##### Table of Contents



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 March 31,
2003,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:
033-53742-14

WARNER COMMUNICATIONS INC.

(Exact name of registrant as specified in its charter)


Delaware
    
    13-2696809(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)


American Television and Communications Corporation
    
    Delaware
    
    13-2922502(Exact name of registrant as specified in its charter)
    
    (State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)


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

(Address, including zip code, and telephone number, including
area code, of each 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).  Yes [ ]  No [X]





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TABLE OF CONTENTS



|                                                                                      |                                                     |                                                |  |  |  |  |  | 
|------------------------------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------------------- |  |  |  |  |  | 
|MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
|                                                                                      | Item 4.  Controls and Procedures                   
|                                                                                      |                                                     | CONSOLIDATED BALANCE SHEET                    
|                                                                                      |                                                     | CONSOLIDATED STATEMENT OF OPERATIONS          
|                                                                                      |                                                     | CONSOLIDATED STATEMENT OF CASH FLOWS          
|                                                                                      |                                                     | CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
|                                                                                      |                                                     | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|Part II. Other Information                                                           
|                                                                                      | Item 1.  Legal Proceedings.                        
|                                                                                      | Item 2.  Changes in Securities and Use of Proceeds.
|                                                                                      | Item 6.  Exhibits and Reports on Form 8-K.         
|SIGNATURES                                                                           
|EX-99.1 SECTION 906 CERTIFICATION OF THE PEO/PFO                                     



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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION

PagePart I. Financial InformationManagements Discussion and Analysis of Results of Operations and Financial
Condition
    
    2Item 4.
Controls and Procedures
    
    19Consolidated Financial Statements:Consolidated
Balance Sheet at March 31, 2003 and December 31, 2002
    
    20Consolidated
Statement of Operations for the three months ended March 31,
2003 and 2002
    
    21Consolidated
Statement of Cash Flows for the three months ended March 31,
2003 and 2002
    
    22Consolidated
Statement of Shareholders Equity for the three months ended March 31,
2003 and 2002
    
    23Notes to Consolidated Financial Statements
    
    
    
    24Part II. Other InformationItem 1. Legal Proceedings
    
    49Item 2. Changes in Securities and Use of Proceeds
    
    49Item 6. Exhibits and Reports on Form 8-K
    
    49






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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

INTRODUCTION

Managements discussion and analysis of results of operations and
financial condition (MD&A) is provided as a supplement to the accompanying
consolidated financial statements and footnotes to help provide an
understanding of Warner Communications Inc.s (WCI) and American Television
and Communications Corporations (ATC)
(collectively, the Companies) financial condition, changes in financial condition and results
of operations. The MD&A is organized as follows:



| |  |  | Overview.This section provides a general description of the
Companies businesses, as well as recent developments that the
Companies believe are important in understanding the results of
operations and to anticipate future trends in those operations. As
discussed in further detail below, the results of WCI and ATC have
been retroactively restated to reflect the restructuring of Time
Warner Entertainment Company, L.P. (TWE), which occurred on March
31, 2003 (the TWE Restructuring).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Results of operations.This section provides an analysis of
WCIs results of operations for the three months ended March 31, 2003
compared to the same period in 2002. As only WCI has independent
business operations, the results of ATC are not discussed. This
analysis is presented on both a consolidated and segment basis. In
addition, a brief description is provided of significant transactions
and events that impact the comparability of the results being
analyzed.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Financial condition and liquidity.This section provides an
analysis of the Companies financial condition and WCIs cash flows,
as well as a discussion of the Companies outstanding debt and
commitments, both firm and contingent. Included in the discussion of
outstanding debt is a discussion of the amount of financial capacity
available to fund WCIs future commitments, as well as a discussion
of other financing arrangements.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Market risk management.This section discusses how the
Companies manage exposure to potential loss arising from adverse
changes in foreign currency exchange rates and changes in the market
value of investments.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Critical accounting policies.This section discusses those
accounting policies that are considered important to the Companies
financial condition and results and require significant judgment and
estimates on the part of management in their application. In
addition, all of the Companies significant accounting policies,
including the critical accounting policies, are summarized in Note 1
to the accompanying consolidated financial statements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Risk factors and caution concerning forward-looking statements.
This section provides a description of risk factors that could
adversely affect the operations, businesses or financial results of
the Companies or its business segments and how certain
forward-looking statements made by the Companies in this report,
including throughout MD&A and in the accompanying consolidated
financial statements, are based on managements current expectations
about future events and are inherently susceptible to uncertainty and
changes in circumstances.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As discussed in more detail below, the TWE Restructuring has significantly
impacted the operations of WCI. Pursuant to accounting principles generally
accepted in the United States, the information included herein has been
adjusted to reflect the impact of the TWE Restructuring and other transfers of
assets under common control (e.g., the former film and television libraries of
Metro-Goldwyn-Mayer, Inc. and RKO Pictures (the Library division) for all
periods presented. In addition, these transactions have resulted in
significant changes to certain of WCIs disclosures in the MD&A section of
WCIs Annual Report on Form 10-K for the year ended December 31, 2002.
Accordingly, WCI has included in this interim filing certain disclosures with
respect to the year ended December 31, 2002, which have been restated to
include the impact of the TWE Restructuring and other transfers of assets under
common control. In addition, an update to the annual disclosure has been
provided for any material changes occurring during the first quarter of 2003.

2



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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

OVERVIEW

Description of Business

AOL Time Warner Inc. (AOL Time Warner) is the worlds leading media and
entertainment company. AOL Time Warner was formed in connection with the merger
of America Online, Inc. (America Online) and Time Warner Inc. (Time
Warner), which was consummated on January 11, 2001 (the Merger). As a result
of the Merger, America Online and Time Warner each became a wholly owned
subsidiary of AOL Time Warner, and WCI and ATC each became an indirect wholly
owned, subsidiary of AOL Time Warner. WCI and ATC are registrants because they
guarantee the public debt of TWE.

As a result of the TWE Restructuring discussed below, WCI has interests in
a majority of AOL Time Warners filmed entertainment operations, including the
operations of Warner Bros. and the former film and television libraries of
Metro-Goldwyn-Mayer, Inc. and RKO Pictures, a portion of AOL Time Warners
television network businesses, including Home Box Office (HBO) and The WB
Network, and substantially all of AOL Time Warners music operations, including
copyrighted music from many of the worlds leading recording artists that is
produced and distributed by a family of established record labels including
Warner Bros. Records, Atlantic Records, Elektra Entertainment and Warner Music
International. In addition, WCI holds a 74.6% economic interest in Time Warner
Cable Inc. (TWC Inc.) representing a 44.5% voting interest. All of AOL Time
Warners interests in cable television systems are held through or for the
benefit of TWC Inc. WCI accounts for its interest in TWC Inc. under the equity
method of accounting based upon its 44.5% voting interest.

WCI classifies its business interests into three fundamental areas: Filmed
Entertainment, consisting principally of interests in filmed entertainment and
television production; Networks, consisting principally of interests in cable
television and broadcast network programming; and Music, consisting principally
of interests in recorded music, music publishing and CD and DVD manufacturing.

ATC does not conduct independent business operations. The financial
position and results of operations of ATC are principally derived from its
investments in WCI, TWE, Time Warner Companies, Inc. (TW Companies), Turner
Broadcasting System, Inc. (TBS) and Time Warner Telecom Inc. (Time Warner
Telecom) all of which are accounted for using the equity-method of accounting.

TWE Restructuring

Prior to the restructuring
discussed below, a majority of AOL Time
Warners interests in the Filmed Entertainment and Cable segments, and a
portion of its interests in the Networks segment, were held through Time Warner
Entertainment Company, L.P. (TWE). AOL Time Warner owned general and limited
partnership interests in TWE consisting of 72.36% of the pro rata priority
capital and residual equity capital, and 100% of the junior priority capital.
The remaining 27.64% limited partnership interests in TWE were held by
subsidiaries of Comcast Corp. (Comcast).

On March 31, 2003, AOL Time
Warner and Comcast completed the TWE Restructuring. As a result of the TWE Restructuring, AOL
Time Warner acquired complete ownership of TWEs content
businesses, including
Warner Bros., Home Box Office, and TWEs interests in The WB Network, Comedy
Partners (Comedy Central) and the Courtroom Television
Network (Court TV). Additionally, all of AOL Time Warners interests in
cable, including those that
were wholly-owned and those that were held through TWE are now controlled by a
new subsidiary of AOL Time Warner called Time Warner Cable Inc. (TWC Inc.).
As part of the restructuring, AOL Time Warner received a 79% economic
interest in TWC Inc.s cable systems. TWE is now a subsidiary of TWC Inc.

In exchange for its previous stake in TWE, Comcast: (i) received AOL Time
Warner preferred stock, which will be converted into $1.5 billion of AOL Time
Warner common stock; (ii) received a 21.0% economic interest in TWC Inc.s
cable systems; and (iii) was relieved of $2.1 billion of pre-existing debt at
one of its subsidiaries, which was incurred by TWC Inc., as part of the
restructuring.

Comcasts 21.0% economic interest in TWC Incs
cable business is held through a 17.9% direct ownership interest in TWC Inc.
(representing a 10.7% voting interest) and a limited partnership interest in
TWE representing a 4.7% residual equity interest. AOL Time Warners 79%
economic interest in TWC Inc.'s cable business is held through an 82.1% ownership interest in
TWC Inc. (representing an 89.3% voting interest) and a partnership interest in
TWE representing a 1% residual equity interest. ATC also holds a
$2.4 billion mandatorily redeemable preferred equity interest in
TWE.

3



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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

As part of the TWE Restructuring, ATC transferred the majority of its
interest in TWE to WCI in exchange for a 22.6% interest in WCI. WCI holds a 74.6%
ownership interest in TWC
Inc., which represents a 44.5% voting interest. In
addition, concurrent with the TWE Restructuring, TBS, an indirect wholly-owned
subsidiary of AOL Time Warner, transferred its interest in the former film and
television libraries of Metro-Goldwyn-Mayer, Inc. and RKO Pictures to WCI in
exchange for an ownership interest in WCI (the Film Library Transfer).

The transfer of businesses and investments between consolidated
subsidiaries of AOL Time Warner (i.e., TWEs transfer of content
businesses to WCI, ATCs transfer of its interest in TWE to
WCI and the Film Library Transfer) have been recorded at historical carrying
value as a transfer of assets under common control. As such, consistent with
accounting principles generally accepted in the United States, the financial
information included herein, has been adjusted to reflect the impact of the
common control transfers for all periods presented.

The purchase consideration paid by AOL Time Warner in the TWE Restructuring was
as follows (in millions):

Description
    
    AmountDebt incurred at TWC Inc.
    
    $
    2,100Issuance of AOLTW mandatorily convertible preferred stock to Comcast
    
    
    1,500Value of cable assets transferred to Comcast
    
    
    1,000Acquisition costs
    
    
    44Total purchase consideration
    
    $
    4,644


Of
the $4.644 billion purchase consideration paid by AOL Time Warner,
$3.245 billion of purchase consideration is attributable to the
incremental interest in the content businesses acquired. A preliminary allocation of the purchase consideration has been performed
and the purchase consideration has been allocated to the net assets
acquired ($1.818 billion) with the balance reflected as goodwill at WCI. The goodwill
will not be amortized but will be tested for impairment on an annual basis.

Use of EBITDA

WCI considers EBITDA to be an important indicator of WCIs operational
strength and performance of its businesses. EBITDA is defined as operating
income (loss) before non-cash depreciation of tangible assets, amortization of
intangible assets and impairment write-downs related to goodwill and intangible
assets. EBITDA eliminates the uneven effect across all business segments of
considerable amounts of non-cash depreciation of tangible assets and
amortization or write-downs of certain intangible assets, including goodwill,
that were recognized in business combinations.

EBITDA should be considered in addition to, not as a substitute for WCIs
operating income (loss), net income (loss) and various cash flow measures
(e.g., cash provided by operations), or other measures of financial performance
reported in accordance with accounting principles generally accepted in the
United States.

WCIS RESULTS OF OPERATIONS

Transactions Affecting Comparability of Results of Operations

As more fully described herein and in the related footnotes to the
accompanying consolidated financial statements, the comparability of WCIs
operating results has been affected by certain significant transactions and
other items in each period as follows:

Three Months Ended3/31/03
    
    3/31/02(millions)Merger and restructuring costs
    
    $
    
    
    
    $
    (5
    )Loss on write-down of investments
    
    
    (18
    )
    
    
    (248
    )Gain on sale of assets
    
    
    36
    
    
    
    Pretax impact
    
    
    18
    
    
    
    (253
    )Income tax impact
    
    
    (7
    )
    
    
    101After-tax impact
    
    $
    11
    
    
    $
    (152
    )


4



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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

For the three months ended March 31, 2003 these items included (i)
approximately $36 million in gains on the sale of certain investments,
including a $35 million gain on the sale of WCIs interest in an international
theater chain (Note 4) and (ii) a non-cash charge of $18 million to reduce the
carrying value of certain investments that experienced other-than-temporary
declines in market value (Note 4).

For the three months ended March 31, 2002, these items included (i) merger
and restructuring costs of $5 million (Note 3)
and (ii) a non-cash charge of $248 million, including a $258 million charge to
reduce the carrying value of certain investments that experienced
other-than-temporary declines in market value and a $10 million gain related to
market fluctuations on equity derivative instruments. Included in the $258
million charge is a $255 million non-cash charge to reduce the carrying value
of WCIs investment in Time Warner Telecom, an equity investment (Note 4).

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

Consolidated Results

Revenues.WCIs consolidated revenues by category are as follows:

Three Months Ended3/31/03
    
    3/31/02
    
    % Change(millions)Revenues:Subscription
    
    $
    629
    
    
    $
    595
    
    
    
    6
    %Advertising
    
    
    138
    
    
    
    108
    
    
    
    28
    %Content
    
    
    2,747
    
    
    
    2,454
    
    
    
    12
    %Other
    
    
    185
    
    
    
    175
    
    
    
    6
    %Total revenues
    
    $
    3,699
    
    
    $
    3,332
    
    
    
    11
    %


The 6% increase in Subscription revenues was principally due to increases
in the number of subscribers and in subscription rates at the Networks segment.
The 28% increase in Advertising revenues was primarily related to higher
advertising rates and ratings at the Networks segment. The 12% increase in
Content revenues was principally due to improved results at the Networks and
the Filmed Entertainment segments related to improved worldwide home video
results, offset in part by lower results at the Music segment related to lower
recorded music sales. The 6% increase in Other revenues was primarily due to an
increase in DVD manufacturing sales at the Music segment.

Each of the revenue categories is discussed in greater detail by segment
under the Business Segment Results section below.

Reconciliation of Consolidated EBITDA to Operating Income and Net Income

The
following table reconciles EBITDA to operating income and in addition
provides the components from operating income to net income (loss)
for purposes of the discussions that follow:

Three Months Ended3/31/03
    
    3/31/02
    
    % Change(millions)EBITDA
    
    $
    525
    
    
    $
    438
    
    
    
    20
    %Depreciation expense
    
    
    (65
    )
    
    
    (55
    )
    
    
    18
    %Amortization
of goodwill and other intangible assets
    
    
    (111
    )
    
    
    (90
    )
    
    
    23
    %Operating income
    
    
    349
    
    
    
    293
    
    
    
    19
    %Equity in pretax income of TWC Inc.
    
