, through
Time-Telepictures Television, 'Change of Heart' (in its first season) and
'EXTRA' (in its fourth season). Telepictures also produces 'How'd They Do That'
(in its second season) for cable television.
 
     Warner Bros. Television Animation ('WBTA') is responsible for the creation,
development and production of contemporary television animation, as well as for
the creative use and production of classic animated characters from Warner
Bros.', TBS's and DC Comic's libraries, including 'Looney Tunes' and the Hanna-
Barbera and MGM libraries. Animation programming is important to TWE as a
foundation for various product merchandising and marketing revenue streams as
well as being a cost-effective source of initial and on-going programming for
various distribution outlets, including those owned by TWE's divisions
(including Kids' WB!).
 
     WBTA continues to be a leading supplier of original children's animation
programming and direct-to-video projects, with such programs as 'Steven
Spielberg Presents Animaniacs,' 'Steven Spielberg presents Pinky & The Brain,'
'The Sylvester and Tweety Mysteries,' 'The New Batman/Superman Adventures' and
'Superman,' the upcoming edu-tainment series 'Histeria' and Batman's
direct-to-video release 'Sub-Zero.' Since the TBS Transaction, WBTA has managed
Hanna-Barbera programming, which includes the television series 'Dexter's
Laboratory,' 'Cow and Chicken,' 'Johnny Bravo' and 'Scooby Doo's Zombie Island'
direct-to-video.
 
     The rapid expansion of off-network, pay-per-view, pay and basic cable and
satellite broadcasting has increased the distribution opportunities for
already-produced feature films and television programming of all varieties from
the Warner Bros. libraries. A typical sale of a new program series produced by
or for Warner Bros. Television to a major domestic network grants that network
an option to carry such program series for four years, after which time Warner
Bros. Television can enter into a new license agreement with that or any other
network as well as license the already-broadcast episodes into off-network
syndication (broadcast and/or cable). New series are also licensed concurrently
into the international marketplace and can, after a short period of time, be
sold in part or in whole on home video. Warner Bros.' domestic distribution
operation handles the launching and supporting of first-run series produced
directly for syndication, as well as the sale of movie packages, off-network
syndication strips (in which shows originally produced for weekly broadcast on a
network are aired five days a week), and reruns of classic television series for
cable and satellite broadcasting.
 
     Television programs currently in off-network syndication include, among
others, 'Murphy Brown,' 'Living Single,' 'The Fresh Prince of Bel Air' and
'Family Matters.' The top-rated series 'ER' was sold to Turner Network
Television for syndication commencing in 1998, and 'Friends' was sold for
syndication commencing in 1998 to stations covering over 85% of the country.
 
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     Warner Bros. International Television Distribution ('WBITD') is the world's
largest distributor of feature and television programming for television
exhibition outside of the United States. WBITD distributes programming in more
than 175 countries and in more than 40 languages. During l997, WBITD entered
into new significant licensing agreements with Sogecable, the leading Spanish
pay television operator, and Channel 5, the United Kingdom's newest free
television broadcaster.
 
     The introduction of new technologies and programming services throughout
the world has created many new opportunities for WBITD. In conjunction with
these new services seeking Warner Bros.' programming, WBITD is seeking to form
strategic alliances with some of the world's leading satellite, cable and
over-the-air television broadcasters. In December l997, WBITD acquired a l0%
interest in Canal Satellite, a partnership with Canal Plus and Pathe, which is
the largest digital direct-to-home satellite television service in France.
 
     WBITD has recently commenced the development and production of television
programming with international partners. In l997, WBITD completed and sold four
new co-produced series internationally: the live-action television series 'The
New Adventures of Robin Hood' and 'Police Academy: The Series' and the animated
television series 'The Fantastic Voyages of Sinbad the Sailor' and 'Zorro.'
 
     Warner Bros.' backlog, representing the amount of future revenue not yet
recorded from cash contracts for the licensing of theatrical and television
product for pay cable, network, basic cable and syndicated television
exhibition, amounted to $2.1 billion at December 31, 1997, compared to $1.5
billion at December 31, 1996 (including amounts relating to the licensing of
product to Time Warner's and TWE's cable television networks of $719 million as
of December 31, 1997, and $463 million as of December 31, 1996, respectively).
The backlog excludes advertising barter contracts. See also 'Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Filmed Entertainment Backlog.'
 
HOME VIDEO
 
     Warner Home Video ('WHV') distributes for home video use pre-recorded
videocassettes, laser optical videodiscs and digital versatile discs or 'DVDs'
(as described below) containing the filmed entertainment product of Warner
Bros., Home Box Office, WarnerVision Entertainment and TBS. WHV also distributes
(or services the distribution of) other companies' product for which it has
acquired home video distribution or servicing rights. In August l997, WHV
granted exclusive laserdisc distribution rights in North America to Image
Entertainment Inc. for five years in order to concentrate on the videocassette
and DVD markets.
 
     During 1997, WHV released five titles in the North American rental market
with sales exceeding 400,000 units each: 'Contact,' 'Conspiracy Theory,'
'Sleepers,' 'Michael' and 'Absolute Power.' Internationally, the following
titles generated substantial home video revenue in 1997: 'Space Jam,' 'Mars
Attacks,' 'Batman & Robin,' 'Eraser' and the first and second seasons of the
television series 'Friends.' Additionally, the Warner Bros. Family Entertainment
label continued to expand through affordably-priced North American video
releases, including 'Space Jam,' 'Free Willy 3: The Rescue,' 'Wild America,'
'Cats Don't Dance,' 'The Swan Princess: Escape from Castle Mountain' and
'Shiloh' which generated combined videocassette sales in excess of 14 million
units. Also, WHV released for home sale in North America 'Batman & Robin' which
generated sales of more than six million units. During l997, approximately 55%
of WHV's revenue was generated in the United States and approximately 45% in
other territories.
 
     WHV sells its product in the United States and in major international
territories through its own sales force, with warehousing and fulfillment
handled by divisions of Warner Music Group and third parties. In some
international markets, WHV's product is distributed through licensees.
Videocassette and laser optical videodisc product is generally manufactured
under contract with independent duplicators and replicators. DVD product is
replicated by Warner Advance Media Operations, a Warner Music Group company, and
third parties.
 
     In December l995, a consortium of nine major consumer electronics
manufacturers and TWE announced agreement on a standard for a high density
digital optical technology ('DVD') that is capable of storing large volumes of
digitalized information -- enough storage capacity for two full-length feature
films on a double-sided disc. The DVD technology offers picture quality
significantly superior to existing home video technology as well as premium
features such as multiple language soundtracks. WHV, along with several other
studios,
 
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released software titles in the DVD format in l997 in the United States, Canada,
Japan and certain countries in Asia. Additionally, WHV is currently benefiting
by releasing first-run feature motion pictures in the DVD format as well as
re-releasing titles from the extensive WHV catalogue of feature motion pictures.
By year-end l998, WHV plans to have DVD distribution in all major territories
worldwide.
 
CONSUMER PRODUCTS AND WARNER BROS. STUDIO STORES
 
     Warner Bros. Consumer Products licenses rights in both domestic and
international markets to the names, photographs, logos and other representations
of characters and copyrighted material from the films and television series
produced or distributed by Warner Bros., including the superhero characters of
DC Comics, Hanna-Barbera characters and Turner classic films.
 
     In 1997, Warner Bros. Studio Stores continued its expansion with the
opening of eight outlets in the United States and 16 internationally by
franchisees. Of the total of 185 stores at the end of 1997, 157 are wholly owned
and 28 are operated outside the United States by franchisees. Six stores are
currently planned to be opened overseas in 1998.
 
THEATERS
 
     Through joint ventures, Warner Bros. International Theatres operates 72
multi-screen cinema complexes with 625 screens in seven foreign countries,
including 28 theatres in Australia, 17 in the United Kingdom, 13 in Japan, five
in Portugal, four in Germany, three in Italy and two in Spain. During l998,
Warner Bros. International Theatres plans to open a further 28 cinemas and 281
screens, including expansion into Taiwan with the opening of a l7-screen
multiplex in the city of Taipei.
 
                           THE WB TELEVISION NETWORK
 
     The WB Television Network ('The WB') completed its third year of broadcast
operations in January l998. In January l998, five major market affiliates were
added to The WB station line-up bringing total coverage to 97 stations
representing 88% of U.S. households. During the l997/98 broadcast season, The
WB's primetime program schedule was expanded to a fourth night, broadcasting on
Sunday, Monday, Tuesday and Wednesday nights. A fifth night of primetime
programming is scheduled to be added in January l999.
 
     Kids' WB! children's programming expanded in September l997 with the
addition of ten hours per week of programming. Kids' WB! currently airs l9 hours
per week, including Saturday morning, weekday mornings and weekday afternoons.
 
     The WeB, The WB's satellite-delivered program service, is expected to
launch in September l998 with initial penetration of about eight to ten percent
of U.S. TV households. This is a program service that, in partnership with local
broadcasters in smaller markets, will create an affiliate of The WB on local
cable systems.
 
     Tribune Broadcasting owns a 22.25% interest in The WB. Key employees of The
WB hold an ll% interest in the network.
 
                           OTHER ENTERTAINMENT ASSETS
 
THEME PARKS
 
     Through joint ventures with local partners, Warner Bros. has developed
theme parks in select international locations which feature Warner Bros.' movie,
cartoon and superhero characters. Warner Bros. Movie World, a regional theme
park and studio complex, was opened in 1996 in the Rhine/Ruhr area of Germany.
The park complex is modeled after Warner Bros. Movie World in Australia which
owns and operates a 400-acre movie-related theme park (including a movie studio)
and water park complex near Brisbane, Australia, as well as Sea World of
Australia. The Company has announced that it is studying the feasibility of
building the first movie-based theme park in Spain.
 
                                      I-7
 




     In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags to Premier, a regional theme park operator, for
approximately $375 million of cash and $100 million of convertible preferred
stock, before transaction costs. Under the terms of the transaction, Premier
will continue to license the use of Warner Bros.' and DC Comics' cartoon
characters at the Six Flags parks, and the license will be extended to Premier's
other parks in the United States and Canada. Subject to the satisfaction of
certain conditions, the closing of the transaction is expected in the second
quarter of 1998.
 
DC COMICS AND MAD MAGAZINE
 
     TWE and WCI, which is wholly owned by Time Warner, each own a 50% interest
in DC Comics. DC Comics publishes more than 60 regularly issued comics
magazines, among the most popular of which are 'Superman,' 'Batman,' 'Wonder
Woman' and 'The Sandman,' as well as collections sold as books. DC Comics also
derives revenues from motion pictures, television, product licensing, books
for juvenile and adult markets and foreign publishing.
 
                           REGULATION AND LEGISLATION
 
     The Telecommunications Competition and Deregulation Act of 1996 (the '1996
Telecommunications Act') substantially revised the Communications Act of 1934,
as amended. The new law contains certain provisions relating to violent and
sexually explicit programming. First, the statute requires manufacturers to
build television sets with the capability of blocking certain coded programming
(the so-called 'V-chip'). The effective date for Federal Communications
Commission ('FCC') rules regarding the manufacture of such sets, originally
scheduled for March 8, 1998, has been deferred for one year. Second, the 1996
Telecommunications Act gave the cable and broadcasting industries one year to
develop voluntary ratings for video programming containing violent, sexually
explicit or other indecent content and to agree voluntarily to transmit signals
containing such ratings. Principal representatives from both industries have
agreed upon a system of parental guidelines, which has been implemented on a
voluntary basis by broadcast stations and networks, program producers, as well
as cable systems and networks. The 1996 Telecommunications Act authorizes the
FCC to prescribe guidelines of its own, in consultation with an advisory
committee, if the industry guidelines are not acceptable to the FCC. In 1997,
the FCC sought public comment on whether the voluntary industry guidelines
comply with the requirements of the 1996 Telecommunications Act. That proceeding
remains pending.
 
     The 1996 Telecommunications Act eliminated the restrictions on the number
of television stations that one entity may own and increased the national
audience reach limitation by one entity from 25% to 35% of U.S. television
households. As required by the 1996 Telecommunications Act, the FCC revised its
dual network rule to allow a TV station to affiliate with an entity maintaining
two or more networks, unless certain limited circumstances pertain. The FCC also
amended its rules to permit common ownership or control of a broadcast network
and cable systems.
 
     The FCC rules currently prohibit an entity from having an attributable
interest in two local TV stations with overlapping specified signal contours. In
an ongoing rulemaking proceeding, the FCC has proposed to relax this rule in
certain circumstances and sought comment on a possible waiver mechanism. In
another rulemaking, the FCC has sought comment on possible changes to its
attribution rules, which define the type of interests in television stations
that are recognizable for purposes of its ownership rules. Under one such
proposal, certain currently nonattributable debt or passive equity interests
would become attributable if held in conjunction with certain other interests in
or relationships with the TV licensee, such as the provision of programming.
Such a proposal, if adopted, could adversely affect The WB's efforts to add new
television stations as affiliates.
 
     Pursuant to the 1996 Telecommunications Act, the FCC must conduct a
biennial review of its ownership rules and repeal or modify any regulation that
it deems to be no longer in the public interest. The first such biennial review
will commence in 1998. Among the ownership rules which will be reviewed are the
daily newspaper-television station and cable system-television station
cross-ownership prohibitions.
 
     Warner Bros. cannot at this time predict the effect on its television
businesses of the passage of the 1996 Telecommunications Act and the changes, or
proposed changes, to the FCC rules discussed above.
 
                                      I-8
 




                                  COMPETITION
 
     The production and distribution of theatrical motion pictures, television
and animation product and videocassettes/videodiscs are highly competitive
businesses, as each competes with the other for viewers' attention, as well as
with other forms of entertainment and leisure time activities, including video
games, the Internet and other computer-related activities. Furthermore, there is
increased competition in the television industry evidenced by the increasing
number and variety of broadcast networks and basic cable and pay television
services now available. There is active competition among all production
companies in these industries for the services of producers, directors, actors
and others and for the acquisition of literary properties. With respect to the
distribution of television product, there is significant competition from
independent distributors as well as major studios. The increased number of
theatrical films released in the U.S. has resulted in increased competition for
theater space and audience attention. Revenues for filmed entertainment product
depend in part upon general economic conditions, but the competitive position of
a producer or distributor is still greatly affected by the quality of, and
public response to, the entertainment product it makes available to the
marketplace. The television network industry is extremely competitive as
networks seek to attract audience share and television stations for affiliation
and to obtain advertising revenue and distribution rights to television
programming. There is strong competition throughout the home video industry,
both from home video subsidiaries of several major motion picture studios and
from independent companies, as well as from new film viewing opportunities, such
as pay-per-view. Warner Bros. competes in its character merchandising and other
licensing and retail activities with other licensors and retailers of character,
brand and celebrity names. Warner Bros.' operation of theaters is subject to
varying degrees of competition with respect to obtaining new theater sites and
attracting patrons, including competition from a number of motion picture
exhibition delivery systems, such as pay television and home video systems.
 
                             CABLE NETWORKS -- HBO
 
     TWE's Cable Networks business consists of the domestic and international
HBO and Cinemax pay television programming services, operated by the Home Box
Office division of TWE ('Home Box Office'). HBO is the nation's most widely
distributed pay television service, which together with its sister service,
Cinemax, had approximately 33.6 million subscribers as of December 31, 1997. TWE
also has a partial interest in certain other domestic and international
programming networks.
 
                                    GENERAL
 
     Through Home Box Office, TWE distributes HBO, the leading pay-TV service,
as well as Cinemax. HBO and Cinemax offer uncut, commercial-free motion pictures
and high-quality documentaries. In addition, HBO offers sporting and special
entertainment events (such as concerts and comedy shows), and feature motion
pictures and television series produced specifically by or for HBO.
 
     Each of the pay cable networks distributes its programming via cable and
other distribution technologies, including satellite distribution. The pay
television programming services generally enter into separate multi-year
agreements, known as affiliation agreements, with operators of cable television
systems and direct-to-home satellite ('DTH') distribution companies in the
United States that have agreed to carry such networks. In the United States,
cable operators elect to carry networks and services on an individual, and not
packaged, basis. With the proliferation of new cable networks and services,
competition for cable carriage on the limited available channel capacity has
intensified.
 
     The programming produced for HBO and Cinemax is generally transmitted via
C-band or Ku-band communications satellites from an uplinking terminus and
received on receivers located at local operations centers for each affiliated
cable company, or on home satellite dish receivers. Individual dish owners
wishing to receive programming from one of the satellite distribution companies
must purchase a consumer decoder from a local source and arrange for its
activation.
 
     The pay-TV services, being commercial free, generate their revenue
principally from receipt of monthly per subscriber fees for each of the services
carried, paid by cable system operators, DTH distribution companies,
 
                                      I-9
 




hotels and other customers (known as affiliates) who have contracted to receive
and distribute such networks, which are generally charged on a per subscriber
basis. Individual subscribers to HBO and Cinemax are then generally billed
monthly by their local cable company or DTH packager for each service purchased
and are free to cancel a service at any time.
 
     As a result of acquisitions and mergers in the cable television industry in
recent years, the percentage of Home Box Office's revenue from affiliates that
are large multiple system cable operators has increased. As of December 31,
1997, the largest single multiple system cable operator with which Home Box
Office does business is Tele-Communications, Inc. ('TCI'), which accounted for
approximately 17% of HBO's and Cinemax's combined subscribers. As of December
31, 1997, Time Warner Cable (see 'Cable') accounted for an additional 14% of
HBO's and Cinemax's combined subscribers. Home Box Office attempts to assure
continuity in its relationships with affiliates and has entered into multi-year
contracts with affiliates, whenever possible. Although Home Box Office believes
the prospects of continued carriage and marketing of its programming services by
the larger affiliates are good, the loss of one or more of them as distributors
of any individual service could have a material adverse effect on its business.
 
PROGRAMMING
 
     A majority of HBO's programming and a large portion of that on Cinemax
consists of recently released, uncut and uncensored feature motion pictures.
Home Box Office's practice has been to negotiate licensing agreements of varying
duration for such programming with major motion picture studios and independent
producers and distributors. These agreements typically grant pay television
exhibition rights to recently released and certain older films owned by the
particular studio, producer or distributor in exchange for a negotiated fee,
which may be a function of, among other things, HBO and Cinemax subscriber
levels and the films' box office performances.
 
     Home Box Office attempts to ensure access to future movies in a number of
ways. In addition to its exhibition of movies distributed by Warner Bros. and
its regular licensing agreements with numerous distributors, it has entered into
agreements with DreamWorks SKG, Regency Entertainment, Sony Pictures
Entertainment, Inc. ('Sony Pictures'), and Twentieth Century Fox Film
Corporation ('Fox') pursuant to which Home Box Office has acquired exclusive and
non-exclusive rights to exhibit on its pay television services all or a
substantial portion of the films produced, acquired and/or released by these
entities during the term of each agreement. Home Box Office has also entered
into non-exclusive license agreements with Fox, Paramount Pictures Corporation,
Sony Pictures and Walt Disney Pictures for older, library films.
 
     HBO also defines itself by the exhibition of sporting events, such as
boxing matches and Wimbledon, sports documentaries, contemporary and sometimes
controversial, pay television premiere movies and mini-series, dramatic and
comedy specials, concert events, family programming, television series and
documentaries that are produced by HBO for initial exhibition on HBO.
 
OTHER INTERESTS
 
     Time Warner Sports, a division of Home Box Office, operates TVKO and TVKO
Entertainment, entities that distribute pay-per-view prize fights and other
pay-per-view programming.
 
     In 1997, Home Box Office's own production company, HBO Independent
Productions, produced 'Everybody Loves Raymond' in its second season on CBS.
Divisions of Home Box Office also produce comedy programming for HBO, Comedy
Central, broadcast networks and syndication. Home Box Office is also co-owner of
a U.K. television production company and a separate joint venture for the
foreign distribution of programming.
 
     When it controls the rights, Home Box Office also distributes theatrical
films and made-for-pay television programming to other cable television or
pay-per-view services, and distributes its original programming into domestic
syndication and foreign television.
 
                                      I-10
 




INTERNATIONAL
 
     HBO Ole, a 37.5%-owned partnership comprised of TWE (acting through its
Home Box Office and Warner Bros. divisions), a Venezuelan company and two other
motion picture companies, operates two Spanish-language pay television motion
picture services, HBO Ole and Cinemax, which are currently distributed in
Central and South America, Mexico and the Caribbean. TWE also has interests in
several advertiser-supported television services distributed by HBO Ole in Latin
America. HBO Brasil, another partnership in which TWE has an interest,
distributes Portuguese-language pay television movie services in Brazil. TWE
also has a 40% interest in HBO Asia, an English-language, movie-based pay
television service which, together with Cinemax, is currently distributed to
various countries in Southeast Asia.
 
     In addition to the Latin American and Asian ventures, Home Box Office has
interests in pay television services in Hungary, the Czech Republic, the Slovak
Republic, Poland and Romania.
 
                         BASIC CABLE NETWORK INTERESTS
 
     TWE holds a 50% interest in Comedy Central, an advertiser-supported basic
cable television service, which provides comedy programming. Comedy Central was
available in approximately 46 million homes at year-end 1997.
 
     TWE holds a 33 1/3% interest in Court TV. Court TV, launched in 1991, is a
24-hour cable network covering actual courtroom trials from around the United
States and abroad with approximately 33 million viewers at year-end 1997. During
prime time, Court TV features live analyses of the day's coverage and other
programming exploring aspects of the legal system.
 
                           REGULATION AND LEGISLATION
 
     In April 1993, the FCC released regulations designed to implement
provisions of the 1992 Cable Act, which generally prohibits vertically
integrated programmers, which currently include the program services owned by
Home Box Office, from offering different prices, terms, or conditions to
competing multichannel video programming distributors unless the differential is
justified by certain permissible factors set forth in the regulations. The rules
also place certain restrictions on the ability of vertically integrated
programmers to enter into exclusive distribution arrangements with cable
operators. The FCC has recently proposed to amend the rules to strengthen the
enforcement process. Although HBO and Cinemax services are currently provided to
subscribers by means of a number of different technologies including cable, MMDS
and DTH, any changes in the FCC's interpretation of the 1992 Cable Act and
existing regulations could have a material adverse effect on their businesses.
See 'Cable Systems -- Regulation and Legislation.'
 
     The 1996 Telecommunications Act contains provisions concerning manufacturer
insertion of a 'V-chip' into television sets and industry implementation of a
ratings system for violent, sexually explicit and indecent programming. (See
'Filmed Entertainment -- Regulation and Legislation.') TWE cannot predict at
this time the effect of this legislation on its cable network business.
 
                                  COMPETITION
 
     Home Box Office's businesses face strong competition. Each of the
programming services compete with other cable television programming services
for distribution on the limited number of channels available on cable operating
systems. All of the networks compete for viewers' attention with all other forms
of programming provided to viewers, including broadcast networks, local
over-the-air television stations, other pay and basic cable television services,
home video, pay-per-view services and on-line activities. In addition, the cable
networks face competition for programming product with those same commercial
television networks, independent stations, and pay and basic cable television
services, some of which have exclusive contracts with motion picture studios and
independent motion picture distributors.
 
                                      I-11
 




     Home Box Office's production divisions compete with other producers and
distributors of programs for air time on broadcast networks, independent
commercial television stations, and pay and basic cable television networks.
 
     Internationally, the expected entry of Poland and other eastern European
countries into the European Union may result in the imposition of local content
quotas or other restrictions on pay television services in those countries,
which may adversely affect services in which Home Box Office has an interest.
 
                                     CABLE
 
     TWE's Cable business consists principally of interests in cable television
systems that, in general, are operated under the name Time Warner Cable. Of the
approximately 12.6 million subscribers owned or managed by TWE, approximately
2.1 million are in systems owned by TWI Cable Inc. ('TWI Cable'), a wholly owned
subsidiary of Time Warner which is not a part of TWE, and approximately 10.5
million are in systems owned by TWE. TWE's cable systems include approximately
5.8 million subscribers in a joint venture between TWE and Advance/Newhouse
known as the TWE-A/N Partnership. Time Warner Cable generally manages all such
systems and receives a fee for management of the systems owned by TWI Cable and
the TWE-A/N Partnership.
 
                            CABLE TELEVISION SYSTEMS
 
GENERAL
 
     Time Warner Cable is the second-largest multiple system cable operator in
the United States. As of March 1, 1998, Time Warner Cable serves 12.6 million
cable subscribers geographically concentrated in 34 groupings of more than
100,000 subscribers each. This includes the approximately 5.8 million
subscribers in the TWE-A/N Partnership, in which TWE owns a 65.2% common equity
interest (and TWI Cable owns a 1.5% common equity interest) and is paid a fee to
manage. Approximately 58% of Time Warner Cable's aggregate subscribers are
located in five states: Florida, New York, North Carolina, Ohio and Texas.
 
     Through a network of coaxial and fiber-optic cable, TWE's cable television
system subscribers generally receive more than 50 channels of video programming,
including local broadcast television signals, locally produced or originated
video programming, distant broadcast television signals (such as WGN),
advertiser-supported video programming (such as ESPN and CNN) and premium
programming services (such as HBO, Cinemax, Showtime and The Movie Channel). In
many systems, Time Warner Cable also offers movies and other events on a
pay-per-view basis, as well as audio and other entertainment services.
 
     Pursuant to the Admission Agreement under which US West became a limited
partner of TWE, TWE has agreed to use its best efforts to complete the
technological upgrade of a substantial portion of its cable systems by the end
of 1998. As of December 31, 1997, more than half of Time Warner Cable's systems
have been upgraded. Such upgrades include the broad deployment of fiber and
electronics in order to provide expanded programming options, high-speed
Internet access and other service. As systems are designated for upgrade and
after any required approvals are obtained, US West and TWE share joint control
over the direction of those systems through a 50-50 management committee.
 
     Time Warner Cable has also agreed with the FCC under the Social Contract
described below to invest a total of $4 billion in capital costs to rebuild and
upgrade systems over a five-year period ending November 30, 2000. The agreement
with the FCC covers all Time Warner Cable systems, including those owned by TWI
Cable and the TWE-A/N Partnership.
 
     Time Warner Cable intends to use a portion of the bandwidth in its upgraded
systems for its high speed online service for personal computers, called Road
Runner'tm'. Road Runner provides Internet access and proprietary local, national
and international content through the cable network to customers' home (or small
office) computers. The service has been launched commercially in Time Warner
Cable's Akron/Canton; Albany; Binghamton; Columbus; El Paso; Hawaii; Memphis;
Portland, Maine; San Diego and Tampa systems, and will continue to expand into
other systems during 1998. In December 1997, Road Runner announced plans to
merge with US West's Media One Express, also a cable modem online service
provider. Based on current roll-outs in
 
                                      I-12
 




the Time Warner Cable and Media One cable systems, at the time of the
consummation of the merger, the venture's high speed online services would
immediately be available in at least 13 states serving approximately 5 million
homes.
 
     The number of subscribers managed by Time Warner Cable has grown primarily
as a result of the acquisition of cable systems, the formation of the TWE-A/N
Partnership and increases in the number of subscribers to its existing cable
television systems. Time Warner Cable has also sought to concentrate its
subscriber base in geographically-clustered systems through the exchange or
purchase of cable television systems, and expects to continue these efforts.
 
     In September 1997, Time Warner, TWE, the TWE-A/N Partnership and a
subsidiary of TCI signed a letter of intent to enter into a series of agreements
to, among other things, (i) form two new cable television joint ventures in the
Houston and south Texas areas that will be managed by TWE and will own cable
television systems serving an aggregate of approximately 1.1 million
subscribers, (ii) expand an existing joint venture in Kansas City, which is
managed by TWE, through the contribution by TCI of a contiguous cable television
system serving approximately 95,000 subscribers, and (iii) exchange various
cable television systems owned by Time Warner and TWE serving over 500,000
subscribers (of which cable television systems serving approximately 400,000
subscribers are owned by TWE) for other cable television systems of comparable
size in an effort to enhance each company's geographic clusters of cable
(collectively, the 'TCI Cable Transactions'). The TCI Cable Transactions are
expected to close periodically throughout 1998, subject to execution of
definitive agreements and customary closing conditions.
 
     In early 1998, Time Warner Cable transferred or beneficially assigned
ownership of franchises in 43 cable systems serving approximately 1.1 million
customers primarily in Florida, North Carolina and upstate New York from Paragon
Communications ('Paragon') and various TWI Cable-owned entities to the TWE-A/N
Partnership. As a result of this and related transactions, the TWE-A/N
Partnership serves approximately 5.8 million customers, and Paragon, which is
now 100% owned by wholly owned subsidiaries of Time Warner, serves approximately
770,000 customers primarily in New York City, Texas and California. Following
these transactions, the common equity of the TWE-A/N Partnership is owned
approximately as follows: 33.3% by Advance/Newhouse, 65.2% by TWE and 1.5%
indirectly by Time Warner.
 
     Most of TWE's cable television revenue is derived from monthly fees paid by
subscribers for cable video programming services. Additional revenue is
generated by selling time on cable television systems for commercial
advertisements to local, regional and, in some cases, national advertisers.
Advertising time is sold as inserts into certain non-broadcast cable programming
and local origination programming shown on TWE's cable television systems. In
addition, pay-per-view service is offered in most cable television systems,
which allows subscribers to choose to view specific movies and events, such as
concerts and sporting events, and to pay on a per-event basis.
 
     As of December 31, 1997, the TWE-A/N Partnership beneficially owned a 31%
equity interest in Primestar Partners L.P. ('Primestar'), a satellite
distribution company offering packages of programming services to customers
owning DTH receiving dishes, and Time Warner Satellite Services generally had
the non-exclusive right to distribute Primestar service to customers in Time
Warner Cable's service areas (including TWI Cable and the TWE-A/N Partnership)
and also in certain adjacent areas.
 
     In June 1997, TWE, Advance/Newhouse and the other partners of Primestar
entered into agreements to consolidate the separate Primestar direct broadcast
satellite distribution business of such partners (including Time Warner
Satellite Services) with the business of Primestar into a new company ('New
Primestar'), into which the partners will also contribute their respective
partnership interests. The restructuring is currently expected to close on or
about April 1, 1998. Thereafter, TCI Satellite Entertainment, Inc., a public
company that is one of the current partners of Primestar, is expected to merge
into New Primestar, subject to certain conditions, including regulatory
approval. If the merger is approved and completed, TWE's 24% equity ownership in
New Primestar will not be affected. In a separate pending transaction, New
Primestar would acquire certain high power satellite assets and FCC permits from
MCI Communications Corporation and The News Corporation Limited, in exchange for
nonvoting stock and notes of New Primestar (the 'News/MCI transaction'). This
transaction is subject to approval from the Department of Justice and the FCC.
If regulatory
 
                                      I-13
 




approvals are obtained and the News/MCI transaction is completed, TWE would then
have approximately 16% of the outstanding equity of New Primestar on a fully
diluted basis.
 
PROGRAMMING
 
     Time Warner Cable provides video programming to its subscribers pursuant to
multi-year contracts with program suppliers who generally are paid a monthly fee
per subscriber. Many of these contracts contain price escalation provisions;
however, in most cases the cable operator has a right to cancel the contract if
the supplier raises its price beyond agreed limits. It is unknown whether the
loss of any one popular supplier would have a material adverse effect on Time
Warner Cable's operations.
 
SERVICE AND PROGRAMMING CHARGES
 
     Subscribers to TWE's cable systems generally are charged monthly fees based
on the level of service selected. The monthly prices for various levels of cable
television services (excluding services offered on a per-channel or per-program
basis) range generally from $5 to $25 for residential customers. Other services
offered include equipment rentals, usually for an additional monthly fee.
Systems offering pay-per-view movies generally charge between $4 and $6 per
movie, and systems offering pay-per-view events generally charge between $6 and
$50, depending on the event. A one-time installation fee is generally charged
for connecting subscribers to TWE's cable television system. Rates for certain
programming and for equipment and installation are generally regulated pursuant
to Federal law. See 'Regulation and Legislation -- Rate Regulation,' below.
 
     Subscribers may purchase premium programming services and, in certain
systems, other per-channel services, for an additional monthly fee for each such
service, with discounts generally available for the purchase of more than one
service.
 
INTERNATIONAL
 
     TWE and the TWE-A/N Partnership collectively have a 53.75% interest in a
joint venture established to invest in, and further develop, cable television
systems and programming in Hungary. In France, TWE and TWE-A/N own 100% of Cite
Reseau and 49.9% of Rhone Vision Cable both of which were established to acquire
new franchises, build and operate cable systems in France. In China, TWE and the
TWE-A/N Partnership own 75% of the Beijing-Time Warner Cable Television
Engineering Company. In Japan, TWE and TWE-A/N beneficially own, directly or
indirectly, 25% of Titus Communications Corporation and 19.2% of Chofu Cable
Television Company. TWE sold its 13% indirect interest in Sky Network
Television, an over-the-air subscription service in New Zealand, in September
1997.
 
                           REGULATION AND LEGISLATION
 
     The cable television industry is regulated by the FCC, some states and
substantially all local governments. In addition, various legislative and
regulatory proposals under consideration from time to time by the Congress and
various federal agencies may in the future materially affect the cable
television industry. The following discussion summarizes certain federal, state
and local laws and regulations affecting cable television.
 
     Federal Laws. The Cable Communications Policy Act of 1984 ('1984 Cable
Act'), the 1992 Cable Act and the 1996 Telecommunications Act are the principal
federal statutes governing the cable industry. These statutes regulate the cable
industry, among other things, with respect to: (i) cable system rates for both
basic and certain nonbasic services; (ii) programming access and exclusivity
arrangements; (iii) access to cable channels for public, educational and
governmental programming; (iv) leased access terms and conditions; (v)
horizontal and vertical ownership of cable systems; (vi) consumer protection and
customer service requirements; (vii) franchise renewals; (viii) television
broadcast signal carriage requirements and retransmission consent; (ix)
technical standards; and (x) privacy of customer information.
 
     Federal Regulations. The FCC, the principal federal regulatory agency with
jurisdiction over cable television, has promulgated regulations implementing the
federal statutes.
 
                                      I-14
 




     Rate Regulation. Under federal laws, nearly all cable television systems
are subject to local rate regulation of basic service pursuant to a formula
established by the FCC and enforced by local franchising authorities.
Additionally, the legislation required the FCC to review rates for nonbasic
service tiers, known as 'cable programming service tiers' ('CPST'), other than
per-channel or per-program services, in response to complaints filed by
franchising authorities; prohibited cable television systems from requiring
subscribers to purchase service tiers above basic service in order to purchase
premium service if the system is technically capable of doing so; required the
FCC to adopt regulations to establish, on the basis of actual costs, the price
for installation of cable service and rental of cable equipment; and allowed the
FCC to impose restrictions on the retiering and rearrangement of basic and CPST
services under certain limited circumstances.
 
     Under the 1996 Telecommunications Act, regulation of CPST rates is
scheduled to terminate on March 31, 1999. Regulation of both basic and CPST
rates also ceases for any cable system subject to 'effective competition.' The
1996 Telecommunications Act expanded the definition of 'effective competition'
to cover situations where a local telephone company or its affiliate, or any
multichannel video provider using telephone company facilities, offers
comparable video service by any means except DTH. The FCC has found Time Warner
Cable to be subject to 'effective competition' in certain jurisdictions.
 
     The FCC's rate regulations employ a benchmark system for measuring the
reasonableness of existing basic and CPST service rates. Alternatively, cable
operators have the opportunity to make cost-of-service showings which, in some
cases, may justify rates above the applicable benchmarks. The regulations also
provide that future rate increases may not exceed an inflation-indexed amount,
plus increases in certain costs beyond the cable operator's control, such as
taxes, franchise fees and programming costs. Cost-based adjustments to these
capped rates can also be made in the event a cable operator adds or deletes
channels or significantly upgrades its system. In addition, new product tiers
consisting of services new to the cable system can be created free of rate
regulation as long as certain conditions are met, e.g., services may not be
moved from existing tiers to the new product tier. The rules also require that
charges for cable-related equipment (e.g., converter boxes and remote control
devices) and installation be unbundled from the provision of cable service and
based upon actual costs plus a reasonable profit.
 
     Local franchising authorities and/or the FCC are empowered to order a
reduction of existing rates which exceed the maximum permitted level for either
basic and/or CPST services and associated equipment, and refunds can be
required.
 
     In November 1995, the FCC adopted a Social Contract with Time Warner Cable
which resolved all of the cable television rate complaints pending against Time
Warner Cable and requires Time Warner Cable to upgrade its domestic cable
television systems. The Social Contract was negotiated in accordance with the
FCC's authority to consider and adopt 'social contracts' as alternatives to
other regulatory approaches applicable to cable television rates. Specifically,
the Social Contract provides for an estimated $4.7 million plus interest in
refunds in the form of bill credits to subscribers of certain designated Time
Warner Cable systems, a commitment by Time Warner Cable to establish a lifeline
basic service priced at 10% below Time Warner Cable's benchmark regulated rates
with an adjustment to the nonbasic tier to recoup the reduced basic service tier
revenue; and a commitment by Time Warner Cable to upgrade its domestic systems
by November 30, 2000; and Time Warner Cable is allowed to increase the non-basic
service tier by $1.00 per year over the term of the Social Contract. Court
appeals filed by the city of Austin, Texas and the Intercommunity Cable
Regulatory Commission (which represents 28 Cincinnati suburbs served by Time
Warner Cable) seeking review of the FCC decision adopting the Social Contract as
well as certain FCC staff decisions implementing the Social Contract are
pending. The appeals contend, among other things, that the terms of the Social
Contract and the process by which it was negotiated and implemented are contrary
to the 1992 Cable Act, and are inconsistent with the FCC's own rules. A petition
was also filed with the FCC seeking reconsideration of the Social Contract,
which is currently pending.
 
     Carriage of Broadcast Television Signals. The 1992 Cable Act allows
commercial television broadcast stations which are 'local' to a cable system to
elect every three years either to require the cable system to carry the station,
subject to certain exceptions, or to negotiate for 'retransmission consent' to
carry the station. Broadcast stations typically seek monetary compensation or
the carriage of additional programming in return for
 
                                      I-15
 




granting retransmission consent. Local non-commercial television stations are
also given mandatory carriage rights, subject to certain exceptions. Unlike
commercial stations, noncommercial stations are not given the option to require
negotiation of retransmission consent. In addition, cable systems must obtain
retransmission consent for the carriage of all 'distant' commercial broadcast
stations, except for certain 'superstations,' i.e., commercial
satellite-delivered independent stations such as WGN. Time Warner Cable has
obtained any necessary retransmission consents from all stations carried, which
consents have varying expiration dates. In those cases where the expiration date
of particular agreements has not been contractually varied from the original
schedule set up by the 1996 Act, the next three-year election between mandatory
carriage and retransmission consent for local commercial television stations
will occur on October 1, 1999.
 
     Deletion of Certain Programming. Cable television systems that serve 1,000
or more customers must delete the simultaneous or nonsimultaneous network
programming of a distant station upon the appropriate request of a local
television station holding local exclusive rights to such programming. FCC
regulations also enable television broadcast stations that have obtained
exclusive distribution rights for syndicated programming in their market to
require a cable system to delete or 'black out' such programming from other
television stations which are carried by the cable system.
 
     Public and Leased Access Channels. The 1984 Cable Act permits local
franchising authorities to require operators to set aside certain channels for
public, educational and governmental access programming. The 1984 Cable Act
further requires cable television systems with thirty-six or more activated
channels to designate a portion of their channel capacity for commercial leased
access by unaffiliated third parties. The 1992 Cable Act requires leased access
rates to be set according to a formula determined by the FCC.
 
     Ownership. The 1996 Telecommunications Act repealed the 1984 Cable Act's
restrictions on local exchange telephone companies ('LECs') from providing video
programming directly to customers within their local exchange telephone service
areas. With certain limited exceptions, a LEC may not acquire more than a 10%
equity interest in an existing cable system operating within the LEC's service
area. The 1996 Telecommunications Act also authorized LECs and others to operate
'open video systems' without obtaining a local cable franchise, although LECs
operating such systems can be required to make payments to local governmental
bodies in lieu of cable franchise fees. A number of separate entities have been
certified to operate open video systems in New York City and in other areas
where the Company operates cable systems.
 
     The 1996 Telecommunications Act eliminated the FCC rule prohibiting common
ownership between a cable system and a national broadcast television network,
and the statutory ban covering certain common ownership interests, operation or
control between a television station and cable system within the station's Grade
B signal coverage area. However, the parallel FCC rule against cable/television
station cross-ownership remains in place, subject to review by the FCC within
two years. Time Warner Cable obtained a temporary waiver from this rule, and is
now seeking a permanent waiver, so that it can continue to own certain Atlanta
area cable systems located within the Grade B signal coverage area of WTBS. The
FCC denied the permanent waiver request, but that denial is presently stayed
pending resolution of a petition for reconsideration. Finally, the 1992 Cable
Act prohibits common ownership, control or interest in cable television systems
and MMDS facilities or SMATV systems having overlapping service areas, except in
limited circumstances. The 1996 Telecommunications Act exempts cable systems
facing 'effective competition' from the MMDS and SMATV cross-ownership
restrictions.
 
     The FCC has initiated a rulemaking proceeding in which it asks what
restrictions, if any, should be placed on a cable operator's ownership of a DTH
service. This could affect Time Warner, in that TWE has an ownership interest in
Primestar, a DTH service, which is seeking to obtain FCC approval for the
transfer of certain DTH licenses. See 'Cable -- Cable Television
Systems -- General.'
 
     Pursuant to the 1992 Cable Act, the FCC has adopted rules which, with
certain exceptions, preclude a cable television system from devoting more than
40% of its first 75 activated channels to national video programming services in
which the cable system owner has an attributable interest. The 1992 Cable Act
also directed the FCC to adopt regulations establishing reasonable limits on the
number of cable subscribers an operator may reach through systems in which it
holds an attributable interest. The FCC has stayed the effectiveness of such
 
                                      I-16
 




regulations pending final judicial resolution of a federal district court
decision finding the statutory ownership limit provision to be unconstitutional.
 
     Other FCC Regulations and FTC Consent Decree. Additional FCC regulations
relate to a cable system's carriage of local sports programming; privacy of
customer information; equipment compatibility; franchise transfers; franchise
fees; closed captioning; equal employment opportunity; pole attachments;
restrictions on origination and cablecasting by cable system operators;
application of the rules governing political broadcasts; customer service;
technical standards; home wiring; and limitations on advertising contained in
nonbroadcast children's programming. Pursuant to the 1996 Telecommunications
Act, the FCC changed the formula for pole attachment fees which will result in
substantial increases in payments by cable operators to utilities for pole
attachment rights when telecommunications services are delivered by cable
systems. This new higher rate formula will be phased in beginning in February
2001.
 
     Under the terms of the FTC Consent Decree entered into in connection with
the consummation of the TBS Transaction, Time Warner Cable is required to carry
on a significant number of its cable systems a 24-hour per day news and
information channel that is not owned, controlled by or affiliated with Time
Warner.
 
     Copyright. Cable television systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making
semi-annual payments to a federal copyright royalty pool and meeting certain
other obligations, cable operators obtain a statutory license to retransmit
broadcast signals. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable system with respect to over-the-air
television stations.
 
     State and Local Regulation. Because a cable television system uses local
streets and rights-of-way, cable television systems are subject to local
regulation, typically imposed through the franchising process, and certain
states have also adopted cable television legislation and regulations. Cable
franchises are nonexclusive, granted for fixed terms and usually terminable if
the cable operator fails to comply with material provisions. No Time Warner
Cable franchise has been terminated due to breach. Franchises usually call for
the payment of fees (which are limited under the 1984 Cable Act to 5% of the
system's gross revenues from cable service) to the granting authority. The terms
and conditions of cable franchises vary materially from jurisdiction to
jurisdiction, and even from city to city within the same state, historically
ranging from reasonable to highly restrictive or burdensome.
 
     The 1992 Cable Act prohibits exclusive franchises and allows franchising
authorities to operate their own multichannel video distribution system without
having to obtain a franchise. Moreover, franchising authorities are immunized
from monetary damage awards arising from regulation of cable television systems
or decisions made on franchise grants, renewals, transfers and amendments.
 
     The 1996 Telecommunications Act provides that local franchising authorities
may not condition the grant or renewal of a cable franchise on the provision of
telecommunications service or facilities (other than institutional networks) and
clarifies that the calculation of franchise fees is to be based solely on
revenues derived from the provision of cable services, not revenues derived from
telecommunications services.
 
     Renewal of Franchises. The 1984 Cable Act established renewal procedures
and criteria designed to protect incumbent franchisees against arbitrary denials
of renewal. While these formal procedures are not mandatory unless timely
invoked by either the cable operator or the franchising authority, they can
provide substantial protection to incumbent franchisees. The 1992 Cable Act
makes several changes to the renewal process which could make it easier in some
cases for a franchising authority to deny renewal.
 
     In the renewal process, a franchising authority may seek to impose new and
more onerous requirements, such as upgraded facilities, increased channel
capacity or enhanced services, although the municipality must take into account
the cost of meeting such requirements. Time Warner Cable may be required to make
significant additional investments in its cable television systems as part of
the franchise renewal process. Of Time Warner Cable's franchises, as of January
1, 1998, 518 franchises serving approximately 2,600,000 subscribers expire
during the period ending December 31, 2000. Although Time Warner Cable has been
 
                                      I-17
 




successful in the past in negotiating new franchise agreements, there can be no
assurance as to the renewal of franchises in the future.
 
     The foregoing does not describe all present and proposed federal, state and
local regulations and legislation relating to the cable television industry.
Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the subject
of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable television systems operate. Neither the outcome of these proceedings
nor their impact upon the cable television industry or Time Warner Cable can be
predicted at this time.
 
                                  COMPETITION
 
     Cable television systems face strong competition for viewer attention from
a wide variety of established providers and new entrants, including broadcast
television, DTH, MMDS, SMATV systems and telephone companies. Cable television
systems also compete with these and other media for advertising dollars.
 
     DTH. The FCC has awarded permits to several companies for orbital slots
from which medium- or high-power Ku-Band DTH service can be provided. DTH
services offer pre-packaged programming that can be received by relatively small
and inexpensive receiving dishes. As of June 1997, satellite-delivered DTH
services including Echostar, DirecTV, USSB and Primestar, a medium-power DTH
service partially owned by TWE, were reported to be serving over five million
subscribers. Echostar has announced that, unlike other DTH services, it will
deliver some local broadcast stations in some areas. In addition to DTH, most
cable programming is available to owners of larger, more expensive C-Band
satellite dishes ('TVROs'), either directly from the programmers or through
third-party packagers.
 
     MMDS/Wireless Cable. Wireless cable operators use microwave technology to
distribute video programming. Wireless cable has grown rapidly, reportedly
servicing over 1.1 million subscribers nationwide as of June 1997. In recent
years, the FCC has adopted rules to facilitate the use of greater numbers of
channels by wireless cable operators.
 
     SMATV. Additional competition may come from private cable television
systems servicing condominiums, apartment complexes and certain other multiple
unit residential developments. The operators of these private systems, known as
SMATV systems, often enter into exclusive agreements with apartment building
owners or homeowners' associations which preclude franchised cable television
operators from serving residents of such private complexes. Under the 1996
Telecommunications Act, a SMATV system is not a cable system as long as it uses
no public right-of-way. SMATV systems offer both improved reception of local
television stations and many of the same satellite-delivered program services as
offered by franchised cable television systems.
 
     Overbuilds. Under the 1992 Cable Act, franchising authorities are
prohibited from unreasonably refusing to award additional franchises. There are
an increasing number of overlapping cable systems operating in Time Warner Cable
franchise areas. Municipalities themselves are authorized to operate cable
systems without a franchise. One municipally-owned system is presently in
operation in a Time Warner Cable franchise area and several other municipalities
have indicated an interest in operating a cable system.
 
     Telephone Companies. The 1996 Telecommunications Act eliminated the
restriction against ownership and operation of cable systems by local telephone
companies within their local exchange service areas (subject to the restriction
against acquisition of greater than 10% of existing cable systems described
under 'Regulation and Legislation -- Ownership,' above). Telephone companies are
now free to enter the retail video distribution business through any means, such
as DTH, MMDS, SMATV or as traditional franchised cable system operators.
Alternatively, the 1996 Telecommunications Act authorizes local telephone
companies to operate 'open video systems' without obtaining a local cable
franchise, although telephone companies operating such systems can be required
to make payments to local governmental bodies in lieu of cable franchise fees.
Where demand exceeds available channel capacity, up to two-thirds of the
channels on an 'open video system' must be available to programmers unaffiliated
with the local telephone company.
 
     Other Competition. Cable television systems compete with other
communications and entertainment media, including off-air television broadcast
signals which a viewer is able to receive directly using the viewer's own
 
                                      I-18
 




television set and antenna. Cable systems also face competition from alternative
methods of distributing and receiving television signals and from other sources
of entertainment such as live sporting events, movie theaters and home video
products, including videocassette recorders. In recent years, the FCC has
adopted policies providing for authorization of new technologies and a more
favorable operating environment for certain existing technologies that provide,
or may provide, substantial additional competition for cable television systems.
 
                                   TELEPHONY
 
     Time Warner Communications, a subsidiary of TWE, is a facilities-based
competitive local exchange carrier ('CLEC') in selected metropolitan markets
across the United States, offering a wide range of business telephony services,
primarily to medium and large-sized business customers and other carriers. Time
Warner Communications' customers are principally telecommunications-intensive
businesses, long distance carriers, Internet service providers, wireless
communications companies and governmental entities. Such customers are offered a
wide range of integrated telecommunications services, including dedicated
transmission, local switched, data and video transmission services and certain
Internet services. As of March 1, 1998, Time Warner Communications had deployed
switches in 16 of its 19 metropolitan markets. Its networks have been
constructed primarily through licensing the use of fiber capacity from Time
Warner Cable.
 
     Time Warner Communications' business was commenced in 1993 by Time Warner
Cable, originally to provide residential and business telephony services
together with cable television. Since January 1997, Time Warner Communications
has focused exclusively on the business segments.
 
       DESCRIPTION OF CERTAIN PROVISIONS OF THE TWE PARTNERSHIP AGREEMENT
 
     The following description summarizes certain provisions of the TWE
Partnership Agreement relating to the ongoing operations of TWE. Such
description does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the provisions of the TWE Partnership
Agreement.
 
MANAGEMENT AND OPERATIONS OF TWE
 
     Partners. Upon the capitalization of TWE in June 1992, certain subsidiaries
of Time Warner became the general partners (the 'Class B Partners' or the 'Time
Warner General Partners') of TWE and subsidiaries of Itochu Corporation
('Itochu') and Toshiba Corporation ('Toshiba') became limited partners of TWE
(the 'Class A Partners'). U S West was admitted as a Class A Partner in
September 1993. In 1995, Time Warner acquired the limited partnership interests
of Itochu and Toshiba. Consequently, the limited partnership interests in TWE
are held by the Class A Partners consisting of U S West and wholly owned
subsidiaries of Time Warner and the general partnership interests in TWE are
held by the Class B Partners consisting of wholly owned subsidiaries of Time
Warner.
 
     Board of Representatives. Subject to certain authority of the Management
Committee (as described below) with respect to the Cable division, the business
and affairs of TWE are managed under the direction of a board of representatives
(the 'Board of Representatives' or the 'Board') that is comprised of
representatives appointed by subsidiaries of Time Warner (the 'Time Warner
Representatives') and representatives appointed by US West (the 'US West
Representatives').
 
