TIME WARNER INC/, 10-Q, 2000-08-14

TIME WARNER INC/
10-Q, 2000-08-14
MOTION PICTURE & VIDEO TAPE PRODUCTION

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<PAGE>

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 June 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.
<TABLE>

<S> <C>
Common Stock - $.01 par value 1,209,318,496
Series LMCN-V Common Stock - $.01 par value 114,123,884
-------------------------------------------- -------------------
Description of Class Shares Outstanding
as of July 31, 2000

</TABLE>

<PAGE>

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

INDEX TO FORM 10-Q

PAGE
--------------------
TIME
WARNER TWE
------ ---
<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 June 30, 2000 and December 31, 1999......................... 14 46
Consolidated statement of operations for the three and six months ended
June 30, 2000 and 1999............................................................... 15 47
Consolidated statement of cash flows for the six months ended June 30, 2000
and 1999............................................................................. 16 48
Consolidated statement of shareholders' equity and partnership capital.................... 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. The remaining
25.51% limited partnership interests in the Series A Capital and Residual
Capital of TWE are held by a subsidiary of MediaOne Group, Inc. ("MediaOne"),
which was acquired by AT&T Corp. ("AT&T") on June 15, 2000. The 1999 financial
statements reflect the consolidation of TWE and certain related companies
(referred to as the Entertainment Group), retroactive to the beginning of 1999.

USE OF EBITA

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

<PAGE>

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

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.

For 2000, the significant, nonrecurring items included (i) net pretax
gains of approximately $28 million recognized in the first quarter and net
pretax losses of approximately $7 million recognized in the second quarter
relating to the sale or exchange of various cable television systems and
investments, (ii) a $50 million pretax charge in the second quarter relating to
the Six Flags Entertainment Corporation ("Six Flags") litigation, (iii) a pretax
gain of $10 million in the first quarter relating to the partial recognition of
a deferred gain on the 1998 sale of Six Flags, (iv) transaction costs of
approximately $46 million recognized in the first quarter and approximately $31
million recognized in the second quarter relating to Time Warner's proposed
merger with America Online, Inc. ("America Online"), (v) 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
(vi) 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 $771 million recognized in the second quarter 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 and second 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 and (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"), an integrated communications provider that provides a wide range of
telephony and data services to businesses.

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:

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 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..................... $ 422 $ 366 $369 $ 315 $ 786 $ 675 $ 680 $ 574
Publishing(b)...................... 226 196 213 186 343 290 317 270
Music.............................. 109 98 47 33 189 187 68 60
Filmed Entertainment(c)............ 175 203 125 153 360 578 260 478
Broadcasting-The WB Network........ (21) (30) (22) (31) (52) (71) (54) (73)
Cable(d)........................... 455 1,180 300 1,046 940 1,583 631 1,316
Digital Media...................... (55) - (55) - (85) - (85) -
Intersegment elimination........... (16) 1 (16) 1 (24) 13 (24) 13
------ -------- ----- ------- ------ ------- ------ -------

Total.............................. $1,295 $2,014 $961 $1,703 $2,457 $3,255 $1,793 $2,638
====== ====== ==== ====== ====== ====== ====== ======
</TABLE>
-----------------
(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 months ended June 30, 1999, the Publishing
segment's operating results included EBITA losses of $3 million and
operating losses of $4 million relating to Book-of-the-Month Club. During
the six months ended June 30, 1999, the Publishing segment's operating
results included EBITA losses of $12 million and operating losses of $14
million relating to Book-of-the-Month Club.
(c) Includes 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 and second 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 losses related to the sale or exchange of certain cable
television systems and investments of approximately $7 million in the
second quarter of 2000 and net pretax gains of approximately $771 million
in 1999. Similarly, six-month results include net pretax gains of
approximately $21 million in 2000 and approximately $771 million in 1999.

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

CONSOLIDATED RESULTS

Time Warner had revenues of $7.080 billion and net income of $75
million for the three months ended June 30, 2000, compared to revenues of $6.531
billion and net income of $593 million for the three months ended June 30, 1999.
After preferred dividend requirements, Time Warner had basic and diluted net
income per common share of $.05 in 2000, compared to basic net income of $.46
per common share and diluted net income of $.43 per common share 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 $88 million of net pretax losses in 2000, compared to $896 million
of net pretax gains in 1999. The aggregate net effect of these items was to
decrease basic and diluted net income per common share by $.06 in 2000 and to
increase basic net income per common share by $.35 and diluted net income per
common share by $.32 in 1999.

Time Warner's net income decreased to $75 million in 2000, compared to
$593 million in 1999. However, excluding the significant effect of the
nonrecurring items referred to earlier, net income decreased by $14 million to
$143 million in 2000 from $157 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

<PAGE>

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

business segment operating income. Normalized basic and diluted net income per
common share, excluding the effect of significant nonrecurring items, was $.11
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 $1.769 billion in 2000, compared
to $1.611 billion in 1999. EBITA increased to $422 million in 2000 from $366
million in 1999. Operating income increased to $369 million in 2000 from $315
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 increases in advertising and 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 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, CNN International, 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 revenue gains, offset in part by higher programming costs and lower
results at World Championship Wrestling. In addition, EBITA and operating income
for 2000 included a $21 million one-time gain on the sale of an investment.
However, this gain did not significantly affect operating trends because it was
principally offset by the combination of start-up costs for new cable networks
and one-time sports and entertainment programming expenses. For HBO, the
increase in EBITA and operating income was principally due to the revenue gains
and increased cost savings.

Publishing. Revenues increased to $1.196 billion in 2000, compared to
$1.153 billion in 1999. EBITA increased to $226 million in 2000 from $196
million in 1999. Operating income increased to $213 million in 2000 from $186
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 June 30, 1999, the
Publishing segment's operating results included revenues of $81 million, EBITA
losses of $3 million and operating losses of $4 million relating to
Book-of-the-Month Club.

Excluding the 1999 operations of Book-of-the-Month Club, revenues
increased primarily from significant growth in magazine advertising revenues.
Magazine circulation revenues were flat. The increase in advertising revenues
was principally due to a strong overall advertising market for the division's
magazines, primarily led by Fortune, In Style, Time and People. 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.

<PAGE>

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

Music. Revenues increased to $956 million in 2000, compared to $828
million in 1999. EBITA increased to $109 million in 2000 from $98 million in
1999 after giving effect to the Columbia House reclassification described
earlier. Operating income increased to $47 million in 2000 from $33 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 matchbox twenty, Kid Rock and the Red Hot
Chili Peppers. 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 $1.802 billion in 2000,
compared to $1.783 billion in 1999. EBITA, including the negative effect on
operating trends of one-time items relating to Six Flags, decreased to $175
million in 2000 from $203 million in 1999. Operating income similarly decreased
to $125 million in 2000 from $153 million in 1999 due to the one-time items.
Revenues grew primarily due to increases at both Warner Bros. and the Turner
filmed entertainment businesses. For Warner Bros., revenues principally
benefited from an increase in the distribution of television product, offset in
part by lower revenues from the distribution of theatrical product. Warner
Bros.'s revenues from the distribution of theatrical product decreased
principally due to difficult comparisons to last year's theatrical success of
The Matrix and lower revenues from worldwide television exhibition, which more
than offset significant increases in DVD and home video sales. Warner Bros.'s
revenues from the distribution of television product increased principally due
to higher aggregate revenues from broadcast network and syndicated television
exhibition, offset in part by lower aggregate revenues from basic cable
exhibition. For the Turner filmed entertainment businesses, the revenue gains
reflect higher home video and international theatrical revenues, offset in part
by lower domestic theatrical revenues due to last year's theatrical success of
Austin Powers: The Spy Who Shagged Me and lower revenues from television
exhibition of theatrical product.

Operating results for both periods include one-time items related to
Six Flags. The 2000 results include a pretax charge of $24 million relating to
the Six Flags litigation. 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 Six Flags, EBITA and operating income were higher
due to improved results at Warner Bros., offset in part by decreases at the
Turner filmed entertainment businesses. For Warner Bros., EBITA and operating
income principally increased as a result of the revenue gains and lower film
costs. For the Turner filmed entertainment business, EBITA and operating income
were lower principally due to difficult comparisons to last year's theatrical
success of Austin Powers: The Spy Who Shagged Me.

Broadcasting-The WB Network. Revenues increased to $109 million in
2000, compared to $83 million in 1999. EBITA improved to a loss of $21 million
in 2000 from a loss of $30 million in 1999. Operating losses decreased to $22
million in 2000 from $31 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 due to the revenue gains, which more
than offset higher programming costs associated with the expanded programming
schedule.

Cable. Revenues increased to $1.502 billion in 2000, compared to $1.330
billion in 1999. EBITA, including the negative effect on operating trends of
one-time items recognized in each period, decreased to $455 million in 2000 from
$1.180 billion in 1999. Operating income similarly decreased to $300 million in
2000 from $1.046 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 and pay-per-view 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
$7

<PAGE>

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

million in 2000 and net pretax gains of approximately $771 million 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. Digital Media had $55 million of operating losses on $22
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 $646
million of expense in 2000, compared to $354 million of expense in 1999.
Interest expense increased to $424 million in 2000, compared to $369 million 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,
net, increased to an expense of $222 million in 2000 from income of $15 million
in 1999. Other expense, net, increased primarily because of transaction costs of
approximately $31 million in 2000 relating to Time Warner's proposed merger with
America Online, 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 $57 million
in 2000, compared to $245 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 the TWE-Advance/Newhouse Partnership
("TWE-A/N") to the minority owners of that partnership. Excluding the
significant effect of the gains recognized in each period, minority interest
expense decreased principally due to a higher allocation of losses in 2000 to a
minority partner in The WB Network.

SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999

CONSOLIDATED RESULTS

Time Warner had revenues of $13.644 billion, a loss of $26 million
before the cumulative effect of an accounting change and a net loss of $469
million for the six months ended June 30, 2000, compared to revenues of $12.622
billion and net income of $731 million for the six months ended June 30, 1999.
After preferred dividend requirements, Time Warner had a basic loss per common
share before the cumulative effect of an accounting change of $.03 in 2000, and
$.36 after, compared to basic net income of $.56 per common share in 1999. On a
diluted basis, Time Warner had a loss per common share before the cumulative
effect of an accounting change of $.03 in 2000, and $.36 after, compared to net
income of $.54 per common share 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, excluding the impact
of the accounting change, aggregated approximately $316 million of net pretax
losses in 2000, compared to $1.121 billion of net pretax gains in 1999. In
addition, net income in 2000 was reduced by an after-tax charge of $443 million
relating to the cumulative effect of the accounting change. The aggregate net
effect of these items was to decrease basic and diluted net income per common
share by $.50 in 2000 and to increase basic net income per common share by $.46
and diluted net income per common share by $.44 in 1999.

