TIME WARNER INC/, 10-Q, 2000-11-13

TIME WARNER INC/
10-Q, 2000-11-13
MOTION PICTURE & VIDEO TAPE PRODUCTION

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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended September 30, 2000, or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT of 1934 for the transition period from to .
--------------- ------------------
Commission file number 1-12259

TIME WARNER INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
Delaware 13-3527249
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>

75 Rockefeller Plaza
New York, New York 10019
(212) 484-8000

(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Common Stock - $.01 par value 1,213,387,394
Series LMCN-V Common Stock - $.01 par value 114,123,884
------------------------------------------- ----------------------
Description of Class Shares Outstanding
as of October 31, 2000

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TIME WARNER INC. AND
TIME WARNER ENTERTAINMENT COMPANY, L.P.

INDEX TO FORM 10-Q

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<CAPTION>
PAGE
-------------------
TIME
WARNER TWE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Management's discussion and analysis of results of operations and financial condition..... 1 37
Consolidated balance sheet at September 30, 2000 and December 31, 1999.................... 14 46
Consolidated statement of operations for the three and nine months ended
September 30, 2000 and 1999.......................................................... 15 47
Consolidated statement of cash flows for the nine months ended September 30, 2000
and 1999............................................................................. 16 48
Consolidated statement of shareholders' equity and partnership capital for the nine
months ended September 30, 2000 and 1999............................................. 17 49
Notes to consolidated financial statements................................................ 18 50
Supplementary information................................................................. 29

PART II. OTHER INFORMATION.................................................................... 57

</TABLE>

<PAGE>

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

DESCRIPTION OF BUSINESS

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

INVESTMENT IN TWE

A majority of Time Warner's interests in filmed entertainment,
television production, television broadcasting and cable television systems, and
a portion of its interests in cable television programming and digital media are
held through Time Warner Entertainment Company, L.P. ("TWE"). Time Warner owns
general and limited partnership interests in TWE consisting of 74.49% of the pro
rata priority capital ("Series A Capital") and residual equity capital
("Residual Capital"), and 100% of the junior priority capital ("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 AT&T Corp.

USE OF EBITA

Time Warner evaluates operating performance based on several factors,
including its primary financial measure of business segment operating income
before noncash amortization of intangible assets ("EBITA"). Consistent with
management's financial focus on controlling capital spending, EBITA measures
operating performance after charges for depreciation. In addition, EBITA
eliminates the uneven effect across all business segments of considerable
amounts of noncash amortization of intangible assets recognized in business
combinations accounted for by the purchase method. These business combinations
include the $14 billion acquisition of Warner Communications Inc. in 1989, the
$6.2 billion acquisition of Turner Broadcasting System, Inc. ("TBS") in 1996 and
the $2.3 billion of cable acquisitions in 1996 and 1995, which created over $25
billion of intangible assets that generally are being amortized over a twenty to
forty year period. The exclusion of noncash amortization charges is also
consistent with management's belief that Time Warner's intangible assets, such
as cable television and sports franchises, music catalogues and copyrights, film
and television libraries and the goodwill associated with its brands, generally
are increasing in value and importance to Time Warner's business objective of
creating, extending and distributing recognizable brands and copyrights
throughout the world. As such, the following comparative discussion of the
results of operations of Time Warner includes, among other factors, an analysis
of changes in business segment EBITA. However, EBITA should be considered in
addition to, not as a substitute for, operating income, net income and other
measures of financial performance reported in accordance with generally accepted
accounting principles.

TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS

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

<PAGE>

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

For 2000, the significant, nonrecurring items included (i) a net
pretax, investment-related gain of approximately $65 million recognized in the
third quarter, principally relating to additional proceeds received in the third
quarter of 2000 in connection with the 1999 sale of an interest in
CanalSatellite, a satellite television platform servicing France and Monaco,
(ii) net pretax gains of approximately $21 million recognized in the first nine
months relating to the sale or exchange of various cable television systems and
investments, (iii) a $50 million pretax charge recognized in the second quarter
relating to the Six Flags Entertainment Corporation ("Six Flags") litigation,
(iv) a pretax gain of $10 million recognized in the first quarter relating to
the partial recognition of a deferred gain on the 1998 sale of Six Flags, (v)
merger-related costs of approximately $52 million recognized in the third
quarter and approximately $129 million recognized for the year-to-date period
relating to Time Warner's proposed merger with America Online, Inc. ("America
Online") and Time Warner's recently terminated merger agreement with EMI Group
plc ("EMI"), (vi) a noncash pretax charge of approximately $220 million
recognized in the first quarter relating to the write-down of Time Warner's
carrying value of its investment in the Columbia House Company Partnerships
("Columbia House"), a 50%-owned equity investee and (vii) a noncash, after-tax
charge of $443 million in the first quarter reflecting the cumulative effect of
an accounting change in connection with the adoption of a new film accounting
standard.

For 1999, the significant, nonrecurring items included (i) net pretax
gains of approximately $477 million recognized in the third quarter and
approximately $1.248 billion recognized in the first nine months relating to the
sale or exchange of various cable television systems and investments, (ii) a
pretax gain of $10 million recognized in each of the first three quarters
relating to the partial recognition of a deferred gain on the 1998 sale of Six
Flags, (iii) an approximate $215 million pretax gain recognized in the first
quarter in connection with the early termination and settlement of a long-term,
home video distribution agreement, (iv) a net pretax gain of approximately $115
million recognized in the second quarter relating to the initial public offering
of a 20% interest in Time Warner Telecom Inc. (the "Time Warner Telecom IPO"), a
leading fiber facilities-based provider of integrated communications services
and solutions and (v) an extraordinary loss of $12 million recognized in the
third quarter of 1999 relating to the retirement of debt.

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

In addition to the above significant and nonrecurring items, the
comparability of Time Warner's Publishing segment results has been affected by
the deconsolidation of Book-of-the-Month Club after its operations were
contributed to a joint venture with Doubleday Direct, Inc. ("Doubleday"), a
leading consumer book club group owned by Bertelsmann AG, as discussed in Note 2
to the accompanying consolidated financial statements. While this transaction
had a significant effect on the comparability of the Publishing segment's EBITA
and operating income, it did not have a significant effect on the comparability
of Time Warner's net income and per share results.

<PAGE>

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

RESULTS OF OPERATIONS

EBITA and operating income are as follows:

THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------
EBITA OPERATING INCOME EBITA OPERATING INCOME
-------------- ---------------- --------------- ----------------
2000 1999(a) 2000 1999(a) 2000 1999(a) 2000 1999(a)
---- ------- ---- ------- ---- ------- ---- -------
(MILLIONS)

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cable Networks..................... $ 376 $ 328 $323 $ 277 $1,162 $1,003 $1,003 $ 851
Publishing(b)...................... 151 129 134 118 494 419 451 388
Music.............................. 87 79 27 19 276 266 95 79
Filmed Entertainment(c)............ 271 228 221 177 631 806 481 655
Broadcasting-The WB Network........ (15) (24) (17) (25) (67) (95) (71) (98)
Cable(d)........................... 472 894 315 752 1,412 2,477 946 2,068
Digital Media...................... (62) - (62) - (147) - (147) -
Intersegment elimination........... (4) (23) (4) (23) (28) (10) (28) (10)
------- ------ ----- ------ ------ ------ ------ -----

Total.............................. $1,276 $1,611 $937 $1,295 $3,733 $4,866 $2,730 $3,933
====== ====== ==== ====== ====== ====== ====== ======

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-----------------
(a) Effective on January 1, 2000, management reclassified Time Warner's share
of the segment operating results of Columbia House from its Music segment
to interest and other, net. Accordingly, segment operating results for 1999
have been reclassified to conform to the 2000 presentation.
(b) 1999 results include losses from Book-of-the-Month Club, which was
deconsolidated in 2000 after its operations were contributed to a joint
venture with Doubleday. Equity losses for 2000 are classified in interest
and other, net. During the three and nine months ended September 30, 1999,
the Publishing segment's operating results included EBITA losses of $3
million and $15 million, respectively, and operating losses of $3 million
and $17 million, respectively, relating to Book-of-the-Month Club.
(c) Includes a net pretax, investment-related gain of approximately $65 million
recognized in the third quarter of 2000, a pretax charge of $24 million
recognized in the second quarter of 2000 in connection with the Six Flags
litigation, a pretax gain of $10 million related to the partial recognition
of a deferred gain in connection with the 1998 sale of Six Flags recognized
in the first quarter of 2000 and in each of the first three quarters of
1999 and a pretax gain of approximately $215 million recognized in the
first quarter of 1999 relating to the early termination and settlement of a
long-term, home video distribution agreement.
(d) Includes net pretax gains related to the sale or exchange of certain cable
television systems and investments of approximately $477 million recognized
in the third quarter of 1999. Similarly, nine-month results include net
pretax gains of approximately $21 million in 2000 and approximately $1.248
billion in 1999.

THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999

CONSOLIDATED RESULTS

Time Warner had revenues of $6.873 billion and net income of $88
million for the three months ended September 30, 2000, compared to revenues of
$6.723 billion, income of $381 million before an extraordinary loss on the
retirement of debt and net income of $369 million for the three months ended
September 30, 1999. After preferred dividend requirements, Time Warner had basic
net income per common share of $.06 in 2000, compared to basic income per common
share before the extraordinary loss on retirement of debt of $.29, and $.28
after, in 1999. On a diluted basis, net income per common share was $.06 in
2000, compared to income per common share before the extraordinary loss on
retirement of debt of $.28, and $.27 after, in 1999.

As previously described, the comparability of Time Warner's operating
results for 2000 and 1999 has been affected by certain significant, nonrecurring
items recognized in each period. These nonrecurring items aggregated
approximately $13 million of net pretax income in 2000, compared to $487 million
of net pretax income in 1999. In addition, net income in 1999 was reduced by an
extraordinary loss on the retirement of debt of $12 million. The aggregate net
effect of these items was to decrease basic and diluted net income per common
share by $.01 in 2000. The aggregate net effect of these items in 1999 was to
increase basic net income per common share by $.21 and diluted net income per
common share by $.20.

<PAGE>

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

Time Warner's net income decreased to $88 million in 2000, compared to
$369 million in 1999. However, excluding the significant effect of the
nonrecurring items referred to earlier, net income decreased by $13 million to
$90 million in 2000 from $103 million in 1999. As discussed more fully below,
this decrease principally resulted from higher interest expense principally due
to higher market interest rates on variable-rate debt and higher losses from
certain investments accounted for under the equity method of accounting, offset
in part by an overall increase in Time Warner's business segment operating
income. Normalized basic and diluted net income per common share, excluding the
effect of significant nonrecurring items, was $.07 in both 2000 and 1999.

The relationship between income before income taxes and income tax
expense of Time Warner is principally affected by the amortization of goodwill
and certain other financial statement expenses that are not deductible for
income tax purposes.

BUSINESS SEGMENT RESULTS

Cable Networks. Revenues increased to $1.560 billion in 2000, compared
to $1.450 billion in 1999. EBITA increased to $376 million in 2000 from $328
million in 1999. Operating income increased to $323 million in 2000 from $277
million in 1999. Revenues grew due to increases at both the Turner cable
networks group and HBO. For the Turner cable networks group, revenues benefited
from a 14% increase in both advertising and subscription revenues on a
normalized basis, partially offset by lower revenues at World Championship
Wrestling. The increase in advertising revenues was principally due to a strong
overall advertising market for most of the group's networks, including CNN, CNN
International, TBS Superstation and TNT. The increase in subscription revenues
was principally due to an increase in subscriptions and higher rates, primarily
led by revenue increases at CNN, TBS Superstation, TNT and Turner Classic
Movies. For HBO, revenues benefited primarily from an increase in subscriptions.

Likewise, EBITA and operating income were higher due to improved
results at both the Turner cable networks group and HBO. For the Turner cable
networks group, the increase in EBITA and operating income was principally due
to the strong revenue growth. The results also benefited from $14 million of
investment-related gains and $46 million of reduced costs relating to the
finalization of certain licensing arrangements. These benefits were
substantially offset by lower results at World Championship Wrestling, higher
start-up costs for new cable networks, certain one-time costs and continuing
investments in entertainment programming and news operations, including CNN's
coverage of the national political conventions. For HBO, the increase in EBITA
and operating income was principally due to the revenue gains, increased cost
savings and higher income from Comedy Central, a 50%-owned equity investee.

Publishing. Revenues decreased to $1.081 billion in 2000, compared to
$1.110 billion in 1999. EBITA increased to $151 million in 2000 from $129
million in 1999. Operating income increased to $134 million in 2000 from $118
million in 1999. As described further below, the comparability of the Publishing
segment's operating results was affected by a transaction in 2000 involving
Book-of-the-Month Club.

In the first quarter of 2000, the operations of Book-of-the-Month Club
were deconsolidated after being contributed to a joint venture with the domestic
book club operations of Doubleday. Time Warner is accounting for its interest in
the joint venture under the equity method of accounting and Time Warner's equity
in the net loss of the joint venture for 2000 is classified in interest and
other, net, in the accompanying statement of operations. As such, the Publishing
segment's revenue and operating results for 2000 exclude the operations of
Book-of-the-Month Club. During the three months ended September 30, 1999, the
Publishing segment's operating results included revenues of $81 million and
EBITA losses and operating losses of $3 million relating to Book-of-the-Month
Club.

<PAGE>

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

Excluding the 1999 operations of Book-of-the-Month Club, revenues
increased primarily from a 15% growth in magazine advertising revenues, offset
in part by lower magazine circulation revenues. The increase in advertising
revenues was principally due to a strong advertising market for the segment's
magazines, primarily led by Fortune, In Style, Sports Illustrated and Time.
Circulation revenues decreased primarily due to lower newsstand sales,
principally resulting from the absence in 2000 of certain special issues
published in 1999. Excluding the 1999 operations of Book-of-the-Month Club,
EBITA and operating income increased principally as a result of the revenue
gains and increased cost savings, including pension-related savings, offset in
part by higher start-up costs in 2000 for new magazine launches.

In October 2000, Time Warner's Publishing segment signed an agreement
to acquire Times Mirror Magazines, Inc., a subsidiary of Tribune Co., for
approximately $475 million. Times Mirror Magazines, Inc. publishes
special-interest magazines such as Popular Science, Field & Stream, Ski and
Golf. The acquisition is expected to close by the end of 2000 or in early 2001
and is subject to customary closing conditions, including regulatory approvals.
As such, there can be no assurances that the acquisition will occur. The
acquisition will be accounted for by Time Warner under the purchase method of
accounting for business combinations.

Music. Revenues increased to $938 million in 2000, compared to $852
million in 1999. EBITA increased to $87 million in 2000 from $79 million in 1999
after giving effect to the Columbia House reclassification described earlier.
Operating income increased to $27 million in 2000 from $19 million in 1999 after
giving effect to the Columbia House reclassification. Revenues increased
primarily due to higher domestic and international recorded music sales and
higher revenues from DVD manufacturing operations. Revenues benefited
principally from higher compact disc sales of a broad range of popular releases,
including the latest releases from Madonna, The Corrs and Eric Clapton with B.B.
King. EBITA and operating income increased principally as a result of the
revenue gains, offset in part by higher marketing and artist royalty costs.

Filmed Entertainment. Revenues decreased to $2.006 billion in 2000,
compared to $2.208 billion in 1999. EBITA increased to $271 million in 2000 from
$228 million in 1999. Operating income increased to $221 million in 2000 from
$177 million in 1999. Revenues decreased at both Warner Bros. and the Turner
filmed entertainment businesses. For Warner Bros., revenues decreased primarily
due to the 1999 initial off-network availability of the popular television
series The Drew Carey Show. Revenues from theatrical operations were essentially
flat, as the combination of higher worldwide DVD sales and domestic theatrical
revenues offset lower international theatrical revenues, principally relating to
last year's highly successful release of The Matrix. For the Turner filmed
entertainment businesses, the revenue decline reflects lower domestic theatrical
revenues due to last year's theatrical success of Austin Powers: The Spy Who
Shagged Me and lower revenues from the licensing of library product, offset in
part by increased DVD sales.

For Warner Bros., the operating results in both periods were affected
by certain one-time items. The 2000 results include a net pretax,
investment-related gain of $65 million. The 1999 results include a pretax gain
of $10 million relating to the partial recognition of a deferred gain on the
1998 sale of Six Flags. Excluding the impact of these items, EBITA and operating
income decreased as a result of the decline in revenues, offset in part by lower
film and television costs. For the Turner filmed entertainment business, EBITA
and operating income decreased as a result of the decline in revenues, offset in
part by lower film costs.