     The Time Warner Representatives control all Board decisions except for
certain matters including (i) the merger or consolidation of TWE; (ii) the sale
or other disposition of assets of TWE generating in excess of 10% of the
consolidated revenues of TWE during the previous fiscal year or representing in
excess of 10% of the fair market value of the total assets of TWE (in each case,
other than in connection with certain joint ventures and 'cable asset swaps' as
to which the thresholds are greater); (iii) any acquisition by TWE, other than
in the ordinary course of business, if the consideration paid by TWE in
connection with such acquisition would exceed the greater of (1) $750 million
and (2) 10% of the consolidated revenues of TWE for the most recently ended
fiscal year of TWE; (iv) the engagement by TWE in any business other than the
businesses then being conducted by TWE, as they may evolve from time to time and
any business related to such businesses (provided that TWE may not engage in the
manufacturing, sale or servicing of hardware, other than as may be incidental to
TWE's
 
                                      I-19
 




businesses); (v) the incurrence by TWE of indebtedness for money borrowed if,
after giving effect to such incurrence, the ratio of total indebtedness for
money borrowed to cash flow would exceed the greater of (x) 5.00 to 1.00 and (y)
 .5 over the analogous ratio in the TWE credit agreement as in effect from time
to time; (vi) cash distributions other than as provided in the TWE Partnership
Agreement; (vii) the dissolution or voluntary bankruptcy of TWE; and (viii) any
amendment to the TWE Partnership Agreement, which matters also require the
approval of the US West Representatives.
 
     The managing general partners, both of which are wholly owned subsidiaries
of Time Warner, may take any action without the approval or consent of the Board
if such action may be authorized by the Time Warner Representatives without the
approval of the US West Representatives. However, see 'Cable Management
Committee,' below.
 
     Cable Management Committee. Subject to obtaining necessary franchise and
other approvals, the businesses and operations of the cable television systems
of TWE and TWE-A/N are governed by a Cable Management Committee (the 'Management
Committee'). The systems that have been designated from time to time to be
governed by the management committee and with respect to which all necessary
franchise and other approvals have been obtained are referred to as the
'Designated Systems.' The Management Committee is comprised of six voting
members, three designated by US West and three designated by TWE. If US West at
any time owns less than 50% of the partnership interest which it owned, directly
or indirectly, as of September 15, 1993 or if a 'change in control' of US West
occurs, US West's right to designate any members of the Management Committee
will terminate. The Designated Systems are managed on a day-to-day basis by the
officers of Time Warner Cable. The approval of a majority of the members of the
Management Committee is required for certain significant transactions relating
to the Designated Systems, including, among other things, the sale, pledge or
encumbrance of assets of the Designated Systems, the acquisition of cable
assets, the making of commitments or expenditures relating to the Designated
Systems, in each case subject to agreed upon thresholds, certain decisions with
respect to design, architecture and designation of cable systems for upgrade and
the adoption of the annual business plan.
 
     Non-Voting Representatives and Committee Members. Each of ITOCHU and
Toshiba has the right to designate non-voting members to the Board of
Representatives and the Management Committee. In addition, Advance/Newhouse has
the right to designate a non-voting member to the Management Committee.
 
     Day-to-Day Operations. TWE is managed on a day-to-day basis by the officers
of TWE, and each of TWE's three principal partnership divisions is managed on a
day-to-day basis by the officers of such division. Upon the TWE Capitalization,
the officers of Time Warner also became officers of TWE and the officers of the
Time Warner General Partners became the officers of the corresponding
partnership divisions and the subdivisions thereof.
 
CERTAIN COVENANTS
 
     Covenant Not to Compete. For so long as any partner (or affiliate of any
partner) owns in excess of 5% of TWE and in the case of any Time Warner General
Partner, for one year thereafter, such partner (including its affiliates) is
generally prohibited from competing or owning an interest in the three principal
lines of business of TWE -- cable, cable programming and filmed entertainment
(including the ownership and operation of theme parks) -- as such businesses may
evolve, subject to certain agreed upon exceptions (including TBS), limited
passive investments and inadvertent violations. The covenant not to compete does
not prohibit (i) U S West from conducting cable and certain regional programming
businesses in the 14-state region in which it provides telephone service, (ii)
any party from engaging in the cable business in a region in which TWE is not
then engaging in the cable business, subject to TWE's right of first refusal
with respect to such cable business, or (iii) any party from engaging in the
telephone or information services business. ITOCHU and Toshiba continue to be
bound by and benefit from the non-compete provisions but only as they relate to
Japan.
 
     Transactions with Affiliates. Subject to agreed upon exceptions for
existing arrangements, TWE will not enter into any transaction with any partner
or any of its affiliates other than on an arm's-length basis.
 
                                      I-20
 




REGISTRATION RIGHTS
 
     Beginning on June 30, 2002 (or as early as June 30, 1999 if certain
threshold cash distributions are not made to the Class A Partners), the Class A
Partners holding, individually or in the aggregate, at least 10% of the residual
equity of TWE will have the right to request that TWE reconstitute itself as a
corporation and register for sale in a public offering an amount of partnership
interests held by such Class A Partners determined by an investment banking firm
so as to maximize trading liquidity and minimize the initial public offering
discount, if any. Upon any such request, the parties will cause an investment
banker to determine the price at which the interests sought to be registered
could be sold in a public offering (the 'Appraised Value'). Upon determination
of the Appraised Value, TWE may elect either to register such interests or
purchase such interests at the Appraised Value, subject to certain adjustments.
If TWE elects to register the interests and the proposed public offering price
(as determined immediately prior to the time the public offering is to be
declared effective) is less than 92.5% of the Appraised Value, TWE will have a
second option to purchase such interests immediately prior to the time such
public offering would otherwise have been declared effective by the Securities
and Exchange Commission at the proposed public offering price less underwriting
fees and discounts. If TWE exercises its purchase option, it will be required to
pay the fees and expenses of the underwriters. Upon exercise of either purchase
option, TWE may also elect to purchase the entire partnership interests of the
Class A Partners requesting registration at the relevant price, subject to
certain adjustments.
 
     In addition to the foregoing, U S West will have the right to exercise an
additional demand registration right (in which the other Class A Partners would
be entitled to participate) beginning 18 months following the date on which TWE
reconstitutes itself as a corporation and registers the sale of securities
pursuant to a previously exercised demand registration right.
 
     At the request of any Time Warner General Partner, TWE will effect a public
offering of the partnership interests of the Time Warner General Partners or
reconstitute TWE as a corporation and register the shares held by the Time
Warner General Partners. In any such case, the Class A Partners will have
standard 'piggy-back' registration rights.
 
     Upon any reconstitution of TWE into a corporation, each partner will
acquire preferred and common equity in the corporation corresponding in both
relative value, rate of return and priority to the partnership interests it held
prior to such reconstitution, subject to certain adjustments to compensate the
partners for the effects of converting their partnership interests into capital
stock.
 
CERTAIN PUT RIGHTS OF THE CLASS A PARTNERS
 
     Change in Control Put. Upon the occurrence of a change in control of Time
Warner, at the request of any Class A Partner, TWE will be required to elect
either to liquidate TWE within a two-year period or to purchase the interest of
such partner at fair market value (without any minority discount) as determined
by investment bankers. A 'change in control' of Time Warner shall be deemed to
have occurred:
 
     (x) whenever, in any three-year period, a majority of the members of the
Board of Directors of Time Warner elected during such three-year period shall
have been so elected against the recommendation of the management of Time Warner
or the Board of Directors shall be deemed to have been elected against the
recommendation of such Board of Directors of Time Warner in office immediately
prior to such election; provided, however, that for purposes of this clause (x)
a member of such Board of Directors shall be deemed to have been elected against
the recommendation of such Board of Directors if his or her initial election
occurs as a result of either an actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended) or other actual or threatened solicitation of
proxies or consents by or on behalf of a person other than such Board of
Directors; or
 
     (y) whenever any person shall acquire (whether by merger, consolidation,
sale, assignment, lease, transfer or otherwise, in one transaction or any
related series of transactions), or otherwise beneficially owns voting
securities of Time Warner that represent in excess of 50% of the voting power of
all outstanding voting securities of Time Warner generally entitled to vote for
the election of directors, if such person acquires or publicly announces its
intention to initially acquire ten percent or more of such voting securities in
a transaction
 
                                      I-21
 




that has not been approved by the management of Time Warner within 30 days after
the date of such acquisition or public announcement.
 
     Assignment of Put Rights, etc. TWE, with the consent of such assignee, may
assign to Time Warner, any general partner or any third party, the obligation to
pay the applicable put price in connection with the exercise of a change in
control put right by a Class A Partner and the right to receive the partnership
interests in payment therefor.
 
     With respect to any of the put rights of the Class A Partners, TWE may pay
the applicable put price in cash or Marketable Securities (defined as any debt
or equity securities that are listed on a national securities exchange or quoted
on NASDAQ) issued by TWE (or if TWE assigns its obligation to pay the put price
to Time Warner, by Time Warner). The amount of any Marketable Securities
comprising the applicable put price shall be determined based on the market
price of such securities during the seven months following the closing of such
put transaction.
 
RESTRICTIONS ON TRANSFER BY TIME WARNER GENERAL PARTNERS
 
     Time Warner General Partners. Any Time Warner General Partner is permitted
to dispose of any partnership interest (and any Time Warner General Partner and
any parent of any Time Warner General Partner may issue or sell equity) at any
time so long as, immediately after giving effect thereto, (i) Time Warner would
not own, directly or indirectly, less than (a) 43.75% of the residual equity of
TWE, if such disposition occurs prior to the date on which the Class A Partners
have received cash distributions of $500 million per $1 billion of investment,
and (b) 35% of the residual equity of TWE if such disposition occurs after such
date, (ii) no person or entity would own, directly or indirectly, a partnership
interest greater than that owned, directly or indirectly, by Time Warner, and
(iii) a subsidiary of Time Warner would be a managing general partner of TWE.
 
     No other dispositions are permitted, except that Time Warner may sell its
entire partnership interest subject to the Class A Partners' rights of first
refusal and 'tag-along' rights pursuant to which Time Warner must provide for
the concurrent sale of the partnership interests of the Class A Partners so
requesting.
 
                         CURRENCY RATES AND REGULATIONS
 
     TWE's foreign operations are subject to the risk of fluctuation in currency
exchange rates and to exchange controls. TWE cannot predict the extent to which
such controls and fluctuations in currency exchange rates may affect its
operations in the future or its ability to remit dollars from abroad. See Note 1
'Organization and Summary of Significant Accounting Policies -- Foreign
Currency' and Note 11 'Financial Instruments -- Foreign Currency Risk
Management' to the consolidated financial statements set forth at pages F-18 and
F-34, respectively, herein. For the revenues of foreign operations, see Note 12
'Segment Information' to the consolidated financial statements set forth on page
F-38 herein.
 
                                   EMPLOYEES
 
     At December 31, 1997, TWE employed a total of approximately 29,700 persons.
 
                                      I-22




                 BUSINESSES OF THE TIME WARNER GENERAL PARTNERS
 
     WCI, under the umbrella name Warner Music Group, conducts substantially all
of Time Warner's vertically integrated worldwide recorded music business and
worldwide music publishing business. The other General Partner does not conduct
operations independent of its ownership interest in TWE and certain other
investments.
 
                                     MUSIC
 
     In the United States and around the world, WCI, through its wholly owned
Warner Music Group division ('WMG'), is in the business of discovering and
signing musical artists and manufacturing, packaging, distributing and marketing
their recorded music.
 
     WMG also operates Warner/Chappell, a music publishing business with offices
around the world, and is a joint venture partner of music and video clubs in
North America.
 
RECORDED MUSIC
 
     In the United States, WMG's recorded music business is principally
conducted through WMG's Warner Bros. Records, Inc., Atlantic Recording
Corporation, Elektra Entertainment Group and the newly formed Sire Records Group
Inc. and their affiliated labels, as well as through the WEA Inc. companies. The
WEA Inc. companies include WEA Manufacturing Inc., which manufactures compact
discs (CDs), audio and videocassettes, CD-ROMs and, commencing in 1997, digital
versatile discs (DVDs), for WMG's record labels as well as for outside
companies; Ivy Hill Corporation, which produces printed material and packaging
for WMG's recorded music products as well as for a wide variety of other
consumer products; and Warner-Elektra-Atlantic Corporation ('WEA Corp.'), which
markets and distributes WMG's recorded music products to retailers and wholesale
distributors. WMG also owns a majority interest in Alternative Distribution
Alliance ('ADA'), a so-called 'independent' distribution company specializing in
alternative rock music with a focus on new artists and smaller retailers.
 
     These activities are conducted in more than 70 countries outside the United
States by Warner Music International and its subsidiaries, affiliates and
non-affiliated licensees. In 1997, more than 55% of WMG's recorded music
revenues came from outside the United States.
 
DOMESTIC
 
     WMG's record labels in the United States -- Warner Bros., Atlantic, Elektra
and Sire -- each with a distinct identity, discover and sign musical artists.
The labels scout and sign talent in many different musical genres, including
pop, rock, jazz, country, hip hop, reggae, folk, blues, gospel and Christian
music. Artists generally receive royalties based upon a percentage of the
suggested retail or wholesale price of their recordings and music videos, and
most receive non-refundable advance payments against such royalties.
 
     WMG is a vertically-integrated music company. After an artist has entered
into a contract with a WMG label, a master recording of the artist's music is
produced and provided to WMG's manufacturing operation, WEA Manufacturing, which
replicates the music primarily on CDs and audio cassettes. Ivy Hill prints
material that is included with CDs and audio cassettes and creates packaging for
them. WEA Corp. and ADA, WMG's distribution arms, sell product and deliver it,
either directly or through sub-distributors and wholesalers, to thousands of
record stores, mass merchants and other retailers throughout the country.
Product is also beginning to be sold directly to consumers through the Internet.
At the same time these activities take place, the label's promotion, marketing,
advertising and publicity departments place advertisements in print and
electronic media, work to get the new album played on the radio, reviewed and
mentioned in publications and the artist booked for appearances on radio and
television. If a music video featuring an artist has been produced, the video is
distributed and promoted to music video television programmers. Label personnel
may also help organize a tour that will further promote a new album.
 
     In addition to newly released records, each of WMG's labels markets and
sells albums from their extensive catalogues of prior releases, in which the
labels generally continue to own the copyright in perpetuity. Rhino
 
                                      I-23
 




Records, in which WMG owns a 50% equity interest, specializes in compilations
and re-issues of previously released music.
 
     WMG also has entered into joint venture arrangements pursuant to which WMG
companies manufacture, distribute and market (in most cases, domestically and
internationally) recordings owned by the joint ventures. Such agreements
typically provide a WMG label with an equity interest and a profit participation
in the venture, with financing furnished either solely by the WMG label or by
both parties. Included among these arrangements are the labels Maverick, Tommy
Boy, Sub Pop, Qwest and 143 Records. WMG labels also enter into agreements with
unaffiliated third-party record labels such as Curb to manufacture and
distribute recordings that are marketed under the owner's proprietary label.
Through a joint venture, WMG and Sony Music Entertainment operate The Columbia
House Company, the leading direct marketer of CDs, audio and videocassettes in
the United States and Canada.
 
     Among the albums resulting in significant sales for WMG during 1997 were
the Space Jam soundtrack and Madonna's 'Evita' soundtrack, as well as releases
by Paula Cole, Fleetwood Mac, Jewel, matchbox20, Metallica, Sugar Ray and LeAnn
Rimes.
 
INTERNATIONAL
 
     Operating in more than 70 countries around the world, Warner Music
International ('WMI') engages in the same activities as WMG's domestic labels,
discovering and signing artists and manufacturing, packaging, distributing and
marketing their recorded music. The artists signed to WMI and its affiliates
number more than a thousand. In most cases, WMI also markets and distributes the
recordings of those artists for whom WMG's domestic record labels have
international rights. In certain countries, WMI licenses to unaffiliated
third-party record labels the right to distribute its recordings.
 
     WMI operates a plant in Germany that manufactures CDs, laser discs and
vinyl records for its affiliated companies, as well as for outside companies
and, as part of a joint venture, operates a plant in Australia that also
manufactures CDs. WMI operates a video company that coordinates the
international release of music and non-music video titles.
 
     Among the artists whose albums resulted in significant sales for WMI in
1997 were Enya, Noriyuki Makihara, Luis Miguel and Alejandro Sanz.
 
MUSIC PUBLISHING
 
     WMG's music publishing companies own or control the rights to more than one
million musical compositions, including numerous pop music hits, American
standards, folk songs, and motion picture and theatrical compositions. The
catalogue includes works from a diverse range of artists and composers,
including Phil Collins, Comden & Green, George and Ira Gershwin, Michael
Jackson, Leiber & Stoller, Madonna and Cole Porter. Warner/Chappell also
administers the music of several television and motion picture companies,
including Lucasfilm, Ltd., Samuel Goldwyn Productions, Aaron Spelling
Productions and New World.
 
     Warner/Chappell's printed music division markets publications throughout
the world containing the works of such artists as Alabama, The Grateful Dead,
Led Zeppelin, Madonna, Bob Seger and many others. Warner/Chappell also owns
Warner Bros. Publications and CPP/Belwin, two of the world's largest publishers
of printed music.
 
     The principal source of revenues to Warner/Chappell are license fees paid
for the use of its musical compositions on radio, television, in motion pictures
and in other public performances; royalties for the use of its compositions on
CDs, audio cassettes, music videos and in television commercials; and sales of
published sheet music and song books.
 
COMPETITION
 
     The recorded music business is highly competitive. The revenues of a
company in the recording industry depend upon public acceptance of the company's
recording artists and their music. Although WMG is one of the
 
                                      I-24
 




largest recorded music companies in the world, its competitive position is
dependent on its continuing ability to attract and develop talent that can
achieve a high degree of public acceptance. Overexpansion of retail recorded
music outlets over the past several years led to the closing of many such stores
during 1996 and 1997, which has resulted in further increased competition among
recorded music companies. Competition during 1997, as in past years, also
reflected the growth in the number of albums released by independent record
labels. The recorded music business continues to be adversely affected by
counterfeiting of both audio cassettes and CDs, piracy and parallel imports and
may in the future be affected by consumers' ability to download quality sound
reproductions from the Internet without authorization from WMG. In addition, the
recorded music business also meets with competition from other forms of
entertainment, such as television, pre-recorded videocassettes, the Internet and
computer and video games. Competition in the music publishing business is
intense. Although WMG's music publishing business is the largest on a worldwide
basis, it competes with every other music publishing company in acquiring
musical compositions and in having them recorded and performed.
 
                                     OTHER
 
DC COMICS AND MAD MAGAZINE
 
     TWE and WCI each owns a 50% interest in DC Comics. DC Comics publishes more
than 60 regularly issued comics magazines, among the most popular of which are
'Superman,' 'Batman,' 'Wonder Woman' and 'The Sandman,' as well as story
collections sold as books. DC Comics also derives revenues from motion pictures,
television syndication, product licensing, books for juvenile and adult markets
and foreign publishing. Trademarks in DC Comics' principal characters have been
registered in the United States Patent and Trademark Office and in certain
foreign countries.
 
     WCI owns 100% of E.C. Publications, Inc., the publisher of MAD, a magazine
featuring articles of humorous and satirical interest, which is regularly
published nine times a year and also in periodic special editions.
 
TURNER BROADCASTING SYSTEM, INC.
 
     In October 1996, Time Warner consummated the acquisition of TBS by
acquiring the remaining approximately 80% interest in TBS not already owned by
Time Warner. The Time Warner General Partners collectively own a 10.6% economic
interest in TBS. TBS is a diversified information and entertainment company.
Through its subsidiaries, TBS owns and operates four domestic entertainment
networks: TBS Superstation, Turner Network Television (TNT), Cartoon Network and
Turner Classic Movies (TCM); four international entertainment networks: TNT
Latin America, Cartoon Network Latin America, TNT & Cartoon Network Europe, and
TNT & Cartoon Network Asia; and six news networks: Cable News Network (CNN),
Headline News, Cable News Network International (CNNI), CNN en Espanol, CNN
Financial Network (CNNfn) and CNN/SI. TBS produces and distributes entertainment
and news programming worldwide, and also has operations in motion picture,
animation and television production, home video, television syndication,
licensing and merchandising.
 
TWE JAPAN
 
     WCI owns a 37.25% interest in, US West owns a 12.75% interest in, and each
of Toshiba and ITOCHU owns a 25% interest in, Time Warner Entertainment Japan
Inc. ('TWE Japan'). TWE Japan was organized to conduct TWE's businesses in
Japan, including home video distribution, theatrical film and television
distribution and merchandising businesses, and to expand and develop new
business opportunities. Pursuant to distribution and merchandising agreements
entered into between TWE and TWE Japan, TWE Japan receives distribution fees
generally comparable to those currently received by TWE for performing
distribution services for unaffiliated third parties.
 
                                      I-25
 




ITEM 2.  PROPERTIES
 
PROPERTIES OF TWE
 
     The following table sets forth certain information as of December 31, 1997
with respect to principal properties (over 250,000 square feet in area) owned or
leased by TWE's Filmed Entertainment, Cable Networks -- HBO and cable television
businesses, all of which TWE considers adequate for its present needs, and all
of which were substantially used by TWE.
 


                                                            APPROXIMATE
                                                            SQUARE FEET            TYPE OF OWNERSHIP;
        LOCATION          PRINCIPAL USE                  FLOOR SPACE/ACRES      EXPIRATION DATE OF LEASE
- ------------------------  -----------------------------  ------------------   -----------------------------
                                                                     
New York, New York        Business offices               335,000 sq. ft.      Leased by TWE.
  1100 and 1114           (HBO)                          and 237,000 sq.      Leases expire in 2004
  Avenue of the                                          ft.                  and 2006.
  Americas
Baltimore, Maryland       Warehouse (Filmed              387,000 sq. ft.      Owned by TWE.
  White Marsh             Entertainment)
Burbank, California       Sound stages,                  3,303,000            Owned by TWE.
  The Warner Bros.        administrative, technical and  sq. ft. of
  Studio                  dressing room structures,      improved
                          screening theaters, machinery  space on 158
                          and equipment facilities,      acres(a)
                          back lot and parking lot and
                          other Burbank properties
                          (Filmed Entertainment)
West Hollywood,           Sound stages,                  350,000              Owned by TWE.
  California              administrative,                sq. ft. of
  The Warner              technical and dressing         improved
  Hollywood Studio        room structures, screening     space on 11
                          theaters, machinery and        acres
                          equipment facilities (Filmed
                          Entertainment)
Valencia, California      Location filming (Filmed       232 acres            Owned by TWE.
  Undeveloped Land        Entertainment)

 
- ------------
 
(a)  Ten acres consist of various parcels adjoining The Warner Bros. Studio,
     with mixed commercial, office and residential uses.
 
PROPERTIES OF THE TIME WARNER GENERAL PARTNERS
 
     The following table sets forth certain information as of December 31, 1997
with respect to the principal properties of WCI and its subsidiaries (over
250,000 square feet in area), all of which WCI considers adequate
 
                                      I-26
 




for its present needs, and all of which were substantially used by WCI. The Time
Warner General Partners other than WCI and its subsidiaries do not own or lease
any properties material to their businesses.
 


                                                                                APPROXIMATE     TYPE OF OWNERSHIP;
                                                                                SQUARE FEET     EXPIRATION DATE OF
         LOCATION                             PRINCIPAL USE                     FLOOR SPACE            LEASE
- --------------------------  -------------------------------------------------   -----------   -----------------------
                                                                                     
Olyphant,                   Manufacturing, warehouses, distribution and          1,058,000    Owned and occupied by
  Pennsylvania              office space (Music)                                              WCI.
  1400 and 1444 East
  Lackawanna
  Avenue
Nortorf, Germany            Manufacturing, distribution and office space           334,000    Owned and occupied by
  Niedernstrasse 3-7        (Music)                                                           WCI.
Alsdorf, Germany            Manufacturing, distribution and office space           269,000    Owned and occupied by
  Max-Planck Strasse 1-9    (Music)                                                           WCI.
Terre Haute, Indiana        Manufacturing and office space (Music)                 269,000    Leased by WCI. Lease
  Building 102, Fort                                                                          expires in 2001.
  Harrison Industrial Park

 
ITEM 3.  LEGAL PROCEEDINGS
 
     TWE and its divisions and the Time Warner General Partners are parties, in
the ordinary course of business, to litigations involving property, personal
injury and contract claims. The amounts that TWE believes may be recoverable in
these matters are either covered by insurance or are not material.
 
     In October 1993, 15 music performers or representatives of deceased
performers, on behalf of an alleged similarly-situated class, filed suit in the
United States District Court for the Northern District of Georgia against
approximately 50 record companies, including four WCI subsidiaries (Samuel D.
Moore, et al. v. American Federation of Television and Radio Artists, et al.,
No. 93-Civ-2358). Plaintiffs claimed that the recording companies, the American
Federation of Television and Radio Artists ('AFTRA') (their union), and the
AFTRA Health and Retirement Fund (the 'Fund') under-reported and
under-contributed to the Fund, in violation of ERISA, in breach of contract and
fiduciary duty, through fraud and embezzlement, and in violation of RICO.
Plaintiffs sought substantial, but unquantified, monetary damages, treble
damages, attorneys' fees and costs and the imposition of a constructive trust
over their master recordings. Following a series of motions, on August 2, 1994,
the court dismissed the claims against the Fund and the Fund's trustees, and
dismissed all claims against the defendant recording companies except the RICO
claim. The record company defendants then answered the RICO claim, denying its
material allegations and alleging defenses. After certain discovery, the
defendants, on January 29, 1997, moved for summary judgment. A second, similar
lawsuit, commenced by the same plaintiffs in the United States District Court
for the Southern District of New York, alleging a class action and derivative
claims on behalf of the Fund against essentially the same defendants has, after
various motions by defendants, been combined with the first action in the
Northern District of Georgia. Defendants moved to dismiss the newly-added counts
on December 18, 1996. On August 14, 1997, the Court granted the record company
defendants' motion to dismiss the new ERISA claims but denied the defendants'
motion to dismiss the newly-added state law claims for breach of contract and
fraud and their motion for summary judgment on the RICO claims. The Court also
denied a motion by the Fund and the Fund Trustees to dismiss the claims asserted
against them. On January 20, 1998, the Court denied plaintiffs' motions for
class certification of the remaining claims against the record company
defendants and against the Fund and Fund Trustees. Accordingly, the case is now
limited to the individual claims of the 15 named plaintiffs, which remain
pending before the Court. Plaintiffs have filed a motion seeking certification
of the Court's Order of January 20, 1998, so that an appeal can immediately be
taken to the Eleventh Circuit Court of Appeals. Additionally, plaintiffs have
filed a motion seeking either entry of final judgment on the ERISA claims
dismissed by the Court's Order of August 14, 1997, or, in the alternative,
certification of that Order for immediate appeal. Both motions remain pending.
 
                                      I-27
 




     On July 14, 1994, Time Warner received a civil investigative demand from
the United States Department of Justice in furtherance of an investigation into
certain worldwide activities of WMG and other companies in the recorded music
industry principally related to cable, wire and satellite-delivered music and
music video programmers. Time Warner has complied with the civil investigative
demand and provided information and produced documents as required by a 1997
decision of the United States District Court for the District of Columbia.
 
     On May 30, 1995, a purported class action was filed with the United States
District Court for the Central District of California, entitled Digital
Distribution Inc. d/b/a Compact Disc Warehouse v. CEMA Distribution, Sony Music
Entertainment, Inc., Warner Elektra Atlantic Corporation, UNI Distribution
Corporation, Bertelsmann Music Group, Inc. and PolyGram Group Distribution,
Inc., No. 95-3536. The plaintiff, representing a class of direct purchasers of
recorded music compact discs ('CDs'), alleged that Warner Elektra Atlantic
Corporation ('WEA'), along with five other distributors of CDs, violated the
federal antitrust laws by engaging in a conspiracy to fix the prices of CDs, and
sought an injunction and treble damages. On January 9, 1996, the defendants'
motion to dismiss the amended complaint was granted and the action was
dismissed, with prejudice. Plaintiff appealed the dismissal to the United States
Court of Appeals for the Ninth Circuit, No. 96-55264. On July 3, 1997, the
United States Court of Appeals for the Ninth Circuit reversed the dismissal of
the amended complaint and remanded the case to the District Court, holding that
the amended complaint was sufficient to meet the pleading requirements of the
Federal Rules and that the action should proceed. On October 29, 1997, the
District Court stayed proceedings in the action due to the filing on May 12,
1997 of a Chapter 7 Petition under the U.S. Bankruptcy Code by plaintiff.
 
     As TWE has disclosed and discussed more fully in previous reports on Form
10-K filed by TWE, fifteen actions against TBS, Time Warner, certain officers
and directors of TBS or TWE, and other defendants, purportedly on behalf of a
class of TBS shareholders, filed in Superior Court, Fulton County, Georgia in
connection with the TBS Transaction have been consolidated. On February 29,
1996, plaintiffs filed their third amended consolidated supplemental and
derivative class action complaint (the 'Third Amended Complaint') alleging,
among other things, that the terms of the TBS Transaction were unfair to TBS
shareholders and that, in connection with the TBS Transaction, the defendants
acted fraudulently, had breached or aided and abetted the breach of fiduciary
common law and statutory duties owed to TBS shareholders and that the vote of
the TBS Board approving the TBS Transaction did not comply with legal
requirements. Among other relief demanded, the Third Amended Complaint sought
damages, an injunction against the consummation of the TBS Transaction and
related transactions, and an auction of TBS. Plaintiffs' request for a
preliminary injunction was denied in October 1996 and in December 1996, the
Court granted defendants' motion for judgment on the pleadings with respect to
certain claims in the Third Amended Complaint and also granted plaintiffs'
motion for leave to file a fourth amended complaint. In January 1997, plaintiffs
filed a fourth amended class action complaint containing allegations and
requesting relief substantially similar in substance to the Third Amended
Complaint. On July 14, 1997, defendants' motion for summary judgment on
plaintiffs' fourth amended complaint and defendants' motion for final judgment
on the Third Amended Complaint were both granted. On July 23, 1997, plaintiffs
filed a notice of appeal from these decisions; the appeal has now been fully
briefed and is awaiting decision.
 
     On July 25, 1996, WEA was served with an antitrust civil investigative
demand from the Office of the Attorney General of the State of Florida that
calls for the production of documents in connection with an investigation to
determine whether there is, has been or may be a conspiracy to fix the prices of
CDs or conduct consisting of unfair methods of competition or unfair trade
practices in the sale and marketing of CDs. WEA produced documents in compliance
with the investigative demand. By letter dated January 8, 1998, WEA was notified
by the Office of the Attorney General of the State of Florida that certain
documents that WEA had produced to its office were shared under a
confidentiality provision in the Florida statutes with the Office of the
Attorney General of the State of Illinois and the Office of the Attorney General
of the State of New York. To date, no action has been taken by the Attorney
Generals of these states.
 
     On March 19, 1997, Six Flags Theme Parks Inc. ('Six Flags') and its
wholly-owned subsidiary Six Flags Over Georgia, Inc. commenced a declaratory
judgment action in the Superior Court of Gwinnett County, Georgia, entitled Six
Flags Over Georgia, Inc. and Six Flags Theme Parks, Inc. v. Six Flags Fund, Ltd.
and
 
                                      I-28
 




Avram Salkin, as Trustee of the Claims Trust. The action sought, among other
things, a declaration and determination of the rights and obligations of the
partners of Six Flags Over Georgia, L.P. with respect to certain disputed
partnership matters and an accounting of all partnership affairs. The parties
have since been realigned, so that the original defendants are now the
plaintiffs in the action and Six Flags Entertainment Corporation, the parent
company of Six Flags that is 49% owned by TWE, and certain of its subsidiaries
and TWE are now the defendants against whom additional claims have been made.
These claims seek imposition of a constructive trust, compensatory damages of in
excess of $250 million and unspecified punitive damages for alleged breach of
fiduciary duty, conversion, fraud and conspiracy allegedly committed by the
counterclaim-defendants in connection with the management of the Six Flags Over
Georgia theme park. The parties are currently engaged in document discovery. TWE
and its 51% partner in Six Flags will retain financial responsibility for this
litigation following completion of the sale of Six Flags. (See Item 1.
'Entertainment -- Other Entertainment Assets').
 
     On April 11, 1997, the Washington and Dallas offices of the Federal Trade
Commission notified WEA that they had commenced a preliminary investigation into
whether WEA and others may be violating or have violated laws against unfair
competition by the adoption, implementation or maintenance of minimum advertised
pricing programs. On September 23, 1997, Warner Communications Inc. was served
by the Federal Trade Commission with a subpoena duces tecum calling for the
production of documents in connection with a nonpublic investigation into
whether the recorded music distribution companies and others may be engaging or
may have engaged in unfair methods of competition through the adoption,
implementation and maintenance of cooperative advertising programs that included
minimum advertised price provisions. WEA produced documents in response to the
subpoena.
 
     On September 30, 1997, a purported class action was commenced in the United
States District Court for the Central District of California entitled Chandu
Dani d/b/a Compact Disc Warehouse and Record Revolution v. EMI Music
Distribution, Sony Music Entertainment, Inc., Warner Elektra Atlantic
Corporation, Universal Music and Video Distribution, Bertelsmann Music Group,
Inc. and Polygram Group Distribution, Inc., No. 97-7226. On October 16, 1997,
plaintiffs filed a first amended complaint. The plaintiffs, purporting to
represent a class of direct purchasers of CDs, allege that WEA, along with five
other distributors of CDs, violated the federal and state antitrust laws by
engaging in a conspiracy to fix the prices of CDs and seek an injunction and
treble damages. On December 22, 1997, WEA answered the action, denying the
material allegations of the amended complaint, asserting affirmative defenses
and demanding judgment against plaintiffs.
 
     On December 2, 1997, a purported class action was commenced in the United
States District Court for the Central District of California entitled Third
Street Jazz and Rock Holding Corporation v. EMI Music Distribution, Sony Music
Entertainment, Inc., Warner Elektra Atlantic Corporation, Universal Music and
Video Distribution, Bertelsmann Music Group, Inc. and PolyGram Group
Distribution, Inc., No. 97-8864. The claims asserted are substantially the same
as those asserted in the Chandu Dani action reported above. On December 24,
1997, WEA answered the action, denying the material allegations of the
complaint, asserting affirmative defenses and demanding judgment against
plaintiffs.
 
     On January 28, 1998, a purported class action was commenced in the United
States District Court for the Southern District of New York entitled Nathan
Muchnick, Inc. v. Sony Music Entertainment, Inc., PolyGram Group Distribution,
Inc., Bertelsmann Music Group, Inc., Universal Music and Video Distribution,
Warner Elektra Atlantic Corporation and EMI Music Distribution, No. 98 Civ.
0612. The claims asserted are substantially the same as those asserted in the
Chandu Dani action reported above. On February 23, 1998, WEA answered the
action, denying the material allegations of the complaint, asserting affirmative
defenses and demanding judgment against plaintiffs.
 
     By letter dated February 12, 1998, the New York State Attorney General
advised Time Warner of the termination of an antitrust investigation begun in
1996 regarding the carriage of video programming services on Time Warner's cable
systems, including its decision to carry the MSNBC news service and not the Fox
News Channel.
 
     On February 17, 1998, a purported class action was commenced in the Circuit
Court of Cocke County, Tennessee at Newport, entitled Ottinger & Silvey, et.
al., v. EMI Music Distribution, Inc., Sony Music
 
                                      I-29
 




Entertainment, Inc., Warner Elektra Atlantic Corporation, UNI Distribution
Corporation, Bertelsmann Music Group, Inc., and Polygram Group Distribution,
Inc. The action is brought on behalf of persons who from January 29, 1993 to the
present, purchased CDs indirectly from the defendants in Alabama, Arizona,
California, the District of Columbia, Florida, Kansas, Maine, Michigan,
Minnesota, Mississippi, New Mexico, North Carolina, North Dakota, South Dakota,
Tennessee, West Virginia and Wisconsin, and alleges that the defendants are
engaged in a conspiracy to fix the prices of CDs, in violation of the antitrust,
unfair trade practices and consumer protection statutes of each of those
jurisdictions.
 
     TWE and its divisions and the Time Warner General Partners are also subject
to industry investigations by certain government agencies and/or proceedings
under the antitrust laws that have been filed by private parties in which, in
some cases, other companies in the same or related industries are also
defendants. TWE and the Time Warner General Partners have denied or will deny
liability in all of these actions. In all but a few similar past actions, the
damages, if any, recovered from TWE and the Time Warner General Partners or the
amounts, if any, for which the actions were settled were small or nominal in
relation to the damages sought; and it is the opinion of the management of TWE
that any settlements or adverse judgments in the similar actions currently
pending will not involve the payment of amounts or have other results that would
have a material adverse effect on the financial condition of TWE and the Time
Warner General Partners.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     Not applicable.
 
                                      I-30




                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
     Not Applicable.
 
ITEM 6.  SELECTED FINANCIAL DATA
 
     The selected financial information of TWE and Time Warner General Partners
set forth at pages F-42 and F-80, respectively, herein, is incorporated herein
by reference.
 
ITEM 7.  MANGEMENT'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-12 and at pages F-45 through F-49 herein, is
incorporated herein by reference.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     The information set forth under the caption 'Foreign Currency Risk
Management' at page F-11 is incorporated herein by reference.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The consolidated fiancial statements set forth at pages F-13 through F-40
of TWE and the report of independent auditors thereon set forth at page F-41
herein, and the consolidated financial statements set forth at pages F-50
through F-78 of the TWE General Partners and the report of independent auditors
thereon set forth at page F-79 herein, are incorporated herein by reference.
 
     Quarterly Financial Information set forth at page F-43 herein, is
incorporated herein by reference.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     Not Applicable.
 
                                      II-1




                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
 
REPRESENTATIVES AND DIRECTORS
 
     Set forth below is the name and age of each person who is a member with
voting rights of the Board of Representatives of TWE and each person who is a
director of one or more of the Time Warner General Partners, such person's
present principal occupation or employment, the name of the corporation or other
organization in which such occupation or employment is conducted and the name
and principal business of any corporation or other organization in which such
person held a material position or office or engaged in a material occupation or
employment during the last five years and such position, office, occupation or
employment. Messrs. Levin and Haje became members of the Board of
Representatives of TWE on June 30, 1992 and Messrs. Lillis, Parsons, Bressler,
Lochner and Williams became members on September 15, 1993, February 1, 1995,
January 1, 1996, March 7, 1997 and September 5, 1997, respectively. Mr. Lochner
also served as a member of the Board of Representatives from January 2, 1995
until December 31, 1995. The selection of TWE's Board of Representatives is
governed by the TWE Partnership Agreement. See 'Description of Certain
Provisions of the TWE Partnership Agreement -- Management and Operations of
TWE.' Mr. Levin became a director of WCI on July 24, 1989 and of ATC on
September 24, 1992. Mr. Haje became a director of ATC on September 24, 1992 and
of WCI on January 25, 1994. Mr. Parsons became a director of each Time Warner
General Partner on February 1, 1995. Mr. Bressler became a director of each Time
Warner General Partner on March 2, 1996. Mr. Haje agreed to an order entered on
September 27, 1993 by the U.S. Office of Thrift Supervision ('OTS') that, for a
period of five years, suspends him from practicing before the OTS and requires
him not to engage in the legal representation of a federally insured depository
institution. Mr. Haje also agreed, for such period, not to participate in any
unsafe or unsound banking practices or the submission of any materially
misleading statements to any federal banking authority. Such order relates to
events that occurred while Mr. Haje was a partner in a law firm that represented
a federally insured depository institution, prior to his employment by Time
Warner and TWE, and places no limits on his services for Time Warner or TWE.
 
     For a general discussion of the duties of the executive officers and
representatives of TWE, see 'Description of Certain Provisions of the TWE
Partnership Agreement -- Management and Operations of TWE.'
 


                                  DIRECTOR AND/OR                           PRINCIPAL OCCUPATIONS OR
            NAME                 REPRESENTATIVE OF       AGE          POSITIONS DURING THE PAST FIVE YEARS
- ----------------------------  ------------------------   ---   ---------------------------------------------------
                                                      
Gerald M. Levin.............  TWE, WCI and ATC           58    Chairman of the Board of Directors and Chief
                                                               Executive Officer of TWE and Time Warner since
                                                               January 21, 1993. He is also a director of Time
                                                               Warner.
Richard D. Parsons..........  TWE, WCI and ATC           49    President of TWE and Time Warner since February 1,
                                                               1995. Prior to that, Mr. Parsons served as the
                                                               Chairman and Chief Executive Officer of The Dime
                                                               Savings Bank of New York, FSB from January 1991. He
                                                               served as a director of ATC, then an 82%-owned
                                                               subsidiary of Time Warner, from 1989 until 1991 and
                                                               is currently also a director of Citicorp, the
                                                               Federal National Mortgage Association, Philip
                                                               Morris Companies Inc. and Time Warner.

 
                                     III-1
 






                                  DIRECTOR AND/OR                           PRINCIPAL OCCUPATIONS OR
            NAME                 REPRESENTATIVE OF       AGE          POSITIONS DURING THE PAST FIVE YEARS
- ----------------------------  ------------------------   ---   ---------------------------------------------------
                                                      
Richard J. Bressler.........  TWE, WCI and ATC           40    Executive Vice President and Chief Financial
                                                               Officer of TWE and Time Warner since January 15,
                                                               1998. Prior to that, Mr. Bressler served as Senior
                                                               Vice President and Chief Financial Officer of TWE
                                                               and Time Warner from March 16, 1995, as Senior Vice
                                                               President, Finance from January 2, 1995 and as a
                                                               Vice President prior to that.
Peter R. Haje...............  TWE, WCI and ATC           63    Executive Vice President and General Counsel of TWE
                                                               since June 30, 1992 and of Time Warner since
                                                               October 1, 1990 and Secretary of TWE and Time
                                                               Warner since May 20, 1993.
Philip R. Lochner, Jr.......  TWE                        55    Senior Vice President of TWE since January 2, 1995
                                                               and of Time Warner since July 18, 1991.
Charles M. Lillis...........  TWE                        56    President and Chief Executive Officer of US West
                                                               Media Group since May 25, 1995 and Executive Vice
                                                               President of US West since 1985. Mr. Lillis is a
                                                               director of Ascent Entertainment Inc., SUPERVALU
                                                               Inc. and US West.
Pearre Williams.............  TWE                        43    President of Multimedia Ventures of US West Media
                                                               Group since July 1997. Prior to that, Mr. Williams
                                                               served as the Vice President, Business Development
                                                               of US West Media Group from June 1995 and as Vice
                                                               President, Corporate Development of US West prior
                                                               to that.

 
EXECUTIVE OFFICERS
 
     Set forth below is the name and age of each person who is an executive
officer of TWE and each person who is an executive officer of the Time Warner
General Partners, such person's present principal occupation or employment, the
name of the corporation or other organization in which such occupation or
employment is conducted and the name and principal business of any corporation
or other organization in which such person held a material position or office or
engaged in a material occupation or employment during the last five years and
such position, office, occupation or employment. The executive officers of TWE
indicated below became executive officers of the Time Warner General Partners on
September 25, 1992 or, if later, on the date they became executive officers of
TWE.
 


                                                                           PRINCIPAL OCCUPATIONS OR
           NAME               EXECUTIVE OFFICER OF     AGE           POSITIONS DURING THE PAST FIVE YEARS
- --------------------------  ------------------------   ---   ----------------------------------------------------
                                                    
Gerald M. Levin...........  TWE and each Time Warner   58    See ' -- Representatives and Directors.'
                            General Partner
Richard D. Parsons........  TWE and each Time Warner   49    See ' -- Representatives and Directors.'
                            General Partner
Richard J. Bressler.......  TWE and each Time Warner   40    See ' -- Representatives and Directors.'
                            General Partner

 
                                     III-2
 




 


                                                                           PRINCIPAL OCCUPATIONS OR
           NAME               EXECUTIVE OFFICER OF     AGE           POSITIONS DURING THE PAST FIVE YEARS
- --------------------------  ------------------------   ---   ----------------------------------------------------
                                                    
Peter R. Haje.............  TWE and each Time Warner   63    See ' -- Representatives and Directors.'
                            General Partner
Timothy A. Boggs..........  TWE                        47    Senior Vice President of TWE and Time Warner since
                                                             November 19, 1992.
John A. LaBarca...........  TWE                        55    Senior Vice President and Controller of TWE and Time
                                                             Warner since May 15, 1997, having served TWE and
                                                             Time Warner as Vice President and Controller from
                                                             January 19, 1995 and as Vice President, Director of
                                                             Internal Audit from May 1, 1993. Prior to that he
                                                             was Senior Partner at Ernst & Young LLP.
Philip R. Lochner, Jr.....  TWE and each Time Warner   55    See ' -- Representatives and Directors.'
                            General
                            Partner

 
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
 
     Not Applicable.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     The executive officers of TWE and the Time Warner General Partners are
compensated by Time Warner for services provided to Time Warner pursuant to
employment agreements with Time Warner and receive no additional compensation
from TWE or any of the Time Warner General Partners. Time Warner provides the
services of such executive officers to TWE and is reimbursed for such services
pursuant to arrangements set forth in the TWE Partnership Agreement. See Item 13
'Certain Relationships and Related Transactions -- Corporate Services.' Members
of the Board of Representatives of TWE and directors of the Time Warner General
Partners are not additionally compensated for such activities.
 
EXECUTIVE COMPENSATION SUMMARY TABLE
 
     The following table sets forth information concerning total compensation
paid to the Chief Executive Officer and each of the four most highly compensated
executive officers of Time Warner who served in such capacities at Time Warner
and TWE on December 31, 1997 (the 'named executive officers') for services
rendered to Time Warner during each of the last three fiscal years in their
capacities as executive officers.
 
                                     III-3
 




                           SUMMARY COMPENSATION TABLE
 


                                                                                                    LONG-TERM
                                                                ANNUAL COMPENSATION              COMPENSATION(5)
                                                     -----------------------------------------   ---------------
                                                                                    OTHER          SECURITIES
             NAME AND PRINCIPAL                                                    ANNUAL          UNDERLYING         ALL OTHER
                  POSITION                    YEAR   SALARY(3)      BONUS      COMPENSATION(4)   OPTIONS AWARDED   COMPENSATION(6)
- --------------------------------------------- ----   ----------   ----------   ---------------   ---------------   ---------------
                                                                                                 
Gerald M. Levin.............................. 1997   $1,050,000   $6,500,000      $ 198,554           350,000         $ 108,701
  Chairman of the Board and                   1996    1,050,000    4,000,000        209,624           350,000           109,773
  Chief Executive Officer                     1995    1,050,000    4,000,000        153,930           --                107,039
Richard D. Parsons........................... 1997   $  900,000   $2,750,000      $ 117,593           150,000         $ 106,299
  President (1)                               1996      900,000    2,000,000         98,627           300,000           104,019
                                              1995      825,000    2,000,000         92,000           300,000            77,628
Peter R. Haje................................ 1997   $  825,000   $1,200,000      $  64,939            45,000         $ 120,816
  Executive Vice President                    1996      825,000    1,000,000         56,500            45,000           119,105
  and General Counsel                         1995      675,000    1,000,000         56,500            40,000           114,102
Richard J. Bressler.......................... 1997   $  525,000   $1,200,000      $  53,338            50,000         $  53,175
  Executive Vice President and                1996      525,000      900,000         50,500           100,000            44,421
  Chief Financial Officer (2)                 1995      450,000      750,000         50,500           100,000            42,755
Philip R. Lochner, Jr. ...................... 1997   $  525,000   $  540,000      $  51,098            30,000         $  76,327
  Senior Vice President                       1996      525,000      450,000             --            30,000            70,045
                                              1995      525,000      450,000             --            30,000            58,651

 
- ------------
 
(1) Mr. Parsons became President on February 1, 1995. Prior to that, he served
    as a director of Time Warner and was not an employee of Time Warner. Mr.
    Parsons' 1995 stock options were awarded at the end of 1994 in connection
    with his anticipated employment by Time Warner.
 
(2) Mr. Bressler became Executive Vice President and Chief Financial Officer on
    January 15, 1998, having served as Senior Vice President and Chief Financial
    Officer since March 16, 1995 and Senior Vice President, Finance from January
    2, 1995.
 
(3) Amounts shown in the table include credits to each named executive officer's
    deferred compensation account equal to one-third of the total shown under
    the 'salary' column for each of 1997, 1996 and 1995.
 
(4) In accordance with the rules of the Securities and Exchange Commission (the
    'SEC'), amounts totalling less than $50,000 have been omitted. The amounts
    of personal benefits shown in this column for 1997 that represent more than
    25% of the applicable executive's total Other Annual Compensation include
    financial services of $85,000 to Mr. Levin, $75,000 to Mr. Parsons, $35,000
    to each of Messrs. Haje and Bressler and $22,844 to Mr. Lochner,
    transportation-related benefits (including an automobile allowance) of
    $109,068 to Mr. Levin and $41,080 to Mr. Parsons and automobile allowances
    of $24,000 to Mr. Haje and $18,000 to each of Messrs. Bressler and Lochner.
 
(5) None of the options indicated was awarded with tandem stock appreciation
    rights. None of such executive officers was awarded restricted stock during
    the relevant period and, as of December 31, 1997, only Mr. Parsons held any
    such shares. These shares were awarded in or prior to 1994 under the Time
    Warner Inc. 1988 Restricted Stock Plan for Non-Employee Directors in his
    capacity then as a non-employee director. The value of Mr. Parsons' 4,213
    restricted shares based on the closing price of Time Warner Common Stock on
    the New York Stock Exchange Composite Listing on December 31, 1997 was
    $261,206. Mr. Parsons receives the dividends paid in cash on such shares.
 
(6) The amounts shown in this column for 1997 include the following:
 
        (a) Pursuant to the Time Warner Savings Plan (the 'Savings Plan'), a
    defined contribution plan available generally to employees of Time Warner,
    for the 1997 plan year, each executive named above, deferred a portion of
    his annual compensation and Time Warner contributed $2,000 for the first
    $3,000 so deferred by the executive ('Matching Contribution'). These
    Matching Contributions were invested under the Savings Plan in a Time Warner
    Common Stock fund. In addition, pursuant to a profit-sharing component of
    the Savings Plan, Time Warner may make annual contributions for the benefit
    of eligible employees of up to 12% of total eligible compensation; for 1997,
    Time Warner contributed 11%, including $17,600 for the account of each
    executive named above. Because the Internal Revenue Code of 1986, as amended
    (the 'Code'), limits the amount of eligible compensation under the Savings
    Plan ($160,000 for 1997) for any employee, Time Warner has adopted an
    unfunded, non-qualified, excess profit-sharing plan covering otherwise
    eligible compensation between $160,000 and $289,406 for 1997 (increased 5%
    per year thereafter, to a maximum of $350,000). Time Warner's accrual for
    this excess profit-sharing plan, $14,235 in 1997 for each named executive
    officer, is deemed to earn interest at a long-term applicable federal rate
    announced monthly by the Internal Revenue Service.
 