<PAGE>

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

Time Warner had a net loss of $469 million in 2000, compared to net
income of $731 million in 1999. However, excluding the significant effect of the
nonrecurring items referred to earlier, net income increased by $35 million to
$197 million in 2000 from $162 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 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 $.14 in 2000,
compared to $.10 in 1999.

BUSINESS SEGMENT RESULTS

Cable Networks. Revenues increased to $3.355 billion in 2000, compared
to $2.975 billion in 1999. EBITA increased to $786 million in 2000 from $675
million in 1999. Operating income increased to $680 million in 2000 from $574
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 increases in advertising and 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 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, CNN International, 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 revenue gains, offset in part by higher programming costs and lower
results at World Championship Wrestling. In addition, EBITA and operating income
for 2000 included a $31 million one-time gain on the sale of an investment.
However, this gain did not significantly affect operating trends because it was
principally offset by the combination of start-up costs for new cable networks
and one-time sports and entertainment programming expenses. For HBO, the
increase in EBITA and operating income was principally due to the revenue gains
and increased cost savings, offset in part by lower gains from the sale of
certain investments.

Publishing. Revenues increased to $2.135 billion in 2000, compared to
$2.127 billion in 1999. EBITA increased to $343 million in 2000 from $290
million in 1999. Operating income increased to $317 million in 2000 from $270
million in 1999. As previously described, the comparability of the Publishing
segment's operating results was 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 six months ended June 30, 1999, the Publishing segment's results
included revenues of $147 million, EBITA losses of $12 million and operating
losses of $14 million relating to Book-of-the-Month Club.

Excluding the 1999 operations of Book-of-the-Month Club, revenues
increased primarily from significant growth in magazine advertising revenues,
offset in part by marginally lower magazine circulation revenues. The increase
in advertising revenues was principally due to a strong overall advertising
market for the division's magazines, primarily led by Fortune, In Style, Time
and People. 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-

<PAGE>

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

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 $1.873 billion in 2000, compared to $1.764
billion in 1999. EBITA increased to $189 million in 2000 from $187 million in
1999 after giving effect to the Columbia House reclassification described
earlier. Operating income increased to $68 million in 2000 from $60 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 matchbox twenty, Kid Rock and the Red Hot
Chili Peppers. 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 $3.697 billion in 2000,
compared to $3.480 billion in 1999. EBITA, including the negative effect on
operating trends of one-time items recognized in each period, decreased to $360
million in 2000, compared to $578 million in 1999. Operating income similarly
decreased to $260 million in 2000, compared to $478 million in 1999 due to the
one-time items. Revenues grew primarily due to increases at both Warner Bros.
and 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 and home video sales, offset in part by
lower revenues from worldwide theatrical and television exhibition. Warner
Bros.'s revenues from the distribution of television product increased
principally due to higher aggregate revenues from basic cable, broadcast network
and syndicated television exhibition. For the Turner filmed entertainment
businesses, revenues benefited principally from the licensing of library
product.

Operating results for both periods include one-time items. The 2000
results include 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 $20 million relating to the partial recognition of the deferred gain on
the 1998 sale of Six Flags and an approximate $215 million net pretax gain
recognized in connection with the early termination and settlement of a
long-term, home video distribution agreement. Excluding the effect of these
items, EBITA and operating income were higher due to improved results at Warner
Bros., offset in part by decreases at the Turner filmed entertainment
businesses. For Warner Bros., EBITA and operating income increased principally
as a result of the revenue gains and lower film costs, offset in part by lower
investment-related income. For the Turner filmed entertainment businesses, EBITA
and operating income were lower principally due to difficult comparisons to last
year's theatrical success of Austin Powers: The Spy Who Shagged Me.

Broadcasting-The WB Network. Revenues increased to $211 million in
2000, compared to $162 million in 1999. EBITA improved to a loss of $52 million
in 2000 from a loss of $71 million in 1999. Operating losses decreased to $54
million in 2000 from $73 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 due to the revenue gains, which more
than offset higher programming costs associated with the expanded programming
schedule.

<PAGE>

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

Cable. Revenues increased to $2.949 billion in 2000, compared to $2.626
billion in 1999. EBITA, including the negative effect on operating trends of
significantly higher one-time net gains in 1999, decreased to $940 million in
2000 from $1.583 billion in 1999. Operating income similarly decreased to $631
million in 2000 from $1.316 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 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 $771 million 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. Digital Media had $85 million of operating losses on $24
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 $1.454
billion of expense in 2000, compared to $860 million of expense in 1999.
Interest expense increased to $822 million in 2000, compared to $735 million 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 $632 million in 2000 from $125 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, transaction costs of approximately $77 million in 2000 relating
to Time Warner's proposed merger with America Online, 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 $111 million
in 2000, compared to $330 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 gains recognized in
each period, 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
JUNE 30, 2000

FINANCIAL CONDITION

At June 30, 2000, Time Warner had $17.8 billion of debt, $459 million
of cash and equivalents (net debt of $17.3 billion), $1.135 billion of
borrowings against future stock option proceeds, $575 million of mandatorily
redeemable preferred securities of a subsidiary and $9.7 billion of
shareholders' equity, compared to $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.

<PAGE>

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

CASH FLOWS

During the first six months of 2000, Time Warner's cash provided by
operations amounted to $873 million and reflected $2.457 billion of business
segment EBITA, $626 million of noncash depreciation expense and $208 million of
proceeds from Time Warner's asset securitization program, less $753 million of
interest payments, $190 million of income taxes, $87 million of corporate
expenses and $1.388 billion related to an aggregate increase in working capital
requirements, other balance sheet accounts and noncash items. Cash provided by
operations of $1.810 billion for the first six months of 1999 reflected $3.255
billion of business segment EBITA, $585 million of noncash depreciation expense
and $99 million of proceeds from Time Warner's asset securitization program,
less $684 million of interest payments, $172 million of income taxes, $80
million of corporate expenses and $1.193 billion related to an aggregate
increase in working capital requirements, other balance sheet accounts and
noncash items.

Cash used by investing activities was $1.416 billion in the first six
months of 2000, compared to $877 million in the first six months of 1999. This
increase was principally due to an increase in cash used for acquisitions and
investments, a decrease in cash proceeds from the sale of investments and higher
capital expenditures. Capital expenditures increased to $1.290 billion in the
first six months of 2000, compared to $963 million in the first six 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 $282 million in the first six
months of 2000, compared to $954 million in the first six months of 1999. The
use of cash in 2000 principally resulted from $280 million of debt reduction,
the repayment of $110 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 $131 million in dividends, offset in part by $310 million of proceeds
received principally from the exercise of employee stock options. The use of
cash in 1999 principally resulted from $196 million of debt reduction, the
repurchase of approximately 13.7 million shares of Time Warner common stock at
an aggregate cost of $926 million, the redemption of preferred stock of a
subsidiary at an aggregate cost of $217 million and the payment of $149 million
in dividends, offset in part by $324 million of borrowings against future stock
option proceeds and $287 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 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

<PAGE>

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

be approximately $1.0 billion, 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.

INVESTMENT IN ROAD RUNNER

In June 1998, Time Warner, TWE, TWE-A/N, MediaOne, Microsoft Corp.
("Microsoft") and Compaq Computer Corp. ("Compaq") formed a joint venture
to operate and expand Time Warner Cable's and MediaOne's existing high-speed
online business ("Road Runner"). In exchange for contributing these operations,
Time Warner, TWE and TWE-A/N received a collective 68.6% common equity
interest in Road Runner and MediaOne received 31.4% interest. In exchange for
Microsoft and Compaq contributing $425 million of cash to Road Runner, Microsoft
and Compaq each received a preferred equity interest therein that is
convertible into a 10% common equity interest (the "Preferred Equity
Interests").

In June 2000, AT&T acquired MediaOne. As a condition to closing the
acquisition, AT&T agreed to a requirement by the United States Department of
Justice to divest itself of MediaOne's interest in Road Runner within an
eighteen-month period of time. As a result, Time Warner is evaluating strategic
alternatives for restructuring Road Runner's ownership and operations. In
connection with some of these alternatives, Time Warner could be required to
record a one-time restructuring charge that could range from $200-300 million.
This charge would be expected to cover any premium paid to redeem Road Runner's
Preferred Equity Interests, lease termination and other related restructuring
costs. Such a charge would be recorded in interest and other, net. In addition,
as part of a restructuring, Time Warner's Cable segment could begin
consolidating a portion of the operations of Road Runner. This would result
in the Cable segment recognizing operating losses from Road Runner, which
previously had been included in interest and other, net, through Time Warner's
equity in the pretax losses of Road Runner.

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 $3.830 billion
at June 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 $1.260 billion at June 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 June 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

<PAGE>

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

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 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" 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
complete its proposed transaction with EMI and integrate the businesses
successfully; and the overall strength of global music sales.

<PAGE>

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

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; 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 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 current 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)

JUNE 30, DECEMBER 31,
2000 1999
-------- -----------
(MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents....................................................................... $ 459 $ 1,284
Receivables, less allowances of $1.634 and $1.682 billion.................................. 4,251 4,931
Inventories................................................................................ 1,439 1,472
Prepaid expenses........................................................................... 1,557 1,464
------ ------

Total current assets....................................................................... 7,706 9,151

Noncurrent inventories and film costs...................................................... 4,647 4,911
Investments................................................................................ 1,883 2,096
Property, plant and equipment.............................................................. 9,368 8,728
Music catalogues, contracts and copyrights................................................. 727 782
Cable television and sports franchises..................................................... 8,264 8,472
Goodwill................................................................................... 15,178 15,458
Other assets............................................................................... 1,574 1,641
------- -------

Total assets............................................................................... $49,347 $51,239
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................................................... $ 1,533 $ 1,923
Participations payable..................................................................... 1,281 1,403
Royalties and programming costs payable.................................................... 1,617 1,564
Debt due within one year................................................................... 20 22
Other current liabilities.................................................................. 4,409 4,758
------- -------

Total current liabilities.................................................................. 8,860 9,670

Long-term debt ............................................................................ 17,806 18,083
Borrowings against future stock option proceeds............................................ 1,135 1,243
Deferred income taxes...................................................................... 3,589 4,234
Unearned portion of paid subscriptions..................................................... 767 762
Other liabilities.......................................................................... 3,754 3,773
Minority interests......................................................................... 3,173 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, 1.208 and 1.173 billion shares outstanding................... 12 12
Paid-in capital............................................................................ 14,798 12,998
Accumulated deficit........................................................................ (5,123) (3,299)
------- -------

Total shareholders' equity................................................................. 9,688 9,713
------- -------

Total liabilities and shareholders' equity................................................. $49,347 $51,239
======= =======

</TABLE>

See accompanying notes.