    
    108
    
    
    
    111
    
    
    
    (3
    %)Interest expense, net
    
    
    (38
    )
    
    
    (43
    )
    
    
    (12
    %)Other income (expense), net
    
    
    40
    
    
    
    (263
    )
    
    NMIncome before income taxes and cumulative
effect of an accounting change
    
    
    459
    
    
    
    98
    
    
    NMIncome tax expense
    
    
    (185
    )
    
    
    
    
    
    NMCumulative effect of accounting change
    
    
    
    
    
    
    (27,628
    )
    
    NMNet income (loss)
    
    $
    274
    
    
    $
    (27,530
    )
    
    NM


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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

EBITDA.WCIs EBITDA increased 20% to $525 million in 2003 from $438
million in 2002 principally as a result of double-digit increases at the Filmed
Entertainment and Networks segments, offset in part by declines at the Music
segment. The segment changes are discussed in detail under Business Segment
Results below. In 2002, EBITDA included merger and restructuring costs of $5
million at the Music segment.

Depreciation Expense.Depreciation expense increased to $65 million in
2003 from $55 million in 2002 principally due to increases at the Music segment
as discussed in detail under Business Segment Results below.

Amortization Expense.Amortization expense increased to $111 million in
2003 from $90 million in 2002. The increase in amortization expense in 2003
was principally due to increases at the Music segment as discussed in detail
under Business Segment Results below.

Operating Income.WCIs operating income increased to $349 million in 2003
from $293 million in 2002. The improvement in operating income related to an
increase in business segment EBITDA noted above and discussed in detail under
Business Segment Results, offset in part by an increase in depreciation and
amortization expense at the Music segment as discussed below.

Equity in Pretax Income of TWC Inc.Equity in pretax income of TWC Inc.
decreased to $108 million in 2003 from $111 million in 2002 primarily due to a
decrease in pretax income of TWC Inc. primarily resulting from an increase in
depreciation expense.

Interest Expense, Net.Interest expense, net, decreased to $38 million in
2003, from $43 million in 2002, as a result of a decrease in interest rates,
which was offset in part by an increase in WCIs long-term debt
with related parties.

Other
Income (Expense), Net.Other income (expense), net, was $40 million
of income in 2003, compared to expense of $263 million in 2002. The
improvement primarily relates to a reduction in the losses from the write-down
of investments ($18 million in 2003 compared to $248 million in 2002), gains of
$36 million in 2003 related to the sale of investments and an increase in
income from investments accounted for using the equity method of accounting
($45 million of income in 2003 compared to $2 million of losses in 2002).

Income
Tax Expense.WCI had income tax expense of $185 million in 2003,
compared to $0 in 2002. WCIs pretax income was $459 million in 2003
compared to $98 million in 2002. Applying the 35% U.S. federal statutory rate
to pretax income would result in income tax expense of $161 million in 2003 and
$34 million in 2002. The effective rate in each period differs from the federal
statutory rate as a result of several factors, including non-temporary differences,
foreign income taxed at different rates and state and local income taxes.

Net
Income (Loss).WCI had net income of $274 million in 2003 compared to
a net loss of $27.530 billion in 2002. Net loss for 2002
includes a $27.628
billion charge relating to a cumulative effect of an accounting change in 2002
(Note 2). Excluding this item, WCIs net income before the cumulative effect of
an accounting change was $98 million in 2002. The increase in WCIs income
before the cumulative effect of an accounting change was primarily the result
of an overall increase in EBITDA and an increase in other income, net, offset
in part by a reduction in income from WCIs investment in TWC Inc., increased
depreciation and amortization expense and higher income tax expense.

6



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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

Business Segment Results

Filmed Entertainment.Revenues, EBITDA, depreciation, amortization and
operating income of the Filmed Entertainment segment for the three months ended
March 31, 2003 and 2002 are as follows:

Three Months Ended3/31/03
    
    3/31/02
    
    % Change(millions)Revenues:Advertising
    
    $
    2
    
    
    $
    2
    
    
    
    Content
    
    
    1,891
    
    
    
    1,716
    
    
    
    10
    %Other
    
    
    67
    
    
    
    55
    
    
    
    22
    %Total revenues
    
    $
    1,960
    
    
    $
    1,773
    
    
    
    11
    %EBITDA
    
    $
    235
    
    
    $
    190
    
    
    
    24
    %Depreciation
    
    
    (19
    )
    
    
    (18
    )
    
    
    6
    %Amortization
    
    
    (45
    )
    
    
    (44
    )
    
    
    2
    %Operating income
    
    $
    171
    
    
    $
    128
    
    
    
    34
    %


The 11% increase in total revenues was driven by a 10% increase in Content
revenues. This increase was primarily related to improved worldwide home video
results, primarily related to DVD sales, and improvements in television,
primarily related to the timing of deliveries of network series and the timing
of international television availabilities. These increases were offset in part
by declines in theatrical performance and difficult comparisons to the prior year, which benefited from the strong
carryover of the international results of Harry Potter and the Sorcerers
Stone.

EBITDA and operating income increased due primarily to the higher revenues
and improved margin contribution from the theatrical and television businesses,
as well as lower print and advertising expenses in the period, offset in part by
fair value adjustments on certain future theatrical releases.

Networks.Revenues, EBITDA, depreciation, amortization and operating
income of the Networks segment for the three months ended March 31, 2003 and
2002 are as follows:

Three Months Ended3/31/03
    
    3/31/02
    
    % Change(millions)Revenues:Subscription
    
    $
    629
    
    
    $
    595
    
    
    
    6
    %Advertising
    
    
    141
    
    
    
    111
    
    
    
    27
    %Content
    
    
    278
    
    
    
    76
    
    
    
    266
    %Other
    
    
    3
    
    
    
    
    
    
    NMTotal revenues
    
    $
    1,051
    
    
    $
    782
    
    
    
    34
    %EBITDA
    
    $
    220
    
    
    $
    169
    
    
    
    30
    %Depreciation
    
    
    (6
    )
    
    
    (7
    )
    
    
    (14
    )%Amortization
    
    
    (3
    )
    
    
    (3
    )
    
    
    Operating income
    
    $
    211
    
    
    $
    159
    
    
    
    33
    %


The 6% increase in Subscription revenues was due to an increase in the
number of subscribers and higher rates at HBO. The WB Networks higher
advertising rates, higher ratings and the impact of an expanded Sunday night
schedule that began in September 2002 drove the 27% increase in Advertising
revenues. The 266% increase in Content revenues was primarily due to higher
home video sales at HBO, including My Big Fat Greek Wedding(released in
February 2003) and HBOs original programming.

EBITDA and operating income increased primarily due to the increase in
total revenues described above. This was offset in part by higher programming
costs at HBO and The WB Network and higher participations related to the
increase in Content revenues at HBO.

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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

Music.Revenues, EBITDA, depreciation, amortization and operating income
(loss) of the Music segment for the three months ended March 31, 2003 and 2002
are as follows:

Three Months Ended3/31/03
    
    3/31/02
    
    % Change(millions)Revenues:Content
    
    $
    688
    
    
    $
    763
    
    
    
    (10
    )%Other
    
    
    226
    
    
    
    184
    
    
    
    23
    %Total revenues
    
    $
    914
    
    
    $
    947
    
    
    
    (3
    )%EBITDA
    
    $
    87
    
    
    $
    91
    
    
    
    (4
    )%Depreciation
    
    
    (38
    )
    
    
    (28
    )
    
    
    36
    %Amortization
    
    
    (63
    )
    
    
    (43
    )
    
    
    47
    %Operating income (loss)
    
    $
    (14
    )
    
    $
    20
    
    
    NM


The 10% decline in Content revenues was primarily related to the
industry-wide impact of piracy on worldwide music sales, which is expected to
continue. This decrease was partially offset by an approximate $50 million
favorable impact of foreign currency exchange rates primarily related to the
strengthening of the Euro relative to that of the U.S. dollar. The 23% increase
in Other revenues was primarily related to an increase in the worldwide DVD
manufacturing volume, due in part, from the timing of certain key releases and
an approximate $10 million favorable impact of foreign currency exchange rates,
offset in part by lower DVD manufacturing prices. As of March 31, 2003, the
Music segment had year-to-date domestic album market share of 17.8% as compared
to year-to-date market share of 17.0% at December 31, 2002 and 18.0% as of
March 31, 2002.

The decrease in EBITDA is due primarily to the overall decline in recorded
music sales, partially offset by increased DVD manufacturing volume and lower
overhead costs resulting from the restructuring of the recorded music
operations. In addition, EBITDA reflects a $12 million net benefit to accrual
reversals, including lower than expected employee compensation costs related to
the restructuring of compensation plans, partially offset by increased reserves
related to certain music publishing advances. The operating loss in 2003 is due
primarily to the aforementioned changes in EBITDA, as well as higher
depreciation expense related to increased capital expenditures associated with
the DVD manufacturing business and higher amortization expense, which is
principally related to the reduction in the amortization period of recorded
music catalog and music publishing copyrights from 20 years to 15.

FINANCIAL CONDITION AND LIQUIDITY

March 31, 2003

Current Financial Condition

At March 31, 2003, WCI had
$970 million of related party debt, $686 million of cash and
equivalents (net debt of $284 million, defined as total debt less cash and
equivalents) and $39.673 billion of shareholders equity. This compares to $887
million of debt, $179 million of cash and equivalents (net debt of $708
million) and $34.823 billion of shareholders equity at December 31, 2002.

At March 31, 2003, ATC had
$15.117 billion of shareholders equity. This
compares to $14.049 billion of shareholders equity at
December 31, 2002. ATC did not own any cash and equivalents and
had no debt outstanding at March 31, 2003 and December 31,
2002.

In
addition, in April 2003, WCI agreed to sell its 50% ownership
interest in Comedy Central for $1.225 billion in cash, and this
transaction is expected to close in the second quarter of 2003. Also
during April 2003, WCI paid $391 million related to the
settlement of certain litigation (Note 11).

As discussed in more detail below, management believes that WCIs and
ATCs operating cash flow, cash and equivalents and borrowing capacity under
its credit agreements, with AOL Time Warner and TW Companies and
other financing agreements, are
sufficient to fund its capital and liquidity needs for the foreseeable future.

Cash Flows

WCIs cash and cash equivalents increased to $686 million as of March 31,
2003 from $179 million as of December 31, 2002. See below for a discussion of
the change.

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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

Operating Activities

Cash provided by operations decreased to $1.012 billion for the first
three months of 2003, compared to $1.284 billion in the first three months of
2002. The decrease in cash flow from operations is primarily related to a
decrease in cash generated by working capital and an increase in cash taxes
paid, offset in part by an increase in EBITDA. The changes in working capital
are subject to wide fluctuations based on the timing of cash transactions
related to production schedules, collection of sales proceeds and similar
items.

Sources of cash provided (used) by
operations are as follows:

Three Months Ended March 31,2003
    
    2002(millions)EBITDA
    
    $
    525
    
    
    $
    438Net interest payments
    
    
    (6
    )
    
    
    (7
    )Net income taxes refunded (paid)
    
    
    (209
    )
    
    
    (128
    )All other, including working capital changes
    
    
    702
    
    
    
    981Cash provided by operations
    
    $
    1,012
    
    
    $
    1,284


Investing Activities

Cash used by investing activities decreased to $188 million for the first
three months of 2003, compared to $210 million in 2002. The decrease in cash
used by investing activities is primarily due to the lower level of cash used
for investments and acquisitions and an increase in investment proceeds, offset
in part by an increase in capital expenditures.

Sources of cash provided (used) by
investing activities are as follows:

Three Months Ended March 31,2003
    
    2002(millions)Investments and acquisitions
    
    $
    (148
    )
    
    $
    (173
    )Capital expenditures
    
    
    (48
    )
    
    
    (37
    )Investment proceeds from available-for-sale securities
    
    
    2
    
    
    
    Other investment proceeds
    
    
    6
    
    
    
    Cash used by investing activities
    
    $
    (188
    )
    
    $
    (210
    )


Financing Activities

Cash used by financing activities decreased to $317 million for the first
three months of 2003 compared to $1.031 billion in 2002. The decrease in cash
used by financing activities is principally due to a decrease in dividends and
a smaller increase in amounts due from AOL Time Warner, offset in part by an
increase in cash from other financing activities.

Sources of cash provided (used) by
financing activities are as follows:

Three Months Ended March 31,2003
    
    2002(millions)Dividends
    
    $
    (12
    )
    
    $
    (26
    )Increase in due from AOL Time Warner
    
    
    (357
    )
    
    
    (1,005
    )Other
    
    
    52
    
    
    
    Cash used by financing activities
    
    $
    (317
    )
    
    $
    (1,031
    )


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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

Outstanding Debt and Other Financing Arrangements

Borrowing Arrangements with TW Companies

During 2002, WCI and ATC each had a revolving credit agreement with TW
Companies. On March 31, 2003, ATCs intercompany facility was terminated. The
WCI facility was modified to allow WCI to both borrow from and lend to TW
Companies on an as needed basis. The revised facility has no stated maturity
date and no specified limit on the amount lent or borrowed by either entity.
Interest on any outstanding borrowings is payable in amounts and at intervals
consistent with AOL Time Warners 5-year revolving credit facility (or any
successor facility thereto).

Other Financing Arrangements

From time to time, WCI enters into various other financing arrangements
with special purpose entities (SPEs). These arrangements include facilities
which provide for the accelerated receipt of cash on certain accounts
receivable and backlog licensing contracts. WCI employs these arrangements
because they provide a cost-efficient form of financing, including certain tax
benefits, as well as an added level of diversification of funding
sources. These arrangements are cost-efficient for WCI since the assets
securing the financing are held by legally separate,
bankruptcy-remote SPEs
and provide direct security for the funding being provided. These facilities
generally have relatively short-term maturities. The assets and financing associated with these arrangements
generally qualify for off-balance sheet treatment (Note 6).

The following table summarizes WCIs financing arrangements with SPEs at
December 31, 2002:

Committed
    
    Unused
    
    OutstandingCapacity
    
    Capacity
    
    Utilization(millions)Accounts
receivable securitization facilities (a)
    
    $
    450
    
    
    $
    
    
    
    $
    450Backlog securitization
facility (a)(b)
    
    
    500
    
    
    
    
    
    
    
    500Total other financing arrangements
    
    $
    950
    
    
    $
    
    
    
    $
    950




---

|(a) |  | Ability to use accounts receivable securitization facilities and backlog
securitization facility depends on availability of qualified assets.       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | The outstanding utilization on the backlog securitization facility is
classified as deferred revenue on the accompanying consolidated balance
sheet.

In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46), which requires variable interest entities (commonly referred to as SPEs)
be consolidated by the primary beneficiary of the entity if certain criteria
are met. FIN 46 is effective immediately for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN
46 become effective for WCI during the third quarter of 2003. Management
anticipates that the adoption of FIN 46 will not result in a material impact to
WCIs consolidated financial statements.

