Time Inc. said today that it set up a $10.7 million reserve to cover any losses from the previously announced discontinuation of its theatrical and television film production activities.

As a result, Time's first-quarter net income fell to $26.8 million (90 cents a share) from $28.3 million ($1) in the first three months of 1980.

Time President J. Richard Munro said that when the reserve is factored out, earnings from "on-going" operations rose 22 percent to $37.5 million ($1.26) and revenues increased 12 percent to $748.6 million in the first quarter.

Munro, speaking to Time's annual shareholder meeting here, said the major communications and forest products company had decided to invest heavily in the video business -- mainly cable television operations as well as programing for cable television.

"Because we see so much opportunity in cable as we know it and as we expect it to develop, we made the decision earlier this year to withdraw from television and theatrical movie production. . .Very simply, it is difficult to develop two capital-intensive business at the same time," Munro said.

Time Inc. will invest $180 million in its video operations this year, about 60 percent of the company's capital spending budget, Munro told stockholders.

He said Time is negotiating with Columbia Pictures over the sale of Time's theatrical film operation. Earlier negotiations with Fox broke down.

Time Inc. -- which, among other ventures, publishes Time and Sports Iilustrated magazines and the Washington Star newspaper -- has been a major factor in the cable business for several years.

Time owns American Television and Communications Corp., now the largest operator of cable television systems in the country, and Home Box Office, a major supplier of programing for pay television. ATC has 1.4 million subscribers and recently won the right to wire Indianapolis and its 140,000 households. Two weeks ago it bought the 60,000 subscribers to Honolulu's cable system and is trying to buy the cable operations in Austin, Tex.

Munro, who became president and chief executive of Time six months ago, said the first-quarter results were better "than we would have predicted three months ago, though it is not a guarantee of the full year. For even in normal times -- if you can remember any -- meetings such as this sparkle with references to uncertainty and a clouded crystal ball."

He told shareholders that he anticipates growth in all of the company's operations. He said advertising and subscription revenues from the company's magazines -- including Time, Fortune and Sports Illustrated -- have been growing rapidly. Discover, the company's new science magazine, "is on target and on budget," he said.

He said, however, that the Washington Star "has had its recovery impeded by the recessionary economy."

Munro told stockholders that Time's building-materials subsidiary had a profitable first quarter after losing money last year, but that it continues to "be plagued . . . buffeted . . . pick your own cliche, by the longest housing slump since World War II." He said he expects building materials to be profitable for the year as a whole.