<PAGE>

TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2000 1999 2000 1999
------- -------- ------- ------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues(a).......................................................... $7,080 $ 6,531 $13,644 $12,622
------ ------- ------- -------

Cost of revenues(a)(b)............................................... (3,761) (3,514) (7,374) (6,833)
Selling, general and administrative(a)(b)............................ (2,017) (1,774) (3,834) (3,520)
Amortization of goodwill and other intangible assets................. (334) (311) (664) (617)
Gain (loss) on sale or exchange of cable systems and investments..... (7) 771 21 771
Gain on early termination of video distribution agreement............ - - - 215
------ ------- ------- -------

Business segment operating income.................................... 961 1,703 1,793 2,638
Interest and other, net(a)(c)........................................ (646) (354) (1,454) (860)
Corporate expenses................................................... (44) (40) (87) (80)
Minority interest.................................................... (57) (245) (111) (330)
------ ------- ------- -------

Income before income taxes and cumulative effect of
accounting change................................................. 214 1,064 141 1,368
Income taxes......................................................... (139) (471) (167) (637)
------ ------- ------- -------

Income (loss) before cumulative effect of accounting change.......... 75 593 (26) 731
Cumulative effect of accounting change, net of $295 million
income tax benefit................................................ - - (443) -
------ ------- ------- -------

Net income (loss).................................................... 75 593 (469) 731
Preferred dividend requirements...................................... (3) (18) (8) (36)
------ ------- ------- -------

Net income (loss) applicable to common shares........................ $ 72 $ 575 $ (477) $ 695
======= ======= ======= =======

Basic income (loss) per common share:
Income (loss) per common share before cumulative effect
of accounting change............................................ $ 0.05 $ 0.46 $ (0.03) $ 0.56
======== ======= ======= =======
Net income (loss) per common share................................ $ 0.05 $ 0.46 $ (0.36) $ 0.56
======== ======= ======= =======
Average common shares............................................. 1,319.4 1,249.3 1,310.4 1,246.2
======== ======= ======= =======

Diluted income (loss) per common share:
Income (loss) per common share before cumulative effect
of accounting change............................................ $ 0.05 $ 0.43 $ (0.03) $ 0.54
======== ======= ======= =======
Net income (loss) per common share................................ $ 0.05 $ 0.43 $ (0.36) $ 0.54
======== ======= ======= =======
Average common shares............................................. 1,319.4 1,403.7 1,310.4 1,401.6
======== ======= ======= =======
--------------
(a) Includes the following income (expenses) resulting from
transactions with related companies:
Revenues................................................... $ 93 $ 138 $ 185 $ 267
Cost of revenues........................................... (28) (36) (57) (81)
Selling, general and administrative........................ (10) (28) (15) (20)
Interest and other, net.................................... (7) (13) (14) (12)

(b) Includes depreciation expense of:................................. $ 318 $ 306 $ 626 $ 585
======== ======== ======= =======

(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)

SIX MONTHS
ENDED JUNE 30,
------------------
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
OPERATIONS
Net income (loss)....................................................................... $ (469) $ 731
Adjustments for noncash and nonoperating items:
Cumulative effect of accounting change............................................... 443 -
Depreciation and amortization........................................................ 1,290 1,202
Amortization of film costs........................................................... 910 1,081
Gain on sale or exchange of cable systems and investments............................ (21) (771)
Equity in losses of investee companies after distributions........................... 262 188
Changes in operating assets and liabilities............................................. (1,542) (621)
------- ------

Cash provided by operations............................................................. 873 1,810
------- ------

INVESTING ACTIVITIES
Consolidation of the Entertainment Group's cash and cash equivalents.................... - 87
Investments and acquisitions............................................................ (383) (324)
Capital expenditures.................................................................... (1,290) (963)
Investment proceeds..................................................................... 257 323
------- ------

Cash used by investing activities....................................................... (1,416) (877)
------- ------

FINANCING ACTIVITIES
Borrowings.............................................................................. 1,595 1,651
Debt repayments......................................................................... (1,875) (1,847)
Borrowings against future stock option proceeds......................................... 2 324
Repayments of borrowings against future stock option proceeds........................... (110) -
Repurchases of Time Warner common stock................................................. (65) (926)
Dividends paid.......................................................................... (131) (149)
Redemption of preferred stock of a subsidiary........................................... - (217)
Proceeds received from stock option and dividend reinvestment plans..................... 310 287
Other................................................................................... (8) (77)
------- ------

Cash used by financing activities....................................................... (282) (954)
------- ------

DECREASE IN CASH AND EQUIVALENTS........................................................ (825) (21)

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

CASH AND EQUIVALENTS AT END OF PERIOD................................................... $ 459 $ 421
====== =======

</TABLE>

See accompanying notes.

<PAGE>

TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
---------------
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD.............................................................. $9,713 $8,852

Net income (loss)........................................................................... (469) 731
Other comprehensive loss.................................................................... (179) (10)
------ ------
Comprehensive income (loss)(a).............................................................. (648) 721

Common stock dividends...................................................................... (118) (113)
Preferred stock dividends................................................................... (8) (36)
Repurchases of Time Warner common stock..................................................... (65) (926)
Other, principally shares issued pursuant to stock option, dividend
reinvestment and benefit plans........................................................... 814 594
------ ------

BALANCE AT END OF PERIOD.................................................................... $9,688 $9,092
====== ======
</TABLE>

-------------------
(a) Comprehensive income (loss) was $(111) million for the three months ended
June 30, 2000 and $580 million for the three months ended June 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 $334 million for the three months ended June 30, 2000 and $311
million for the three months ended June 30, 1999. On a year-to-date basis,
noncash amortization of intangible assets recorded by Time Warner's business
segments amounted to $664 million in 2000 and $617 million in 1999.

BASIS OF PRESENTATION

A majority of Time Warner's interests in filmed entertainment,
television production, television broadcasting and cable television systems, and
a portion of its interests in cable television programming and digital media are
held through Time Warner Entertainment Company, L.P. ("TWE"). Time Warner owns
general and limited partnership interests in TWE consisting of 74.49% of the pro
rata priority capital ("Series A Capital") and residual equity capital
("Residual Capital"), and 100% of the junior priority capital ("Series B
Capital"). The remaining 25.51% limited partnership interests in the Series A
Capital and Residual Capital of TWE are held by a subsidiary of MediaOne Group,
Inc.

<PAGE>

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

("MediaOne"), which was acquired by AT&T Corp. on June 15, 2000. Time Warner's
1999 financial statements and segment information reflect the consolidation of
the Entertainment Group, which substantially consists of TWE, retroactive to the
beginning of 1999.

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 six months
ended June 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.

As a result of adopting the provisions of SOP 00-2 retroactively to the
beginning of 2000, Time Warner has restated its operating results for the three
months ended March 31, 2000, as follows:

AS REPORTED AS RESTATED
----------- -----------
(MILLIONS)
<S> <C> <C>
Revenues................................................................... $6,549 $6,564
Business segment operating income.......................................... 841 832
Loss before cumulative effect of accounting change......................... (96) (101)
Net loss................................................................... (96) (544)
Basic and diluted loss per common share.................................... $ (.08) $ (.42)

</TABLE>

Revenue Classification Changes

<PAGE>

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

As a result of these classification changes, it is expected that both annual
revenues and costs in Time Warner's filmed entertainment businesses will be
reduced by an equal amount of approximately $1.5-2 billion. Similarly, it is
expected that Time Warner's disclosure of the amount of backlog, which
represents the amount of future revenue not yet recorded from cash contracts for
the licensing of theatrical and television product, will be reduced by
approximately $500-700 million, depending upon the amount of third-party and
co-financed joint venture product being licensed. Time Warner is continuing
to evaluate the overall impact of SAB 101 on its consolidated financial
statements; however, other aspects of SAB 101 are not expected to have a
significant effect on Time Warner's consolidated financial statements.

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
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. The Merger is expected to close in the fall of 2000 and
is subject to customary closing conditions, including all necessary 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
transaction 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. Such costs amounted to $31 million for
the three months ended June 30, 2000 and $77 million for the six months ended
June 30, 2000. These costs have been classified in interest and other, net, in
the accompanying consolidated statement of operations.

<PAGE>

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

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. Time
Warner will control the ventures through majority board representation, among
other factors, and will account for the transaction under the purchase method of
accounting for business combinations.

As part of the transaction, each company will contribute its music
operations to the ventures, subject to a comparable amount of debt. As of March
31, 2000, EMI had approximately $1.5 billion of net debt. EMI shareholders also
will receive an aggregate, special cash dividend of approximately $1.3 billion.
This dividend is expected to be financed through a combination of proceeds from
debt incurred or assumed by the ventures and consideration to be paid by Time
Warner directly to EMI for a new class of EMI equity securities. The new class
of EMI equity securities to be held by Time Warner will convert automatically
into an 8% common equity interest in EMI, on a fully diluted basis, if EMI's
share price reaches 'L'9 for a short period of time within the first
three-and-a-half years after closing.

The transaction was approved by the shareholders of EMI on June 26,
2000. The transaction is expected to close by the end of 2000, subject to
customary closing conditions, including all necessary regulatory approvals.
There can be no assurance that such approvals will be obtained.

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 half of 2000 has been
included in interest and other, net, in the accompanying consolidated statement
of operations.

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.

<PAGE>

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

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.

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 losses for the
three months ended June 30, 2000 of approximately $7 million and net pretax
gains of $771 million in 1999. Net pretax gains for the first six months of the
year amounted to $21 million in 2000 and $771 million 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 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.

Time Warner is continuing to evaluate strategic alternatives for
Columbia House's operations. Those alternatives are focused primarily on ways to
improve Columbia House's declining operating performance, including online
initiatives, joint ventures and other strategic actions. Management believes
that such strategies are important to achieve a turnaround in Columbia House's
operating performance and to position it for long-term growth in a highly
competitive and rapidly changing business environment.

With the termination of the CDNOW merger in March 2000, the risk
associated with the timely execution of these strategies and the transformation
of Columbia House's traditional business model to an online one increased. As a
result, management concluded that the decline in Columbia House's business is
going to continue through the near term. As such, Time Warner recorded a $220
million noncash pretax charge during the first quarter of 2000 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 1999 business segment
operating income in the accompanying consolidated statement of operations.

<PAGE>

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

1999 GAIN ON TIME WARNER TELECOM'S INITIAL PUBLIC OFFERING

In May 1999, Time Warner Telecom Inc. ("Time Warner Telecom"), an
integrated communications provider that provides a wide range of telephony and
data services to businesses, 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 for the three and six months
ended June 30, 1999.

3. GAINS ON THE SALE OF OTHER INVESTMENTS

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") for proceeds of approximately
$33 million. As a result, Time Warner recognized a pretax gain of approximately
$32 million for the six months ended June 30, 2000. In addition, during the
first six months 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. for aggregate proceeds of approximately $56 million. As a
result, Time Warner recognized pretax gains of approximately $21 million in the
second quarter of 2000 and $31 million for the year-to-date period. These gains
are included in business segment operating income in the accompanying
consolidated statement of operations.