Broadcasting-The WB Network. Revenues increased to $99 million in 2000,
compared to $84 million in 1999. EBITA improved to a loss of $15 million in 2000
from a loss of $24 million in 1999. Operating losses decreased to $17 million in
2000 from $25 million in 1999. Revenues increased principally as a result of one
additional night of prime-time programming in comparison to the prior year and
advertising rate increases, offset in part by lower prime-time television
ratings. Prime-time television ratings were negatively affected by lower
household delivery associated with the WGN Superstation discontinuing its
carriage of The WB Network's programming beginning in the fall of 1999. The

<PAGE>

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

EBITA and operating loss improvements were principally due to the revenue gains
and lower promotion costs, which more than offset higher programming costs
associated with the expanded programming schedule.

Cable. Revenues increased to $1.511 billion in 2000, compared to $1.342
billion in 1999. EBITA, including the negative effect on operating trends of
one-time gains recognized in 1999, decreased to $472 million in 2000 from $894
million in 1999. Operating income similarly decreased to $315 million in 2000
from $752 million in 1999 due to the one-time gains. Revenues increased due to
growth in basic cable subscribers, increases in basic cable rates, increases in
advertising revenues and increases from the deployment of digital cable and
high-speed online services. The 1999 operating results of the Cable segment were
affected by net pretax gains of approximately $477 million relating to the sale
or exchange of various cable television systems and investments. Excluding the
effect of these items, EBITA and operating income increased principally as a
result of the revenue gains and pension-related cost savings, offset in part by
higher programming costs and higher depreciation related to capital spending.

Digital Media. The Digital Media segment had $62 million of operating
losses on $20 million of revenues in 2000, principally due to start-up costs
associated with Time Warner's digital media businesses. Time Warner's digital
media businesses include CNN's interactive news sites, Entertaindom, an
advertiser-supported entertainment destination site, and magazine and other
entertainment-related websites. Due to the start-up nature of most of these
businesses, losses are expected to continue in 2000.

Interest and Other, Net. Interest and other, net, increased to $641
million of expense in 2000, compared to $485 million of expense in 1999.
Interest expense increased to $443 million in 2000, compared to $374 million in
1999. Interest expense increased principally as a result of higher market
interest rates on variable-rate debt. Other expense, net, increased to $198
million in 2000 from $111 million in 1999, primarily because of merger-related
costs of approximately $52 million in 2000 relating to Time Warner's proposed
merger with America Online and Time Warner's recently terminated merger
agreement with EMI and higher losses from certain investments accounted for
under the equity method.

Minority Interest. Minority interest expense increased to $77 million
in 2000, compared to $72 million in 1999. Minority interest expense was affected
by the allocation of a portion of the net pretax gains in 1999 relating to the
sale or exchange of various cable television systems and investments owned by
the TWE-Advance/Newhouse Partnership ("TWE-A/N") to the minority owners of that
partnership. Excluding the effect of the 1999 gains, minority interest expense
increased principally due to a lower allocation of losses in 2000 to a minority
partner in The WB Network.

NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999

CONSOLIDATED RESULTS

Time Warner had revenues of $20.517 billion, income of $62 million
before the cumulative effect of an accounting change and a net loss of $381
million for the nine months ended September 30, 2000, compared to revenues of
$19.345 billion, income of $1.112 billion before an extraordinary loss on
retirement of debt and net income of $1.100 billion for the nine months ended
September 30, 1999. After preferred dividend requirements, Time Warner had basic
income per common share before the cumulative effect of an accounting change of
$.04 in 2000, and a basic loss per common share of $.30 after. This is compared
to basic income per common share before extraordinary loss on retirement of debt
of $.85, and $.84 after, in 1999. On a diluted basis, Time Warner had income per
common share before the cumulative effect of an accounting change of $.04 in
2000, and loss per common share of $.30 after, compared to income per common
share before the extraordinary loss on retirement of debt of $.82, and $.81
after, in 1999.

<PAGE>

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

As previously described, the comparability of Time Warner's operating
results for 2000 and 1999 has been affected by certain significant, nonrecurring
items recognized in each period. These items aggregated approximately $303
million of net pretax losses in 2000, compared to $1.608 billion of net pretax
income in 1999. In addition, net income in 2000 was reduced by an after-tax
charge of $443 million relating to the cumulative effect of an accounting change
and net income in 1999 was reduced by an after-tax charge of $12 million
relating to an extraordinary loss on retirement of debt. The aggregate net
effect of these items in 2000 was to decrease basic and diluted net income per
common share by $.51. The aggregate net effect of these items in 1999 was to
increase basic net income per common share by $.67 and diluted net income per
common share by $.64.

Time Warner had a net loss of $381 million in 2000, compared to net
income of $1.100 billion in 1999. However, excluding the significant effect of
the nonrecurring items referred to earlier, net income increased by $22 million
to $287 million in 2000 from $265 million in 1999. As discussed more fully
below, this improvement principally resulted from an overall increase in Time
Warner's business segment operating income, offset in part by higher interest
expense principally due to higher market interest rates on variable-rate debt
and higher losses from certain investments accounted for under the equity method
of accounting. Similarly, normalized basic and diluted net income per common
share, excluding the effect of significant nonrecurring items, increased to $.21
in 2000, compared to $.17 in 1999.

BUSINESS SEGMENT RESULTS

Cable Networks. Revenues increased to $4.915 billion in 2000, compared
to $4.425 billion in 1999. EBITA increased to $1.162 billion in 2000 from $1.003
billion in 1999. Operating income increased to $1.003 billion in 2000 from $851
million in 1999. Revenues grew due to increases at both the Turner cable
networks group and HBO. For the Turner cable networks group, revenues benefited
from an 18% increase in advertising on a normalized basis and a 13% increase in
subscription revenues, partially offset by lower revenues at World Championship
Wrestling. The increase in advertising revenues was principally due to a strong
overall advertising market for most of the group's networks, including CNN, CNN
International, TBS Superstation, TNT and the Cartoon Network. The increase in
subscription revenues was principally due to an increase in subscriptions and
higher rates, primarily led by revenue increases at CNN, TBS Superstation, TNT
and Turner Classic Movies. For HBO, revenues benefited primarily from an
increase in subscriptions.

Likewise, EBITA and operating income were higher due to improved
results at both the Turner cable networks group and HBO. For the Turner cable
networks group, the increase in EBITA and operating income was principally due
to the strong revenue growth. The results also benefited from $45 million of
investment-related gains and $46 million of reduced costs relating to the
finalization of certain licensing arrangements. These benefits were
substantially offset by lower results at World Championship Wrestling, higher
start-up costs for new cable networks, certain one-time costs and continuing
investments in entertainment programming and news operations. For HBO, the
increase in EBITA and operating income was principally due to the revenue gains,
increased cost savings and higher income from Comedy Central, a 50%-owned equity
investee.

Publishing. Revenues decreased to $3.216 billion in 2000, compared to
$3.237 billion in 1999. EBITA increased to $494 million in 2000 from $419
million in 1999. Operating income increased to $451 million in 2000 from $388
million in 1999. As previously described, the comparability of the Publishing
segment's operating results was

<PAGE>

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

affected by the deconsolidation of the operations of Book-of-the-Month Club.
As such, the Publishing segment's revenue and operating results for 2000
exclude the operations of Book-of-the-Month Club. During the nine months ended
September 30, 1999, the Publishing segment's results included revenues of $228
million, EBITA losses of $15 million and operating losses of $17 million
relating to Book-of-the-Month Club.

Excluding the 1999 operations of Book-of-the-Month Club, revenues
increased primarily from an 18% growth in magazine advertising revenues, offset
in part by lower magazine circulation revenues. The increase in advertising
revenues was principally due to a strong advertising market for the segment's
magazines, primarily led by Fortune, In Style, Time and People. Circulation
revenues decreased primarily due to lower newsstand sales, principally resulting
from the absence in 2000 of certain special issues published in 1999. Excluding
the 1999 operations of Book-of-the-Month Club, EBITA and operating income
increased principally as a result of the revenue gains and increased cost
savings, including pension-related savings. In addition, EBITA and operating
income for 2000 included approximately $32 million of gains on the sale of
assets. However, those gains did not affect operating trends because they were
more than offset by the combination of higher start-up costs in 2000 for new
magazine launches, severance costs in 2000 related to certain restructuring
efforts and lower gains on the sale of assets recognized in 1999.

Music. Revenues increased to $2.811 billion in 2000, compared to $2.616
billion in 1999. EBITA increased to $276 million in 2000 from $266 million in
1999 after giving effect to the Columbia House reclassification described
earlier. Operating income increased to $95 million in 2000 from $79 million in
1999 after giving effect to the Columbia House reclassification. Revenues
increased primarily due to higher domestic and international recorded music
sales and higher revenues from DVD manufacturing operations. Revenues benefited
principally from higher compact disc sales of a broad range of popular releases,
including the latest releases from the Red Hot Chili Peppers, The Corrs, Eric
Clapton with B.B. King, and matchbox twenty. EBITA and operating income
increased principally as a result of the revenue gains, offset in part by higher
marketing and artist royalty costs.

Filmed Entertainment. Revenues increased to $5.703 billion in 2000,
compared to $5.688 billion in 1999. EBITA, including the effect on operating
trends of one-time items recognized in each period, decreased to $631 million in
2000, compared to $806 million in 1999. Operating income similarly decreased to
$481 million in 2000, compared to $655 million in 1999 due to the one-time
items. Revenues grew primarily due to an increase at Warner Bros., offset by
marginally lower revenues at the Turner filmed entertainment businesses. For
Warner Bros., revenues benefited from increases in the distribution of both
theatrical and television product, offset in part by lower revenues from
consumer product operations. Warner Bros.'s revenues from the distribution of
theatrical product increased principally due to higher worldwide DVD sales,
offset in part by lower revenues from worldwide theatrical operations,
principally relating to last year's highly successful release of The Matrix.
Warner Bros.'s revenues from the distribution of television product increased
principally due to higher aggregate revenues from basic cable, broadcast network
and international syndicated television exhibition, offset in part by lower
revenues from domestic syndicated television exhibition relating to the 1999
initial off-network availability of the popular television series The Drew Carey
Show. For the Turner filmed entertainment businesses, revenues decreased
marginally, principally as a result of lower revenues from the licensing of
theatrical product, substantially offset by higher DVD sales.

For Warner Bros., the operating results in both periods were affected
by certain one-time items. The 2000 results include a net pretax,
investment-related gain of $65 million, a pretax charge of $24 million relating
to the Six Flags litigation and a $10 million pretax gain relating to the
partial recognition of a deferred gain on the 1998 sale of Six Flags. The 1999
results include pretax gains of $30 million relating to the partial recognition
of a deferred gain on the 1998 sale of Six Flags and a $215 million net pretax
gain recognized in connection with the early termination and settlement of a
long-term, home video distribution agreement. Excluding the impact of these
items, EBITA and operating income increased principally as a result of the
revenue gains and lower film costs, offset in part by lower results from

<PAGE>

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

domestic television syndication operations. For the Turner filmed entertainment
businesses, EBITA and operating income increased marginally, principally due to
lower film costs, offset in part by difficult comparisons to last year's
theatrical success of Austin Powers: The Spy Who Shagged Me.

Broadcasting-The WB Network. Revenues increased to $310 million in
2000, compared to $246 million in 1999. EBITA improved to a loss of $67 million
in 2000 from a loss of $95 million in 1999. Operating losses decreased to $71
million in 2000 from $98 million in 1999. Revenues increased principally as a
result of one additional night of prime-time programming in comparison to the
prior year and advertising rate increases, offset in part by lower prime-time
television ratings. Prime-time television ratings were negatively affected by
lower household delivery associated with the WGN Superstation discontinuing its
carriage of The WB Network's programming beginning in the fall of 1999. The
EBITA and operating loss improvements were principally due to the revenue gains,
which more than offset higher programming costs associated with the expanded
programming schedule.

Cable. Revenues increased to $4.460 billion in 2000, compared to $3.968
billion in 1999. EBITA, including the negative effect on operating trends of
significantly higher one-time net gains in 1999, decreased to $1.412 billion in
2000 from $2.477 billion in 1999. Operating income similarly decreased to $946
million in 2000 from $2.068 billion in 1999 due to the one-time net gains.
Revenues increased due to growth in basic cable subscribers, increases in basic
cable rates, increases in advertising revenues and increases from the deployment
of digital cable and high-speed online services. The operating results of the
Cable segment were affected by net pretax gains of approximately $21 million in
2000 and approximately $1.248 billion in 1999 relating to the sale or exchange
of various cable television systems and investments. Excluding the effect of
these items, EBITA and operating income increased principally as a result of the
revenue gains and pension-related cost savings, offset in part by higher
programming costs and higher depreciation related to capital spending.

Digital Media. The Digital Media segment had $147 million of operating
losses on $44 million of revenues in 2000, principally due to start-up costs
associated with Time Warner's digital media businesses. Time Warner's digital
media businesses include CNN's interactive news sites, Entertaindom, an
advertiser-supported entertainment destination site, and magazine and other
entertainment-related websites. Due to the start-up nature of most of these
businesses, losses are expected to continue in 2000.

Interest and Other, Net. Interest and other, net, increased to $2.095
billion of expense in 2000, compared to $1.345 billion of expense in 1999.
Interest expense increased to $1.265 billion in 2000, compared to $1.109 billion
in 1999. Interest expense increased principally as a result of higher market
interest rates on variable-rate debt and $26 million of additional interest
expense recorded in 2000 in connection with the Six Flags litigation. Other
expense, net, increased to $830 million in 2000 from $236 million in 1999. Other
expense, net, increased primarily because of a $220 million noncash pretax
charge in 2000 to reduce the carrying value of Time Warner's investment in
Columbia House, merger-related costs of approximately $129 million in 2000
relating to Time Warner's proposed merger with America Online and Time Warner's
recently terminated merger agreement with EMI, higher losses from certain
investments accounted for under the equity method of accounting and the absence
in 2000 of an approximate $115 million pretax gain in 1999 in connection with
the Time Warner Telecom IPO.

Minority Interest. Minority interest expense decreased to $188 million
in 2000, compared to $402 million in 1999. The decrease in minority interest
expense was principally due to the allocation of a portion of the higher net
pretax gains in 1999 relating to the sale or exchange of various cable
television systems and investments owned by TWE-A/N to the minority owners of
that partnership. Excluding the significant effect of the 1999 gains, minority
interest expense decreased principally due to a higher allocation of losses in
2000 to a minority partner in The WB Network.

<PAGE>

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

FINANCIAL CONDITION AND LIQUIDITY
SEPTEMBER 30, 2000

FINANCIAL CONDITION

At September 30, 2000, Time Warner had $18.1 billion of debt, $601
million of cash and equivalents (net debt of $17.5 billion), $1.115 billion of
borrowings against future stock option proceeds, $575 million of mandatorily
redeemable preferred securities of a subsidiary and $9.8 billion of
shareholders' equity, compared to $18.1 billion of debt, $1.3 billion of cash
and equivalents (net debt of $16.8 billion), $1.243 billion of borrowings
against future stock option proceeds, $575 million of mandatorily redeemable
preferred securities of a subsidiary and $9.7 billion of shareholders' equity at
December 31, 1999.

CASH FLOWS

During the first nine months of 2000, Time Warner's cash provided by
operations amounted to $1.402 billion and reflected $3.733 billion of business
segment EBITA, $957 million of noncash depreciation expense and $91 million of
proceeds from Time Warner's asset securitization program, less $1.192 billion of
interest payments, $347 million of income taxes, $133 million of corporate
expenses and $1.707 billion related to an aggregate increase in working capital
requirements, other balance sheet accounts and noncash items. Cash provided by
operations of $2.802 billion for the first nine months of 1999 reflected $4.866
billion of business segment EBITA, $905 million of noncash depreciation expense
and $85 million of proceeds from Time Warner's asset securitization program,
less $1.137 billion of interest payments, $261 million of income taxes, $120
million of corporate expenses and $1.536 billion related to an aggregate
increase in working capital requirements, other balance sheet accounts and
noncash items.

Cash used by investing activities was $2.071 billion in the first nine
months of 2000, compared to $1.392 billion in the first nine months of 1999.
This increase was principally due to higher capital expenditures, an increase in
cash used for acquisitions and investments and a decrease in cash proceeds from
the sale of investments. Capital expenditures increased to $2.046 billion in the
first nine months of 2000, compared to $1.532 billion in the first nine months
of 1999, reflecting higher spending on variable capital to facilitate a more
aggressive roll-out of Time Warner Cable's popular digital cable and high-speed
online services.