        (b) Time Warner maintains a program of life and disability insurance
    generally available to all salaried employees on the same basis. Commencing
    in June 1997, group term life insurance coverage was reduced to $50,000 for
    each of the named executive officers, who are given an annual cash payment
    equal to the cost of replacing such reduced coverage under a voluntary group
    program available to employees generally. Such payments are included in the
    'Other Annual Compensation' column. In addition, during 1997, Time Warner
    maintained for certain members of senior management, including the named
    executive officers, certain supplemental life insurance benefits and paid
    premiums for this supplemental coverage of approximately $250 each. Time
    Warner also maintained split-dollar life insurance policies on the lives of
    the named executive officers and paid the following amounts allocated to the
    term portion of the split-dollar coverage for 1997: Mr. Levin, $14,684; Mr.
    Parsons, $4,101; Mr. Haje, $7,957; Mr. Bressler, $1,057; and Mr. Lochner,
    $3,492. The actuarial equivalent of the value of the premiums paid by Time
    Warner for 1997 based on certain assumptions regarding interest rates and
    periods of coverage are: Mr. Levin, $74,616; Mr. Parsons, $72,214; Mr. Haje,
    $86,731; Mr. Bressler, $19,090; and Mr. Lochner, $42,242 . It is anticipated
    that Time Warner will recover the net after-tax cost of the premiums on
    these policies or the cash surrender value thereof. For a description of
    life insurance coverage for certain executive officers provided pursuant to
    the terms of their employment agreements, see 'Employment Arrangements.'
 
                                     III-4
 




STOCK OPTION GRANTS DURING 1997
 
     The following table sets forth certain information with respect to employee
options to purchase shares of Time Warner Common Stock ('options') awarded
during 1997 to the named executive officers. All such options were nonqualified
options. No stock appreciation rights ('SARs'), alone or in tandem with stock
options, were awarded in 1997.
 
                          STOCK OPTION GRANTS IN 1997
 


                                                                     INDIVIDUAL GRANTS(1)
                                                   ---------------------------------------------------------
                                                                    PERCENT
                                                   NUMBER OF        OF TOTAL
                                                   SECURITIES       OPTIONS        EXERCISE
                                                   UNDERLYING      GRANTED TO       OR BASE
                                                    OPTIONS        EMPLOYEES         PRICE        EXPIRATION         GRANT DATE
                     NAME                           GRANTED         IN 1997         ($/SH)           DATE         PRESENT VALUE(2)
- ----------------------------------------------     ----------      ----------      ---------      ----------      -----------------
                                                                                                   
Gerald M. Levin...............................       175,000           2.1%         $ 47.19         5/14/07          $ 3,209,500
                                                      87,500           1.1            58.99         5/14/07            1,241,625
                                                      87,500           1.1            70.79         5/14/07              959,000
Richard D. Parsons............................        75,000            .9%         $ 47.19         5/14/07          $ 1,375,500
                                                      37,500            .5            58.99         5/14/07              532,125
                                                      37,500            .5            70.79         5/14/07              411,000
Peter R. Haje.................................        45,000            .5%         $ 47.19         5/14/07          $   825,300
Richard J. Bressler...........................        50,000            .6%         $ 47.19         5/14/07          $   917,000
Philip R. Lochner, Jr. .......................        30,000            .4%         $ 47.19         5/14/07          $   550,200

 
- ------------
 
(1) Options for executive officers are generally awarded pursuant to plans
    approved by Time Warner's stockholders and the terms are governed by the
    plans and the recipient's option agreement. The option exercise price is the
    fair market value of Time Warner Common Stock on the date of grant except
    for the awards to Messrs. Levin and Parsons of which one quarter of the
    total award has an exercise price 25% above the fair market value of Time
    Warner Common Stock on the date of grant and one quarter of which has an
    exercise price 50% above such fair market value. The options shown in the
    table become exercisable in installments of one-third on the first three
    anniversaries of the date of grant, subject to acceleration upon the
    occurrence of certain events. Payment of the exercise price of an option may
    be made in cash or, in whole or in part, in full shares of Time Warner
    Common Stock already owned by the holder of the option. The payment of
    withholding taxes due upon exercise of an option may generally be made with
    shares of Time Warner Common Stock.
 
(2) These amounts represent the estimated present value of stock options at the
    date of grant calculated using the Black-Scholes option pricing model, based
    upon the following assumptions used in developing the grant valuations: an
    expected volatility of 21.4% based on a three-year period ending May 30,
    1997; an expected term to exercise of eight years; a risk-free rate of
    return based on the interest rate of a U.S. Government zero-coupon bond in
    effect on the date of the award with an eight-year maturity (May 15,
    1997 -- 6.74%); and a dividend yield of 1%. The actual value of the options,
    if any, realized by an officer will depend on the extent to which the market
    value of Time Warner Common Stock exceeds the exercise price of the option
    on the date the option is exercised. Consequently, there is no assurance
    that the value realized by an officer will be at or near the value estimated
    above. These amounts should not be used to predict stock performance.
 
OPTION EXERCISES AND VALUES IN 1997
 
     The following table sets forth as to each of the named executive officers
information on option exercises during 1997 and the status of his options on
December 31, 1997: (i) the number of shares of Time Warner Common Stock
underlying options exercised during 1997; (ii) the aggregate dollar value
realized upon exercise of such options; (iii) the total number of shares of Time
Warner Common Stock underlying exercisable and nonexercisable stock options held
on December 31, 1997; and (iv) the aggregate dollar value of in-the-money
exercisable and nonexercisable stock options on December 31, 1997.
 
                                     III-5
 




                     AGGREGATE OPTION EXERCISES DURING 1997
                                      AND
                       OPTION VALUES ON DECEMBER 31, 1997
 


                                         NUMBER OF                          NUMBER OF SHARES                  DOLLAR VALUE OF
                                           SHARES        DOLLAR          UNDERLYING UNEXERCISED          UNEXERCISED IN-THE-MONEY
                                         UNDERLYING       VALUE            OPTIONS ON 12/31/97             OPTIONS ON 12/31/97*
                                          OPTIONS       REALIZED      -----------------------------    -----------------------------
                 NAME                    EXERCISED     ON EXERCISE    EXERCISABLE    NONEXERCISABLE    EXERCISABLE    NONEXERCISABLE
- --------------------------------------   ----------    -----------    -----------    --------------    -----------    --------------
                                                                                                    
Gerald M. Levin (1)...................     48,000      $ 1,688,640     2,554,268          583,332      $80,776,635      $5,623,025
Richard D. Parsons....................      --             --            400,000          350,000      $ 9,097,250      $3,596,125
Peter R. Haje.........................     28,620      $ 1,011,308       691,667           88,333      $28,308,658      $1,558,342
Richard J. Bressler (1)...............      --             --            214,137          149,999      $ 5,982,648      $2,808,812
Philip R. Lochner, Jr. ...............     40,000      $ 1,215,650       330,496           60,000      $ 8,564,300      $1,064,800

 
- ------------
 
* Calculated using the closing price of $62.00 per share on December 31, 1997
  minus the option exercise price.
 
(1) The options exercised by Mr. Levin were awarded in 1987. Messrs. Levin and
    Bressler are the only executive officers listed above who have been awarded
    SARs in tandem with any of their stock options. 217,600 of Mr. Levin's
    options and 9,644 of Mr. Bressler's options held on December 31, 1997 were
    awarded with tandem SARs; they all were awarded on or prior to September 22,
    1989 and are currently exercisable; and at December 31, 1997, they had a
    value of $6,795,760 and $304,380, respectively, but no separate value has
    been attributed to these SARs. These SARs are exercisable for Time Warner
    Common Stock or cash, subject to a $250,000 limit on the amount of cash that
    may be received upon their exercise.
 
     The option exercise price of all the options held by the named executive
officers is the fair market value of Time Warner Common Stock on the date of
grant except for half of the options awarded to Messrs. Levin and Parsons in
1996 and 1997 (see 'Stock Option Grants in 1997') and 500,000 of Mr. Levin's
options awarded in 1993, half of which have an exercise price 25% above the fair
market value of Time Warner Common Stock on the date of grant and the other half
of which have an exercise price 50% above such fair market value. All options
held by the named executive officers become immediately exercisable in full upon
the occurrence of certain events, including the death or total disability of the
option holder, certain change-of-control transactions and, in most cases, a
termination of employment as a result of Time Warner's breach of the holder's
employment agreement. All such nonqualified options permit a portion of each
award to be transferred by gift directly or indirectly to members of the
holder's immediate family.
 
     The options held by executive officers remain exercisable for the full term
of their employment agreements in the event their employment terminates as a
result of Time Warner's breach. For some executive officers, some or all of
their options remain exercisable for the full term of the options if their
employment is terminated for any reason other than for cause, including death.
Otherwise, options may generally be exercised for one year after death or total
disability and five years after retirement. All options terminate immediately if
the holder's employment is terminated for cause. The terms of the options shown
in the chart are generally ten years, although 320,000 options held by Mr. Levin
have a term of 15 years from the date of their award in 1989.
 
EMPLOYMENT ARRANGEMENTS
 
     Time Warner is, and during 1997 was, a party to employment agreements with
the five named executive officers and certain directors or representatives of
the Time Warner General Partners and TWE. These agreements have been filed with
the SEC as exhibits to Time Warner's periodic filings. In addition, each such
person participates in Time Warner's employee benefit plans available to its
employees generally.
 
     Among other things, the agreements with Time Warner's executive officers
typically provide for: a fixed term of employment in a specified executive post;
annual salary; deferred compensation, generally equal to 50% of annual salary,
which is invested and paid out as described below under 'Deferred Compensation';
an annual bonus in the discretion of the Compensation Committee of the Time
Warner Board of Directors, all or a portion of which may be deferred at the
election of the executive officer (Mr. Levin may also defer a portion of his
salary); and life insurance benefits to be provided by split dollar policies,
generally for the life of the executive and pursuant to which Time Warner
recovers an amount equal to the net after-tax cost to Time Warner of the
premiums on such policy or the cash surrender value thereof, as well as $50,000
of group term life insurance under an insurance program generally provided by
Time Warner to its employees and a cash payment equal to
 
                                     III-6
 




the premium for the coverage that would have otherwise been provided under the
general terms of such program.
 
     Generally, such agreements include a narrow definition of the 'cause' for
which an executive's employment may be terminated and in that event, the
executive will only receive earned and unpaid base salary and deferred
compensation accrued through such date of termination.
 
     These agreements typically provide that in the event of Time Warner's
material breach or termination of an executive's employment during the term of
employment without cause, the executive will be entitled to elect either (a) to
receive a lump-sum payment equal to the present value of the base salary,
average bonus and deferred compensation otherwise payable during the remaining
portion of the executive's term of employment or (b) to remain an employee of
Time Warner through the end of the term of employment and, without performing
any services, receive the base salary, bonuses and deferred compensation payable
as if there had been no breach or wrongful termination. Executives are not
generally required to mitigate damages after such a termination, other than as
necessary to prevent Time Warner from losing any tax deductions to which it
otherwise would have been entitled for any payments deemed to be 'contingent on
a change' under the Code. In addition, these agreements typically provide that
if an executive thereafter obtains other employment, the total cash salary and
bonus received therefrom for services prior to the expiration of the executive's
employment term (up to the amount of compensation paid to the executive by Time
Warner for such period) must be paid over to Time Warner as received except that
the executive officer may retain and not pay over to Time Warner an amount equal
to the severance he would have received in accordance with Time Warner's
personnel policies if he had been job eliminated.
 
     In addition, if Mr. Bressler's or Mr. Lochner's employment terminates as a
result of Time Warner's material breach or termination without cause by Time
Warner during or after the term of his employment agreement, such executive is
entitled to a severance payment equal to the greater of the amount described in
the preceding paragraph or the present value of three times the sum of his
annual base salary, average bonus and deferred compensation. If his employment
terminates under these circumstances, Mr. Parsons is entitled to a severance
payment equal to the greater of the amount described in the preceding paragraph
or the present value of the sum of one year's annual base salary, average bonus
and deferred compensation.
 
     If an executive becomes disabled during the term of his employment
agreement, the executive typically will receive full salary, bonus and deferred
compensation for six months and 75% thereof through the end of the employment
term or, in some cases, for three years, if longer. Deferred compensation will
be maintained and paid after giving effect to the executive's base salary after
disability. Any such payments will be reduced by amounts received from Worker's
Compensation, Social Security and disability insurance policies maintained by
Time Warner.
 
     If an executive dies during the term of an employment agreement, generally
the executive's beneficiaries will receive the executive's earned and unpaid
salary and deferred compensation to the last day of the month in which the death
occurs and a pro rata portion of the executive's bonus for the year of his
death.
 
     The minimum annual salaries and deferred compensation under these
agreements for the named executive officers are as shown for 1997 in the Summary
Compensation Table, except that the current annual salary and deferred
compensation for Mr. Levin totals $1,500,000 and for Mr. Bressler totals
$675,000. The expiration dates of these agreements and the amounts of the
individual life insurance coverage for the lifetime of such persons are: Mr.
Levin -- December 31, 2003 and $6 million; Mr. Parsons -- December 31, 1999 and
$4 million; Mr. Haje -- December 31, 1999 (not including a two-year advisory
period) and $4 million; Mr. Bressler -- December 31, 1999 and $4 million; and
Mr. Lochner -- December 31, 1998 and $2 million. Mr. Levin's agreement allows
him, effective no earlier than June 30, 2002 and with not less than six months'
prior notice to Time Warner, to give up his executive positions and become an
advisor to Time Warner for the remainder of his agreement term. In that case,
his advisory compensation would be equal to his annual salary and deferred
compensation.
 
                                     III-7
 




DEFERRED COMPENSATION
 
     Deferred compensation for executive officers is deposited into separate
accounts maintained by Time Warner for each of such officers in a grantor trust
established by Time Warner. Time Warner appoints an investment advisor for each
such account subject to approval by the relevant executive. Funds are invested
in securities as directed by the investment advisor, with the assumed after-tax
effect upon Time Warner of gains, losses and income, and distributions thereof,
and of interest expenses and brokerage commissions and other direct expenses
attributed thereto, being credited or charged to the account. Payments are
generally made to the officer from the account in installments to liquidate the
account over a period of five to ten years commencing on the date employment
terminates under the employment agreement, or at such other times as the officer
might have elected. Such payments include an amount equal to the assumed tax
benefit to Time Warner of the compensation deduction available for tax purposes
for the portion of the account represented by the net appreciation in such
account, even though Time Warner might not actually receive such tax benefit.
 
     Amounts paid by Time Warner to the deferred compensation accounts of the
named executive officers for 1997 and the portion, if any, of the 1997 annual
bonus elected to be deferred by any such officer are included in the amounts
shown in the Summary Compensation Table above.
 
TIME WARNER EMPLOYEES' PENSION PLAN
 
     The Time Warner Employees' Pension Plan, as amended (the 'Pension Plan'),
provides benefits to eligible employees, including officers, of Time Warner and
certain of its subsidiaries. Directors who are not also employees of Time Warner
are not eligible to participate in the Pension Plan.
 
     A participant accrues benefits under the Pension Plan on the basis of
1 2/3% of the average annual compensation (defined as the highest average annual
compensation for any five consecutive full or partial calendar years of
employment, which includes regular salary, overtime and shift differential
payments, and non-deferred bonuses paid according to a regular program) for each
year of service up to 30 years and 1/2% for each year of service over 30.
Compensation for purposes of calculating average annual compensation under the
Pension Plan is limited to $200,000 per year for 1988 through 1993 and $150,000
per year for 1994 and thereafter (each subject to adjustments provided in the
Code). Eligible employees become vested in all benefits under the Pension Plan
on the earlier of five years of service or certain other events.
 
     Annual pension benefits are reduced by a Social Security offset determined
by a formula that takes into account credited service up to 35 years, covered
compensation up to the average Social Security wage base and a disparity factor
based on the age at which Social Security benefits are payable (the 'Social
Security Offset'). The pension benefit of participants on December 31, 1977 in
the former Time Employees' Profit-Sharing Savings Plan (the 'Profit Sharing
Plan') is further reduced by a fixed amount attributable to a portion of the
employer contributions and investment earnings credited to such employees'
account balances in the Profit Sharing Plan as of such date (the 'Profit Sharing
Plan Offset').
 
     Under the Pension Plan, employees who are at least 60 years old and have
completed at least ten years of service may elect early retirement and receive
the full amount of their annual pension ('early retirement'). An early
retirement supplement is payable to an employee terminating employment at age 55
and before age 60, after 20 years of service, equal to the actuarial equivalent
of such person's accrued benefit, or, if greater, an annual amount equal to 35%
of such person's average compensation determined under the Pension Plan. The
supplement ceases when the regular pension commences at age 60 or upon the death
of the retiree.
 
     Federal law limits both the amount of compensation that is eligible for the
calculation of benefits and the amount of benefits derived from employer
contributions that may be paid to participants under the Pension Plan. However,
as permitted by the Employee Retirement Income Security Act of 1974, as amended
('ERISA'), Time Warner has adopted the Time Warner Excess Benefit Pension Plan
(the 'Excess Plan'), which provides for payments by Time Warner of certain
amounts which employees of Time Warner would have received under the Pension
Plan if eligible compensation were limited to $250,000 in 1994 (increased 5% per
year thereafter, to a maximum of $350,000) and there were no payment
restrictions. For purposes of the Excess Plan, the $200,000
 
                                     III-8
 




limit (as indexed for years after 1989) on eligible compensation will only apply
to compensation received in 1988 through 1993; the $250,000 limit (as adjusted)
will apply to compensation received in 1994 and thereafter.
 
     The following table shows the estimated annual pension payable upon
retirement to employees in specified remuneration and years-of-service
classifications. The amounts shown in the table do not reflect the effect of the
previously-described (i) Social Security Offset, (ii) Profit Sharing Plan Offset
or (iii) early retirement supplements. The amount of the estimated annual
pension is based upon a pension formula which applies to all participants in
both the Pension Plan and the Excess Plan. The estimated amounts are based on
the assumption that payments under the Pension Plan will commence upon normal
retirement (generally age 65) or early retirement, that the Pension Plan will
continue in force in its present form and that no joint and survivor annuity
will be payable (which would on an actuarial basis reduce benefits to the
employee but provide benefits to a surviving beneficiary). Amounts calculated
under the pension formula which exceed ERISA limits will be paid under the
Excess Plan from Time Warner's assets and are included in the amounts shown in
the following table.
 


                                                               ESTIMATED ANNUAL PENSION FOR
HIGHEST CONSECUTIVE                                             YEARS OF CREDITED SERVICE
FIVE YEAR AVERAGE                          --------------------------------------------------------------------
COMPENSATION                                  10          15          20          25          30          35
- ---------------------                      --------    --------    --------    --------    --------    --------
                                                                                     
$100,000................................   $ 16,667    $ 25,000    $ 33,334    $ 41,668    $ 50,000    $ 52,500
 200,000................................     33,334      50,000      66,668      83,335     100,000     105,000
 400,000................................     66,668     100,000     133,336     166,670     200,000     210,000
 600,000................................    100,000     150,000     200,000     250,000     300,000     315,000
 800,000................................    133,336     200,000     266,672     333,340     400,000     420,000

 
     The amount of covered compensation that would be considered in the
determination of the highest five consecutive full or partial years of
compensation under the Pension Plan and the Excess Plan for each of Messrs.
Levin, Parsons, Haje, Bressler and Lochner is limited as a result of the
imposition of the limitations on eligible compensation. However, because
combined payments under the Pension Plan and the Excess Plan are based on the
highest average annual compensation for any five consecutive full or partial
years of employment (taking into account the compensation limits only for 1988
and thereafter), the compensation used for determining benefits under such Plans
for Mr. Levin and Mr. Lochner (and employees who participated in the Pension
Plan prior to 1988) will include eligible compensation in years prior to 1988
which exceeded these limits. The estimated annual benefits payable under the
Pension Plan and the Excess Plan, as of February 1, 1998, would be based on
average compensation of $729,248 for Mr. Levin; $275,840 for Mr. Parsons;
$262,674 for Mr. Haje; $262,674 for Mr. Bressler; and $279,610 for Mr. Lochner,
with 25.8, 3.0, 7.4, 9.2 and 18.2 years of credited service, respectively. In
addition, pursuant to their employment agreements, Messrs. Parsons and Lochner
will be entitled to receive supplemental payments from Time Warner that will
achieve a total retirement benefit equal to what each of them would have
received if he had 5.0 and 1.3 additional years of credited service under the
Pension Plan, respectively.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
OWNERSHIP BY PARTNERS OF TWE
 
     The table below sets forth, as of March 15, 1998, the pro rata priority
capital and residual equity interests of each Time Warner General Partner and
each Limited Partner in TWE. Subsidiaries of Time Warner and the Time Warner
General Partners collectively own 74.49% of the pro rata priority capital and
residual equity partnership interests and certain priority capital interests
senior and junior to the pro rata priority capital interests. TW/TAE, Inc., Time
Warner Companies, Inc. and each Time Warner General Partner is a direct or
indirect wholly owned subsidiary of Time Warner. U S WEST Multimedia
Communications, Inc. is a wholly owned subsidiary of US West.
 
                                     III-9
 






                                                                                       RESIDUAL
                                                                                        EQUITY
                            TIME WARNER GENERAL PARTNERS                               INTEREST
- ------------------------------------------------------------------------------------   --------
                                                                                    
American Television and Communications Corporation..................................     25.77%
Warner Communications Inc...........................................................     37.50%
 

                                  LIMITED PARTNERS
- ------------------------------------------------------------------------------------
                                                                                    
U S WEST Multimedia Communications, Inc.............................................     25.51%
Time Warner Companies, Inc..........................................................      5.61%
TW/TAE, Inc.........................................................................      5.61%
                                                                                       --------
                                                                                        100.00%
                                                                                       --------
                                                                                       --------

 
     The address of the principal executive offices of each of the companies
listed above is as follows: Time Warner Companies, Inc., TW/TAE, Inc. and Warner
Communications Inc.: 75 Rockefeller Plaza, New York, New York 10019; American
Television and Communications Corporation: 290 Harbor Drive, Stamford,
Connecticut 06902; and U S WEST Multimedia Communications, Inc.: 9785 Maroon
Circle, Suite 400, Englewood, CO 80112.
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
 
     Set forth below is the name, address and stock ownership of each person or
group of persons known by TWE to own beneficially securities of Time Warner
having more than 5% of the voting power of Time Warner's voting securities and,
unless otherwise indicated, is based on information provided to Time Warner as
of February 1, 1998 by the beneficial owner. Subsidiaries of Time Warner
collectively own 74.49% of the pro rata priority capital and residual equity
partnership interests in TWE.
 


                                                                               SHARES OF
                                                                                 STOCK                     PERCENT OF
NAME AND ADDRESS                                                               BENEFICIALLY  PERCENT OF      VOTING
OF BENEFICIAL OWNER                                                              OWNED        CLASS(1)      POWER(2)
- ----------------------------------------------------------------------------   ----------    ----------    ----------
                                                                                                  
TIME WARNER COMMON STOCK (3)
The Capital Group Companies, Inc. (4) ......................................   55,672,790        10.6%          8.7%
  333 South Hope Street
  Los Angeles, CA 90071
FMR Corp. (5) ..............................................................   36,327,065         6.9           5.4
  82 Devonshire Street
  Boston, MA 02109
R.E. Turner (6) ............................................................   60,147,310        11.7          10.3
  c/o Turner Broadcasting System, Inc.
  One CNN Center
  Atlanta, GA 30303
TIME WARNER SERIES LMCN-V STOCK
Tele-Communications, Inc. (7) ..............................................   57,061,942       100.0         *
  5619 DTC Parkway
  Englewood, CO 80111

 
- ------------
 
* Less than 1%.
 
 (1) Under certain circumstances, each share of Series LMCN-V Common Stock is
     convertible into one share of Time Warner Common Stock; such circumstances
     are not currently present.
 
 (2) Each share of Series LMCN-V Common Stock currently has 1/100 of a vote on
     certain limited matters.
 
 (3) The Seagram Company Ltd. has filed with the SEC Amendment No. 10, dated
     February 9, 1998, to its statement on Schedule 13D to report that as a
     result of the sale of 15 million shares of its beneficially owned Time
     Warner Common Stock on February 5, 1998, it is no longer a beneficial owner
     of more than 5% of Time Warner Common Stock.
 
 (4) Beneficial ownership is as of December 31, 1997. The Capital Group
     Companies, Inc., a holding company, has filed with the SEC Amendment No.
     11, dated February 10, 1998, to its statement on Schedule 13G to the effect
     that (a) it (directly or indirectly) has sole
 
                                              (footnotes continued on next page)
 
                                     III-10
 




(footnotes continued from previous page)
     dispositive power over all these shares, (b) it has sole voting power over
     7,006,810 of these shares, (c) these shares are held principally by Capital
     Research and Management Company, an investment adviser, (d) the shares of
     Time Warner Common Stock reported as beneficially owned include 1,388,090
     shares of Time Warner Common Stock issuable upon conversion of $178,900,000
     principal amount of Time Warner's Liquid Yield OptionTM Notes ('LYONs') due
     2013 and 3,158,500 shares of Time Warner Common Stock reported as issuable
     upon the conversion of 3,822,000 shares of 7.00% automatic common exchange
     securities due 2000 of Houston Industries Incorporated (the 'Houston ACEs')
     (these shares have been excluded from the calculation of voting power), (e)
     all of the reported shares are held for the benefit of its clients and (f)
     it and each of its subsidiary investment management companies acts
     separately in exercising investment discretion over its managed accounts.
 
 (5) Beneficial ownership is as of December 31, 1997. FMR Corp., a holding
     company, has filed with the SEC a statement on Schedule 13G dated February
     14, 1998 to the effect that (a) it (directly or indirectly) has sole
     dispositive power over all these shares, (b) it has sole voting power over
     1,702,010 of these shares and no shared voting power, (c) these shares are
     held principally by Fidelity Management & Research Company, an investment
     adviser, (d) the shares of Time Warner Common Stock reported as
     beneficially owned include 3,248,647 shares of Time Warner Common Stock
     issuable upon conversion of $418,694,000 principal amount of Time Warner's
     LYONs and 1,249,100 shares of Time Warner Common Stock reported as issuable
     upon the conversion of 1,249,100 shares of Houston ACEs (these shares have
     been excluded from the calculation of voting power), (e) these shares are,
     for the most part, held by investment companies and institutional accounts
     managed by subsidiaries of FMR Corp. and (f) the family of Edward C.
     Johnson 3d, including Mr. Johnson, the Chairman of FMR Corp., and his
     daughter Abigail Johnson, a director, and trusts for the family members'
     benefit may be deemed to form a controlling group with respect to FMR Corp.
 
 (6) Includes (a) 839,942 shares of Time Warner Common Stock owned by a
     corporation wholly owned by Mr. Turner, (b) 1,416,690 shares of Time Warner
     Common Stock held by a trust over which Mr. Turner has sole voting and
     dispositive control, (c) 3,564,448 shares of Time Warner Common Stock held
     by a limited partnership of which Mr. Turner is the sole general partner,
     (d) 2,000,000 shares of Time Warner Common Stock that, on May 12, 2000, Mr.
     Turner has the right to put to a broker at $39.63 per share and the broker
     has a right to call from Mr. Turner at $60.10 per share (which call Mr.
     Turner may settle in cash), (e) 386,000 shares of Time Warner Common Stock
     owned by Mr. Turner's wife and (f) 2,500,000 shares of Time Warner Common
     Stock held by the Turner Foundation, Inc., of which Mr. Turner is one of
     six trustees; and excludes 433,335 shares of Time Warner Common Stock
     subject to options to purchase Time Warner Common Stock issued by Time
     Warner which, on February 1, 1998, were unexercised but were exercisable
     within 60 days from that date (but such shares are included in the
     percent-of-class calculation but not voting power). Mr. Turner disclaims
     beneficial ownership of shares held by his spouse and the Turner
     Foundation, Inc.
 
 (7) Consists of shares controlled by Tele-Communications, Inc. through its
     direct and indirect subsidiaries; excludes 279,533 shares of Time Warner
     Common Stock held by TCI TKR of Southern Kentucky, Inc. as to which
     Tele-Communications, Inc. disclaims beneficial ownership.
 
SECURITY OWNERSHIP OF MANAGEMENT
 
     The following table sets forth as of February 1, 1998 for each current
representative of TWE and each current member of the board of directors of one
or more of the Time Warner General Partners, the five most highly compensated
executive officers of TWE and the Time Warner General Partners in 1997 and for
all current representatives, directors and executive officers of TWE and the
Time Warner General Partners as a group, information concerning the beneficial
ownership of Time Warner Common Stock.
 


                                                                       COMMON STOCK BENEFICIALLY OWNED(1)
                                                                 ----------------------------------------------
                                                                  NUMBER OF            OPTION          PERCENT
                             NAME                                   SHARES           SHARES(2)         OF CLASS
- --------------------------------------------------------------   ------------      --------------      --------
                                                                                              
Richard J. Bressler (5).......................................         5,587              280,803        *
Peter R. Haje (5).............................................         9,960              720,000        *
Gerald M. Levin (3)(5)........................................       434,085            2,670,935        *
Philip R. Lochner, Jr. (4)(5).................................        62,913              350,496        *
Richard D. Parsons (5)........................................        11,278              500,000        *
Charles M. Lillis.............................................            --                   --        *
Pearre Williams...............................................            --                   --        *
All current representatives, directors and executive officers
  (9 persons) as a group (3)-(5)..............................       530,845            4,712,043        1.0%

 
- ------------
 
 * Represents beneficial ownership of less than one percent of issued and
   outstanding stock on February 1, 1998.
 
(1) Beneficial ownership as reported in the above table has been determined in
    accordance with Rule 13d-3 of the SEC. Unless otherwise indicated,
    beneficial ownership includes both sole voting and sole investment power.
    This table does not include any Time Warner Common Stock which may be held
    by the Time Warner General Partners or other Time Warner subsidiaries or
    pension and profit-sharing
 
                                              (footnotes continued on next page)
 
                                     III-11
 




(footnotes continued from previous page)
    plans of other corporations or endowment funds of educational and charitable
    institutions for which various directors and officers may serve as directors
    or trustees. As of February 1, 1998, the only equity securities of Time
    Warner beneficially owned by the named persons or group were shares of Time
    Warner Common Stock and options to purchase Time Warner Common Stock.
 
(2) Reflects shares of Time Warner Common Stock subject to options to purchase
    Time Warner Common Stock issued by Time Warner which, on February 1, 1998,
    were unexercised but were exercisable within a period of 60 days from that
    date. These shares are excluded from the column headed 'Number of Shares.'
 
(3) Includes 15,000 shares of Time Warner Common Stock held by Mr. Levin's wife,
    as to which Mr. Levin disclaims any beneficial ownership.
 
(4) Includes 400 shares of Time Warner Common Stock held by Mr. Lochner's wife,
    as to which Mr. Lochner disclaims any beneficial ownership.
 
(5) Includes an aggregate of approximately 36,615 shares of Time Warner Common
    Stock held by a trust under an employee stock plan of Time Warner and its
    subsidiaries for the benefit of current representatives, directors and
    executive officers (including 4,452 shares for Mr. Bressler, 3,472 shares
    for Mr. Haje, 10,964 shares for Mr. Levin, 11,390 shares for Mr. Lochner and
    115 shares for Mr. Parsons).
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
CORPORATE SERVICES
 
     Time Warner provides TWE with corporate support services and facilities
(including, without limitation, internal accounting, financial, tax, legal and
similar administrative and other services) as may be necessary or appropriate
for TWE to conduct the businesses that were contributed to TWE in the manner
that such businesses were conducted by Time Warner and its subsidiaries prior to
the TWE Capitalization. As compensation and reimbursement for the cost of
providing such services and facilities, TWE paid Time Warner fees in the amount
of $70 million, $69 million and $64 million in 1997, 1996 and 1995,
respectively. The corporate support services agreement expired on June 30, 1997,
but is expected to be renewed on substantially similar terms.
 
US WEST ADVISORY FEE
 
     In consideration of US West's making available to TWE its expertise in the
areas of telecommunications, telephony and information technology and
participating in the management and upgrade of the cable systems comprising the
Full Service Network business and to reimburse US West for providing to TWE
certain services and overhead costs related to US West's participation on the
Management Committee, TWE has paid or will pay to US West fees aggregating $130
million payable over the five years following the closing of the US West
Transaction on September 15, 1993.
 
OPTION REIMBURSEMENT
 
     Upon the exercise of options to purchase securities of Time Warner by any
officer or other employee of TWE or of any 'strategic venture' of TWE,
including, without limitation, TWE Japan, or of Time Warner or any of its
subsidiaries who in such capacity performs substantially all of his or her
duties on behalf of TWE or any such 'strategic venture,' TWE or such 'strategic
venture' must reimburse Time Warner for the amount by which the market price of
such securities on the exercise date exceeds the exercise price, or with respect
to options granted prior to the TWE Capitalization, the greater of the exercise
price and the market price of such securities as of the TWE Capitalization (such
reimbursement amount is hereinafter called a 'Stock Option Distribution'). At
December 31, 1997, TWE had accrued $417 million of Stock Option Distributions
payable to Time Warner. Such amount, which is not payable until the underlying
options are exercised and then only subject to limitations on cash distributions
in accordance with the TWE credit agreement, will be adjusted in subsequent
accounting periods based on changes in the quoted market prices for the
underlying securities. Such amount would increase (decrease) by approximately
$15 million for each one dollar increase (decrease) in the closing price of Time
Warner Common Stock. See Notes 8 and 9 to the TWE consolidated financial
statements, which are presented herein at pages F-28 and F-31, respectively.
 
                                     III-12
 




TWE JAPAN DISTRIBUTION AGREEMENTS
 
     Concurrently with the closing of the TWE Japan transaction, TWE and TWE
Japan entered into distribution and merchandising agreements pursuant to which
TWE granted to TWE Japan the right to engage in theatrical and non-theatrical,
television and home video distribution in Japan as well as the right to engage
in the licensing and merchandising of TWE's copyrights and trademarks in Japan.
Such agreements provide that TWE Japan will receive distribution fees generally
comparable to those currently received by TWE for performing distribution
services for unaffiliated third parties.
 
OTHER ARRANGEMENTS AND TRANSACTIONS
 
     The TWE Partnership Agreement expressly permits Time Warner and TWE to
continue certain arrangements and transactions that prior to the TWE
Capitalization existed between Time Warner and certain of the subsidiaries of
Time Warner that contributed assets to TWE at the TWE Capitalization, to the
extent that such arrangements and transactions relate to the businesses that
were contributed. The TWE Partnership Agreement also permits Time Warner to
enter into additional similar arrangements and transactions with TWE in the
ordinary course of business consistent with past practice as well as any new
arrangements and transactions with TWE on an arm's-length basis. For additional
information regarding such arrangements, see Note 13 to TWE's consolidated
financial statements included herein at pages F-38 and F-39 and Note 14 to the
TWE General Partners' consolidated financial statements included herein at page
F-77.
 
     For information with respect to WCl's payment of a special dividend to Time
Warner and the establishment of a revolving credit agreement, see Note 5 to the
TWE General Partners' consolidated financial statements at page F-71 herein.
 
                                     III-13




                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
     (a)(1)-(2) Financial Statements and Schedules:
 
          The list of consolidated financial statments and schedules set forth
     in the accompanying Index to Consolidated Financial Statements and Other
     Financial Information at page F-1 herein is incorporated herein by
     reference. Such consolidated financial statements and schedules are filed
     as part of this report.
 
     All other financial statement schedules are omitted because the required
information is not applicable, or because the information required is included
in the consolidated financial statements and notes thereto.
 
     (3) Exhibits:
 
          The exhibits listed on the accompanying Exhibit Index are filed or
     incorporated by reference as part of this report and such Exhibit Index is
     incorporated herein by reference.
 
          (b) Reports on Form 8-K:
 
          No Current Report on Form 8-K was filed by TWE during the quarter
     ended December 31, 1997.
 
                                      IV-1




                                   SIGNATURES
 
     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, EACH OF THE REGISTRANTS HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY
OF NEW YORK, STATE OF NEW YORK, ON MARCH 27, 1998.
 
                               TIME WARNER ENTERTAINMENT COMPANY, L.P.
                               By: Warner Communications Inc.,
                               as General Partner
 
                               By:            /S/ RICHARD J. BRESSLER
                                    ............................................
                                  NAME: RICHARD J. BRESSLER
                                  TITLE: SENIOR VICE PRESIDENT AND CHIEF
                                         FINANCIAL OFFICER
 
                               AMERICAN TELEVISION AND COMMUNICATIONS
                               CORPORATION ('ATC')
                               WARNER COMMUNICATIONS INC. ('WCI')
 
                               By:          /S/ RICHARD J. BRESSLER
                                    ............................................
                                  NAME: RICHARD J. BRESSLER
                                  TITLE: SENIOR VICE PRESIDENT AND CHIEF
                                         FINANCIAL OFFICER
 
     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.
 


                SIGNATURE                                       TITLE                              DATE
- ------------------------------------------  ---------------------------------------------   -------------------
                                                                                      
           /S/ GERALD M. LEVIN              Director of ATC and WCI and Chairman of the       March 27, 1998
 .........................................    Board and Chief Executive Officer of each
            (GERALD M. LEVIN)                 Registrant (Principal Executive Officer)
 
         /S/ RICHARD J. BRESSLER            Director and Senior Vice President of ATC and     March 27, 1998
 .........................................    WCI, Executive Vice President of TWE and
          (RICHARD J. BRESSLER)               Chief Financial Officer of each Registrant
                                              (Principal Financial Officer)
 
           /S/ JOHN A. LABARCA              Vice President of ATC and WCI, Senior Vice        March 27, 1998
 .........................................    President of TWE and Controller of each
            (JOHN A. LABARCA)                 Registrant (Principal Accounting Officer)
 
           /S/ PETER R. HAJE                Director of ATC and WCI                           March 27, 1998
 .........................................
             (PETER R. HAJE)
 
         /S/ RICHARD D. PARSONS             Director of ATC and WCI                           March 27, 1998
 .........................................
           (RICHARD D. PARSONS)

 
                                      IV-2





        TIME WARNER ENTERTAINMENT COMPANY L.P. AND TWE GENERAL PARTNERS
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND OTHER FINANCIAL INFORMATION
 


                                                                                                         PAGE
                                                                                                   ----------------
                                                                                                             TWE
                                                                                                           GENERAL
                                                                                                   TWE     PARTNERS
                                                                                                   ----    --------
 
                                                                                                     
Management's Discussion and Analysis of Results of Operations and Financial Condition...........    F-2      F-45
Consolidated Financial Statements:
     Balance Sheets.............................................................................   F-13      F-50
     Statements of Operations...................................................................   F-14      F-52
     Statements of Cash Flows...................................................................   F-15      F-55
     Statements of Partnership Capital and Shareholders' Equity.................................   F-16      F-58
     Notes to Consolidated Financial Statements.................................................   F-17      F-60
Report of Independent Auditors..................................................................   F-41      F-79
Selected Financial Information..................................................................   F-42      F-80
Quarterly Financial Information.................................................................   F-43
Financial Statement Schedule II-Valuation and Qualifying Accounts...............................   F-44      F-81

 
                                      F-1






                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
     TWE classifies its business interests into three fundamental areas:
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; Cable Networks, consisting
principally of interests in cable television programming; and Cable, consisting
principally of interests in cable television systems. TWE also manages the cable
properties owned by Time Warner and the combined cable television operations are
conducted under the name of Time Warner Cable. Capitalized terms are as defined
and described in the accompanying consolidated financial statements, or
elsewhere herein.
 
OVERVIEW
 
     TWE had a strong financial performance in 1997, as measured by the
operating performance of its businesses and the improved strength of its
financial condition, as more fully discussed herein. This performance was driven
by solid business fundamentals at its businesses and a disciplined financial
focus on cost management and controlling capital spending.
 
USE OF EBITA
 
     During 1997, management concluded that the most appropriate measure for
evaluating the operating performance of TWE's business segments is operating
income before noncash amortization of intangible assets ('EBITA'). Consistent
with management's financial focus on controlling capital spending, EBITA
measures operating performance after charges for depreciation. In addition,
EBITA eliminates the uneven effect across all business segments of considerable
amounts of noncash amortization of intangible assets recognized in business
combinations accounted for by the purchase method, including Time Warner's $14
billion acquisition of Warner Communications Inc. in 1989 and $1.3 billion
acquisition of the minority interest in American Television and Communications
Corporation in 1992. The exclusion of noncash amortization charges is also
consistent with management's belief that TWE's intangible assets, such as cable
television franchises, film and television libraries and the goodwill associated
with its brands, are generally increasing in value and importance to TWE's
business objective of creating, extending and distributing recognizable brands
and copyrights throughout the world. As such, the following comparative
discussion of the results of operations of TWE includes, among other factors, an
analysis of changes in business segment EBITA. However, EBITA should be
considered in addition to, not as a substitute for, operating income, net income
and other measures of financial performance reported in accordance with
generally accepted accounting principles.
 
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS
 
     TWE completed a number of transactions in 1995 that have affected the
comparability of its operating results for such year. These 1995 transactions
include the formation of the TWE-Advance/Newhouse Partnership ('TWE-A/N'), the
consolidation of Paragon Communications ('Paragon'), the refinancing of its bank
debt, the reacquisition of the Time Warner Service Partnership Assets and
certain asset sales, including the initial sale of 51% of TWE's interest in Six
Flags Entertainment Corporation ('Six Flags'), all of which are more fully
discussed herein. Such transactions are collectively referred to herein as the
'1995 Transactions.'
 
     In order to enhance comparability, the following discussion of results of
operations for TWE is supplemented, where appropriate, by pro forma financial
information that gives effect to the 1995 Transactions as if such transactions
had occurred at the beginning of 1995. The pro forma results are presented for
informational purposes only and are not necessarily indicative of the operating
results that would have occurred had the transactions actually occurred at the
beginning of 1995, nor are they necessarily indicative of future operating
results.
 
                                      F-2
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
RESULTS OF OPERATIONS
 
1997 VS. 1996
 
     EBITA and operating income for TWE in 1997 and 1996 are as follows:
 


                                                                                YEARS ENDED DECEMBER 31,
                                                                         ---------------------------------------
                                                                               EBITA           OPERATING INCOME
                                                                         -----------------     -----------------
                                                                          1997       1996       1997       1996
                                                                         ------     ------     ------     ------
                                                                                       (MILLIONS)
                                                                                              
Filmed Entertainment-Warner Bros......................................   $  387     $  367     $  264     $  242
Broadcasting-The WB Network...........................................      (88)       (98)       (88)       (98)
Cable Networks-HBO....................................................      391        328        391        328
Cable(1)..............................................................    1,184        917        877        606
                                                                         ------     ------     ------     ------
Total.................................................................   $1,874     $1,514     $1,444     $1,078
                                                                         ------     ------     ------     ------
                                                                         ------     ------     ------     ------

 
- ------------
 
(1)  Includes net gains of approximately $200 million recognized in 1997 related
     to the sale or exchange of certain cable television systems.
 
     TWE had revenues of $11.318 billion, income of $637 million before an
extraordinary loss on the retirement of debt and net income of $614 million for
the year ended December 31, 1997, compared to revenues of $10.852 billion and
net income of $210 million for the year ended December 31, 1996.
 
     As discussed more fully below, TWE's net income increased significantly in
1997 as compared to 1996 due to an overall increase in EBITA and operating
income generated by its business segments, including approximately $200 million
of net gains recognized in 1997 related to the sale or exchange of certain cable
television systems, and the recognition of an approximate $250 million gain in
1997 related to the sale of TWE's interest in E! Entertainment Television, Inc.
These increases were offset in part by the recognition of a $23 million
extraordinary loss on the retirement of debt in 1997 and an increase in minority
interest expense related to TWE-A/N.
 
     As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $85 million in the year ended December
31, 1997, and $70 million in the year ended December 31, 1996, have been
provided for the operations of TWE's domestic and foreign subsidiary
corporations.
 
     Filmed Entertainment-Warner Bros.  Revenues decreased to $5.462 billion,
compared to $5.639 billion in 1996. EBITA increased to $387 million from $367
million. Operating income increased to $264 million from $242 million. Revenues
decreased principally as a result of lower worldwide theatrical and home video
revenues, offset in part by increases in worldwide television distribution
revenues. EBITA and operating income increased principally as a result of
high-margin sales of library product that contributed to the strong performance
of worldwide television distribution operations, cost savings and certain
one-time gains, offset in part by higher depreciation principally relating to
the expansion of theme parks and consumer products operations.
 
     Broadcasting-The WB Network.  Revenues increased to $136 million, compared
to $87 million in 1996. EBITA and operating losses improved to a loss of $88
million from a loss of $98 million. The increase in revenues primarily resulted
from the expansion of programming in September 1996 to three nights of primetime
scheduling and the expansion of Kids' WB!, the network's animated programming
lineup on Saturday mornings and weekdays. The 1997 operating loss improved
principally as a result of the revenue gains and the effect of an increase in a
limited partner's interest in the network that occurred in early 1997. Due to
the start-up nature of this national broadcast operation and the addition of a
fourth night of primetime programming in January 1998, losses are expected to
continue.
 
                                      F-3
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     Cable Networks-HBO.  Revenues increased to $1.923 billion, compared to
$1.763 billion in 1996. EBITA and operating income increased to $391 million
from $328 million. Revenues benefited primarily from an increase in
subscriptions to 33.6 million from 32.4 million at the end of 1996. EBITA and
operating income improved principally as a result of the revenue gains and, to a
lesser extent, cost savings.
 
     Cable.  Revenues increased to $4.243 billion, compared to $3.851 billion in
1996. EBITA increased to $1.184 billion from $917 million. Operating income
increased to $877 million from $606 million. Revenues benefited from an increase
in basic cable and Primestar-related, direct broadcast satellite subscribers,
increases in regulated cable rates as permitted under Time Warner Cable's
'social contract' with the Federal Communications Commission (the 'FCC') and an
increase in advertising and pay-per-view revenues. EBITA and operating income
increased principally as a result of the revenue gains, as well as net gains of
approximately $200 million recognized in 1997 in connection with the sale or
exchange of certain cable systems. The increases in EBITA and operating income
were partially offset by higher depreciation relating to capital spending.
 
     As of December 31, 1997, including the wholly owned cable operations of
Time Warner, there were 12.6 million subscribers under the management of TWE's
Cable division, as compared to 12.3 million subscribers at the end of 1996.
 
     Interest and Other, Net.  Interest and other, net, decreased to $345
million, compared to $522 million in 1996. Interest expense increased to $490
million, compared to $475 million in 1996. There was other income, net, of $145
million in 1997, compared to other expense, net, of $47 million in 1996,
principally due to higher gains on asset sales, including an approximate $250
million pretax gain on the sale of an interest in E! Entertainment Television,
Inc. recognized in 1997. This income was offset in part by higher losses from
reductions in the carrying value of certain investments and the dividend
requirements on preferred stock of a subsidiary issued in February 1997.
 
1996 VS. 1995
 
     EBITA and operating income for TWE in 1996 and 1995 are as follows:
 


                                                                                 YEARS ENDED DECEMBER 31,
                                                                           -------------------------------------
                                                                                                    OPERATING
                                                                                 EBITA               INCOME
                                                                           -----------------     ---------------
                                                                            1996       1995       1996      1995
                                                                           ------     ------     ------     ----
                                                                                        (MILLIONS)
 
                                                                                                
Filmed Entertainment-Warner Bros........................................   $  367     $  352     $  242     $228
Six Flags Theme Parks(1)................................................       --         40         --       29
Broadcasting-The WB Network.............................................      (98)       (66)       (98)     (66)
Cable Networks-HBO......................................................      328        275        328      274
Cable...................................................................      917        803        606      495
                                                                           ------     ------     ------     ----
Total...................................................................   $1,514     $1,404     $1,078     $960
                                                                           ------     ------     ------     ----
                                                                           ------     ------     ------     ----

 
- ------------
(1)  Deconsolidated as a result of the sale of a 51% interest in Six Flags
     effective as of June 23, 1995.
 
     TWE had revenues of $10.852 billion and net income of $210 million for the
year ended December 31, 1996, compared to revenues of $9.517 billion, income of
$97 million before an extraordinary loss on the retirement of debt and net
income of $73 million for the year ended December 31, 1995.
 
     On a pro forma basis, giving effect to the 1995 Transactions as if each of
such transactions had occurred at the beginning of 1995, TWE would have reported
for the year ended December 31, 1995, revenues of $9.682 billion, depreciation
expense of $635 million, EBITA of $1.396 billion, operating income of $962
million, income before extraordinary item of $172 million and net income of $148
million. No pro forma financial
 
                                      F-4
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
information has been presented for TWE for the year ended December 31, 1996
because all of such transactions are already reflected, in all material
respects, in the historical financial statements of TWE.
 
     As discussed more fully below, TWE's historical net income was higher in
1996 as compared to pro forma results in 1995 due to an overall increase in
EBITA and operating income generated by its business segments, interest savings
due to lower floating interest rates and the absence of a $24 million
extraordinary loss on the retirement of debt recognized in 1995, offset in part
by a decrease in investment-related income and an increase in minority interest
expense related to TWE-A/N. On a historical basis, such underlying operating
trends were enhanced by favorable comparisons as 1996 more fully benefited from
the interest savings on lower average debt levels.
 
     As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $70 million in the year ended December
31, 1996, and $86 million in the year ended December 31, 1995, have been
provided for the operations of TWE's domestic and foreign subsidiary
corporations.
 
     Filmed Entertainment-Warner Bros.  Revenues increased to $5.639 billion,
compared to $5.069 billion in 1995. EBITA increased to $367 million from $352
million. Operating income increased to $242 million from $228 million. Revenues
benefited from increases in worldwide home video, television distribution and
consumer products operations, offset in part by lower international theatrical
revenues. EBITA and operating income benefited principally from the revenue
gains, offset in large part by a $51 million increase in depreciation
principally related to the 1996 summer opening of an international theme park in
Germany.
 
     Six Flags Theme Parks.  As a result of TWE's sale of 51% of its interest in
Six Flags, the operating results of Six Flags have been deconsolidated effective
as of June 23, 1995 and TWE's remaining 49% interest in Six Flags is accounted
for under the equity method of accounting. In February 1998, TWE entered into an
agreement to sell its remaining 49% interest. See Note 2 to the accompanying
consolidated financial statements.
 
     Broadcasting-The WB Network.  The WB Network recorded EBITA and operating
losses of $98 million on $87 million of revenues in 1996, compared to EBITA and
operating losses of $66 million on $33 million of revenues in 1995. The increase
in revenues and operating losses primarily resulted from the expansion of the WB
Network's primetime programming schedule and the expansion of Kids' WB!, the
network's animated programming lineup on Saturday mornings and weekdays. In
addition, operating losses for 1995 were mitigated by a favorable legal
settlement. Due to the start-up nature of this national broadcast operation,
losses are expected to continue.
 
     Cable Networks-HBO.  Revenues increased to $1.763 billion in 1996, compared
to $1.593 billion in 1995. EBITA increased to $328 million from $275 million.
Operating income increased to $328 million from $274 million. Revenues benefited
primarily from a significant increase in subscriptions to 32.4 million from 29.7
million at the end of 1995. EBITA and operating income improved principally as a
result of the revenue gains.
 
     Cable.  Revenues increased to $3.851 billion in 1996, compared to $3.005
billion in 1995. EBITA increased to $917 million from $803 million. Operating
income increased to $606 million from $495 million. The 1996 Cable operating
results increased as a result of the full year effect from the formation of
TWE-A/N effective as of April 1, 1995 and the consolidation of Paragon effective
as of July 6, 1995.
 
     On a pro forma basis, TWE's Cable division had 1995 revenues of $3.368
billion, EBITA of $837 million and operating income of $528 million. In
comparison to 1995 pro forma results, 1996 revenues benefited from an aggregate
increase in basic cable and Primestar-related, direct broadcast satellite
subscribers, increases in regulated cable rates as permitted under Time Warner
Cable's 'social contract' with the FCC and increases in advertising and
pay-per-view revenues. EBITA and operating income increased principally as a
result of revenue gains, offset in part by higher depreciation relating to
increased capital spending.
 