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 MediaOne. 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 $369 million and a net loss of $155 million
for the six months ended June 30, 2000. For the six months ended June 30, 1999,
TWE reported net income of $1.079 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 and losses were allocated to Time Warner and
none was allocated to MediaOne.

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.

<PAGE>

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

5. INVENTORIES AND FILM COSTS

Inventories and film costs consist of:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
Programming costs, less amortization.................................................... $1,592 $1,620
Magazines, books, recorded music and other merchandise.................................. 629 652
Film costs-Theatrical:
Released, less amortization.......................................................... 962 1,050
Completed and not released........................................................... 159 80
In production........................................................................ 778 704
Development and pre-production....................................................... 90 155
Film costs-Television:
Released, less amortization.......................................................... 300 546
Completed and not released........................................................... 10 9
In production........................................................................ 63 8
Development and pre-production....................................................... 6 5

Film costs-Library, less amortization................................................... 1,497 1,554
------ ------

Total inventories and film costs........................................................ 6,086 6,383
Less current portion of inventory....................................................... 1,439 1,472
------ ------

Total noncurrent inventories and film costs............................................. $4,647 $4,911
====== ======

</TABLE>

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, or in other
certain circumstances. If TW Companies elects to redeem these securities, the
redemption amount would be in each case at an amount per Preferred Trust
Security equal to $25 per security, plus accrued and unpaid distributions
thereon.

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

<PAGE>

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

7. INCOME (LOSS) PER COMMON SHARE BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE

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

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------------
2000(a) 1999 2000(a) 1999
------- ---- -------- ----
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Income (loss) applicable to common shares before cumulative
effect of accounting change - basic................................. $ 72 $ 575 $ (34) $ 695
Interest savings, net of tax(b)........................................ - 10 - 19
Preferred dividends.................................................... - 18 - 36
------ ------- ------- -------
Income (loss) applicable to common shares before cumulative
effect of accounting change - diluted............................... $ 72 $ 603 $ (34) $ 750
======= ======= ======= =======

Average number of common shares outstanding - basic.................... 1,319.4 1,249.3 1,310.4 1,246.2
Dilutive effect of stock options....................................... - 73.3 - 74.0
Dilutive effect of convertible preferred shares........................ - 81.1 - 81.4
------- ------- ------- -------
Average number of common shares outstanding - diluted.................. 1,319.4 1,403.7 1,310.4 1,401.6
======= ======= ======= =======

Income (loss) per common share before cumulative effect
of accounting change:
Basic............................................................. $ 0.05 $ 0.46 $ (0.03) $ 0.56
======= ======== ======== =======
Diluted........................................................... $ 0.05 $ 0.43 $ (0.03) $ 0.54
======= ======== ======== =======
</TABLE>
---------------
(a) 2000 basic and diluted income (loss) per common share before 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; 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, of which
the primary financial measure is business segment operating income before
noncash amortization of intangible assets ("EBITA"). The accounting policies of
the business segments are the same as those described in the summary of
significant accounting policies 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

<PAGE>

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

comparability of the Publishing segment's operating results was affected by a
transaction in 2000 involving Book-of-the-Month Club. In connection with that
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 six months of 2000 has been included in interest and other, net, in the
accompanying consolidated statement of operations. During the three months ended
June 30, 1999, the Publishing segment's operating results included revenues of
$81 million, EBITA losses of $3 million and operating losses of $4 million
relating to Book-of-the-Month Club. During the six months ended June 30, 1999,
the Publishing segment's operating results included revenues of $147 million,
EBITA losses of $12 million and operating losses of $14 million relating to
Book-of-the-Month Club.

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Cable Networks......................................................... $1,769 $1,611 $ 3,355 $ 2,975
Publishing............................................................. 1,196 1,153 2,135 2,127
Music.................................................................. 956 828 1,873 1,764
Filmed Entertainment................................................... 1,802 1,783 3,697 3,480
Broadcasting-The WB Network............................................ 109 83 211 162
Cable.................................................................. 1,502 1,330 2,949 2,626
Digital Media.......................................................... 22 - 24 -
Intersegment elimination............................................... (276) (257) (600) (512)
------ ------ ------- -------

Total.................................................................. $7,080 $6,531 $13,644 $12,622
====== ====== ======= =======

</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
EBITA(a)
Cable Networks......................................................... $ 422 $ 366 $ 786 $ 675
Publishing............................................................. 226 196 343 290
Music.................................................................. 109 98 189 187
Filmed Entertainment(b)................................................ 175 203 360 578
Broadcasting-The WB Network............................................ (21) (30) (52) (71)
Cable(c)............................................................... 455 1,180 940 1,583
Digital Media.......................................................... (55) - (85) -
Intersegment elimination............................................... (16) 1 (24) 13
------ ------- ------ -------

Total.................................................................. $1,295 $2,014 $2,457 $3,255
====== ====== ====== ======
</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
second quarter was $961 million in 2000 and $1.703 billion in 1999. Time
Warner's business segment operating income for the first six months of the
year was $1.793 billion in 2000 and $2.638 billion in 1999.
(b) Includes 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 and second 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 losses relating to the sale or exchange of certain
cable television systems and investments of approximately $7 million in the
second quarter of 2000 and net pretax gains of approximately $771 million
in the second quarter of 1999. Similarly, six month results include net
pretax gains of approximately $21 million in 2000 and approximately $771
million in 1999.

<PAGE>

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

THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Cable Networks......................................................... $ 38 $ 32 $ 71 $ 63
Publishing............................................................. 16 19 35 38
Music.................................................................. 21 18 41 35
Filmed Entertainment................................................... 23 38 45 68
Broadcasting-The WB Network............................................ 1 1 1 1
Cable.................................................................. 218 198 431 380
Digital Media.......................................................... 1 - 2 -
----- ----- ----- ------

Total.................................................................. $318 $306 $626 $585
==== ==== ==== ====
</TABLE>

THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
AMORTIZATION OF INTANGIBLE ASSETS(a)
Cable Networks......................................................... $ 53 $ 51 $106 $101
Publishing............................................................. 13 10 26 20
Music.................................................................. 62 65 121 127
Filmed Entertainment................................................... 50 50 100 100
Broadcasting-The WB Network............................................ 1 1 2 2
Cable.................................................................. 155 134 309 267
Digital Media.......................................................... - - - -
---- ---- ---- ----

Total.................................................................. $334 $311 $664 $617
==== ==== ==== ====
</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.

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.

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 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.

<PAGE>

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

10. ADDITIONAL FINANCIAL INFORMATION

CASH FLOWS

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

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------
2000 1999
---- ----
(MILLIONS)

<S> <C> <C>
Cash payments made for interest..................................................... $753 $684
Cash payments made for income taxes................................................. 209 209
Income tax refunds received......................................................... 19 37

</TABLE>

INTEREST AND OTHER, NET

Interest and other, net, consists of:

THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ -------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)

<S> <C> <C> <C> <C>
Interest expense....................................... $(424) $(369) $ (822) $(735)
Other investment-related activity, principally net
losses of corporate-related equity investees......... (122) (44) (200) (127)
Write-down of Columbia House investment................ - - (220) -
America Online-Time Warner merger costs................ (31) - (77) -
Gain on Time Warner Telecom IPO and certain
related activities................................... - 115 - 115
Corporate finance-related activity, principally losses
on asset securitization programs..................... (73) (31) (109) (63)
Miscellaneous.......................................... 4 (25) (26) (50)
----- ----- ------- -----
Total interest and other, net.......................... $(646) $(354) $(1,454) $(860)
===== ===== ======= =====

</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 JUNE 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>
Revenues ................................... $ - $ - $ 260 $6,825 $ (5) $7,080
------ ------ ----- ------ ----- ------

Cost of revenues(a)......................... - - (127) (3,616) (18) (3,761)
Selling, general and administrative(a)...... - - (68) (1,949) - (2,017)
Amortization of goodwill and other
intangible assets........................ - - - (334) - (334)
Loss on sale or exchange of cable systems
and investments.......................... - - - (7) - (7)
------ ------ ----- ----- ----- ------

Business segment operating income........... - - 65 919 (23) 961
Equity in pretax income of consolidated
subsidiaries............................. 350 350 175 - (875) -
Interest and other, net..................... (109) (152) (46) (343) 4 (646)
Corporate expenses.......................... (27) (16) (5) (36) 40 (44)
Minority interest........................... - - - (57) - (57)
------ ------ ----- ----- ----- ------

Income before income taxes.................. 214 182 189 483 (854) 214
Income taxes................................ (139) (120) (96) (298) 514 (139)
------ ------ ----- ----- ----- ------

Net income.................................. $ 75 $ 62 $ 93 $ 185 $(340) $ 75
====== ====== ===== ===== ===== ======
---------------
(a) Includes depreciation expense of:....... $ - $ - $ 3 $ 315 $ - $ 318
====== ====== ===== ===== ===== ======
</TABLE>

<PAGE>

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

CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 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>
Revenues.................................... $ - $ - $ 242 $6,175 $ 114 $6,531
----- ------ ------ ------ ------- ------

Cost of revenues(a)......................... - - (132) (3,263) (119) (3,514)
Selling, general and administrative(a)...... - - (48) (1,726) - (1,774)
Amortization of goodwill and other
intangible assets........................ - - - (311) - (311)
Gain on sale or exchange of cable
systems and investments.................. - - - 771 - 771
----- ------ ------ ------ ------- ------

Business segment operating income........... - - 62 1,646 (5) 1,703
Equity in pretax income of consolidated
subsidiaries............................. 1,156 1,162 158 - (2,476) -
Interest and other, net..................... (70) (163) (35) (64) (22) (354)
Corporate expenses.......................... (22) (14) (4) (34) 34 (40)
Minority interest........................... - - - (245) - (245)
----- ------ ------ ------ ------- ------

Income before income taxes.................. 1,064 985 181 1,303 (2,469) 1,064
Income taxes................................ (471) (436) (89) (581) 1,106 (471)
----- ------ ------ ------ ------- ------

Net income.................................. $ 593 $ 549 $ 92 $ 722 $(1,363) $ 593
===== ====== ====== ====== ======= ======
-----------------
(a) Includes depreciation expense of:....... $ - $ - $ 3 $ 303 $ - $ 306
==== ====== ====== ====== ======= ======
</TABLE>

<PAGE>

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

CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 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>
Revenues ...................................$ - $ - $ 474 $13,186 $ (16) $13,644
------ -------- ------ ------- ------ -------

Cost of revenues(a)......................... - - (209) (7,158) (7) (7,374)
Selling, general and administrative(a)...... - - (126) (3,708) - (3,834)
Amortization of goodwill and other
intangible assets........................ - - - (664) - (664)
Gain on sale or exchange of cable systems
and investments.......................... - - - 21 - 21
------ -------- ------ ------- ------ -------