Film Sale-Leaseback Transactions

From time to time, WCI has entered into arrangements with investors in
which certain films are sold and leased back. The sale-leaseback of the films
allows the foreign investors to claim certain tax benefits of ownership of the
film master negatives while WCI maintains control over all exploitation rights
and privileges to the films. Such entities are capitalized with the investors
capital and debt and the investors participate in all of the profits or losses
of the entities. The present value to these entities of the future revenue
streams attributable to these transactions was approximately
$1.3 billion as of
December 31, 2002. WCI does not consolidate nor participate in the operating
results of the entities. WCI retains certain proceeds of the transactions as
consideration for entering into the sale-leaseback transactions, and records
the consideration received as a reduction of corresponding film costs. The
benefit to WCI from these transactions that was recognized as a reduction to
film cost amortization was $47 million in 2002.

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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

Rating Triggers and Financial Covenants

The
financing arrangements with certain SPEs discussed above contain customary covenants. A breach of
such covenants that continues beyond any grace
period constitutes a termination event which can limit the facility as a
future source of liquidity; however, there would be no claims on WCI for the
receivables or backlog contracts previously sold. WCI is not subject
to any other covenants as a result of the other financing
arrangements discussed above.

As of March 31, 2003 and through the date of this filing, WCI was in
compliance with all covenants. Management does not expect that WCI will have
any difficulty complying with the covenants currently in place in the
foreseeable future.

Contractual and Other Obligations

Firm Commitments

In addition to the above financing arrangements, WCI has commitments under
certain firm contractual arrangements (firm commitments) to make future
payments for goods and services. These firm commitments secure the future
rights to various assets and services to be used in the normal course of
operations. For example, WCI is contractually committed to make certain minimum
lease payments for the use of property under operating lease agreements or make
payments to music artists for future album deliveries. In accordance with
current accounting rules, the future rights and obligations pertaining to firm
commitments contracts are not reflected as assets or liabilities on the
accompanying consolidated balance sheet.

The following table summarizes WCIs material firm commitments at December
31, 2002 and the timing and effect that such obligations are expected to have
on WCIs liquidity and cash flow in future periods. Amounts are
not materially different at March 31, 2003. In addition, the table
reflects the timing of principal payments on outstanding debt, which has been
previously discussed under Outstanding Debt and Available Financial Capacity.
It should be noted that although there are a number of firm commitments made
by WCI in the normal course of business, the following table represents the
more significant of those firm commitments. WCI expects to fund the firm
commitments with operating cash flow generated in the normal course of
business.

2007Firm Commitments and Outstanding Debt at December 31, 2002
    
    2003
    
    2004-2006
    
    and thereafter
    
    Total(millions)Programming and production deals
    
    $
    1,261
    
    
    $
    1,858
    
    
    $
    2,715
    
    
    $
    5,834Net operating leases
    
    
    162
    
    
    
    464
    
    
    
    929
    
    
    
    1,555Talent contracts and other firm commitments
    
    
    259
    
    
    
    383
    
    
    
    118
    
    
    
    760Total firm commitments
    
    
    1,682
    
    
    
    2,705
    
    
    
    3,762
    
    
    
    8,149Total principal outstanding on long-term debt
    
    
    5
    
    
    
    2
    
    
    
    880
    
    
    
    887Total firm commitments and outstanding debt
    
    $
    1,687
    
    
    $
    2,707
    
    
    $
    4,642
    
    
    $
    9,036


Following is a description of WCIs firm commitments at December 31, 2002:



| |  |  | The Networks segment (HBO and The WB Network) enters into agreements
with studios to air movies and licensed and original series they
produce.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Operating lease obligations primarily relate to the minimum lease
rental obligations for WCIs real estate and operating equipment in
various locations around the world.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Contingent Commitments

WCI also has certain contractual arrangements that would require WCI to
make payments or provide funding if certain circumstances occur (contingent
commitments). For example, WCI has guaranteed certain lease obligations of
joint venture investees. In this circumstance, WCI would be required to make
payments due under the lease to the lessor in the event of default by the joint
venture investee. WCI does not expect that these contingent commitments will
result in any material amounts being paid by WCI in the foreseeable future.

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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

The following table summarizes separately WCIs contingent commitments at
December 31, 2002. Amounts are not materially different at March 31, 2003. The
timing of amounts presented in the table represents when the maximum contingent
commitment will expire and does not necessarily mean that WCI expects to incur
an obligation to make any payments during that timeframe.

Expiration of CommitmentsTotal
    
    
    
    
    
    
    
    
    
    2007Nature of Contingent Commitments at December 31, 2002
    
    Commitments
    
    2003
    
    2004-2006
    
    and thereafter(millions)Guarantees
    
    $
    4,156
    
    
    $
    62
    
    
    $
    310
    
    
    $
    3,784Letters of credit and other contingent commitments
    
    
    42
    
    
    
    10
    
    
    
    1
    
    
    
    31Total contingent commitments
    
    $
    4,198
    
    
    $
    72
    
    
    $
    311
    
    
    $
    3,815


Prior
to the TWE restructuring, TWE had various contingent commitments,
including guarantees, related to the content businesses. In
connection with the TWE restructuring, some of these commitments were
not readily transferable with their applicable business and
they remain contingent commitments of TWE. AOL Time Warner and WCI have agreed, on a joint and several basis, to
indemnify TWE from and against any and all of these contingent
liabilities, but TWE remains party to these commitments. These
contingent commitments are included in the table above.

Guarantees include guarantees that WCI has provided on certain of TWEs
debt and accrued interest, which was $2.283 billion at March 31, 2003 and
$1.950 billion as of December 31, 2002 (Note 6), as well as guarantees on
certain lease and operating commitments entered into by formerly owned entities
and joint ventures in which WCI was or is a venture partner.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a reconciliation of changes in the entitys
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantors fiscal
year-end. The initial recognition and initial measurement provisions of FIN 45
did not have a material impact on WCIs consolidated financial statements. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002; therefore, WCI has
modified its disclosures herein as required.

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 WCIs
Filmed Entertainment segment was approximately $3.4 billion at March 31, 2003,
compared to approximately $3.2 billion at December 31, 2002, including amounts
relating to the licensing of film product to WCIs Networks segment of
approximately $355 million at March 31, 2003 and approximately $405 million at
December 31, 2002.

Because backlog generally relates to contracts for the licensing of
theatrical and television product which have already been produced, the
recognition of revenue for such completed product is principally only dependent
upon the commencement of the availability period for telecast under the terms
of the related licensing agreement. Cash licensing fees are collected
periodically over the term of the related licensing agreements or, as
referenced above and discussed in more detail in Note 6 to the accompanying
consolidated financial statements, 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. Of the approximately $3.4 billion of backlog relating to the
Filmed Entertainment segment as of March 31, 2003, WCI has recorded
approximately $659 million of deferred revenue on the accompanying consolidated
balance sheet, representing cash received through the utilization of the
securitization facility and other advanced payments. The backlog excludes
filmed entertainment 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.

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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

MARKET RISK MANAGEMENT

Market risk is the potential loss arising from adverse changes in market
rates and prices, such as foreign currency exchange rates and changes in the
market value of investments.

Foreign Currency Risk

AOL Time Warner uses foreign exchange contracts primarily to hedge the
risk that unremitted or future royalties and license fees owed to WCI domestic
companies for the sale or anticipated sale of U.S. copyrighted products abroad
may be adversely affected by changes in foreign currency exchange rates.
Similarly, AOL Time Warner enters into foreign exchange contracts to hedge
WCIs film production costs abroad. As part of its overall strategy to manage
the level of exposure to the risk of foreign currency exchange rate
fluctuations, AOL Time Warner hedges a portion of its foreign currency
exposures anticipated over the ensuing fifteen-month period (the hedging
period), including those related to WCI. At December 31, 2002, AOL Time Warner
had effectively hedged approximately 75% of WCIs estimated net foreign
currency exposures that principally relate to anticipated cash flows for
royalties and license fees to be remitted to the U.S. over the ensuing hedging
period. The hedging period for royalties and license fees covers revenues
expected to be recognized over the ensuing twelve-month period, however, there
is often a lag between the time that revenue is recognized and the transfer of
foreign-denominated revenues back into U.S. dollars, therefore, the hedging
period covers fifteen months. To hedge this exposure, AOL Time Warner uses
foreign exchange contracts that generally have maturities of three months to
fifteen months providing continuous coverage throughout the hedging period. WCI
is reimbursed by or reimburses AOL Time Warner for AOL Time Warner contract
gains and losses related to WCIs foreign currency exposure. At December 31,
2002, AOL Time Warner had contracts for the sale of $1.588 billion and the
purchase of $1.341 billion of foreign currencies at fixed rates. Of AOL Time
Warners $247 million net sale contract position, $1.424 billion of foreign
currency exchange sale contracts and $1.162 billion of the foreign exchange
purchase contracts related to WCIs foreign currency exposure, including net
contracts for the sale of $45 million of Canadian dollars, $155 million of
Japanese yen and $428 million of European currency and for the purchase of $356
million of the British pound.

Based on AOL Time Warners outstanding foreign exchange contracts related
to WCIs exposure at December 31, 2002, which are not materially different at
March 31, 2003, each 5% devaluation of the U.S. dollar as compared to the level
of foreign exchange rates for currencies under contract at December 31, 2002
would result in approximately $13 million of net unrealized losses on foreign
exchange contracts. Conversely, a 5% appreciation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies under contract
at December 31, 2002 would result in $13 million of net unrealized gains on
contracts. Consistent with the nature of the economic hedge provided by such
foreign exchange contracts, such unrealized gains or losses largely would be
offset by corresponding decreases or increases, respectively, in the dollar
value of future foreign currency license fee payments that would be received in
cash within the hedging period from the sale of U.S. copyrighted products
abroad.

Equity Risk

The Companies are exposed to market risk as it relates to changes in
market value of its investments. The Companies invest in equity instruments of
public and private companies for operational and strategic business purposes.
These securities are subject to significant fluctuations in fair market value
due to volatility of the stock market and the industries in which the Companies
operate. These securities, which are classified in Investments, including
available-for-sale securities on the accompanying consolidated balance sheet,
include equity-method investments, investments in private securities,
available-for-sale securities and equity derivative instruments. As of December
31, 2002, WCI had $172 million of cost-method investments, primarily relating to
private equity securities, $186 million of fair value investments, primarily
relating to public equity securities, and $17.445 billion of investments
accounted for using the equity method of accounting.

Over the past few years, the Companies experienced significant declines in
the value of certain investments. As a result, WCI recorded non-cash pretax
charges of $18 million in the first quarter of 2003 and $446 million in 2002
($258 million of which was in the first quarter of 2002). These charges were
primarily to reduce the carrying value of certain publicly traded and privately
held investments and investments accounted for using the equity method of
accounting that had experienced otherthan-temporary declines in value. While
WCI and ATC have recognized all declines that are believed to be
other-than-temporary, it is reasonably possible that individual investments in
their respective portfolios may experience an other-than-temporary decline in
value in the future if the underlying investee experiences poor operating
results or the U.S. equity markets experience future broad declines in value.
See Note 4 to the accompanying consolidated financial statements for additional
discussion.

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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

CRITICAL ACCOUNTING POLICIES

The Securities and Exchange Commissions (SEC) Financial Reporting
Release No. 60, Cautionary Advice Regarding Disclosure About Critical
Accounting Policies (FRR 60) suggests companies provide additional
disclosure and commentary on those accounting policies considered most
critical. FRR 60 considers an accounting policy to be critical if it is
important to the companys financial condition and results, and requires
significant judgment and estimates on the part of management in its
application. WCI believes the following represent the critical accounting
policies of WCI as contemplated by FRR 60. For a summary of all of WCIs
significant accounting policies, see Note 1 to the accompanying consolidated
financial statements.

Merger Accounting

The judgments made in determining the estimated fair value and expected
useful lives assigned to each class of assets and liabilities acquired in a
business combination can significantly impact net income. For example,
different classes of assets will have useful lives that differthe useful life
of a customer list may not be the same as the useful life of a music catalogue
or copyright. Consequently, to the extent a longer-lived asset (e.g., music
copyright) is ascribed greater value under the purchase method than a
shorter-lived asset (e.g., customer list), there may be less amortization
recorded in a given period.

Determining the fair value of certain assets and liabilities acquired is
judgmental in nature and often involves the use of significant estimates and
assumptions. As provided by the accounting rules, WCI uses the one-year period
following the consummation of a merger to finalize estimates of the fair value
of assets and liabilities acquired. One of the areas that require more judgment
in determining fair values and useful lives is intangible assets. To assist in
this process, WCI may obtain appraisals from independent valuation firms for
certain intangible assets. While there are a number of different methods used
in estimating the value of the intangibles acquired, two approaches are
primarily used: discounted cash flow and market multiple approaches. Some of
the more significant estimates and assumptions inherent in the two approaches
include: projected future cash flows (including timing); discount rate
reflecting the risk inherent in the future cash flows; perpetual growth rate;
determination of appropriate market comparables; and the determination of
whether a premium or a discount should be applied to comparables. Most of the
above assumptions are made based on available historical information.

Accounting for Goodwill and Other Intangible Assets

During 2001, the FASB issued Statement of Financial Accounting Standards
(Statement) No. 142 Goodwill and Other Intangible Assets (FAS 142), which
requires that, effective January 1, 2002, goodwill, including the goodwill
included in the carrying value of investments accounted for using the equity
method of accounting, and certain other intangible assets deemed to have an
indefinite useful life, cease amortizing. FAS 142 also requires that goodwill
and certain intangible assets be assessed for impairment using fair value
measurement techniques. Specifically, goodwill impairment is determined using
a two-step process. The first step of the goodwill impairment test is used to
identify potential impairment by comparing the fair value of a reporting unit
(generally, WCIs operating segment) with its net book value (or carrying
amount), including goodwill. If the fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not impaired and
the second step of the impairment test is unnecessary. If the carrying amount
of a reporting unit exceeds its fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the implied fair value
of the reporting units goodwill with the carrying amount of that goodwill. If
the carrying amount of the reporting units goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to
that excess. The implied fair value of goodwill is determined in the same
manner as the amount of goodwill recognized in a business combination. That
is, the fair value of the reporting unit is allocated to all of the assets and
liabilities of that unit (including any unrecognized intangible assets) as if
the reporting unit had been acquired in a business combination and the fair
value of the reporting unit was the purchase price paid to acquire the
reporting unit. The impairment test for other intangible assets consists of a
comparison of the fair value of the intangible asset with its carrying value.
If the carrying value of the intangible asset exceeds its fair value, an
impairment loss is recognized in an amount equal to that excess.