                                      F-5
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     As of December 31, 1996, including the wholly owned cable operations of
Time Warner, there were 12.3 million subscribers under the management of TWE's
Cable division, as compared to 10.4 million subscribers at the end of 1995.
 
     Interest and Other, Net.  Interest and other, net, decreased to $522
million in 1996, compared to $580 million in 1995. Interest expense decreased to
$475 million, compared to $571 million in 1995, principally as a result of
interest savings on lower average debt levels related to management's debt
reduction program and lower short-term, floating-rates of interest paid on
borrowings under TWE's former and existing bank credit agreements. There was
other expense, net, of $47 million in 1996 compared to other expense, net, of $9
million in 1995, principally due to an overall decrease in investment-related
income. The decrease in investment-related income resulted from a reduction in
interest income, and lower aggregate gains on the sale of certain assets. The
reduction in interest income related to lower average cash balances and lower
average principal amounts due under the note receivable from U S WEST that was
fully collected during 1996.
 
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1997
 
1997 FINANCIAL CONDITION
 
     At December 31, 1997, TWE had $6.0 billion of debt, $322 million of cash
and equivalents (net debt of $5.7 billion), $233 million of preferred stock of a
subsidiary, $1.1 billion of Time Warner General Partners' Senior Capital and
$6.3 billion of partners' capital, compared to $5.7 billion of debt, $216
million of cash and equivalents (net debt of $5.5 billion), $1.5 billion of Time
Warner General Partners' Senior Capital and $6.6 billion of partners' capital at
December 31, 1996.
 
DEBT REFINANCINGS
 
     In November 1997, TWE and TWE-A/N, together with Time Warner Inc. and
certain of its consolidated subsidiaries, entered into a new, five-year
revolving credit facility (the '1997 Credit Agreement') and terminated their
previously existing bank credit facility (the 'Old Credit Agreement'). This
enabled TWE to reduce its aggregate borrowing availability from $8.3 billion to
$7.5 billion, lower interest rates and refinance approximately $2.1 billion of
its outstanding borrowings under the Old Credit Agreement. See Note 5 to the
accompanying consolidated financial statements for a summary of the principal
terms of the 1997 Credit Agreement.
 
CREDIT STATISTICS
 
     The combination of EBITA growth and controlled capital spending has
resulted in improvements in TWE's financial condition and overall financial
flexibility, as reflected in its strengthening financial ratios. These ratios,
consisting of commonly used financial measures such as leverage and coverage
ratios, are used by credit rating agencies and other credit analysts to measure
the ability of a company to repay debt (leverage) and to pay interest
(coverage). The leverage ratio represents the ratio of total debt, less cash to
total business segment operating income before depreciation and amortization,
less corporate expenses ('Adjusted EBITDA'). The coverage ratio represents the
ratio of Adjusted EBITDA to total interest expense. Those ratios, on a
historical basis for 1997 and 1996 and on a pro forma basis for 1995 are as set
forth below:
 
                                      F-6
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 


                                                                                        HISTORICAL
                                                                                       -------------     PRO FORMA
                                                                                       1997     1996      1995(a)
                                                                                       ----     ----     ---------
 
                                                                                                
Leverage ratio......................................................................   2.1x     2.4x        3.0x
Interest coverage ratio(b)..........................................................   5.4x     4.7x        3.7x

 
- ------------
 
 (a)  Pro forma ratios for 1995 give effect to the 1995 Transactions as if each
      of such transactions had occurred at the beginning of 1995. Historical
      ratios for 1995 are not meaningful and have not been presented because
      they reflect the operating results of acquired or disposed entities for
      only a portion of the year in comparison to year-end net debt levels.
 
 (b)  Includes dividends related to the preferred stock of a subsidiary.
 
     TWE's leverage and coverage ratios for 1998 are expected to be negatively
affected by TWE-A/N's assumption of approximately $1 billion of debt in
connection with the TWE-A/N Transfers (as described more fully hereinafter).
Nevertheless, management believes that TWE's operating cash flow will continue
to be sufficient to service its debt requirements.
 
CASH FLOWS
 
     In 1997, TWE's cash provided by operations amounted to $1.834 billion and
reflected $1.874 billion of EBITA from the Filmed Entertainment-Warner Bros.,
Broadcasting-The WB Network, Cable Networks-HBO and Cable businesses, $940
million of noncash depreciation expense and $300 million from the securitization
of backlog, less $493 million of interest payments, $95 million of income taxes,
$72 million of corporate expenses and $620 million related to an increase in
working capital requirements, other balance sheet accounts and noncash items.
Cash provided by operations of $1.912 billion in 1996 reflected $1.514 billion
of business segment EBITA, $799 million of noncash depreciation expense and $255
million related to a reduction in working capital requirements, other balance
sheet accounts and noncash items, less $513 million of interest payments, $74
million of income taxes and $69 million of corporate expenses.
 
     Cash used by investing activities was $1.252 billion in 1997, compared to
$1.253 billion in 1996, principally as a result of lower capital expenditures,
offset by a decrease in investment proceeds. Capital expenditures were $1.565
billion in 1997, and $1.719 billion in 1996.
 
     Cash used by financing activities was $476 million in 1997, compared to
$652 million in 1996, principally as a result of an increase in debt used to
fund cash distributions to Time Warner and the issuance of 250,000 shares of
preferred stock of a subsidiary for aggregate net proceeds of $243 million,
offset in part by a $706 million increase in distributions paid to Time Warner
and the absence of $169 million of collections on the note receivable from U S
WEST that was fully paid in 1996.
 
     Management believes that TWE's operating cash flow, cash and equivalents
and additional borrowing capacity are sufficient to fund its capital and
liquidity needs for the foreseeable future.
 
CABLE CAPITAL SPENDING
 
     Time Warner Cable has been engaged in a plan to upgrade the technological
capability and reliability of its cable television systems and develop new
services, which it believes will position the business for sustained, long-term
growth. Capital spending by TWE's Cable division amounted to $1.401 billion in
1997, compared to $1.348 billion in 1996. Capital spending includes over $100
million in each year relating to Primestar, which is expected to be eliminated
in 1998 upon the consummation of the Primestar Transactions (as described more
fully hereinafter). Capital spending by TWE's Cable division for 1998 is
budgeted to be approximately $1.4 billion and is expected to continue to be
funded by cable operating cash flow. In exchange for certain flexibility in
establishing cable rate pricing structures for regulated services that went into
effect on January 1, 1996 and
 
                                      F-7
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
consistent with Time Warner Cable's long-term strategic plan, Time Warner Cable
agreed with the FCC to invest a total of $4 billion in capital costs in
connection with the upgrade of its cable infrastructure, which is expected to be
substantially completed over a five-year period ending December 31, 2000. The
agreement with the FCC covers all of the cable operations of Time Warner Cable,
including the owned or managed cable television systems of TWE, TWE-A/N and Time
Warner. As discussed more fully below, management expects to continue to finance
such level of investment through cable operating cash flow and the development
of new revenue streams from expanded programming options, high-speed Internet
access, telephony and other services.
 
CABLE FINANCING STRATEGY
 
     Time Warner's and TWE's cable financing strategy is to continue to use
cable operating cash flow to finance the level of capital spending necessary to
upgrade the technological capability of its cable television systems and develop
new services, while pursuing opportunities to reduce both existing debt and its
share of future funding requirements related to the cable television business
and related ancillary businesses. Consistent with this strategy, Time Warner,
TWE and TWE-A/N have recently announced or consummated certain transactions,
primarily consisting of (i) a series of transactions with TCI Communications,
Inc. ('TCI'), a subsidiary of Tele-Communications, Inc., to establish two, new
strategic joint ventures, expand an existing joint venture and exchange certain
cable television systems (collectively, the 'TCI Cable Transactions'), (ii) the
transfer of TWE's and TWE-A/N's direct broadcast satellite operations and
related assets to a separate entity, as well as certain related transactions and
(iii) the transfer by a wholly owned subsidiary of Time Warner of cable
television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, as well as certain
related transactions (collectively, the 'TWE-A/N Transfers'). Each of these
transactions is discussed more fully below.
 
TCI Cable Transactions
 
     In September 1997, Time Warner, TWE, TWE-A/N and TCI signed a letter of
intent to enter into a series of agreements to (i) form two cable television
joint ventures in the Houston and south Texas areas that will be managed by TWE
and own cable television systems serving an aggregate 1.1 million subscribers,
subject to approximately $1.4 billion of debt, (ii) expand an existing joint
venture in Kansas City, which is managed by TWE, through the contribution by TCI
of a contiguous cable television system serving approximately 95,000
subscribers, subject to approximately $200 million of debt, and (iii) exchange
various cable television systems owned by Time Warner and TWE serving over
500,000 subscribers (of which cable television systems serving approximately
400,000 subscribers are owned by TWE) for other cable television systems of
comparable size in an effort to enhance each company's geographic clusters of
cable television properties. The joint ventures will be accounted for under the
equity method of accounting.
 
     As a result of these transactions, TWE expects to reduce debt by
approximately $500 million, benefit from the geographic clustering of cable
television systems and increase the number of subscribers under its management
by approximately 675,000 subscribers, thereby becoming the largest cable
television operator in the U.S. The TCI Cable Transactions are expected to close
periodically throughout 1998 and are subject to the execution of definitive
agreements by the parties and customary closing conditions, including all
necessary governmental and regulatory approvals. There can be no assurance that
such agreements will be completed or that such approvals will be obtained.
 
                                      F-8
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
Primestar Transactions
 
     In June 1997, TWE and the Advance/Newhouse Partnership ('Advance/Newhouse')
entered into agreements to transfer the direct broadcast satellite operations
conducted by TWE and TWE-A/N (the 'DBS Operations') and the 31% partnership
interest in Primestar Partners, L.P. held by TWE-A/N ('Primestar' and
collectively, the 'Primestar Assets') to a new holding company ('Newco') that is
ultimately expected to be the publicly traded parent of TCI Satellite
Entertainment, Inc. ('TSAT'). Newco will also own the DBS Operations and
Primestar partnership interests currently owned by TSAT and other existing
partners of Primestar. In exchange for contributing its interests in the
Primestar Assets, TWE will receive an approximate 24% equity interest in Newco
and realize approximately $260 million of debt reduction, as well as eliminate
its share of future funding requirements for these operations that will be
separately financed by Newco. In partial consideration for contributing its
indirect interest in certain of the Primestar Assets, Advance/Newhouse will
receive an approximate 6% equity interest in Newco. This transaction is referred
to herein as the 'Primestar Roll-up Transaction.'
 
     In a related transaction, Primestar also entered into an agreement in June
1997 with The News Corporation Limited, MCI Telecommunications Corporation and
American Sky Broadcasting LLC ('ASkyB'), pursuant to which Primestar (or, under
certain circumstances, Newco) will acquire certain assets relating to the
high-power, direct broadcast satellite business of ASkyB (the 'Primestar ASkyB
Transaction' and, when taken together with the Primestar Roll-up Transaction,
the 'Primestar Transactions'). In exchange for such assets, ASkyB will receive
non-voting securities of Newco that will be convertible into non-voting common
stock of Newco and, accordingly, will reduce TWE's equity interest in Newco to
approximately 16% on a fully diluted basis.
 
     The Primestar Transactions are not conditioned on each other and are
expected to close independently. The Primestar Roll-up Transaction is expected
to close on or about April 1, 1998. The Primestar ASkyB Transaction is expected
to close in 1998, subject to customary closing conditions, including all
necessary governmental and regulatory approvals, including the approval of the
FCC. There can be no assurance that such approvals will be obtained.
 
TWE-A/N Transfers
 
     In early 1998, Time Warner (through a wholly owned subsidiary) contributed
cable television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, and completed certain
related transactions. The cable television systems transferred to TWE-A/N were
formerly owned by TWI Cable Inc. ('TWI Cable'), a wholly owned subsidiary of
Time Warner, and Paragon, a partnership formerly owning cable television systems
serving approximately 1 million subscribers that was previously wholly owned by
subsidiaries of Time Warner, with 50% beneficially owned in the aggregate by TWE
and TWE-A/N. The TWE-A/N Transfers increased the under-leveraged capitalization
of TWE-A/N and consequently, TWE. The debt assumed by TWE-A/N has been
guaranteed by TWI Cable and certain of its subsidiaries, including Paragon.
 
     As part of the TWE-A/N Transfers, TWE exchanged substantially all of its
beneficial interests in Paragon for an equivalent share of Paragon's cable
television systems (or interests therein) serving approximately 500,000
subscribers. TWE, in turn, transferred such systems and certain related assets
to TWE-A/N in exchange for TWE-A/N's beneficial interest in Paragon and in
satisfaction of certain pre-existing obligations to TWE-A/N. This resulted in
wholly owned subsidiaries of Time Warner owning 100% of the restructured Paragon
entity, with less than 1% beneficially held for TWE. Accordingly, effective as
of January 1, 1998, TWE will deconsolidate Paragon. Because this transaction
represented an exchange of TWE's and TWE-A/N's beneficial
 
                                      F-9
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
interests in Paragon for an equivalent amount of its cable television systems,
it did not have a significant economic impact on Time Warner, TWE or TWE-A/N.
 
     In connection with the TWE-A/N Transfers, Advance/Newhouse made a capital
contribution to TWE-A/N in order to maintain its 33.3% common partnership
interest therein. Accordingly, TWE-A/N is now owned 65.2% by TWE, 33.3% by
Advance/Newhouse and 1.5% indirectly by Time Warner. The TWE-A/N Transfers will
be accounted for effective as of January 1, 1998.
 
SIX FLAGS
 
     In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags to Premier Parks Inc. ('Premier'), a regional theme park
operator, for approximately $375 million of cash and $100 million of convertible
preferred stock. TWE expects to use the net proceeds from this transaction,
after taxes and transaction costs, to reduce debt. As part of the transaction,
TWE will continue to license its animated cartoon and comic book characters to
Six Flags's theme parks and will similarly license such rights to Premier's
theme parks in the United States and Canada under a long-term agreement covering
an aggregate of twenty-five existing and all future locations. The transaction
is expected to close in the second quarter of 1998, subject to customary closing
conditions, including the successful completion of certain equity offerings by
Premier.
 
OFF-BALANCE SHEET ASSETS
 
     As discussed below, TWE believes that the value of certain off-balance
sheet assets should be considered, along with other factors discussed elsewhere
herein, in evaluating TWE's financial condition and prospects for future results
of operations, including its ability to meet its capital and liquidity needs.
 
Intangible Assets
 
     As a creator and distributor of branded information and entertainment
copyrights, TWE has a significant amount of internally generated intangible
assets whose value is not fully reflected in the consolidated balance sheet.
Such intangible assets extend across TWE's principal business interests, but are
best exemplified by its interest in Warner Bros.' and HBO's copyrighted film and
television product libraries, and the creation or extension of brands. Generally
accepted accounting principles do not recognize the value of such assets, except
at the time they may be acquired in a business combination accounted for by the
purchase method of accounting.
 
     Because TWE owns the copyrights to such creative material, it continually
generates revenue through the sale of such products across different media and
in new and existing markets. The value of film and television-related
copyrighted product and trademarks is continually realized by the licensing of
films and television series to secondary markets and the licensing of
trademarks, such as the Looney Tunes characters and Batman, to the retail
industry and other markets. In addition, technological advances, such as the
introduction of the home videocassette in the 1980's and the potential
exploitation of the digital video disc in the future, have historically
generated significant revenue opportunities through the repackaging and sale of
such copyrighted products in the new technological format. Accordingly, such
intangible assets have significant off-balance sheet asset value that is not
fully reflected in TWE's consolidated balance sheet.
 
Warner Bros. Backlog
 
     Warner Bros.' backlog, representing the amount of future revenue not yet
recorded from cash contracts for the licensing of theatrical and television
product for pay cable, basic cable, network and syndicated television
exhibition, amounted to $2.126 billion at December 31, 1997, compared to $1.502
billion at December 31, 1996
 
                                      F-10
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
(including amounts relating to TWE's cable television networks of $238 million
and $189 million, respectively, and to Time Warner's cable television networks
of $481 million in 1997 and $274 million in 1996).
 
     Because backlog generally relates to contracts for the licensing of
theatrical and television product which have already been produced, the
recognition of revenue for such completed product is principally only dependent
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement. Cash licensing fees are collected periodically
over the term of the related licensing agreements. In order to accelerate the
receipt of cash under these licensing contracts, TWE established a $600 million
securitization facility in 1997 and received approximately $300 million of net
proceeds thereunder. The remaining portion of backlog for which cash advances
have not already been received continues to have significant off-balance sheet
asset value as a source of future funding. The backlog excludes advertising
barter contracts, which are also expected to result in the future realization of
revenues and cash through the sale of advertising spots received under such
contracts.
 
FOREIGN CURRENCY RISK MANAGEMENT
 
Foreign Exchange Contracts
 
     Time Warner uses foreign exchange contracts primarily to hedge the risk
that unremitted or future license fees owed to TWE domestic companies for the
sale or anticipated sale of U.S. copyrighted products abroad may be adversely
affected by changes in foreign currency exchange rates. As part of its overall
strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, Time Warner hedges a portion of its foreign currency
exposures anticipated over the ensuing twelve month period, including those
related to TWE. At December 31, 1997, Time Warner had effectively hedged
approximately half of TWE's estimated foreign currency exposures that
principally relate to anticipated cash flows to be remitted to the U.S. over the
ensuing twelve month period, using foreign exchange contracts that generally
have maturities of three months or less, which are generally rolled over to
provide continuing coverage throughout the year. TWE is reimbursed by or
reimburses Time Warner for Time Warner contract gains and losses related to
TWE's foreign currency exposure. Time Warner often closes foreign exchange
contracts by purchasing an offsetting purchase contract. At December 31, 1997,
Time Warner had contracts for the sale of $507 million and the purchase of $139
million of foreign currencies at fixed rates. Of Time Warner's $368 million net
sale contract position, none of the foreign exchange purchase contracts and $105
million of the foreign exchange sale contracts related to TWE's foreign currency
exposure, compared to contracts for the sale of $102 million of foreign
currencies at December 31, 1996.
 
     Based on Time Warner's outstanding foreign exchange contracts related to
TWE's exposure at December 31, 1997, each 5% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies under contract at
December 31, 1997 would result in approximately $5 million of unrealized losses
on foreign exchange contracts. Conversely, a 5% appreciation of the U.S. dollar
as compared to the level of foreign exchange rates for currencies under contract
at December 31, 1997 would result in $5 million of unrealized gains on
contracts. Consistent with the nature of the economic hedge provided by such
foreign exchange contracts, such unrealized gains or losses would be offset by
corresponding decreases or increases, respectively, in the dollar value of
future foreign currency license fee payments that would be received in cash
within the ensuing twelve month period from the sale of U.S. copyrighted
products abroad.
 
Asian Financial Markets
 
     During 1997, the Asian financial markets experienced significant
instability. Because less than 5% of TWE's revenues are derived from the sale of
products and services in Asia, management does not believe that the state of the
Asian financial markets poses a material risk to TWE's operations.
 
                                      F-11
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
YEAR 2000 TECHNOLOGY PREPAREDNESS
 
     TWE is currently working to resolve the potential impact of the year 2000
on the processing of time-sensitive information by its computerized information
systems. Year 2000 issues may arise if computer programs have been written using
two digits (rather than four) to define the applicable year. In such case,
programs that have time-sensitive logic may recognize a date using '00' as the
year 1900 rather than the year 2000, which could result in miscalculations or
system failures. Management is in the process of completing a review of
significant software and equipment used in TWE's operations and, to the extent
practicable, in the operations of its key business partners, in order to
determine if any year 2000 risks exist that may be material to TWE as a whole.
This process includes an assessment of year 2000 risks on an ongoing basis and
the identification of practical remediation measures that could be taken on a
timely basis to alter, validate or replace time-sensitive software. Management
has already begun implementing certain of these measures and intends to complete
its remediation efforts prior to any anticipated material impact on its
computerized information systems. Costs of addressing potential problems have
not been material to date and, based on preliminary information, are not
currently expected to have a material adverse impact on TWE's financial
position, results of operations or cash flows in future periods. However, if
TWE, its customers or vendors are unable to resolve such processing issues in a
timely manner, it could result in a material financial risk. Accordingly,
management plans to devote the resources it concludes are appropriate to resolve
all significant year 2000 issues in a timely manner.
 
                                      F-12






                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                           CONSOLIDATED BALANCE SHEET
                                  DECEMBER 31,
                                   (MILLIONS)
 


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

 
See accompanying notes.
 
                                      F-13
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)
 


                                                                                        1997         1996         1995
                                                                                       -------      -------      ------
 
                                                                                                        
Revenues (a)........................................................................   $11,318      $10,852      $9,517
                                                                                       -------      -------      ------
 
Cost of revenues (a)(b).............................................................     7,406        7,441       6,597
Selling, general and administrative (a)(b)..........................................     2,468        2,333       1,960
                                                                                       -------      -------      ------
 
Operating expenses..................................................................     9,874        9,774       8,557
                                                                                       -------      -------      ------
 
Business segment operating income...................................................     1,444        1,078         960
Interest and other, net (a).........................................................      (345)        (522)       (580)
Minority interest...................................................................      (305)        (207)       (133)
Corporate services (a)..............................................................       (72)         (69)        (64)
                                                                                       -------      -------      ------
 
Income before income taxes..........................................................       722          280         183
Income taxes........................................................................       (85)         (70)        (86)
                                                                                       -------      -------      ------
 
Income before extraordinary item....................................................       637          210          97
Extraordinary loss on retirement of debt............................................       (23)          --         (24)
                                                                                       -------      -------      ------
 
Net income..........................................................................   $   614      $   210      $   73
                                                                                       -------      -------      ------
                                                                                       -------      -------      ------

 
- ------------
(a) Includes the following income (expenses) resulting from transactions with
    the partners of TWE and other related companies for the years ended December
    31, 1997, 1996 and 1995, respectively: revenues-$431 million, $198 million
    and $56 million; cost of revenues-$(167) million, $(95) million and $(54)
    million; selling, general and administrative-$18 million, $(38) million and
    $(61) million; interest and other, net-$30 million, $30 million and $24
    million; and corporate expenses-$(72) million, $(69) million and $(64)
    million (Note 14).
 
                                                                                                        
(b) Includes depreciation and amortization expense of:..............................   $ 1,370      $ 1,235      $1,039
                                                                                       -------      -------      ------
                                                                                       -------      -------      ------


 
See accompanying notes.
 
                                      F-14
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)
 


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

 
See accompanying notes.
 
                                      F-15
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                 CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
                                   (MILLIONS)
 


                                                                                    PARTNERS' CAPITAL
                                                  TIME WARNER    -------------------------------------------------------
                                                    GENERAL                     UNDISTRIBUTED       U S
                                                   PARTNERS'                     PARTNERSHIP        WEST         TOTAL
                                                    SENIOR       CONTRIBUTED      EARNINGS          NOTE       PARTNERS'
                                                    CAPITAL        CAPITAL        (DEFICIT)      RECEIVABLE     CAPITAL
                                                  -----------    -----------    -------------    ----------    ---------
 
                                                                                                
BALANCE AT DECEMBER 31, 1994...................     $ 1,663        $ 7,398         $  (394)        $ (771)      $ 6,233
Net income.....................................                                         73                           73
Decrease in unrealized gains on securities.....                                         (4)                          (4)
Foreign currency translation adjustments.......                                         --                           --
                                                                                -------------                  ---------
    Comprehensive income.......................                                         69                           69
Distributions..................................        (366)                          (421)                        (421)
Reacquisition of Time Warner Service
  Partnership Assets...........................                        124                                          124
Allocation of income...........................         129                           (129)                        (129)
Collections....................................                                                       602           602
                                                  -----------    -----------    -------------       -----      ---------
BALANCE AT DECEMBER 31, 1995...................       1,426          7,522            (875)          (169)        6,478
Net income.....................................                                        210                          210
Increase in unrealized gains on securities.....                                          4                            4
Foreign currency translation adjustments.......                                         14                           14
                                                                                -------------                  ---------
    Comprehensive income.......................                                        228                          228
Distributions..................................                                       (199)                        (199)
Capital contributions..........................                         15                                           15
Allocation of income...........................         117                           (117)                        (117)
Collections....................................                                                       169           169
                                                  -----------    -----------    -------------       -----      ---------
BALANCE AT DECEMBER 31, 1996...................       1,543          7,537            (963)            --         6,574
Net income.....................................                                        614                          614
Increase in unrealized gains on securities.....                                          7                            7
Foreign currency translation adjustments.......                                        (29)                         (29)
                                                                                -------------                  ---------
    Comprehensive income.......................                                        592                          592
Distributions..................................        (535)                          (723)                        (723)
Allocation of income...........................         110                           (110)                        (110)
                                                  -----------    -----------    -------------       -----      ---------
BALANCE AT DECEMBER 31, 1997...................     $ 1,118        $ 7,537         $(1,204)        $   --       $ 6,333
                                                  -----------    -----------    -------------       -----      ---------
                                                  -----------    -----------    -------------       -----      ---------

 
See accompanying notes.
 
                                      F-16






                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
DESCRIPTION OF BUSINESS
 
     Time Warner Entertainment Company, L.P., a Delaware limited partnership
('TWE'), classifies its business interests into three fundamental areas:
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; Cable Networks, consisting
principally of interests in cable television programming; and Cable, consisting
principally of interests in cable television systems.
 
     Each of the business interests within Entertainment, Cable Networks and
Cable is important to TWE's objective of increasing partner value through the
creation, extension and distribution of recognizable brands and copyrights
throughout the world. Such brands and copyrights include (1) the unique and
extensive film, television and animation libraries of Warner Bros. and
trademarks such as the Looney Tunes characters and Batman, (2) The WB Network, a
national broadcasting network launched in 1995 as an extension of the Warner
Bros. brand and as an additional distribution outlet for Warner Bros.'
collection of children's cartoons and television programming, (3) HBO and
Cinemax, the leading pay television services and (4) Time Warner Cable,
currently the second largest operator of cable television systems in the U.S.
 
     The operating results of TWE's various business interests are presented
herein as an indication of financial performance (Note 12). Except for start-up
losses incurred in connection with The WB Network, TWE's principal business
interests generate significant operating income and cash flow from operations.
The cash flow from operations generated by such business interests is
considerably greater than their operating income due to significant amounts of
noncash amortization of intangible assets recognized principally in Time Warner
Companies, Inc.'s ('Time Warner')* $14 billion acquisition of Warner
Communications Inc. ('WCI') in 1989 and $1.3 billion acquisition of the minority
interest in American Television and Communications Corporation ('ATC') in 1992,
a portion of which cost was allocated to TWE upon the capitalization of the
partnership. Noncash amortization of intangible assets recorded by TWE's
businesses amounted to $430 million in 1997, $436 million in 1996 and $444
million in 1995.
 
     Time Warner and certain of its wholly owned subsidiaries collectively own
general and limited partnership interests in TWE consisting of 74.49% of the pro
rata priority capital ('Series A Capital') and residual equity capital
('Residual Capital'), and 100% of the senior priority capital ('Senior Capital')
and junior priority capital ('Series B Capital'). The remaining 25.51% limited
partnership interests in the Series A Capital and Residual Capital of TWE are
held by a subsidiary of U S WEST, Inc. ('U S WEST'), which acquired such
interests in 1993 for $1.532 billion of cash and a $1.021 billion 4.4% note (the
'U S WEST Note Receivable') that was fully collected during 1996. Certain of
Time Warner's subsidiaries are the general partners of TWE ('Time Warner General
Partners').
 
BASIS OF PRESENTATION
 
     The consolidated financial statements of TWE reflect (i) the formation by
TWE of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995, (ii)
the deconsolidation of Six Flags Entertainment Corporation ('Six Flags')
effective as of June 23, 1995 and (iii) the consolidation of Paragon
Communications ('Paragon') effective as of July 6, 1995. Certain
reclassifications have been made to the prior years' financial statements to
conform to the 1997 presentation.
 
     In lieu of contributing certain assets to the partnership at its
capitalization in 1992 (the 'Beneficial Assets'), the Time Warner General
Partners assigned to TWE the net cash flow generated by such assets or
 
- ------------
 
* On October 10, 1996, Time Warner Inc. acquired the remaining 80% interest in
  Turner Broadcasting System, Inc. ('TBS') that it did not already own. As a
  result of this transaction, a new parent company with the name 'Time Warner
  Inc.' replaced the old parent company of the same name (now known as Time
  Warner Companies, Inc., 'TW Companies'), and TW Companies and TBS became
  separate, wholly owned subsidiaries of the new parent company. Unless the
  context indicates otherwise, references herein to 'Time Warner' refer to TW
  Companies.
 
                                      F-17
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
agreed to pay an amount equal to the net cash flow generated by such assets. TWE
has the right to receive from the Time Warner General Partners, at the limited
partners' option, an amount equal to the fair value of the Beneficial Assets,
net of associated liabilities, that have not been contributed to TWE, rather
than continuing to receive the net cash flow, or an amount equal to the net cash
flow, generated by such Beneficial Assets. The consolidated financial statements
include the assets and liabilities of the businesses contributed by the Time
Warner General Partners, including the Beneficial Assets and associated
liabilities, all at Time Warner's historical cost basis of accounting.
 
BASIS OF CONSOLIDATION AND
ACCOUNTING FOR INVESTMENTS
 
     The consolidated financial statements include 100% of the assets,
liabilities, revenues, expenses, income, loss and cash flows of TWE and all
companies in which TWE has a controlling voting interest ('subsidiaries'), as if
TWE and its subsidiaries were a single company. Significant intercompany
accounts and transactions between the consolidated companies have been
eliminated. Significant accounts and transactions between TWE and its partners
and affiliates are disclosed as related party transactions (Note 14).
 
     Investments in companies in which TWE has significant influence, but less
than a controlling voting interest, are accounted for using the equity method.
Under the equity method, only TWE's investment in and amounts due to and from
the equity investee are included in the consolidated balance sheet, only TWE's
share of the investee's earnings is included in the consolidated operating
results, and only the dividends, cash distributions, loans or other cash
received from the investee, less any additional cash investments, loan
repayments or other cash paid to the investee are included in the consolidated
cash flows.
 
     Investments in companies in which TWE does not have a controlling interest
or an ownership and voting interest so large as to exert significant influence
are accounted for at market value if the investments are publicly traded and
there are no resale restrictions, or at cost, if the sale of a publicly traded
investment is restricted or if the investment is not publicly traded. Unrealized
gains and losses on investments accounted for at market value are reported in
partners' capital until the investment is sold, at which time the realized gain
or loss is included in income. Dividends and other distributions of earnings
from both market value and cost method investments are included in income when
declared.
 
FOREIGN CURRENCY
 
     The financial position and operating results of substantially all foreign
operations are consolidated using the local currency as the functional currency.
Local currency assets and liabilities are translated at the rates of exchange on
the balance sheet date, and local currency revenues and expenses are translated
at average rates of exchange during the period. Resulting translation gains or
losses, which have not been material, are included in partners' capital. Foreign
currency transaction gains and losses, which have not been material, are
included in operating results.
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
 
     Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include management's forecast of anticipated
revenues from the distribution of theatrical and television product in order to
evaluate the ultimate recoverability of accounts receivables and film inventory
recorded as assets in the consolidated balance sheet. Accounts receivables and
sales related to the distribution of home video product
 
                                      F-18
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
in the filmed entertainment industry are subject to customers' rights to return
unsold items. Management periodically reviews such estimates and it is
reasonably possible that management's assessment of recoverability of accounts
receivables and individual films and television product may change based on
actual results and other factors.
 
REVENUES AND COSTS
 
     Feature films are produced or acquired for initial exhibition in theaters
followed by distribution in the home video, pay cable, basic cable, broadcast
network and syndicated television markets. Generally, distribution to the
theatrical, home video and pay cable markets (the primary markets) is
principally completed within eighteen months of initial release. Thereafter,
feature films are distributed to the basic cable, broadcast network and
syndicated television markets (the secondary markets). Theatrical revenues are
recognized as the films are exhibited. Home video revenues, less a provision for
returns, are recognized when the home videos are sold. Revenues from the
distribution of theatrical product to cable, broadcast network and syndicated
television markets are recognized when the films are available to telecast.
 
     Television films and series are initially produced for the networks or
first-run television syndication (the primary markets) and may be subsequently
licensed to foreign or domestic cable and syndicated television markets (the
secondary markets). Revenues from the distribution of television product are
recognized when the films or series are available to telecast, except for barter
agreements where the recognition of revenue is deferred until the related
advertisements are exhibited.
 
     License agreements for the telecast of theatrical and television product in
the cable, broadcast network and syndicated television markets are routinely
entered into well in advance of their available date for telecast, which is
generally determined by the telecast privileges granted under previous license
agreements. Accordingly, there are significant contractual rights to receive
cash and barter upon which the related revenues will not be recognized until
such product is available for telecast under the contractual terms of the
related license agreement. Such contractual rights for which revenue is not yet
recognizable is referred to as 'backlog.' Excluding advertising barter
contracts, Warner Bros.' backlog amounted to $2.126 billion and $1.502 billion
at December 31, 1997 and 1996, respectively (including amounts relating to the
licensing of film product to TWE's cable television networks of $238 million and
$189 million, respectively, and to Time Warner's cable television networks of
$481 million and $274 million, respectively).
 
     Inventories of theatrical and television product are stated at the lower of
amortized cost or net realizable value. Cost principally consists of direct
production costs and production overhead. A portion of the cost to acquire WCI
in 1989 was allocated to its theatrical and television product, including an
allocation to product that had been exhibited at least once in all markets
('Library'). The Library is amortized on a straight-line basis over twenty
years. Individual films and series are amortized, and the related participations
and residuals are accrued, based on the proportion that current revenues from
the film or series bear to an estimate of total revenues anticipated from all
markets. These estimates are revised periodically and losses, if any, are
provided in full. Current film inventories include the unamortized cost of
completed feature films allocated to the primary markets, television films and
series in production pursuant to a contract of sale, film rights acquired for
the home video market and advances pursuant to agreements to distribute
third-party films in the primary markets. Noncurrent film inventories include
the unamortized cost of completed theatrical and television films allocated to
the secondary markets, theatrical films in production and the Library.
 
     A significant portion of cable system and cable programming revenues are
derived from subscriber fees. Subscriber fees are recorded as revenue in the
period the service is provided. The cost of rights to exhibit feature films and
other programming on pay cable services during one or more availability periods
('programming costs') generally is recorded when the programming is initially
available for exhibition, and is allocated to the appropriate availability
periods and amortized as the programming is exhibited.
 
                                      F-19
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
ADVERTISING
 
     In accordance with the Financial Accounting Standards Board ('FASB')
Statement No. 53, 'Financial Reporting by Producers and Distributors of Motion
Picture Films,' advertising costs for theatrical and television product are
capitalized and amortized over the related revenue streams in each market that
such costs are intended to benefit, which generally does not exceed three
months. Other advertising costs are expensed upon the first exhibition of the
advertisement. Advertising expense, excluding theatrical and television product,
amounted to $288 million in 1997, $332 million in 1996 and $241 million in 1995.
 
CASH AND EQUIVALENTS
 
     Cash equivalents consist of commercial paper and other investments that are
readily convertible into cash and have original maturities of three months or
less.
 
FINANCIAL INSTRUMENTS
 
     The fair value of financial instruments, such as long-term debt and
investments, is generally determined by reference to market values resulting
from trading on a national securities exchange or in an over-the-counter market.
In cases where quoted market prices are not available, such as for derivative
financial instruments, fair value is based on estimates using present value or
other valuation techniques.
 
PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment are stated at cost. Additions to cable
property, plant and equipment generally include material, labor, overhead and
interest. Depreciation is provided generally on the straight-line method over
useful lives ranging up to thirty years for buildings and improvements and up to
fifteen years for furniture, fixtures, cable television equipment and other
equipment. Property, plant and equipment consists of:
 


                                                                                                 DECEMBER 31,
                                                                                              -------------------
                                                                                               1997        1996
                                                                                              -------     -------
                                                                                                  (MILLIONS)
 
                                                                                                    
Land and buildings.........................................................................   $   804     $   780
Cable television equipment.................................................................     7,423       6,602
Furniture, fixtures and other equipment....................................................     2,310       2,129
                                                                                              -------     -------
                                                                                               10,537       9,511
Less accumulated depreciation..............................................................    (3,980)     (3,512)
                                                                                              -------     -------
Total......................................................................................   $ 6,557     $ 5,999
                                                                                              -------     -------
                                                                                              -------     -------

 
     Effective January 1, 1996, TWE adopted FASB Statement No. 121, 'Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of' ('FAS 121'), which established standards for the recognition and measurement
of impairment losses on long-lived assets and certain intangible assets. The
adoption of FAS 121 did not have a material effect on TWE's financial
statements.
 
INTANGIBLE ASSETS
 
     As a creator and distributor of branded information and entertainment
copyrights, TWE has a significant and growing amount of intangible assets,
including goodwill, cable television franchises, film and television libraries
and other copyrighted products and trademarks. In accordance with generally
accepted accounting principles, TWE does not recognize the fair value of
internally generated intangible assets. Costs incurred to create and produce
copyrighted product, such as feature films and television series, are generally
either expensed as incurred, or capitalized as tangible assets, as in the case
of cash advances and inventoriable product costs.
 
                                      F-20
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
However, accounting recognition is not given to any increasing asset value that
may be associated with the collection of the underlying copyrighted material.
Additionally, costs incurred to create or extend brands, such as the start-up of
The WB Network, generally result in losses over an extended development period
and are recognized as a reduction of income as incurred, while any corresponding
brand value created is not recognized as an intangible asset in the consolidated
balance sheet. On the other hand, intangible assets acquired in business
combinations accounted for by the purchase method of accounting are capitalized
and amortized over their expected useful life as a noncash charge against future
results of operations. Accordingly, the intangible assets reported in the
consolidated balance sheet do not reflect the fair value of TWE's internally
generated intangible assets, but rather are limited to intangible assets
resulting from certain acquisitions in which the cost of the acquired companies
exceeded the fair value of their tangible assets at the time of acquisition.
 
     TWE amortizes goodwill over periods up to forty years using the
straight-line method. Cable television franchises, film and television libraries
and other intangible assets are amortized over periods up to twenty years using
the straight-line method. Amortization of intangible assets amounted to $430
million in 1997, $436 million in 1996 and $444 million in 1995. Accumulated
amortization of intangible assets at December 31, 1997 and 1996 amounted to
$3.020 billion and $2.623 billion, respectively.
 
     TWE periodically reviews the carrying value of acquired intangible assets
for each acquired entity to determine whether an impairment may exist. TWE
considers relevant cash flow and profitability information, including estimated
future operating results, trends and other available information, in assessing
whether the carrying value of intangible assets can be recovered. If it is
determined that the carrying value of intangible assets will not be recovered
from the undiscounted future cash flows of the acquired business, the carrying
value of such intangible assets would be considered impaired and reduced by a
charge to operations in the amount of the impairment. An impairment charge is
measured as any deficiency in the amount of estimated undiscounted future cash
flows of the acquired business available to recover the carrying value related
to the intangible assets.
 
INCOME TAXES
 
     As a Delaware limited partnership, TWE is not subject to U.S. federal and
state income taxation. However, certain of TWE's operations are conducted by
subsidiary corporations that are subject to domestic or foreign taxation. Income
taxes are provided on the income of such corporations using the liability method
prescribed by FASB Statement No. 109, 'Accounting for Income Taxes.'
 
COMPREHENSIVE INCOME
 
     Effective January 1, 1997, TWE adopted FASB Statement No. 130, 'Reporting
Comprehensive Income' ('FAS 130'). The new rules establish standards for the
reporting of comprehensive income and its components in financial statements.
Comprehensive income consists of net income and other gains and losses affecting
partners' capital that, under generally accepted accounting principles, are
excluded from net income. For TWE, such items consist primarily of unrealized
gains and losses on marketable equity investments and foreign currency
translation gains and losses. The adoption of FAS 130 did not have a material
effect on TWE's primary financial statements, but did affect the presentation of
the accompanying consolidated statement of partnership capital.
 
SEGMENT INFORMATION
 
     On December 31, 1997, TWE adopted FASB Statement No. 131, 'Disclosures
about Segments of an Enterprise and Related Information' ('FAS 131'). The new
rules establish revised standards for public companies relating to the reporting
of financial and descriptive information about their operating segments in
financial statements. The adoption of FAS 131 did not have a material effect on
TWE's primary financial statements, but did affect the disclosure of segment
information contained elsewhere herein (Note 12).
 
                                      F-21
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. ACQUISITIONS AND DISPOSITIONS
 
TCI CABLE TRANSACTIONS
 
     In September 1997, Time Warner Inc., TWE, the TWE-Advance/Newhouse
Partnership ('TWE-A/N') and TCI Communications, Inc. ('TCI'), a subsidiary of
Tele-Communications, Inc., signed a letter of intent to enter into a series of
agreements to (i) form two cable television joint ventures in the Houston and
south Texas areas that will be managed by TWE and own cable television systems
serving an aggregate 1.1 million subscribers, subject to approximately $1.4
billion of debt, (ii) expand an existing joint venture in Kansas City, which is
managed by TWE, through the contribution by TCI of a contiguous cable television
system serving approximately 95,000 subscribers, subject to approximately $200
million of debt, and (iii) exchange various cable television systems owned by
Time Warner and TWE and serving over 500,000 subscribers (of which cable
television systems serving approximately 400,000 subscribers are owned by TWE)
for other cable television systems of comparable size in an effort to enhance
each company's geographic clusters of cable television properties (collectively,
the 'TCI Cable Transactions'). The joint ventures will be accounted for under
the equity method of accounting.
 
     As a result of these transactions, TWE expects to reduce debt by
approximately $500 million, benefit from the geographic clustering of cable
television systems and increase the number of subscribers under its management
by approximately 675,000 subscribers. The TCI Cable Transactions are expected to
close periodically throughout 1998, subject to the execution of definitive
agreements by the parties and customary closing conditions, including all
necessary governmental and regulatory approvals. There can be no assurance that
such agreements will be completed or that such approvals will be obtained.
 
PRIMESTAR TRANSACTIONS
 
     In June 1997, TWE and the Advance/Newhouse Partnership ('Advance/Newhouse')
entered into agreements to transfer the direct broadcast satellite operations
conducted by TWE and TWE-A/N (the 'DBS Operations') and the 31% partnership
interest in Primestar Partners, L.P. held by TWE-A/N ('Primestar' and
collectively, the 'Primestar Assets') to a new holding company ('Newco') that is
ultimately expected to be the publicly traded parent of TCI Satellite
Entertainment, Inc. ('TSAT'). Newco will also own the DBS Operations and
Primestar partnership interests currently owned by TSAT and other existing
partners of Primestar. In exchange for contributing its interests in the
Primestar Assets, TWE will receive an approximate 24% equity interest in Newco
and realize approximately $260 million of debt reduction, as well as eliminate
its share of future funding requirements for these operations that will be
separately financed by Newco. In partial consideration for contributing its
indirect interest in certain of the Primestar Assets, Advance/Newhouse will
receive an approximate 6% equity interest in Newco. This transaction is
collectively referred to herein as the 'Primestar Roll-up Transaction.'
 
     In a related transaction, Primestar also entered into an agreement in June
1997, with The News Corporation Limited, MCI Telecommunications Corporation
('MCI') and American Sky Broadcasting LLC ('ASkyB'), pursuant to which Primestar
(or, under certain circumstances, Newco) will acquire certain assets relating to
the high-power, direct broadcast satellite business of ASkyB (the 'Primestar
ASkyB Transaction' and, when taken together with the Primestar Roll-up
Transaction, the 'Primestar Transactions'). In exchange for such assets, ASkyB
will receive non-voting securities of Newco that will be convertible into
non-voting common stock of Newco and, accordingly, will reduce TWE's equity
interest in Newco to approximately 16% on a fully diluted basis.
 
     The Primestar Transactions are not conditioned on each other and are
expected to close independently. The Primestar Roll-up Transaction is expected
to close on or about April 1, 1998. The Primestar ASkyB Transaction is expected
to close in 1998, subject to customary closing conditions, including all
necessary governmental and
 
                                      F-22
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
regulatory approvals, including the approval of the Federal Communications
Commission. There can be no assurance that such approvals will be obtained.
 
TWE-A/N TRANSFERS
 
     In April 1995, TWE formed a cable television joint venture with
Advance/Newhouse to which Advance/Newhouse and TWE contributed cable television
systems (or interests therein) serving approximately 4.5 million subscribers, as
well as certain foreign cable investments and programming investments that
included an aggregate 31% interest in Primestar. Upon formation of TWE-A/N, TWE,
which is the managing partner, owned a 66.7% common partnership interest therein
and Advance/Newhouse owned a 33.3% common partnership interest. TWE consolidates
the partnership and the common partnership interest owned by Advance/Newhouse is
reflected in TWE's consolidated financial statements as minority interest. In
accordance with the partnership agreement, Advance/Newhouse can require TWE to
purchase its equity interest for fair market value at specified intervals
following the death of both of its principal shareholders. In addition,
beginning on April 1, 1998, TWE or Advance/Newhouse can initiate a restructuring
of the partnership, in which Advance/Newhouse would withdraw from the
partnership and receive one-third of the partnership's net assets. The assets
contributed by TWE and Advance/Newhouse to the partnership were recorded at
their predecessor's historical cost. No gain was recognized by TWE upon the
capitalization of the partnership.
 
     In early 1998, Time Warner (through a wholly owned subsidiary) contributed
cable television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, and completed certain
related transactions (collectively, the 'TWE-A/N Transfers'). The cable
television systems transferred to TWE-A/N were formerly owned by TWI Cable Inc.
('TWI Cable'), a wholly owned subsidiary of Time Warner, and Paragon, a
partnership formerly owning cable television systems serving approximately 1
million subscribers that was previously wholly owned by subsidiaries of Time
Warner, with 50% beneficially owned in the aggregate by TWE and TWE-A/N. The
debt assumed by TWE-A/N has been guaranteed by TWI Cable and certain of its
subsidiaries, including Paragon.
 
     As part of the TWE-A/N Transfers, TWE exchanged substantially all of its
beneficial interest in Paragon for an equivalent share of Paragon's cable
television systems (or interests therein) serving approximately 500,000
subscribers. TWE, in turn, transferred such systems and certain related assets
to TWE-A/N in exchange for TWE-A/N's beneficial interest in Paragon and in
satisfaction of certain pre-existing obligations to TWE-A/N. This resulted in
wholly owned subsidiaries of Time Warner owning 100% of the restructured Paragon
entity, with less than 1% beneficially held for TWE. Accordingly, effective as
of January 1, 1998, TWE will deconsolidate Paragon. Because this transaction
represented an exchange of TWE's and TWE-A/N's beneficial interests in Paragon
for an equivalent amount of its cable television systems, it did not have a
significant economic impact on Time Warner, TWE or TWE-A/N.
 
     In connection with the TWE-A/N Transfers, Advance/Newhouse made a capital
contribution to TWE-A/N in order to maintain its 33.3% common partnership
interest therein. Accordingly, TWE-A/N is now owned 65.2% by TWE, 33.3% by
Advance/Newhouse and 1.5% indirectly by Time Warner. The TWE-A/N Transfers will
be accounted for effective as of January 1, 1998.
 
SALE OR EXCHANGE OF CABLE TELEVISION SYSTEMS
 
     In 1997, in an effort to enhance its geographic clustering of cable
television properties, TWE sold or exchanged various cable television systems.
As a result of these transactions, TWE recognized net, pretax gains of
approximately $200 million, which have been included in operating income in the
accompanying consolidated statement of operations.
 
                                      F-23
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
SIX FLAGS
 
     In June 1995, TWE sold an initial 51% interest in Six Flags to an
investment group led by Boston Ventures for $204 million and received $640
million in additional proceeds from Six Flags, representing payment of certain
intercompany indebtedness and licensing fees. As a result of the transaction,
Six Flags was deconsolidated and TWE's remaining 49% interest in Six Flags has
been accounted for under the equity method of accounting. TWE reduced debt by
approximately $850 million in 1995 in connection with the transaction, and a
portion of the income on the transaction was deferred by TWE principally as a
result of its guarantee of certain third-party, zero-coupon indebtedness of Six
Flags due in 1999.
 
     In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags to Premier Parks Inc. ('Premier'), a regional theme park
operator, for approximately $375 million of cash and $100 million of convertible
preferred stock. TWE expects to use the net proceeds from this transaction,
after taxes and transaction costs, to reduce debt. As part of the transaction,
TWE will continue to license its animated cartoon and comic book characters to
Six Flags's theme parks and will similarly license such rights to Premier's
theme parks in the United States and Canada under a long-term agreement covering
an aggregate of twenty-five existing and all future locations. The transaction
is expected to close in the second quarter of 1998, subject to customary closing
conditions, including the successful completion of certain equity offerings by
Premier.
 
PRO FORMA FINANCIAL INFORMATION
 
     Along with the formation of TWE-A/N and the partial sale of Six Flags in
1995, TWE completed a number of other transactions that also affected the
comparability of its 1995 operating results (the '1995 Transactions'). The pro
forma effect of these transactions on 1995 operating results is set forth below.
No pro forma information has been presented for 1997 and 1996 because such
transactions are already reflected in TWE's historical financial statements for
such periods and, with regard to the acquisitions and dispositions announced or
closed subsequent to 1995 as described above, there was no material effect on
the comparability of the accompanying consolidated financial statements.
 
     On a pro forma basis, giving effect to the 1995 Transactions, including (i)
the formation of TWE-A/N, (ii) the refinancing of approximately $2.6 billion of
bank debt, (iii) the consolidation of Paragon, (iv) the reacquisition of the
Time Warner Service Partnership Assets (Note 8), (v) the sale of 51% of TWE's
interest in Six Flags and (vi) the sale or transfer of certain unclustered cable
television systems owned by TWE, as if each of such transactions had occurred at
the beginning of 1995, TWE would have reported for the year ended December 31,
1995, revenues of $9.682 billion, depreciation expense of $635 million,
operating income before noncash amortization of intangible assets of $1.396
billion, operating income of $962 million, income before extraordinary item of
$172 million and net income of $148 million.
 
                                      F-24
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. INVENTORIES
  TWE's inventories consist of:
 


                                                                                     DECEMBER 31,
                                                                   -------------------------------------------------
                                                                            1997                       1996
                                                                   ----------------------     ----------------------
                                                                   CURRENT     NONCURRENT     CURRENT     NONCURRENT
                                                                   -------     ----------     -------     ----------
                                                                                      (MILLIONS)
                                                                                              
Film costs:
     Released, less amortization................................   $  545        $  658       $  544        $  535
     Completed and not released.................................      170            50          168            42
     In process and other.......................................       27           595           21           704
     Library, less amortization.................................       --           612           --           664
Programming costs, less amortization............................      382           339          319           318
Merchandise.....................................................       80            --           82            --
                                                                   -------     ----------     -------     ----------
Total...........................................................   $1,204        $2,254       $1,134        $2,263
                                                                   -------     ----------     -------     ----------
                                                                   -------     ----------     -------     ----------

 
     Excluding the Library, the total cost incurred in the production of
theatrical and television product (including direct production costs, production
overhead and certain exploitation costs, such as film prints and home
videocassettes) amounted to $2.360 billion in 1997, $2.543 billion in 1996 and
$2.011 billion in 1995; and the total cost amortized amounted to $2.329 billion,
$1.998 billion and $2 billion, respectively. Excluding the Library, the
unamortized cost of completed films at December 31, 1997 amounted to $1.423
billion, more than 90% of which is expected to be amortized within three years
after release.
 