Business segment operating income........... - - 139 1,677 (23) 1,793
Equity in pretax income of consolidated
subsidiaries............................. 427 476 263 - (1,166) -
Interest and other, net..................... (236) (302) (90) (809) (17) (1,454)
Corporate expenses.......................... (50) (31) (9) (73) 76 (87)
Minority interest........................... - - - (111) - (111)
------ -------- ------ ------- ------ -------

Income before income taxes and cumulative
effect of accounting change.............. 141 143 303 684 (1,130) 141
Income taxes................................ (167) (156) (158) (415) 729 (167)
------ -------- ------ ------- ------ -------

Income (loss) before cumulative effect of
accounting change........................ (26) (13) 145 269 (401) (26)
Cumulative effect of accounting change,
net of tax............................... (443) (340) (128) (443) 911 (443)
------ -------- ------ ------- ------ -------

Net income (loss)........................... $ (469) $ (353) $ 17 $ (174) $ 510 $ (469)
====== ======== ======= ====== ====== =======
---------------
(a) Includes depreciation expense of:...... $ - $ - $ 5 $ 621 $ - $ 626
====== ======== ======= ====== ====== =======
</TABLE>

<PAGE>

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

CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 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>
Revenues ................................... $ - $ - $ 426 $12,180 $ 16 $12,622
----- ------ ----- ------- ------- -------

Cost of revenues(a)......................... - - (200) (6,607) (26) (6,833)
Selling, general and administrative(a)...... - (104) (3,416) - (3,520)
Amortization of goodwill and other
intangible assets........................ - - (617) - (617)
Gain on sale or exchange of cable
systems and investments.................. - - - 771 - 771
Gain on early termination of video
distribution agreement................... - - - 215 - 215
----- ------ ----- ------- ------- -------

Business segment operating income........... - - 122 2,526 (10) 2,638
Equity in pretax income of consolidated
subsidiaries............................. 1,534 1,636 234 - (3,404) -
Interest and other, net..................... (122) (346) (69) (289) (34) (860)
Corporate expenses.......................... (44) (28) (8) (68) 68 (80)
Minority interest........................... - - - (330) - (330)
----- ------ ----- ------- ------- -------

Income before income taxes.................. 1,368 1,262 279 1,839 (3,380) 1,368
Income taxes................................ (637) (587) (145) (845) 1,577 (637)
----- ------ ----- ------- ------- -------

Net income.................................. $ 731 $ 675 $ 134 $ 994 $(1,803) $ 731
===== ====== ===== ======= ======= =======
-------------------
(a) Includes depreciation expense of:...... $ - $ - $ 5 $ 580 $ - $ 585
===== ====== ===== ======= ======= =======
</TABLE>

<PAGE>

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

CONSOLIDATING BALANCE SHEET
JUNE 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....................................... $ - $ 15 $ 75 $ 369 $ - $ 459
Receivables, net........................................... 13 27 86 4,125 - 4,251
Inventories................................................ - - 134 1,305 - 1,439
Prepaid expenses........................................... 217 - 4 1,336 - 1,557
------- ------- ------ ------- ------- -------

Total current assets....................................... 230 42 299 7,135 - 7,706

Noncurrent inventories..................................... - - 193 4,454 - 4,647
Investments in and amounts due to and from
consolidated subsidiaries............................... 16,198 15,509 8,951 - (40,658) -
Other investments.......................................... 307 7 24 2,292 (747) 1,883
Property, plant and equipment.............................. 32 - 41 9,295 - 9,368
Music catalogues, contracts and copyrights................. - - - 727 - 727
Cable television and sports franchises..................... - - - 8,264 - 8,264
Goodwill................................................... - - - 15,178 - 15,178
Other assets............................................... 192 97 73 1,212 - 1,574
------- ------- ------ ------- -------- -------

Total assets............................................... $16,959 $15,655 $9,581 $48,557 $(41,405) $49,347
======= ======= ====== ======= ======== =======

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................... $ 53 $ - $ 18 $ 1,462 $ - $ 1,533
Participations payable..................................... - - - 1,281 - 1,281
Royalties and programming costs payable.................... - - 35 1,582 - 1,617
Debt due within one year................................... - - - 20 - 20
Other current liabilities.................................. 327 170 98 3,829 (15) 4,409
------- ------- ------ ------- -------- -------

Total current liabilities.................................. 380 170 151 8,174 (15) 8,860

Long-term debt ............................................ 1,585 6,293 747 9,181 - 17,806
Debt due to affiliates..................................... - - 1,647 158 (1,805) -
Borrowings against future stock option proceeds............ 1,135 - - - - 1,135
Deferred income taxes...................................... 3,589 3,379 290 3,670 (7,339) 3,589
Unearned portion of paid subscriptions..................... - - - 767 - 767
Other liabilities.......................................... 582 - 168 3,004 - 3,754
Minority interests......................................... - - - 3,173 - 3,173
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...................... - (1,996) (1,213) (3,897) 7,106 -
Other shareholders' equity................................. 9,688 7,809 7,791 23,752 (39,352) 9,688
------- ------- ------ ------- -------- -------

Total shareholders' equity................................. 9,688 5,813 6,578 19,855 (32,246) 9,688
------- ------- ------ ------- -------- -------

Total liabilities and shareholders' equity................. $16,959 $15,655 $9,581 $48,557 $(41,405) $49,347
======= ======= ====== ======= ======== =======
</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..................................... - - 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 SIX MONTHS ENDED JUNE 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).......................................... $(469) $(353) $ 17 $ (174) $ 510 $ (469)
Adjustments for noncash and nonoperating items:
Cumulative effect of an accounting change............... 443 340 128 443 (911) 443
Depreciation and amortization........................... - - 5 1,285 - 1,290
Amortization of film costs.............................. - - - 910 - 910
Gain on sale or exchange of cable systems and
investments.......................................... - - - (21) - (21)
Excess of distributions over equity in
pretax income of consolidated subsidiaries........... 192 4 260 - (456) -
Equity in losses of investee companies
after distributions.................................. - - - 219 43 262
Changes in operating assets and liabilities................ (478) (81) (97) (2,093) 1,207 (1,542)
---- ----- ----- ------ ----- ------

Cash provided (used) by operations......................... (312) (90) 313 569 393 873
---- ----- ----- ------ ----- ------

INVESTING ACTIVITIES
Investments and acquisitions............................... - - - (383) - (383)
Advances to parents and consolidated subsidiaries.......... - - - (272) 272 -
Repayment of advances from consolidated subsidiaries....... - 191 - - (191) -
Capital expenditures....................................... - - (5) (1,285) - (1,290)
Investment proceeds........................................ - - - 257 - 257
---- ----- ----- ------ ----- ------

Cash provided (used) by investing activities............... - 191 (5) (1,683) 81 (1,416)
---- ----- ----- ------ ----- ------

FINANCING ACTIVITIES
Borrowings................................................. - 109 - 1,486 - 1,595
Debt repayments............................................ - (562) - (1,313) - (1,875)
Change in due to/from parent............................... 272 1 (310) 511 (474) -
Borrowings against future stock option proceeds............ 2 - - - - 2
Repayments of borrowings against future stock option
proceeds................................................ (110) - - - - (110)
Repurchases of Time Warner common stock.................... (65) - - - - (65)
Dividends paid............................................. (131) - - - - (131)
Proceeds received from stock option and
dividend reinvestment plans............................. 310 - - - - 310
Other...................................................... 34 - - (42) - (8)
---- ----- ----- ------ ----- ------

Cash provided (used) by financing activities............... 312 (452) (310) 642 (474) (282)
---- ----- ----- ------ ----- ------

DECREASE IN CASH AND EQUIVALENTS........................... - (351) (2) (472) - (825)
---- ----- ----- ------ ----- ------

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

CASH AND EQUIVALENTS AT END OF PERIOD...................... $ - $ 15 $ 75 $ 369 $ - $ 459
==== ===== ===== ====== ====== =======
</TABLE>

<PAGE>

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

CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 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................................................. $ 731 $ 675 $ 134 $ 994 $(1,803) $ 731
Adjustments for noncash and nonoperating items:
Depreciation and amortization........................... - - 2 1,210 (10) 1,202
Amortization of film costs.............................. - - - 1,081 - 1,081
Gain on sale or exchange of cable systems and
investments.......................................... - - - (771) - (771)
Excess (deficiency) of distributions over equity in
pretax income of consolidated subsidiaries........... (127) (928) 165 - 890 -
Equity in losses of investee companies after
distributions........................................ - 3 - 185 - 188
Changes in operating assets and liabilities................ (136) 374 (148) (874) 163 (621)
----- ---- ---- ---- ------- ------

Cash provided by operations................................ 468 124 153 1,825 (760) 1,810
----- ---- ---- ---- ------- ------

INVESTING ACTIVITIES
Consolidation of the Entertainment Group's cash and
cash equivalents........................................ - - - 87 - 87
Investments and acquisitions............................... - - - (324) - (324)
Advances to parents and consolidated subsidiaries.......... - - - (228) 228 -
Repayments of advances from consolidated subsidiaries...... - 70 - 232 (302) -
Capital expenditures....................................... - - (6) (957) - (963)
Investment proceeds........................................ - - - 323 - 323
----- ---- ---- ---- ------- ------

Cash provided (used) by investing activities............... - 70 (6) (867) (74) (877)
----- ---- ---- ---- ------- ------

FINANCING ACTIVITIES
Borrowings................................................. - 117 - 1,534 - 1,651
Debt repayments............................................ - (68) - (1,779) - (1,847)
Change in due to/from parent............................... (4) (309) (164) (357) 834 -
Borrowings against future stock option proceeds............ 324 - - - - 324
Repurchases of Time Warner common stock.................... (926) - - - - (926)
Dividends paid............................................. (149) - - - - (149)
Redemption of preferred stock of a subsidiary.............. - - - (217) - (217)
Proceeds received from stock option and
dividend reinvestment plans............................. 287 - - - - 287
Other...................................................... - - - (77) - (77)
----- ---- ---- ---- ------- ------

Cash used by financing activities.......................... (468) (260) (164) (896) 834 (954)
----- ---- ---- ---- ------- ------

INCREASE (DECREASE) IN CASH AND
EQUIVALENTS............................................. - (66) (17) 62 - (21)
----- ---- ---- ---- ------- ------
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD..................................... - 66 25 351 - 442
----- ---- ---- ---- ------- ------

CASH AND EQUIVALENTS AT END OF PERIOD...................... $ - $ - $ 8 $ 413 $ - $ 421
===== ===== ===== ===== ======= ======
</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 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 2000, the significant, nonrecurring items included (i) net pretax
losses of approximately $8 million recognized in the second quarter relating to
the sale or exchange of various cable television systems and investments, (ii) a
$50 million pretax charge in the second quarter related to the Six Flags
Entertainment Corporation ("Six Flags") litigation, (iii) a pretax gain of $10
million in the first quarter relating to the partial recognition of a deferred
gain on the 1998 sale of Six Flags and (iv) a noncash charge of $524 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 $760 million recognized in the second quarter 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 and second 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.