Determining the
fair value of a reporting unit under the first step of the
goodwill impairment test and determining the fair value of individual assets
and liabilities of a reporting unit (including unrecognized intangible assets)
under the second step of the goodwill impairment test is judgmental in nature
and often involves the use of significant estimates and assumptions.
Similarly, estimates and assumptions are used in determining the fair value of
other intangible assets. These estimates and assumptions could have a
significant impact on whether or not an impairment charge is recognized and
also the magnitude of any such charge. To assist in the process of determining
goodwill impairment, WCI obtains appraisals from independent valuation firms.
In addition to the use of independent valuation firms, WCI performs internal
analyses and considers other market information that is publicly available.
Estimates of fair value are primarily determined using discounted cash flows
and market comparisons and

14



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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

recent transactions. These approaches use significant estimates and
assumptions including projected future cash flows (including timing), discount
rates reflecting the risk inherent in future cash flows, perpetual growth rate,
determination of appropriate market comparables and the determination of
whether a premium or discount should be applied to comparables.

During the first quarter of 2002, upon adoption of FAS 142, WCI and ATC
completed their initial impairment reviews and recorded $27.628 billion and
$7.085 billion non-cash pre-tax charges, respectively, for the impairment of
goodwill, substantially all of which was generated in the Merger. These
charges are reflected as a cumulative effect of an accounting change in the
accompanying consolidated statement of operations. Approximately $17 billion
of WCIs charge and all of ATCs charge related to investments in consolidated
AOL Time Warner segments that WCI and ATC account for under the equity method
of accounting. These charges are non-operational and non-cash in nature and do
not affect WCIs or ATCs liquidity.

Investments

WCIs investments are comprised of fair value investments, including
available-for-sale investments, investments accounted for using the cost method
of accounting and investments accounted for using the equity method of
accounting. A judgmental aspect of accounting for investments involves
determining whether an other-than-temporary decline in value of the investment
has been sustained. If it has been determined that an investment has sustained
an other-than-temporary decline in its value, the investment is written down to
its fair value, by a charge to earnings. Such evaluation is dependent on the
specific facts and circumstances. Factors that are considered by WCI in
determining whether an other-than-temporary decline in value has occurred
include: the market value of the security in relation to its cost basis; the
financial condition of the investee; and the intent and ability to retain the
investment for a sufficient period of time to allow for recovery in the market
value of the investment.

In evaluating the factors above for available-for-sale securities,
management presumes a decline in value to be other-than-temporary if the quoted
market price of the security is 20% or more below the investments cost basis
for a period of six months or more (the 20% criteria) or the quoted market
price of the security is 50% or more below the securitys cost basis at any
quarter end (the 50% criteria). However, the presumption of an
other-than-temporary decline in these instances may be overcome if there is
persuasive evidence indicating that the decline is temporary in nature (e.g.,
strong operating performance of investee, historical volatility of investee,
etc.). Additionally, there may be instances where impairment losses are
recognized even if the 20% and 50% criteria are not satisfied (e.g., plan to
sell the security in the near term and the fair value is below WCIs cost
basis).

For investments accounted for using the cost or equity method of
accounting, management evaluates information (e.g., budgets, business plans,
financial statements, etc.) in addition to quoted market price, if any, in
determining whether an other-than-temporary decline in value exists. Factors
indicative of an other-than-temporary decline include recurring operating
losses, credit defaults and subsequent rounds of financings at an amount below
the cost basis of the investment. This list is not all inclusive and management
weighs all quantitative and qualitative factors in determining if an
other-than-temporary decline in value of an investment has occurred.

Over the past few years, the United States economy has experienced a broad
decline in the public equity markets, particularly in technology stocks,
including investments held in WCIs portfolio. Similarly, WCI experienced
significant declines in the value of certain privately held investments and
investments accounted for using the equity method of accounting. As a result,
WCI recorded non-cash pretax charges to reduce the carrying value of certain
investments that experienced other-than-temporary declines, and to reflect
market fluctuations in equity derivative instruments. These charges were
approximately $18 million in the first quarter of 2003 and approximately $446
million in 2002 ($258 million of which was recognized in the first quarter of
2002, offset in part by a $10 million gain related to market fluctuations on
equity derivative instruments). These charges were included in other income
(expense), net in the accompanying consolidated statement of operations. The
portion of the above charges relating to publicly traded securities
was $1 million in the first quarter of 2003 and $433
million in 2002.

Revenue and Cost Recognition

One area related to revenue and cost recognition which incorporate
significant judgment and estimates by management is film revenue and cost
recognition.

15



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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

Filmed Entertainment Revenues and Costs

An aspect of film accounting that requires the exercise of judgment
relates to the process of estimating the total revenues to be received
throughout a films life cycle. Such estimate of a films ultimate revenue is
important for two reasons. First, while a film is being produced, and the
related costs are being capitalized, it is necessary for management to estimate
the ultimate revenues, less additional costs to be incurred including
exploitation costs, in order to determine whether the value of a film has been
impaired and, thus, requires an immediate write off of unrecoverable film
costs. Second, the amount of capitalized film costs recognized as cost of
revenues for a given film as it is exhibited in various markets, throughout its
life cycle, is based upon the proportion of the films revenues recognized for
such period to the films estimated ultimate total revenues. Similarly, the
recognition of participations and residuals is recognized based upon the
proportion of the films revenues recognized for such period to the films
estimated ultimate total revenues.

Management bases its estimates of ultimate revenue for each film on the
historical performance of similar films, incorporating factors such as the star
power of the lead actors and actresses, the genre of the film and the expected
number of theaters at which the film will be released. Management updates such
estimates based on the actual results of each film. For example, a film which
has resulted in lower-than-expected theatrical revenues in its initial weeks of
release would generally have its theatrical, home video and distribution
ultimate revenues adjusted downward; a failure to do so would result in the
understatement of amortized film costs for the period. Since the total film
cost to be amortized for a given film is fixed, the estimate of ultimate
revenues impacts only the timing of film cost amortization.

Gross Versus Net Revenue Recognition

In the normal course of business, WCI acts as an intermediary or agent
with respect to certain payments received from third parties. For example, the
Filmed Entertainment segment distributes films on behalf of independent film
producers and the Music segment distributes music product (e.g., CD and DVDs)
on behalf of third-party record labels.

The accounting issue encountered in these arrangements is whether WCI
should report revenue based on the gross amount billed to the ultimate
customer or on the net amount received from the customer after commissions
and other payments to third parties. To the extent revenues are recorded
gross, any commissions or other payments to third parties are recorded as
expenses so that the net amount (gross revenues less expenses) flows through
operating income. Accordingly, the impact on operating income is the same
whether WCI records the revenue on a gross or net basis. For example, if the
Music segment distributes a CD to a wholesaler for $15 and passes $10 to the
third-party record label, should the Music segment record gross revenue from
the wholesaler of $15 and $10 of expenses or should they record the net
revenues withheld of $5? In either case, the impact on operating income is $5.

Determining whether revenue should be reported gross or net is based on an
assessment of whether WCI is acting as the principal in a transaction or
acting as an agent in the transaction. To the extent WCI is acting as a
principal in a transaction, it reports as revenue the payments received on a
gross basis. To the extent WCI is acting as an agent in a transaction, it
reports as revenue the payments received less commissions and other payments to
third parties (i.e., on a net basis). The determination of whether WCI is
serving as principal or agent in a transaction is judgmental in nature and
based on an evaluation of the terms of an arrangement.

In determining whether WCI serves as principal or agent in these
arrangements, WCI follows the guidance in EITF Issue No. 99-19, Reporting
Revenue Gross as a Principal versus Net as an Agent (EITF 99-19). Pursuant
to such guidance, WCI serves as the principal in transactions in which it has
substantial risks and rewards of ownership. The indicators that WCI has
substantial risks and rewards of ownership are as follows:



| |  | WCI is the supplier of the products or services to the customer;
|- |  | ----------------------------------------------------------------



| |  | WCI has general inventory risk for a product before it is sold;
|- |  | ---------------------------------------------------------------



| |  | WCI has latitude in establishing prices;
|- |  | ----------------------------------------



| |  | WCI has the contractual relationship with the ultimate customer;
|- |  | ----------------------------------------------------------------



| |  | WCI modifies and services the product purchased to meet the ultimate customer specifications;
|- |  | ---------------------------------------------------------------------------------------------



| |  | WCI has discretion in supplier selection; and
|- |  | ---------------------------------------------



| |  | WCI has credit risk.
|- |  | --------------------

16



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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

Conversely, pursuant to EITF 99-19, WCI serves as agent in arrangements
where WCI does not have substantial risks and rewards of ownership. The
indicators that WCI does not have substantial risks and rewards of ownership
are as follows:



| |  | The supplier (not WCI) is responsible for providing the product or service to the customer;
|- |  | -------------------------------------------------------------------------------------------



| |  | The supplier (not WCI) has latitude in establishing prices;
|- |  | -----------------------------------------------------------



| |  | The amount WCI earns is fixed; and
|- |  | ----------------------------------



| |  | The supplier (not WCI) has credit risk.
|- |  | ---------------------------------------

Based on the above criteria and for WCIs more significant transactions
that management evaluated, the Filmed Entertainment segment records revenue
from the distribution of films on behalf of independent film producers on a
gross basis and the Music segment records the distribution of product on behalf
of third-party record labels on either a gross or net basis, depending on the
terms of the contract.

Accounting for Artist Advances

Another area of judgment affecting reported net income is managements
estimate of the recoverability of artist advances. The recoverability of those
assets is based on managements forecast of anticipated revenues from the sale
of future and existing music. In determining whether those amounts are
recoverable, management evaluates the current and past popularity of the
artists, the initial commercial acceptability of the product, the current and
past popularity of the genre of music that the product is designed to appeal
to, and other relevant factors. Based on this information, management expenses
the portion of such advances that it believes is not recoverable.

Sales Returns and Uncollectible Accounts

One area of judgment affecting reported revenue and net income is
managements estimate of product sales that will be returned and the amount of
the receivables that will ultimately be collected. In determining the estimate
of product sales that will be returned, management analyzes historical returns,
current economic trends and changes in customer demand and acceptance of WCIs
products. Based on this information, management reserves a percentage of each
dollar of product sales that provide the customer with the right of return.

Similarly, management evaluates accounts receivables to determine if they
will ultimately be collected. In performing this evaluation, significant
judgments and estimates are involved, including an analysis of specific risks
on a customer-by-customer basis for larger accounts and customers, and an
analysis of receivables aging that determines the percent that has historically
been uncollected by aged category. Based on this information, management
reserves an amount that is believed to be uncollectible.

RISK FACTORS AND CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS

Risk Factors

If the events discussed in these risk factors occur, the Companies
business, financial condition, results of operations or cash flows could be
materially adversely affected.

Technological developments may adversely affect WCIs competitive position
and limit its ability to protect its valuable intellectual property rights.
WCIs businesses operate in the highly competitive, consumer-driven and rapidly
changing media and entertainment industries. These businesses, as well as the
industries generally, are to a large extent dependent on technological
developments, including access to and selection and viability of new
technologies, and are subject to potential pressure from competitors as a
result of their technological developments. For example:



| |  |  | WCIs Filmed Entertainment and Network businesses may be
adversely affected by the fragmentation of consumer leisure and
entertainment time caused by a greater number of choices resulting
from technological developments, the impact of personal video
recorder or other technologies that have ad-stripping functions,
and technological developments that facilitate the piracy of its
copyrighted works; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | WCIs Music business may be adversely affected by technological
developments, such as Internet peer-to-peer file sharing and CD-R
activity, that facilitate the piracy of music; by its inability to
enforce WCIs intellectual property
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17



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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)



| |  |  | rights in digital environments; and by its failure to develop a
successful business model applicable to a digital online environment.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------

Caution Regarding
Forward-Looking Statements

The SEC encourages companies to disclose forward-looking information so
that investors can better understand a companys future prospects and make
informed investment decisions. This document contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995, particularly statements anticipating future growth in revenues, EBITDA
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 forward-looking statements. These
forward-looking statements are based on managements present expectations and
beliefs about future events. As with any projection or forecast, they are
inherently susceptible to uncertainty and changes in circumstances, and the
Companies are under no obligation to, and expressly disclaim any obligation to,
update or alter the forward-looking statements whether as a result of such
changes, new information, future events or otherwise.

The Companies operate in highly competitive, consumer-driven and rapidly
changing media and entertainment businesses. These businesses are affected by
government regulation, economic, strategic, political and social conditions,
consumer response to new and existing products and services, technological
developments and, particularly in view of new technologies, the continued
ability to protect intellectual property rights. The Companies actual results
could differ materially from managements expectations because of changes in
such factors. Other factors and risks could adversely affect the operations,
business or financial results of the Companies or its business segments in the
future and could also cause actual results to differ from those contained in
the forward-looking statements, including those identified in the Companies
other filings with the SEC and the following:

For WCIs Filmed Entertainment businesses:



| |  | the 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;
|- |  | --------------------------------------



| |  | the uncertain impact of technological developments that may facilitate piracy of its copyrighted works;
|- |  | -------------------------------------------------------------------------------------------------------



| |  | the ability to develop and apply adequate protections for filmed entertainment content in a digital delivery environment;
|- |  | -------------------------------------------------------------------------------------------------------------------------



| |  | the ability to develop a successful business model for delivery of feature films in a digital online environment;
|- |  | -----------------------------------------------------------------------------------------------------------------



| |  | risks associated with foreign currency exchange rates;
|- |  | ------------------------------------------------------



| |  | with respect to feature films, the increasing marketing costs associated with theatrical film releases in a highly
competitive marketplace;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | with respect to television programming, a decrease in demand for television programming provided by non-affiliated
producers; and
|- |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  | with respect to home video, the ability to maintain relationships with significant customers in the rental and
sell-through markets.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------

For WCIs Networks businesses:



| |  | greater than expected programming or production costs;
|- |  | ------------------------------------------------------



| |  | public or 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 network advertising to economic cyclicality and to new media technologies;
|- |  | ---------------------------------------------------------------------------------------------



| |  | the negative impact of consolidation among cable and satellite distributors;
|- |  | ----------------------------------------------------------------------------



| |  | piracy of content by means of interception of cable and satellite transmissions or Internet peer-to-peer file sharing;
|- |  | ----------------------------------------------------------------------------------------------------------------------



| |  | the impact of personal video recorder ad-stripping functions on advertising sales and network branding;
|- |  | ---------------------------------------------------------------------------------------------------------



| |  | the development of new technologies that alter the role of programming networks and services; and
|- |  | -------------------------------------------------------------------------------------------------



| |  | greater than expected fragmentation of consumer viewership due to an increased number of programming services or the
increased popularity of alternatives to television.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18



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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  (Continued)

For WCIs Music business:



| |  | the ability to continue to attract and select desirable talent at manageable costs; the popular demand for particular
artists and albums; the timely completion of albums by major artists;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the ability to continue to enforce its intellectual property rights in digital environments; piracy of music by means of
Internet peer-to-peer file sharing and organized and home CD-R activity;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the ability to develop a successful business model applicable to a digital online environment;
|- |  | ----------------------------------------------------------------------------------------------



| |  | the ability to maintain retail product pricing in a competitive environment;
|- |  | ----------------------------------------------------------------------------



| |  | the potential loss of catalog if it is determined that recording artists have a right to recapture sound recordings
under the United States Copyright Act;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the potential repeal of Subsection (b) of California Labor Code Section 2855, a Section which prescribes a maximum
length for personal service contracts;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the risk that there will be other federal and state statutes enacted which are similar to California Labor Code Section
2855, a Section which prescribes a maximum length for personal service contracts;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | risks from disruptions in the retail environment from bankruptcies, store closings and liquidity problems of record
retailers;
|- |  | ------------------------------------------------------------------------------------------------------------------------------



| |  | risks associated with foreign currency exchange rates;
|- |  | ------------------------------------------------------



| |  | the ability to utilize DVD manufacturing capacity fully and to maintain current DVD manufacturing pricing; and
|- |  | --------------------------------------------------------------------------------------------------------------



| |  | the overall strength of global music sales.
|- |  | -------------------------------------------

For the Companies, the overall financial strategy, including growth in
operations and maintaining a strong balance sheet, could be
adversely affected by significant acquisitions, dispositions or other
transactions, economic slowdowns, the impact of war, and changes in the
Companies plans, strategies and intentions. In addition, lower than expected
valuations associated with the cash flows and revenues at the segments of WCI
may result in its inability to realize the value of recorded intangibles and
goodwill at those segments.