Cash used by financing activities was $14 million in the first nine
months of 2000, compared to $1.207 billion in the first nine months of 1999. The
use of cash in 2000 principally resulted from the repayment of $130 million of
borrowings against future stock option proceeds, the repurchase of approximately
930 thousand shares of Time Warner common stock at an aggregate cost of $65
million in early 2000 before the merger-related suspension of Time Warner's
stock repurchase program and the payment of $194 million in dividends, offset in
part by $356 million of proceeds received principally from the exercise of
employee stock options. The use of cash in 1999 principally resulted from the
repurchase of approximately 24.3 million shares of Time Warner common stock at
an aggregate cost of $1.636 billion, the redemption of preferred stock of a
subsidiary at an aggregate cost of $217 million and the payment of $226 million
of dividends, offset in part by a $316 million increase in net borrowings, $335
million of borrowings against future stock option proceeds and $350 million of
proceeds received principally from the exercise of employee stock options.

The assets and cash flows of TWE are restricted by certain borrowing
and partnership agreements and are unavailable to Time Warner except through the
payment of certain fees, reimbursements, cash distributions and loans, which are
subject to limitations. Under its bank credit agreement, TWE is permitted to
incur additional indebtedness to

<PAGE>

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

make loans, advances, distributions and other cash payments to Time Warner,
subject to its individual compliance with the cash flow coverage and leverage
ratio covenants contained therein.

Management believes that Time Warner's operating cash flow, cash and
equivalents and additional borrowing capacity are sufficient to fund its capital
and liquidity needs for the foreseeable future without distributions and loans
from TWE above those permitted by existing agreements.

CABLE CAPITAL SPENDING

Time Warner Cable has been engaged in a plan to upgrade the
technological capability and reliability of its cable television systems and
develop new services, which it believes will position the business for
sustained, long-term growth. Capital spending by Time Warner Cable amounted to
$1.623 billion in the nine months ended September 30, 2000, compared to $1.107
billion in the nine months ended September 30, 1999. Cable capital spending for
the fourth quarter of 2000 is budgeted to be approximately $500 million,
reflecting higher spending on variable capital to facilitate a more aggressive
roll-out of Time Warner Cable's popular digital cable and high-speed online
services. Capital spending by Time Warner Cable is expected to continue to be
funded by cable operating cash flow.

FILMED ENTERTAINMENT BACKLOG

Backlog represents the amount of future revenue not yet recorded from
cash contracts for the licensing of theatrical and television product for pay
cable, basic cable, network and syndicated television exhibition. Backlog for
all of Time Warner's filmed entertainment companies amounted to $3.386 billion
at September 30, 2000, compared to $3.595 billion at December 31, 1999
(including amounts relating to the licensing of film product to Time Warner's
cable television networks of $1.139 billion at September 30, 2000 and $1.176
billion at December 31, 1999).

Because backlog generally relates to contracts for the licensing of
theatrical and television product which already have been produced, the
recognition of revenue for such completed product is principally only dependent
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement. Cash licensing fees are collected periodically
over the term of the related licensing agreements or on an accelerated basis
using a $500 million securitization facility. The portion of backlog for which
cash has not already been received has significant off-balance sheet asset value
as a source of future funding. As of September 30, 2000, including cash received
under the securitization facility and other advanced payments, approximately
$700 million of cash licensing fees had been collected against the backlog. The
backlog excludes advertising barter contracts, which also are expected to result
in the future realization of revenues and cash through the sale of advertising
spots received under such contracts.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

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

<PAGE>

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

expressly disclaims any such obligation to) update or alter its forward-looking
statements whether as a result of such changes, new information, future events
or otherwise.

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

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

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

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

o For Time Warner's music business, its ability to continue to attract and
select desirable talent at manageable costs; the timely completion of
albums by major artists; the popular demand for particular artists and
albums; its ability to continue to enforce and capitalize on its
intellectual property rights in digital environments; its ability to
renegotiate the proposed transaction with EMI on terms acceptable to the
parties and European and U.S. regulatory authorities; and the overall
strength of global music sales.

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

o For Time Warner's digital media businesses, their ability to locate and
invest in profitable businesses, to develop products and services that are
attractive, accessible and commercially viable in terms of content,
technology and cost; their ability to manage costs and generate revenues;
aggressive competition from existing and developing technologies and
products; the resolution of issues concerning commercial activities via the
Internet, including

<PAGE>

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

security, reliability, cost, ease of use and access; and the possibility
of increased government regulation of new media services.

o The risks related to the Company's merger with America Online (the
"Merger"), including the risk that the Time Warner and America Online
businesses will not be integrated successfully; the costs related to the
Merger; the inability to obtain, or meet conditions imposed for,
governmental approvals for the Merger; the failure of the combined company
to realize the anticipated benefits of the Merger; the difficulty the
financial market may have in valuing the business model of the combined
company; fluctuating market prices that could cause the value of the stock
of the combined company to fail to reflect the historical values of Time
Warner's or America Online's stock; and other economic, business,
competitive, technological and/or regulatory factors generally affecting
the businesses of Time Warner, America Online or the combined company.

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

<PAGE>

TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents....................................................................... $ 601 $ 1,284
Receivables, less allowances of $1.477 and $1.682 billion.................................. 4,467 4,931
Inventories................................................................................ 1,430 1,472
Prepaid expenses........................................................................... 1,511 1,464
------ ------

Total current assets....................................................................... 8,009 9,151

Noncurrent inventories and film costs...................................................... 4,857 4,911
Investments................................................................................ 1,822 2,096
Property, plant and equipment.............................................................. 9,761 8,728
Music catalogues, contracts and copyrights................................................. 713 782
Cable television and sports franchises..................................................... 8,087 8,472
Goodwill................................................................................... 15,122 15,458
Other assets............................................................................... 1,709 1,641
------- -------

Total assets............................................................................... $50,080 $51,239
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................................................... $ 1,514 $ 1,923
Participations payable..................................................................... 1,292 1,403
Royalties and programming costs payable.................................................... 1,560 1,564
Debt due within one year................................................................... 20 22
Other current liabilities.................................................................. 5,016 4,758
------- -------

Total current liabilities.................................................................. 9,402 9,670

Long-term debt ............................................................................ 18,094 18,083
Borrowings against future stock option proceeds............................................ 1,115 1,243
Deferred income taxes...................................................................... 3,299 4,234
Unearned portion of paid subscriptions..................................................... 741 762
Other liabilities.......................................................................... 3,804 3,773
Minority interests......................................................................... 3,227 3,186
Mandatorily redeemable preferred securities of a subsidiary holding solely
debentures of a subsidiary of the Company............................................... 575 575

SHAREHOLDERS' EQUITY
Preferred stock, $.10 par value, 4.0 and 8.4 million shares outstanding,
$.400 and $.840 billion liquidation preference.......................................... - 1
Series LMCN-V Common Stock, $.01 par value, 114.1 million shares outstanding............... 1 1
Common stock, $.01 par value, 1.212 and 1.173 billion shares outstanding................... 12 12
Paid-in capital............................................................................ 14,939 12,998
Accumulated deficit........................................................................ (5,129) (3,299)
------ -------

Total shareholders' equity................................................................. 9,823 9,713
------ -------

Total liabilities and shareholders' equity................................................. $50,080 $51,239
======= =======
</TABLE>

See accompanying notes.

<PAGE>

TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues(a).......................................................... $6,873 $ 6,723 $20,517 $19,345
------- ------- ------- -------

Cost of revenues(a)(b)............................................... (3,744) (3,717) (11,118) (10,550)
Selling, general and administrative(a)(b)............................ (1,853) (1,872) (5,687) (5,392)
Amortization of goodwill and other intangible assets................. (339) (316) (1,003) (933)
Gain on sale or exchange of cable systems and investments(a)......... - 477 21 1,248
Gain on early termination of video distribution agreement............ - - - 215
------- ------- ------- -------

Business segment operating income.................................... 937 1,295 2,730 3,933
Interest and other, net(a)(c)........................................ (641) (485) (2,095) (1,345)
Corporate expenses................................................... (46) (40) (133) (120)
Minority interest.................................................... (77) (72) (188) (402)
------- ------- ------- -------

Income before income taxes, extraordinary loss on retirement of
debt and cumulative effect of accounting change................... 173 698 314 2,066
Income taxes......................................................... (85) (317) (252) (954)
------- ------- ------- -------

Income before extraordinary loss on retirement of debt and
cumulative effect of accounting change............................ 88 381 62 1,112
Extraordinary loss on retirement of debt, net of $9 million income
tax benefit....................................................... - (12) - (12)
------- ------- ------- -------

Income before cumulative effect of accounting change................. 88 369 62 1,100
Cumulative effect of accounting change, net of $295 million income
tax benefit....................................................... - - (443) -
------- ------- ------- -------

Net income (loss).................................................... 88 369 (381) 1,100
Preferred dividend requirements...................................... (3) (9) (11) (45)
------- ------- ------- -------

Net income (loss) applicable to common shares........................ $ 85 $ 360 $ (392) $ 1,055
======= ======= ======= =======

Basic income per common share before extraordinary loss on
retirement of debt and cumulative effect of accounting change..... $ 0.06 $ 0.29 $ 0.04 $ 0.85
Extraordinary loss on retirement of debt............................. - (0.01) - (0.01)
Cumulative effect of accounting change............................... - - (0.34) -
------- ------- ------- -------
Basic net income (loss) per common share............................. $ 0.06 $ 0.28 $ (0.30) $ 0.84
======= ======= ======= =======
Average basic common shares.......................................... 1,324.2 1,288.9 1,315.0 1,260.5
======= ======= ======= =======

Diluted income per common share before extraordinary loss on
retirement of debt and cumulative effect of accounting change..... $ 0.06 $ 0.28 $ 0.04 $ 0.82
Extraordinary loss on retirement of debt............................. - (0.01) - (0.01)
Cumulative effect of accounting change............................... - - (0.34) -
------- ------- ------- -------
Diluted net income (loss) per common share........................... $ 0.06 $ 0.27 $ (0.30) $ 0.81
======= ======= ======= =======
Average diluted common shares........................................ 1,324.2 1,397.8 1,315.0 1,400.4
======= ======= ======= =======
--------------
(a) Includes the following income (expenses) resulting from transactions with related companies:
Revenues...................................................... $218 $109 $403 $376
Cost of revenues.............................................. (86) (40) (143) (121)
Selling, general and administrative........................... (11) (6) (26) (17)
Gain on sale or exchange of cable systems and investments..... - 427 - 427
Interest and other, net....................................... (3) (8) (17) (20)

(b) Includes depreciation expense of:............................... $331 $320 $957 $905
==== ==== ==== ====

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

See accompanying notes.

<PAGE>

TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
OPERATIONS
Net income (loss)....................................................................... $ (381) $1,100
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt............................................. - 12
Cumulative effect of accounting change............................................... 443 -
Depreciation and amortization........................................................ 1,960 1,838
Amortization of film costs........................................................... 1,386 1,709
Gain on sale or exchange of cable systems and investments............................ (21) (1,248)
Equity in losses of investee companies after distributions........................... 398 301
Changes in operating assets and liabilities............................................. (2,383) (910)
------- ------

Cash provided by operations............................................................. 1,402 2,802
------- ------

INVESTING ACTIVITIES
Consolidation of the Entertainment Group's cash and cash equivalents.................... - 87
Investments and acquisitions............................................................ (454) (423)
Capital expenditures.................................................................... (2,046) (1,532)
Investment proceeds..................................................................... 429 476
------- ------

Cash used by investing activities....................................................... (2,071) (1,392)
------- ------

FINANCING ACTIVITIES
Borrowings.............................................................................. 2,007 3,127
Debt repayments......................................................................... (2,001) (2,811)
Borrowings against future stock option proceeds......................................... 2 335
Repayments of borrowings against future stock option proceeds........................... (130) -
Repurchases of Time Warner common stock................................................. (65) (1,636)
Dividends paid.......................................................................... (194) (226)
Redemption of preferred stock of a subsidiary........................................... - (217)
Proceeds received from stock option and dividend reinvestment plans..................... 356 350
Other................................................................................... 11 (129)
------- ------

Cash used by financing activities....................................................... (14) (1,207)
------- ------

INCREASE (DECREASE) IN CASH AND EQUIVALENTS............................................. (683) 203

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD............................................. 1,284 442
------- ------

CASH AND EQUIVALENTS AT END OF PERIOD................................................... $ 601 $ 645
======= ======
</TABLE>

See accompanying notes.

<PAGE>

TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
------------------
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD.............................................................. $9,713 $8,852

Net income (loss)........................................................................... (381) 1,100
Other comprehensive loss.................................................................... (210) (40)
------ ------
Comprehensive income (loss)(a).............................................................. (591) 1,060

Common stock dividends...................................................................... (178) (170)
Preferred stock dividends................................................................... (11) (45)
Repurchases of Time Warner common stock..................................................... (65) (1,636)
Other, principally shares issued pursuant to stock option, dividend
reinvestment and benefit plans........................................................... 955 725
------ ------
BALANCE AT END OF PERIOD.................................................................... $9,823 $8,786
====== ======
</TABLE>

-------------------
(a) Comprehensive income was $57 million for the three months ended September
30, 2000 and $339 million for the three months ended September 30, 1999.

See accompanying notes.

<PAGE>

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Each of the business interests within Cable Networks, Publishing,
Music, Filmed Entertainment, Cable and Digital Media is important to
management's objective of increasing shareholder value through the creation,
extension and distribution of recognizable brands and copyrights throughout the
world. Such brands and copyrights include (1) leading cable television networks,
such as HBO, Cinemax, CNN, TNT and TBS Superstation, (2) magazine franchises,
such as Time, People and Sports Illustrated, (3) copyrighted music from many of
the world's leading recording artists that is produced and distributed by a
family of established record labels such as Warner Bros. Records, Atlantic
Records, Elektra Entertainment and Warner Music International, (4) the unique
and extensive film, television and animation libraries owned or managed by
Warner Bros. and New Line Cinema, and trademarks such as the Looney Tunes
characters, Batman and The Flintstones, (5) The WB Network, a national
broadcasting network launched in 1995 as an extension of the Warner Bros. brand
and as an additional distribution outlet for the Company's collection of
children's cartoons and television programming, (6) Time Warner Cable, the
second largest operator of cable television systems in the U.S. and (7) Internet
websites, such as CNN.com and Entertaindom.com.

Financial information for Time Warner's various business segments is
presented herein as an indication of financial performance (Note 8). Except for
start-up losses incurred in connection with The WB Network and Digital Media,
Time Warner's principal business segments generate significant operating income
and cash flow from operations. The cash flow from operations generated by such
business segments is considerably greater than their operating income due to
significant amounts of noncash amortization of intangible assets recognized in
various acquisitions accounted for by the purchase method of accounting. Noncash
amortization of intangible assets recorded by Time Warner's business segments
amounted to $339 million for the three months ended September 30, 2000 and $316
million for the three months ended September 30, 1999. On a year-to-date basis,
noncash amortization of intangible assets recorded by Time Warner's business
segments amounted to $1.003 billion in 2000 and $933 million in 1999.

BASIS OF PRESENTATION

<PAGE>

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

Interim Financial Statements

The accompanying consolidated financial statements are unaudited but,
in the opinion of management, contain all the adjustments (consisting of those
of a normal recurring nature) considered necessary to present fairly the
financial position and the results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles applicable
to interim periods. The accompanying consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of Time
Warner included in its Annual Report on Form 10-K for the year ended December
31, 1999, as amended on June 27, 2000 (the "1999 Form 10-K").

Cumulative Effect of Change in Film Accounting Principle

In June 2000, Time Warner adopted Statement of Position 00-2,
"Accounting by Producers and Distributors of Films" ("SOP 00-2"). SOP 00-2
established new film accounting standards, including changes in revenue
recognition and accounting for advertising, development and overhead costs.
Specifically, SOP 00-2 requires advertising costs for theatrical and television
product to be expensed as incurred. This compares to Time Warner's previous
policy of first capitalizing and then expensing advertising costs for theatrical
product over the related revenue streams. In addition, SOP 00-2 requires
development costs for abandoned projects and certain indirect overhead costs to
be charged directly to expense, instead of those costs being capitalized to film
costs, which was required under the previous accounting model. SOP 00-2 also
requires all film costs to be classified in the balance sheet as noncurrent
assets. Provisions of SOP 00-2 in other areas, such as revenue recognition,
generally are consistent with Time Warner's existing accounting policies.

Time Warner has adopted the provisions of SOP 00-2 retroactively to the
beginning of 2000. As a result, Time Warner's net income for the nine months
ended September 30, 2000 includes a one-time, noncash, after-tax charge of $443
million, primarily to reduce the carrying value of its film inventory. This
charge has been reflected as a cumulative effect of an accounting change in the
accompanying consolidated statement of operations.