<PAGE>

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

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 JUNE 30, SIX MONTHS ENDED JUNE 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)................. $121 $ 132 $ 90 $ 101 $ 267 $ 478 $206 $ 417
Broadcasting-The WB Network.......................... (21) (30) (22) (31) (52) (71) (54) (73)
Cable Networks-HBO................................... 150 131 150 131 294 256 294 256
Cable(b)............................................. 385 1,099 276 1,011 778 1,436 560 1,263
Digital Media........................................ (17) - (17) - (30) - (30) -
---- ------ ---- ------ ------ ------ ---- -------

Total................................................ $618 $1,332 $477 $1,212 $1,257 $2,099 $976 $1,863
==== ====== ==== ====== ====== ====== ==== ======
</TABLE>
------------
(a) Includes 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 on the 1998
sale of Six Flags recognized in the first quarter of 2000 and in each of
the first and second 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 losses related to the sale or exchange of certain cable
television systems and investments of approximately $8 million in the
second quarter of 2000 and net pretax gains of approximately $760 million
in the second quarter of 1999.

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

CONSOLIDATED RESULTS

TWE had revenues of $3.313 billion and net income of $145 million for
the three months ended June 30, 2000, compared to revenues of $3.060 billion and
net income of $767 million for the three months ended June 30, 1999.

TWE's net income decreased to $145 million in 2000, compared to $767
million in 1999. However, excluding the effect of the nonrecurring items
referred to earlier, net income increased by $48 million to $203 million in 2000
from $155 million in 1999. As discussed more fully below, this increase
principally resulted from an overall increase in TWE's business segment
operating income, offset in part by higher interest expense principally due to
higher market interest rates on variable-rate debt, higher losses associated
with TWE's asset securitization program and higher losses from certain
investments accounted for under the equity method.

As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $25 million and $27 million for
the three months ended June 30, 2000 and 1999, respectively, have been provided
for the operations of TWE's domestic and foreign subsidiary corporations.

<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 $1.452 billion
in 2000, compared to $1.446 billion in 1999. EBITA, including the negative
effect on operating trends of one-time items relating to Six Flags, decreased to
$121 million in 2000 from $132 million in 1999. Operating income similarly
decreased to $90 million in 2000 from $101 million in 1999 due to the one-time
items. Revenues principally benefited from an increase in the distribution of
television product, offset in part by lower revenues from the distribution of
theatrical product. Revenues from the distribution of theatrical product
decreased principally due to difficult comparisons to last year's theatrical
success of The Matrix and lower revenues from worldwide television exhibition,
which more than offset significant increases in DVD and home video sales.
Revenues from the distribution of television product increased principally due
to higher aggregate revenues from broadcast network and syndicated television
exhibition, offset in part by lower aggregate revenues from basic cable
exhibition.

Operating results for both periods include items related to Six Flags.
The 2000 results include a pretax charge of $24 million relating to the Six
Flags litigation. 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 Six Flags, EBITA and operating income principally
increased as a result of the revenue gains and lower film costs.

Cable Networks-HBO. Revenues increased to $570 million in 2000,
compared to $546 million in 1999. EBITA and operating income increased to $150
million in 2000 from $131 million in 1999. Revenues benefited primarily from an
increase in subscriptions. EBITA and operating income increased principally due
to the revenue gains and increased cost savings.

Cable. Revenues increased to $1.280 billion in 2000, compared to $1.114
billion in 1999. EBITA, including the negative effect on operating trends of
one-time items recognized in each period, decreased to $385 million in 2000 from
$1.099 billion in 1999. Operating income similarly decreased to $276 million in
2000 from $1.011 billion in 1999 due to one-time items. Revenues increased due
to growth in basic cable subscribers, increases in basic cable rates, increases
in advertising and pay-per-view 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 $760 million 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. Digital Media had $17 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

<PAGE>

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

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 $246
million of expense in 2000, compared to $167 million of expense in 1999.
Interest expense increased to $169 million in 2000, compared to $136 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 $77 million in 2000,
compared to $31 million in 1999, primarily because of higher losses associated
with TWE's asset securitization program and higher losses from certain
investments accounted for under the equity method of accounting.

Minority Interest. Minority interest expense decreased to $43 million
in 2000, compared to $233 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 the TWE-Advance/Newhouse Partnership
("TWE-A/N") to the minority owners of that partnership. Excluding the
significant effect of the gains recognized in each period, minority interest
expense decreased principally due to a higher allocation of losses in 2000 to a
minority partner in The WB Network.

SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999

CONSOLIDATED RESULTS

TWE had revenues of $6.624 billion, income of $369 million before the
cumulative effect of an accounting change and a net loss of $155 million for the
six months ended June 30, 2000, compared to revenues of $5.994 billion and net
income of $1.079 billion for the six months ended June 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, excluding the impact of the
accounting change, aggregated approximately $48 million of net pretax losses
in 2000, compared to approximately $995 million of net pretax gains in 1999. In
addition, net income in 2000 was reduced by an after-tax charge of $524 million
relating to the cumulative effect of the accounting change.

TWE had a net loss of $155 million in 2000, compared to net income of
$1.079 billion in 1999. However, excluding the significant effect of the
nonrecurring items referred to earlier, net income increased by $175 million to
$417 million in 2000 from $242 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.

BUSINESS SEGMENT RESULTS

Filmed Entertainment-Warner Bros. Revenues increased to $3.019 billion
in 2000, compared to $2.826 billion in 1999. EBITA, including the negative
effect on operating trends of one-time items recognized in each period,
decreased to $267 million in 2000 from $478 million in 1999. Operating income
similarly decreased to $206 million in 2000 from $417 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. Revenues from the distribution of theatrical
product increased principally due to higher worldwide DVD and home video sales,
offset in part by lower revenues from worldwide theatrical and television
exhibition. Revenues from the distribution of television

<PAGE>

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

product increased principally due to higher aggregate revenues from basic cable,
broadcast network and syndicated television exhibition.

Cable Networks-HBO. Revenues increased to $1.124 billion in 2000,
compared to $1.072 billion in 1999. EBITA and operating income increased to $294
million in 2000 from $256 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 and increased cost savings, offset in part
by lower gains from the sale of certain investments.

Cable. Revenues increased to $2.511 billion in 2000, compared to $2.188
billion in 1999. EBITA, including the negative effect on operating trends of
one-time items recognized in each period, decreased to $778 million in 2000 from
$1.436 billion in 1999. Operating income similarly decreased to $560 million in
2000 from $1.263 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 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 $760 million 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. Digital Media had $30 million of operating losses on $3
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 $426
million of expense in 2000, compared to $387 million of expense in 1999.
Interest expense increased to $313 million in 2000, compared to $273 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, decreased to $113 million in 2000,
compared to

<PAGE>

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

$114 million in 1999. This decrease principally related to lower losses from
certain investments accounted for under the equity method, offset primarily by
higher losses associated with TWE's asset securitization program.

Minority Interest. Minority interest expense decreased to $83 million
in 2000, compared to $306 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 gains recognized in
each period, 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
JUNE 30, 2000

FINANCIAL CONDITION

At June 30, 2000, TWE had $6.2 billion of debt, $179 million of cash
and equivalents (net debt of $6.0 billion) and $6.5 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 six months of 2000, TWE's cash provided by operations
amounted to $1.675 billion and reflected $1.257 billion of business segment
EBITA, $437 million of noncash depreciation expense, $246 million of proceeds
from TWE's asset securitization program and $86 million related to an aggregate
decrease in working capital requirements, other balance sheet accounts and
noncash items, less $263 million of interest payments, $51 million of income
taxes and $37 million of corporate expenses. Cash provided by operations of
$1.519 billion in the first six months of 1999 reflected $2.099 billion of
business segment EBITA, $406 million of noncash depreciation expense and $21
million of proceeds from TWE's asset securitization program, less $242
million of interest payments, $49 million of income taxes, $36 million of
corporate expenses and $680 million related to an aggregate increase in
working capital requirements, other balance sheet accounts and noncash items.

Cash used by investing activities was $1.051 billion in the first six
months of 2000, compared to $662 million in the first six months of 1999,
principally as a result of a decrease in cash proceeds from the sale of
investments and an increase in capital expenditures. Capital expenditures
increased to $894 million in the first six months of 2000, compared to $649
million in the first six 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 $962 million in the first six
months of 2000, compared to $827 million in the first six months of 1999. The
use of cash in 2000 principally resulted from the payment of $473 million of
capital distributions to Time Warner and $423 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 $280 million of
capital distributions to Time Warner and $229 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.

<PAGE>

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

CABLE CAPITAL SPENDING

Time Warner Cable has been engaged in a plan to upgrade the
technological capability and reliability of its cable television systems and
develop new services, which it believes will position the business for
sustained, long-term growth. Capital spending by TWE's Cable segment amounted to
$836 million in the six months ended June 30, 2000, compared to $587 million in
the six months ended June 30, 1999. Cable capital spending for the remainder of
2000 is budgeted to be approximately $850 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.

INVESTMENT IN ROAD RUNNER

In June 1998, Time Warner, TWE, TWE-A/N, MediaOne, Microsoft Corp.
("Microsoft") and Compaq Computer Corp. ("Compaq") formed a joint venture
to operate and expand Time Warner Cable's and MediaOne's existing high-speed
online businesses ("Road Runner"). In exhange for contributing these operations,
TWE and TWE-A/N received a collective 57.9% common equity interest in Road
Runner and MediaOne received a 31.4% interest. In exchange for Microsoft and
Compaq contributing $425 million of cash to Road Runner, Microsoft and
Compaq each received a preferred equity interest therein that is convertible
into a 10% common equity interest (the "Preferred Equity Interests").

In June 2000, AT&T Corp. ("AT&T") acquired MediaOne Group, Inc.
("MediaOne"). As a condition to closing the acquisition, AT&T agreed to a
requirement by the United States Department of Justice to divest itself of
MediaOne's interest in Road Runner within an eighteen-month period of time.
As a result, TWE is evaluating strategic alternatives for restructuring Road
Runner's ownership and operations. In connection with some of these
alternatives, TWE could be required to record a one-time restructuring charge
that could range from $150-250 million. This charge would be expected to cover
any premium paid to redeem Road Runner's Preferred Equity Interests, lease
termination and other related restructuring costs. Such a charge would be
recorded in interest and other, net. In addition, as part of a restructuring,
TWE's Cable segment could begin consolidating a portion of the operations of
Road Runner. This would result in the Cable segment recognizing operating
losses from Road Runner, which previously had been included in interest and
other, net, through TWE's equity in the pretax losses of Road Runner.