Item 4.  Controls and Procedures

Within
the 90-day period prior to the filing of this report, each of WCI and
ATC, under the supervision and with the participation of its management,
including its Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a 
14(c)) under the Securities Exchange Act of 1934 (the Exchange Act)). Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer
of each of WCI and ATC concluded that its disclosure controls and
procedures are effective in timely making known to them material information
relating to such company and its consolidated subsidiaries
required to be disclosed in its reports filed or submitted under
the Exchange Act. WCI and ATC have investments in certain unconsolidated
entities. As WCI and ATC do not control or manage these entities, their
disclosure controls and procedures with respect to such entities are
necessarily substantially more limited than those maintained with respect to
their consolidated subsidiaries. There have been no significant changes in the
internal controls of WCI and ATC or in other factors that could significantly
affect the internal controls subsequent to the date they completed
their respective evaluations.

19



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##### Table of Contents






WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEET(Unaudited)

WCI
    
    ATCMarch 31,
    
    December 31,
    
    March 31,
    
    December 31,2003
    
    2002(a)
    
    2003
    
    2002(a)(millions)ASSETSCurrent assetsCash and equivalents
    
    $
    686
    
    
    $
    179
    
    
    $
    
    
    
    $
    Receivables, including $1.260 billion and $742 million due from AOL
Time Warner, less allowances of $1.414 billion and $1.908 billion
    
    
    3,601
    
    
    
    4,294
    
    
    
    
    
    
    
    Inventories
    
    
    1,094
    
    
    
    1,002
    
    
    
    
    
    
    
    Other current assets
    
    
    1,128
    
    
    
    1,146
    
    
    
    
    
    
    
    Total current assets
    
    
    6,509
    
    
    
    6,621
    
    
    
    
    
    
    
    Noncurrent inventories and film costs
    
    
    2,279
    
    
    
    2,205
    
    
    
    
    
    
    
    Investment in TWC Inc.
    
    
    13,622
    
    
    
    12,245
    
    
    
    
    
    
    
    Investment in TWE
    
    
    
    
    
    
    
    
    
    
    2,599
    
    
    
    2,597Investment in WCI
    
    
    
    
    
    
    
    
    
    
    11,093
    
    
    
    10,213Investment
in ATC
    
    
    1,062
    
    
    
    1,029
    
    
    
    
    
    
    
    Other investments, including available-for-sale securities
    
    
    4,168
    
    
    
    4,529
    
    
    
    1,084
    
    
    
    1,122Property, plant and equipment
    
    
    1,672
    
    
    
    1,660
    
    
    
    
    
    
    
    Intangible assets subject to amortization
    
    
    5,846
    
    
    
    5,962
    
    
    
    
    
    
    
    Intangible assets not subject to amortization
    
    
    2,880
    
    
    
    2,880
    
    
    
    
    
    
    
    Goodwill
    
    
    13,691
    
    
    
    12,134
    
    
    
    
    
    
    
    Other assets
    
    
    1,121
    
    
    
    1,217
    
    
    
    344
    
    
    
    120Total assets
    
    $
    52,850
    
    
    $
    50,482
    
    
    $
    15,120
    
    
    $
    14,052LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    1,341
    
    
    $
    1,700
    
    
    $
    
    
    
    $
    Participations payable
    
    
    2,688
    
    
    
    2,609
    
    
    
    
    
    
    
    Debt
due within one year
    
    
    105
    
    
    
    5
    
    
    
    
    
    
    
    Other current liabilities
    
    
    2,201
    
    
    
    2,262
    
    
    
    
    
    
    
    Total current liabilities
    
    
    6,335
    
    
    
    6,576
    
    
    
    
    
    
    
    Long-term debt, due to AOL Time Warner
    
    
    865
    
    
    
    882
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    3,293
    
    
    
    3,367
    
    
    
    
    
    
    
    Other long-term liabilities
    
    
    2,630
    
    
    
    2,980
    
    
    
    3
    
    
    
    3Minority interests
    
    
    54
    
    
    
    1,854
    
    
    
    
    
    
    
    Shareholders equity
    
    
    39,673
    
    
    
    34,823
    
    
    
    15,117
    
    
    
    14,049Total liabilities and shareholders equity
    
    $
    52,850
    
    
    $
    50,482
    
    
    $
    15,120
    
    
    $
    14,052




---

|(a) |  | As discussed in more detail in Note 1, the results of WCI and ATC have
been retroactively restated for all periods presented to reflect the TWE
Restructuring, and other transfers of assets under common control.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes.

20



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##### Table of Contents






WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS

Three Months Ended March 31,
(Unaudited)


WCI
    
    ATC2003
    
    2002(a)
    
    2003
    
    2002(a)(millions)Revenues:Subscription
    
    $
    629
    
    
    $
    595
    
    
    $
    
    
    
    $
    Advertising
    
    
    138
    
    
    
    108
    
    
    
    
    
    
    
    Content
    
    
    2,747
    
    
    
    2,454
    
    
    
    
    
    
    
    Other
    
    
    185
    
    
    
    175
    
    
    
    
    
    
    
    Total revenues(b)
    
    
    3,699
    
    
    
    3,332
    
    
    
    Cost of revenues(b)
    
    
    (2,389
    )
    
    
    (2,195
    )
    
    
    
    
    
    
    Selling, general and administrative(b)
    
    
    (850
    )
    
    
    (754
    )
    
    
    
    
    
    
    Amortization of goodwill and other intangible assets
    
    
    (111
    )
    
    
    (90
    )
    
    
    
    
    
    
    Operating income
    
    
    349
    
    
    
    293
    
    
    
    
    
    
    
    Equity in pretax income of TWC Inc.
    
    
    108
    
    
    
    111
    
    
    
    
    
    
    
    Interest expense, net(b)
    
    
    (38
    )
    
    
    (43
    )
    
    
    
    
    
    
    Other income (expense), net(b)
    
    
    40
    
    
    
    (263
    )
    
    
    114
    
    
    
    (153
    )Income (loss) before income taxes and
cumulative effect of accounting change
    
    
    459
    
    
    
    98
    
    
    
    114
    
    
    
    (153
    )Income tax expense(b)
    
    
    (185
    )
    
    
    
    
    
    
    (47
    )
    
    
    62Income (loss) before cumulative effect of accounting
change
    
    
    274
    
    
    
    98
    
    
    
    67
    
    
    
    (91
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (27,628
    )
    
    
    
    
    
    
    (7,085
    )Net income (loss)
    
    $
    274
    
    
    $
    (27,530
    )
    
    $
    67
    
    
    $
    (7,176
    )




---

|(a) |  | As discussed in more detail in Note 1, the results of WCI and ATC have
been retroactively restated for all periods presented to reflect the TWE
Restructuring, and other transfers of assets under common control.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Includes the following income (expenses) resulting from transactions with
related companies within AOL Time Warner and equity investees of WCI and
ATC:                                                           

Revenue
    
    $
    339
    
    
    $
    290
    
    
    $
    
    
    
    $
    Cost of revenues
    
    
    (38
    )
    
    
    (20
    )
    
    
    
    
    
    
    Selling, general and administrative
    
    
    (2
    )
    
    
    (3
    )
    
    
    
    
    
    
    Interest income (expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income, net
    
    
    28
    
    
    
    14
    
    
    
    
    
    
    
    Income tax benefit (expense)
    
    
    (145
    )
    
    
    (78
    )
    
    
    (47
    )
    
    
    (9
    )


See accompanying notes.

21



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##### Table of Contents






WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31,
(Unaudited)

WCI
    
    ATC2003
    

2002(a)
    
    2003
    

2002(a)(millions)OPERATIONSNet income (loss)
    
    $
    274
    
    
    $
    (27,530
    )
    
    $
    67
    
    
    $
    (7,176
    )Adjustments for noncash and nonoperating items:Cumulative effect of accounting change
    
    
    
    
    
    
    27,628
    
    
    
    
    
    
    
    7,085Depreciation and amortization
    
    
    176
    
    
    
    145
    
    
    
    
    
    
    
    Amortization of film costs
    
    
    523
    
    
    
    400
    
    
    
    
    
    
    
    Loss on write-down of investments
    
    
    18
    
    
    
    258
    
    
    
    
    
    
    
    175Gain on sale of investments
    
    
    (36
    )
    
    
    
    
    
    
    
    
    
    
    Equity in pretax income of TWC Inc.
    
    
    (108
    )
    
    
    (111
    )
    
    
    
    
    
    
    Excess of distributions over equity in TWE
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (3
    )Equity in (income) losses of investee companies after distributions
    
    
    (22
    )
    
    
    13
    
    
    
    (114
    )
    
    
    (20
    )Changes in operating assets and liabilities
    
    
    187
    
    
    
    481
    
    
    
    49
    
    
    
    (61
    )Cash provided by operations
    
    
    1,012
    
    
    
    1,284
    
    
    
    
    
    
    
    INVESTING ACTIVITIESInvestments and acquisitions
    
    
    (148
    )
    
    
    (173
    )
    
    
    
    
    
    
    Capital expenditures
    
    
    (48
    )
    
    
    (37
    )
    
    
    
    
    
    
    Investment proceeds from available-for-sale securities
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Other investment proceeds
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    Cash used by investing activities
    
    
    (188
    )
    
    
    (210
    )
    
    
    
    
    
    
    FINANCING ACTIVITIESDividends
    
    
    (12
    )
    
    
    (26
    )
    
    
    
    
    
    
    Increase in due from AOL Time Warner
    
    
    (357
    )
    
    
    (1,005
    )
    
    
    
    
    
    
    Other
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    Cash used by financing activities
    
    
    (317
    )
    
    
    (1,031
    )
    
    
    
    
    
    
    INCREASE IN CASH AND EQUIVALENTS
    
    
    507
    
    
    
    43
    
    
    
    
    
    
    
    CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    179
    
    
    
    215
    
    
    
    
    
    
    
    CASH AND EQUIVALENTS AT END OF PERIOD
    
    $
    686
    
    
    $
    258
    
    
    $
    
    
    
    $
    




---

|(a) |  | As discussed in more detail in Note 1, the results of WCI and ATC have
been retroactively restated for all periods presented to reflect the TWE
Restructuring, and other transfers of assets under common control.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes.

22



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##### Table of Contents






WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

Three Months Ended March 31,
(Unaudited)

WCI
    
    ATC2003
    

2002(a)
    
    2003
    

2002(a)(millions)BALANCE
AT BEGINNING OF PERIOD(a)
    
    $
    34,823
    
    
    $
    81,894
    
    
    $
    14,049
    
    
    $
    25,317Net income (loss)
    
    
    274
    
    
    
    (27,530
    )
    
    
    67
    
    
    
    (7,176
    )Change in foreign currency translation
    
    
    (89
    )
    
    
    14
    
    
    
    
    
    
    
    Other comprehensive income
    
    
    (5
    )
    
    
    (1
    )
    
    
    
    
    
    
    Comprehensive loss
    
    
    180
    
    
    
    (27,517
    )
    
    
    67
    
    
    
    (7,176
    )Reallocation of goodwill among AOL Time Warner segments
upon adoption of FAS 142
    
    
    
    
    
    
    (10,815
    )
    
    
    
    
    
    
    (3,512
    )Allocation of a portion of the purchase price in connection
with the TWE Restructuring
    
    
    3,696
    
    
    
    
    
    
    
    278
    
    
    
    Distributions to/from AOL Time Warner
    
    
    929
    
    
    
    240
    
    
    
    668
    
    
    
    Other
    
    
    45
    
    
    
    91
    
    
    
    55
    
    
    
    BALANCE AT END OF PERIOD
    
    $
    39,673
    
    
    $
    43,898
    
    
    $
    15,117
    
    
    $
    14,629




---



|(a) |  | As discussed in more detail in Note 1, the results of WCI and ATC have
been retroactively restated for all periods presented to reflect the TWE
Restructuring, and other transfers of assets under common control.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes.

23



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##### Table of Contents






WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Basis of Presentation

Description of Business

AOL Time Warner Inc. (AOL Time Warner) is the worlds leading media and
entertainment company. AOL Time Warner was formed in connection with the merger
of America Online, Inc. (America Online) and Time Warner Inc. (Time
Warner), which was consummated on January 11, 2001 (the Merger). As a result
of the Merger, America Online and Time Warner each became a wholly owned
subsidiary of AOL Time Warner, and Warner Communications Inc. (WCI) and
American Television and Communications Corporation (ATC) each became an
indirect wholly-owned, subsidiary of AOL Time Warner. WCI and ATC are
collectively referred to as the Companies.

Subsequent to the restructuring of Time Warner Entertainment Company, L.P.
(TWE) discussed below, WCI conducts a majority of AOL Time Warners filmed
entertainment operations, including the operations of Warner Bros. and the
former film and television libraries of Metro-Goldwyn-Mayer, Inc. and RKO
Pictures (the Library division), a portion of AOL Time Warners television
network businesses, including Home Box Office (HBO) and The WB Network, and
substantially all of AOL Time Warners music operations, including 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. In addition, WCI holds a 74.6% economic interest in Time Warner
Cable Inc. (TWC Inc.). All of AOL Time Warners interests in cable
television systems are held through or for the benefit of TWC Inc. WCI
accounts for its interest in TWC Inc. under the equity method of accounting
based upon its 44.5% voting interest.

WCI classifies its business interests into three fundamental areas: Filmed
Entertainment, consisting principally of interests in filmed entertainment and
television production; Networks, consisting principally of interests in cable
television and broadcast network programming; and Music, consisting principally
of interests in recorded music, music publishing and CD and DVD manufacturing.

ATC does not conduct independent business operations. The financial
position and results of operations of ATC are principally derived from its
investments in WCI, TWE, Time Warner Companies, Inc. (TW Companies), Turner
Broadcasting System, Inc. (TBS) and Time Warner Telecom Inc. (Time Warner
Telecom).

TWE Restructuring

Prior to the restructuring discussed below, a majority of AOL Time
Warners interests in the Filmed Entertainment and Cable segments, and a
portion of its interests in the Networks segment, were held through Time Warner
Entertainment Company, L.P. (TWE). AOL Time Warner owned general and limited
partnership interests in TWE consisting of 72.36% of the pro rata priority
capital and residual equity capital, and 100% of the junior priority capital.
The remaining 27.64% limited partnership interests in TWE were held by
subsidiaries of Comcast Corp. (Comcast).