4. INVESTMENTS
  TWE's investments consist of:
 


                                                                                                   DECEMBER 31,
                                                                                                -------------------
                                                                                                 1997        1996
                                                                                                -------     -------
                                                                                                    (MILLIONS)
                                                                                                      
Equity method investments....................................................................    $ 238       $ 298
Cost method investments......................................................................       77          53
                                                                                                -------     -------
Total........................................................................................    $ 315       $ 351
                                                                                                -------     -------
                                                                                                -------     -------

 
     In the first quarter of 1997, TWE sold its 58% interest in E! Entertainment
Television, Inc. A pretax gain of approximately $250 million relating to this
sale has been included in the accompanying consolidated statement of operations.
 
                                      F-25
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     At December 31, 1997, companies accounted for using the equity method
included: Comedy Partners, L.P. (50% owned), certain cable system joint ventures
(generally 50% owned), Primestar (31% owned), Six Flags (49% owned), certain
international cable and programming joint ventures (25% to 50% owned) and
Courtroom Television Network (33% owned). A summary of combined financial
information as reported by the equity investees of TWE is set forth below:
 


                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1997       1996       1995
                                                                                     ------     ------     ------
                                                                                              (MILLIONS)
                                                                                                  
Revenues..........................................................................   $2,207     $1,823     $1,450
Depreciation and amortization.....................................................     (235)      (197)      (195)
Operating income (loss)...........................................................      118         62         (9)
Net loss..........................................................................      (82)      (138)      (168)
Current assets....................................................................      412        624        455
Total assets......................................................................    3,046      3,193      2,416
Current liabilities...............................................................      993        431        405
Long-term debt....................................................................    1,625      2,853      1,778
Total liabilities.................................................................    2,734      2,829      2,323
Total shareholders' equity or partners' capital...................................      312        340         93

 
5. LONG-TERM DEBT
 


                                                              WEIGHTED AVERAGE                     DECEMBER 31,
                                                              INTEREST RATE AT                   -----------------
                                                              DECEMBER 31, 1997    MATURITIES     1997       1996
                                                              -----------------    -----------   ------     ------
                                                                                                    (MILLIONS)
                                                                                                
Bank credit agreement borrowings...........................          6.4%             2002       $1,970     $1,555
Commercial paper...........................................          6.2%             1998          210        310
Fixed-rate senior notes and debentures.....................          8.6%           2002-2033     3,810      3,811
                                                                                                 ------     ------
Total......................................................                                      $5,990     $5,676
                                                                                                 ------     ------
                                                                                                 ------     ------

 
BANK CREDIT AGREEMENT
 
     In November 1997, TWE and TWE-A/N, together with Time Warner Inc. and
certain of its consolidated subsidiaries, entered into a new, five-year
revolving credit facility (the '1997 Credit Agreement') and terminated their
previously existing bank credit facility (the 'Old Credit Agreement'). This
enabled TWE to reduce its aggregate borrowing availability from $8.3 billion to
$7.5 billion, lower interest rates and refinance approximately $2.1 billion of
its outstanding borrowings under the Old Credit Agreement. In connection
therewith, TWE recognized an extraordinary loss of $23 million in 1997. In
addition, TWE recognized a $24 million extraordinary loss in 1995 related to
certain other bank refinancings.
 
     The 1997 Credit Agreement permits borrowings in an aggregate amount of up
to $7.5 billion, with no scheduled reduction in credit availability prior to
maturity in November 2002. The borrowers under the 1997 Credit Agreement are
TWE, TWE-A/N, Time Warner Inc., TW Companies, TBS and TWI Cable. Borrowings
under the 1997 Credit Agreement are limited to (i) $7.5 billion in the case of
TWE, (ii) $2 billion in the case of TWE-A/N and (iii) $6 billion in the
aggregate for Time Warner Inc., TW Companies, TBS and TWI Cable, subject in each
case to an aggregate borrowing limit of $7.5 billion and certain other
limitations and adjustments. Such borrowings bear interest at specific rates for
each of the borrowers (generally equal to LIBOR plus a margin initially equal to
40 basis points for TWE and 35 basis points for TWE-A/N) and each borrower is
required to pay a commitment fee on the unused portion of its commitment
(initially equal to .15% per annum for TWE and .125% per annum for TWE-A/N),
which margin and fee vary based on the credit rating or financial leverage of
the applicable borrower. Borrowings may be used for general business purposes
and unused credit is available to support commercial paper borrowings. The 1997
Credit Agreement contains certain
 
                                      F-26
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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.
 
TIME WARNER GENERAL PARTNER GUARANTEES
 
     Each Time Warner General Partner has guaranteed a pro rata portion of
approximately $5.8 billion of TWE's debt and accrued interest thereon based on
the relative fair value of the net assets each Time Warner General Partner (or
its predecessor) contributed to TWE (the 'Time Warner General Partner
Guarantees'). Such indebtedness is recourse to each Time Warner General Partner
only to the extent of its guarantee. The indenture pursuant to which TWE's notes
and debentures have been issued (the 'Indenture') requires the majority consent
of the holders of the notes and debentures to terminate the Time Warner General
Partner Guarantees. There are generally no restrictions on the ability of the
Time Warner General Partner guarantors to transfer material assets, other than
TWE assets, to parties that are not guarantors.
 
INTEREST EXPENSE AND MATURITIES
 
     Interest expense was $490 million in 1997, $475 million in 1996 and $571
million in 1995. The weighted average interest rate on TWE's total debt was 7.8%
at December 31, 1997 and 1996.
 
     Annual repayments of long-term debt for the five years subsequent to
December 31, 1997 consist only of $2.78 billion due in 2002. This includes all
borrowings under the 1997 Credit Agreement, as well as any commercial paper
borrowings supported thereby. TWE has the intent and ability under the 1997
Credit Agreement to continue to refinance its commercial paper borrowings on a
long-term basis.
 
6. INCOME TAXES
  Domestic and foreign pretax income (loss) are as follows:
 


                                                                                       YEARS ENDED DECEMBER 31,
                                                                                       ------------------------
                                                                                       1997      1996      1995
                                                                                       ----      ----      ----
                                                                                              (MILLIONS)
                                                                                                  
Domestic............................................................................   $654      $263      $191
Foreign.............................................................................     68        17        (8)
                                                                                       ----      ----      ----
Total...............................................................................   $722      $280      $183
                                                                                       ----      ----      ----
                                                                                       ----      ----      ----

 
     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:
 


                                                                                         YEARS ENDED DECEMBER 31,
                                                                                         ------------------------
                                                                                         1997      1996      1995
                                                                                         ----      ----      ----
                                                                                                (MILLIONS)
                                                                                                    
Federal:
     Current(1).......................................................................   $  2      $  4      $ 7
     Deferred.........................................................................    (10)       (3)      (5)
Foreign:
     Current(2).......................................................................     69        86       74
     Deferred.........................................................................     22       (21)       6
State and local:
     Current..........................................................................      4         5        7
     Deferred.........................................................................     (2)       (1)      (3)
                                                                                         ----      ----      ----
Total income taxes....................................................................   $ 85      $ 70      $86
                                                                                         ----      ----      ----
                                                                                         ----      ----      ----

 
- ------------
(1) Includes utilization of Six Flags's tax carryforwards in the amount of $16
million in 1995.
(2) Includes foreign withholding taxes of $58 million in 1997, $54 million in
1996 and $60 million in 1995.
 
                                      F-27
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The financial statement basis of TWE's assets exceeds the corresponding tax
basis by $8.1 billion at December 31, 1997, principally as a result of
differences in accounting for depreciable and amortizable assets for financial
statement and income tax purposes.
 
7. PREFERRED STOCK OF SUBSIDIARY
 
     In February 1997, a newly formed, substantially owned subsidiary of TWE
(the 'REIT') issued 250,000 shares of preferred stock ('REIT Preferred Stock').
The REIT is intended to qualify as a real estate investment trust under the
Internal Revenue Code of 1986, as amended. TWE used the aggregate net proceeds
from the transaction of $243 million to reduce its bank debt. The sole asset of
the REIT is a $432 million mortgage note payable by TWE, which has been secured
by certain real estate owned by TWE or its affiliates.
 
     Each share of REIT Preferred Stock is entitled to a liquidation preference
of $1,000 and entitles the holder thereof to receive cumulative cash dividends,
payable quarterly, at the rate of 14.253% per annum through December 30, 2006
and 1% per annum thereafter, which results in an effective dividend yield of
8.48%. Shares of REIT Preferred Stock are redeemable only in the event of
certain changes or proposed changes to the tax laws or regulations to the effect
that dividends paid by the REIT or interest paid under the mortgage note would
not be fully deductible for federal income tax purposes. TWE has the right to
liquidate or dissolve the REIT at any time after December 30, 2006 or, at any
time prior thereto, upon the approval of the holders of at least two-thirds of
the outstanding shares of REIT Preferred Stock.
 
8. TWE PARTNERS' CAPITAL
 
PARTNERSHIP CAPITAL AND ALLOCATION OF INCOME
 
     Each partner's interest in TWE generally consists of the undistributed
priority capital and residual equity amounts that were initially assigned to
that partner or its predecessor based on the estimated fair value of the net
assets each contributed to the partnership ('Undistributed Contributed
Capital'), plus, with respect to the priority capital interests only, any
undistributed priority capital return. The priority capital return consists of
net partnership income allocated to date in accordance with the provisions of
the TWE partnership agreement and the right to be allocated additional
partnership income which, together, provides for the various priority capital
rates of return as specified in the table below. The sum of Undistributed
Contributed Capital and the undistributed priority capital return is referred to
herein as 'Cumulative Priority Capital.' Cumulative Priority Capital is not
necessarily indicative of the fair value of the underlying priority capital
interests principally due to above-market rates of return on certain priority
capital interests as compared to securities of comparable credit risk and
maturity, such as the 13.25% rate of return on the Series B Capital interest
owned by the Time Warner General Partners. Furthermore, the ultimate realization
of Cumulative Priority Capital could be affected by the fair value of TWE, which
is subject to fluctuation.
 
                                      F-28
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of the priority of Undistributed Contributed Capital, ownership
of Undistributed Contributed Capital and Cumulative Priority Capital at December
31, 1997 and priority capital rates of return thereon is set forth below:
 


                                                                                                             LIMITED
                                                                                PRIORITY       TIME         PARTNERS
                                                UNDISTRIBUTED    CUMULATIVE     CAPITAL       WARNER     ---------------
                                                 CONTRIBUTED      PRIORITY      RATES OF     GENERAL      TIME      U S
PRIORITY OF UNDISTRIBUTED CONTRIBUTED CAPITAL    CAPITAL(a)       CAPITAL      RETURN(b)     PARTNERS    WARNER    WEST
- ---------------------------------------------   -------------    ----------    ----------    --------    ------    -----
                                                        (BILLIONS)                                        (OWNERSHIP%)
 
                                                                                                 
Senior Capital...............................       $ 0.9          $  1.1          8.00%      100.00%       --       --
Series A Capital.............................         5.6            11.3         13.00%       63.27%    11.22 %   25.51%
Series B Capital.............................         2.9(d)          6.0         13.25%      100.00%       --       --
Residual Capital.............................         3.3(d)          3.3(c)         --(c)     63.27%    11.22 %   25.51%

 
- ------------
 
(a) Excludes partnership income or loss allocated thereto.
 
(b) To the extent income allocations are concurrently distributed, the priority
    capital rates of return on the Series A Capital and Series B Capital are 11%
    and 11.25%, respectively.
 
(c) Residual Capital is not entitled to stated priority rates of return and, as
    such, its Cumulative Priority Capital is equal to its Undistributed
    Contributed Capital. However, in the case of certain events such as the
    liquidation or dissolution of TWE, Residual Capital is entitled to any
    excess of the then fair value of the net assets of TWE over the aggregate
    amount of Cumulative Priority Capital and special tax allocations.
 
(d) The Undistributed Contributed Capital relating to the Series B Capital has
    priority over the priority returns on the Series A Capital. The
    Undistributed Contributed Capital relating to the Residual Capital has
    priority over the priority returns on the Series B Capital and the Series A
    Capital.
 
     Because Undistributed Contributed Capital is generally based on the fair
value of the net assets that each partner initially contributed to the
partnership, the aggregate of such amounts is significantly higher than TWE's
partners' capital as reflected in the consolidated financial statements, which
is based on the historical cost of the contributed net assets. For purposes of
allocating partnership income or loss to the partners, partnership income or
loss is based on the fair value of the net assets contributed to the partnership
and results in significantly less partnership income, or results in partnership
losses, in contrast to the net income reported by TWE for financial statement
purposes, which is also based on the historical cost of contributed net assets.
 
     Under the TWE partnership agreement, partnership income, to the extent
earned, is first allocated to the partners' capital accounts so that the
economic burden of the income tax consequences of partnership operations is
borne as though the partnership were taxed as a corporation ('special tax
allocations'). After any special tax allocations, partnership income is
allocated to the Senior Capital, Series A Capital and Series B Capital, in order
of priority, at rates of return ranging from 8% to 13.25% per annum, and finally
to the Residual Capital. Partnership losses generally are allocated first to
eliminate prior allocations of partnership income to, and then to reduce the
Undistributed Contributed Capital of, the Residual Capital, Series B Capital and
Series A Capital, in that order, then to reduce the Time Warner General
Partners' Senior Capital, including partnership income allocated thereto, and
finally to reduce any special tax allocations. To the extent partnership income
is insufficient to satisfy all special allocations in a particular accounting
period, the right to receive additional partnership income necessary to provide
for the various priority capital rates of return is carried forward until
satisfied out of future partnership income, including any partnership income
that may result from any liquidation, sale or dissolution of TWE.
 
     The Series B Capital owned by subsidiaries of Time Warner may be increased
if certain operating performance targets are achieved over a ten-year period
ending on December 31, 2001. In addition, U S WEST has an option to obtain up to
an additional 6.33% of Series A Capital and Residual Capital interests,
depending on cable operating performance. The option is exercisable between
January 1, 1999 and on or about May 31, 2005 at a maximum exercise price of
$1.25 billion to $1.8 billion, depending on the year of exercise. Either U S
WEST or TWE may elect that the exercise price be paid with partnership interests
rather than cash.
 
                                      F-29
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
CAPITAL DISTRIBUTIONS
 
     Distributions and loans to the partners are subject to partnership and
credit agreement limitations. Generally, TWE must be in compliance with the cash
flow coverage and leverage ratios, restricted payment limitations and other
credit agreement covenants in order to make such distributions or loans.
 
     In July 1997, the Time Warner General Partners received a $535 million
distribution from TWE relating to their Senior Capital interests (representing
the return of $455 million of contributed capital and the distribution of $80
million of priority capital return), which, when taken together with a $366
million distribution in 1995 (representing a portion of the priority capital
return) increased the cumulative cash distributions received from TWE on such
interests to $901 million. The Time Warner General Partners' remaining $1.1
billion Senior Capital interests and any undistributed partnership income
allocated thereto (based on an 8% annual rate of return) are required to be
distributed in two annual installments on July 1, 1998 and 1999.
 
     TWE reimburses Time Warner for the amount by which the market price on the
exercise date of Time Warner common stock options exercised by employees of TWE
exceeds the exercise price or, with respect to options granted prior to the TWE
capitalization, the greater of the exercise price and $27.75, the market price
of the common stock at the time of the TWE capitalization on June 30, 1992
('Stock Option Distributions'). TWE accrues Stock Option Distributions and a
corresponding liability with respect to unexercised options when the market
price of Time Warner common stock increases during the accounting period, and
reverses previously accrued Stock Option Distributions and the corresponding
liability when the market price of Time Warner common stock declines. Stock
Option Distributions are paid when the options are exercised. At December 31,
1997 and 1996, TWE had recorded a liability for Stock Option Distributions of
$417 million and $93 million, respectively, based on the unexercised options and
the market prices at such dates of $62.00 and $37.50, respectively, per Time
Warner common share. This liability reflects the accrual of $399 million and $50
million of Stock Option Distributions in 1997 and 1995, respectively, when the
market price of Time Warner common stock increased during such periods, and the
reversal of $16 million of previously accrued Stock Option Distributions in 1996
when the market price of Time Warner common stock declined. TWE paid Stock
Option Distributions to Time Warner in the amount of $75 million in 1997, $13
million in 1996 and $17 million in 1995.
 
     Cash distributions are required to be made to the partners to permit them
to pay income taxes at statutory rates based on their allocable taxable income
from TWE ('Tax Distributions'), including any taxable income generated by the
Beneficial Assets, subject to limitations referred to herein. The aggregate
amount of such Tax Distributions is computed generally by reference to the taxes
that TWE would have been required to pay if it were a corporation. Tax
Distributions are paid to the partners on a current basis. TWE paid Tax
Distributions to the Time Warner General Partners in the amount of $324 million
in 1997, $215 million in 1996 and $680 million in 1995 (of which $334 million
was accrued in prior periods).
 
     In September 1993, certain assets of TWE were distributed to the Time
Warner General Partners and were owned and operated by other partnerships (the
'Time Warner Service Partnerships') in order to ensure compliance with the
Modification of Final Judgment entered on August 24, 1982 by the United States
District Court for the District of Columbia applicable to U S WEST and its
affiliated companies, which may have included TWE. This distribution was
recorded for financial statement purposes based on the $95 million historical
cost of such assets and, for partnership agreement purposes, Time Warner General
Partners' Series B Capital was reduced by approximately $300 million. In 1994, U
S WEST received a judicial order that TWE was no longer prohibited from owning
or operating substantially all of such assets. Accordingly, in September 1995,
TWE reacquired substantially all of the assets of the Time Warner Service
Partnerships, subject to the liabilities relating thereto, (the 'Time Warner
Service Partnership Assets') in exchange for Series B Capital interests in TWE
equal to approximately $400 million. The reacquisition was recorded for
financial statement purposes based on the $124 million historical cost of the
Time Warner Service Partnership Assets. Prior to the reacquisition of the Time
Warner Service Partnership Assets in September 1995, TWE was required to make
 
                                      F-30
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
quarterly cash distributions of Series B Capital in the amount of $12.5 million
to the Time Warner General Partners ('TWSP Distributions'), which the General
Partners were then required to contribute to the Time Warner Service
Partnerships. TWE paid TWSP Distributions to the Time Warner General Partners in
the amount of $25 million in 1995, which was recorded as a reduction of Time
Warner General Partners' Series B Capital.
 
     In addition to Stock Option Distributions, Tax Distributions and Senior
Capital Distributions, quarterly cash distributions may be made to the partners
to the extent of excess cash, as defined in the TWE partnership agreement. Such
cash distributions will generally be made on a priority and pro rata basis with
respect to each partner's interest in the Series A Capital, Series B Capital and
Residual Capital. However, cash distributions to the Time Warner General
Partners with respect to their Series A Capital and Residual Capital interests
will be deferred until the limited partners receive aggregate distributions
(excluding Tax Distributions) of approximately $800 million. Similarly, cash
distributions with respect to the Time Warner General Partners' Series B Capital
interest will be deferred until the limited partners receive aggregate
distributions of $1.6 billion. If any such deferral occurs, a portion of the
corresponding partnership income allocations with respect to such deferred
amounts will be made at a rate higher than otherwise would have been the case.
As of December 31, 1997, no cash distributions have been made to the limited
partners. In addition, if a division of TWE or a substantial portion thereof is
sold, the net proceeds of such sale, less expenses and proceeds used to repay
outstanding debt, will be required to be distributed with respect to the
partners' partnership interests. Similar distributions are required to be made
in the event of a financing or refinancing of debt. Subject to any limitations
on the incurrence of additional debt contained in the TWE partnership and credit
agreements, and the Indenture, TWE may borrow funds to make distributions.
 
9. STOCK OPTION PLANS
 
     Time Warner has various stock option plans under which Time Warner may
grant options to purchase Time Warner common stock to employees of Time Warner
and TWE. Such options have been granted to employees of TWE at, or in excess of,
fair market value at the date of grant. Accordingly, in accordance with
Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to
Employees,' and related interpretations, no compensation cost has been
recognized by Time Warner, nor charged to TWE, related to such stock option
plans. Generally, the options become exercisable over a three-year vesting
period and expire ten years from the date of grant. Had compensation cost for
Time Warner's stock option plans been determined based on the fair value at the
grant dates for all awards made subsequent to 1994 consistent with the method
set forth under FASB Statement No. 123, 'Accounting for Stock-Based
Compensation' ('FAS 123'), TWE's allocable share of compensation cost would have
decreased its net income to the pro forma amounts indicated below:
 


                                                                                         YEARS ENDED DECEMBER 31,
                                                                                         -----------------------
                                                                                         1997     1996      1995
                                                                                         ----     ----      ----
                                                                                               (MILLIONS)
 
                                                                                                   
Net income:
     As reported......................................................................   $614     $210      $73
                                                                                         ----     ----      ----
                                                                                         ----     ----      ----
     Pro forma........................................................................   $584     $193      $68
                                                                                         ----     ----      ----
                                                                                         ----     ----      ----

 
     FAS 123 is applicable only to stock options granted subsequent to December
31, 1994. Accordingly, since TWE's compensation expense associated with such
grants would generally be recognized over a three-year vesting period, the
initial impact of applying FAS 123 on pro forma net income for 1996 and 1995 is
not comparable to the impact on pro forma net income for 1997, when the pro
forma effect of the three-year vesting period has been fully reflected.
 
     For purposes of applying FAS 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants
 
                                      F-31
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
to TWE employees in 1997, 1996 and 1995: dividend yields of 1% in all periods;
expected volatility of 22.2%, 21.7% and 22.3%, respectively; risk-free interest
rates of 6.3%, 5.7% and 6.6%, respectively; and expected lives of 5 years in all
periods. The weighted average fair value of an option granted to TWE employees
during the year was $12.18, $10.43 and $11.46 and for the years ended December
31, 1997, 1996 and 1995, respectively. In 1996, Time Warner granted options to
certain TWE executives at exercise prices exceeding the market price of Time
Warner common stock on the date of grant. These above-market options had a
weighted average exercise price and fair value of $48.51 and $6.82.
 
     A summary of stock option activity with respect to employees of TWE is as
follows:
 


                                                                                                          WEIGHTED-
                                                                                            THOUSANDS      AVERAGE
                                                                                               OF         EXERCISE
                                                                                             SHARES         PRICE
                                                                                            ---------     ---------
 
                                                                                                    
Balance at January 1, 1995...............................................................     30,198       $ 32.36
Granted..................................................................................      2,141         38.13
Exercised................................................................................     (1,316)        27.31
Cancelled(a).............................................................................     (2,488)        29.69
                                                                                            ---------
Balance at December 31, 1995.............................................................     28,535       $ 33.26
 
Granted..................................................................................      4,510         42.48
Exercised................................................................................     (1,242)        28.67
Cancelled(a).............................................................................     (1,492)        31.37
                                                                                            ---------
Balance at December 31, 1996.............................................................     30,311       $ 34.91
 
Granted..................................................................................      3,920         41.35
Exercised................................................................................     (3,523)        28.74
Cancelled(a).............................................................................     (1,206)        33.52
                                                                                            ---------
Balance at December 31, 1997.............................................................     29,502       $ 36.56
                                                                                            ---------
                                                                                            ---------

 
- ------------
 
(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.
 


                                                                                               DECEMBER 31,
                                                                                        --------------------------
                                                                                         1997      1996      1995
                                                                                        ------    ------    ------
                                                                                               (THOUSANDS)
 
                                                                                                   
Exercisable..........................................................................   21,511    22,772    21,846

 
                                      F-32
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table summarizes information about stock options outstanding
with respect to employees of TWE at December 31, 1997:
 


                                                                 OPTIONS OUTSTANDING
                                                        --------------------------------------     OPTIONS EXERCISABLE
                                                                        WEIGHTED-                ------------------------
                                                                         AVERAGE     WEIGHTED-                  WEIGHTED-
                                                           NUMBER       REMAINING     AVERAGE       NUMBER       AVERAGE
                                                        OUTSTANDING    CONTRACTUAL   EXERCISE    EXERCISABLE    EXERCISE
               RANGE OF EXERCISE PRICES                 AT 12/31/97       LIFE         PRICE     AT 12/31/97      PRICE
- ------------------------------------------------------ -------------   -----------   ---------   ------------   ---------
                                                        (THOUSANDS)                              (THOUSANDS)
                                                                                                 
Under $17.............................................        245       2.4 years     $ 16.63          245       $ 16.63
$17.00 to $25.00......................................      2,132       2.5 years     $ 21.73        2,132       $ 21.73
$25.01 to $35.00......................................      4,724       3.9 years     $ 29.16        4,672       $ 29.11
$35.01 to $40.00......................................     12,364       4.8 years     $ 36.76        9,068       $ 36.43
$40.01 to $50.00......................................      9,917       6.7 years     $ 43.26        5,394       $ 42.51
$50.01 to $60.41......................................        120       9.1 years     $ 58.68           --            --
                                                        ------------                             ------------
Total.................................................     29,502       5.2 years     $ 36.56       21,511       $ 34.68
                                                        ------------                             ------------
                                                        ------------                             ------------

 
     TWE reimburses Time Warner for the use of Time Warner stock options on the
basis described in Note 8.
 
10. BENEFIT PLANS
 
     TWE and its divisions have defined benefit pension plans covering
substantially all domestic employees. Pension benefits are based on formulas
that reflect the employees' years of service and compensation levels during
their employment period. Qualifying plans are funded in accordance with
government pension and income tax regulations. Plan assets are invested in
equity and fixed income securities. Time Warner's common stock represents
approximately 7% and 5% of plan assets at December 31, 1997 and 1996,
respectively.
 
     Pension expense included the following:
 


                                                                                         YEARS ENDED DECEMBER 31,
                                                                                         ------------------------
                                                                                         1997      1996      1995
                                                                                         ----      ----      ----
                                                                                                (MILLIONS)
 
                                                                                                    
Service cost..........................................................................   $ 33      $ 33      $ 20
Interest cost.........................................................................     31        28        21
Actual return on plan assets..........................................................    (71)      (27)      (55)
Net amortization and deferral.........................................................     45         7        37
                                                                                         ----      ----      ----
Total.................................................................................   $ 38      $ 41      $ 23
                                                                                         ----      ----      ----
                                                                                         ----      ----      ----

 
                                      F-33
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The status of funded pension plans is as follows:
 


                                                                                                   DECEMBER 31,
                                                                                                   -------------
                                                                                                   1997     1996
                                                                                                   ----     ----
                                                                                                    (MILLIONS)
                                                                                                      
Accumulated benefit obligation (90% vested).....................................................   $275     $212
Effect of future salary increases...............................................................    157      124
                                                                                                   ----     ----
Projected benefit obligation....................................................................    432      336
Plan assets at fair value.......................................................................    364      284
                                                                                                   ----     ----
Projected benefit obligation in excess of plan assets...........................................    (68)     (52)
Unamortized actuarial losses....................................................................     (1)       1
Unamortized plan changes........................................................................      3        3
Other...........................................................................................     (1)      (2)
                                                                                                   ----     ----
Accrued pension expense.........................................................................   $(67)    $(50)
                                                                                                   ----     ----
                                                                                                   ----     ----

 
     The following assumptions were used in accounting for pension plans:
 


                                                                                         1997     1996     1995
                                                                                         -----    -----    -----
 
                                                                                                  
Weighted average discount rate........................................................   7.25%    7.75%    7.25%
Return on plan assets.................................................................      9%       9%       9%
Rate of increase in compensation levels...............................................      6%       6%       6%

 
     Certain domestic employees of TWE participate in multiemployer pension
plans as to which the expense amounted to $29 million in 1997, $30 million in
1996 and $21 million in 1995. Employees of TWE's operations in foreign countries
participate to varying degrees in local pension plans, which in the aggregate
are not significant.
 
     Certain TWE employees also participate in Time Warner's savings and profit
sharing plans, as to which the expense amounted to $30 million in 1997, $28
million in 1996 and $25 million in 1995. Contributions to the savings plans are
based upon a percentage of the employees' elected contributions. Contributions
to the profit sharing plans are generally determined by management.
 
11. FINANCIAL INSTRUMENTS
 
     The carrying value of TWE's financial instruments approximates fair value,
except for differences with respect to long-term, fixed-rate debt and certain
differences related to cost method investments and other financial instruments
which are not significant.
 
LONG-TERM DEBT
 
     Based on the level of interest rates prevailing at December 31, 1997, the
fair value of TWE's fixed-rate debt exceeded its carrying value by $532 million
which represents an unrealized loss. Based on the level of interest rates
prevailing at December 31, 1996, the fair value of TWE's fixed-rate debt
exceeded its carrying value by $181 million, which also represents an unrealized
loss. Unrealized gains or losses related to the differences in the fair value
and carrying value of TWE's long-term debt are not recognized unless such debt
is retired prior to its maturity.
 
FOREIGN CURRENCY RISK MANAGEMENT
 
     Time Warner uses foreign exchange contracts primarily to hedge the risk
that unremitted or future license fees owed to TWE domestic companies for the
sale or anticipated sale of U.S. copyrighted products abroad may
 
                                      F-34
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
be adversely affected by changes in foreign currency exchange rates. As part of
its overall strategy to manage the level of exposure to the risk of foreign
currency exchange rate fluctuations, Time Warner hedges a portion of its foreign
currency exposures anticipated over the ensuing twelve month period, including
those related to TWE. At December 31, 1997, Time Warner had effectively hedged
approximately half of TWE's estimated foreign currency exposures that
principally relate to anticipated cash flows to be remitted to the U.S. over the
ensuing twelve month period, using foreign exchange contracts that generally
have maturities of three months or less, which generally are rolled over to
provide continuing coverage throughout the year. TWE is reimbursed by or
reimburses Time Warner for Time Warner contract gains and losses related to
TWE's foreign currency exposure. Time Warner often closes foreign exchange sale
contracts by purchasing an offsetting purchase contract. At December 31, 1997,
Time Warner had contracts for the sale of $507 million and the purchase of $139
million of foreign currencies at fixed rates. Of Time Warner's $368 million net
sale contract position, none of the foreign exchange purchase contracts and $105
million of the foreign exchange sale contracts related to TWE's foreign currency
exposure, primarily Japanese yen (27% of net contract position related to TWE),
French francs (24%), German marks (11%) and Canadian dollars (12%), compared to
a net sale contract position of $102 million of foreign currencies at December
31, 1996.
 
     Unrealized gains or losses related to foreign exchange contracts are
recorded in income as the market value of such contracts change; accordingly,
the carrying value of foreign exchange contracts approximates market value. The
carrying value of foreign exchange contracts was not material at December 31,
1997 and 1996. No cash is required to be received or paid with respect to the
realization of such gains and losses until the related foreign exchange
contracts are settled, generally at their respective maturity dates. For the
years ended December 31, 1997, 1996 and 1995, TWE recognized $14 million in
gains, $6 million in gains and $11 million in losses, respectively, on foreign
exchange contracts, which were or are expected to be offset by corresponding
decreases and increases, respectively, in the dollar value of foreign currency
license fee payments that have been or are anticipated to be received in cash
from the sale of U.S. copyrighted products abroad. Time Warner places foreign
currency contracts with a number of major financial institutions in order to
minimize credit risk.
 
12. SEGMENT INFORMATION
 
     TWE classifies its business interests into three fundamental areas:
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; Cable Networks, consisting
principally of interests in cable television programming; and Cable, consisting
principally of interests in cable television systems.
 
     Information as to the operations of TWE in different business segments is
set forth below based on the nature of the products and services offered. TWE
evaluates performance based on several factors, of which the primary financial
measure is business segment operating income before noncash amortization of
intangible assets ('EBITA'). The accounting policies of the business segments
are the same as those described in the summary of significant accounting
policies (Note 1). Intersegment sales are accounted for at fair value as if the
sales were to third parties.
 
     The operating results of TWE reflect the cable-related formation of TWE-A/N
effective as of April 1, 1995, the deconsolidation of Six Flags effective as of
June 23, 1995 and the cable-related consolidation of Paragon effective as of
July 6, 1995. The operating results of Six Flags prior to June 23, 1995 are
reported separately to facilitate comparability.
 
                                      F-35
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 


                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1997       1996       1995
                                                                                     -------    -------    ------
                                                                                              (MILLIONS)
 
                                                                                                  
REVENUES
Filmed Entertainment-Warner Bros..................................................   $ 5,462    $ 5,639    $5,069
Six Flags Theme Parks.............................................................        --         --       227
Broadcasting-The WB Network.......................................................       136         87        33
Cable Networks-HBO................................................................     1,923      1,763     1,593
Cable.............................................................................     4,243      3,851     3,005
Intersegment elimination..........................................................      (446)      (488)     (410)
                                                                                     -------    -------    ------
Total.............................................................................   $11,318    $10,852    $9,517
                                                                                     -------    -------    ------
                                                                                     -------    -------    ------

 


                                                                                         YEARS ENDED DECEMBER 31,
                                                                                        --------------------------
                                                                                         1997      1996      1995
                                                                                        ------    ------    ------
                                                                                                (MILLIONS)
 
                                                                                                   
EBITA(1)
Filmed Entertainment-Warner Bros.....................................................   $  387    $  367    $  352
Six Flags Theme Parks................................................................       --        --        40
Broadcasting-The WB Network..........................................................      (88)      (98)      (66)
Cable Networks-HBO...................................................................      391       328       275
Cable(2).............................................................................    1,184       917       803
                                                                                        ------    ------    ------
Total................................................................................   $1,874    $1,514    $1,404
                                                                                        ------    ------    ------
                                                                                        ------    ------    ------

 
- ------------
 
(1) EBITA represents business segment operating income before noncash
    amortization of intangible assets. After deducting amortization of
    intangible assets, TWE's business segment operating income was $1.444
    billion in 1997, $1.078 billion in 1996 and $960 million in 1995.
(2) Includes net gains of approximately $200 million recognized in 1997 related
    to the sale or exchange of certain cable television systems.
 


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                        ------------------------
                                                                                         1997     1996     1995
                                                                                         ----     ----     ----
                                                                                               (MILLIONS)
                                                                                                  
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment-Warner Bros......................................................   $181     $158     $107
Six Flags Theme Parks.................................................................     --       --       20
Broadcasting-The WB Network...........................................................      1       --       --
Cable Networks-HBO....................................................................     22       22       16
Cable.................................................................................    736      619      452
                                                                                         ----     ----     ----
Total.................................................................................   $940     $799     $595
                                                                                         ----     ----     ----
                                                                                         ----     ----     ----

 
                                      F-36
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                        ------------------------
                                                                                         1997     1996     1995
                                                                                         ----     ----     ----
                                                                                               (MILLIONS)
                                                                                                  
AMORTIZATION OF INTANGIBLE ASSETS(1)
Filmed Entertainment-Warner Bros......................................................   $123     $125     $124
Six Flags Theme Parks.................................................................     --       --       11
Broadcasting-The WB Network...........................................................     --       --       --
Cable Networks-HBO....................................................................     --       --        1
Cable.................................................................................    307      311      308
                                                                                         ----     ----     ----
Total.................................................................................   $430     $436     $444
                                                                                         ----     ----     ----
                                                                                         ----     ----     ----

 
- ------------
 
(1) Amortization includes amortization relating to all business combinations
    accounted for by the purchase method, including Time Warner's $14 billion
    acquisition of WCI in 1989 and $1.3 billion acquisition of the minority
    interest in ATC in 1992.
 
     Information as to the assets and capital expenditures of TWE is as follows:
 


                                                                                            DECEMBER 31,
                                                                                    -----------------------------
                                                                                     1997       1996       1995
                                                                                    -------    -------    -------
                                                                                             (MILLIONS)
 
                                                                                                 
ASSETS
Filmed Entertainment-Warner Bros.................................................   $ 8,098    $ 8,057    $ 7,334
Six Flags Theme Parks............................................................        --         --         --
Broadcasting-The WB Network......................................................       113         67         63
Cable Networks-HBO...............................................................     1,080        997        935
Cable............................................................................    10,771     10,202      9,842
Corporate(1).....................................................................       669        650        731
                                                                                    -------    -------    -------
Total............................................................................   $20,731    $19,973    $18,905
                                                                                    -------    -------    -------
                                                                                    -------    -------    -------

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


                                                                                      YEARS ENDED DECEMBER 31,
                                                                                    ----------------------------
                                                                                     1997       1996       1995
                                                                                    ------     ------     ------
                                                                                             (MILLIONS)
 
                                                                                                 
CAPITAL EXPENDITURES
Filmed Entertainment-Warner Bros.................................................   $  144     $  340     $  294
Six Flags Theme Parks............................................................       --         --         43
Broadcasting-The WB Network......................................................        1          2         --
Cable Networks-HBO...............................................................       19         29         20
Cable(1).........................................................................    1,401      1,348      1,178
                                                                                    ------     ------     ------
Total............................................................................   $1,565     $1,719     $1,535
                                                                                    ------     ------     ------
                                                                                    ------     ------     ------

 
- ------------
 
(1) Cable capital expenditures were funded in part through collections on the
    U S WEST Note Receivable in the amount of $169 million in 1996 and $602
    million in 1995 (Note 1). The U S WEST Note Receivable was fully collected
    during 1996.
 
                                      F-37
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Information as to TWE's operations in different geographical areas is as
follows:
 


                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1997       1996       1995
                                                                                     -------    -------    ------
                                                                                              (MILLIONS)
 
                                                                                                  
REVENUES(1)
United States.....................................................................   $ 9,086    $ 8,718    $7,535
United Kingdom....................................................................       488        383       338
Germany...........................................................................       284        374       247
Japan.............................................................................       172        196       245
France............................................................................       152        143       141
Canada............................................................................       137        157       144
Other international...............................................................       999        881       867
                                                                                     -------    -------    ------
Total.............................................................................   $11,318    $10,852    $9,517
                                                                                     -------    -------    ------
                                                                                     -------    -------    ------

 
- ------------
 
(1) Revenues are attributed to countries based on location of customer.
 
     Because a substantial portion of TWE's international revenues is derived
from the sale of U.S. copyrighted products abroad, assets located outside the
United States are not material.
 
13. COMMITMENTS AND CONTINGENCIES
 
     TWE's total rent expense amounted to $218 million in 1997, $205 million in
1996 and $176 million in 1995. The minimum rental commitments under
noncancellable long-term operating leases are: 1998-$178 million; 1999-$171
million; 2000-$163 million; 2001-$160 million; 2002-$151 million and after
2002-$859 million.
 
     TWE's minimum commitments and guarantees under certain programming,
licensing, franchise and other agreements aggregated approximately $7.4 billion
at December 31, 1997, which are payable principally over a five-year period.
 
     Pending legal proceedings are substantially limited to litigation
incidental to the businesses of TWE. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the consolidated
financial statements.
 
14. RELATED PARTY TRANSACTIONS
 
     In the normal course of conducting their businesses, TWE units have had
various transactions with Time Warner units, generally on terms resulting from a
negotiation between the affected units that in management's view results in
reasonable allocations. Employees of TWE participate in various Time Warner
medical, stock option and other benefit plans for which TWE is charged its
allocable share of plan expenses, including administrative costs. In addition,
Time Warner provides TWE with certain corporate services for which TWE paid a
fee in the amount of $72 million, $69 million and $64 million in 1997, 1996 and
1995, respectively.
 
     TWE is required to pay a $130 million advisory fee to U S WEST over a
five-year period ending September 15, 1998 for U S WEST's expertise in
telecommunications, telephony and information technology, and its participation
in the management and technological upgrade of TWE's cable systems. TWE has made
cumulative payments to U S WEST of $70 million under this arrangement and the
remaining installment is scheduled to be paid on September 15, 1998.
 
     TWE has management services agreements with Time Warner's Cable division,
pursuant to which TWE manages, or provides services to, the cable television
systems owned by Time Warner. Such cable television
 
                                      F-38
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
systems also pay fees to TWE for the right to carry cable television programming
provided by TWE's cable networks. Similarly, TWE's cable television systems pay
fees to Time Warner for the right to carry cable television programming provided
by Time Warner's cable networks.
 
     TWE's Filmed Entertainment-Warner Bros. division has various service
agreements with Time Warner's Filmed Entertainment-TBS division, pursuant to
which TWE's Filmed Entertainment-Warner Bros. division provides certain
management and distribution services for Time Warner's theatrical, television
and animated product, as well as certain services for administrative and
technical support.
 
     Time Warner's Cable Networks-TBS division has license agreements with TWE,
pursuant to which the cable networks have acquired broadcast rights to certain
film and television product. In addition, Time Warner's Music division provides
home videocassette distribution services to certain TWE operations, and certain
TWE units place advertising in magazines published by Time Warner's Publishing
division.
 
     Time Warner has a credit agreement with TWE that allows it to borrow up to
$400 million from TWE through September 15, 2000. Outstanding borrowings from
TWE in the amount of $400 million bear interest at LIBOR plus 1% per annum.
 
     Prior to TWE's reacquisition of the Time Warner Service Partnership Assets
in September 1995, TWE had service agreements with the Time Warner Service
Partnerships for program signal delivery and transmission services, and TWE
provided billing, collection and marketing services to the Time Warner Service
Partnerships. TWE also has distribution and merchandising agreements with Time
Warner Entertainment Japan Inc., a company owned by certain former and existing
partners of TWE to conduct TWE's businesses in Japan.
 
     In addition to transactions with its partners, TWE has had transactions
with The Columbia House Company partnerships, Comedy Partners, L.P., Six Flags
and other equity investees of Time Warner and the Entertainment Group, generally
with respect to sales of products and services in the ordinary course of
business.
 
15. ADDITIONAL FINANCIAL INFORMATION
 
CASH FLOWS
 
     TWE established an asset securitization facility on December 31, 1997,
which effectively provides for the accelerated receipt of up to $600 million of
cash through the year 2000 on available licensing contracts. Assets securitized
under this facility consist of cash contracts for the licensing of theatrical
and television product for broadcast network and syndicated television
exhibition, under which revenues have not been recognized because such product
is not available for telecast until a later date ('Backlog Contracts'). In
connection with this securitization facility, TWE sells, on a revolving and
nonrecourse basis, certain of its Backlog Contracts ('Pooled Backlog Contracts')
to a wholly owned, special purpose entity which, in turn, sells a percentage
ownership interest in the Pooled Backlog Contracts to a third-party, commercial
paper conduit sponsored by a financial institution.
 
     Because the Backlog Contracts securitized under this facility consist of
cash contracts for the licensing of theatrical and television product that have
already been produced, the recognition of revenue for such completed product is
only dependent upon the commencement of the availability period for telecast
under the terms of the licensing agreements. Accordingly, the proceeds received
under the program are classified as deferred revenues in long-term liabilities
in the accompanying consolidated balance sheet. Net proceeds of approximately
$300 million were received under this securitization program in 1997.
 
                                      F-39
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Additional financial information with respect to cash flows is as follows:
 


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                        ------------------------
                                                                                         1997     1996     1995
                                                                                         ----     ----     ----
                                                                                               (MILLIONS)
                                                                                                  
Cash payments made for interest.......................................................   $493     $513     $571
Cash payments made for income taxes, net..............................................     95       74       75
Noncash capital contributions (distributions), net....................................    399       (1)      50

 
     Noncash investing activities in 1995 included the formation of TWE-A/N in
April 1995 (Note 2) and the reacquisition of the Time Warner Service Partnership
Assets in September 1995 (Note 8).
 
OTHER CURRENT LIABILITIES
 
     Other current liabilities consist of:
 


                                                                                                  DECEMBER 31,
                                                                                                -----------------
                                                                                                 1997       1996
                                                                                                ------     ------
                                                                                                   (MILLIONS)
 
                                                                                                     
Accrued expenses.............................................................................   $1,159     $1,200
Accrued compensation.........................................................................      253        247
Deferred revenues............................................................................      255        293
                                                                                                ------     ------
Total........................................................................................   $1,667     $1,740
                                                                                                ------     ------
                                                                                                ------     ------

 
                                      F-40






                         REPORT OF INDEPENDENT AUDITORS
 
THE PARTNERS OF
TIME WARNER ENTERTAINMENT COMPANY, L.P.
 
We have audited the accompanying consolidated balance sheet of Time Warner
Entertainment Company, L.P. ('TWE') as of December 31, 1997 and 1996, and the
related consolidated statements of operations, cash flows and partnership
capital for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
TWE's management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TWE at December
31, 1997 and 1996, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
 
                                          ERNST & YOUNG LLP
 
New York, New York
February 10, 1998
 
                                      F-41






                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                         SELECTED FINANCIAL INFORMATION
 
     The selected financial information for each of the five years in the period
ended December 31, 1997 set forth below has been derived from and should be read
in conjunction with the consolidated financial statements and other financial
information presented elsewhere herein. Capitalized terms are as defined and
described in such consolidated financial statements, or elsewhere herein.
 
     The selected historical financial information for 1995 reflects the
consolidation by TWE of TWE-A/N resulting from the formation of such
partnership, effective as of April 1, 1995, and the consolidation of Paragon
effective as of July 6, 1995. The selected historical financial information
gives effect to the consolidation of Six Flags effective as of January 1, 1993
as a result of an increase in TWE's ownership of Six Flags from 50% to 100% in
September 1993, and the subsequent deconsolidation of Six Flags resulting from
the disposition by TWE of a 51% interest in Six Flags effective as of June 23,
1995. The selected historical financial information for 1993 also gives effect
to the admission of U S WEST as an additional limited partner of TWE as of
September 15, 1993 and the issuance of $2.6 billion of TWE debentures during the
year to reduce indebtedness under the former TWE credit agreement.
 


                                                                           YEARS ENDED DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED OPERATING STATEMENT INFORMATION                       1997       1996       1995       1994       1993
                                                              -------    -------    -------    -------    -------
                                                                                  (MILLIONS)
 
                                                                                           
Revenues...................................................   $11,318    $10,852    $ 9,517    $ 8,460    $ 7,946
Depreciation and amortization..............................    (1,370)    (1,235)    (1,039)      (943)      (902)
Business segment operating income(1).......................     1,444      1,078        960        848        883
Interest and other, net(2).................................      (345)      (522)      (580)      (587)      (551)
Income before extraordinary item...........................       637        210         97        161        208
Net income(3)..............................................       614        210         73        161        198

 


                                                                                 DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED BALANCE SHEET INFORMATION                             1997       1996       1995       1994       1993
                                                              -------    -------    -------    -------    -------
                                                                                  (MILLIONS)
 
                                                                                           
Cash and equivalents.......................................   $   322    $   216    $   209    $ 1,071    $ 1,338
Total assets...............................................    20,731     19,973     18,905     18,662     17,963
Debt due within one year...................................         8          7         47         32         24
Long-term debt.............................................     5,990      5,676      6,137      7,160      7,125
Preferred stock of subsidiary..............................       233         --         --         --         --
Time Warner General Partners' Senior Capital...............     1,118      1,543      1,426      1,663      1,536
Partners' capital..........................................     6,333      6,574      6,478      6,233      6,000

 
- ------------
 
(1) Includes net gains of approximately $200 million recognized in 1997 related
    to the sale or exchange of certain cable television systems.
(2) Includes a gain of approximately $250 million in 1997 related to the sale of
    an interest in E! Entertainment Television, Inc.
(3) Net income for each of the years ended December 31, 1997, 1995 and 1993
    includes an extraordinary loss on the retirement of debt of $23 million, $24
    million and $10 million, respectively.
 
                                      F-42
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 


                                                                                                 OPERATING
                                                                                                 INCOME OF     NET
                                                                                                 BUSINESS     INCOME
QUARTER                                                                              REVENUES    SEGMENTS     (LOSS)
- ----------------------------------------------------------------------------------   --------    ---------    ------
                                                                                                 (MILLIONS)
 
                                                                                                     
1997
1st(1)............................................................................   $  2,600     $   329      $320
2nd...............................................................................      2,728         320        82
3rd...............................................................................      2,855         335        81
4th(2)(3).........................................................................      3,135         460       131
Year..............................................................................     11,318       1,444       614
 
1996
1st...............................................................................   $  2,485     $   268      $ 94
2nd...............................................................................      2,608         297        74
3rd...............................................................................      2,718         271        45
4th...............................................................................      3,041         242        (3)
Year..............................................................................     10,852       1,078       210

 
- ------------
 
(1) Net income in the first quarter of 1997 includes a gain of approximately
    $250 million related to the sale of an interest in E! Entertainment
    Television, Inc.
(2) Operating income for 1997 includes net gains of approximately $200 million
    for the year relating to the sale or exchange of certain cable television
    systems, of which approximately $160 million was recorded in the fourth
    quarter of 1997.
(3) Net income for the fourth quarter of 1997 includes an extraordinary loss on
    the retirement of debt of $23 million.
 
                                      F-43
 





                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
 


                                                                                  ADDITIONS
                                                                    BALANCE AT    CHARGED TO                   BALANCE
                                                                    BEGINNING     COSTS AND                    AT END
                           DESCRIPTION                              OF PERIOD      EXPENSES     DEDUCTIONS    OF PERIOD
- -----------------------------------------------------------------   ----------    ----------    ----------    ---------
                                                                                        (MILLIONS)
 
                                                                                                  
1997:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts.............................      $195          $113         $  (90)(a)    $ 218
     Reserves for sales returns and allowances...................       178           289           (261)(b)      206
                                                                    ----------    ----------    ----------    ---------
          Total..................................................      $373          $402         $ (351)       $ 424
                                                                    ----------    ----------    ----------    ---------
                                                                    ----------    ----------    ----------    ---------
 
1996:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts.............................      $196          $ 97         $  (98)(a)    $ 195
     Reserves for sales returns and allowances...................       169           278           (269)(b)      178
                                                                    ----------    ----------    ----------    ---------
          Total..................................................      $365          $375         $ (367)       $ 373
                                                                    ----------    ----------    ----------    ---------
                                                                    ----------    ----------    ----------    ---------
 
1995:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts.............................      $188          $104         $  (96)(a)    $ 196
     Reserves for sales returns and allowances...................       118           218           (167)(b)      169
                                                                    ----------    ----------    ----------    ---------
          Total..................................................      $306          $322         $ (263)       $ 365
                                                                    ----------    ----------    ----------    ---------
                                                                    ----------    ----------    ----------    ---------

 
- ------------
 
(a) Represents uncollectible receivables charged against the reserve.
(b) Represents returns or allowances applied against the reserve.
 
                                      F-44






                              TWE GENERAL PARTNERS
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
     On June 30, 1992, thirteen direct or indirect subsidiaries of Time Warner
Companies, Inc. ('TW Companies')* contributed the assets and liabilities or the
rights to the cash flows of substantially all of TW Companies's Filmed
Entertainment-Warner Bros., Cable Networks-HBO and Cable businesses to Time
Warner Entertainment Company, L.P., a Delaware limited partnership ('TWE'), for
general partnership interests, and each general partner guaranteed a pro rata
portion of substantially all of TWE's debt and accrued interest based on the
relative fair value of the net assets each contributed to TWE (the 'General
Partner Guarantees'). In 1997, two of the original general partners, Warner
Cable Communications Inc. ('WCCI') and Time Warner Operations Inc. ('TWOI'),
were merged into another original general partner, Warner Communications Inc.
(the 'WCCI Merger' and the 'TWOI Merger,' respectively, and collectively, the
'1997 General Partner Mergers'). After the 1997 General Partner Mergers, eleven
of the thirteen original general partners have now been merged or dissolved into
the other two. Warner Communications Inc. ('WCI') and American Television and
Communications Corporation ('ATC') are the two remaining general partners of
TWE. They have succeeded to the general partnership interests and have assumed
the General Partner Guarantees of the eleven former general partners.
 