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 $3.178 billion at June 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 $331 million and
to Time Warner's cable television networks of $650 million at June 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 received periodically
over the term of the related licensing agreements or on an accelerated basis
using a $500 million securitization facility. The portion of backlog for which
cash has not already been received has significant off-balance sheet asset value
as a source of future funding. As of June 30, 2000, including cash received
under the

<PAGE>

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

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.

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 TWE is under no obligation to (and expressly disclaims any such obligation
to) update or alter its forward-looking statements whether as a result of such
changes, new information, future events or otherwise.

TWE operates in highly competitive, consumer driven and rapidly
changing media and entertainment businesses that are dependent on government
regulation and economic, political 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" 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.

<PAGE>

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

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 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>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(MILLIONS)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and equivalents........................................................................ $ 179 $ 517
Receivables, including $1.114 and $1.354 billion due from Time Warner,
less allowances of $696 and $668 million................................................ 2,678 3,328
Inventories................................................................................. 581 639
Prepaid expenses............................................................................ 179 246
------- -------
Total current assets........................................................................ 3,617 4,730

Noncurrent inventories and film costs....................................................... 2,478 2,855
Investments................................................................................. 702 774
Property, plant and equipment............................................................... 6,971 6,488
Cable television franchises................................................................. 5,471 5,464
Goodwill.................................................................................... 3,665 3,731
Other assets................................................................................ 664 801
------- -------
Total assets................................................................................ $23,568 $24,843
======= =======

LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable............................................................................ $ 1,761 $ 1,791
Participations payable...................................................................... 1,077 1,258
Programming costs payable................................................................... 539 459
Debt due within one year.................................................................... 7 6
Other current liabilities, including $1.022 billion and $893 million due to Time Warner..... 2,285 2,209
-------- -------
Total current liabilities................................................................... 5,669 5,723

Long-term debt.............................................................................. 6,231 6,655
Other long-term liabilities, including $1.328 and $1.292 billion due to Time Warner......... 3,413 3,501
Minority interests.......................................................................... 1,802 1,815

PARTNERS' CAPITAL
Contributed capital......................................................................... 7,349 7,338
Partnership deficit......................................................................... (896) (189)
-------- -------

Total partners' capital..................................................................... 6,453 7,149
------- -------

Total liabilities and partners' capital..................................................... $23,568 $24,843
======= =======
</TABLE>

See accompanying notes.

<PAGE>

TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Revenues(a)........................................................ $3,313 $3,060 $6,624 $5,994
------ ------ ------ ------
Cost of revenues(a)(b)............................................. (1,976) (1,879) (4,002) (3,697)
Selling, general and administrative(a)(b).......................... (711) (609) (1,357) (1,173)
Amortization of goodwill and other intangible assets............... (141) (120) (281) (236)
Gain (loss) on sale or exchange of cable systems and investments... (8) 760 (8) 760
Gain on early termination of video distribution agreement.......... - - - 215
------ ------ ------ ------
Business segment operating income.................................. 477 1,212 976 1,863
Interest and other, net(a)......................................... (246) (167) (426) (387)
Corporate services(a).............................................. (18) (18) (37) (36)
Minority interest.................................................. (43) (233) (83) (306)
------ ------ ------ ------
Income before income taxes and cumulative effect of accounting
change.......................................................... 170 794 430 1,134
Income taxes....................................................... (25) (27) (61) (55)
------ ------ ------ ------
Income before cumulative effect of accounting change............... 145 767 369 1,079
Cumulative effect of accounting change............................. - - (524) -
------ ------ ------ ------
Net income (loss).................................................. $ 145 $ 767 $ (155) $1,079
====== ====== ====== ======
</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.................................................... $ 126 $ 152 $ 219 $ 272
Cost of revenues............................................ (84) (58) (147) (136)
Selling, general and administrative......................... (23) (12) (47) (16)
Interest and other, net..................................... 6 8 9 28
Corporate expenses.......................................... (18) (18) (37) (36)

(b) Includes depreciation expense of:............................. $ 222 $ 214 $ 437 $ 406
===== ===== ===== =====
</TABLE>

See accompanying notes.

<PAGE>

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

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------
2000 1999
---- ----
(MILLIONS)
OPERATIONS
<S> <C> <C>
Net income (loss)........................................................................... $ (155) $1,079
Adjustments for noncash and nonoperating items:
Cumulative effect of accounting change................................................... 524 -
Depreciation and amortization............................................................ 718 642
Amortization of film costs............................................................... 732 877
(Gain) loss on sale or exchange of cable systems and investments......................... 8 (760)
Equity in losses of investee companies after distributions............................... 111 100
Changes in operating assets and liabilities................................................. (263) (419)
------ ------
Cash provided by operations................................................................. 1,675 1,519
------ ------

INVESTING ACTIVITIES
Investments and acquisitions................................................................ (231) (223)
Capital expenditures........................................................................ (894) (649)
Investment proceeds......................................................................... 74 210
------ ------
Cash used by investing activities........................................................... (1,051) (662)
------ ------

FINANCING ACTIVITIES
Borrowings.................................................................................. 894 1,310
Debt repayments............................................................................. (1,317) (1,539)
Redemption of preferred stock of subsidiary................................................. - (217)
Capital distributions....................................................................... (473) (280)
Other....................................................................................... (66) (101)
------ ------
Cash used by financing activities........................................................... (962) (827)
------ ------

INCREASE (DECREASE) IN CASH AND EQUIVALENTS................................................. (338) 30

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

CASH AND EQUIVALENTS AT END OF PERIOD....................................................... $ 179 $ 117
====== ======
</TABLE>

See accompanying notes.

<PAGE>

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

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

Net income (loss)........................................................................... (155) 1,079
Other comprehensive income (loss)........................................................... (46) 47
------ ------
Comprehensive income(a)..................................................................... (201) 1,126

Distributions............................................................................... (509) (497)
Allocation of income to Time Warner General Partners' Senior Capital........................ - (24)
Other....................................................................................... 14 (1)
------ ------

BALANCE AT END OF PERIOD.................................................................... $6,453 $5,711
====== ======
</TABLE>
-------------------
(a) Comprehensive income was $108 million for the three months ended June 30,
2000 and $773 million for the three months ended June 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.

The operating results of TWE's various business segments are 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 cost was allocated to TWE upon the capitalization of the
partnership. Noncash amortization of intangible assets recorded by TWE's
business segments amounted to $141 million for the three months ended June 30,
2000 and $120 million for the three months ended June 30, 1999. On a
year-to-date basis, noncash amortization of intangible assets recorded by
TWE's business segments amounted to $281 million in 2000 and $236 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 MediaOne Group,
Inc. ("MediaOne"), which was acquired by AT&T Corp. on June 15, 2000. 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)

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 six months ended
June 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.

As a result of adopting the provisions of SOP 00-2 retroactively to the
beginning of 2000, TWE has restated its operating results for the three months
ended March 31, 2000, as follows:

<TABLE>
<CAPTION>
AS REPORTED AS RESTATED
----------- -----------
(MILLIONS)
<S> <C> <C>
Revenues................................................................... $3,297 $3,311
Business segment operating income.......................................... 497 499
Income before cumulative effect of accounting change....................... 222 224
Net income (loss).......................................................... 222 (300)
</TABLE>

Revenue Classification Changes

In June 2000, the Securities and Exchange Commission issued an
amendment to Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"), which delays the implementation date for TWE
to the fourth quarter of 2000. While TWE's existing revenue recognition policies
are consistent with the provisions of SAB 101, the new rules are expected to
result in some changes in how the filmed entertainment industry classifies its
revenues and costs, particularly relating to distribution arrangements for
third-party and co-financed joint venture product. As a result of these
classification changes, it is expected that both annual revenues and costs in
TWE's filmed entertainment businesses will be reduced by an equal amount of
approximately $1.5-2 billion. Similarly, it is expected that TWE's
disclosure of the amount of backlog, which represents the amount of future
revenue not yet recorded from cash contracts for the licensing of theatrical
and television product, will be reduced by approximately $500-700 million,
depending upon the amount of third-party and co-financed joint venture product
being licensed. TWE is continuing to evaluate the overall impact of SAB 101
on its consolidated financial statements; however, other aspects of SAB 101
are not expected to have a significant effect on TWE's consolidated financial
statements.

Reclassifications

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

<PAGE>

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

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

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.

<PAGE>

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

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.

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

In 2000 and 1999, largely in an 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 for the three and six months ended
June 30, 2000 of approximately $8 million and net pretax gains of approximately
$760 million for the three and six months ended June 30, 1999. Such amounts have
been included in business segment operating income in the accompanying
consolidated statement of operations.

1999 GAIN ON TERMINATION OF VIDEO DISTRIBUTION AGREEMENT

3. INVENTORIES AND FILM COSTS

Inventories and film costs consist of:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
Programming costs, less amortization.................................................... $ 799 $ 854
Film costs-Theatrical:
Released, less amortization.......................................................... 790 924
Completed and not released........................................................... 139 68
In production........................................................................ 279 468
Development and pre-production....................................................... 35 59
Film costs-Television:
Released, less amortization.......................................................... 210 363
Completed and not released........................................................... 10 9
In production........................................................................ 63 8
Development and pre-production....................................................... 6 5
Film costs-Library, less amortization................................................... 482 508
Merchandise............................................................................. 246 228
------ ------
Total inventories and film costs........................................................ 3,059 3,494
Less current portion of inventory....................................................... 581 639
------ ------
Total noncurrent inventories and film costs............................................. $2,478 $2,855
====== ======
</TABLE>

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

<PAGE>

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

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.

During the six months ended June 30, 2000, TWE accrued $284 million of
tax-related distributions and $225 million of stock option distributions, based
on closing prices of Time Warner Inc. common stock of $76 at June 30, 2000 and
$72.31 at December 31, 1999. During the six months ended June 30, 1999, TWE
accrued $138 million of tax-related distributions and $359 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 six months ended June 30, 2000, TWE
paid distributions to the Time Warner General Partners in the amount of $473
million, consisting of $284 million of tax-related distributions and $189
million of stock option related distributions. During the six months ended June
30, 1999, TWE paid distributions to the Time Warner General Partners in the
amount of $280 million, consisting of $138 million of tax-related distributions
and $142 million of stock option related distributions.

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, of which the primary financial
measure is business segment operating income before noncash amortization of
intangible assets ("EBITA"). The accounting policies of the business segments
are the same as those described in the summary of significant accounting
policies 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
REVENUES
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros................................... $1,452 $1,446 $3,019 $2,826
Broadcasting-The WB Network........................................ 109 83 211 162
Cable Networks-HBO................................................. 570 546 1,124 1,072
Cable.............................................................. 1,280 1,114 2,511 2,188
Digital Media...................................................... 2 - 3 -
Intersegment elimination........................................... (100) (129) (244) (254)
------ ------ ------ ------
Total.............................................................. $3,313 $3,060 $6,624 $5,994
====== ====== ====== ======
</TABLE>

<PAGE>

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

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
EBITA(a)
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros.(b)............................... $121 $ 132 $ 267 $ 478
Broadcasting-The WB Network........................................ (21) (30) (52) (71)
Cable Networks-HBO................................................. 150 131 294 256
Cable(c)........................................................... 385 1,099 778 1,436
Digital Media...................................................... (17) - (30) -
---- ------ ------ ------
Total.............................................................. $618 $1,332 $1,257 $2,099
==== ====== ====== ======
</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 second
quarter was $477 million in 2000 and $1.212 billion in 1999. TWE's business
segment operating income for the first six months of the year was $976
million in 2000 and $1.863 billion in 1999.