Reclassifications

Certain reclassifications have been made to the prior year's financial
information to conform to the 2000 presentation, including a reclassification of
the Music segment's operating results for 1999 to reflect a change in how
management classifies Time Warner's share of the operating results of the
Columbia House Company Partnerships ("Columbia House"), a 50%-owned equity
investee. Effective on January 1, 2000, management reclassified Time Warner's
share of the operating results of Columbia House from its Music segment to
interest and other, net. This reclassification resulted primarily from the
planned restructuring of Columbia House's traditional direct-marketing business
and an increasing dependency on the sale of video product.

2. SIGNIFICANT TRANSACTIONS

AMERICA ONLINE-TIME WARNER MERGER

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

<PAGE>

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

approximately 6.25 shares of AOL Time Warner common stock. Lastly, each issued
and outstanding share of common stock of America Online will be converted into
one share of common stock of AOL Time Warner.

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

The Merger was approved by the shareholders of America Online and Time
Warner on June 23, 2000. In addition, the European Union Commission approved the
Merger on October 11, 2000. The Merger is expected to close in the fall of 2000
and is subject to customary closing conditions, including all necessary U.S.
government regulatory approvals. There can be no assurance that such approvals
will be obtained.

In connection with the Merger, Time Warner has been incurring one-time,
merger-related costs, including legal, investment banking and stock registration
fees. These costs are required to be expensed by Time Warner in accordance with
generally accepted accounting principles. These costs have been classified in
interest and other, net, in the accompanying consolidated statement of
operations.

WARNER-EMI MUSIC MERGER

In January 2000, Time Warner and EMI Group plc ("EMI") announced they
had entered into an agreement to combine their global music operations into two
50-50 joint ventures, to be referred to collectively as Warner EMI Music. On
October 5, 2000, Time Warner and EMI terminated the merger agreement and
withdrew their application seeking approval of the transaction from the European
Union Commission. Time Warner and EMI intend to continue discussions with each
other, the European Union Commission and other regulatory authorities in order
to attempt to agree to a combination which is acceptable to all parties. There
can be no assurance that these parties will be able to reach an agreement.

In connection with the proposed merger, Time Warner has been incurring
one-time, merger-related costs, which are permitted to be capitalized in
accordance with generally accepted accounting principles. In the third quarter
of 2000, because the merger agreement was terminated, Time Warner expensed all
of its previously capitalized merger-related costs. These costs have been
classified in interest and other, net, in the accompanying consolidated
statement of operations.

BOOK-OF-THE-MONTH CLUB JOINT VENTURE

In the first quarter of 2000, Time Warner formed a 50-50 joint venture
with Bertelsmann AG ("Bertelsmann"). The venture combined the domestic
operations of Time Warner's Book-of-the-Month Club with the domestic book club
operations of Doubleday Direct, Inc. ("Doubleday"), a leading consumer book club
group owned by Bertelsmann. In connection with this transaction, Time Warner has
deconsolidated its domestic book club operations in 2000 and is accounting for
its interest in the joint venture under the equity method of accounting. Time
Warner's initial interest in the joint venture was recorded based on the
historical cost basis of the contributed net assets. Time Warner did not
recognize a gain or loss on the transaction. Time Warner's share of the
operating results of the joint venture for the first nine months of 2000 has
been included in interest and other, net, in the accompanying consolidated
statement of operations.

<PAGE>

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

SIX FLAGS

In 1998, TWE sold its remaining 49% interest in Six Flags Entertainment
Corporation ("Six Flags") to Premier Parks Inc. ("Premier," now known as Six
Flags Inc.), a regional theme park operator, for approximately $475 million. TWE
initially deferred a $400 million gain on the transaction principally as a
result of uncertainties surrounding its realization. Those uncertainties related
to litigation and TWE's guarantees of Premier's long-term obligations to make
minimum payments to the limited partners of the Six Flags Over Texas and Six
Flags Over Georgia theme parks (the "Co-Venture Guarantees").

Time Warner management periodically had evaluated its reasonably
possible risk of loss relating to the Six Flags litigation and Co-Venture
Guarantees. Based on the improving financial performance of Premier and the Six
Flags Over Texas and Six Flags Over Georgia theme parks, management believed
that its aggregate financial exposure had declined steadily. Accordingly, TWE
periodically recognized a portion of the deferred gain as its realization became
more fully assured. For each quarter of 1999 and in the first quarter of 2000, a
$10 million pretax gain was recognized. These amounts have been included in
business segment operating income in the accompanying consolidated statement of
operations.

In December 1998, a jury returned an adverse verdict in the Six Flags
litigation in the amount of $454 million. TWE and its former 51% partner in Six
Flags are financially responsible for this judgment. TWE appealed the verdict,
but, in July 2000, an appellate court unexpectedly affirmed the jury's verdict.
As a result, TWE revised its estimate of its financial exposure and recorded a
one-time, pretax charge of $50 million in the second quarter of 2000 to cover
its additional financial exposure in excess of established reserves. These
reserves consisted of the unrecognized portion of the deferred gain and accrued
interest. The $50 million charge is classified in two components in Time
Warner's accompanying consolidated statement of operations: $26 million of the
charge, representing an accrual for additional interest, is included in interest
and other, net, and the remaining $24 million is included in business segment
operating income.

FILMED ENTERTAINMENT INVESTMENT-RELATED GAINS

During the third quarter of 2000, Warner Bros. recognized a net pretax,
investment-related gain of approximately $65 million, principally relating to
additional proceeds received in the third quarter of 2000 in connection with the
1999 sale of an interest in CanalSatellite, a satellite television platform
servicing France and Monaco. This gain has been included in business segment
operating income in the accompanying consolidated statement of operations.

GAINS (LOSSES) ON THE SALE OR EXCHANGE OF CABLE TELEVISION SYSTEMS
AND INVESTMENTS

In 2000 and 1999, largely in an ongoing effort to enhance its
geographic clustering of cable television properties, Time Warner continued to
sell or exchange various cable television systems and investments. In connection
with these transactions, Time Warner Cable recognized net pretax gains of $477
million for the three months ended September 30, 1999. Net pretax gains for the
first nine months of the year amounted to $21 million in 2000 and $1.248 billion
in 1999. Such amounts have been included in business segment operating income in
the accompanying consolidated statement of operations.

COLUMBIA HOUSE INVESTMENT WRITE-DOWN

In July 1999, Time Warner announced an agreement with Sony Corporation
of America ("Sony") to merge their jointly owned music and video club operations
of Columbia House with CDNOW, Inc. ("CDNOW"), a music and video

<PAGE>

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

e-commerce company. While awaiting the receipt of regulatory approvals, the
March 13, 2000 termination date in the merger agreement was reached, and the
parties terminated the agreement. Accordingly, the merger will not occur.

In March 2000, Time Warner recorded a $220 million noncash pretax
charge to reduce the carrying value of its investment in Columbia House to an
estimate of its fair value. The charge has been included in interest and other,
net, in the accompanying consolidated statement of operations.

1999 GAIN ON TERMINATION OF VIDEO DISTRIBUTION AGREEMENT

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

1999 GAIN ON TIME WARNER TELECOM'S INITIAL PUBLIC OFFERING

In May 1999, Time Warner Telecom Inc. ("Time Warner Telecom"), a
leading fiber facilities-based provider of integrated communications services
and solutions, completed an initial public offering of 20% of its common stock
(the "Time Warner Telecom IPO"). In connection with the Time Warner Telecom IPO
and certain related transactions, Time Warner's ownership interest in Time
Warner Telecom was diluted from 62% to 48%. As a result, Time Warner recognized
a pretax gain of approximately $115 million before providing for deferred taxes.
This gain has been included in interest and other, net, in the accompanying
consolidated statement of operations.

3. OTHER INVESTMENT-RELATED GAINS

GAIN ON THE SALE OF INVESTMENT IN MARTHA STEWART

During 2000, Time Warner sold a portion of its interest in Martha
Stewart Living Omnimedia Inc. ("Martha Stewart"). As a result, Time Warner
recognized a pretax gain of approximately $32 million. In addition, during the
first quarter of 1999, Time Warner recognized a pretax gain of a comparable
amount, also related to its interest in Martha Stewart. These gains are included
in business segment operating income in the accompanying consolidated statement
of operations.

GAIN ON THE SALE OF INVESTMENT IN HEALTHEON/WEBMD

During 2000, Time Warner periodically sold portions of its interest in
Healtheon/WebMD Corp. As a result, Time Warner recognized pretax gains of
approximately $31 million for the year-to-date period. These gains are included
in business segment operating income in the accompanying consolidated statement
of operations.

GAIN ON THE SALE OF OTHER INVESTMENT-RELATED ASSETS

During 2000 and 1999, Time Warner recognized other investment-related
pretax gains, principally related to the sale of various assets. Pretax gains
for the first nine months of the year amounted to approximately $32 million in
2000 and approximately $29 million in 1999. These gains are included in business
segment operating income in the accompanying consolidated statement of
operations.

<PAGE>

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

4. INVESTMENT IN THE ENTERTAINMENT GROUP

TWE is a Delaware limited partnership that was capitalized in 1992 to
own and operate substantially all of the Filmed Entertainment-Warner Bros.,
Cable Networks-HBO and Cable businesses previously owned by subsidiaries of Time
Warner. Time Warner, through its wholly owned subsidiaries, collectively owns
general and limited partnership interests in TWE consisting of 74.49% of the
Series A Capital and Residual Capital and 100% of the Series B Capital. The
remaining 25.51% limited partnership interests in the Series A Capital and
Residual Capital of TWE are held by a subsidiary of AT&T. Certain Time Warner
subsidiaries are the general partners of TWE ("Time Warner General Partners").

The TWE partnership agreement provides for special allocations of
income, loss and distributions of partnership capital, including priority
distributions in the event of liquidation. TWE reported income before cumulative
effect of an accounting change of $617 million and a net income of $93 million
for the nine months ended September 30, 2000. For the nine months ended
September 30, 1999, TWE reported net income of $1.640 billion. Because of the
priority rights over allocations of income and distributions of TWE held by the
Time Warner General Partners, all of TWE's net income was allocated to Time
Warner and none was allocated to AT&T.

The assets and cash flows of TWE are restricted by the TWE partnership
and credit agreements. As such, they are unavailable for use by the partners
except through the payment of certain fees, reimbursements, cash distributions
and loans, which are subject to limitations.

5. INVENTORIES AND FILM COSTS

Inventories and film costs consist of:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(MILLIONS)
<S> <C> <C>
Programming costs, less amortization.................................................... $1,660 $1,620
Magazines, books, recorded music and other merchandise.................................. 671 652
Film costs-Theatrical:
Released, less amortization.......................................................... 921 1,050
Completed and not released........................................................... 172 80
In production........................................................................ 806 704
Development and pre-production....................................................... 111 155
Film costs-Television:
Released, less amortization.......................................................... 194 546
Completed and not released........................................................... 199 9
In production........................................................................ 79 8
Development and pre-production....................................................... 6 5

Film costs-Library, less amortization................................................... 1,468 1,554
------ ------

Total inventories and film costs........................................................ 6,287 6,383
Less current portion of inventory....................................................... 1,430 1,472
------ ------

Total noncurrent inventories and film costs............................................. $4,857 $4,911
====== ======
</TABLE>

Approximately $1.017 billion of released and completed and not released
film costs are expected to be amortized during the next twelve months.

<PAGE>

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

6. MANDATORILY REDEEMABLE PREFERRED SECURITIES

In 1995, Time Warner, through TW Companies, issued approximately 23
million Company-obligated mandatorily redeemable preferred securities of a
wholly owned subsidiary ("Preferred Trust Securities") for aggregate gross
proceeds of $575 million. The sole assets of the subsidiary that is the obligor
on the Preferred Trust Securities are $592 million principal amount of 8 7/8%
subordinated debentures of TW Companies due December 31, 2025. Cumulative cash
distributions are payable on the Preferred Trust Securities at an annual rate of
8 7/8%. The Preferred Trust Securities are mandatorily redeemable for cash on
December 31, 2025, and TW Companies has the right to redeem the Preferred Trust
Securities, in whole or in part, on or after December 31, 2000, and in certain
other circumstances. If TW Companies elects to redeem these securities, the
redemption amount would be in each case at an amount per Preferred Trust
Security equal to $25 per security, plus accrued and unpaid distributions
thereon.

Time Warner has certain obligations relating to the Preferred Trust
Securities which amount to a full and unconditional guaranty (on a subordinated
basis) of its subsidiary's obligations with respect thereto.

7. INCOME PER COMMON SHARE BEFORE EXTRAORDINARY LOSS ON RETIREMENT OF
DEBT AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE

Set forth below is a reconciliation of basic and diluted income per
common share before extraordinary loss on retirement of debt and cumulative
effect of accounting change for each period.

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000(a) 1999 2000(a) 1999
------- ------- ------- -------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Income applicable to common shares before extraordinary loss on
retirement of debt and cumulative effect of accounting change - basic $ 85 $ 372 $ 51 $1,067
Interest savings, net of tax(b)........................................ - 12 - 31
Preferred dividends.................................................... - 9 - 45
------- ------- ------- -------
Income applicable to common shares before extraordinary loss on retire-
ment of debt and cumulative effect of accounting change - diluted... $ 85 $ 393 $ 51 $1,143
======= ======= ======= =======

Average number of common shares outstanding - basic.................... 1,324.2 1,288.9 1,315.0 1,260.5
Dilutive effect of stock options....................................... - 71.8 - 73.3
Dilutive effect of convertible preferred shares........................ - 37.1 - 66.6
------- ------- ------- -------
Average number of common shares outstanding - diluted.................. 1,324.2 1,397.8 1,315.0 1,400.4
======= ======= ======= =======

Income per common share before extraordinary loss on retirement of debt and
cumulative effect of accounting change:
Basic............................................................. $0.06 $0.29 $0.04 $0.85
===== ===== ===== =====
Diluted........................................................... $0.06 $0.28 $0.04 $0.82
===== ===== ===== =====
</TABLE>
---------------
(a) 2000 basic and diluted income per common share before extraordinary loss on
retirement of debt and cumulative effect of accounting change are the same
because the effect of Time Warner's stock options and convertible preferred
stock was antidilutive.
(b) Reflects the required use of a portion of the proceeds from the future
exercise of employee stock options to repay all outstanding borrowings
under Time Warner's stock option proceeds credit facility.

8. SEGMENT INFORMATION

Time Warner classifies its business interests into six fundamental
areas: Cable Networks, consisting principally of interests in cable television
programming; Publishing, consisting principally of interests in magazine
publishing, book publishing and direct marketing; Music, consisting principally
of interests in recorded music and music publishing;

<PAGE>

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

Filmed Entertainment, consisting principally of interests in filmed
entertainment, television production and television broadcasting; Cable,
consisting principally of interests in cable television systems; and Digital
Media, consisting principally of interests in Internet-related and digital
media businesses. Time Warner's Digital Media segment commenced operations in
the fourth quarter of 1999.

Information as to the operations of Time Warner in different business
segments is set forth below based on the nature of the products and services
offered. Time Warner evaluates performance based on several factors, including
its primary financial measure of 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 under Note 1 in Time Warner's 1999 Form 10-K.
Intersegment sales are accounted for at fair value as if the sales were to third
parties.

As described more fully in Note 1, effective January 1, 2000,
management reclassified Time Warner's share of the operating results of Columbia
House from its Music segment to interest and other, net. As such, segment
results for 1999 have been reclassified to conform to the 2000 presentation.
Also, as described more fully in Note 2, the comparability of the Publishing
segment's operating results was affected by a joint venture transaction in
2000 involving Book-of-the-Month Club. In connection with the joint venture
transaction, the operating results of Book-of-the-Month Club were deconsolidated
and are no longer included in the Publishing segment's operating results for
2000. Time Warner's share of the operating results of the joint venture for
the first nine months of 2000 has been included in interest and other, net, in
the accompanying consolidated statement of operations. During the three months
ended September 30, 1999, the Publishing segment's operating results included
revenues of $81 million and EBITA losses and operating losses of $3 million
relating to Book-of-the-Month Club. During the nine months ended September 30,
1999, the Publishing segment's operating results included revenues of $228
million, EBITA losses of $15 million and operating losses of $17 million
relating to Book-of-the-Month Club.

THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Cable Networks......................................................... $1,560 $1,450 $ 4,915 $ 4,425
Publishing............................................................. 1,081 1,110 3,216 3,237
Music.................................................................. 938 852 2,811 2,616
Filmed Entertainment................................................... 2,006 2,208 5,703 5,688
Broadcasting-The WB Network............................................ 99 84 310 246
Cable.................................................................. 1,511 1,342 4,460 3,968
Digital Media.......................................................... 20 - 44 -
Intersegment elimination............................................... (342) (323) (942) (835)
------ ------- ------- -------

Total.................................................................. $6,873 $6,723 $20,517 $19,345
====== ====== ======= =======

</TABLE>

<PAGE>

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

THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
EBITA(a)
Cable Networks......................................................... $ 376 $ 328 $1,162 $1,003
Publishing............................................................. 151 129 494 419
Music.................................................................. 87 79 276 266
Filmed Entertainment(a)................................................ 271 228 631 806
Broadcasting-The WB Network............................................ (15) (24) (67) (95)
Cable(c)............................................................... 472 894 1,412 2,477
Digital Media.......................................................... (62) - (147) -
Intersegment elimination............................................... (4) (23) (28) (10)
------ ------ ------ ------

Total.................................................................. $1,276 $1,611 $3,733 $4,866
====== ====== ====== ======
</TABLE>
---------------
(a) EBITA represents business segment operating income before noncash
amortization of intangible assets. After deducting amortization of
intangible assets, Time Warner's business segment operating income for the
third quarter was $937 million in 2000 and $1.295 billion in 1999. Time
Warner's business segment operating income for the first nine months of the
year was $2.730 billion in 2000 and $3.933 billion in 1999.
(b) Includes a net pretax, investment-related gain of approximately $65 million
recognized in the third quarter of 2000, a pretax charge of $24 million
recognized in the second quarter of 2000 in connection with the Six Flags
litigation, a pretax gain of $10 million related to a partial recognition
of a deferred gain in connection with the 1998 sale of Six Flags recognized
in the first quarter of 2000 and in each of the first three quarters of
1999 and a pretax gain of approximately $215 million recognized in the
first quarter of 1999 relating to the early termination and settlement of a
long-term, home video distribution agreement.
(c) Includes net pretax gains relating to the sale or exchange of certain cable
television systems and investments of approximately $477 million in the
third quarter of 1999. Similarly, nine month results include net pretax
gains of approximately $21 million in 2000 and approximately $1.248 billion
in 1999.

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Cable Networks......................................................... $ 40 $ 33 $111 $ 96
Publishing............................................................. 14 19 49 57
Music.................................................................. 21 19 62 54
Filmed Entertainment................................................... 20 46 65 114
Broadcasting-The WB Network............................................ - - 1 1
Cable.................................................................. 235 203 666 583
Digital Media.......................................................... 1 - 3 -
---- ---- ---- ----

Total.................................................................. $331 $320 $957 $905
==== ==== ==== ====

<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
AMORTIZATION OF INTANGIBLE ASSETS(a)
Cable Networks......................................................... $ 53 $ 51 $ 159 $152
Publishing............................................................. 17 11 43 31
Music.................................................................. 60 60 181 187
Filmed Entertainment................................................... 50 51 150 151
Broadcasting-The WB Network............................................ 2 1 4 3
Cable.................................................................. 157 142 466 409
Digital Media.......................................................... - - - -
---- ---- ------ ----

Total.................................................................. $339 $316 $1,003 $933
==== ==== ====== ====
</TABLE>

-----------
(a) Includes amortization relating to all business combinations accounted for by
the purchase method, including the $14 billion acquisition of Warner
Communications Inc. in 1989, the $6.2 billion acquisition of Turner
Broadcasting System, Inc. in 1996 and the $2.3 billion of cable acquisitions
in 1996 and 1995.

<PAGE>

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

9. COMMITMENTS AND CONTINGENCIES

Time Warner is subject to various class action lawsuits as well as
actions that have been brought by various state attorneys general alleging
collusive and other illegal pricing practices by the major record companies in
their capacity as distributors of compact discs. Although management believes
these cases are without merit, adverse jury verdicts could result in a material
loss to Time Warner. Due to the lack of specificity to plaintiffs' claims, a
range of loss is not determinable at this time.

Time Warner is subject to a civil action brought by a former cable
television competitor in New York City alleging violations of the antitrust
laws. The case is presently scheduled for trial in February 2001. Although
management believes these allegations are without merit, an adverse jury verdict
could result in a material loss to Time Warner. Due to the vague nature of both
plaintiffs' claims and their assertions of damages, a range of loss is not
determinable at this time.

TWE also is subject to certain litigation relating to Six Flags. In
December 1998, a jury returned an adverse verdict in the Six Flags matter in the
amount of $454 million. TWE and its former 51% partner in Six Flags are
financially responsible for this judgment. As described in Note 2, TWE appealed
the verdict, but, in July 2000, an appellate court unexpectedly affirmed the
jury's verdict. As a result, TWE revised its estimate of its financial exposure
and recorded a one-time, pretax charge of $50 million in the second quarter of
2000 to cover its additional financial exposure in excess of established
reserves.

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

10. ADDITIONAL FINANCIAL INFORMATION

CASH FLOWS

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

<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
Cash payments made for interest.....................................................$1,192 $1,137
Cash payments made for income taxes................................................. 378 304
Income tax refunds received......................................................... 31 43
</TABLE>

<PAGE>

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

INTEREST AND OTHER, NET

Interest and other, net, consists of:

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Interest expense....................................... $(443) $(374) $(1,265) $(1,109)
Other investment-related activity, principally net
losses of corporate-related equity investees......... (112) (70) (312) (197)
Write-down of Columbia House investment................ - - (220) -
Merger-related costs................................... (52) - (129) -
Gain on Time Warner Telecom IPO........................ - - - 115
Corporate finance-related activity, principally losses
on asset securitization programs..................... (42) (27) (151) (90)
Miscellaneous.......................................... 8 (14) (18) (64)
----- ----- ------- -------
Total interest and other, net.......................... $(641) $(485) $(2,095) $(1,345)
===== ===== ======= =======
</TABLE>

<PAGE>

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

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

CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000

NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS CONSOLIDATED
------ --------- --- ------------ ----- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................... $ - $ - $ 220 $ 6,655 $ (2) $ 6,873
------ ------ ----- ------- ----- -------

Cost of revenues(a)......................... - - (77) (3,657) (10) (3,744)
Selling, general and administrative(a)...... - - (76) (1,777) - (1,853)
Amortization of goodwill and other
intangible assets........................ - - - (339) - (339)
------ ------ ----- ------- ----- -------

Business segment operating income........... - - 67 882 (12) 937
Equity in pretax income of consolidated
subsidiaries............................. 292 384 58 - (734) -
Interest and other, net..................... (92) (149) (47) (343) (10) (641)
Corporate expenses.......................... (27) (16) (4) (37) 38 (46)
Minority interest........................... - - - (77) - (77)
------ ------ ----- ------- ----- -------

Income before income taxes.................. 173 219 74 425 (718) 173
Income taxes................................ (85) (93) (43) (196) 332 (85)
------ ------ ----- ------- ----- -------

Net income.................................. $ 88 $ 126 $ 31 $ 229 $(386) $ 88
====== ====== ===== ======= ===== =======
---------------
(a) Includes depreciation expense of:....... $ - $ - $ 2 $ 329 $ - $ 331
====== ====== ===== ======= ===== =======
</TABLE>

<PAGE>

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

CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999

NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS CONSOLIDATED
------ --------- --- ------------ ----- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ - $ - $200 $ 6,586 $ (63) $ 6,723
----- ----- ---- ------- ------- -------

Cost of revenues(a)......................... - - (88) (3,702) 73 (3,717)
Selling, general and administrative(a)...... - - (50) (1,822) - (1,872)
Amortization of goodwill and other
intangible assets........................ - - - (316) - (316)
Gain on sale or exchange of cable
systems and investments.................. - - - 477 - 477
----- ----- ---- ------- ------- -------

Business segment operating income........... - - 62 1,223 10 1,295
Equity in pretax income of consolidated
subsidiaries............................. 782 869 81 - (1,732) -
Interest and other, net..................... (63) (158) (39) (197) (28) (485)
Corporate expenses.......................... (21) (14) (4) (35) 34 (40)
Minority interest........................... - - - (72) - (72)
----- ----- ---- ------- ------- -------

Income before income taxes and extra-
ordinary loss on retirement of debt...... 698 697 100 919 (1,716) 698
Income taxes................................ (317) (305) (57) (386) 748 (317)
----- ----- ---- ------- ------- -------

Income before extraordinary loss on
retirement of debt....................... 381 392 43 533 (968) 381
Extraordinary loss on retirement of debt,
net of tax............................... (12) (12) - - 12 (12)
----- ----- ---- ------- ------- -------

Net income.................................. $ 369 $ 380 $ 43 $ 533 $ (956) $ 369
===== ===== ==== ======= ======= =======
-------------------
(a) Includes depreciation expense of:....... $ - $ - $ 2 $ 318 $ - $ 320
===== ===== ==== ======= ======= =======
</TABLE>

<PAGE>

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

CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000

NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS CONSOLIDATED
------ --------- --- ------------ ----- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................... $ - $ - $ 694 $ 19,841 $ (18) $ 20,517
------ ------ ------ -------- ------- --------

Cost of revenues(a)......................... - - (286) (10,815) (17) (11,118)
Selling, general and administrative(a)...... - - (202) (5,485) - (5,687)
Amortization of goodwill and other
intangible assets........................ - - - (1,003) - (1,003)
Gain on sale or exchange of cable systems
and investments.......................... - - - 21 - 21
------ ------ ------ -------- ------- --------

Business segment operating income........... - - 206 2,559 (35) 2,730
Equity in pretax income of consolidated
subsidiaries............................. 719 860 321 - (1,900) -
Interest and other, net..................... (328) (451) (137) (1,152) (27) (2,095)
Corporate expenses.......................... (77) (47) (13) (110) 114 (133)
Minority interest........................... - - - (188) - (188)
------ ------ ------ -------- ------- --------

Income before income taxes and cumulative
effect of accounting change.............. 314 362 377 1,109 (1,848) 314
Income taxes................................ (252) (249) (201) (611) 1,061 (252)
------ ------ ------ -------- ------- --------

Income before cumulative effect of
accounting change........................ 62 113 176 498 (787) 62
Cumulative effect of accounting change,
net of tax............................... (443) (340) (128) (443) 911 (443)
------ ------ ------ ------ ------- --------

Net income (loss)........................... $ (381) $ (227) $ 48 $ 55 $ 124 $ (381)
====== ====== ====== ======== ======= ========
---------------
(a) Includes depreciation expense of:...... $ - $ - $ 7 $ 950 $ - $ 957
====== ====== ====== ======== ======= ========
</TABLE>

<PAGE>

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

CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999

NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS CONSOLIDATED
------ --------- --- ------------ ----- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................... $ - $ - $ 626 $ 18,766 $ (47) $ 19,345
------ ------ ----- -------- ------- --------

Cost of revenues(a)......................... - - (288) (10,309) 47 (10,550)
Selling, general and administrative(a)...... - (154) (5,238) - (5,392)
Amortization of goodwill and other
intangible assets........................ - - (933) - (933)
Gain on sale or exchange of cable
systems and investments.................. - - - 1,248 - 1,248
Gain on early termination of video
distribution agreement................... - - - 215 - 215
------ ------ ----- -------- ------- --------

Business segment operating income........... - - 184 3,749 - 3,933
Equity in pretax income of consolidated
subsidiaries............................. 2,316 2,505 315 - (5,136) -
Interest and other, net..................... (185) (504) (108) (486) (62) (1,345)
Corporate expenses.......................... (65) (42) (12) (103) 102 (120)
Minority interest........................... - - - (402) - (402)
------- ------ ----- -------- ------- --------

Income before income taxes and extra-
ordinary loss on retirement of debt...... 2,066 1,959 379 2,758 (5,096) 2,066
Income taxes................................ (954) (892) (202) (1,231) 2,325 (954)
------ ------ ----- -------- ------- --------

Income before extraordinary loss on
retirement of debt....................... 1,112 1,067 177 1,527 (2,771) 1,112
Extraordinary loss on retirement of debt,
net of tax............................... (12) (12) - - 12 (12)
------ ------ ----- -------- ------- --------

Net income.................................. $1,100 $1,055 $ 177 $ 1,527 $(2,759) $ 1,100
====== ====== ===== ======== ======= ========
-------------------
(a) Includes depreciation expense of:...... $ - $ - $ 7 $ 898 $ - $ 905
====== ====== ===== ======== ======= ========
</TABLE>

<PAGE>

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

CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2000

<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS CONSOLIDATED
-------- --------- ---- ------------ ------- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents....................................... $ - $ 49 $ 31 $ 521 $ - $ 601
Receivables, net........................................... 24 25 75 4,343 - 4,467
Inventories................................................ - - 145 1,285 - 1,430
Prepaid expenses........................................... 140 - 5 1,366 - 1,511
------- ------- ------- ------- -------- -------

Total current assets....................................... 164 74 256 7,515 - 8,009

Noncurrent inventories and film costs...................... - - 197 4,660 - 4,857
Investments in and amounts due to and from
consolidated subsidiaries............................... 16,120 15,145 8,891 - (40,156) -
Other investments.......................................... 302 8 24 2,242 (754) 1,822
Property, plant and equipment.............................. 31 - 43 9,687 - 9,761
Music catalogues, contracts and copyrights................. - - - 713 - 713
Cable television and sports franchises..................... - - - 8,087 - 8,087
Goodwill................................................... - - - 15,122 - 15,122
Other assets............................................... 167 96 77 1,369 - 1,709
------- ------- ------- ------- -------- -------

Total assets............................................... $16,784 $15,323 $9,488 $49,395 $(40,910) $50,080
======= ======= ======= ======= ======== =======

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................... $ 5 $ - $ 1 $ 1,508 $ - $ 1,514
Participations payable..................................... - - - 1,292 - 1,292
Royalties and programming costs payable.................... - - 14 1,546 - 1,560
Debt due within one year................................... - - - 20 - 20
Other current liabilities.................................. 377 132 189 4,323 (5) 5,016
------- ------- ------- ------- -------- -------

Total current liabilities.................................. 382 132 204 8,689 (5) 9,402

Long-term debt ............................................ 1,585 6,292 748 9,469 - 18,094
Debt due to affiliates..................................... - - 1,647 158 (1,805) -
Borrowings against future stock option proceeds............ 1,115 - - - - 1,115
Deferred income taxes...................................... 3,299 3,110 269 3,379 (6,758) 3,299
Unearned portion of paid subscriptions..................... - - - 741 - 741
Other liabilities.......................................... 580 - 123 3,101 - 3,804
Minority interests......................................... - - - 3,227 - 3,227
TW Companies-obligated mandatorily redeemable
preferred securities of subsidiaries holding solely
debentures of TW Companies.............................. - - - 575 - 575

SHAREHOLDERS' EQUITY
Due from Time Warner and subsidiaries...................... - (2,126) (1,321) (3,903) 7,350 -
Other shareholders' equity................................. 9,823 7,915 7,818 23,959 (39,692) 9,823
------- ------- ------- ------- -------- -------

Total shareholders' equity................................. 9,823 5,789 6,497 20,056 (32,342) 9,823
------- ------- ------- ------- -------- -------

Total liabilities and shareholders' equity................. $16,784 $15,323 $ 9,488 $49,395 $(40,910) $50,080
======= ======= ======= ======= ======== =======
</TABLE>

<PAGE>

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

CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS CONSOLIDATED
------ --------- --- ------------- -------- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents....................................... $ - $ 366 $ 77 $ 841 $ - $ 1,284
Receivables, net........................................... 18 27 89 4,797 - 4,931
Inventories................................................ - - 125 1,347 - 1,472
Prepaid expenses........................................... 12 - 4 1,448 - 1,464
------- ------- ------- ------- -------- -------

Total current assets....................................... 30 393 295 8,433 - 9,151

Noncurrent inventories and film costs...................... - - 203 4,708 - 4,911
Investments in and amounts due to and from
consolidated subsidiaries............................... 17,212 16,711 9,354 - (43,277) -
Other investments.......................................... 236 7 24 2,562 (733) 2,096
Property, plant and equipment.............................. 42 - 47 8,639 - 8,728
Music catalogues, contracts and copyrights................. - - - 782 - 782
Cable television and sports franchises..................... - - - 8,472 - 8,472
Goodwill................................................... - - - 15,458 - 15,458
Other assets............................................... 91 103 65 1,382 - 1,641
------- ------- ------- ------- -------- -------

Total assets............................................... $17,611 $17,214 $9,988 $50,436 $(44,010) $51,239
======= ======= ======= ======= ======== =======

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................... $ 13 $ - $ 25 $ 1,885 $ - $ 1,923
Participations payable..................................... - - - 1,403 - 1,403
Royalties and programming costs payable.................... - - 35 1,529 - 1,564
Debt due within one year................................... - - - 22 - 22
Other current liabilities.................................. 342 190 150 4,114 (38) 4,758
------- ------- ------- ------- -------- -------

Total current liabilities.................................. 355 190 210 8,953 (38) 9,670

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

SHAREHOLDERS' EQUITY
Due from Time Warner and subsidiaries...................... - (1,997) (903) (3,791) 6,691 -
Other shareholders' equity................................. 9,713 8,298 7,821 24,110 (40,229) 9,713
------- ------- ------- ------- -------- -------