On March 31, 2003, AOL Time Warner and Comcast completed the restructuring
of TWE (the TWE Restructuring). As a result of the TWE Restructuring, AOL
Time Warner acquired complete ownership of TWEs content
businesses, including
Warner Bros., Home Box Office, and TWEs interests in The WB Network, Comedy
Partners (Comedy Central) and the Courtroom Television
Network (Court TV).
Additionally, all of AOL Time Warners 79% economic interests in
cable systems, including those that
were wholly-owned and those that were held through TWE are now controlled by a
new subsidiary of AOL Time Warner called Time Warner Cable Inc. (TWC Inc.).
TWE is now a subsidiary of TWC Inc.

In exchange for its previous stake in TWE, Comcast: (i) received AOL Time
Warner preferred stock, which will be converted into $1.5 billion of AOL Time
Warner common stock; (ii) received a 21.0% economic interest in TWC Inc.s
cable systems; and (iii) was relieved of $2.1 billion of pre-existing debt at
one of its subsidiaries, which was incurred by TWC Inc., as part of the
restructuring.

Comcasts
21.0% economic interest in TWC Incs cable business is held through a 17.9% direct ownership interest in TWC Inc.
(representing a 10.7% voting interest) and a limited partnership interest in
TWE representing a 4.7% residual equity interest. AOL Time Warners 79%
economic interest in TWC Inc.s cable business is held through an 82.1% ownership

24



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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

interest in TWC Inc. (representing an 89.3% voting interest) and a
partnership interest in TWE representing a 1% residual equity
interest. ATC also holds a $2.4 billion mandatorily redeemable
preferred equity interest in TWE.

As part of the TWE Restructuring, ATC transferred the majority of its
interest mandatorily redeemable in TWE to WCI in exchange for a 22.6% interest in WCI. WCI holds a 74.6% ownership interest in TWC
Inc., which represents a 44.5% voting interest. In
addition, concurrent with the TWE Restructuring, TBS, an indirect wholly-owned
subsidiary of AOL Time Warner, transferred its interest in the former film and
television libraries of Metro-Goldwyn-Mayer, Inc. and RKO Pictures to WCI in
exchange for an ownership interest in WCI (the Film Library Transfer).

The transfer of businesses and investments between consolidated
subsidiaries of AOL Time Warner (i.e., TWE's transfer of content
assets to WCI, ATCs transfer of its interest in TWE to
WCI and the Film Library Transfer) have been recorded at historical carrying
value as a transfer of assets under common control. As such, consistent with
accounting principles generally accepted in the United States, the financial
information included herein, has been adjusted to reflect the impact of the
common control transfers for all periods presented.

The purchase consideration paid by AOL Time Warner in the TWE Restructuring was
as follows (in millions):

Description
    
    AmountDebt incurred at TWC Inc.
    
    $
    2,100Issuance of AOLTW mandatorily convertible preferred stock to Comcast
    
    
    1,500Value
of cable assets transferred to Comcast(a)
    
    
    1,000Acquisition costs
    
    
    44Total purchase consideration
    
    $
    4,644




---

(a) Based on an analysis of discounted cash flow and comparison to
comparable market data.


Of
the $4.644 billion purchase consideration paid by AOL Time Warner,
$3.245 billion of purchase consideration is
attributable to the incremental interest in the content businesses acquired. A preliminary
allocation of the purchase consideration has been performed, and the purchase consideration has been allocated
to the net assets acquired ($1.818 billion) with the balance
reflected as goodwill at WCI. The goodwill
will not be amortized but will be tested for impairment on an annual basis.

Had the TWE Restructuring occurred at
the beginning of each period presented, it would not have materially
impacted the financial results presented herein.

Basis of Presentation

TWE Restructuring

As discussed above, the TWE Restructuring has significantly impacted the
operations of WCI. Pursuant to accounting principles generally accepted in the
United States, the information included herein has been adjusted to reflect the
impact of the TWE Restructuring and other transfers of assets under common
control (e.g., the Library division) for all periods presented. In addition,
these transactions have resulted in significant changes to certain of WCIs
disclosures in the MD&A section of WCIs Annual Report on Form 10-K for the
year ended December 31, 2002. Accordingly, WCI has included in this interim
filing certain disclosures with respect to the year ended December 31, 2002,
which have been restated to include the impact of the TWE Restructuring and
other transfers of assets under common control. In addition, an update to the
annual disclosure has been provided for any material changes occurring during
the first quarter of 2003.

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 accounting principles generally accepted in the United
States applicable to interim periods. The accompanying consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements of WCI and ATC, included in its Annual Report on Form 10-K
for the year ended December 31, 2002, filed on March 28, 2003 (the 2002 Form
10-K). In addition, the consolidation of TWEs content
businesses has resulted in
significant changes to certain of WCIs annual disclosures in the 2002 Form
10-K. As such, where appropriate, the notes to the consolidated interim
financial statements herein include certain annual disclosures as of December
31, 2002, which have been restated to include the impact of consolidating the
TWE content businesses and other transfers of assets under common control and did
not differ materially at March 31, 2003.

25



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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

New Accounting Principles

Derivative Instruments

In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (Statement) No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities (FAS 149).
FAS 149 amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivative instruments) and for hedging
activities under FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS 133). FAS 149 is effective for contracts
entered into or modified after June 30, 2003. Management does not believe that
adoption of this statement will have a material impact on the consolidated
financial statements.

Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46), which requires
variable interest entities (commonly referred to as SPEs) to be consolidated
by the primary beneficiary of the entity if certain criteria are met. FIN 46
is effective immediately for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 become effective
for the Companies during the third quarter of 2003. For variable interest
entities acquired prior to February 1, 2003, any difference between the net
amount added to the balance sheet and the amount of any previously recognized
interest in the variable interest entity will be recognized as a cumulative
effect of an accounting change. Management anticipates the adoption of FIN 46
will not result in a material impact to the Companies consolidated financial
statements.

Guarantees

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a reconciliation of changes in the entitys
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantors fiscal
year-end. The initial recognition and initial measurement provisions of FIN 45
did not have a material impact on the Companies consolidated financial
statements. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002;
therefore, the Companies have modified their disclosures as required.

Multiple Element Arrangements

In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21). EITF 00-21 provides guidance on how to account
for arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets. The provisions of EITF 00-21 will apply
to revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The Companies believe that the current accounting is consistent with the
provisions of EITF 00-21 and, therefore, does not expect that the application
of the provisions of EITF 00-21 will have a material impact on the Companies
consolidated financial statements.

Consideration Received from a Vendor by a Customer

In November 2002, the EITF reached a consensus on EITF Issue No. 02-16,
Accounting for Consideration Received from a Vendor by a Customer (EITF
02-16). EITF 02-16 provides guidance as to how customers should account for
cash consideration received from a vendor. EITF 02-16 presumes that cash
received from a vendor represents a reduction of the prices of the vendors
products or services, unless the cash received represents a payment for assets
or services provided to the vendor or a reimbursement of costs incurred by the
customer to sell the vendors products. The provisions of EITF 02-16 apply to
all agreements entered into or modified after December 31, 2002. The provisions
of EITF 02-16 did not have a material impact on the Companies consolidated
financial statements during the first quarter of 2003.

26



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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Exit and Disposal Activities

In July 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (FAS 146). FAS 146 nullifies
the accounting for restructuring costs provided in EITF Issue No. 94-3
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). FAS 146 requires that a liability associated with an exit or
disposal activity be recognized and measured at fair value only when incurred.
In addition, one-time termination benefits should be recognized over the period
employees will render service, if the service period required is beyond a
minimum retention period. FAS 146 is effective for exit or disposal activities
initiated after December 31, 2002. The application of the provisions of FAS
146 did not have a material impact on the Companies consolidated financial
statements during the first quarter of 2003.

Summary of Significant Accounting Policies

Basis of Consolidation and Accounting for Investments

The consolidated financial statements include 100% of the assets,
liabilities, revenues, expenses, income, loss and cash flows of the Companies
and all entities in which WCI and ATC have a controlling voting interest
(subsidiaries), as if the Companies and its subsidiaries were a single
company. Intercompany accounts and transactions between the consolidated
entities have been eliminated. Significant accounts and transactions between
the Companies and its partners and affiliates are disclosed as related party
transactions (Note 12).

The Companies fiscal year-end is December 31; however, certain foreign
locations are on a one-month lag. In addition, during 2002, WCIs domestic
music operations changed its fiscal year end from December 31 to November 30 in
order to be consistent with its foreign operations which had previously been
operating under a November fiscal year end. The impact of this change was not
material to WCIs overall financial results. To the extent a significant and or
unusual transaction or event occurs during the one-month-lag period, it would
be accounted for within WCIs year-end financial statements (Note 3).

Investments in investees in which the Companies have significant
influence, but less than a controlling voting interest, are accounted for using
the equity method. This is generally presumed to exist when the Companies own
between 20% and 50% of the investee. However, in certain circumstances, the
Companies ownership percentage exceeds 50% but the Companies account for the
investment using the equity method because the minority shareholders hold
certain rights which allow them to participate in the day-to-day operations of
the business. Additionally, the carrying value of investments accounted for
using the equity method of accounting are adjusted downward to reflect any
other-than-temporary declines in value.

Investments in investees in which the Companies do not have a controlling
interest, or an ownership and voting interest so large as to exert significant
influence, are accounted for as available-for-sale securities at market value
if the investments are publicly traded and there are no resale restrictions
greater than one year. If there are resale restrictions greater than one year,
or if the investment is not publicly traded, then the investment is accounted
for at cost. Unrealized gains and losses on investments accounted for at market
value are reported in the accompanying consolidated statement of shareholders
equity as a component of accumulated other comprehensive income (loss) until
the investment is sold, at which time the realized gain or loss is included in
income. Dividends and other distributions of earnings from both market value
and investments accounted for at cost are included in income when declared.

The effect of any changes in the Companies ownership interests resulting
from the issuance of equity capital by consolidated subsidiaries or equity
investees to unaffiliated parties is accounted for as a capital transaction.

Business Combinations

Business combinations have been accounted for using the purchase method of
accounting. Business combinations which have been accounted for under the
purchase method of accounting include the results of operations of the acquired
business from the effective date of acquisition. The cost to acquire companies,
including transaction costs, have been allocated to the underlying net assets
of the acquired company in proportion to their respective fair values. Any
excess of the purchase price over estimated fair values of the net assets
acquired has been recorded as goodwill. In certain purchase business
combinations, the Companies may review the operations of the acquired company
and implement plans to restructure its operations. As a result, the Companies
may accrue a liability related to these restructuring plans using the criteria
prescribed in EITF Issue No. 95-3, Recognition of Liabilities in Connection
with a Purchase Business Combination. The impact of accruing these liabilities
in connection with a purchase business combination is that the related cost is
reflected as a liability assumed in the acquisition and results in additional
goodwill as opposed to being included as a charge in the current period
determination of income (Note 3).

27



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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Foreign Currency Translation

The financial position and operating results of substantially all foreign
operations are consolidated using the local currency as the functional
currency. Local currency assets and liabilities are translated at the rates of
exchange on the balance sheet date, and local currency revenues and expenses
are translated at average rates of exchange during the period. Resulting
translation gains or losses, are included in the accompanying statement of
shareholders equity as a component of accumulated other comprehensive income
(loss).

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and footnotes thereto. Actual results could differ from those
estimates.

Significant
estimates inherent in the preparation of the accompanying
consolidated financial statements include managements forecast of anticipated
revenues and cash flows from investments and the sale of future and existing
consumer products, including music products, as well as from the distribution
of theatrical and television product, in order to evaluate the ultimate
recoverability of accounts receivable, film inventory, artist advances and
investments recorded as assets in the consolidated balance sheet. Accounts
receivable and sales of product in the music industry, as well as sales of home
video product in the filmed entertainment industry, are subject to customers
rights to return unsold items.

Management periodically reviews such estimates and it is reasonably
possible that managements assessment of recoverability of accounts receivable,
individual films and television product, individual artist advances and
investments may change based on actual results and other factors.

Revenues and Costs

Networks

Network revenues are primarily derived from subscriber fees and
advertising. Subscriber fees are recorded as revenue in the period the service
is provided and advertising revenues are recognized in the period that the
advertisements are exhibited. The costs of rights to exhibit feature films and
other programming on pay cable services during one or more availability periods
(programming costs) generally are recorded as inventory when the programming
is initially available for exhibition, and are allocated to the appropriate
availability periods and amortized as the programming is exhibited.

Filmed Entertainment

Feature films are produced or acquired for initial exhibition in theaters
followed by distribution in the home video, pay cable, basic cable, broadcast
network and syndicated television markets. Generally, distribution to the
theatrical, home video and pay cable markets (the primary markets) is completed
within eighteen months of initial release. Thereafter, feature films are
distributed to the basic cable, broadcast network and syndicated television
markets (the secondary markets). Theatrical revenues are recognized as the
films are exhibited. Home video revenues, less a provision for returns, are
recognized when the home videos are sold. Revenues from the distribution of
theatrical product to cable, broadcast network and syndicated television
markets are recognized when the films are available to telecast.

Television films and series are initially produced for the broadcast
networks, cable networks or first-run television syndication (the primary
markets) and may be subsequently licensed to foreign or domestic cable and
syndicated television markets (the secondary markets). Revenues from the
distribution of television product are recognized when the films or series are
available to telecast, except for barter agreements where the recognition of
revenue is deferred until the related advertisements are exhibited.

License agreements for the telecast of theatrical and television product
in the cable, broadcast network and syndicated television markets are routinely
entered into well in advance of their available date for telecast, which is
generally determined by the telecast privileges granted under previous license
agreements. Accordingly, there are significant contractual rights to receive
cash and barter under these licensing agreements. For cash contracts, the
related revenues will not be recognized until such product is available for
telecast under the contractual terms of the related license agreement. For
barter contracts, the related revenues will not be recognized until the product
is available for telecast and the advertising spots received under such
contracts are either used or sold to third parties. All of these contractual
rights for which revenue is not yet recognizable is referred to as backlog.

28



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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Inventories of theatrical and television product are stated at the lower
of unamortized cost or net realizable value. Cost principally consists of
direct production costs and production overhead. Individual films and series
are amortized, and the related participations and residuals are accrued, based
on the proportion that current revenues from the film or series bear to an
estimate of total revenues anticipated from all markets (the film-forecast
method). These estimates are revised periodically and losses, if any, are
provided in full. A portion of the cost to acquire Time Warner in 2001 was
allocated to its theatrical and television product, including an allocation to
purchased program rights and product that had been exhibited at least once in
all markets (Library). Library product is amortized on a straight-line basis
over twenty years, which approximated the use of the film-forecast method. Film
inventories generally include the unamortized cost of completed theatrical and
television films, theatrical films and television series in production pursuant
to a contract of sale, film rights acquired for the home video market, advances
pursuant to agreements to distribute third-party films and the Library.