(b) Includes 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 and second 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 losses relating to the sale or exchange of certain
cable television systems of approximately $8 million in the second quarter
of 2000 and net pretax gains of approximately $760 million in the second
quarter of 1999.

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros................................... $ 22 $ 36 $ 43 $ 65
Broadcasting-The WB Network........................................ 1 1 1 1
Cable Networks-HBO................................................. 8 6 15 13
Cable.............................................................. 191 171 377 327
Digital Media...................................................... - - 1 -
---- ---- ---- ----
Total.............................................................. $222 $214 $437 $406
==== ==== ==== ====
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
AMORTIZATION OF INTANGIBLE ASSETS (a)
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros................................... $ 31 $ 31 $ 61 $ 61
Broadcasting-The WB Network........................................ 1 1 2 2
Cable Networks-HBO................................................. - - - -
Cable.............................................................. 109 88 218 173
Digital Media...................................................... - - - -
---- ---- ---- ----
Total.............................................................. $141 $120 $281 $236
==== ==== ==== ====
</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 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

<PAGE>

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

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>
SIX MONTHS
ENDED JUNE 30,
----------------
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
Cash payments made for interest.................................................... $263 $242
Cash payments made for income taxes, net........................................... 51 49
Noncash capital distributions...................................................... 225 359
</TABLE>

INTEREST AND OTHER, NET

Interest and other, net, consists of:

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
2000 1999 2000 1999
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Interest expense............................................ $(169) $(136) $(313) $(273)
Other investment-related activity, principally net losses
on corporate-related equity investees..................... (47) (21) (61) (87)
Corporate finance-related activity, including losses on
asset securitization programs............................. (36) (9) (43) (18)
Miscellaneous............................................... 6 (1) (9) (9)
----- ----- ----- -----
Total interest and other, net............................... $(246) $(167) $(426) $(387)
===== ===== ===== =====
</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., 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").
On July 13, 2000, the Georgia Court of Appeals affirmed the trial court's
judgment. Time Warner filed a motion for reconsideration with the Court of
Appeals, which the Court of Appeals denied on July 27, 2000. Defendants will
seek certiorari from the Supreme Court of Georgia.

Reference is made to Ottinger & Silvey et al. v. EMI Music
Distribution, Inc. et al., described on page I-33 of the 1999 Form 10-K. The
defendants' motion to dismiss has been briefed and is pending before the Court.

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 the 1999 Form 10-K. On June 15, 2000, the Court denied plaintiffs'
motion for class certification. On June 28, 2000, plaintiffs applied for
interlocutory review by the United States Court of Appeals for the Ninth
Circuit. On July 17, 2000, the Ninth Circuit issued an order directing
plaintiffs to move for voluntary dismissal of their application or to show cause
why the application should not be dismissed, on the ground that the application
was untimely filed. Plaintiffs have filed their response to the Ninth Circuit's
Order to Show Cause.

Bauman v. EMI Music Distribution et al., filed in Supreme Court of the
State of New York, County of New York on May 12, 2000, and numerous other
lawsuits have been brought against Time Warner, among other defendants, in
various state and federal courts by purported classes of direct and/or indirect
purchasers of compact discs, including consumers, alleging vertical and/or
horizontal conspiracies to engage in price fixing in violation of state and
federal law. Many of these lawsuits focus on the Consent Order signed by the
major record companies with the Federal Trade Commission ("FTC") with respect to
the FTC's investigation of minimum advertised price ("MAP") programs described
on pages I-11, I-32 and I-33 of Time Warner's 1999 Form 10-K. The Consent Order
was on public notice for comment until June 3 and is now before the FTC for
final approval.

On August 8, 2000, attorneys general of 30 states filed an action
titled State of Florida et al. v. BMG Music et al., in the United States
District Court for the Southern District of New York, alleging that a number of
record distributors, including Warner-Elektra-Atlantic Corp., and several record
retailers had violated state and federal antitrust laws through the adoption and
implementation of MAP programs.

Reference is made to the lawsuit brought by the former President of
Indonesia, H. M. Suharto, against Time Inc. Asia and certain individuals,
described on page I-33 of the 1999 Form 10-K. On June 6, 2000, the Central
Jakarta District Court in Indonesia ruled in Time Warner's favor on all counts.
Mr. Suharto has filed an appeal of the Court's ruling.

On April 12, 2000, Chambers et al. v. Time Warner Inc. et al., was
filed in the United States District Court for the Southern District of New York.
The plaintiffs, purportedly representing a class of recording artists, challenge
whether defendants have a federal copyright in certain sound recordings created
and published prior to 1972. Time Warner has filed a motion to dismiss, as well
as an opposition to plaintiffs' motion for class certification. Both motions are
pending.

In Huffman et al. v. The Hearst Corporation et al., which was filed in
the United States District Court for the Southern District of New York on June
30, 2000, three plaintiffs have purported to bring a class action lawsuit on
behalf of magazine subscribers against a trade association (Magazine Publishers
of America) and twelve magazine publishers, including Time Inc. Plaintiffs
allege that defendants have violated federal antitrust law by agreeing to limit
the extent to which they discount the price of subscriptions to their magazines.
Since the Huffman suit was filed, seven other similar lawsuits have been filed
in the Southern District of New York.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

On January 21, 2000, Time Warner Entertainment Company, L.P. ("TWE"),
acquired the remaining partnership interest in Queens Inner Unity Cable System
that it did not already own. As part of the consideration for

<PAGE>

this acquisition, TWE transferred to the seller, Inner City Broadcasting
Corporation, in a private placement 450,000 shares of Time Warner common stock
that Time Warner sold to TWE on the same day for $40.5 million in a private
placement exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933, as amended. The proceeds of the sale were used by Time Warner for
general corporate purposes. On February 16, 2000, Time Warner filed with the
Commission a registration statement on Form S-3 (Registration No. 333-30532)
covering the resale of these shares. This registration statement was declared
effective on May 24, 2000 and all the securities registered for sale thereunder
have been sold.

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

(a) (b) (c) (i) The Annual Meeting of Stockholders of Time Warner was
held on May 18, 2000 (the "2000 Annual Meeting"). The following matters were
voted upon at the 2000 Annual Meeting:

(x) The following were elected directors of Time Warner for terms
expiring in 2001:

<TABLE>
<CAPTION>
Broker
For Withheld Non-Votes
--- -------- ---------

<S> <C> <C> <C>
J. Carter Bacot 1,084,507,848 6,147,745 0
Stephen F. Bollenbach 1,084,349,565 6,306,028 0
John C. Danforth 1,074,563,260 16,092,333 0
Gerald Greenwald 1,084,664,097 5,991,496 0
Carla A. Hills 1,084,541,215 6,114,378 0
Gerald M. Levin 1,084,429,099 6,226,494 0
Reuben Mark 1,084,540,907 6,114,686 0
Michael A. Miles 1,084,224,274 6,431,319 0
Richard D. Parsons 1,084,451,316 6,204,277 0
R. E. Turner 1,084,351,010 6,304,583 0
Francis T. Vincent, Jr 1,084,494,168 6,161,425 0

</TABLE>

(y) Approval of the appointment of Ernst & Young LLP as independent
auditors of Time Warner for 2000:

<TABLE>
<CAPTION>
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------

<S> <C> <C> <C>
1,080,948,282 2,504,458 5,979,538 0

</TABLE>

(a) (c) (ii) A Special Meeting of Stockholders of Time Warner was held
on June 23, 2000 for the purpose of voting on the approval of the merger
agreement relating to the merger of Time Warner and America Online, Inc.

<TABLE>
<CAPTION>
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------

<S> <C> <C> <C>
1,001,726,221 2,410,041 3,047,742 0

</TABLE>

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.

<PAGE>

(b) Reports on Form 8-K.

(i ) Time Warner filed a Current Report on Form 8-K dated April 12,
2000 in which it reported in Item 5 that Time Warner announced its results of
operations for the quarter ended March 31, 2000.

(ii) Time Warner filed a Current Report on Form 8-K dated April 19,
2000 in which it reported in Item 5 that Time Warner was reclassifying its share
of the operating results of the Columbia House Partnerships and set forth
certain historical financial information with respect to Time Warner's business
segments restating the Music division's financial results to reflect such
change.

(iii) Time Warner filed a Current Report on Form 8-K dated May 22, 2000
setting forth in Item 5 pro forma consolidated condensed financial statements of
the new holding company which will be formed in connection with the proposed
merger of Time Warner and America Online (the "AOL Merger"), giving effect to
the AOL Merger as of and for (i) the three months ended March 31, 2000 and the
year ended December 31, 1999, and (ii) the nine months ended March 31, 2000 and
the year ended June 30, 1999.

<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: August 11, 2000

<PAGE>

EXHIBIT INDEX
PURSUANT TO ITEM 601 OF REGULATIONS S-K

EXHIBIT NO. DESCRIPTION OF EXHIBIT

<S> <C>

10.1 Amendment No. 1 dated as of June 30, 2000 to the Credit Agreement dated
as of November 10, 1997 among Time Warner Inc., Time Warner Companies,
Inc., Time Warner Entertainment Company, L.P., Turner Broadcasting
System, Inc., Time Warner Entertainment-Advance/Newhouse Partnership
and TWI Cable Inc., as Credit Parties, The Chase Manhattan Bank, as
Administrative Agent, Bank of America National Trust and Savings
Association, The Bank of New York and Morgan Guaranty Trust Company of
New York, as Documentation and Syndication Agents, Chase Securities, as
Arranger, and the lenders party thereto from time to time.

10.2 Amendment No. 7 to the Time Warner Inc. Deferred Compensation Plan (the
"Deferred Compensation Plan"), approved on May 25, 2000.

10.3 Amendment No. 8 to the Deferred Compensation Plan, approved on June 28, 2000

10.4 Transaction Agreement No.4, dated as of July 12, 2000, among Advance
Publications, Inc., Newhouse Broadcasting Corporation, Advance/Newhouse
Partnership, Time Warner Entertainment Company, L.P., Paragon
Communications and Time Warner Entertainment-Advance/Newhouse
Partnership and Related Side Letter.

27.1 Financial Data Schedule with respect to the period ending June 30, 2000.

27.2 Restated Financial Data Schedule with respect to the period ending
March 31, 2000.

</TABLE>

STATEMENT OF DIFFERENCES
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