     In addition to the 1997 General Partner Mergers, WCI acquired two wholly
owned subsidiaries of TBS in 1997 that conduct certain of TBS's cable television
programming operations in the United Kingdom (the 'TBS UK Merger'). The WCCI
Merger had no effect on the consolidated results of operations and financial
condition of WCI because WCCI was a consolidated subsidiary of WCI prior to the
merger and, as such, WCCI's net assets, operating results and cash flows were
already included in the consolidated financial statements of WCI. The TWOI
Merger and the TBS UK Merger have each been accounted for as a merger of
entities under common control, similar to the pooling-of-interest method of
accounting for business combinations. Accordingly, the consolidated financial
statements of WCI have been restated to reflect the TWOI Merger for all periods
presented herein and to reflect the TBS UK Merger effective as of January 1,
1997.
 
     Set forth below is a discussion of the results of operations and financial
condition of WCI, the only General Partner with independent business operations.
WCI conducts substantially all of TW Companies's Music operations, which include
copyrighted music from many of the world's leading recording artists that is
produced and distributed by a family of established record labels such as Warner
Bros. Records, Atlantic Records, Elektra Entertainment and Warner Music
International. The financial position and results of operations of ATC are
principally derived from its investment in TWE, TW Companies, Turner
Broadcasting System, Inc. ('TBS') and its revolving credit agreement with TW
Companies. Capitalized terms are as defined and described in the accompanying
consolidated financial statements, or elsewhere herein.
 
USE OF EBITA
 
     During 1997, management concluded that the most appropriate measure for
evaluating the operating performance of WCI is operating income before noncash
amortization of intangible assets ('EBITA'). Consistent with management's
financial focus on controlling capital spending, EBITA measures operating
performance after charges for depreciation. In addition, EBITA eliminates the
uneven effect across all business segments of considerable amounts of noncash
amortization of intangible assets recognized in business combinations accounted
for by the purchase method, including the $14 billion acquisition of WCI in
1989. The exclusion of noncash amortization charges is also consistent with
management's belief that WCI's intangible assets, such as music catalogues,
contracts and copyrights and the goodwill associated with its brands, are
generally increasing in value and importance to WCI's business objective of
creating, extending and distributing
 
- ------------
* On October 10, 1996, Time Warner Inc. ('Time Warner') acquired the remaining
  80% interest in TBS that it did not already own (the 'TBS Transaction'). As a
  result of this transaction, a new parent company with the name 'Time Warner
  Inc.' replaced the old parent company of the same name (now known as Time
  Warner Companies, Inc., 'TW Companies'), and TW Companies and TBS became
  separate, wholly owned subsidiaries of the new parent company. The General
  Partners' pre-existing ownership interests in TW Companies and TBS were
  unaffected by the TBS Transaction.
 
                                      F-45
 





                              TWE GENERAL PARTNERS
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
recognizable brands and copyrights throughout the world. As such, the following
comparative discussion of the results of operations of WCI 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.
 
RESULTS OF OPERATIONS
 
1997 VS. 1996
 
     WCI had revenues of $3.691 billion, income of $522 million before an
extraordinary loss on the retirement of debt and net income of $514 million in
1997, compared to revenues of $3.949 billion and net income of $185 million in
1996. EBITA decreased to $434 million from $611 million. Operating income
decreased to $146 million from $332 million. Despite WCI having a leading
domestic market share for the year of 20%, the decline in revenues principally
related to softness in the overexpanded U.S. retail marketplace, artist delays
affecting the timing of releases of new product and a decline in international
recorded music sales. EBITA and operating income decreased principally as a
result of the decline in revenues, offset in part by certain one-time gains.
Management expects that these domestic and international trends will continue
through the first quarter of 1998, after which WCI is expected to benefit from
the release of new products from popular established artists.
 
     WCI's equity in the pretax income of TWE was $428 million in 1997, compared
to $166 million in 1996. TWE's pretax income increased significantly in 1997 as
compared to 1996 due to an overall increase in EBITA and operating income
generated by its business segments, including approximately $200 million of net
gains recognized in 1997 related to the sale or exchange of certain cable
television systems, and the recognition of an approximate $250 million gain in
1997 related to the sale of TWE's interest in E! Entertainment Television, Inc.
These increases were offset in part by an increase in minority interest expense
related to the TWE-Advance/Newhouse Partnership ('TWE-A/N').
 
     Interest and other, net was $452 million of income in 1997 compared to $53
million of expense in 1996. Interest expense decreased to $23 million from $34
million. There was other income, net, of $475 million in 1997, compared to other
expense, net, of $19 million in 1996, principally because of the recognition of
a $437 million pretax gain in 1997 in connection with the disposal of WCI's
interest in Hasbro, Inc. and lower losses from the reduction in carrying value
of certain investments, offset in part by costs associated with WCI's
receivables securitization program.
 
     The relationship between income before income taxes and income tax expense
for the General Partners is principally affected by the amortization of goodwill
and certain other financial statement expenses that are not deductible for
income tax purposes. Income tax expense for each of the General Partners
includes all income taxes related to its allocable share of partnership income
and its equity in the income tax expense of corporate subsidiaries of TWE.
 
1996 VS. 1995
 
     WCI had revenues of $3.949 billion and net income of $185 million in 1996,
compared to revenues of $4.196 billion, income of $169 million before an
extraordinary loss on the retirement of debt and net income of $160 million in
1995. EBITA increased to $611 million from $563 million. Operating income
increased to $332 million from $302 million. Operating results for 1995 included
an $85 million charge relating to certain start-up businesses and joint ventures
owned by WCI which were restructured or closed. With regard to 1996, despite
maintaining its leading domestic market share of over 22%, WCI's domestic
recorded music operating results were negatively affected by the industry-wide
softness in the overexpanded U.S. retail marketplace, which has resulted in a
number of music retail store closings and higher returns of music product. The
decline in revenues
 
                                      F-46
 





                              TWE GENERAL PARTNERS
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
principally related to (i) the effects from the current U.S. retail environment,
including an increase in WCI's provision for returns, (ii) a decline in
international recorded music sales and (iii) the absence of revenues from
certain start-up businesses which are no longer being operated by WCI. The
increase in EBITA and operating income principally resulted from the absence of
losses from certain start-up businesses and joint ventures, the absence of the
$85 million charge recognized in 1995 and the inclusion of certain one-time
gains, including gains on the sale of investments, offset in part by the decline
in the worldwide recorded music business and a related increase in WCI's
provision for bad debts.
 
     WCI's equity in the pretax income of TWE was $166 million in 1996, compared
to $108 million in 1995. TWE's operating results in 1996 as compared to 1995
reflect an overall increase in EBITA and operating income generated by its
business segments and interest savings in 1996 on lower average debt levels,
offset in part by a decrease in investment-related income and an increase in
minority interest expense related to TWE-A/N.
 
     Interest and other, net was $53 million of expense in 1996 compared to $17
million of income in 1995. Interest expense decreased to $34 million from $88
million primarily due to lower average debt levels associated with the
recapitalization of WCI that occurred on April 1, 1995. There was other expense,
net, of $19 million in 1996, compared to other income, net, of $105 million in
1995, principally because of a decrease in investment-related income resulting
from gains on certain asset sales recognized in 1995, increased losses from
reductions in the carrying value of certain investments and a reduction in
interest income related to the resolution of a corporate tax matter in 1995.
 
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1997
 
1997 FINANCIAL CONDITION
 
     WCI had $8.5 billion of equity at December 31, 1997, compared to $9.5
billion of equity at December 31, 1996. Cash and equivalents increased to $102
million at December 31, 1997, compared to $91 million at December 31, 1996. WCI
had no long-term debt due to TW Companies under its revolving credit agreement
at the end of either period.
 
     The total capitalization of ATC at December 31, 1997 consisted of equity
capital of $2.1 billion, compared to $2.3 billion at December 31, 1996. Although
ATC has no independent operations, it is expected that additional tax-related
and other distributions from TWE, as well as availability under ATC's revolving
credit agreement with TW Companies, will continue to be sufficient to satisfy
ATC's obligations with respect to its tax sharing agreement with TW Companies
for the foreseeable future.
 
CASH FLOWS
 
     In 1997, WCI's cash provided by operations amounted to $337 million and
reflected $434 million of EBITA, $83 million of noncash depreciation expense,
$284 million of distributions from TWE and $63 million related to a reduction in
other working capital requirements, balance sheet accounts and noncash items,
less $14 million of interest payments and $513 million of income taxes ($370
million of which was paid to Time Warner under a tax sharing agreement). Cash
provided by WCI's operations of $722 million in 1996 reflected $611 million of
EBITA, $91 million of noncash depreciation expense, $135 million of
distributions from TWE, and $110 million related to a reduction in other working
capital requirements, balance sheet accounts, and noncash items, less $24
million of interest payments and $201 million of income taxes ($91 million of
which was paid to Time Warner under a tax sharing agreement).
 
                                      F-47
 





                              TWE GENERAL PARTNERS
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     Management believes that WCI's operating cash flow and borrowing
availability under its revolving credit agreement with TW Companies are
sufficient to fund its capital and liquidity needs for the foreseeable future
without cash distributions from TWE above those permitted by existing
agreements.
 
     WCI and ATC have no claims on the assets and cash flows of TWE except
through the payment of certain reimbursements and cash distributions. In 1997,
the General Partners received an aggregate $934 million of distributions from
TWE, 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 1996, the General
Partners received an aggregate $228 million of distributions, consisting of $215
million of tax-related distributions, and $13 million of stock option related
distributions. Of such aggregate distributions, WCI received $554 million and
$135 million in 1997 and 1996, respectively, and ATC received $380 million and
$93 million in 1997 and 1996, respectively.
 
OFF-BALANCE SHEET ASSETS
 
     WCI believes that the value of certain off-balance sheet assets should be
considered, along with other factors discussed elsewhere herein, in evaluating
its financial condition and prospects for future results of operations,
including its ability to fund its capital and liquidity needs.
 
     As a creator and distributor of entertainment copyrights, WCI has a
significant amount of internally generated intangible assets whose value is not
fully reflected in its consolidated balance sheet. Such intangible assets extend
across WCI's principal business interests, but are best exemplified by WCI's
collection of copyrighted music product. Generally accepted accounting
principles do not recognize the value of such assets, except at the time they
may be acquired in a business combination accounted for by the purchase method
of accounting.
 
     Because WCI owns the copyrights to such creative material, it continually
generates revenue through the sale of such products across different media and
in new and existing markets. Technological advances, such as the introduction of
the compact disc and home videocassette in the 1980's and the potential
exploitation of the digital video disc in the future, have historically
generated significant revenue opportunities through the repackaging and sale of
such copyrighted products in the new technological format. Accordingly, such
intangible assets have significant off-balance sheet asset value that is not
fully reflected in the consolidated balance sheet of WCI.
 
FOREIGN CURRENCY RISK MANAGEMENT
 
Foreign Exchange Contracts
 
     Time Warner uses foreign exchange contracts primarily to hedge the risk
that unremitted or future royalties owed to WCI domestic companies for the sale
or anticipated sale of U.S. copyrighted products abroad may be adversely
affected by changes in foreign currency exchange rates. As part of its overall
strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, Time Warner hedges a portion of its, TWE's and WCI's
combined foreign currency exposures anticipated over the ensuing twelve month
period. At December 31, 1997, Time Warner had effectively hedged approximately
half of WCI's total estimated foreign currency exposures that principally relate
to anticipated cash flows to be remitted to the U.S. over the ensuing twelve
month period, using foreign exchange contracts that generally have maturities of
three months or less, which are generally rolled over to provide continuing
coverage throughout the year. Time Warner is reimbursed by or reimburses WCI for
Time Warner contract gains and losses related to WCI's foreign currency
exposure. Time Warner often closes foreign exchange sale contracts by purchasing
an offsetting purchase contract. At
 
                                      F-48
 





                              TWE GENERAL PARTNERS
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
December 31, 1997, Time Warner had contracts for the sale of $507 million and
the purchase of $139 million of foreign currencies at fixed rates. Of Time
Warner's $368 million net sale contract position, $380 million of foreign
exchange sale contracts and $139 million of foreign exchange purchase contracts
related to WCI's foreign currency exposure, compared to contracts for the sale
of $323 million and the purchase of $102 million of foreign currencies at
December 31, 1996.
 
     Based on Time Warner's foreign exchange contracts outstanding related to
WCI's exposure at December 31, 1997, each 5% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies under contract at
December 31, 1997 would result in approximately $19 million of unrealized losses
and $7 million of unrealized gains on foreign exchange contracts involving
foreign currency sales and purchases, respectively. Conversely, a 5%
appreciation of the U.S. dollar would result in $19 million of unrealized gains
and $7 million of unrealized losses, respectively. Consistent with the nature of
the economic hedge provided by such foreign exchange contracts, such unrealized
gains or losses would be offset by corresponding decreases or increases,
respectively, in the dollar value of future foreign currency royalty payments
that would be received in cash within the ensuing twelve month period from the
sale of U.S. copyrighted products abroad.
 
YEAR 2000 TECHNOLOGY PREPAREDNESS
 
     WCI is currently working to resolve the potential impact of the year 2000
on the processing of time-sensitive information by its computerized information
systems. Year 2000 issues may arise if computer programs have been written using
two digits (rather than four) to define the applicable year. In such case,
programs that have time-sensitive logic may recognize a date using '00' as the
year 1900 rather than the year 2000, which could result in miscalculations or
system failures. Management is in the process of completing a review of
significant software and equipment used in WCI's operations and, to the extent
practicable, in the operations of its key business partners, in order to
determine if any year 2000 risks exist that may be material to WCI as a whole.
This process includes an assessment of year 2000 risks on an ongoing basis and
the identification of practical remediation measures that could be taken on a
timely basis to alter, validate or replace time-sensitive software and
equipment. Management has already begun implementing certain of these measures
and intends to complete its remediation efforts prior to any anticipated
material impact on its computerized information systems. Costs of addressing
potential problems have not been material to date and, based on preliminary
information, are not currently expected to have a material adverse impact on
WCI's financial position, results of operations or cash flows in future periods.
However, if WCI, its customers or vendors are unable to resolve such processing
issues in a timely manner, it could result in a material financial risk.
Accordingly, management plans to devote the resources it concludes are
appropriate to resolve all significant year 2000 issues in a timely manner.
 
                                      F-49






                              TWE GENERAL PARTNERS
                          CONSOLIDATED BALANCE SHEETS
                               DECEMBER 31, 1997
                        (MILLIONS, EXCEPT SHARE AMOUNTS)
 


                                                                                                    WCI         ATC
                                                                                                  -------      ------
 
                                                                                                         
ASSETS
Current assets
Cash and equivalents...........................................................................   $   102      $   --
Receivables, less allowances of $264 million...................................................       866          --
Inventories....................................................................................       140          --
Prepaid expenses...............................................................................       651          --
                                                                                                  -------      ------
Total current assets...........................................................................     1,759          --
 
Investments in and amounts due to and from TWE.................................................     2,423       1,861
Investments in TW Companies....................................................................       103          62
Other investments..............................................................................     1,259         352
 
Music catalogues, contracts and copyrights.....................................................       928          --
Goodwill.......................................................................................     3,554          --
Other assets, primarily property, plant and equipment..........................................       464          --
                                                                                                  -------      ------
Total assets...................................................................................   $10,490      $2,275
                                                                                                  -------      ------
                                                                                                  -------      ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable...............................................................................   $   221      $   --
Royalties payable..............................................................................       757          --
Other current liabilities......................................................................       464           1
                                                                                                  -------      ------
Total current liabilities......................................................................     1,442           1
 
Long-term liabilities, including $251 and $187 million due to TW Companies.....................       527         187
 
Shareholders' equity
Common stock, no par value, 1,000 and 20,000 shares authorized, 100 and 11,582 shares issued
  and outstanding..............................................................................         1           1
Preferred stock, $.01 par value, 125 thousand shares authorized, 90 thousand shares
  outstanding, $90 million liquidation preference..............................................        --          --
Paid-in capital................................................................................    10,465       2,708
Retained earnings (accumulated deficit)........................................................       450          (4)
                                                                                                  -------      ------
                                                                                                   10,916       2,705
 
Due from TW Companies, net.....................................................................    (1,809)       (282)
Reciprocal interest in TW Companies stock......................................................      (586)       (336)
                                                                                                  -------      ------
Total shareholders' equity.....................................................................     8,521       2,087
                                                                                                  -------      ------
Total liabilities and shareholders' equity.....................................................   $10,490      $2,275
                                                                                                  -------      ------
                                                                                                  -------      ------

 
See accompanying notes.
 
                                      F-50
 





                              TWE GENERAL PARTNERS
                          CONSOLIDATED BALANCE SHEETS
                               DECEMBER 31, 1996
                        (MILLIONS, EXCEPT SHARE AMOUNTS)
 


                                                                                                    WCI         ATC
                                                                                                  -------      ------
 
                                                                                                         
ASSETS
Current assets
Cash and equivalents...........................................................................   $    91      $   --
Receivables, less allowances of $362 million...................................................     1,013          --
Inventories....................................................................................       165          --
Prepaid expenses...............................................................................       510          --
                                                                                                  -------      ------
Total current assets...........................................................................     1,779          --
 
Investments in and amounts due to and from TWE.................................................     2,553       1,980
Investments in TW Companies....................................................................       103          64
Other investments..............................................................................     1,688         345
 
Music catalogues, contracts and copyrights.....................................................     1,035          --
Goodwill.......................................................................................     3,704          --
Other assets, primarily property, plant and equipment..........................................       537          --
                                                                                                  -------      ------
Total assets...................................................................................   $11,399      $2,389
                                                                                                  -------      ------
                                                                                                  -------      ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable...............................................................................   $   107      $   --
Royalties payable..............................................................................       827          --
Other current liabilities......................................................................       518           2
                                                                                                  -------      ------
Total current liabilities......................................................................     1,452           2
 
Long-term liabilities, including $148 and $55 million due to TW Companies......................       406          56
 
Shareholders' equity
Common stock, no par value, 1,000 and 20,000 shares authorized, 100 and 11,582 shares issued
  and outstanding..............................................................................         1           1
Paid-in capital................................................................................    10,735       2,893
Retained earnings..............................................................................       393          27
                                                                                                  -------      ------
                                                                                                   11,129       2,921
 
Due from TW Companies, net.....................................................................    (1,002)       (254)
Reciprocal interest in TW Companies stock......................................................      (586)       (336)
                                                                                                  -------      ------
Total shareholders' equity.....................................................................     9,541       2,331
                                                                                                  -------      ------
Total liabilities and shareholders' equity.....................................................   $11,399      $2,389
                                                                                                  -------      ------
                                                                                                  -------      ------

 
See accompanying notes.
 
                                      F-51






                              TWE GENERAL PARTNERS
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1997
                                   (MILLIONS)
 


                                                                                                     WCI         ATC
                                                                                                    ------      -----
                                                                                                          
Revenues (a).....................................................................................   $3,691      $  --
                                                                                                    ------      -----
 
Cost of revenues (a)(b)..........................................................................    2,412         --
Selling, general and administrative (a)(b).......................................................    1,133         --
                                                                                                    ------      -----
 
Operating expenses...............................................................................    3,545         --
                                                                                                    ------      -----
 
Business segment operating income................................................................      146         --
Equity in pretax income of TWE (a)...............................................................      428        294
Interest and other, net (a)......................................................................      452         30
                                                                                                    ------      -----
 
Income before income taxes.......................................................................    1,026        324
Income taxes (a).................................................................................     (504)      (145)
                                                                                                    ------      -----
 
Income before extraordinary item.................................................................      522        179
Extraordinary loss on retirement of debt, net of $6 and $3 million income tax benefit............       (8)        (6)
                                                                                                    ------      -----
 
Net income.......................................................................................   $  514      $ 173
                                                                                                    ------      -----
                                                                                                    ------      -----

 
- ------------
 
(a) Includes the following income (expenses) resulting from transactions with
    Time Warner, TW Companies, TWE or equity investees of the General Partners:
 
                                                                                                          
Revenues.........................................................................................   $  185      $  --
Cost of revenues.................................................................................      (36)        --
Selling, general and administrative..............................................................      (17)        --
Equity in pretax income of TWE...................................................................      (18)        --
Interest and other, net..........................................................................       62         --
Income taxes.....................................................................................     (370)      (111)
 
(b) Includes depreciation and amortization expense of:...........................................   $  371      $  --
                                                                                                    ------      -----
                                                                                                    ------      -----


 
See accompanying notes.
 
                                      F-52
 





                              TWE GENERAL PARTNERS
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1996
                                   (MILLIONS)
 


                                                                                                    WCI        ATC
                                                                                                   ------      ----
                                                                                                         
Revenues (a)....................................................................................   $3,949      $--
                                                                                                   ------      ----
 
Cost of revenues (a)(b).........................................................................    2,765       --
Selling, general and administrative (a)(b)......................................................      852       --
                                                                                                   ------      ----
 
Operating expenses..............................................................................    3,617       --
                                                                                                   ------      ----
 
Business segment operating income...............................................................      332       --
Equity in pretax income of TWE (a)..............................................................      166      114
Interest and other, net (a).....................................................................      (53)      24
                                                                                                   ------      ----
 
Income before income taxes......................................................................      445      138
Income taxes (a)................................................................................     (260)     (76)
                                                                                                   ------      ----
 
Net income......................................................................................   $  185      $62
                                                                                                   ------      ----
                                                                                                   ------      ----

 
- ------------
 
(a) Includes the following income (expenses) resulting from transactions with
    Time Warner, TW Companies, TWE or equity investees of the General Partners:
 
                                                                                                         
Revenues........................................................................................   $  188      $--
Cost of revenues................................................................................      (55)      --
Selling, general and administrative.............................................................       45       --
Equity in pretax income of TWE..................................................................      (18)      --
Interest and other, net.........................................................................       47       --
Income taxes....................................................................................      (91)     (47)
 
(b) Includes depreciation and amortization expense of:..........................................   $  370      $--
                                                                                                   ------      ----
                                                                                                   ------      ----


 
See accompanying notes.
 
                                      F-53
 





                              TWE GENERAL PARTNERS
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1995
                                   (MILLIONS)
 


                                                                                                    WCI         ATC
                                                                                                   ------      -----
                                                                                                         
Revenues (a)....................................................................................   $4,196      $ --
                                                                                                   ------      -----
 
Cost of revenues (a)(b).........................................................................    2,918        --
Selling, general and administrative (a)(b)......................................................      976        --
                                                                                                   ------      -----
 
Operating expenses..............................................................................    3,894        --
                                                                                                   ------      -----
 
Business segment operating income...............................................................      302        --
Equity in pretax income of TWE (a)..............................................................      108        75
Interest and other, net (a).....................................................................       17       138
                                                                                                   ------      -----
 
Income before income taxes......................................................................      427       213
Income taxes (a)................................................................................     (258)     (112)
                                                                                                   ------      -----
 
Income before extraordinary item................................................................      169       101
Extraordinary loss on retirement of debt, net of $5 and $4 million income tax benefit...........       (9)       (6)
                                                                                                   ------      -----
 
Net income......................................................................................   $  160      $ 95
                                                                                                   ------      -----
                                                                                                   ------      -----

 
- ------------
 
(a) Includes the following income (expenses) resulting from transactions with
    Time Warner, TW Companies, TWE or equity investees of the General Partners:
 
                                                                                                         
Revenues........................................................................................   $  196      $ --
Cost of revenues................................................................................      (56)       --
Selling, general and administrative.............................................................       29        --
Equity in pretax income of TWE..................................................................      (14)       --
Interest and other, net.........................................................................      (23)       --
Income taxes....................................................................................      (56)      (77)
 
(b) Includes depreciation and amortization expense of:..........................................   $  356      $ --
                                                                                                   ------      -----
                                                                                                   ------      -----


 
See accompanying notes.
 
                                      F-54






                              TWE GENERAL PARTNERS
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1997
                                   (MILLIONS)
 


                                                                                                    WCI         ATC
                                                                                                  -------      -----
                                                                                                         
OPERATIONS
Net income.....................................................................................   $   514      $173
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt.......................................................         8         6
Depreciation and amortization..................................................................       371        --
Excess of equity in pretax income of TWE over distributions....................................      (144)      (99)
Equity in income of other investee companies, net of distributions.............................        32        --
Changes in operating assets and liabilities:
    Receivables................................................................................       119        --
    Inventories................................................................................        24        --
    Accounts payable and other liabilities.....................................................        60        --
    Other balance sheet changes................................................................      (647)       11
                                                                                                  -------      -----
Cash provided by operations....................................................................       337        91
                                                                                                  -------      -----
INVESTING ACTIVITIES
Investments and acquisitions...................................................................       (66)       --
Capital expenditures...........................................................................       (99)       --
Investment proceeds............................................................................       131        --
Proceeds received from return of Senior Capital contributed to TWE.............................       270       185
                                                                                                  -------      -----
Cash provided by investing activities..........................................................       236       185
                                                                                                  -------      -----
FINANCING ACTIVITIES
Dividends......................................................................................      (365)     (248)
Increase in amounts due from TW Companies, net.................................................      (197)      (28)
                                                                                                  -------      -----
Cash used by financing activities..............................................................      (562)     (276)
                                                                                                  -------      -----
INCREASE IN CASH AND EQUIVALENTS...............................................................        11        --

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD....................................................        91        --
                                                                                                  -------      -----
CASH AND EQUIVALENTS AT END OF PERIOD..........................................................   $   102      $ --
                                                                                                  -------      -----
                                                                                                  -------      -----

 
See accompanying notes.
 
                                      F-55
 





                              TWE GENERAL PARTNERS
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1996
                                   (MILLIONS)
 


                                                                                                     WCI       ATC
                                                                                                    -----      ----
                                                                                                         
OPERATIONS
Net income.......................................................................................   $ 185      $62
Adjustments for noncash and nonoperating items:
Depreciation and amortization....................................................................     370       --
Excess of equity in pretax income of TWE over distributions......................................     (31)     (21)
Equity in income of other investee companies, net of distributions...............................     (36)      (2)
Changes in operating assets and liabilities:
    Receivables..................................................................................      64       --
    Inventories..................................................................................      16       --
    Accounts payable and other liabilities.......................................................      (2)      --
    Other balance sheet changes..................................................................     156        6
                                                                                                    -----      ----
Cash provided by operations......................................................................     722       45
                                                                                                    -----      ----
INVESTING ACTIVITIES
Investments and acquisitions.....................................................................     (56)      --
Capital expenditures.............................................................................    (154)      --
Investment proceeds..............................................................................      38       --
                                                                                                    -----      ----
Cash used by investing activities................................................................    (172)      --
                                                                                                    -----      ----
FINANCING ACTIVITIES
Dividends........................................................................................      (8)      (5)
Increase in amounts due from TW Companies, net...................................................    (557)     (40)
                                                                                                    -----      ----
Cash used by financing activities................................................................    (565)     (45)
                                                                                                    -----      ----
DECREASE IN CASH AND EQUIVALENTS.................................................................     (15)      --

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD......................................................     106       --
                                                                                                    -----      ----
CASH AND EQUIVALENTS AT END OF PERIOD............................................................   $  91      $--
                                                                                                    -----      ----
                                                                                                    -----      ----

 
See accompanying notes.
 
                                      F-56
 





                              TWE GENERAL PARTNERS
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1995
                                   (MILLIONS)
 


                                                                                                     WCI        ATC
                                                                                                    -----      -----
                                                                                                         
OPERATIONS
Net income.......................................................................................   $ 160      $ 95
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt.........................................................       9         6
Depreciation and amortization....................................................................     356        --
Excess of distributions over equity in pretax income of TWE......................................     537       369
Equity in income of other investee companies, net of distributions...............................    (110)      (96)
Changes in operating assets and liabilities:
    Receivables..................................................................................    (200)       --
    Inventories..................................................................................     (10)       --
    Accounts payable and other liabilities.......................................................      (1)       --
    Other balance sheet changes..................................................................     137        16
                                                                                                    -----      -----
Cash provided by operations......................................................................     878       390
                                                                                                    -----      -----
INVESTING ACTIVITIES
Investments and acquisitions.....................................................................    (213)      (10)
Capital expenditures.............................................................................    (124)       --
Investment proceeds..............................................................................     117        --
                                                                                                    -----      -----
Cash used by investing activities................................................................    (220)      (10)
                                                                                                    -----      -----
FINANCING ACTIVITIES
Borrowings.......................................................................................      16        48
Debt repayments..................................................................................    (186)      (58)
Capital contributions............................................................................     142        --
Dividends........................................................................................    (227)     (156)
Increase in amounts due from TW Companies, net...................................................    (445)     (214)
                                                                                                    -----      -----
Cash used by financing activities................................................................    (700)     (380)
                                                                                                    -----      -----
DECREASE IN CASH AND EQUIVALENTS.................................................................     (42)       --
                                                                                                    
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD......................................................     148        --
                                                                                                    -----      -----
CASH AND EQUIVALENTS AT END OF PERIOD............................................................   $ 106      $ --
                                                                                                    -----      -----
                                                                                                    -----      -----

 
See accompanying notes.
 
                                      F-57






                                      WCI
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                   (MILLIONS)
 


                                                            RETAINED                        RECIPROCAL
                                                            EARNINGS       DUE FROM TW     INTEREST IN
                                     COMMON    PAID-IN    (ACCUMULATED     COMPANIES,      TW COMPANIES    SHAREHOLDERS'
                                     STOCK     CAPITAL      DEFICIT)           NET            STOCK            EQUITY
                                     ------    -------    ------------    -------------    ------------    --------------
                                                                                         
BALANCE AT DECEMBER 31, 1994.......    $1      $ 8,093       $  248          $    --          $ (586)          $7,756
 
Net income.........................                             160                                               160
Increase in unrealized gains on
  securities, net of $5 million tax
  expense..........................                               7                                                 7
Foreign currency translation
  adjustments......................                              16                                                16
                                                              -----                                            ------
    Comprehensive income...........                             183                                               183
Contributions......................              2,642                                                          2,642
Increase in stock option
  distribution liability to TW
  Companies (a)....................                             (30)                                              (30)
Dividends..........................                            (217)                                             (217)
Transfers to TW Companies, net.....                                             (445)                            (445)
Other..............................                              (1)                                               (1)
                                       ---     -------        -----       -------------        -----           ------
BALANCE AT DECEMBER 31, 1995.......     1       10,735          183             (445)           (586)           9,888
 
Net income.........................                             185                                               185
Increase in unrealized gains on
  securities, net of $12 million
  tax expense......................                              16                                                16
Foreign currency translation
  adjustments......................                              (2)                                               (2)
                                                              -----                                            ------
    Comprehensive income...........                             199                                               199
Reduction of stock option
  distribution liability to TW
  Companies (a)....................                              10                                                10
Transfers to TW Companies, net.....                                             (557)                            (557)
Other..............................                               1                                                 1
                                       ---     -------        -----       -------------        -----           ------
BALANCE AT DECEMBER 31, 1996.......     1       10,735          393           (1,002)           (586)           9,541
 
Net income.........................                             514                                               514
Decrease in unrealized gains on
  securities, net of $91 million
  tax benefit (b)..................                            (129)                                             (129)
Foreign currency translation
  adjustments......................                             (45)                                              (45)
                                                              -----                                            ------
    Comprehensive income...........                             340                                               340
Increase in stock option
  distribution liability to TW
  Companies (a)....................                            (236)                                             (236)
Dividends..........................               (270)         (50)                                             (320)
Transfers to TW Companies, net.....                                             (807)                            (807)
Other..............................                               3                                                 3
                                      ---      -------        -----       -------------        -----           ------
BALANCE AT DECEMBER 31, 1997.......    $1      $10,465       $  450          $(1,809)         $ (586)          $8,521
                                      ---      -------        -----       -------------        -----           ------
                                      ---      -------        -----       -------------        -----           ------

 
- ------------
(a) The General Partners record distributions to TW Companies and a
    corresponding receivable from TWE as a result of the stock option related
    distribution provisions of the TWE partnership agreement. Previously-accrued
    stock option distributions of $10 million were reversed in 1996 because the
    market price of Time Warner common stock declined during the period and
    stock option distributions of $236 million and $30 million were accrued in
    1997 and 1995, respectively, because of an increase in the market price of
    Time Warner common stock (Note 3).
(b) Includes a $13 million reduction related to realized gains on the sale of
    securities in 1997 that represents the turnaround of previous unrealized
    gains included in comprehensive income in prior periods, net of $9 million
    tax effect.
 
See accompanying notes.
 
                                      F-58
 





                                      ATC
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                   (MILLIONS)
 


                                                            RETAINED                      RECIPROCAL
                                                            EARNINGS      DUE FROM TW    INTEREST IN
                                     COMMON    PAID-IN    (ACCUMULATED    COMPANIES,     TW COMPANIES   SHAREHOLDERS'
                                     STOCK     CAPITAL      DEFICIT)          NET           STOCK           EQUITY
                                     ------   ---------   ------------   -------------   ------------   --------------
                                                                                      
BALANCE AT DECEMBER 31, 1994........   $1      $ 2,893       $   49          $  --          $ (336)         $2,607
 
Net income..........................                             95                                             95
Decrease in unrealized gains on
  securities, net of $15 million tax
  benefit...........................                            (22)                                           (22)
                                                              -----                                         ------
    Comprehensive income............                             73                                             73
Increase in stock option
  distribution liability to TW
  Companies (a).....................                            (20)                                           (20)
Dividends...........................                           (149)                                          (149)
Transfers to TW Companies, net......                                          (214)                           (214)
                                       ---    ---------       -----          -----           -----          ------
BALANCE AT DECEMBER 31, 1995........    1        2,893          (47)          (214)           (336)          2,297
 
Net income..........................                             62                                             62
Increase in unrealized gains on
  securities, net of $1 million tax
  expense...........................                              1                                              1
Foreign currency translation
  adjustments.......................                              6                                              6
                                                              -----                                         ------
    Comprehensive income............                             69                                             69
Reduction of stock option
  distribution liability to TW
  Companies (a).....................                              6                                              6
Transfers to TW Companies, net......                                           (40)                            (40)
Other...............................                             (1)                                            (1)
                                       ---    ---------       -----          -----           -----          ------
BALANCE AT DECEMBER 31, 1996........    1        2,893           27           (254)           (336)          2,331
 
Net income..........................                            173                                            173
Increase in unrealized gains on
  securities, net of $1 million tax
  expense...........................                              2                                              2
Foreign currency translation
  adjustments.......................                            (12)                                           (12)
                                                              -----                                         ------
    Comprehensive income............                            163                                            163
Increase in stock option
  distribution liability to TW
  Companies (a).....................                           (163)                                          (163)
Dividends...........................              (185)         (33)                                          (218)
Transfers to TW Companies, net......                                           (28)                            (28)
Other...............................                              2                                              2
                                      ---     ---------       -----          -----           -----          ------
BALANCE AT DECEMBER 31, 1997........   $1      $ 2,708       $   (4)         $(282)         $ (336)         $2,087
                                      ---     ---------       -----          -----           -----          ------
                                      ---     ---------       -----          -----           -----          ------

 
- ------------
(a) The General Partners record distributions to TW Companies and a
corresponding receivable from TWE as a result of the stock option related
distribution provisions of the TWE partnership agreement. Previously-accrued
stock option distributions of $6 million were reversed in 1996 because the
market price of Time Warner common stock declined during the period and stock
option distributions of $163 million and $20 million were accrued in 1997 and
1995, respectively, because of an increase in the market price of Time Warner
common stock (Note 3).
 
See accompanying notes.
 
                                      F-59






                              TWE GENERAL PARTNERS
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
 
     On June 30, 1992, thirteen direct or indirect subsidiaries of Time Warner
Companies, Inc. ('TW Companies')* contributed the assets and liabilities or the
rights to the cash flows of substantially all of TW Companies's Filmed
Entertainment-Warner Bros., Cable Networks-HBO and Cable businesses to Time
Warner Entertainment Company, L.P., a Delaware limited partnership ('TWE'), for
general partnership interests, and each general partner guaranteed a pro rata
portion of substantially all of TWE's debt and accrued interest based on the
relative fair value of the net assets each contributed to TWE (the 'General
Partner Guarantees,' see Note 6). In 1997, two of the original general partners,
Warner Cable Communications Inc. ('WCCI') and Time Warner Operations Inc.
('TWOI'), were merged into another original general partner, Warner
Communications Inc. (the 'WCCI Merger' and the 'TWOI Merger,' respectively, and
collectively, the '1997 General Partner Mergers'). After the 1997 General
Partner Mergers, eleven of the thirteen original general partners have now been
merged or dissolved into the other two. Warner Communications Inc. ('WCI') and
American Television and Communications Corporation ('ATC') are the two remaining
general partners of TWE. They have succeeded to the general partnership
interests and have assumed the General Partner Guarantees of the eleven former
general partners. WCI, ATC and, where appropriate, the former general partners
are referred to herein as the 'General Partners.'
 
     In addition to the 1997 General Partner Mergers, WCI acquired two wholly
owned subsidiaries of TBS in 1997 that conduct certain of TBS's cable television
programming operations in the United Kingdom (the 'TBS UK Merger,' see Note 2).
The WCCI Merger had no effect on the consolidated financial statements of WCI
because WCCI was a consolidated subsidiary of WCI prior to the merger and, as
such, WCCI's net assets, operating results and cash flows were already included
in the consolidated financial statements of WCI. The TWOI Merger and the TBS UK
Merger have each been accounted for as a merger of entities under common
control, similar to the pooling-of-interest method of accounting for business
combinations. Accordingly, the consolidated financial statements of WCI have
been restated to reflect the TWOI Merger for all periods presented herein and to
reflect the TBS UK Merger effective as of January 1, 1997. The financial
position, results of operations and cash flows of the companies acquired by WCI
in the TBS UK Merger for the period from October 10, 1996 (the date on which
such companies were acquired by Time Warner) to December 31, 1996 are not
material to WCI's consolidated financial statements.
 
     In lieu of contributing certain assets to the partnership at its
capitalization in 1992 (the 'Beneficial Assets'), the General Partners assigned
to TWE the net cash flow generated by such assets or agreed to pay an amount
equal to the net cash flow generated by such assets. TWE has the right to
receive from the General Partners, at the limited partners' option, an amount
equal to the fair value of the Beneficial Assets, net of associated liabilities,
that have not been contributed to TWE, rather than continuing to receive the net
cash flow, or an amount equal to the net cash flow, generated by such Beneficial
Assets. The consolidated financial statements of the General Partners exclude
the Beneficial Assets.
 
     WCI conducts substantially all of TW Companies's Music operations, which
include copyrighted music from many of the world's leading recording artists
that is produced and distributed by a family of established record labels such
as Warner Bros. Records, Atlantic Records, Elektra Entertainment and Warner
Music International. ATC does not conduct operations independent of its
ownership interest in TWE and certain other investments.
 
- ------------
* On October 10, 1996, Time Warner Inc. ('Time Warner') acquired the remaining
  80% interest in TBS that it did not already own (the 'TBS Transaction'). As a
  result of this transaction, a new parent company with the name 'Time Warner
  Inc.' replaced the old parent company of the same name (now known as Time
  Warner Companies, Inc., 'TW Companies'), and TW Companies and TBS became
  separate, wholly owned subsidiaries of the new parent company. The General
  Partners' pre-existing ownership interests in TW Companies and TBS were
  unaffected by the TBS Transaction.
 
                                      F-60
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     TW Companies's $14 billion acquisition of WCI as of December 31, 1989, and
$1.3 billion acquisition of the minority interest in ATC on June 26, 1992 were
accounted for by the purchase method of accounting. WCI subsequently contributed
filmed entertainment and cable assets to TWE, and ATC subsequently contributed
its cable assets. The financial statements of WCI reflect an allocable portion
of TW Companies's cost to acquire the Music business and certain other assets of
WCI, and each General Partner's investment in TWE (and the financial statements
of TWE) reflect an allocable portion of TW Companies's cost to acquire the
filmed entertainment and cable assets of WCI and the ATC minority interest.
 
     As a result of a recapitalization of WCI effective as of April 1, 1995
(Note 5) and cash distributions received from TWE during 1995 by each of the
General Partners (Note 3), certain amounts due from or to TW Companies are
reflected by the General Partners as a separate component of shareholders'
equity under the caption 'Due from TW Companies, net.'
 
     Certain reclassifications have been made to the prior years' financial
statements to conform to the 1997 presentation.
 
BASIS OF CONSOLIDATION AND
ACCOUNTING FOR INVESTMENTS
 
     The consolidated financial statements include 100% of the assets,
liabilities, revenues, expenses, income, loss and cash flows of each General
Partner and all companies in which the General Partner has a controlling voting
interest ('subsidiaries'), as if the General Partner and its subsidiaries were a
single company. Significant intercompany accounts and transactions between the
consolidated companies have been eliminated.
 
     Investments in TWE, and certain other companies in which the General
Partners have significant influence, but less than a controlling voting
interest, are accounted for using the equity method. Under the equity method,
only the General Partner's investment in and amounts due to and from the equity
investee are included in the consolidated balance sheet, only its share of the
investee's earnings is included in the consolidated operating results, and only
the dividends, cash distributions, loans or other cash received from the
investee, less any additional cash investments, loan repayments or other cash
paid to the investee, are included in the consolidated cash flows.
 
     Investments in companies in which the General Partners do not have a
controlling interest or an ownership and voting interest so large as to exert
significant influence are accounted for at market value if the investments are
publicly traded and there are no resale restrictions, or at cost, if the sale of
a publicly-traded investment is restricted or if the investment is not publicly
traded. Unrealized gains and losses on investments accounted for at market value
are reported net-of-tax in retained earnings until the investment is sold, at
which time the realized gain or loss is included in income. Dividends and other
distributions of earnings from both market value and cost method investments are
included in income when declared.
 
     The effect of any changes in each General Partner's ownership interests
resulting from the issuance of equity capital by consolidated subsidiaries or
equity investees to unaffiliated parties is included in income.
 
FOREIGN CURRENCY
 
     The financial position and operating results of substantially all foreign
operations are consolidated using the local currency as the functional currency.
Local currency assets and liabilities are translated at the rates of exchange on
the balance sheet date, and local currency revenues and expenses are translated
at average rates of exchange during the period. Resulting translation gains or
losses, which have not been material, are included in retained earnings. Foreign
currency transaction gains and losses, which have not been material, are
included in operating results.
 
                                      F-61
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
 
     Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include management's forecast of anticipated
revenues from the sale of future and existing music-related products in order to
evaluate the ultimate recoverability of accounts receivables and artist advances
recorded as assets in the WCI consolidated balance sheet. Accounts receivables
and sales in the music industry are subject to customers' rights to return
unsold items. Management periodically reviews such estimates and it is
reasonably possible that management's assessment of recoverability of accounts
receivables and individual artist advances may change based on actual results
and other factors.
 
REVENUES AND COSTS
 
     Inventories of WCI consist of cassette tapes, compact discs and related
music and music publishing products. Inventories of cassettes and compact discs
are stated at the lower of cost or estimated realizable value. Cost is
determined using first-in, first-out; last-in, first-out; and average cost
methods. In accordance with industry practice, certain products (such as compact
discs and cassettes) are sold to customers with the right to return unsold
items. Revenues from such sales represent gross sales less a provision for
future returns. Returned goods included in inventory are valued at estimated
realizable value, but not in excess of cost.
 
ADVERTISING
 
     Advertising costs are expensed upon the first exhibition of the
advertisement, except for certain direct-response advertising, for which the
costs are capitalized and amortized over the expected period of future benefits.
Direct-response advertising principally consists of product promotional
mailings, catalogues and other promotional costs incurred in WCI's
direct-marketing businesses. Deferred advertising costs are generally amortized
using the straight-line method over a period of twelve months or less subsequent
to the promotional event. Deferred advertising costs for WCI amounted to $16
million and $4 million at December 31, 1997 and 1996, respectively. Advertising
expense for WCI amounted to $183 million in 1997, $185 million in 1996 and $237
million in 1995.
 
CASH EQUIVALENTS
 
     Cash equivalents consist of commercial paper and other investments that are
readily convertible into cash and have original maturities of three months or
less.
 
FINANCIAL INSTRUMENTS
 
     The fair value of financial instruments, such as investments, is generally
determined by reference to market values resulting from trading on a national
securities exchange or in an over-the-counter market. In cases where quoted
market prices are not available, such as for derivative financial instruments,
fair value is based on estimates using present value or other valuation
techniques.
 
PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment are stated at cost. Depreciation is provided
generally on the straight-line method over useful lives ranging up to thirty
years for buildings and improvements and up to fifteen years for furniture,
fixtures and other equipment.
 
                                      F-62
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Effective January 1, 1996, WCI adopted Financial Accounting Standards Board
('FASB') Statement No. 121, 'Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of' ('FAS 121'), which established
standards for the recognition and measurement of impairment losses on long-lived
assets and certain intangible assets. The adoption of FAS 121 did not have a
material effect on WCI's financial statements.
 
INTANGIBLE ASSETS
 
     As a creator and distributor of entertainment copyrights, WCI has a
significant and growing amount of intangible assets, including goodwill and
music catalogues, contracts and copyrights. In accordance with generally
accepted accounting principles, WCI does not recognize the fair value of
internally generated intangible assets. Costs incurred to create and produce
copyrighted product, such as compact discs and cassettes, are generally either
expensed as incurred, or capitalized as tangible assets as in the case of cash
advances and inventoriable product costs. However, accounting recognition is not
given to any increasing asset value that may be associated with the collection
of the underlying copyrighted material. Additionally, costs incurred to create
or extend brands generally result in losses over an extended development period
and are recognized as a reduction of income as incurred, while any corresponding
brand value created is not recognized as an intangible asset in the consolidated
balance sheet. On the other hand, intangible assets acquired in business
combinations accounted for by the purchase method of accounting are capitalized
and amortized over their expected useful life as a noncash charge against future
results of operations. Accordingly, the intangible assets reported in the
consolidated balance sheet do not reflect the fair value of WCI's internally
generated intangible assets, but rather are limited to intangible assets
resulting from certain acquisitions, including TW Companies's acquisition of
WCI, in which the cost of the acquired companies exceeded the fair value of
their tangible assets at the time of acquisition. TW Companies's allocable
portion of its cost to acquire the Music business and certain other assets of
WCI is reflected in the consolidated financial statements of WCI under the
pushdown method of accounting.
 
     WCI amortizes goodwill over periods up to forty years using the
straight-line method. Music catalogues, contracts and copyrights are amortized
over periods up to twenty years using the straight-line method. Amortization of
intangible assets amounted to $288 million in 1997, $279 million in 1996 and
$261 million in 1995. Accumulated amortization of intangible assets at December
31, 1997 and 1996 amounted to $1.950 billion and $1.856 billion, respectively.
 
     WCI periodically reviews the carrying value of acquired intangible assets
for each acquired entity to determine whether an impairment may exist. WCI
considers relevant cash flow and profitability information, including estimated
future operating results, trends and other available information, in assessing
whether the carrying value of intangible assets can be recovered. 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
 
     The domestic operating results of the General Partners are included in the
consolidated U.S. federal, state and local income tax returns of WCI or
subsidiaries of Time Warner. The foreign operations of WCI are subject to
taxation by foreign jurisdictions. Both domestic and foreign income tax
provisions are reflected in the consolidated statements of operations of the
General Partners on a stand-alone basis consistent with the liability method
prescribed by FASB Statement No. 109, 'Accounting for Income Taxes.' Under the
liability method, deferred income taxes reflect tax carryforwards and the net
tax effects of temporary differences between the carrying amount of assets and
liabilities for financial statement and income tax purposes, as determined under
 
                                      F-63
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 tax
carryforwards acquired in acquisitions is accounted for as a reduction of
goodwill.
 
     Under a tax-sharing agreement between the General Partners and Time Warner,
each General Partner pays to, or receives from, Time Warner amounts equal to the
total domestic income taxes, or tax benefits, provided by, or attributable to,
the partner. Accordingly, no domestic income tax balances are reflected in the
consolidated balance sheets of the General Partners.
 
     As a Delaware limited partnership, TWE is not subject to U.S. federal and
state income taxation. However, certain of TWE's operations are conducted by
subsidiary corporations that are subject to domestic or foreign taxation. Income
tax expense for each of the General Partners includes all income taxes related
to its allocable share of partnership income and its equity in the income tax
expense of corporate subsidiaries of TWE.
 
COMPREHENSIVE INCOME
 
     Effective January 1, 1997, the General Partners adopted FASB Statement No.
130, 'Reporting Comprehensive Income' ('FAS 130'). The new rules establish
standards for the reporting of comprehensive income and its components in
financial statements. Comprehensive income consists of net income and other
gains and losses affecting shareholders' equity that, under generally accepted
accounting principles, are excluded from net income. For the General Partners,
such items consist primarily of unrealized gains and losses on marketable equity
investments and foreign currency translation gains and losses. The adoption of
FAS 130 did not have a material effect on the General Partners' primary
financial statements, but did affect the presentation of the accompanying
consolidated statements of shareholders' equity.
 
SEGMENT INFORMATION
 
     On December 31, 1997, the General Partners adopted FASB Statement No. 131,
'Disclosures about Segments of an Enterprise and Related Information' ('FAS
131'). The new rules establish revised standards for public companies relating
to the reporting of financial and descriptive information about their operating
segments in financial statements. The adoption of FAS 131 did not have a
material effect on the General Partners' primary financial statements, but did
affect the disclosure of geographical information contained elsewhere herein
(Note 11).
 
2. TBS UK MERGER
 
     In June 1997, WCI acquired TBS's interests in Turner Broadcasting System
Europe Limited ('TBSEL') and Turner Entertainment Networks International Limited
('TENIL'), wholly owned subsidiaries of TBS, which conduct certain of TBS's
cable television programming operations in the United Kingdom. To acquire TBSEL
and TENIL, WCI issued 90 thousand shares of a new series of preferred stock.
Each share of preferred stock is entitled to a liquidation preference of $1,000
per share and entitles the holder thereof to receive an $80 annual dividend per
share, payable in cash on a quarterly basis. The TBS UK Merger was accounted for
as a merger of entities under common control effective as of January 1, 1997,
similar to the pooling-of-interest method of accounting for business
combinations. The operating results of the companies acquired are not material
to WCI's results of operations.
 
                                      F-64
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. TWE
 
     The General Partners' investment in and amounts due to and from TWE at
December 31, 1997 and 1996 consists of the following:
 


DECEMBER 31, 1997                                                                                  WCI       ATC
- -----------------------------------------------------------------------------------------------   ------    ------
                                                                                                     (MILLIONS)
 
                                                                                                      
Investment in TWE..............................................................................   $2,418    $1,691
Stock option related distributions due from TWE................................................      247       170
Other net liabilities due to TWE, principally related to home video distribution...............     (242)       --
                                                                                                  ------    ------
Total..........................................................................................   $2,423    $1,861
                                                                                                  ------    ------
                                                                                                  ------    ------

 


DECEMBER 31, 1996                                                                                  WCI       ATC
- -----------------------------------------------------------------------------------------------   ------    ------
                                                                                                     (MILLIONS)
 
                                                                                                      
Investment in TWE..............................................................................   $2,786    $1,942
Stock option related distributions due from TWE................................................       55        38
Other net liabilities due to TWE, principally related to home video distribution...............     (288)       --
                                                                                                  ------    ------
Total..........................................................................................   $2,553    $1,980
                                                                                                  ------    ------
                                                                                                  ------    ------

 
PARTNERSHIP STRUCTURE
 
     TWE was capitalized on June 30, 1992 to own and operate substantially all
of the Filmed Entertainment-Warner Bros., Cable Networks-HBO and Cable
businesses previously owned by the General Partners. The General Partners in the
aggregate hold, directly or indirectly, 63.27% of the pro rata priority capital
('Series A Capital') and residual equity capital ('Residual Capital') of TWE and
100% of the senior priority capital ('Senior Capital') and junior priority
capital ('Series B Capital') of TWE. TW Companies acquired the 11.22% of the
Series A Capital and Residual Capital limited partnership interests previously
held by subsidiaries of each of ITOCHU Corporation and Toshiba Corporation in
1995. The remaining 25.51% limited partnership interests in the Series A Capital
and Residual Capital of TWE are held by a subsidiary of U S WEST, Inc. ('U S
WEST'). The General Partners did not recognize a gain when TWE was capitalized.
TWE recorded the assets contributed by the General Partners at the General
Partners' historical cost. The excess of the General Partners' interest in the
net assets of TWE over the net book value of their investment in TWE is being
amortized to income over a twenty-year period.
 