Total shareholders' equity................................. 9,713 6,301 6,918 20,319 (33,538) 9,713
------- ------- ------- ------- -------- -------

Total liabilities and shareholders' equity................. $17,611 $17,214 $9,988 $50,436 $(44,010) $51,239
======= ======= ======= ======= ======== =======
</TABLE>

<PAGE>

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

CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS CONSOLIDATED
------ --------- --- ------------ -------- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net income (loss).......................................... $(381) $(227) $ 48 $ 55 $ 124 $ (381)
Adjustments for noncash and nonoperating items:
Cumulative effect of accounting change.................. 443 340 128 443 (911) 443
Depreciation and amortization........................... - - 7 1,953 - 1,960
Noncash interest expense................................ - 3 - - - 3
Amortization of film costs.............................. - - - 1,386 - 1,386
Gain on sale or exchange of cable systems and
investments.......................................... - - - (21) - (21)
Excess of distributions over equity in
pretax income of consolidated subsidiaries........... 283 102 286 - (671) -
Equity in losses of investee companies after
distributions - - - 342 56 398
Changes in operating assets and liabilities................ (626) (168) (87) (1,624) 119 (2,386)
------ ------ ------ ------ ------ ------

Cash provided (used) by operations......................... (281) 50 382 2,534 (1,283) 1,402
------ ------ ------ ------ ------ ------

INVESTING ACTIVITIES
Investments and acquisitions............................... - - - (454) - (454)
Advances to parents and consolidated subsidiaries.......... - - - (261) 261 -
Repayment of advances from consolidated subsidiaries....... - 215 - - (215) -
Capital expenditures....................................... - - (10) (2,036) - (2,046)
Investment proceeds........................................ - - - 429 - 429
------ ------ ------ ------ ------ ------

Cash provided (used) by investing activities............... - 215 (10) (2,322) 46 (2,071)
------ ------ ------ ------ ------ ------

FINANCING ACTIVITIES
Borrowings................................................. - 109 - 1,898 - 2,007
Debt repayments............................................ - (562) - (1,439) - (2,001)
Change in due to/from parent............................... 261 (129) (418) (951) 1,237 -
Borrowings against future stock option proceeds............ 2 - - - - 2
Repayments of borrowings against future stock option
proceeds................................................ (130) - - - - (130)
Repurchases of Time Warner common stock.................... (65) - - - - (65)
Dividends paid............................................. (194) - - - - (194)
Proceeds received from stock option and
dividend reinvestment plans............................. 356 - - - - 356
Other...................................................... 51 - - (40) - 11
------ ------ ------ ------ ------ ------

Cash provided (used) by financing activities............... 281 (582) (418) (532) 1,237 (14)
------ ------ ------ ------ ------ ------

DECREASE IN CASH AND EQUIVALENTS........................... - (317) (46) (320) - (683)
------ ------ ------ ------ ------ ------

CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD..................................... - 366 77 841 - 1,284
------ ------ ------ ------ ------ ------

CASH AND EQUIVALENTS AT END OF PERIOD...................... $ - $ 49 $ 31 $521 $ - $ 601
====== ====== ====== ====== ====== ======
</TABLE>

<PAGE>

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

CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999

<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS CONSOLIDATED
------- ---------- ---- ------------ -------- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net income................................................. $1,100 $1,055 $ 177 $1,527 $(2,759) $1,100
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt................ 12 12 - - (12) 12
Depreciation and amortization........................... - - 7 1,831 - 1,838
Noncash interest expense................................ - 3 - - - 3
Amortization of film costs.............................. - - - 1,709 - 1,709
Gain on sale or exchange of cable systems and
investments.......................................... - - - (1,248) - (1,248)
Excess (deficiency) of distributions over equity in
pretax income of consolidated subsidiaries........... (756) (511) 14 - 1,253 -
Equity in losses of investee companies after
distributions........................................ - 4 - 240 57 301
Changes in operating assets and liabilities................ (101) (145) 74 (1) (740) (913)
------ ------ ------ ------ ------ ------

Cash provided by operations................................ 255 418 272 4,058 (2,201) 2,802
------ ------ ------ ------ ------ ------

INVESTING ACTIVITIES
Consolidation of the Entertainment Group's cash and
cash equivalents........................................ - - - 87 - 87
Investments and acquisitions............................... - - - (423) - (423)
Advances to parents and consolidated subsidiaries.......... - - - (1,153) 1,153 -
Repayments of advances from consolidated subsidiaries...... - 107 - 232 (339) -
Capital expenditures....................................... - - (9) (1,523) - (1,532)
Investment proceeds........................................ - - - 476 - 476
------ ------ ------ ------ ------ ------

Cash provided (used) by investing activities............... - 107 (9) (2,304) 814 (1,392)
------ ------ ------ ------ ------ ------

FINANCING ACTIVITIES
Borrowings................................................. - 1,978 - 1,149 - 3,127
Debt repayments............................................ - (2,567) - (244) - (2,811)
Change in due to/from parent............................... 922 20 (273) (2,056) 1,387 -
Borrowings against future stock option proceeds............ 335 - - - - 335
Repurchases of Time Warner common stock.................... (1,636) - - - - (1,636)
Dividends paid............................................. (226) - - - - (226)
Redemption of preferred stock of a subsidiary.............. - - - (217) - (217)
Proceeds received from stock option and
dividend reinvestment plans............................. 350 - - - - 350
Other...................................................... - (21) - (108) - (129)
------ ------ ------ ------ ------ ------

Cash used by financing activities.......................... (255) (590) (273) (1,476) 1,387 (1,207)
------ ------ ------ ------ ------ ------

INCREASE (DECREASE) IN CASH AND
EQUIVALENTS............................................. - (65) (10) 278 - 203
------ ------ ------ ------ ------ ------

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

CASH AND EQUIVALENTS AT END OF PERIOD...................... $ - $ 1 $ 15 $ 629 $ - $ 645
====== ====== ====== ====== ====== ======

</TABLE>

<PAGE>

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

DESCRIPTION OF BUSINESS

Time Warner Entertainment Company, L.P. ("TWE" or the "Company")
classifies its business interests into four fundamental areas: Cable Networks,
consisting principally of interests in cable television programming; Filmed
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; Cable, consisting principally
of interests in cable television systems; and Digital Media, consisting
principally of interests in Internet-related and digital media businesses. TWE
also manages the cable properties owned by Time Warner Inc. ("Time Warner") and
the combined cable television operations are conducted under the name of Time
Warner Cable.

USE OF EBITA

TWE evaluates operating performance based on several factors, including
its primary financial measure of business segment operating income before
noncash amortization of intangible assets ("EBITA"). Consistent with
management's financial focus on controlling capital spending, EBITA measures
operating performance after charges for depreciation. In addition, EBITA
eliminates the uneven effect across all business segments of considerable
amounts of noncash amortization of intangible assets recognized in business
combinations accounted for by the purchase method. These business combinations
include Time Warner's $14 billion acquisition of Warner Communications Inc. in
1989 and $1.3 billion acquisition of the minority interest in American
Television and Communications Corporation in 1992, which created over $10
billion of intangible assets that generally are being amortized over a twenty to
forty year period. The exclusion of noncash amortization charges also is
consistent with management's belief that TWE's intangible assets, such as cable
television franchises, film and television libraries and the goodwill associated
with its brands, generally are increasing in value and importance to TWE's
business objective of creating, extending and distributing recognizable brands
and copyrights throughout the world. As such, the following comparative
discussion of the results of operations of TWE includes, among other factors, an
analysis of changes in business segment EBITA. However, EBITA should be
considered in addition to, not as a substitute for, operating income, net income
and other measures of financial performance reported in accordance with
generally accepted accounting principles.

TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS

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

For 1999, the significant, nonrecurring items included (i) net pretax
gains of approximately $358 million recognized in the third quarter and
approximately $1.118 billion recognized in the first nine months relating to the
sale

<PAGE>

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

or exchange of various cable television systems and investments, (ii) a
pretax gain of $10 million recognized in each of the first three quarters
relating to the partial recognition of a deferred gain on the 1998 sale of Six
Flags and (iii) an approximate $215 million pretax gain recognized in the first
quarter in connection with the early termination and settlement of a long-term,
home video distribution agreement.

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

RESULTS OF OPERATIONS

EBITA and operating income are as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------
OPERATING OPERATING
EBITA INCOME EBITA INCOME
-------------- -------------- ------------- ---------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ----- ---- ------ ---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros.(a)................. $215 $180 $185 $150 $ 482 $658 $391 $567
Broadcasting-The WB Network.......................... (15) (24) (17) (25) (67) (95) (71) (98)
Cable Networks-HBO................................... 154 138 154 138 448 394 448 394
Cable(b)............................................. 404 699 293 600 1,182 2,135 853 1,863
Digital Media........................................ (15) - (15) - (45) - (45) -
---- ------ ---- ------ ------ -------- ------ ------

Total................................................ $743 $993 $600 $863 $2,000 $3,092 $1,576 $2,726
==== ==== ==== ==== ====== ====== ====== ======
</TABLE>

------------
(a) Includes a net pretax, investment-related gain of approximately $65 million
recognized in the third quarter of 2000, a pretax charge of $24 million
recognized in the second quarter of 2000 in connection with the Six Flags
litigation, a pretax gain of $10 million related to the partial recognition
of a deferred gain in connection with the 1998 sale of Six Flags recognized
in the first quarter of 2000 and in each of the first three quarters of
1999 and a pretax gain of approximately $215 million recognized in the
first quarter of 1999 relating to the early termination and settlement of a
long-term, home video distribution agreement.
(b) Includes net pretax gains related to the sale or exchange of certain cable
television systems and investments of approximately $358 million recognized
in the third quarter of 1999. Similarly, nine-month results include net
pretax losses of $8 million in 2000 and net pretax gains of $1.118 billion
in 1999.

THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999

CONSOLIDATED RESULTS

TWE had revenues of $3.494 billion and net income of $248 million for
the three months ended September 30, 2000, compared to revenues of $3.474
billion and net income of $561 million for the three months ended September 30,
1999.

As previously described, the comparability of TWE's operating results
for 2000 and 1999 has been affected by certain significant, nonrecurring items
recognized in each period. These nonrecurring items aggregated to a net pretax
income of approximately $65 million in 2000, compared to approximately $368
million of net pretax income in 1999.

<PAGE>

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

TWE's net income decreased to $248 million in 2000, compared to $561
million in 1999. However, excluding the effect of the nonrecurring items
referred to earlier, net income decreased by $27 million to $183 million in 2000
from $210 million in 1999. As discussed more fully below, this decrease
principally resulted from higher interest expense principally due to higher
market interest rates on variable-rate debt and higher losses from certain
investments accounted for under the equity method, offset in part by an overall
increase in TWE's business segment operating income.

As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $57 million and $39 million for
the three months ended September 30, 2000 and 1999, respectively, have been
provided for the operations of TWE's domestic and foreign subsidiary
corporations.

BUSINESS SEGMENT RESULTS

Filmed Entertainment-Warner Bros. Revenues decreased to $1.686 billion
in 2000, compared to $1.862 billion in 1999. EBITA increased to $215 million in
2000 from $180 million in 1999. Operating income similarly increased to $185
million in 2000 from $150 million in 1999 due to the one-time items. Revenues
decreased primarily due to the 1999 initial off-network availability of the
popular television series The Drew Carey Show. Revenues from theatrical
operations were essentially flat, as the combination of higher worldwide DVD
sales and domestic theatrical revenues offset lower international theatrical
revenues, principally relating to last year's highly successful release of The
Matrix.

The operating results in both periods were affected by certain one-time
items. The 2000 results include a net pretax, investment-related gain of $65
million. The 1999 results include a pretax gain of $10 million relating to the
partial recognition of a deferred gain on the 1998 sale of Six Flags. Excluding
the impact of these items, EBITA and operating income decreased as a result of
the decline in revenues, offset in part by lower film and television costs.

Cable Networks-HBO. Revenues increased to $559 million in 2000,
compared to $540 million in 1999. EBITA and operating income increased to $154
million in 2000 from $138 million in 1999. Revenues benefited primarily from an
increase in subscriptions. EBITA and operating income were higher principally
due to the revenue gains, increased cost savings and higher income from Comedy
Central, a 50%-owned equity investee.

Cable. Revenues increased to $1.288 billion in 2000, compared to $1.124
billion in 1999. EBITA, including the negative effect on operating trends of
one-time gains recognized in 1999, decreased to $404 million in 2000 from $699
million in 1999. Operating income similarly decreased to $293 million in 2000
from $600 million in 1999 due to one-time gains. Revenues increased due to
growth in basic cable subscribers, increases in basic cable rates, increases

<PAGE>

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

in advertising revenues and increases from the deployment of digital cable and
high-speed online services. The 1999 operating results of the Cable segment were
affected by net pretax gains of approximately $358 million relating to the sale
or exchange of various cable television systems and investments. Excluding the
effect of these items, EBITA and operating income increased principally as a
result of the revenue gains and pension-related cost savings, offset in part by
higher programming costs and higher depreciation related to capital spending.

Digital Media. The Digital Media segment had $15 million of operating
losses on $2 million of revenues in 2000 principally due to start-up costs
associated with TWE's digital media businesses. TWE's digital media businesses
include Entertaindom, an advertiser-supported entertainment destination site,
and other entertainment-related websites. Due to the start-up nature of most of
these businesses, losses are expected to continue in 2000.

Interest and Other, Net. Interest and other, net, increased to $214
million of expense in 2000, compared to $185 million of expense in 1999.
Interest expense increased to $165 million in 2000, compared to $138 million in
1999 as a result of higher market interest rates on variable-rate debt. Other
expense, net, increased to $49 million in 2000, compared to $47 million in 1999,
primarily because of higher losses from certain investments accounted for under
the equity method of accounting.

Minority Interest. Minority interest expense increased to $62 million
in 2000, compared to $60 million in 1999. Minority interest expense was affected
by the allocation of a portion of the net pretax gains in 1999 relating to the
sale or exchange of various cable television systems and investments owned by
the TWE-Advance/Newhouse Partnership ("TWE-A/N") to the minority owners of that
partnership. Excluding the effect of the 1999 gains, minority interest expense
increased principally due to a lower allocation of losses in 2000 to a minority
partner in The WB Network.

NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999

CONSOLIDATED RESULTS

TWE had revenues of $10.118 billion, income of $617 million before the
cumulative effect of an accounting change and net income of $93 million for the
nine months ended September 30, 2000, compared to revenues of $9.468 billion and
net income of $1.640 billion for the nine months ended September 30, 1999.

As previously described, the comparability of TWE's operating results
for 2000 and 1999 has been affected by certain significant, nonrecurring items
recognized in each period. These items aggregated approximately $17 million of
net pretax income in 2000, compared to approximately $1.363 billion of net
pretax income in 1999. In addition, net income in 2000 was reduced by a charge
of $524 million relating to the cumulative effect of an accounting change.

TWE had net income of $93 million in 2000, compared to net income of
$1.640 billion in 1999. However, excluding the significant effect of the
nonrecurring items referred to earlier, net income increased by $148 million to
$600 million in 2000 from $452 million in 1999. As discussed more fully below,
this increase principally resulted from an overall increase in TWE's business
segment operating income and lower losses from certain investments accounted for
under the equity method, offset in part by higher interest expense principally
due to higher market interest rates on variable-rate debt and higher losses
associated with TWE's asset securitization program.

<PAGE>

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

BUSINESS SEGMENT RESULTS

Filmed Entertainment-Warner Bros. Revenues increased to $4.705 billion
in 2000, compared to $4.688 billion in 1999. EBITA, including the effect on
operating trends of one-time items recognized in each period, decreased to $482
million in 2000 from $658 million in 1999. Operating income similarly decreased
to $391 million in 2000 from $567 million in 1999 due to the one-time items.
Revenues benefited from increases in the distribution of both theatrical and
television product, offset in part by lower revenues from consumer product
operations. Warner Bros.'s revenues from the distribution of theatrical product
increased principally due to higher worldwide DVD sales, offset in part by lower
revenues from worldwide theatrical operations, principally relating to last
year's highly successful release of The Matrix. Warner Bros.'s revenues from the
distribution of television product increased principally due to higher aggregate
revenues from basic cable, broadcast network and international syndicated
television exhibition, offset in part by lower revenues from domestic syndicated
television exhibition relating to the 1999 initial off-network availability of
the popular television series The Drew Carey Show.