Music

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

Inventories of WCI consist of cassettes, DVDs, compact discs and related
music and music publishing products. Inventories of cassettes, DVDs and compact
discs are stated at the lower of cost or estimated realizable value. Cost is
determined using first-in, first-out and average cost methods. Returned goods
included in inventory are valued at estimated realizable value, but not in
excess of cost.

Advertising Costs

WCI expenses advertising costs for theatrical and television product as
incurred in accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 00-2, Accounting by
Producers and Distributors of Films. In accordance with AICPA SOP 93-7,
Reporting on Advertising Costs, other advertising costs are expensed upon the
first exhibition of the advertisement. Deferred advertising costs for WCI
amounted to $6 million at December 31, 2002. Advertising expense for WCI
amounted to $1.957 billion for the year ended December 31, 2002.

Cash Equivalents

Cash equivalents consist of commercial paper and other investments that
are readily convertible into cash and have original maturities of three months
or less. Cash equivalents are carried at cost, which approximates fair value.

Derivative and Financial Instruments

FAS 133, as amended by FASB Statement No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities and FAS 149 requires
that all derivative instruments be recognized on the balance sheet at fair
value. In addition, FAS 133 provides that for derivative instruments that
qualify for hedge accounting, changes in the fair value will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in the accompanying consolidated
statement of shareholders equity as a component of accumulated other
comprehensive income (loss) until the hedged item is recognized in earnings,
depending on whether the derivative is being used to hedge changes in fair
value or cash flows. The ineffective portion of a derivative instruments
change in fair value will be immediately recognized in earnings.

The carrying value of WCIs financial instruments approximates fair value,
except for certain differences relating to investments accounted for at cost
and other financial instruments that are not significant (Note 4). The fair
value of financial instruments, such as investments, is generally determined by
reference to market values resulting from trading on a national securities
exchange or in an over-the-counter market. In cases where quoted market prices
are not available, fair value is based on estimates using present value or
other valuation techniques.

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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is provided
generally on the straight-line method over useful lives ranging up to thirty
years for buildings and improvements and up to sixteen years for furniture,
fixtures and other equipment. Property, plant and equipment consists of:

December 31, 2002(millions)Land and buildings
    
    $
    836Furniture, fixtures and other equipment
    
    
    1,250Less accumulated depreciation
    
    
    (426
    )Total
    
    $
    1,660


WCI periodically reviews the carrying value of its long-lived assets,
including property, plant and equipment, whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. To the
extent fair value of a long-lived asset, determined based upon the estimated
future cash inflows attributable to the asset, less estimated future cash
outflows, are less than the carrying amount, an impairment loss is recognized.

Goodwill and Other Intangible Assets

The Companies periodically review the carrying value of acquired
intangible assets, including goodwill, to determine whether impairment may
exist. FASB Statement No. 142, Goodwill and Other Intangible Assets (FAS
142) requires that goodwill and certain intangible assets be assessed for
impairment using fair value measurement techniques. Specifically, goodwill
impairment is determined using a two-step process. The first step of the
goodwill impairment test is used to identify potential impairment by comparing
the fair value of a reporting unit with its carrying amount, including
goodwill. If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is considered not impaired and the second step
of the impairment test is unnecessary. If the carrying amount of a reporting
unit exceeds its fair value, the second step of the goodwill impairment test is
performed to measure the amount of impairment loss, if any. The second step of
the goodwill impairment test compares the implied fair value of the reporting
units goodwill with the carrying amount of that goodwill. If the carrying
amount of the reporting units goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to that excess.
The implied fair value of goodwill is determined in the same manner as the
amount of goodwill recognized in a business combination. That is, the fair
value of the reporting unit is allocated to all of the assets and liabilities
of that unit (including any unrecognized intangible assets) as if the reporting
unit had been acquired in a business combination and the fair value of the
reporting unit was the purchase price paid to acquire the reporting unit. The
impairment test for other intangible assets not subject to amortization
consists of a comparison of the fair value of the intangible asset with its
carrying value. If the carrying value of the intangible asset exceeds its fair
value, an impairment loss is recognized in an amount equal to that excess. For
intangible assets subject to amortization, to the extent the fair value of the
intangible asset, determined based upon the estimated future cash flows
attributable to the asset, less estimated future cash outflows, are less than
the carrying amount, an impairment loss is recognized. The determination of
impairment of goodwill and other intangible assets requires significant
judgments and estimates.

Income Taxes

The domestic operating results of WCI are included in the consolidated
U.S. federal, state and local income tax returns of WCI or subsidiaries of AOL
Time Warner Inc. The foreign operations of WCI are subject to taxation by
foreign jurisdictions. Both domestic and foreign income tax provisions are
reflected in the consolidated statements of operations of WCI on a stand-alone
basis consistent with the liability method prescribed by FASB Statement No.
109, Accounting for Income Taxes. Under the liability method, deferred income
taxes reflect the tax effect of net operating loss and investment carryforwards
and the net tax effects of temporary differences between the carrying amount of
assets and liabilities for financial statement and income tax purposes, as
determined under enacted tax laws and rates. The financial effect of changes in
tax laws or rates is accounted for in the period of enactment.

Under a tax-sharing agreement between the Companies and AOL Time Warner,
the Companies pay to, or receive from, AOL Time Warner amounts equal to the
total domestic income taxes, or tax benefits, provided by, or attributable to,
the Companies. Accordingly, no domestic income tax balances are reflected in
the consolidated balance sheets of the Companies, except for amounts related to
certain book/tax differences created as a result of purchase accounting, and
for certain items reflected in shareholders equity.

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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Stock-Based Compensation

AOL Time Warner has various stock option plans under which it may grant
options to purchase AOL Time Warner common stock to employees of AOL Time
Warner, including employees of WCI. AOL Time Warner follows the provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS 123).
The provisions of FAS 123 allow companies to either expense the estimated fair
value of stock options or to continue to follow the intrinsic value method set
forth in Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25) but disclose the pro forma effects on net
income (loss) had the fair value of the options been expensed. AOL Time Warner
and WCI have elected to continue to apply APB 25 in accounting for its stock
option incentive plans.

In accordance with APB 25 and related interpretations, compensation
expense for stock options is recognized in income based on the excess, if any,
of the quoted market price of the stock at the grant date of the award or other
measurement date over the amount an employee must pay to acquire the stock.
Generally, the exercise price for stock options granted to employees of WCI
equals or exceeds the fair market value of AOL Time Warner common stock at the
date of grant, thereby resulting in no recognition of compensation expense by
AOL Time Warner, nor charged to WCI. For awards that generate compensation
expense as defined under APB 25, WCI calculates the amount of compensation
expense and recognizes the expense over the vesting period of the award.

In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure (FAS 148). FAS 148
provides alternative methods of transition for a voluntary change to the
recognition of the cost of the options in the statement of operations. FAS 148
also requires that disclosures of the pro forma effect of using the fair value
method of accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, FAS 148 requires disclosure
of the pro forma effect in interim financial statements. The transition and
annual disclosure requirements of FAS 148 were effective for fiscal years
ending after December 15, 2002. The interim disclosure requirements of FAS 148
are effective for interim periods beginning after December 15, 2002. The
adoption of the provisions of FAS 148 did not have an impact on WCIs
consolidated financial statements, however WCI has modified its disclosures as
provided for in the new standard.

Had compensation cost for AOL Time Warners stock option plans been
determined based on the fair value method set forth in FAS 123, WCIs allocable
share of compensation expense would have decreased its net income to the pro
forma amounts indicated below:

Three Months Ended March 31,2003
    
    2002(millions)Net income (loss), as reported
    
    $
    274
    
    
    $
    (27,530
    )Deduct: Total stock-based employee compensation expense
determined under fair-value-based method for all awards
    
    
    (32
    )
    
    
    (43
    )Pro forma net income (loss)
    
    $
    242
    
    
    $
    (27,573
    )


Comprehensive Income (Loss)

Comprehensive income (loss), which is reported on the accompanying
consolidated statement of shareholders equity as a component of accumulated
other comprehensive income (loss), consists of net income (loss) and other
gains and losses affecting shareholders equity that, under accounting
principles generally accepted in the United States are excluded from net income
(loss). For WCI, such items consist primarily of changes in the unfunded
accumulated benefit obligation of WCIs pension plans, unrealized gains and
losses on marketable equity investments and certain derivative financial
instruments and foreign currency translation gains and losses.

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

AccumulatedForeign
    
    Net
    
    Derivative
    
    Unfunded
    
    
    
    
    
    OtherCurrency
    
    Unrealized
    
    Financial
    
    Accumulated
    
    
    
    
    
    ComprehensiveTranslation
    
    Gains on
    
    Instrument
    
    Benefit
    
    
    
    
    
    IncomeGains (Losses)
    
    Securities
    
    Gains (Losses)
    
    Obligation
    
    Other
    
    (Loss)(in millions)Balance at December 31, 2001
    
    $
    (195
    )
    
    $
    9
    
    
    $
    8
    
    
    $
    
    
    
    $
    
    
    
    $
    (178
    )2002 activity
    
    
    131
    
    
    
    4
    
    
    
    (18
    )
    
    
    (56
    )
    
    
    2
    
    
    
    63Balance at December 31, 2002
    
    $
    (64
    )
    
    $
    13
    
    
    $
    (10
    )
    
    $
    (56
    )
    
    $
    2
    
    
    $
    (115
    )


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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Reclassifications

Certain reclassifications have been made to the prior years consolidated
financial statements to conform to the March 31, 2003 presentation.

2.  GOODWILL AND INTANGIBLE ASSETS

In January 2002, WCI adopted FAS 142, which requires companies to stop
amortizing goodwill and certain intangible assets with an indefinite useful
life. Instead, FAS 142 requires that goodwill and intangible assets deemed to
have an indefinite useful life be reviewed for impairment upon adoption of FAS
142 (January 1, 2002) and annually thereafter.

Under FAS 142, goodwill impairment is deemed to exist if the net book
value of a reporting unit exceeds its estimated fair value. WCIs reporting
units are generally consistent with the operating segments underlying the
segments identified in Note 10 Segment Information. This methodology differs
from WCIs previous policy, as permitted under accounting standards existing at
that time, of using undiscounted cash flows on an enterprisewide basis to
determine if goodwill is recoverable.

Upon adoption of FAS 142 in the first quarter of 2002, WCI and ATC
recorded one-time, noncash charges of $27.628 billion and $7.085 billion,
respectively, to reduce the carrying value of its goodwill. Such charges are
nonoperational in nature and are reflected as a cumulative effect of an
accounting change in the accompanying consolidated statement of operations. In
calculating the impairment charges, the fair value of the impaired reporting
units underlying the segments and the reporting units underlying the Companies
investments accounted for using the equity method of accounting, were estimated
using either a discounted cash flow methodology, market comparisons, recent
comparable transactions or a combination thereof.

The FAS 142 goodwill impairments are substantially all associated with
goodwill resulting from the Merger. The amount of the impairments primarily
reflect the decline in AOL Time Warners stock price since the Merger was
announced and valued for accounting purposes in January of 2000. Prior to
performing the review for impairment, FAS 142 required that all goodwill deemed
to be related to AOL Time Warner as a whole be assigned to all of the
Companies reporting units, including the reporting units of the acquirer. This
differs from the previous accounting rules where goodwill was assigned only to
the businesses of the company acquired. As a result, a portion of the goodwill
generated in the Merger, which was previously allocated to WCIs and ATCs
segments and the reporting units underlying the Companies investments
accounted for using the equity method of accounting, has been reallocated on a
relative fair value basis to other segments of AOL Time Warner.

A summary of changes in WCIs goodwill during the year ended December 31,
2002 and the quarter ended March 31, 2003, and total assets at March 31, 2003,
by business segment is as follows (millions):

GoodwillTotal AssetsJanuary 1,
    
    Acquisitions &
    
    Cumulative Effect of
    
    4th Quarter
    
    December 31,
    
    Acquisitions &
    
    March 31,
    
    March 31,2002
    

Adjustments(a)
    

Accounting
Change(e)
    
    Impairment
    
    2002
    
    Adjustments(b)
    
    2003
    
    2003Filmed Entertainment(c)
    
    $
    8,636
    
    
    $
    (8
    )
    
    $
    (3,691
    )
    
    $
    
    
    
    $
    4,937
    
    
    $
    712
    
    
    $
    5,649
    
    
    $
    16,033Networks(d)
    
    
    9,277
    
    
    
    64
    
    
    
    (2,144
    )
    
    
    
    
    
    
    7,197
    
    
    
    845
    
    
    
    8,042
    
    
    
    11,398Music
    
    
    5,477
    
    
    
    (35
    )
    
    
    (4,796
    )
    
    
    (646
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,788Corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,631Total
    
    $
    23,390
    
    
    $
    21
    
    
    $
    (10,631
    )
    
    $
    (646
    )
    
    $
    12,134
    
    
    $
    1,557
    
    
    $
    13,691
    
    
    $
    52,850_____________




|(a) |  | Includes goodwill created in acquisitions consummated in 2002, as well as
adjustments to WCIs preliminary purchase price allocation for several
acquisitions consummated in 2001.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Relates primarily to WCIs acquisition of Comcasts 27.64% interest in
the TWE content businesses as part of the TWE Restructuring. The additional
goodwill reflects a preliminary purchase price allocation, which is
subject to adjustment as WCI refines its valuation analysis.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | Includes impairments at Warner Bros. ($2.851 billion) and the Library
($840 million).
|--- |  | -------------------------------------------------------------------------------------



|(d) |  | Includes impairments at HBO ($1.933 billion) and The WB Network ($211
million).
|--- |  | -------------------------------------------------------------------------------



|(e) |  | The impairment
change does not include approximately $16.997 billion related to
goodwill impairments associated with equity investees.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------

The impairment charges are non-cash in nature and do not affect WCIs
liquidity or result in the non-compliance of any debt covenants.

32



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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

WCIs intangible assets and related accumulated amortization consisted of
the following (in millions):

As of March 31, 2003
    
    As of December 31, 2002Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    

Amortization(a)
    
    Net
    
    Gross
    

Amortization(a)
    
    NetIntangible assets subject to amortization:Music
catalogues and copyrights(b)
    
    $
    3,197
    
    
    $
    (399
    )
    
    $
    2,798
    
    
    $
    3,189
    
    
    $
    (323
    )
    
    $
    2,866Film library
    
    
    3,429
    
    
    
    (412
    )
    
    
    3,017
    
    
    
    3,429
    
    
    
    (366
    )
    
    
    3,063Customer lists and other intangible
assets
    
    
    56
    
    
    
    (25
    )
    
    
    31
    
    
    
    56
    
    
    
    (23
    )
    
    
    33Total
    
    $
    6,682
    
    
    $
    (836
    )
    
    $
    5,846
    
    
    $
    6,674
    
    
    $
    (712
    )
    
    $
    5,962Intangible assets not subject to
amortization:Brands, trademarks and other intangible
assets
    
    $
    2,997
    
    
    $
    (117
    )
    
    $
    2,880
    
    
    $
    2,997
    
    
    $
    (117
    )
    
    $
    2,880Total
    
    $
    2,997
    
    
    $
    (117
    )
    
    $
    2,880
    
    
    $
    2,997
    
    
    $
    (117
    )
    
    $
    2,880




---

|(a) |  | Accumulated amortization for intangible assets not subject to
amortization relates to amortization expense recognized prior to the
adoption of FAS 142.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | During 2003, the useful life related to music catalogues and copyrights
was reduced to 15 years from 20 years.
|--- |  | --------------------------------------------------------------------------------------------------------------

WCI recorded amortization expense of $111 million for the quarter ended
March 31, 2003 compared to $90 million for the quarter ended March 31, 2002.
Based on the current amount of intangible assets subject to amortization, the
estimated amortization expense for each of the succeeding 5 years are as
follows: 2003: $420 million; 2004: $420 million; 2005: $420 million; 2006: $444
million; and 2007: $444 million. As acquisitions and dispositions occur in the
future, and as purchase price allocations are finalized, these amounts may
vary.