PARTNERSHIP CAPITAL AND ALLOCATION OF INCOME
 
     Each partner's interest in TWE generally consists of the undistributed
priority capital and residual equity amounts that were initially assigned to
that partner or its predecessor based on the estimated fair value of the net
assets each contributed to TWE ('Undistributed Contributed Capital'), plus, with
respect to the priority capital interests only, any undistributed priority
capital return. The priority capital return consists of net partnership income
allocated to date in accordance with the provisions of the TWE partnership
agreement and the right to be allocated additional partnership income which,
together, provides for the various priority capital rates of return as specified
in the table below. The sum of Undistributed Contributed Capital and the
undistributed priority capital return is referred to herein as 'Cumulative
Priority Capital.' Cumulative Priority Capital is not necessarily indicative of
the fair value of the underlying priority capital interests principally due to
above-market rates of return on certain priority capital interests as compared
to securities of comparable credit risk and maturity, such as the 13.25% rate of
return on the Series B Capital interest owned by the 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-65
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of the priority of Undistributed Contributed Capital, the General
Partner's ownership of Undistributed Contributed Capital and Cumulative Priority
Capital at December 31, 1997 and priority capital rates of return thereon is as
set forth below:
 


                                                                                           PRIORITY        % OWNED
                                                      UNDISTRIBUTED       CUMULATIVE        CAPITAL          BY
                                                       CONTRIBUTED         PRIORITY        RATES OF        GENERAL
   PRIORITY OF UNDISTRIBUTED CONTRIBUTED CAPITAL       CAPITAL(A)          CAPITAL         RETURN(B)       PARTNERS
- ---------------------------------------------------   -------------       ----------       ---------       -------
                                                                (BILLIONS)
 
                                                                                               
Senior Capital.....................................       $ 0.9             $  1.1            8.00%        100.00%
Series A Capital...................................         5.6               11.3           13.00%         63.27%
Series B Capital...................................         2.9(d)             6.0           13.25%        100.00%
Residual Capital...................................         3.3(d)             3.3(c)           --(c)       63.27%

 
- ------------
 
(a) Excludes partnership income or loss allocated thereto.
 
(b) To the extent income allocations are concurrently distributed, the priority
    capital rates of return on the Series A Capital and Series B Capital are 11%
    and 11.25%, respectively.
 
(c) Residual Capital is not entitled to stated priority rates of return and, as
    such, its Cumulative Priority Capital is equal to its Undistributed
    Contributed Capital. However, in the case of certain events such as the
    liquidation or dissolution of TWE, Residual Capital is entitled to any
    excess of the then fair value of the net assets of TWE over the aggregate
    amount of Cumulative Priority Capital and special tax allocations.
 
(d) The Undistributed Contributed Capital relating to the Series B Capital has
    priority over the priority returns on the Series A Capital. The
    Undistributed Contributed Capital relating to the Residual Capital has
    priority over the priority returns on the Series B Capital and the Series A
    Capital.
 
     Because Undistributed Contributed Capital is generally based on the fair
value of the net assets that each partner initially contributed to the
partnership, the aggregate of such amounts is significantly higher than TWE's
partners' capital as reflected in the consolidated financial statements, which
is based on the historical cost of the contributed net assets. For purposes of
allocating partnership income or loss to the partners, partnership income or
loss is based on the fair value of the net assets contributed to the partnership
and results in significantly less partnership income, or results in partnership
losses, in contrast to the net income reported by TWE for financial statement
purposes, which is also based on the historical cost of contributed net assets.
 
     Under the TWE partnership agreement, partnership income, to the extent
earned, is first allocated to the partners' capital accounts so that the
economic burden of the income tax consequences of partnership operations is
borne as though the partnership were taxed as a corporation ('special tax
allocations'). After any special tax allocations, partnership income is
allocated to the Senior Capital, Series A Capital and Series B Capital, in order
of priority, at rates of return ranging from 8% to 13.25% per annum, and finally
to the Residual Capital. Partnership losses generally are allocated first to
eliminate prior allocations of partnership income to, and then to reduce the
Undistributed Contributed Capital of, the Residual Capital, Series B Capital and
Series A Capital, in that order, then to reduce General Partners' Senior
Capital, including partnership income allocated thereto, and finally to reduce
any special tax allocations. To the extent partnership income is insufficient to
satisfy all special allocations in a particular accounting period, the right to
receive additional partnership income necessary to provide for the various
priority capital rates of return is carried forward until satisfied out of
future partnership income, including any partnership income that may result from
any liquidation, sale or dissolution of TWE. TWE reported net income of $614
million, $210 million and $73 million in 1997, 1996 and 1995, respectively, no
portion of which was allocated to the limited partners.
 
     The Series B Capital owned by the General Partners may be increased if
certain operating performance targets are achieved over a ten-year period ending
on December 31, 2001. In addition, U S WEST has an option to obtain up to an
additional 6.33% of Series A Capital and Residual Capital interests, depending
on cable operating performance. The option is exercisable between January 1,
1999 and on or about May 31, 2005 at a
 
                                      F-66
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
maximum exercise price of $1.25 billion to $1.8 billion, depending on the year
of exercise. Either U S WEST or TWE may elect that the exercise price be paid
with partnership interests rather than cash.
 
SUMMARIZED FINANCIAL INFORMATION OF TWE
 
     Set forth below is summarized financial information of TWE, which reflects
the formation by TWE of the TWE-Advance/Newhouse Partnership effective as of
April 1, 1995, the deconsolidation of Six Flags Entertainment Corporation ('Six
Flags') effective as of June 23, 1995 and the consolidation of Paragon
Communications effective as of July 6, 1995:
 
TIME WARNER ENTERTAINMENT COMPANY, L.P.
 


                                                                                    YEARS ENDED DECEMBER 31,
                                                                                 -------------------------------
                                                                                  1997        1996        1995
                                                                                 -------     -------     -------
                                                                                           (MILLIONS)
 
                                                                                                
OPERATING STATEMENT INFORMATION
Revenues......................................................................   $11,318     $10,852     $ 9,517
Depreciation and amortization.................................................    (1,370)     (1,235)     (1,039)
Business segment operating income(1)..........................................     1,444       1,078         960
Interest and other, net(2)....................................................      (345)       (522)       (580)
Minority interest.............................................................      (305)       (207)       (133)
Income before income taxes....................................................       722         280         183
Income before extraordinary item..............................................       637         210          97
Net income....................................................................       614         210          73

 
- ------------
(1) Including net gains of approximately $200 million recognized in 1997 related
    to the sale or exchange of certain cable television systems.
(2) Includes a gain of approximately $250 million recognized in 1997 related to
    the sale of an interest in E! Entertainment Television, Inc.
 


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                  -------------------------------
                                                                                   1997        1996        1995
                                                                                  -------     -------     -------
                                                                                            (MILLIONS)
 
                                                                                                 
CASH FLOW INFORMATION
Cash provided by operations....................................................   $ 1,834     $ 1,912     $ 1,519
Capital expenditures...........................................................    (1,565)     (1,719)     (1,535)
Investments and acquisitions...................................................      (172)       (146)       (203)
Investment proceeds............................................................       485         612       1,050
Borrowings.....................................................................     3,400         215       2,484
Debt repayments................................................................    (3,085)       (716)     (3,596)
Issuance of preferred stock of subsidiary......................................       243          --          --
Collections on note receivable from U S WEST...................................        --         169         602
Capital distributions..........................................................      (934)       (228)     (1,088)
Other financing activities, net................................................      (100)        (92)        (95)
Increase (decrease) in cash and equivalents....................................       106           7        (862)

 
                                      F-67
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 


                                                                                                 DECEMBER 31,
                                                                                              -------------------
                                                                                               1997        1996
                                                                                              -------     -------
                                                                                                  (MILLIONS)
 
                                                                                                    
BALANCE SHEET INFORMATION
Cash and equivalents.......................................................................   $   322     $   216
Total current assets.......................................................................     3,622       3,146
Total assets...............................................................................    20,731      19,973
Total current liabilities..................................................................     3,974       4,075
Long-term debt.............................................................................     5,990       5,676
Minority interests.........................................................................     1,210       1,020
Preferred stock of subsidiary..............................................................       233          --
General Partners' Senior Capital...........................................................     1,118       1,543
Partners' capital..........................................................................     6,333       6,574

 
CAPITAL DISTRIBUTIONS
 
     The assets and cash flows of TWE are restricted by the TWE partnership and
credit agreements and are unavailable for use by the partners except through the
payment of certain fees, reimbursements, cash distributions and loans, which are
subject to limitations.
 
     In July 1997, the General Partners received a $535 million distribution
from TWE relating to their Senior Capital interests, thereby increasing the
cumulative cash distributions received from TWE on such interests to $901
million. The General Partners' remaining $1.1 billion Senior Capital interests
and any undistributed partnership income allocated thereto (based on an 8%
annual rate of return) are required to be distributed in two annual installments
on July 1, 1998 and 1999.
 
     At December 31, 1997 and 1996, the General Partners had recorded $417 and
$93 million, respectively, of stock option related distributions due from TWE,
based on closing prices of Time Warner common stock of $62.00 and $37.50,
respectively. The General Partners are paid when the options are exercised. The
General Partners also receive tax-related distributions from TWE on a current
basis. During 1997, the General Partners received distributions from TWE in the
amount of $934 million, consisting of $535 million of Senior Capital
distributions (representing the return of $455 million of contributed capital
and the distribution of $80 million of priority capital return), $324 million of
tax-related distributions and $75 million of stock option related distributions.
During 1996, the General Partners received distributions from TWE in the amount
of $228 million, consisting of $215 million of tax-related distributions and $13
million of stock option related distributions. During 1995, the General Partners
received distributions from TWE of $1.088 billion, consisting of $366 million of
Senior Capital distributions (representing a portion of the priority capital
return), $680 million of tax-related distributions, $25 million of Time Warner
Service Partnership distributions and $17 million of stock option related
distributions. Of such aggregate distributions in 1997, 1996 and 1995, WCI
received $554 million, $135 million and $645 million, respectively, and ATC
received $380 million, $93 million and $443 million, respectively. In addition
to the tax, stock option and General Partners' senior priority 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.
 
TWE-A/N PARTNERSHIP
 
     On April 1, 1995, TWE formed a cable television joint venture with the
Advance/Newhouse Partnership ('Advance/Newhouse') to which Advance/Newhouse and
TWE contributed cable television systems (or interests therein) serving
approximately 4.5 million subscribers, as well as certain foreign cable
investments and programming investments. Upon formation of the
TWE-Advance/Newhouse Partnership ('TWE-A/N'), TWE,
 
                                      F-68
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
which is the managing partner, owned a 66.7% common partnership interest in
TWE-A/N and Advance/Newhouse owned a 33.3% common partnership interest. TWE
consolidates the partnership and the common partnership interest owned by
Advance/Newhouse is reflected in TWE's consolidated financial statements as
minority interest.
 
     In early 1998, Time Warner (through a wholly owned subsidiary) contributed
cable television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, and completed certain
related transactions (collectively, the 'TWE-A/N Transfers'). The cable
television systems transferred to TWE-A/N were formerly owned by TWI Cable Inc.
('TWI Cable'), a wholly owned subsidiary of Time Warner, and Paragon
Communications, a partnership formerly owning cable television systems serving
approximately 1 million subscribers that was previously wholly owned by
subsidiaries of Time Warner, with 50% beneficially owned in the aggregate by TWE
and TWE-A/N. The debt assumed by TWE-A/N has not been guaranteed by the General
Partners, but has been guaranteed by TWI Cable and certain of its subsidiaries.
 
     In connection with the TWE-A/N Transfers, Advance/Newhouse made a capital
contribution to TWE-A/N in order to maintain its 33.3% common partnership
interest therein. Accordingly, TWE-A/N is now owned 65.2% by TWE, 33.3% by
Advance/Newhouse and 1.5% indirectly by Time Warner. The TWE-A/N Transfers will
be accounted for effective as of January 1, 1998. For further reference, see
Note 2 to the accompanying TWE consolidated financial statements.
 
SIX FLAGS
 
     In June 1995, TWE sold an initial 51% interest in Six Flags to an
investment group led by Boston Ventures for $204 million and received $640
million in additional proceeds from Six Flags, representing payment of certain
intercompany indebtedness and licensing fees. As a result of the transaction,
Six Flags was deconsolidated and TWE's remaining 49% interest in Six Flags has
been accounted for under the equity method of accounting.
 
     In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags to Premier Parks Inc. ('Premier'), a regional theme park
operator, for approximately $375 million of cash and $100 million convertible
preferred stock. TWE expects to use the net proceeds from this transaction,
after taxes and transaction costs, to reduce debt. The transaction is expected
to close in the second quarter of 1998, subject to customary closing conditions,
including the successful completion of certain equity offerings by Premier. For
further reference, see Note 2 to the accompanying TWE consolidated financial
statements.
 
BANK REFINANCINGS
 
     In November 1997, TWE and TWE-A/N, together with Time Warner Inc. and
certain of its consolidated subsidiaries, entered into a new, five-year
revolving credit facility (the '1997 Credit Agreement') and terminated their
previously existing bank credit facility (the 'Old Credit Agreement'). This
enabled TWE to reduce its aggregate borrowing availability from $8.3 billion to
$7.5 billion, lower interest rates and refinance approximately $2.1 billion of
its outstanding borrowings under the Old Credit Agreement. In connection with
this refinancing and certain other bank refinancings by TWE in 1995, each of WCI
and ATC recognized an extraordinary loss in the amount of $8 million and $6
million, respectively, in 1997 and $9 million and $6 million, respectively, in
1995, representing its pro rata share of the extraordinary losses recorded by
TWE in such years.
 
                                      F-69
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
4. OTHER INVESTMENTS
 
     WCI's other investments consist of:
 


                                                                                                  DECEMBER 31,
                                                                                                -----------------
                                                                                                 1997       1996
                                                                                                ------     ------
                                                                                                   (MILLIONS)
 
                                                                                                     
Equity method investments....................................................................   $1,246     $1,252
Market value method investments..............................................................       --        410
Cost method investments......................................................................       13         26
                                                                                                ------     ------
Total........................................................................................   $1,259     $1,688
                                                                                                ------     ------
                                                                                                ------     ------

 
     Market value method investments at December 31, 1996 included 18.1 million
shares of common stock of Hasbro, Inc. ('Hasbro'). Such shares were sold to TW
Companies in December 1997 in exchange for a $610 million, 6.7% note receivable
due December 2002 (the 'TW Companies Note Receivable'). TW Companies, in turn,
simultaneously used these shares to redeem certain mandatorily redeemable
preferred securities of a subsidiary held by third party investors. In
connection therewith, WCI recognized a $437 million pretax gain in 1997, which
has been classified in interest and other, net, in the accompanying consolidated
statement of operations. The TW Companies Note Receivable has been classified in
shareholders' equity under the caption 'Due from TW Companies, net.'
 
     In addition to TWE and its equity investees, companies accounted for using
the equity method include: The Columbia House Company partnerships (10% to 50%
owned by WCI; 50% owned in total by Time Warner), other music joint ventures
(generally 50% owned), Cinamerica Theatres, L.P. (sold in 1997, but previously
50% owned) and, in 1995 only, TBS (4.5% owned by WCI and 6.1% owned by ATC;
acquired in full by Time Warner in 1996). A summary of combined financial
information as reported by the equity investees of WCI is set forth below:
 


                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1997       1996       1995
                                                                                     ------     ------     ------
                                                                                              (MILLIONS)
 
                                                                                                  
Revenues..........................................................................   $1,336     $1,773     $5,123
Depreciation and amortization.....................................................      (13)       (29)      (219)
Operating income..................................................................       80        173        547
Net income (loss).................................................................      (36)        61        188
Current assets....................................................................      792      1,002      2,272
Total assets......................................................................    1,132      1,616      5,851
Current liabilities...............................................................      418        517      1,318
Long-term debt....................................................................    1,303      1,360      3,826
Total liabilities.................................................................    1,791      1,999      5,886
Total shareholders' deficit or partners' capital..................................     (659)      (383)       (35)

 
     WCI and ATC own 28.9 thousand and 14.8 thousand shares, respectively, of TW
Companies common stock. Such investments are accounted for at historical cost,
less the portion (collectively estimated at 85%) attributable to TW Companies'
ownership of the General Partners, which is deducted from shareholders' equity
under the caption 'Reciprocal interest in TW Companies stock.' The TW Companies
common stock owned by the General Partners may only be sold pursuant to an
effective registration statement or in a transaction exempt from the
registration requirements of the Securities Act of 1933. In addition to TW
Companies common stock, ATC also owns certain TW Companies debt securities at a
cost of $3 million at December 31, 1997, which
 
                                      F-70
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
approximates market. Such debt securities are held by ATC for the purpose of
satisfying its obligations under its stock options and restricted stock awards
subsequent to the acquisition of the ATC minority interest.
 
5. BORROWING ARRANGEMENTS WITH TW COMPANIES
 
     In 1993, WCI declared and paid a special dividend to TW Companies in the
form of a $3 billion subordinated reset note due 2008 and entered into a $1
billion revolving credit agreement with TW Companies under which $500 million
was borrowed and used to prepay a corresponding portion of the subordinated
reset note. On April 1, 1995, such debt obligations to TW Companies were
satisfied as part of a recapitalization of WCI, in which TW Companies made a
capital contribution to WCI, consisting of a $2.5 billion subordinated reset
note receivable due from WCI and cash of $142 million. WCI used the cash
proceeds therefrom to repay its obligations to TW Companies under their
revolving credit agreement (collectively, the 'WCI Recapitalization').
 
     In addition to WCI, ATC has a revolving credit agreement with TW Companies,
which provides for borrowings from TW Companies of up to $1 billion. The credit
agreement expires on December 31, 2008. Interest on any borrowings under the
credit agreement is payable quarterly at the prime rate. ATC's obligation to TW
Companies under the credit agreement is subordinate to the General Partner
Guarantees. In July 1995, the other General Partners also repaid their
obligations to TW Companies under their revolving credit agreements using funds
provided by tax-related distributions from TWE.
 
     Interest expense for WCI was $23 million in 1997, $34 million in 1996 and
$88 million in 1995. Interest expense for ATC was not material in each of the
three years ended December 31, 1997.
 
6. GENERAL PARTNER GUARANTEES
 
     Each General Partner has guaranteed a pro rata portion of approximately
$5.8 billion of TWE's debt and accrued interest at December 31, 1997, based on
the relative fair value of the net assets each General Partner (or its
predecessor) contributed to TWE. Such indebtedness is recourse to each General
Partner only to the extent of its guarantee. The indenture pursuant to which
TWE's notes and debentures have been issued (the 'Indenture') requires the
consent of a majority of such holders to effect a termination; however, the
Indenture permits the General Partners to engage in mergers and consolidations.
There are no restrictions on the ability of the General Partner guarantors to
transfer assets, other than TWE assets, to parties that are not guarantors.
 
     The portion of TWE debt and accrued interest at December 31, 1997 that was
guaranteed by each General Partner, individually and on a consolidated basis for
each General Partner and its subsidiaries, is set forth below:
 


                                                                                                   TOTAL GUARANTEED BY
                                                                                                  EACH GENERAL PARTNER
                                                                                             -------------------------------
GENERAL PARTNER                                                                                       %               AMOUNT
- ------------------------------------------------------------------------------------------       -----------          ------
                                                                                                  (DOLLARS IN MILLIONS)
 
                                                                                                                
WCI.......................................................................................           59.27            $3,436
ATC.......................................................................................           40.73             2,361
                                                                                                   -------            ------
Total.....................................................................................          100.00            $5,797
                                                                                                   -------            ------
                                                                                                   -------            ------

 
                                      F-71
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
7. INCOME TAXES
 
     Domestic and foreign pretax income (loss) are as follows:
 


                                                                         YEARS ENDED DECEMBER 31,
                                                             ------------------------------------------------
                                                                  1997              1996             1995
                                                             --------------     ------------     ------------
                                                              WCI      ATC      WCI     ATC      WCI     ATC
                                                             ------    ----     ----    ----     ----    ----
                                                                                (MILLIONS)
 
                                                                                       
Domestic..................................................   $  896    $277     $246    $136     $220    $216
Foreign...................................................      130      47      199       2      207      (3)
                                                             ------    ----     ----    ----     ----    ----
Total.....................................................   $1,026    $324     $445    $138     $427    $213
                                                             ------    ----     ----    ----     ----    ----
                                                             ------    ----     ----    ----     ----    ----

 
     Income taxes (benefits) are as set forth below:
 


                                                                          YEARS ENDED DECEMBER 31,
                                                               ----------------------------------------------
                                                                   1997             1996             1995
                                                               ------------     ------------     ------------
                                                               WCI     ATC      WCI     ATC      WCI     ATC
                                                               ----    ----     ----    ----     ----    ----
                                                                                 (MILLIONS)
 
                                                                                       
Federal.....................................................   $272    $ 82     $ 39    $35      $ 14    $ 62
State and local.............................................     95      26       54     14        47      22
Foreign -- current(a).......................................    144      28      187     35       177      30
        -- deferred.........................................     (7)      9      (20)    (8)       20      (2)
                                                               ----    ----     ----    ----     ----    ----
Total.......................................................   $504    $145     $260    $76      $258    $112
                                                               ----    ----     ----    ----     ----    ----
                                                               ----    ----     ----    ----     ----    ----

 
- ------------
 
(a) Includes foreign withholding taxes set forth elsewhere herein.
 
     Foreign withholding taxes included in the foreign tax provision are as
follows:
 


                                                                     WCI     ATC
                                                                     ---     ---
                                                                     (MILLIONS)
 
                                                                       
1997..............................................................   $64     $24
1996..............................................................    68      22
1995..............................................................    78      24

 
     No U.S. income or foreign withholding taxes have been recorded by WCI on
the permanently reinvested earnings of foreign subsidiaries aggregating
approximately $729 million at December 31, 1997. If such earnings were to be
repatriated, it is expected that any additional U.S. income tax would be offset
by the utilization of the accompanying foreign tax credits.
 
     The differences between the income tax provision (benefit) expected for WCI
at the U.S. federal statutory income tax rate and the total income taxes
provided are as follows:
 


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                        -----------------------
                                                                                         1997     1996     1995
                                                                                         ----     ----     ----
                                                                                               (MILLIONS)
 
                                                                                                  
Taxes on income at U.S. federal statutory rate........................................   $359     $156     $149
Nondeductible expenses................................................................     71       74       72
Foreign income taxed at different rates, net of U.S. foreign tax credits..............     16       (9)      12
State and local taxes, net............................................................     62       35       31
Other.................................................................................     (4)       4       (6)
                                                                                         ----     ----     ----
Total.................................................................................   $504     $260     $258
                                                                                         ----     ----     ----
                                                                                         ----     ----     ----

 
                                      F-72
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The relationship between income taxes and income before income taxes for
the other General Partners is principally affected by the amortization of
goodwill and certain other financial statement expenses that are not deductible
for income tax purposes.
 
     U.S. federal tax carryforwards of WCI included in the consolidated tax
return of Time Warner at December 31, 1997 consisted of $35 million of net
operating losses and $36 million of investment tax credits. The utilization of
certain carryforwards is subject to limitations under U.S. federal income tax
laws. The U.S. federal tax carryforwards expire in varying amounts as follows
for income tax reporting purposes:
 


                                                                                                 CARRYFORWARDS
                                                                                            ------------------------
                                                                                               NET        INVESTMENT
                                                                                            OPERATING        TAX
                                                                                             LOSSES        CREDITS
                                                                                            ---------     ----------
                                                                                                   (MILLIONS)
 
                                                                                                    
1999.....................................................................................      $ 3           $ --
2000.....................................................................................        1             --
Thereafter up to 2010....................................................................       31             36
                                                                                               ---            ---
                                                                                               $35           $ 36
                                                                                               ---            ---
                                                                                               ---            ---

 
8. STOCK OPTION PLANS
 
     Time Warner has various stock option plans under which Time Warner may
grant options to purchase Time Warner common stock to employees of Time Warner
and WCI. Such options have been granted to employees of WCI at, or in excess of,
fair market value at the date of grant. Accordingly, in accordance with
Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to
Employees,' and related interpretations, no compensation cost has been
recognized by Time Warner, nor charged to WCI, related to such stock option
plans. Generally, the options become exercisable over a three-year vesting
period and expire ten years from the date of grant. Had compensation cost for
Time Warner's stock option plans been determined based on the fair value at the
grant dates for all awards made subsequent to 1994 consistent with the method
set forth under FASB Statement No. 123, 'Accounting for Stock-Based
Compensation' ('FAS 123'), WCI's allocable share of compensation cost would have
been changed to the pro forma amounts indicated below:
 


                                                                                       YEARS ENDED DECEMBER 31,
                                                                                       ------------------------
                                                                                       1997      1996      1995
                                                                                       ----      ----      ----
                                                                                              (MILLIONS)
 
                                                                                                  
Net income:
     As reported....................................................................   $514      $185      $160
                                                                                       ----      ----      ----
                                                                                       ----      ----      ----
     Pro forma......................................................................   $506      $179      $158
                                                                                       ----      ----      ----
                                                                                       ----      ----      ----

 
     FAS 123 is applicable only to stock options granted subsequent to December
31, 1994. Accordingly, since WCI's compensation expense associated with such
grants would generally be recognized over a three-year vesting period, the
initial impact of applying FAS 123 on pro forma net income for 1996 and 1995 is
not comparable to the impact on pro forma net income for 1997, when the pro
forma effect of the three-year vesting period has been fully reflected.
 
     For purposes of applying FAS 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants to WCI employees in
1997, 1996 and 1995: dividend yields of 1% in all periods; expected volatility
of 21.6%, 21.7% and 22.3%, respectively; risk-free interest rates of 6.1%, 6.4%
and 7.4%, respectively; and expected lives of 5 years in all periods. The
weighted average fair value of an option granted to WCI employees during the
 
                                      F-73
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
year was $14.36 ($8.47, net of taxes), $10.97 ($6.48, net of taxes) and $12.25
($7.23, net of taxes) for the years ended December 31, 1997, 1996 and 1995,
respectively.
 
     A summary of stock option activity with respect to employees of WCI is as
follows:
 


                                                                                                          WEIGHTED-
                                                                                             THOUSANDS     AVERAGE
                                                                                                OF        EXERCISE
                                                                                              SHARES        PRICE
                                                                                             ---------    ---------
 
                                                                                                    
Balance at January 1, 1995................................................................     12,518      $ 28.44
Granted...................................................................................      1,147        38.55
Exercised.................................................................................     (1,082)       30.16
Cancelled(a)..............................................................................      1,552        30.79
                                                                                             ---------
Balance at December 31, 1995..............................................................     14,135      $ 29.21
 
Granted...................................................................................        987        37.65
Exercised.................................................................................       (403)       25.58
Cancelled(a)..............................................................................     (1,036)       25.47
                                                                                             ---------
Balance at December 31, 1996..............................................................     13,683      $ 30.21
 
Granted...................................................................................        768        50.29
Exercised.................................................................................     (1,864)       27.85
Cancelled(a)..............................................................................        (17)       27.97
                                                                                             ---------
Balance at December 31, 1997..............................................................     12,570      $ 31.45
                                                                                             ---------
                                                                                             ---------

 
- ------------
 
(a) Includes all options cancelled and forfeited during the year, as well as
    options related to employees who have been transferred out of and into WCI
    to and from other Time Warner divisions.
 


                                                                                               DECEMBER 31,
                                                                                        --------------------------
                                                                                         1997      1996      1995
                                                                                        ------    ------    ------
                                                                                               (THOUSANDS)
 
                                                                                                   
Exercisable..........................................................................   10,960    11,941    12,465

 
     The following table summarizes information about stock options outstanding
with respect to employees of WCI at December 31, 1997:
 


                                                         OPTIONS OUTSTANDING
                                              -----------------------------------------        OPTIONS EXERCISABLE
                                                               WEIGHTED-                    -------------------------
                                                                AVERAGE       WEIGHTED-                     WEIGHTED-
                                                NUMBER         REMAINING       AVERAGE        NUMBER         AVERAGE
                                              OUTSTANDING     CONTRACTUAL     EXERCISE      EXERCISABLE     EXERCISE
         RANGE OF EXERCISE PRICES             AT 12/31/97        LIFE           PRICE       AT 12/31/97       PRICE
- ------------------------------------------   -------------    -----------     ---------     -----------     ---------
                                              (THOUSANDS)                                   (THOUSANDS)
 
                                                                                             
Under $17.................................            1        2.1 years       $16.61              1        $ 16.61
$17.00 to $25.00..........................        3,600        2.3 years       $21.72          3,600        $ 21.72
$25.01 to $35.00..........................        3,108        3.3 years       $29.17          3,108        $ 29.17
$35.01 to $40.00..........................        4,680        4.1 years       $36.52          4,064        $ 36.49
$40.01 to $50.00..........................        1,013        8.4 years       $45.15            187        $ 40.96
$50.01 to $60.41..........................          168        9.1 years       $58.68             --        $    --
                                              -----------                                   -----------
Total.....................................       12,570        3.8 years       $31.45         10,960        $ 29.63
                                              -----------                                   -----------
                                              -----------                                   -----------

 
                                      F-74
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
9. BENEFIT PLANS
 
     WCI and its subsidiaries have defined benefit pension plans covering
substantially all domestic employees. Pension benefits are based on formulas
that reflect the employees' years of service and compensation levels during
their employment period. Qualifying plans are funded in accordance with
government pension and income tax regulations. Plan assets are invested in
equity and fixed income securities. Time Warners' common stock represents
approximately 7% and 5% of plan assets at December 31, 1997 and 1996,
respectively.
 
     Pension expense included the following:
 


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                       --------------------------
                                                                                       1997       1996       1995
                                                                                       ----       ----       ----
                                                                                               (MILLIONS)
 
                                                                                                    
Service cost........................................................................   $ 11       $ 12       $  8
Interest cost.......................................................................     13         12          9
Actual return on plan assets........................................................    (31)       (17)       (26)
Net amortization and deferral.......................................................     21          8         16
                                                                                       ----       ----       ----
Total...............................................................................   $ 14       $ 15       $  7
                                                                                       ----       ----       ----
                                                                                       ----       ----       ----

 
     The status of WCI's funded pension plans is as follows:
 


                                                                                                  DECEMBER 31,
                                                                                                 ---------------
                                                                                                 1997       1996
                                                                                                 ----       ----
                                                                                                   (MILLIONS)
 
                                                                                                      
Accumulated benefit obligation (94% vested)...................................................   $115       $ 96
Effect of future salary increases.............................................................     59         49
                                                                                                 ----       ----
Projected benefit obligation..................................................................    174        145
Plan assets at fair value.....................................................................    147        124
                                                                                                 ----       ----
Projected benefit obligation in excess of plan assets.........................................    (27)       (21)
Unamortized actuarial gains...................................................................      1         --
Unamortized plan changes......................................................................      4          4
Other.........................................................................................     (1)        (1)
                                                                                                 ----       ----
Accrued pension expense.......................................................................   $(23)      $(18)
                                                                                                 ----       ----
                                                                                                 ----       ----

 
     The following assumptions were used in accounting for pension plans:
 


                                                                                            1997     1996     1995
                                                                                            ----     ----     ----
 
                                                                                                     
Weighted average discount rate...........................................................   7.25%    7.75%    7.25%
Return on plan assets....................................................................      9%       9%       9%
Rate of increase in compensation levels..................................................      6%       6%       6%

 
     Employees of the operations of WCI in foreign countries participate to
varying degrees in local pension plans, which in the aggregate are not
significant.
 
     Certain domestic employees of WCI also participate in Time Warner's savings
plans and profit sharing plans, as to which the expense amounted to $13 million
in 1997, $14 million in 1996 and $13 million in 1995. Contributions to the
savings plans are based upon a percentage of the employees' elected
contributions. Contributions to the profit sharing plans are generally
determined by management.
 
                                      F-75
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
10. FINANCIAL INSTRUMENTS
 
     The carrying value of WCI's financial instruments approximates fair value,
except for certain differences related to cost method investments and other
financial instruments which are not significant.
 
     Time Warner uses foreign exchange contracts primarily to hedge the risk
that unremitted or future royalties owed to WCI domestic companies for the sale
or anticipated sale of U.S. copyrighted products abroad may be adversely
affected by changes in foreign currency exchange rates. As part of its overall
strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, Time Warner hedges a portion of its, TWE's and WCI's
combined foreign currency exposures anticipated over the ensuing twelve month
period. At December 31, 1997, Time Warner had effectively hedged approximately
half of WCI's total estimated foreign currency exposures that principally relate
to anticipated cash flows to be remitted to the U.S. over the ensuing twelve
month period, using foreign exchange contracts that generally have maturities of
three months or less, which are generally rolled over to provide continuing
coverage throughout the year. Time Warner reimburses or is reimbursed by WCI for
contract gains and losses related to WCI's foreign currency exposure. Time
Warner often closes foreign exchange sale contracts by purchasing an offsetting
purchase contract. At December 31, 1997, Time Warner had contracts for the sale
of $507 million and the purchase of $139 million of foreign currencies at fixed
rates. Of Time Warner's $368 million net sale contract position, $380 million of
foreign exchange sale contracts and $139 million of foreign exchange purchase
contracts related to WCI's foreign currency exposure, primarily English pounds
(28% of net contract position related to WCI), German marks (25%) and French
francs (12%), compared to contracts for the sale of $323 million and the
purchase of $102 million of foreign currencies at December 31, 1996.
 
     Unrealized gains or losses related to foreign exchange contracts are
recorded in income as the market value of such contracts change; accordingly,
the carrying value of foreign exchange contracts approximates market value. The
carrying value of foreign exchange contracts was not material at December 31,
1997 and 1996 and is included in other current liabilities. No cash is required
to be received or paid with respect to such gains and losses until the related
foreign exchange contracts are settled, generally at their respective maturity
dates. For the years ended December 31, 1997, 1996 and 1995, WCI had $26 million
in gains, $14 million in gains and $5 million in losses, respectively, on
foreign exchange contracts, which were or are expected to be offset by
corresponding increases in the dollar value of foreign currency royalty payments
that have been or are anticipated to be received in cash from the sale of U.S.
copyrighted products abroad. Time Warner places foreign currency contracts with
a number of major financial institutions in order to minimize credit risk.
 
11. GEOGRAPHICAL INFORMATION
 
     Information as to WCI's operations in different geographical areas is as
follows:
 


                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1997       1996       1995
                                                                                     ------     ------     ------
                                                                                              (MILLIONS)
 
                                                                                                  
REVENUES(1)
United States.....................................................................   $1,895     $1,960     $2,090
United Kingdom....................................................................      215        239        250
Germany...........................................................................      298        371        413
Japan.............................................................................      265        291        396
France............................................................................      132        192        194
Other international...............................................................      886        896        853
                                                                                     ------     ------     ------
Total.............................................................................   $3,691     $3,949     $4,196
                                                                                     ------     ------     ------
                                                                                     ------     ------     ------

 
- ------------
 
(1) Revenues are attributable to countries based on location of customer.
 
                                      F-76
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Because a substantial portion of WCI's international revenues is derived
from the sale of U.S. copyrighted products abroad, assets located outside the
United States are not material.
 
12. 1995 CLOSURES AND RESTRUCTURINGS
 
     During 1995, WCI recorded $85 million in losses relating to certain
businesses and joint ventures that were restructured or closed. The losses were
primarily related to Warner Music Enterprises, one of WCI's direct marketing
efforts, and the write-off of its related direct mail order assets that were not
recoverable due to the closure of this business.
 
13. COMMITMENTS AND CONTINGENCIES
 
     WCI's total rent expense amounted to $51 million in 1997, $50 million in
1996 and $65 million in 1995. The minimum rental commitments of WCI under
noncancellable long-term operating leases are: 1998 - $46 million; 1999 - $46
million; 2000 - $41 million; 2001 - $39 million; 2002 - $35 million and after
2002 - $406 million.
 
     WCI's minimum commitments and guarantees under certain artist and other
agreements at December 31, 1997 aggregated approximately $423 million for WCI,
which are payable principally over a five-year period. Each General Partner is
jointly and severally liable for all liabilities, commitments and contingencies
of TWE and the Time Warner Service Partnerships, except for approximately $5.8
billion of TWE's indebtedness and accrued interest, which is recourse to each
General Partner only to the extent of its guarantee (Note 6).
 
     Pending legal proceedings are substantially limited to litigation
incidental to the businesses of the General Partners. In the opinion of
management, the ultimate resolution of these matters will not have a material
effect on the consolidated financial statements of the General Partners.
 
14. RELATED PARTY TRANSACTIONS
 
     In the normal course of conducting their businesses, the General Partners
have had various transactions with Time Warner, TW Companies and TWE units,
generally on terms resulting from a negotiation between the affected units that
in management's view results in reasonable allocations. Employees of WCI
participate in various Time Warner medical, stock option and other benefit plans
for which WCI is charged its allocable share of plan expenses, including
administrative costs. ATC does not have a significant number of employees. Time
Warner's corporate group provides various other services to WCI. The
consolidated financial statements of the General Partners include transactions
with Time Warner relating to domestic income taxes or tax benefits (Note 7). The
Music division of WCI provides home videocassette distribution services to
certain TWE operations.
 
     TW Companies has a credit agreement with TWE that allows it to borrow up to
$400 million from TWE through September 15, 2000. Outstanding borrowings from
TWE in the amount of $400 million bear interest at LIBOR plus 1% per annum.
 
     All of the General Partners have incurred indebtedness to TW Companies and
interest expense related to such indebtedness is included in the accompanying
consolidated financial statements. In addition, WCI has had transactions with
The Columbia House Company partnerships and other music joint ventures and with
equity investees of Time Warner, generally with respect to sales of product in
the ordinary course of business.
 
15. ADDITIONAL FINANCIAL INFORMATION
 
     As of December 31, 1997, WCI had an accounts receivable securitization
facility, which provides for the accelerated receipt of up to $450 million of
cash on available receivables. In connection with this securitization
 
                                      F-77
 





                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
facility, WCI 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. This securitization transaction has been accounted for as a sale in
accordance with FASB Statement No. 125, 'Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities.' Accordingly, accounts
receivables sold under this securitization program have been reflected as a
reduction in receivables in the accompanying consolidated balance sheet. Net
proceeds received under this securitization program were $122 million in 1997,
$115 million in 1996 and $35 million in 1995.
 
     Additional financial information with respect to cash flows is as follows:
 


                                                                              YEARS ENDED DECEMBER 31,
                                                                   -----------------------------------------------
                                                                        1997            1996             1995
                                                                   --------------    -----------    --------------
                                                                    WCI      ATC     WCI     ATC     WCI      ATC
                                                                   -----    -----    ----    ---    ------    ----
                                                                                     (MILLIONS)
 
                                                                                            
Cash payments made for interest.................................   $  14    $  --    $ 24    $--    $   78    $ --
Cash payments made for income taxes, net........................     513      111     201     47       194      77
Tax-related distributions received from TWE.....................     192      132     127     88       403     277
Noncash capital contributions (distributions), net..............    (236)    (163)     10      6     2,470     (20)

 
     Noncash financing activities in 1997 included the sale of WCI's interest in
Hasbro in exchange for the TW Companies Note Receivable (Note 4).
 
     Other current liabilities of WCI consist of:
 


                                                                                                    DECEMBER 31,
                                                                                                    -------------
                                                                                                    1997     1996
                                                                                                    ----     ----
                                                                                                     (MILLIONS)
 
                                                                                                       
Accrued expenses.................................................................................   $299     $298
Accrued compensation.............................................................................    118      116
Accrued income taxes.............................................................................      6       55
Deferred revenues................................................................................     41       49
                                                                                                    ----     ----
Total............................................................................................   $464     $518
                                                                                                    ----     ----
                                                                                                    ----     ----

 
                                      F-78






                         REPORT OF INDEPENDENT AUDITORS
 
THE BOARD OF DIRECTORS OF
WARNER COMMUNICATIONS INC.
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
 
We have audited the accompanying consolidated balance sheets of Warner
Communications Inc. ('WCI') and American Television and Communications
Corporation ('ATC'), as of December 31, 1997 and 1996, and the related
consolidated statements of operations, cash flows and shareholders' equity for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 WCI and ATC at
December 31, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
 
                                          ERNST & YOUNG LLP
 
New York, New York
February 10, 1998
 
                                      F-79






                              TWE GENERAL PARTNERS
                         SELECTED FINANCIAL INFORMATION
 
WCI SELECTED HISTORICAL FINANCIAL INFORMATION
 
     The selected historical financial information of WCI set forth below has
been derived from and should be read in conjunction with the consolidated
financial statements and other financial information of WCI presented elsewhere
herein. Capitalized terms are as defined and described in such consolidated
financial statements, or elsewhere herein.
 
     The selected historical financial information for 1997 reflects the merger
of two former General Partners, WCCI and TWOI, into WCI (the 'WCCI Merger' and
the 'TWOI Merger,' respectively). The WCCI Merger had no effect on the
consolidated financial statements of WCI because WCCI was a consolidated
subsidiary of WCI prior to the merger and, as such, WCCI's net assets, operating
results and cash flows were already included in the consolidated financial
statements of WCI. The TWOI Merger was accounted for as a merger of entities
under common control, similar to a pooling-of-interest method of accounting for
business combinations. Accordingly, the selected financial information of WCI
has been restated to reflect the TWOI Merger for all periods presented.
 
     The selected historical financial information for 1995 reflects a
recapitalization of WCI, in which TW Companies made a $2.642 billion capital
contribution to WCI (consisting of a $2.5 billion subordinated reset note
receivable due from WCI and $142 million of cash) and WCI used the cash proceeds
therefrom to repay its obligations to TW Companies under their revolving credit
agreement. The selected historical financial information for 1993 reflects the
payment by WCI of a $3 billion special dividend to TW Companies in the form of a
subordinated reset note due 2008, the prepayment of $500 million of principal of
such note using borrowings under the revolving credit agreement with TW
Companies and the repurchase or redemption by WCI of all of its publicly-held
senior and subordinated debentures using capital contributed by TW Companies.
 


                                                                               YEARS ENDED DECEMBER 31,
                                                                    ----------------------------------------------
SELECTED OPERATING STATEMENT INFORMATION                             1997      1996      1995      1994      1993
                                                                    ------    ------    ------    ------    ------
                                                                                      (MILLIONS)
                                                                                             
Revenues.........................................................   $3,691    $3,949    $4,196    $3,986    $3,334
Depreciation and amortization....................................     (371)     (370)     (356)     (341)     (329)
Business segment operating income................................      146       332       302       306       265
Equity in pretax income of TWE(a)................................      428       166       108       119       161
Interest and other, net(b).......................................      452       (53)       17      (120)       10
Income before extraordinary item.................................      522       185       169        79        98
Net income.......................................................      514       185       160        79        79

 
- ------------
 
(a) WCI's equity in the pretax income of TWE for the year ended December 31,
    1997 includes approximately $265 million relating to its proportionate share
    of approximately $450 million net gains recognized by TWE in connection with
    the sale or exchange of certain assets.
 
(b) Interest and other, net, for the year ended December 31, 1997 includes a
    $437 million pretax gain in connection with the disposal of WCI's interest
    in Hasbro, Inc.
 


                                                                                 DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED BALANCE SHEET INFORMATION                             1997       1996       1995       1994       1993
                                                              -------    -------    -------    -------    -------
                                                                                  (MILLIONS)
                                                                                           
Total assets...............................................   $10,490    $11,399    $11,795    $12,305    $11,878
Long-term debt.............................................        --         --         --      2,670      3,027
Shareholder's equity.......................................     8,521      9,541      9,888      7,756      7,223

 
     Selected historical financial information is not presented for ATC because
ATC has no independent business operations, nor does it have significant amounts
of debt or other liabilities. The financial position and results of operations
of ATC are principally derived from its investments in TWE, TW Companies, TBS
and its revolving credit agreement with TW Companies.
 
                                      F-80
 





                                           TWE GENERAL PARTNERS
                         SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS OF WCI
                               YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                                (MILLIONS)
 


                                                                            ADDITIONS
                                                              BALANCE AT    CHARGED TO                     BALANCE AT
                                                              BEGINNING     COSTS AND                         END
                        DESCRIPTION                           OF PERIOD      EXPENSES     DEDUCTIONS       OF PERIOD
- -----------------------------------------------------------   ----------    ----------    ----------       ----------
                                                                                               
1997:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts.......................      $ 84          $ 63         $  (70)(a)        $ 77
     Reserves for sales returns and allowances.............       278           234           (325)(b)         187
                                                              ----------    ----------    ----------       ----------
          Total............................................      $362          $297         $ (395)           $264
                                                              ----------    ----------    ----------       ----------
                                                              ----------    ----------    ----------       ----------
1996:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts.......................      $102          $ 73         $  (91)(a)        $ 84
     Reserves for sales returns and allowances.............       206           287           (215)(b)         278
                                                              ----------    ----------    ----------       ----------
          Total............................................      $308          $360         $ (306)           $362
                                                              ----------    ----------    ----------       ----------
                                                              ----------    ----------    ----------       ----------
1995:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts.......................      $ 80          $ 87         $  (65)(a)        $102
     Reserves for sales returns and allowances.............       231           264           (289)(b)         206
                                                              ----------    ----------    ----------       ----------
          Total............................................      $311          $351         $ (354)           $308
                                                              ----------    ----------    ----------       ----------
                                                              ----------    ----------    ----------       ----------

 
- ------------
(a) Represents uncollectible receivables charged against the reserve.
(b) Represents returns or allowances applied against the reserve.
 
                                      F-81





                                 EXHIBIT INDEX
 


                                                                                                           SEQUENTIAL
     EXHIBIT                                                                                                  PAGE
     NUMBER                                             DESCRIPTION                                          NUMBER
- -----------------  -------------------------------------------------------------------------------------   ----------
                                                                                                     
3.1                Agreement of Limited Partnership, dated as of October 29, 1991, as amended by the
                   Letter Agreement, dated February 11, 1992, and the Letter Agreement dated June 23,
                   1992, among Time Warner Companies, Inc. ('TWCI') and certain of its subsidiaries,
                   ITOCHU 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
                   Exhibits 10(b) and 10(c) to TWCI's Current Report on Form 8-K dated July 14, 1992
                   (File No. 1-8637) ('TWCI's July 1992 Form 8-K')).....................................         *
3.2                Amendment Agreement, dated as of September 14, 1993, among ITOCHU, Toshiba, TWCI,
                   U S WEST, Inc. ('US West') and certain of their respective subsidiaries amending
                   the TWE Partnership Agreement, as amended (which is incorporated herein by reference
                   to Exhibit 3.2 to TWE's Annual Report on Form 10-K for the year ended December 31,
                   1993 ('TWE's 1993 Form 10-K')).......................................................         *
3.3(i) and (ii)    Certificate of Incorporation and By-Laws of American Television and Communications
                   Corporation ('ATC'), as amended (which are incorporated herein by reference to
                   Exhibits 3.3(i) and (ii) to TWE's 1993 Form 10-K)....................................         *
3.3(iii)           Certificate of Ownership and Merger of American Digital Communications, Inc. into ATC
                   as filed with the Secretary of State of the State of Delaware on May 31, 1996 (which
                   is incorporated herein by reference to Exhibit 3.3(iii) to TWE's Annual Report on
                   Form 10-K for the year ended December 31, 1996 ('TWE's 1996 Form 10-K')).............         *
3.3(iv)            Certificate of Ownership and Merger of Carolina Network Corporation into ATC as filed
                   with the Secretary of State of the State of Delaware on May 31, 1996 (which is
                   incorporated herein by reference to Exhibit 3.3(iv) to TWE's 1996 Form 10-K).........         *
3.3(v)             Certificate of Ownership and Merger of ATC Holdings II, Inc. into ATC as filed with
                   the Secretary of State of the State of Delaware on June 28, 1996 (which is
                   incorporated herein by reference to Exhibit 3.3(v) to TWE's 1996 Form 10-K)..........         *
3.3(vi)            Certificate of Ownership and Merger of ARP 113, Inc. into ATC as filed with the
                   Secretary of State of the State of Delaware on August 29, 1997.......................
3.3(vii)           Certificate of Ownership and Merger of Philadelphia Community Antenna Television
                   Company into ATC as filed with the Secretary of State of the State of Delaware on
                   August 29, 1997......................................................................
3.3(viii)          Certificate of Ownership and Merger of Public Cable Company into ATC as filed with
                   the Secretary of State of the State of Delaware on August 29, 1997...................
3.4(i) and (ii)    Restated Certificate of Incorporation, as amended, and By-Laws of Warner
                   Communications Inc. ('WCI') (which are incorporated herein by reference to Exhibits
                   3.9(i) and (ii) to TWE's 1993 Form 10-K).............................................         *
3.4(iii)           Certificate of Ownership and Merger of Warner Cable Communications Inc. into WCI as
                   filed with the Secretary of State of the State of Delaware on December 29, 1997......
3.4(iv)            Agreement of Merger of Time Warner Operations Inc. and WCI as filed with the
                   Secretary of State of the State of Delaware on September 29, 1997....................
3.4(v)             Certificate of Ownership and Merger of Time Warner Interactive Inc. into WCI as filed
                   with the Secretary of State of the State of Delaware on July 3, 1996 (which is
                   incorporated herein by reference to Exhibit 3.6(iii) to TWE's 1996 Form 10-K)........         *
4.1                Indenture, dated as of April 30, 1992, as amended by the First Supplemental
                   Indenture, dated as of June 30, 1992, among TWE, TWCI, certain of 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
                   July 1992 on Form 8-K)...............................................................         *
4.2                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 the
                   Registration Statement of Form S-4 (Reg. No. 33-67688) of TWE filed with the
                   Securities and Exchange Commission on October 25, 1993 (the '1993 TWE S-4')).........         *









                                                                                                           SEQUENTIAL
     EXHIBIT                                                                                                  PAGE
     NUMBER                                             DESCRIPTION                                          NUMBER
- -----------------  -------------------------------------------------------------------------------------   ----------
                                                                                                     
4.3                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 the 1993 TWE S-4).................         *
4.4                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 1993 Form 10-K).............         *
4.5                Fifth Supplemental Indenture, dated as of December 28, 1994, among TWE, TWCI, certain
                   of TWCI's subsidiaries that are parties thereto and BONY, as Trustee (which is
                   incorporated herein by reference to Exhibit 4.5 to TWE's Annual Report on Form 10-K
                   for the year ended December 31, 1994)................................................         *
4.6                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 Time Warner Inc.'s ('Time
                   Warner') Annual Report on Form 10-K for the year ended December 31, 1997 ('TWI's
                   1997 Form 10-K'))....................................................................         *
4.7                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 TWI's 1997 Form 10-K)..........         *
10.1               Credit Agreement dated as of November 10, 1997 among Time Warner, TWCI, TWE, Turner
                   Broadcasting System, Inc., Time Warner Entertainment-Advance/Newhouse Partnership
                   (the 'TWE-A/N Partnership') and TWI Cable Inc., as Credit Parties, The Chase Manhattan
                   Bank, 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 TWI's 1997 Form 10-K)..................................         *
10.2               Admission Agreement, dated as of May 16, 1993, between TWE and U S West (which is
                   incorporated herein by reference to Exhibit 10(a) to TWE's Current Report on Form 8-K
                   dated May 16, 1993)..................................................................         *
10.3               Restructuring Agreement, dated as of August 31, 1995, among TWCI, ITOCHU and ITOCHU
                   Entertainment Inc. (which is incorporated herein by reference to Exhibit 2(a) to
                   TWCI's Current Report on Form 8-K dated August 31, 1995 ('TWCI's August 1995 Form
                   8-K'))...............................................................................         *
10.4               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).....         *
10.5               Option Agreement, dated as of September 15, 1993, between TWE and US West, (which is
                   incorporated herein by reference to Exhibit 10.9 to TWE's 1993 Form 10-K)............         *
10.6               Contribution Agreement, dated as of September 9, 1994, among TWE, Advance
                   Publications, Inc., ('Advance Publications'), Newhouse Broadcasting Corporation
                   ('Newhouse Broadcasting'), Advance/Newhouse Partnership ('Advance/Newhouse') and
                   TWE-A/N Partnership (which is incorporated herein by reference to Exhibit 10(a) to
                   TWE's Current Report on Form 8-K dated September 9, 1994 ('TWE's September 1994 Form
                   8-K'))...............................................................................         *
10.7               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).............................................................         *






     EXHIBIT                                                                                                  PAGE
     NUMBER                                             DESCRIPTION                                          NUMBER
- -----------------  -------------------------------------------------------------------------------------   ----------
                                                                                                     
10.8               Letter Agreement, dated April 1, 1995, among TWE, Advance/Newhouse, Advance
                   Publications and Newhouse Broadcasting (which is incorporated herein by reference to
                   Exhibit 10(c) to TWE's Current Report on Form 8-K dated April 1, 1995)...............         *
10.9               Amended and Restated Transaction Agreement, dated as of October 27, 1997 among
                   Advance Publications, Newhouse Broadcasting, Advance/Newhouse, TW Holding Co. and
                   TWE-A/N Partnership (which is incorporated herein by reference to Exhibit 99(c) to
                   Time Warner's Current Report on Form 8-K dated October 27, 1997).....................         *
21                 Subsidiaries of TWE and the Time Warner General Partners.............................
23                 Consent of Ernst & Young LLP, Independent Auditors...................................