The operating results in both periods were affected by certain one-time
items. The 2000 results include a net pretax, investment-related gain of $65
million, a pretax charge of $24 million relating to the Six Flags litigation and
a $10 million pretax gain relating to the partial recognition of a deferred gain
on the 1998 sale of Six Flags. The 1999 results include pretax gains of $30
million relating to the partial recognition of a deferred gain on the 1998 sale
of Six Flags and a $215 million net pretax gain recognized in connection with
the early termination and settlement of a long-term, home video distribution
agreement. Excluding the impact of these items, EBITA and operating income
increased principally as a result of the revenue gains and lower film costs,
offset in part by lower results from domestic television syndication operations.

Cable Networks-HBO. Revenues increased to $1.683 billion in 2000,
compared to $1.612 billion in 1999. EBITA and operating income increased to $448
million in 2000 from $394 million in 1999. Revenues benefited primarily from an
increase in subscriptions. The increase in EBITA and operating income was
principally due to the revenue gains, increased cost savings and higher income
from Comedy Central, a 50%-owned equity investee.

Cable. Revenues increased to $3.799 billion in 2000, compared to $3.312
billion in 1999. EBITA, including the negative effect on operating trends of
one-time items recognized in each period, decreased to $1.182 billion in 2000
from $2.135 billion in 1999. Operating income similarly decreased to $853
million in 2000 from $1.863 billion in 1999 due to the one-time items. Revenues
increased due to growth in basic cable subscribers, increases in basic cable
rates, increases in advertising revenues and increases from the deployment of
digital cable and high-speed online services. The operating results of the Cable
segment were affected by net pretax losses of approximately $8 million in 2000
and net pretax gains of approximately $1.118 billion in 1999 relating to the
sale or exchange of various cable television systems and investments. Excluding
the effect of these items, EBITA and operating income increased principally as

<PAGE>

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

a result of the revenue gains and pension-related cost savings, offset in part
by higher programming costs and higher depreciation related to capital spending.

Digital Media. The Digital Media segment had $45 million of operating
losses on $5 million of revenues in 2000 principally due to start-up costs
associated with TWE's digital media businesses. TWE's digital media businesses
include Entertaindom, an advertiser-supported entertainment destination site,
and other entertainment-related websites. Due to the start-up nature of most of
these businesses, losses are expected to continue in 2000.

Interest and Other, Net. Interest and other, net, increased to $640
million of expense in 2000, compared to $572 million of expense in 1999.
Interest expense increased to $478 million in 2000, compared to $411 million in
1999 as a result of higher market interest rates on variable-rate debt and $26
million of additional interest expense recorded in 2000 in connection with the
Six Flags litigation. Other expense, net, increased to $162 million in 2000,
compared to $161 million in 1999. This marginal increase principally related to
higher losses associated with TWE's asset securitization program, offset
primarily by lower losses from certain investments accounted for under the
equity method.

Minority Interest. Minority interest expense decreased to $145 million
in 2000, compared to $366 million in 1999. The decrease in minority interest
expense was principally due to the allocation of a portion of the higher net
pretax gains in 1999 relating to the sale or exchange of various cable
television systems and investments owned by TWE-A/N to the minority owners of
that partnership. Excluding the significant effect of the 1999 gains, minority
interest expense decreased principally due to a higher allocation of losses in
2000 to a minority partner in The WB Network.

FINANCIAL CONDITION AND LIQUIDITY
SEPTEMBER 30, 2000

FINANCIAL CONDITION

At September 30, 2000, TWE had $6.5 billion of debt, $262 million of
cash and equivalents (net debt of $6.2 billion) and $6.4 billion of partners'
capital. This compares to $6.7 billion of debt, $517 million of cash and
equivalents (net debt of $6.2 billion) and $7.1 billion of partners' capital at
December 31, 1999.

CASH FLOWS

During the first nine months of 2000, TWE's cash provided by operations
amounted to $2.172 billion and reflected $2.000 billion of business segment
EBITA, $666 million of noncash depreciation expense and $221 million of proceeds
from TWE's asset securitization program, less $417 million of interest payments,
$81 million of income taxes, $56 million of corporate expenses and $161 million
related to an aggregate increase in working capital requirements, other balance
sheet accounts and noncash items. Cash provided by operations of $2.205 billion
in the first nine months of 1999 reflected $3.092 billion of business segment
EBITA, $632 million of noncash depreciation expense and $20 million of proceeds
from TWE's asset securitization program, less $394 million of interest payments,
$84 million of income taxes, $54 million of corporate expenses and $1.007
billion related to an aggregate increase in working capital requirements, other
balance sheet accounts and noncash items.

<PAGE>

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

Cash used by investing activities was $1.500 billion in the first nine
months of 2000, compared to $540 million in the first nine months of 1999,
principally as a result of a decrease in cash proceeds from the sale of
investments, higher capital expenditures and the absence in 2000 of the 1999
collection of TWE's $400 million loan to Time Warner. Capital expenditures
increased to $1.436 billion in the first nine months of 2000, compared to $1.009
billion in the first nine months of 1999, reflecting higher spending on variable
capital to facilitate a more aggressive roll-out of Time Warner Cable's popular
digital cable and high-speed online services.

Cash used by financing activities was $927 million in the first nine
months of 2000, compared to $1.517 billion in the first nine months of 1999. The
use of cash in 2000 principally resulted from the payment of $684 million of
capital distributions to Time Warner and $168 million of debt reduction. The use
of cash in 1999 principally resulted from the redemption of preferred stock of a
subsidiary at an aggregate cost of $217 million, the payment of $1.116 billion
of capital distributions to Time Warner and $39 million of debt reduction.

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 segment amounted to
$1.351 billion in the nine months ended September 30, 2000, compared to $910
million in the nine months ended September 30, 1999. Cable capital spending for
the fourth quarter of 2000 is budgeted to be approximately $425 million,
reflecting higher spending on variable capital to facilitate a more aggressive
roll-out of Time Warner Cable's popular digital cable and high-speed online
services. Capital spending is expected to continue to be funded by cable
operating cash flow.

WARNER BROS. BACKLOG

Warner Bros.'s backlog represents the amount of future revenue not yet
recorded from cash contracts for the licensing of theatrical and television
product for pay cable, basic cable, network and syndicated television
exhibition. Warner Bros.'s backlog amounted to $2.737 billion at September 30,
2000, compared to $3.033 billion at December 31, 1999 (including amounts
relating to licensing of film product to TWE's cable television networks of $254
million and to Time Warner's cable television networks of $612 million at
September 30, 2000 and $365 million to TWE's cable television networks and $599
million to Time Warner's cable television networks at December 31, 1999).

Because backlog generally relates to contracts for the licensing of
theatrical and television product which have already been produced, the
recognition of revenue for such completed product is principally only dependent
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement. Cash licensing fees are collected periodically
over the term of the related licensing agreements or on an accelerated basis
using a $500 million securitization facility. The portion of backlog for which
cash has not already been received has significant off-balance sheet asset value
as a source of future funding. As of September 30, 2000, including cash received
under the securitization facility and other advanced payments, approximately
$625 million of cash licensing fees had been collected against the backlog. The
backlog excludes advertising barter contracts, which are also expected to result
in the future realization of revenues and cash through the sale of advertising
spots received under such contracts.

<PAGE>

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

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

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

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

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

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

o For TWE's digital media businesses, their ability to locate and invest in
profitable businesses, to develop products and services that are
attractive, accessible and commercially viable in terms of content,
technology and cost; their ability to manage costs and generate revenues;
aggressive competition from existing and developing technologies

<PAGE>

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

and products; the resolution of issues concerning commercial activities via
the Internet, including security, reliability, cost, ease of use and
access; and the possibility of increased government regulation of new media
services.

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

<PAGE>

TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ -----------
(MILLIONS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents........................................................................ $ 262 $ 517
Receivables, including $1.138 and $1.354 billion due from Time Warner,
less allowances of $602 and $668 million................................................ 2,912 3,328
Inventories................................................................................. 630 639
Prepaid expenses............................................................................ 200 246
-------- ------

Total current assets........................................................................ 4,004 4,730

Noncurrent inventories and film costs....................................................... 2,526 2,855
Investments................................................................................. 728 774
Property, plant and equipment............................................................... 7,259 6,488
Cable television franchises................................................................. 5,322 5,464
Goodwill.................................................................................... 3,709 3,731
Other assets................................................................................ 781 801
------- -------

Total assets................................................................................ $24,329 $24,843
======= =======

LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable............................................................................ $ 1,858 $ 1,791
Participations payable...................................................................... 1,072 1,258
Programming costs payable................................................................... 518 459
Debt due within one year.................................................................... 6 6
Other current liabilities, including $1.106 billion and $893 million due to Time Warner..... 2,628 2,209
------ ------

Total current liabilities................................................................... 6,082 5,723

Long-term debt.............................................................................. 6,487 6,655
Other long-term liabilities, including $1.368 and $1.292 billion due to Time Warner......... 3,473 3,501
Minority interests.......................................................................... 1,846 1,815

PARTNERS' CAPITAL
Contributed capital......................................................................... 7,349 7,338
Partnership deficit......................................................................... (908) (189)
------ -------

Total partners' capital..................................................................... 6,441 7,149
------- -------

Total liabilities and partners' capital..................................................... $24,329 $24,843
======= =======
</TABLE>

See accompanying notes.

<PAGE>

TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Revenues(a)........................................................ $ 3,494 $ 3,474 $10,118 $ 9,468
------- ------- ------- -------

Cost of revenues(a)(b)............................................. (2,094) (2,246) (6,096) (5,943)
Selling, general and administrative(a)(b).......................... (657) (593) (2,014) (1,766)
Amortization of goodwill and other intangible assets............... (143) (130) (424) (366)
Gain (loss) on sale or exchange of cable systems and investments(a) - 358 (8) 1,118
Gain on early termination of video distribution agreement.......... - - - 215
------- ------- ------- -------

Business segment operating income.................................. 600 863 1,576 2,726
Interest and other, net(a)......................................... (214) (185) (640) (572)
Corporate services(a).............................................. (19) (18) (56) (54)
Minority interest.................................................. (62) (60) (145) (366)
------- ------- ------- -------

Income before income taxes and cumulative effect of accounting
change.......................................................... 305 600 735 1,734
Income taxes....................................................... (57) (39) (118) (94)
------- ------- ------- -------

Income before cumulative effect of accounting change............... 248 561 617 1,640
Cumulative effect of accounting change............................. - - (524) -
------- ------- ------- -------

Net income......................................................... $ 248 $ 561 $ 93 $1,640
======= ======= ======= ======
</TABLE>

---------------
(a) Includes the following income (expenses) resulting from transactions with
the partners of TWE and other related companies:

<TABLE>
<S> <C> <C> <C> <C>
Revenues.................................................... $224 $150 $443 $422
Cost of revenues............................................ (111) (62) (258) (198)
Selling, general and administrative......................... (6) (7) (53) (23)
Gain on sale or exchange of cable systems and investments... - 308 - 308
Interest and other, net..................................... 11 (8) 20 20
Corporate services.......................................... (19) (18) (56) (54)

(b) Includes depreciation expense of:............................. $229 $226 $666 $632
==== ==== ==== ====
</TABLE>

See accompanying notes.

<PAGE>

TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
OPERATIONS
Net income.................................................................................. $ 93 $ 1,640
Adjustments for noncash and nonoperating items:
Cumulative effect of accounting change................................................... 524 --
Depreciation and amortization............................................................ 1,090 998
Amortization of film costs............................................................... 1,160 1,397
(Gain) loss on sale or exchange of cable systems and investments......................... 8 (1,118)
Equity in losses of investee companies after distributions............................... 164 157
Changes in operating assets and liabilities................................................. (867) (869)
------- -------

Cash provided by operations................................................................. 2,172 2,205
------- -------

INVESTING ACTIVITIES
Investments and acquisitions................................................................ (275) (273)
Capital expenditures........................................................................ (1,436) (1,009)
Investment proceeds......................................................................... 211 342
Collection of loan to Time Warner........................................................... -- 400
------- -------

Cash used by investing activities........................................................... (1,500) (540)
------- -------

FINANCING ACTIVITIES
Borrowings.................................................................................. 1,250 1,854
Debt repayments............................................................................. (1,418) (1,893)
Redemption of preferred stock of subsidiary................................................. -- (217)
Capital distributions....................................................................... (684) (1,116)
Other....................................................................................... (75) (145)
------- -------

Cash used by financing activities........................................................... (927) (1,517)
------- -------

INCREASE (DECREASE) IN CASH AND EQUIVALENTS................................................. (255) 148

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................................................. 517 87
------- -------

CASH AND EQUIVALENTS AT END OF PERIOD....................................................... $ 262 $ 235
======= =======
</TABLE>

See accompanying notes.

<PAGE>

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

<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD.............................................................. $7,149 $5,107

Net income.................................................................................. 93 1,640
Other comprehensive income (loss)........................................................... (57) 6
------ ------
Comprehensive income(a)..................................................................... 36 1,646

Distributions............................................................................... (760) (383)
Allocation of income to Time Warner General Partners' Senior Capital........................ - (24)
Other....................................................................................... 16 (4)
------ ------

BALANCE AT END OF PERIOD.................................................................... $6,441 $6,342
====== ======
</TABLE>
-------------------
(a) Comprehensive income was $237 million for the three months ended September
30, 2000 and $520 million for the three months ended September 30, 1999.

See accompanying notes.

<PAGE>

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

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Time Warner Entertainment Company, L.P., a Delaware limited partnership
("TWE"), classifies its business interests into four fundamental areas: Cable
Networks, consisting principally of interests in cable television programming;
Filmed Entertainment, consisting principally of interests in filmed
entertainment, television production and television broadcasting; Cable,
consisting principally of interests in cable television systems; and Digital
Media, consisting principally of interests in Internet-related and digital media
businesses.

Each of the business interests within Cable Networks, Filmed
Entertainment, Cable and Digital Media is important to TWE's objective of
increasing partner value through the creation, extension and distribution of
recognizable brands and copyrights throughout the world. Such brands and
copyrights include (1) HBO and Cinemax, the leading pay-television services, (2)
the unique and extensive film, television and animation libraries of Warner
Bros. and trademarks such as the Looney Tunes characters and Batman, (3) The WB
Network, a national broadcasting network launched in 1995 as an extension of the
Warner Bros. brand and as an additional distribution outlet for Warner Bros.'s
collection of children's cartoons and television programming, (4) Time Warner
Cable, the second largest operator of cable television systems in the U.S. and
(5) Internet websites, such as Entertaindom.com.

Financial information for TWE's various business segments is presented
herein as an indication of financial performance (Note 5). Except for start-up
losses incurred in connection with The WB Network and Digital Media, TWE's
principal business segments generate significant operating income and cash flow
from operations. The cash flow from operations generated by such business
segments is considerably greater than their operating income due to significant
amounts of noncash amortization of intangible assets recognized principally in
Time Warner Inc.'s ("Time Warner") $14 billion acquisition of Warner
Communications Inc. ("WCI") in 1989 and $1.3 billion acquisition of the minority
interest in American Television and Communications Corporation ("ATC") in 1992,
a portion of which was allocated to TWE upon the capitalization of the
partnership. Noncash amortization of intangible assets recorded by TWE's
business segments amounted to $143 million for the three months ended September
30, 2000 and $130 million for the three months ended September 30, 1999. On a
year-to-date basis, noncash amortization of intangible assets recorded by TWE's
business segments amounted to $424 million in 2000 and $366 million in 1999.

Certain of Time Warner's wholly owned subsidiaries collectively own
general and limited partnership interests in TWE consisting of 74.49% of the pro
rata priority capital ("Series A Capital") and residual equity capital
("Residual Capital"), and 100% of the junior priority capital ("Series B
Capital"). The remaining 25.51% limited partnership interests in the Series A
Capital and Residual Capital of TWE are held by a subsidiary of AT&T Corp.
Certain of Time Warner's subsidiaries are the general partners of TWE ("Time
Warner General Partners").

BASIS OF PRESENTATION

Interim Financial Statements

<PAGE>

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

position and the results of operations and cash flows for the periods presented
in conformity with generally accepted accounting principles applicable to
interim periods. The accompanying consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of TWE
included in its Annual Report on Form 10-K for the year ended December 31, 1999
(the "1999 Form 10-K").

Cumulative Effect of Change in Film Accounting Principle

In June 2000, TWE adopted Statement of Position 00-2, "Accounting by
Producers and Distributors of Films" ("SOP 00-2"). SOP 00-2 established new film
accounting standards, including changes in revenue recognition and accounting
for advertising, development and overhead costs. Specifically, SOP 00-2 requires
advertising costs for theatrical and television product to be expensed as
incurred. This compares to TWE's previous policy of first capitalizing and then
expensing advertising costs for theatrical product over the related revenue
streams. In addition, SOP 00-2 requires development costs for abandoned projects
and certain indirect overhead costs to be charged directly to expense, instead
of those costs being capitalized to film costs, which was required under the
previous accounting model. SOP 00-2 also requires all film costs to be
classified in the balance sheet as noncurrent assets. Provisions of SOP 00-2 in
other areas, such as revenue recognition, generally are consistent with TWE's
existing accounting policies.