- ------------
* Incorporated by reference.
 
     The Registrants hereby agree to furnish to the Securities and Exchange
Commission at its request copies of long-term debt instruments defining the
rights of holders of the Registrants' outstanding long-term debt that are not
required to be filed herewith.


                          STATEMENT OF DIFFERENCES
                          ------------------------

  The trademark symbol shall be expressed as............................  'tm'

EX-3

                       CERTIFICATE OF OWNERSHIP AND MERGER
                                     MERGING
                                  ARP 113, INC.
                            (a Delaware corporation)

                                      INTO

               AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
                            (a Delaware corporation)
                         Pursuant to Section 253 of the
                General Corporation Law of the State of Delaware

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

        American Television and Communications Corporation, a corporation
organized and existing under the laws of the State of Delaware (the
"Corporation"), does hereby certify:

        FIRST: That the Corporation is a corporation duly organized and existing
pursuant to the provisions of the General Corporation Law of the State of
Delaware (the "DGCL");

        SECOND: That the Corporation lawfully owns all of the outstanding shares
of each authorized class of capital stock of ARP 113, Inc., a Delaware
corporation (the "Subsidiary");

        THIRD: That by resolutions of its Board of Directors duly adopted by
unanimous written consent on August 28, 1997, the Corporation approved the
merger of the Subsidiary with and into itself in accordance with Section 253 of
the DGCL, and that said resolutions read exactly as set forth in Exhibit A to
this Certificate; and

        FOURTH: That the merger shall be effective at 9:00 a.m. on August 29,
1997.








        IN WITNESS WHEREOF, American Television and Communications Corporation
has caused this Certificate of Ownership and Merger to be executed and
acknowledged in accordance with Section 103 of the DGCL on this 28th day of
August, 1997.



                                   AMERICAN TELEVISION AND
                                   COMMUNICATIONS CORPORATION

                                   By: GAIL L. ALLAMAN
                                      ---------------------------------
                                       Gail L. Allaman
                                       Vice President

                                       2








                                                                       EXHIBIT A


        RESOLVED, that ARP 113 INC., a Delaware corporation ("113"), all of the
outstanding capital stock of which is owned by the Company, be merged with and
into the Company, which shall be the surviving corporation, pursuant to Section
253 of the DGCL, and that upon such merger becoming effective the Company assume
all of the liabilities and obligations of 113;

        RESOLVED, that the president or any vice president and the secretary or
any assistant secretary of the Company be, and each of them hereby is, directed
to prepare and execute, under the seal of the Company, a Certificate of
Ownership and Merger, which shall set forth a copy of these resolutions, to
merge 113 with and into the Company, and to file the same in the office of the
Secretary of State of the State of Delaware;

        RESOLVED, that as a result of and in connection with the merger
contemplated by these resolutions, 113 shall be completely liquidated in
compliance with Section 332 of the Internal Revenue Code of 1986, as amended
("Section 332"), and such liquidation shall be effected at such time as is
specified as the effective time of the merger in the Certificate of Ownership
and Merger that shall be filed with the Secretary of State of the State of
Delaware;

        RESOLVED, that the foregoing resolutions relating to the effectuation of
the merger of 113 with and into the Company shall be deemed, with respect to
113, to constitute a plan of liquidation satisfying the requirements of Section
332;

        RESOLVED, that the merger shall not become effective until, and shall
become effective upon, the filing of the Certificate of Ownership and Merger
with the Secretary of State and the State of Delaware or at such later time or
date as may be set forth in said Certificate of Ownership and Merger;

        RESOLVED, that the foregoing resolutions may be amended or terminated by
this Board of Directors at any time prior to the filing of any or all
Certificates of Ownership and Merger with the Secretary of State of the State of
Delaware; and

        RESOLVED, that the officers of the Company be, and each of them hereby
is, authorized to take all such actions and to execute and deliver all such
agreements, instruments and documents and to cause all such entities to be
organized or to be dissolved, liquidated or merged as they or any of them shall
deem necessary or appropriate to accomplish the purposes of the foregoing
resolutions; and that the execution and delivery of such agreements, instruments
and documents, the organization, dissolution, liquidation or merger of such
entities and the doing or performing of any such actions, shall be conclusive
evidence that the same is authorized hereby.

EX-3

                       CERTIFICATE OF OWNERSHIP AND MERGER
                                     MERGING
                PHILADELPHIA COMMUNITY ANTENNA TELEVISION COMPANY
                          (a Pennsylvania corporation)

                                      into

               AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
                            (a Delaware corporation)
                         Pursuant to Section 253 of the
                General Corporation Law of the State of Delaware

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

        American Television and Communications Corporation, a corporation
organized and existing under the laws of the State of Delaware (the
"Corporation"), does hereby certify:

        FIRST: That the Corporation is a corporation duly organized and existing
pursuant to the provisions of the General Corporation Law of the State of
Delaware;

        SECOND: That the Corporation lawfully owns all of the outstanding shares
of each authorized class of capital stock of Philadelphia Community Antenna
Television Company, a Pennsylvania corporation (the "Subsidiary");

        THIRD: That, by resolutions of its Board of Directors duly adopted by
unanimous written consent on August 29, 1997, the Corporation approved the
merger of the Subsidiary with and into itself in accordance with Section 253 of
the General Corporation Law of the State of Delaware, and that said resolutions,
including as an exhibit thereto the Plan of Merger, read exactly as set forth in
Annex A to this Certificate; and








        FOURTH: That the merger shall be effective at 9:00 a.m. on August 29,
1997.

        IN WITNESS WHEREOF, American Television and Communications Corporation
has caused this Certificate of Ownership and Merger to be executed and
acknowledged in accordance with Section 103 of the General Corporation Law of
the State of Delaware on this 29th day of August, 1997.



                                  AMERICAN TELEVISION AND
                                  COMMUNICATIONS CORPORATION


                                  By: GAIL L. ALLAMAN
                                     ----------------------------------
                                      Vice President

Attest:

MARC J. APFELBAUM
- ---------------------------
     Secretary

                                       2






                                                                         ANNEX A


               American Television and Communications Corporation
              Unanimous Written Consent of the Board of Directors
                       [Resolutions Relating to Merger of
               Philadelphia Community Antenna Television Company]
                                August 29, 1997


        The undersigned, constituting the entire Board of Directors of American
Television and Communications Corporation, a Delaware Corporation (the
"Company"), acting pursuant to Section 141 of the General Corporation Law of the
State of Delaware (the "DGCL"), do hereby adopt the following resolutions;

        RESOLVED, that Philadelphia Community Antenna Television Company, a
Pennsylvania corporation ("PCATV"), all of the outstanding capital stock of
which is owned by the Company, be merged with and into the Company, which shall
be the surviving corporation, pursuant to Section 253 of the DGCL, and that upon
such merger becoming effective the Company assume all of the liabilities and
obligations of PCATV (the Plan of Merger is attached here to as Exhibit A);

        RESOLVED, that the president or any vice president and the secretary or
any assistant secretary of the Company be, and each of them hereby is, directed
to prepare and execute, under the seal of the Company, a Certificate of
Ownership and Merger, which shall set forth a copy of these resolutions, to
merge PCATV with and into the Company, and to file the same in the office of the
Secretary of State of the State of Delaware;

        RESOLVED, that as a result of and in connection with the merger
contemplated by these resolutions, PCATV shall be completely liquidated in
compliance with Section 332 of the Internal Revenue Code of 1986, as amended
("Section 332"), and such liquidation shall be effected at such time as is
specified as the effective time of the merger in the Certificate of Ownership
and Merger that shall be filed with the Secretary of State of the State of
Delaware;

        RESOLVED, that the following resolutions relating to the effectuation of
the merger of PCATV with and into the Company shall be deemed, with respect to
PCATV, to constitute a plan of liquidation satisfying the requirements of
Section 332;








        RESOLVED, that the merger shall not become effective until, and shall
become effective upon, the filing of the Certificate of Ownership and Merger
with the Secretary of State of the State of Delaware or at such later time or
date as may be set forth in said Certificate of Ownership and Merger;

        RESOLVED, that the foregoing resolutions may be amended or terminated by
this Board of Directors at any time prior to the filing of any or all
Certificates of Ownership and Merger with the Secretary of State of the State of
Delaware; and

        RESOLVED, that the officers of the Company be, and each of them hereby
is, authorized to take all such actions and to execute and deliver all such
agreements, instruments and documents and to cause all such entities to be
organized or to be dissolved, liquidated or merged as they or any of them shall
deem necessary or appropriate to accomplish the purposes of the foregoing
resolutions; and that the execution and delivery of such agreements, instruments
and documents, the organization, dissolution, liquidation or merger of such
entities and the doing or performing of any such actions, shall be conclusive
evidence that the same is authorized hereby.



                                       2






                                                                       EXHIBIT A

                                 PLAN OF MERGER

     PLAN OF MERGER dated as of this 29th day of August, 1997, for the merger of
PHILADELPHIA COMMUNITY ANTENNA TELEVISION COMPANY, a Pennsylvania corporation
("Subsidiary"), with and into AMERICAN TELEVISION AND COMMUNICATIONS
CORPORATION, a Delaware corporation ("Parent"; together with Subsidiary, the
"Constituent Corporations").

     WHEREAS, Parent is a business corporation duly incorporated under the laws
of the State of Delaware;

     WHEREAS, Subsidiary is a business corporation duly incorporated under the
laws of the State of Pennsylvania and its authorized capital is 5,000 shares of
common stock, with par value of Ten Dollars ($10.00), of which 4,200 shares are
issued and outstanding;

     WHEREAS, Parent owns all of said issued and outstanding shares of common
stock of Subsidiary; and

     WHEREAS, the Board of Directors of Parent deems it to be in the best
interests of the Constituent Corporations that Subsidiary be merged into Parent,
and adopts and approves all the provisions of and actions contemplated by this
Plan of Merger;

     NOW, THEREFORE, for the purpose of setting forth the terms of the merger of
the Constituent Corporations (the "Merger"), the mode of effectuating the Merger
and such other related details or provisions as may be necessary or desirable,
it is provided as follows:









                                    ARTICLE I

                                     MERGER

     In accordance with the laws of the States of Delaware and Pennsylvania,
Subsidiary shall be merged into Parent. Parent shall be, and may be referred to
herein as, the "Surviving Corporation".

     The effects of the Merger as of the Effective Date (as defined below) shall
be as provided under Section 259 of the General Corporation Law of the State of
Delaware and under Section 1929 of the Pennsylvania Business Corporation Law.

                                   ARTICLE II

                                 EFFECTIVE DATE

     The Merger shall not become effective until, and shall become effective
upon, the filing of a Certificate of Ownership and Merger with the Secretary of
State of the State of Delaware or at such later time or date as may be set forth
in said Certificate of Ownership and Merger (such date, the "Effective Date").

                                   ARTICLE III

                       TRANSFER OF ASSETS AND LIABILITIES

     From time to time, as and when requested by Parent as the Surviving
Corporation or by its successors or assigns, to the extent permitted by law, the
last acting officers and directors of Subsidiary, or the officers and directors
of Parent, are hereby fully authorized, in the name of Subsidiary (or
otherwise), to execute and deliver any and all deeds, assignments, confirmations
and other instruments and to take or cause to be taken all such other and
further actions as Parent as the Surviving Corporation may deem necessary or
appropriate in order more fully to vest,


                                       2








perfect, confirm in or assure Parent title to, and possession of, all the
property, interests, assets, rights, privileges, powers and franchises of
Subsidiary as of the Effective Date, or otherwise to carry out the provisions of
this Plan of Merger.

                                   ARTICLE IV

                                  CAPITAL STOCK

     As of the Effective Date, all shares of common stock of Subsidiary that are
issued or outstanding shall be cancelled. The shares of capital stock of Parent
shall not be affected by the Merger.

                                    ARTICLE V

                          CERTIFICATE OF INCORPORATION

     The Restated Certificate of Incorporation of Parent shall continue in force
as the certificate of incorporation of the Surviving Corporation, until its due
alteration or amendment in accordance with its provisions and with applicable
law.

                                   ARTICLE VI

                                     BY-LAWS

     The By-Laws of Parent in effect as of the Effective Date shall continue in
force as the By-Laws of the Surviving Corporation, until their due alteration,
amendment, or repeal in accordance with their provisions, with the Certificate
of Incorporation and with applicable law.


                                       3








                                   ARTICLE VII

                             DIRECTORS AND OFFICERS

     The directors and officers of Parent shall be the directors and officers of
the Surviving Corporation as of the Effective Date, each to hold office until
his or her successor has been elected and qualified or until otherwise provided
by law.

                                  ARTICLE VIII

                            TERMINATION AND AMENDMENT

     This Plan of Merger may be terminated by action of the Board of Directors
of Parent at any time before the Effective Date. In the event of such
termination, this Plan of Merger shall become wholly void and of no effect.

     This Plan of Merger may be amended or modified at any time prior to the
Effective Date by action of the Board of Directors of Parent.

     IN WITNESS WHEREOF, this Plan of Merger has been signed on behalf of Parent
by its duly authorized officers as of the day and year first above written.


                                   AMERICAN TELEVISION AND
                                   COMMUNICATIONS CORPORATION


                                   By: GAIL L ALLAMAN
                                      ------------------------------
                                       Vice President

Attest:

MARC J. APFELBAUM
- -----------------------------
Secretary



                                       4

EX-3

                       CERTIFICATE OF OWNERSHIP AND MERGER

                                     MERGING

                              PUBLIC CABLE COMPANY

                              (a Maine corporation)

                                      into

               AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION

                            (a Delaware corporation)

                         Pursuant to Section 253 of the

                General Corporation Law of the State of Delaware

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

     American Television and Communications Corporation, a corporation organized
and existing under the laws of the State of Delaware (the "Corporation"), does
hereby certify:

     FIRST: That the Corporation is a corporation duly organized and existing
pursuant to the provisions of the General Corporation Law of the State of
Delaware;

     SECOND: That the Corporation lawfully owns all of the outstanding shares of
each authorized class of capital stock of Public Cable Company, a Maine
corporation (the "Subsidiary");

     THIRD: That, by resolutions of its Board of Directors duly adopted by
unanimous written consent on August 28, 1997, the Corporation approved the
merger of the Subsidiary with and into itself in accordance with Section 253 of
the General Corporation Law of the State of Delaware, and that said resolutions,
including as an exhibit thereto the Plan of Merger, read exactly as set forth in
Annex A to this Certificate; and










     FOURTH: That the merger shall be effective at 9:00 a.m. on August 29, 1997.

     IN WITNESS WHEREOF, American Television and Communications Corporation has
caused this Certificate of Ownership and Merger to be executed and acknowledged
in accordance with Section 103 of the General Corporation Law of the State of
Delaware on this 28th day of August, 1997.



                                   AMERICAN TELEVISION AND
                                   COMMUNICATIONS CORPORATION


                                   By: GAIL L. ALLAMAN
                                      --------------------------------------
                                       Gail L. Allaman, Vice President


Attest:



MARC J. APFELBAUM
- ------------------------------
Marc J. Apfelbaum
Secretary


                                       2







                                                                         Annex A

               American Television and Communications Corporation
              Unanimous Written Consent of the Board of Directors
                       [Resolutions Relating to Merger of
                             Public Cable Company]
                                August 28, 1997

     The undersigned, constituting the entire Board of Directors of American
Television and Communications Corporation, a Delaware corporation (the
"Company"), acting pursuant to Section 141 of the General Corporation Law of the
State of Delaware (the "DGCL"), do hereby adopt the following resolutions:

          RESOLVED, that Public Cable Company, a Maine corporation ("Public"),
     all of the outstanding capital stock of which is owned by the Company, be
     merged with and into the Company, which shall be the surviving corporation,
     pursuant to Section 253 of the DGCL, and that upon such merger becoming
     effective the Company assume all of the liabilities and obligations of
     Public (the Plan of Merger is attached hereto as Exhibit A);

          RESOLVED, that the president or any vice president and the secretary
     or any assistant secretary of the Company be, and each of them hereby is,
     directed to prepare and execute, under the seal of the Company, a
     Certificate of Ownership and Merger, which shall set forth a copy of these
     resolutions, to merge Public with and into the Company, and to file the
     same in the office of the Secretary of State of the State of Delaware;

          RESOLVED, that as a result of and in connection with the merger
     contemplated by these resolutions, Public shall be completely liquidated in
     compliance with Section 332 of the Internal Revenue code of 1986, as
     amended ("Section 332"), and such liquidation shall be effected at such
     time as is specified as the effective time of the merger in the Certificate
     of Ownership and Merger that shall be filed with the Secretary of State of
     the State of Delaware;

          RESOLVED, that the foregoing resolutions relating to the effectuation
     of the merger of Public with and into the Company shall be deemed, with
     respect to Public, to constitute a plan of liquidation satisfying the
     requirements of Section 332;







          RESOLVED, that the merger shall not become effective until, and shall
     become effective upon, the filing of the Certificate of Ownership and
     Merger with the Secretary of State of Delaware or at such later time or
     date as may be set forth in said Certificate of Ownership and Merger;

          RESOLVED, that the foregoing resolutions may be amended or terminated
     by this Board of Directors at any time prior to the filing of any or all
     Certificates of Ownership and Merger with the Secretary of the State of
     Delaware; and

          RESOLVED, that the officers of the Company be, and each of them hereby
     is, authorized to take all such actions and to execute and deliver all such
     agreements, instruments and documents and to cause all such entities to be
     organized or to be dissolved, liquidated or merged as they or any of them
     shall deem necessary or appropriate to accomplish the purposes of the
     foregoing resolutions; and that the execution and delivery of such
     agreements, instruments and documents, the organization, dissolution,
     liquidation or merger of such entities and the doing or performing of any
     such actions, shall be conclusive evidence that the same is authorized
     hereby.

                                       2









                                                                       EXHIBIT A

                                 PLAN OF MERGER

     PLAN OF MERGER dated as of this 28th day of August, 1997, for the merger of
PUBLIC CABLE COMPANY, a Maine corporation ("Subsidiary"), with and into AMERICAN
TELEVISION AND COMMUNICATIONS CORPORATION, a Delaware corporation ("Parent";
together with Subsidiary, the "Constituent Corporations").

     WHEREAS, Parent is a business corporation duly incorporated under the laws
of the State of Delaware;

     WHEREAS, Subsidiary is a business corporation duly incorporated under the
laws of the State of Maine and its authorized capital is 250 shares of common
stock, without par value, of which 88.1 shares are issued and outstanding;

     WHEREAS, Parent owns all of said issued and outstanding shares of common
stock of Subsidiary; and

     WHEREAS, the Board of Directors of Parent deems it to be in the best
interests of the Constituent Corporations that Subsidiary be merged into Parent,
and adopts and approves all the provisions of and actions contemplated by this
Plan of Merger;

     NOW, THEREFORE, for the purpose of setting forth the terms of the merger of
the Constituent Corporations (the "Merger"), the mode of effectuating the Merger
and such other related details or provisions as may be necessary or desirable,
it is provided as follows:












                                    ARTICLE I

                                     MERGER

     In accordance with the laws of the States of Delaware and Maine, Subsidiary
shall be merged into Parent. Parent shall be, and may be referred to herein as,
the "Surviving Corporation".

     The effects of the Merger as of the Effective Date (as defined below) shall
be as provided under Section 259 of the General Corporation Law of the State of
Delaware and under Section 905 of the Maine Business Corporation Act.


                                   ARTICLE II

                                 EFFECTIVE DATE

     The Merger shall not become effective until, and shall become effective
upon, the filing of a Certificate of Ownership and Merger with the Secretary of
State of the State of Delaware or at such later time or date as may be set forth
in said Certificate of Ownership and Merger (such date, the "Effective Date").


                                   ARTICLE III

                       TRANSFER OF ASSETS AND LIABILITIES

     From time to time, as and when requested by Parent as the Surviving
Corporation or by its successors or assigns, to the extent permitted by law, the
last acting officers and directors of Subsidiary, or the officers and directors
of Parent, are hereby fully authorized, in the name of Subsidiary (or
otherwise), to execute and deliver any and all deeds, assignments, confirmations
and other instruments and to take or cause to be taken all such other and
further actions as Parent as the Surviving Corporation may deem necessary or
appropriate in order more fully to vest,



                                       2









perfect, confirm in or assure Parent title to, and possession of, all the
property, interests, assets, rights, privileges, powers and franchises of
Subsidiary as of the Effective Date, or otherwise to carry out the provisions of
this Plan of Merger.

                                   ARTICLE IV

                                  CAPITAL STOCK

     As of the Effective Date, all shares of common stock of Subsidiary that are
issued or outstanding shall be cancelled. The shares of capital stock of Parent
shall not be affected by the Merger.

                                    ARTICLE V

                          CERTIFICATE OF INCORPORATION

     The Restated Certificate of Incorporation of Parent shall continue in force
as the certificate of incorporation of the Surviving Corporation, until its due
alteration or amendment in accordance with its provisions and with applicable
law.

                                   ARTICLE VI

                                     BY-LAWS

     The By-Laws of Parent in effect as of the Effective Date shall continue in
force as the By-Laws of the Surviving Corporation, until their due alteration,
amendment, or repeal in accordance with their provisions, with the Certificate
of Incorporation and with applicable law.


                                       3








                                   ARTICLE VII

                             DIRECTORS AND OFFICERS

     The directors and officers of Parent shall be the directors and officers of
the Surviving Corporation as of the Effective Date, each to hold office until
his or her successor has been elected and qualified or until otherwise provided
by law.

                                  ARTICLE VIII

                            TERMINATION AND AMENDMENT

     This Plan of Merger may be terminated by action of the Board of Directors
of Parent at any time before the Effective Date. In the event of such
termination, this Plan of Merger shall become wholly void and of no effect.

     This Plan of Merger may be amended or modified at any time prior to the
Effective Date by action of the Board of Directors of Parent.

     IN WITNESS WHEREOF, this Plan of Merger has been signed on behalf of Parent
by its duly authorized officers as of the day and year first above written.



                                    AMERICAN TELEVISION AND
                                    COMMUNICATIONS CORPORATION


                                    By: GAIL L. ALLAMAN
                                       ---------------------------------
                                        Gail L. Allaman, Vice President


Attest:

MARC J. APFELBAUM
- ------------------------------
Marc J. Apfelbaum, Secretary
                                      4

EX-3

                       CERTIFICATE OF OWNERSHIP AND MERGER

                                       OF

                        WARNER CABLE COMMUNICATIONS INC.
                            (A DELAWARE CORPORATION)

                                      INTO

                           WARNER COMMUNICATIONS INC.
                            (A DELAWARE CORPORATION)



It is hereby certified that:

     1. Warner Communications Inc. [hereinafter sometimes referred to as the
"Corporation"] is a business corporation of the State of Delaware.

     2. The Corporation is the owner of all of the outstanding shares of the
stock of Warner Cable Communications Inc., which is also a business corporation
of the State of Delaware.

     3. On December 17, 1997, the Board of Directors of the Corporation adopted
the following resolutions to merge Warner Cable Communications Inc. into the
Corporation:

          RESOLVED that Warner Cable Communications Inc. be merged into this
          Corporation, and that all of the estate, property, rights, privileges,
          powers and franchises of Warner Cable Communications Inc. be vested in
          and held and enjoyed by this Corporation as fully and entirely and
          without change or diminution as the same were before held and enjoyed
          by Warner Cable Communications Inc. in its name.

          RESOLVED that this Corporation shall assume all of the obligations of
          Warner Cable Communications Inc.

          RESOLVED that this Corporation shall cause to be executed and filed
          and/or recorded the documents prescribed by the laws of the State of
          Delaware and by the laws of any other appropriate jurisdiction and
          will cause to be performed all necessary acts within the State of
          Delaware and within any other appropriate jurisdiction.










          RESOLVED that the effective time of the Certificate of Ownership and
          Merger setting forth a copy of these resolutions, and the time when
          the merger therein provided for shall become effective, is on December
          29, 1997.

     4. It is intended that implementation of the merger be in conformity with
the requirements of Section 368(a)(1)(A) and 332 of the Internal Revenue Code of
1986, as amended.


Executed on December 19, 1997.

                                   WARNER COMMUNICATIONS INC.

                                   By: /s/ THOMAS W. McENERNEY
                                      -------------------------------
                                      Thomas W. McEnerney
                                      Vice President



Attest:

/s/ MARIE N. WHITE
- ------------------------------
Marie N. White
Assistant Secretary

EX-3

                               AGREEMENT OF MERGER

                                       OF

                           TIME WARNER OPERATIONS INC.
                            (a Delaware corporation)

                                       AND

                           WARNER COMMUNICATIONS INC.
                            (a Delaware corporation)



     AGREEMENT OF MERGER approved on September 26, 1997 by Time Warner
Operations Inc., a business corporation of the State of Delaware, by resolution
adopted by its Board of Directors on said date, and approved on September 26,
1997 by Warner Communications Inc., a business corporation of the State of
Delaware, by resolution adopted by its Board of Directors on said date.

     WHEREAS Time Warner Operations Inc. is a business corporation of the State
of Delaware with its registered office therein located at 1209 Orange Street,
City of Wilmington, County of New Castle; and

     WHEREAS the total number of shares of stock which Time Warner Operations
Inc. has authority to issue is 20,000, all of which are of one class and of a
par value of $1.00 each; and

     WHEREAS Warner Communications Inc. is a business corporation of the State
of Delaware with its registered office therein located at 1209 Orange Street,
City of Wilmington, County of New Castle; and









     WHEREAS the total number of shares of stock which Warner Communications
Inc. has authority to issue is 126,000, 1,000 common at a par value of $1.00
each and 125,000 preferred at a par value of $.01 each; and

     WHEREAS Time Warner Operations Inc. and Warner Communications Inc. and the
respective Boards of Directors thereof deem it advisable and to the advantage,
welfare and best interests of said corporations and their respective
stockholders to merge Time Warner Operations Inc. with and into Warner
Communications Inc. pursuant to the provisions of the General Corporation Law of
the State of Delaware upon the terms and conditions hereinafter set forth;

     NOW, THEREFORE, in consideration of the premises and of the mutual
agreement of the parties hereto, being thereunto duly approved by a resolution
adopted by the Board of Directors of Time Warner Operations Inc. and duly
approved by a resolution adopted by the Board of Directors of Warner
Communications Inc., the Agreement of Merger and the terms and conditions
thereof and the mode of carrying the same into effect, together with any
provisions required or permitted to be set forth therein, are hereby determined
and agreed upon as hereinafter in this Agreement set forth.

     1. Time Warner Operations Inc. and Warner Communications Inc. shall,
pursuant to the provisions of the General Corporation Law of the State of
Delaware, be merged with and into a single corporation, to wit, Warner
Communications Inc., which shall be the surviving corporation from and after the
effective time of the


                                      -2-







merger, and which is sometimes hereinafter referred to as the "surviving
corporation", and which shall continue to exist as said surviving corporation
under the name Warner Communications Inc. pursuant to the provisions of the
General Corporation Law of the State of Delaware.

     The separate existence of Time Warner Operations Inc., which is hereinafter
sometimes referred to as the "terminating corporation", shall cease at the said
effective time in accordance with the provisions of said General Corporation Law
of the State of Delaware.

     2. The Certificate of Incorporation of the surviving corporation, as now in
force and effect, shall continue to be the Certificate of Incorporation of said
surviving corporation, and said Certificate of Incorporation shall continue in
full force and effect until further amended in the manner prescribed by the
provisions of the General Corporation Law of the State of Delaware.

     3. The present by-laws of the surviving corporation will be the by-laws of
said surviving corporation and will continue in full force and effect until
changed, altered or amended as therein provided and in the manner prescribed by
the provisions of the General Corporation Law of the State of Delaware.

     4. The directors and officers in office of the surviving corporation at the
effective time of the merger shall be the members of the first Board of
Directors and the first officers of the surviving corporation, all of whom shall
hold their directorships and offices until the election and qualification of


                                      -3-







their respective successors or until their tenure is otherwise terminated in
accordance with the by-laws of the surviving corporation.


     5. Each issued share of the terminating corporation shall, at the effective
time of the merger, be cancelled. The issued shares of the surviving corporation
shall not be cancelled, converted or exchanged in any manner, but each said
share which is issued as of the effective time of the merger shall continue to
represent one issued share of the surviving corporation.

     6. In the event that this Agreement of Merger shall have been fully adopted
upon behalf of the terminating corporation and of the surviving corporation in
accordance with the provisions of the General Corporation Law of the State of
Delaware, the said corporations agree that they will cause to be executed and
filed and recorded any document or documents prescribed by the laws of the State
of Delaware, and that they will cause to be performed all necessary acts within
the State of Delaware and elsewhere to effectuate the merger herein provided
for.

     7. The Board of Directors and the proper officers of the terminating
corporation and of the surviving corporation are hereby authorized, empowered
and directed to do any and all acts and things, and to make, execute, deliver,
file, and record any and all instruments, papers and documents which shall be or
become necessary, proper or convenient to carry out or put into effect any of
the provisions of this Agreement of Merger or of the merger herein provided for.


                                      -4-









     8. At any time prior to the consummation of the merger, this Agreement of
Merger may be terminated and the merger abandoned by the Board of Directors of
Time Warner Operations Inc.


     9. This Agreement may be amended at any time prior to the consummation of
the merger with the mutual consent of the Boards of Directors of Time Warner
Operations Inc. and Warner Communications Inc.; provided, however, this
Agreement of Merger may not be amended after it has been adopted by the
stockholders of either Time Warner Operations Inc. or Warner Communications Inc.
in any manner not permitted by applicable law.



                                      -5-







          IN WITNESS WHEREOF, this Agreement of Merger is hereby
signed and attested upon behalf of the constituent corporations
parties thereto.


Dated:  September 26, 1997.

                                          TIME WARNER OPERATIONS INC.



                                          By: /s/ Spencer B. Hays
                                             ----------------------------
                                             Spencer B. Hays
                                             Vice President



Attest:


/s/ Marie N. White
- -------------------------------
Marie N. White
Assistant Secretary



Dated: September 26, 1997.



                                   WARNER COMMUNICATIONS INC.



                                   By: /s/ Thomas W. McEnerney
                                      -------------------------------
                                      Thomas W. McEnerney
                                      Vice President



Attest:


/s/ Marie N. White
- -----------------------------
Marie N. White
Assistant Secretary



                                      -6-









                              CERTIFICATE OF MERGER

                                       OF

                           TIME WARNER OPERATIONS INC.

                                       AND

                           WARNER COMMUNICATIONS INC.


It is hereby certified that:

     1. The constituent business corporations participating in the merger herein
certified are:

         (i) Time Warner Operations Inc., which is incorporated under the laws
of the State of Delaware; and

         (ii) Warner Communications Inc., which is incorporated under the laws
of the State of Delaware.


     2. An Agreement of Merger, annexed hereto as Exhibit A, has been approved,
adopted, certified, executed, and acknowledged by each of the aforesaid
constituent corporations in accordance with the provisions of subsection (c) of
Section 251 of the General Corporation Law of the State of Delaware.

     3. The name of the surviving corporation in the merger herein certified is
Warner Communications Inc., which will continue its existence as said surviving
corporation upon the effective date of said merger pursuant to the provisions of
the General Corporation Law of the State of Delaware.









     4. The Certificate of Incorporation of Warner Communications Inc. shall
continue to be the Certificate of Incorporation of said surviving corporation
until further amended and changed in accordance with the provisions of the
General Corporation Law of the State of Delaware.

     5. The executed Agreement of Merger between the aforesaid constituent
corporations is on file at the principal place of business of the aforesaid
surviving corporation, the address of which is a follows: 75 Rockefeller Plaza,
New York, NY 10019.

     6. A copy of the aforesaid Agreement of Merger will be furnished by the
aforesaid surviving corporation, on request, and without cost, to any
stockholders of each of the aforesaid constituent corporations.


Dated: September 26, 1997.



                                     WARNER COMMUNICATIONS INC.


                                     By: /s/ SPENCER B. HAYS
                                         ------------------------------
                                         Spencer B. Hays
                                         Vice President



Attest:

/s/ MARIE N. WHITE 
- --------------------------------
Marie N. White
Assistant Secretary

EX-21

                                                                      EXHIBIT 21
 
            SUBSIDIARIES OF TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      AND THE TIME WARNER GENERAL PARTNERS
 
     Set forth below are the names of certain subsidiaries, at least 50% owned,
directly or indirectly, of TWE and the Time Warner General Partners as of
December 31, 1997. Certain subsidiaries which, when considered in the aggregate,
would not constitute a significant subsidiary have been omitted. Indented
subsidiaries are direct subsidiaries of the company under which they are
indented.
 
SUBSIDIARIES OF TIME WARNER ENTERTAINMENT COMPANY, L.P.
 


                                                                                PERCENTAGE          STATE OR OTHER
                                                                                 OWNED BY          JURISDICTION OF
                                                                                IMMEDIATE          INCORPORATION OR
                                    NAME                                          PARENT             ORGANIZATION
- -----------------------------------------------------------------------------   ----------         ----------------
                                                                                             
Time Warner Entertainment-Advance/Newhouse Partnership.......................        66.67         New York
  CV of Viera Joint Venture (Partnership)....................................        50            Florida
Century Venture Corporation..................................................        50            Delaware
Erie Telecommunications, Inc.................................................        54.19         Pennsylvania
Kansas City Cable Partners...................................................        50            Colorado
Time Warner Cable New Zealand Holdings Ltd...................................       100(1)         New Zealand
Public Cable Company (partnership)...........................................        77            Maine
Queens Inner Unity Cable System..............................................        66.01         New York
Comedy Partners, L.P.........................................................        50            New York
Warner Cable of Vermont Inc..................................................       100            Delaware
Time Warner Communications Holdings Inc. (2).................................       100            Delaware
HBO Direct, Inc..............................................................       100            Delaware
  TWE Asia Inc...............................................................       100            Delaware
  TW Buffer Inc..............................................................       100            Delaware
     Warner Bros. (F.E.) Inc.................................................       100            Delaware
     Warner Bros. (Japan) Inc................................................       100            Delaware
     Warner Bros. (South) Inc................................................       100            Delaware
     Warner Bros. (Transatlantic) Inc........................................       100            Delaware
       Bethel Productions Inc................................................       100            Delaware
     Warner Films Consolidated Inc...........................................       100            Delaware
       Exeter Distributing Inc...............................................       100            Delaware
       Riverside Avenue Distributing Inc.....................................       100            Delaware
HBO Asia Holdings, L.P. (partnership)........................................       100(3)         Delaware
  HBO Pacific Partners, C.V..................................................        83.33         Neth. Antilles
     Home Box Office (Singapore) Pty. Ltd....................................       100            Singapore
HBO Ceska Republika, S.R.O...................................................       100            Czech Republic
Turner/HBO Ltd. Purpose Joint Venture (partnership)..........................        50            New York
Acapulco 37 S.A. de C.V......................................................       100            Mexico
Warner Bros. Gesellschaft mbH................................................       100            Austria
Time Warner Entertainment Limited............................................       100            U.K.
  The Bountiful Company Limited..............................................        50            U.K.
  Warner Bros. Studio Stores Ltd.............................................       100            U.K.
  Warner Bros. Consumer Products (UK) Ltd....................................       100            U.K.
  TWE Finance Limited........................................................       100            U.K.
  Warner Bros. Theatres Ltd..................................................       100            U.K.
  Warner Bros. Distributors Ltd..............................................       100            U.K.
     Lorimar Telepictures International Ltd..................................       100            U.K.
       Warner Bros. International Television Distribution Italia S.p.A.......       100            Italy
  Warner Bros. Theatres (U.K.) Limited.......................................       100            U.K.
     Warner Bros. Theatres Advertising Agency Limited........................       100            U.K.

 
                                       1







                                                                                PERCENTAGE          STATE OR OTHER
                                                                                 OWNED BY          JURISDICTION OF
                                                                                IMMEDIATE          INCORPORATION OR
                                    NAME                                          PARENT             ORGANIZATION
- -----------------------------------------------------------------------------   ----------         ----------------
                                                                                             
  Warner Bros. Productions Limited...........................................       100            U.K.
  Warner Home Video (U.K.) Limited...........................................       100            U.K.
Lorimar Distribution International (Canada) Corp.............................       100            Canada
Lorimar Canada Inc...........................................................       100            Canada
Productions et Editions Cinematographiques Francaises SARL (PECF)............       100            France
  Warner Home Video France S.A...............................................       100            France
Time Warner Entertainment Australia Pty. Ltd.................................       100            Australia
  Lorimar Telepictures Pty. Limited..........................................       100            Australia
  Warner Bros. (Australia) Pty. Ltd..........................................       100            Australia
  Warner Holdings Australia Pty. Limited.....................................       100            Australia
     Warner Bros. Properties (Australia) Pty. Ltd............................       100            Australia
     Warner Bros. Theatres (Australia) Pty. Limited..........................       100            Australia
     Warner World Australia Pty. Limited.....................................       100            Australia
       Movie World Enterprises Partnership (partnership).....................        50            Australia
     Warner Home Video Pty. Limited..........................................       100            Australia
       Warner Bros. Video Pty. Ltd...........................................       100            Australia
     Warner Sea World Aviation Pty. Ltd......................................       100            Australia
       Sea World Aviation Partnership (partnership)..........................        50            Australia
     Warner Sea World Investments Pty. Limited...............................       100            Australia
       Sari Lodge Pty. Limited...............................................        50            Australia
          Sea World Management Pty. Ltd......................................       100            Australia
     Warner Sea World Operations Pty. Ltd....................................       100            Australia
       Sea World Enterprises Partnership (partnership).......................        50            Australia
     Warner Sea World Units Pty. Ltd.........................................       100            Australia
Time Warner Germany Holding GmbH.............................................       100(4)         Germany
  Time Warner Entertainment Germany GmbH.....................................       100            Germany
     Time Warner Entertainment Germany GmbH and Co. OHG......................       100(5)         Germany
       Warner Bros. Movie World GmbH & Co. KG................................        60            Germany
     Warner Bros. Deutschland Pay TV GmbH....................................       100            Germany
     Warner Home Video GmbH..................................................       100            Germany
       Warner Home Video Spol SRO............................................       100            Czech Republic
     GWHS Grundstrucks Verwaltungs GmbH......................................       100            Germany
     Warner Bros. Film GmbH..................................................       100            Germany
       Warner Bros. Film GmbH Kinobetriebe...................................       100            Germany
       Warner Bros. Film GmbH Multiplex Cinemas Mulheim......................       100            Germany
Time Warner Merchandising Canada Inc.........................................       100            Canada
Warner Bros. Canada Inc......................................................       100            Canada
Warner Bros. Distributing (Canada) Limited...................................       100            Canada
Warner Home Video (Canada) Ltd...............................................       100            Canada
Warner Bros. (Africa) (Pty) Ltd..............................................       100            So. Africa
Warner Bros. Belgium SA/NV...................................................       100            Belgium
Warner Bros. (D) A/S.........................................................       100            Denmark
  Warner & Metronome Films A/S...............................................        50            Denmark
  Warner Bros. Theatres Denmark A/S..........................................       100            Denmark
     Scala Biografome I/S (partnership)......................................        50            Denmark
     Dagmar Teatret I/S (partnership)........................................        50            Denmark
Warner Bros. Film Ve Video Sanayi Ve Ticaret A.S.............................       100            Turkey
Warner Bros. Finland OY......................................................       100            Finland
Warner Bros. (Holland) B.V...................................................       100            Netherlands
  Warner Home Video (Nederland) B.V..........................................       100            Netherlands
  Warner Bros. Theatres (Holland) B.V........................................       100            Netherlands
Warner Bros. Holdings Sweden AB..............................................       100            Sweden


                                       2




 


                                                                                PERCENTAGE          STATE OR OTHER
                                                                                 OWNED BY          JURISDICTION OF
                                                                                IMMEDIATE          INCORPORATION OR
                                    NAME                                          PARENT             ORGANIZATION
- -----------------------------------------------------------------------------   ----------         ----------------
                                                                                             
  Warner Bros. (Sweden) AB...................................................       100            Sweden
  Warner Home Video (Sweden) AB..............................................       100            Sweden
Warner Bros. Italia S.p.A....................................................       100            Italy
  Warner Entertainment Italia S.r.L..........................................       100            Italy
Warner Bros. (Korea) Inc.....................................................       100            Korea
Warner Bros. (Mexico) S.A....................................................       100            Mexico
Warner Bros. (N.Z.) Limited..................................................       100            New Zealand
  Warner Home Video (N.Z.) Limited...........................................       100            New Zealand
Warner Bros. Norway A/S......................................................       100            Norway
Warner Bros. Singapore Pte. Ltd..............................................       100            Singapore
Warner Home Video (Ireland) Ltd..............................................       100            Ireland
Warner Home Video Portugal Lda...............................................       100            Portugal
Warner-Lusomundo Sociedade Iberica de Cinemas Lda............................        50            Portugal
Warner Home Video Espanola S.A...............................................       100            Spain
  Warner Bros. Consumer Products S.A.........................................       100            Spain
Warner Mycal Corporation.....................................................        50            Japan
Kabelkom Management Co. (partnership) (6)....................................        50            Delaware
Hungary Holding Co...........................................................       100(4)         Delaware
  Kabelkom Holding Co. (partnership) (6).....................................        50            Delaware
Quincy Jones Entertainment Company L.P. (partnership)........................        50            Delaware
DC Comics (partnership)......................................................        50(7)         New York
 
SUBSIDIARIES OF THE TIME WARNER GENERAL PARTNERS
 
American Television and Communications Corporation (Registrant)..............       100(8)         Delaware
  Paragon Communications (partnership).......................................       100(9)         Colorado
  ATC/PPV, Inc...............................................................       100            Delaware
  Philadelphia Community Antenna Television Company..........................       100            Pennsylvania
Warner Communications Inc. (Registrant)......................................       100            Delaware
  WCI Record Club Inc........................................................       100(10)        Delaware
     The Columbia House Company (partnership)................................        50            New York
     DC Comics (partnership).................................................        50(7)         New York
     Warner-Tamerlane Publishing Corp........................................       100            California
     WB Music Corp...........................................................       100            California
     HBO Film Management, Inc................................................       100            Delaware
     NPP Music Corp..........................................................       100            Delaware
     Warner/Chappell Music, Inc..............................................       100            Delaware
     Warner Bros. Music International Inc....................................       100            Delaware
       Warner Bros. Publications U.S. Inc....................................       100            New York
       New Chappell Inc.(11).................................................       100            Delaware
       Super Hype Publishing, Inc............................................       100            New York
       Cotillion Music, Inc..................................................       100            Delaware
       Walden Music, Inc.....................................................       100            New York
       CPP/Belwin, Inc.......................................................       100            Delaware
       Summy-Birchard, Inc...................................................       100            Wyoming
  Lorimar Motion Picture Management, Inc.....................................       100            California
  Warner Music Group Inc.....................................................       100            Delaware
  Warner Bros. Records Inc...................................................       100            Delaware
     Atlantic Recording Corporation..........................................       100            Delaware
     Warner-Elektra-Atlantic Corporation.....................................       100            New York
  WEA International Inc.(12).................................................       100            Delaware
     Warner Music Canada Ltd.................................................       100            Canada
          The Columbia House Company (Canada) (partnership)..................        50            Canada

 
                                       3







                                                                                PERCENTAGE          STATE OR OTHER
                                                                                 OWNED BY          JURISDICTION OF
                                                                                IMMEDIATE          INCORPORATION OR
                                    NAME                                          PARENT             ORGANIZATION
- -----------------------------------------------------------------------------   ----------         ----------------
                                                                                             
Warner Special Products Inc..................................................       100            Delaware
  Warner Custom Music Corp...................................................       100            California
WEA Manufacturing Inc........................................................       100            Delaware
  Allied Record Company......................................................       100            California
Time Warner Limited..........................................................       100            U.K.
  Warner Music International Services Ltd....................................       100            U.K.
     Time Warner UK Limited..................................................       100            U.K.
     Warner Chappell Music Group (UK) Ltd....................................       100            U.K.
          Warner Chappell Music Limited......................................       100            U.K.
            Magnet Music Ltd.................................................       100            U.K.
     Warner Music (U.K.) Limited.............................................       100            U.K.
Ivy Hill Corporation.........................................................       100            Delaware
TW Service Holding I, L.P. (partnership).....................................    (13)              Delaware
TW Service Holding II, L.P. (partnership)....................................    (13)              Delaware
  TW Programming Co. (partnership)...........................................    (14)              New York
  TW Cable Service Co. (partnership).........................................    (15)              New York
  Time Warner Connect (partnership)..........................................    (15)              New York
TWI Ventures Ltd.............................................................       100            Delaware
E.C. Publications, Inc.......................................................       100            New York

 
- ------------
 
 (1) TWE owns 99% and Time Warner Companies, Inc. owns 1%.
 
 (2) The names of 21 subsidiaries of Time Warner Communications Holdings Inc.
     carrying on substantially the same alternate access operations are omitted.
 
 (3) TWE owns 99% and TWE Asia, Inc. owns 1%.
 
 (4) TWE owns 99% and HBO Direct, Inc. owns 1%.
 
 (5) Time Warner Entertainment Germany GmbH owns 85% and Time Warner Germany
     Holding GmbH owns 15%.
 
 (6) The names of 13 subsidiaries of Kabelkom Management Co. and Kabelkom
     Holding Co. carrying on substantially the same cable television operations
     in Hungary are omitted.
 
 (7) Warner Communications Inc. owns 50% and TWE owns 50%.
 
 (8) Time Warner Companies, Inc. owns 86.34%, Warner Communications Inc. owns
     7.8% and Time TBS Holdings, Inc. owns 5.86%.
 
 (9) KBL Communications Inc. owns 54.0797% of Paragon Communications, ATC owns
     0.6672% and the remaining 45.2531% is owned by TWI Cable Inc. through its
     subsidiaries.
 
(10) Time Warner Companies, Inc. owns 80% and Warner Communications Inc. owns
     20%.
 
(11) The names of 16 subsidiaries of New Chappell Inc. carrying on substantially
     the same music publishing operations in foreign countries are omitted.
 
(12) The names of 34 subsidiaries of WEA International Inc. carrying on
     substantially the same record, tape and video cassette distribution
     operations in foreign countries are omitted.
 
(13) The General Partners of TWE own 87.5%, TW/TAE, Inc. and Time Warner
     Companies, Inc. each own 6.25% as limited partners.
 
(14) TWE owns 99% and TW Service Holding II, L.P. owns 1%.
 
(15) TW Service Holding I, L.P. owns 99% and TW Service Holding II, L.P. owns
     1%.


                                      4

EX-23

                       CONSENT OF INDEPENDENT ACCOUNTANTS


     We consent to the incorporation by reference in Registration Statement
No. 33-75144 on Form S-3 of Time Warner Entertainment Company, L.P. ('TWE') and
in the related Prospectus of our reports dated February 10, 1998, with respect
to the consolidated financial statements and schedules of TWE, Warner
Communications Inc. and American Television and Communications Corporation,
included in this Annual Report on Form 10-K for the year ended December 31,
1997.


                                                     ERNST & YOUNG LLP
                                                -----------------------------
                                                     ERNST & YOUNG LLP
New York, New York
March 25, 1998

EX-27

 

<ARTICLE>       5
<LEGEND>
         This schedule contains summary financial information extracted from the
financial statements of Time Warner Entertainment Company, L.P. for the twelve
months ended Decenber 31, 1997 and is qualified in its entirety by reference to
such financial statements.

<CIK>           0000893657
<NAME>          TIME WARNER ENTERTAINMENT COMPANY, L.P.
<MULTIPLIER>    1,000,000
       
                                                           
<PERIOD-TYPE>                                                   12-MOS
<FISCAL-YEAR-END>                                               DEC-31-1997
<PERIOD-START>                                                  JAN-01-1997
<PERIOD-END>                                                    DEC-31-1997
<CASH>                                                                  322
<SECURITIES>                                                              0
<RECEIVABLES>                                                         2,338
<ALLOWANCES>                                                            424
<INVENTORY>                                                           3,458
<CURRENT-ASSETS>                                                      3,622
<PP&E>                                                               10,537
<DEPRECIATION>                                                        3,980
<TOTAL-ASSETS>                                                       20,731
<CURRENT-LIABILITIES>                                                 3,974
<BONDS>                                                               5,990
<COMMON>                                                                  0
<PREFERRED-MANDATORY>                                                 1,118
<PREFERRED>                                                               0
<OTHER-SE>                                                            6,333
<TOTAL-LIABILITY-AND-EQUITY>                                         20,731
<SALES>                                                              11,318
<TOTAL-REVENUES>                                                     11,318
<CGS>                                                                 7,406
<TOTAL-COSTS>                                                         7,406
<OTHER-EXPENSES>                                                          0
<LOSS-PROVISION>                                                          0
<INTEREST-EXPENSE>                                                      490
<INCOME-PRETAX>                                                         722
<INCOME-TAX>                                                             85
<INCOME-CONTINUING>                                                     637
<DISCONTINUED>                                                            0
<EXTRAORDINARY>                                                         (23)
<CHANGES>                                                                 0
<NET-INCOME>                                                            614
<EPS-PRIMARY>                                                             0
<EPS-DILUTED>                                                             0