TWE has adopted the provisions of SOP 00-2 retroactively to the
beginning of 2000. As a result, TWE's net income for the nine months ended
September 30, 2000 includes a one-time, noncash charge of $524 million,
primarily to reduce the carrying value of its film inventory. This charge has
been reflected as a cumulative effect of an accounting change in the
accompanying consolidated statement of operations.

Reclassifications

Certain reclassifications have been made to the prior year's financial
statements to conform to the 2000 presentation.

2. SIGNIFICANT TRANSACTIONS

AMERICA ONLINE-TIME WARNER MERGER

In January 2000, Time Warner and America Online, Inc. ("America
Online") announced that they had entered into an agreement to merge (the
"Merger") by forming a new holding company named AOL Time Warner Inc. ("AOL Time
Warner"). As a result of the Merger, the former shareholders of America Online
will have an approximate 55% interest in AOL Time Warner and the former
shareholders of Time Warner will have an approximate 45% interest in the
combined entity, expressed on a fully diluted basis. The Merger is expected to
be accounted for by AOL Time Warner as an acquisition of Time Warner under the
purchase method of accounting for business combinations.

<PAGE>

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

SIX FLAGS

TWE management periodically had evaluated its reasonably possible risk
of loss relating to the Six Flags litigation and Co-Venture Guarantees. Based on
the improving financial performance of Premier and the Six Flags Over Texas and
Six Flags Over Georgia theme parks, management believed that its aggregate
financial exposure had declined steadily. Accordingly, TWE periodically
recognized a portion of the deferred gain as its realization became more fully
assured. For each quarter of 1999 and in the first quarter of 2000, a $10
million pretax gain was recognized. These amounts have been included in business
segment operating income in the accompanying consolidated statement of
operations.

In December 1998, a jury returned an adverse verdict in the Six Flags
litigation in the amount of $454 million. TWE and its former 51% partner in Six
Flags are financially responsible for this judgment. TWE appealed the verdict,
but, in July 2000, an appellate court unexpectedly affirmed the jury's verdict.
As a result, TWE revised its estimate of its financial exposure and recorded a
one-time, pretax charge of $50 million in the second quarter of 2000 to cover
its additional financial exposure in excess of established reserves. These
reserves consisted of the unrecognized portion of the deferred gain and accrued
interest. The $50 million charge is classified in two components in TWE's
accompanying consolidated statement of operations: $26 million of the charge,
representing an accrual for additional interest, is included in interest and
other, net, and the remaining $24 million is included in business segment
operating income.

FILMED ENTERTAINMENT INVESTMENT-RELATED GAINS

During the third quarter of 2000, Warner Bros. recognized a net pretax,
investment-related gain of approximately $65 million, principally relating to
additional proceeds received in the third quarter of 2000 in connection with the
1999 sale of an interest in CanalSatellite, a satellite television platform
servicing France and Monaco. This gain is included in business segment operating
income in the accompanying consolidated statement of operations.

GAINS (LOSSES) ON SALE OR EXCHANGE OF CABLE TELEVISION SYSTEMS AND INVESTMENTS

In 2000 and 1999, largely in an ongoing effort to enhance their
geographic clustering of cable television properties, TWE sold or exchanged
various cable television systems and investments. In connection with these
transactions, TWE's cable segment recognized net pretax losses of approximately
$8 million for the nine months ended September 30, 2000. In 1999, net pretax
gains were approximately $358 million in the third quarter and $1.118 billion
for the year-to-date period. Such amounts have been included in business segment
operating income in the accompanying consolidated statement of operations.

<PAGE>

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

1999 GAIN ON TERMINATION OF VIDEO DISTRIBUTION AGREEMENT

3. INVENTORIES AND FILM COSTS

Inventories and film costs consist of:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
Programming costs, less amortization.................................................... $ 806 $ 854
Film costs-Theatrical:
Released, less amortization.......................................................... 762 924
Completed and not released........................................................... 78 68
In production........................................................................ 361 468
Development and pre-production....................................................... 34 59
Film costs-Television:
Released, less amortization.......................................................... 105 363
Completed and not released........................................................... 194 9
In production........................................................................ 78 8
Development and pre-production....................................................... 6 5

Film costs-Library, less amortization................................................... 469 508
Merchandise............................................................................. 263 228
----- ------

Total inventories and film costs........................................................ 3,156 3,494
Less current portion of inventory....................................................... 630 639
------- ------

Total noncurrent inventories and film costs............................................. $2,526 $2,855
====== ======
</TABLE>

Approximately $798 million of released and completed and not released
film costs are expected to be amortized during the next twelve months.

4. PARTNERS' CAPITAL

TWE is required to make distributions to reimburse the partners for
income taxes at statutory rates based on their allocable share of taxable
income, and to reimburse Time Warner for stock options granted to employees of
TWE based on the amount by which the market price of Time Warner Inc. common
stock exceeds the option exercise price on the exercise date or, with respect to
options granted prior to the TWE capitalization on June 30, 1992, the greater of
the exercise price or the $13.88 market price of Time Warner Inc. common stock
at the time of the TWE capitalization. TWE accrues a stock option distribution
and a corresponding liability with respect to unexercised options when the
market price of Time Warner Inc. 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 Inc. common stock
declines.

<PAGE>

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

During the nine months ended September 30, 2000, TWE accrued $471
million of tax-related distributions and $289 million of stock option
distributions, based on closing prices of Time Warner Inc. common stock of
$78.33 at September 30, 2000 and $72.31 at December 31, 1999. During the nine
months ended September 30, 1999, TWE accrued $316 million of tax-related
distributions and $67 million of stock option distributions as a result of an
increase at that time in the market price of Time Warner Inc. common stock.
During the nine months ended September 30, 2000, TWE paid distributions to the
Time Warner General Partners in the amount of $684 million, consisting of $471
million of tax-related distributions and $213 million of stock option related
distributions. During the nine months ended September 30, 1999, TWE paid
distributions to the Time Warner General Partners in the amount of $489 million,
consisting of $316 million of tax-related distributions and $173 million of
stock option related distributions.

In July 1999, TWE borrowed $627 million under its bank credit agreement
and paid a distribution to the Time Warner General Partners to redeem the
remaining portion of their senior priority capital interests, including a
priority capital return of $173 million. Time Warner used a portion of the
proceeds received from this distribution to repay all $400 million of
outstanding borrowings under its credit agreement with TWE.

5. SEGMENT INFORMATION

TWE classifies its business interests into four fundamental areas:
Cable Networks, consisting principally of interests in cable television
programming; Filmed Entertainment, consisting principally of interests in filmed
entertainment, television production and television broadcasting; Cable,
consisting principally of interests in cable television systems; and Digital
Media, consisting principally of interests in Internet-related and digital media
businesses. TWE's Digital Media segment commenced operations in the fourth
quarter of 1999.

Information as to the operations of TWE in different business segments
is set forth below based on the nature of the products and services offered. TWE
evaluates performance based on several factors, including its primary financial
measure of 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 under Note 1 in TWE's 1999 Form 10-K. Intersegment sales are accounted
for at fair value as if the sales were to third parties.

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Filmed Entertainment-Warner Bros................................... $1,686 $1,862 $ 4,705 $4,688
Broadcasting-The WB Network........................................ 99 84 310 246
Cable Networks-HBO................................................. 559 540 1,683 1,612
Cable.............................................................. 1,288 1,124 3,799 3,312
Digital Media...................................................... 2 - 5 -
Intersegment elimination........................................... (140) (136) (384) (390)
------ ------- ------- ------

Total.............................................................. $3,494 $3,474 $10,118 $9,468
====== ====== ======= ======
</TABLE>

<PAGE>

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

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
EBITA(a)
Filmed Entertainment-Warner Bros.(b)............................... $215 $180 $ 482 $ 658
Broadcasting-The WB Network........................................ (15) (24) (67) (95)
Cable Networks-HBO................................................. 154 138 448 394
Cable(c)........................................................... 404 699 1,182 2,135
Digital Media...................................................... (15) - (45) -
----- ------ ------ ---------

Total.............................................................. $743 $993 $2,000 $3,092
==== ==== ====== ======
</TABLE>
---------------
(a) EBITA represents business segment operating income before noncash
amortization of intangible assets. After deducting amortization of
intangible assets, TWE's business segment operating income for the third
quarter was $600 million in 2000 and $863 million in 1999. TWE's business
segment operating income for the first nine months of the year was $1.576
billion in 2000 and $2.726 billion in 1999.
(b) Includes a net pretax, investment-related gain of approximately $65 million
recognized in the third quarter of 2000, a pretax charge of $24 million
recognized in the second quarter of 2000 in connection with the Six Flags
litigation, a pretax gain of $10 million relating to the partial
recognition of a deferred gain in connection with the 1998 sale of Six
Flags recognized in the first quarter of 2000 and in each of the first
three quarters of 1999 and a pretax gain of approximately $215 million
recognized in the first quarter of 1999 relating to the early termination
and settlement of a long-term, home video distribution agreement.
(c) Includes net pretax gains relating to the sale or exchange of certain cable
television systems of approximately $358 million in the third quarter of
1999. Similarly, nine-month results include net pretax losses of $8 million
in 2000 and net pretax gains of $1.118 billion in 1999.

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment-Warner Bros................................... $ 18 $ 44 $ 61 $109
Broadcasting-The WB Network........................................ - - 1 1
Cable Networks-HBO................................................. 8 7 23 20
Cable.............................................................. 203 175 580 502
Digital Media...................................................... - - 1 -
----- ------- ------ -------

Total.............................................................. $229 $226 $666 $632
==== ==== ==== ====
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
AMORTIZATION OF INTANGIBLE ASSETS(a)
Filmed Entertainment-Warner Bros................................... $ 30 $ 30 $ 91 $ 91
Broadcasting-The WB Network........................................ 2 1 4 3
Cable Networks-HBO................................................. - - - -
Cable.............................................................. 111 99 329 272
Digital Media...................................................... - - - -
------ ------- ------ -------

Total.............................................................. $143 $130 $424 $366
==== ==== ==== ====
</TABLE>
---------------
(a) Includes amortization relating to all business combinations accounted for
by the purchase method, including Time Warner's $14 billion acquisition of
WCI in 1989 and $1.3 billion acquisition of the minority interest in ATC in
1992.

6. COMMITMENTS AND CONTINGENCIES

TWE is subject to a civil action brought by a former cable television
competitor in New York City alleging violations of the antitrust laws. The case
is presently scheduled for trial in February 2001. Although management believes

<PAGE>

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

these allegations are without merit, an adverse jury verdict could
result in a material loss to TWE. Due to the vague nature of both plaintiffs'
claims and their assertions of damages, a range of loss is not determinable at
this time.

TWE is subject to certain litigation relating to Six Flags. In December
1998, a jury returned an adverse verdict in the Six Flags matter in the amount
of $454 million. TWE and its former 51% partner in Six Flags are financially
responsible for this judgment. As described in Note 2, TWE appealed the verdict,
but, in July 2000, an appellate court unexpectedly affirmed the jury's verdict.
As a result, TWE revised its estimate of its financial exposure and recorded a
one-time, pretax charge of $50 million in the second quarter of 2000 to cover
its additional financial exposure in excess of established reserves.

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

7. ADDITIONAL FINANCIAL INFORMATION

CASH FLOWS

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

<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
Cash payments made for interest.................................................... $417 $394
Cash payments made for income taxes, net........................................... 81 84
Noncash capital distributions...................................................... 289 67
</TABLE>

INTEREST AND OTHER, NET

Interest and other, net, consists of:

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Interest expense............................................ $(165) $(138) $(478) $(411)
Other investment-related activity, principally net losses
on corporate-related equity investees..................... (41) (35) (102) (122)
Corporate finance-related activity, including losses on
asset securitization programs............................. (10) (8) (53) (26)
Miscellaneous............................................... 2 (4) (7) (13)
------ ------ ------ -----
Total interest and other, net............................... $(214) $(185) $(640) $(572)
===== ===== ===== =====
</TABLE>

<PAGE>

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Reference is made to Six Flags Over Georgia LLC et al. v. Time Warner
Entertainment Company, L.P. et al., described on page I-32 of Time Warner's
Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 Form
10-K") and page 57 of Time Warner's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000 (the "June 30, 2000 Form 10-Q"). On August 16, 2000,
defendants filed a petition for certiorari with the Supreme Court of Georgia
seeking review of the decision of the Georgia Court of Appeals that had
affirmed the trial court's judgment. The Court is expected to act on the
petition by the end of the year.

Reference is made to the Consent Order signed by Warner Music Group and
the other major record companies with the Federal Trade Commission ("FTC") with
respect to the FTC's investigation of minimum advertised price programs,
described on pages I-32 and I-33 of Time Warner's 1999 Form 10-K and page 57 of
the June 30, 2000 Form 10-Q. On September 6, 2000, the FTC gave its final
approval of the Consent Order.

Reference is made to Digital Distribution Inc. d/b/a Compact Disc
Warehouse v. CEMA Distribution et al., and the related suits, described on page
I-33 of Time Warner's 1999 Form 10-K and page 57 of the June 30, 2000 Form 10-Q.
On September 22, 2000, the United States District Court of Appeals for the Ninth
Circuit denied the plaintiffs' application for review of the district court's
denial of the motion for class certification. On October 23, 2000, defendants
filed a motion for summary judgment. Trial in this matter is now scheduled for
early next year.

Reference is made to the actions pending in various Federal district
courts alleging claims of price fixing in the recorded music industry, described
on page 57 of the June 30, 2000 Form 10-Q under Bauman v. EMI Music Distribution
et al. The Federal actions have been consolidated for pretrial proceedings and
transferred for such purpose to the United States District Court for the
District of Maine. A number of similar cases are pending in various state courts
around the country, although the cases are generally at a very preliminary stage
of the proceedings.

Reference is made to State of Florida et al. v. BMG Music et al.,
described on page 57 of the June 30, 2000 Form 10-Q. The attorneys general of 12
additional states, along with Puerto Rico, the U.S. Virgin Islands and the
Northern Mariana Islands, have since joined the lawsuit. This action has been
consolidated in the United States District Court for the District of Maine with
the Federal actions described in the preceding paragraph.

Reference is made to Chambers et al. v. Time Warner Inc. et al.,
described on page 57 of the June 30, 2000 Form 10-Q. On August 28, 2000, the
Court orally granted Time Warner's motion to dismiss.

Reference is made to Bartholdi Cable Company, Inc. v. Time Warner Inc.
et al., described on page I-33 of Time Warner's 1999 Form 10-K. Trial has been
set to commence February 5, 2001.

Reference is made to Parker et al. v. Time Warner Entertainment et al.,
described on page I-34 of Time Warner's 1999 Form 10-K. On October 2, 2000, the
Magistrate Judge issued a recommendation to grant the defendants' motion to deny
class certification as to the claims for money damages.

Reference is made to Huffman et al. v. The Hearst Corporation et al.,
described on page 57 of the June 30, 2000 Form 10-Q. Since Huffman was filed,
more than 20 other similar lawsuits have been filed. All the cases have been
consolidated in the United States District Court for the Southern District of
New York. The Court stayed discovery pending the resolution of a motion for
partial summary judgment, which was filed by plaintiffs on November 1, 2000.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On August 24, 2000, in connection with the acquisition of Africana.com
Inc., Time Warner issued 132,592 shares of Time Warner common stock in a private
placement exempt from registration under Rule 506 of the Securities Act of 1933,
as amended.

<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.
---------

The exhibits listed on the accompanying Exhibit Index are filed
or incorporated by reference as a part of this report and such Exhibit Index
is incorporated herein by reference.

(b) Reports on Form 8-K.
--------------------

(i) Time Warner filed a Current Report on Form 8-K dated
October 5, 2000 in which it reported in Item 5 that Time Warner and EMI Group
plc terminated their Combination Agreement dated as of January 23, 2000,
providing for the proposed combination of their music businesses.

<PAGE>

TIME WARNER INC.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

TIME WARNER INC.
(Registrant)

By: /s/ Joseph A. Ripp
-----------------------------
Name: Joseph A. Ripp
Title: Executive Vice President and
Chief Financial Officer

Dated: November 10, 2000

<PAGE>

EXHIBIT INDEX
PURSUANT TO ITEM 601 OF REGULATIONS S-K

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
<S> <C>
10.1 Amendment No. 9 to the Time Warner Inc. Deferred Compensation Plan (the "TWI Deferred
Compensation Plan"), approved on August 4, 2000.

10.2 Amendment No. 10 to the TWI Deferred Compensation Plan, approved on November 1, 2000.

27 Financial Data Schedule.
</TABLE>