During the quarter ended of March 31, 2003, WCI acquired $2 million in
intangible assets that are subject to an amortization period of
15 years.

3.  MERGER AND RESTRUCTURING COSTS

Merger Costs Capitalized as Cost of Acquisition

In connection with the Merger, WCI reviewed its operations and implemented
several plans to restructure its operations (restructuring plans). As part of
the restructuring plans, WCI recorded a restructuring liability of $477 million
during 2001. The restructuring accruals relate to costs to exit and consolidate
certain activities of WCI, as well as costs to terminate employees across
various business units. Such amounts were recognized as liabilities assumed in
the purchase business combination and included in the allocation of the cost to
acquire Time Warner. Accordingly, such amounts resulted in additional goodwill
being recorded in connection with the Merger.

Of the total restructuring costs, approximately $316 million related to
work force reductions and represented employee termination benefits. Employee
termination costs occurred across most WCI business units and ranged from
senior executives to line personnel. The total number of employees initially
identified to be involuntarily terminated or relocated approximated 2,900. As
of December 31, 2002, all of the terminations had occurred. Because certain
employees can defer receipt of termination benefits, cash payments may continue
after the employee has been terminated (generally for periods up to 24 months).
Employee termination payments of $67 million were made in 2001, $101 million
were made in 2002 ($40 million of which was paid in the first quarter of 2002)
and $14 million were made in the first quarter of 2003. In addition during
2002, there were non-cash reductions in the restructuring accrual of
$55 million, as actual employee termination payments were less than amounts
originally estimated. As of March 31, 2003, the remaining liability of
approximately $79 million was primarily classified as a current liability in
the accompanying consolidated balance sheet.

The restructuring charge also includes approximately $161 million
associated with exiting certain activities. Specifically, WCI has exited
certain under-performing operations, including the Studio Stores operations
included in the Filmed Entertainment segment. The restructuring accrual
associated with other exit activities specifically includes incremental costs
and contractual

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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

termination obligations for items such as leasehold termination payments
and other facility exit costs incurred as a direct result of these plans, which
will not have future benefits. Payments related to exit activities were
approximately $78 million in 2001, $28 million in 2002 ($25 million of which was
paid in the first quarter of 2002) and $5 million in the first quarter of 2003.
As of March 31, 2003, the remaining liability of $50 million was
primarily classified as a current liability in the accompanying consolidated
balance sheet.

Selected information relating to the restructuring costs included in the
allocation of the cost to acquire Time Warner is as follows (in millions):

EmployeeTermination
    
    Exit Costs
    
    TotalInitial accruals
    
    $
    316
    
    
    $
    161
    
    
    $
    477Cash paid  2001
    
    
    (67
    )
    
    
    (78
    )
    
    
    (145
    )Restructuring liability as of December 31, 2001
    
    
    249
    
    
    
    83
    
    
    
    332Cash paid  2002
    
    
    (101
    )
    
    
    (28
    )
    
    
    (129
    )Noncash
reductions(a)  2002
    
    
    (55
    )
    
    
    
    
    
    
    (55
    )Restructuring liability as of December 31, 2002
    
    
    93
    
    
    
    55
    
    
    
    148Cash paid  2003
    
    
    (14
    )
    
    
    (5
    )
    
    
    (19
    )Restructuring liability as of March 31, 2003
    
    $
    79
    
    
    $
    50
    
    
    $
    129




|(a) |  | Noncash additions (reductions) represent adjustments to the restructuring
accrual, and a corresponding increase (decrease) in goodwill, as actual
costs related to employee terminations and other exit costs were more
(less) than originally estimated.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Restructuring Costs

During the year ended December 31, 2002, WCI incurred restructuring costs
of $8 million that related to various employee and contractual terminations,
including certain contractual employee termination benefits. WCI had recorded
approximately $20 million of restructuring costs (including $13 million
incurred between the music operations November 30 year-end and WCIs December
31, 2002 year-end), which were partially offset by the reversal
of a previously recorded accrual of $12 million as a result of it no
longer being probable that the related contractual employee
termination benefits would be paid by WCI (Note 1).

Included in the 2002 restructuring charge was approximately $16 million
($4 million of which was expensed in the first quarter) related to work force
reductions and represented employee termination benefits. The number of
employees expected to be terminated was approximately 165. As of March 31,
2003, approximately 55 of the terminations had occurred. The remaining 110
terminations are expected to occur by the end of 2003. The severed employees
principally related to WCIs U.S. and Canadian music distribution operations.
The remaining $4 million (including $1 million of which was expensed in the
first quarter) primarily related to incremental costs and contractual
termination obligations for items such as lease termination payments and other
facility exit costs. As of March 31, 2003, $4 million has been paid against
these accruals in 2002 (none of which was paid in the first quarter), and $9
million in the first quarter of 2003. The remaining $7 million is primarily
classified as a current liability in the accompanying consolidated statement of
operations.

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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Employee
    
    
    
    
    
    OtherTerminations
    
    Exit Costs
    
    TotalInitial Accruals
    
    $
    16
    
    
    $
    4
    
    
    $
    20Cash paid  2002
    
    
    (3
    )
    
    
    (1
    )
    
    
    (4
    )Remaining liability as of December 31, 2002
    
    
    13
    
    
    
    3
    
    
    
    16Cash paid  2003
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )Remaining liability as of March 31, 2003
    
    $
    4
    
    
    $
    3
    
    
    $
    7


4.  INVESTMENTS, INCLUDING AVAILABLE-FOR-SALE SECURITIES

Investment Gains

During the three months ended March 31, 2003, WCI recognized gains from
the sale of certain investments of approximately $36 million, including a $35
million gain from the sale of WCIs equity interest in an international theater
chain.

Investment Write-Downs

Over the past few years, the United States economy has experienced a broad
decline in the public equity markets, particularly in technology stocks,
including investments held in WCIs and ATCs portfolios. Similarly, the
Companies have experienced significant declines in the value of certain
privately held investments and investments accounted for using the equity
method of accounting. As a result, the Companies recorded non-cash pretax
charges to reduce the carrying value of certain investments that experienced
other-than-temporary declines. These charges were approximately $18 million for
WCI and $0 for ATC in the first quarter of 2003 and $258 million for WCI
(excluding a $10 million gain related to market fluctuations on equity
derivative instruments) and $175 million for ATC in the first quarter of 2002
and are included in other income (expense), net in the accompanying
consolidated statements of operations. The portion of the above charges
relating to publicly traded securities was $1 million in the first quarter of
2003 and $255 in the first quarter of 2002 for WCI and $0 in the first quarter
of 2003 and $175 million in the first quarter of 2002 for ATC. The significant
components of these charges are discussed in detail below.

Time Warner Telecom

WCI has an approximate 20% interest and ATC has an approximate 14%
interest in Time Warner Telecom. The value of both WCIs and ATCs investment
was adjusted upward in the Merger by approximately $992 million and $682
million, respectively, to their estimated fair values. Since that time, Time
Warner Telecoms share price declined significantly and at December 31, 2001,
the decline had met the 20% criteria. The Companies also reviewed qualitative
factors in accordance with its investment policy and determined that the
decline in value as of December 31, 2001 was other than temporary; therefore,
impairment charges of $542 million for WCI and $372 million for ATC were
recognized in the fourth quarter of 2001 based upon the closing value of Time
Warner Telecom common stock as of December 31, 2001.

During 2002, the fair value of the Companies investments in Time Warner
Telecom continued to decline, resulting in additional impairment charges for
WCI and ATC of $356 million ($255 million in the first quarter) and $244
million ($175 million in the first quarter), respectively, to reduce the
carrying value of the investment to fair value, which was determined by the
quarter ending values of Time Warner Telecom common stock. As of December 31,
2002, the carrying value of the Companies investments in Time Warner Telecom
had been reduced to $0 as a result of the impairment charges and the
Companies shares of Time Warner Telecoms losses pursuant to the equity
method of accounting. The Companies do not have any funding commitments
related to Time Warner Telecom.

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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Equity-Method Investments

At December 31, 2002, investments accounted for using the equity method of
accounting and the voting ownership percentage held by WCI included: TWC Inc.
(45% owned), Comedy Partners, L.P. (50% owned), and Courtroom Television
Network LLC (50% owned). A summary of combined financial information
of the equity investees of WCI is set forth below:

Year EndedDecember 31, 2002(millions)Operating Results:Revenues
    
    $
    8,946Operating loss
    
    
    (9,132
    )Net loss
    
    
    (38,474
    )Balance Sheet:Current assets
    
    
    2,438Total assets
    
    
    41,371Current liabilities
    
    
    2,397Long-term debt
    
    
    8,199Total liabilities
    
    
    26,163Total shareholders equity or partners capital
    
    
    15,208


The above table represents the combined financial information of entities
in which WCI has an investment accounted for using the equity method of
accounting. These amounts are not the amounts reflected on the WCIs
accompanying consolidated financial statements. Consistent with WCIs
accounting policy for investments accounted for using the equity method of
accounting, as described in Note 1, WCI has included $17.445 billion in
Investment in TWC Inc. and Investments, including available-for-sale
securities on the accompanying consolidated balance sheet as of December 31,
2002. For the three months ended March 31, 2003, WCI has recorded
$45 million of income in other income (expense), net, in the accompanying
consolidated statement of operations, representing WCIs share in the pretax
income (loss) of the investees. In April 2003, WCI agreed to
sell its 50% ownership interest in Comedy Central for $1.225 billion
in cash, and this transaction is expected to close in the second
quarter of 2003.

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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

5. INVENTORIES AND FILM COSTS

Inventories and film costs consist of:

March 31,2003
    
    December 31,2002(millions)Programming costs, less amortization
    
    $
    1,373
    
    
    $
    1,314Merchandise and recorded music
    
    
    324
    
    
    
    285Film costs-Theatrical:Released, less amortization
    
    
    540
    
    
    
    602Completed and not released
    
    
    224
    
    
    
    96In production
    
    
    407
    
    
    
    470Development and pre-production
    
    
    46
    
    
    
    39Film costs-Television:Released, less amortization
    
    
    213
    
    
    
    160Completed and not released
    
    
    204
    
    
    
    165In production
    
    
    33
    
    
    
    71Development and pre-production
    
    
    9
    
    
    
    5Total
inventories and film costs(a)
    
    
    3,373
    
    
    
    3,207Less current portion of
inventory(b)
    
    
    1,094
    
    
    
    1,002Total noncurrent inventories and film costs
    
    $
    2,279
    
    
    $
    2,205




|   
|---
|(a)



|(b) |  | Current inventory as of March 31, 2003 and December 31, 2002 is
comprised primarily of programming inventory at the Networks segment
($770 million and $717 million, respectively) and videocassettes and
DVDs at the Filmed Entertainment segment ($193 million and $154 million,
respectively) and compact discs at the Music segment ($131 million and
$131 million, respectively)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of December 31, 2002, approximately 93% of unamortized film costs for
released films, excluding the Library, is expected to be amortized within three
years. Approximately $786 million of released and completed and not released
film costs are expected to be amortized during the next twelve months.

6.  OTHER FINANCING ARRANGEMENTS

Borrowing Arrangements with TW Companies

During 2002, WCI and ATC each had a revolving credit agreement with TW
Companies. On March 31, 2003, ATCs intercompany facility was terminated. The
WCI facility was modified to allow WCI to both borrow from and lend to TW
Companies on an as needed basis. The revised facility has no stated maturity
date and no specified limit on the amount lent or borrowed by either entity.
Interest on any outstanding borrowings is payable in amounts and at intervals
consistent with AOL Time Warners 5-year revolving credit facility (or any
successor facility thereto).

Debt Guarantees

WCI
and ATC each have guaranteed a portion of approximately $3.851
billion of TWEs public and private debt and accrued interest at March 31, 2003, based on the
relative fair value of the net assets WCI and ATC (or their
predecessors)
contributed to TWE prior to the TWE Restructuring. Such indebtedness is recourse to WCI and ATC only to the
extent of their respective guarantee. The indenture pursuant to which TWEs notes and
debentures have been issued (the Indenture) requires the consent of a
majority of such holders to effect a termination of these guarantees; however, the Indenture
permits WCI and ATC to engage in mergers and consolidations, and there are no
restrictions on the ability of WCI or ATC to transfer assets, other
than its ownership interests in TWE or TWC Inc., to parties that are not guarantors.

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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

The portion of TWE debt and accrued interest at March 31, 2003 that was
guaranteed by WCI and ATC, individually and on a consolidated basis, is set
forth below:

Total Guaranteed byWCI and ATC%
    
    Amount(dollars in millions)WCI
    
    
    59.27
    
    
    $
    2,283ATC
    
    
    40.73
    
    
    
    1,568Total
    
    
    100.00
    
    
    $
    3,851


Other Financing Arrangements

From time to time, WCI enters into various other financing arrangements
with special purpose entities (SPEs). These arrangements include facilities
which provide for the accelerated receipt of cash on certain accounts
receivable and backlog licensing contracts. WCI employs these arrangements
because they provide a cost-efficient form of financing, including certain tax
benefits, as well as an added level of diversification of funding
sources. These arrangements are cost-efficient for WCI since the assets
securing the financing are held by legally separate,
bankruptcy-remote SPEs
and provide direct security for the funding being provided. These facilities
generally have relatively short-term maturities. The assets and financing associated with these arrangements, which
are discussed in more detail in the following paragraphs, generally qualify for
off-balance sheet treatment.

Accounts Receivable Securitization Facilities

During 2002, WCI participated in two of AOL Time Warners accounts
receivable securitization facilities that provided for the accelerated receipt
of $800 million of cash on available accounts receivables, including a $350
million accounts receivable securitization facility that matured during the
fourth quarter of 2002 and was not renewed. As of December 31, 2002, WCI had
no unused capacity under its remaining $450 million facility. In connection
with each of these securitization facilities, WCI sells, on a revolving and
nonrecourse basis, certain of its accounts receivables (Pooled Receivables)
to a qualifying SPE, which in turn sells a percentage ownership interest in the
Pooled Receivables to third-party commercial paper conduits sponsored by
financial institutions. These securitization transactions are accounted for as
a sale in accordance with FAS 140, because WCI relinquished control of the
receivables. Accordingly, accounts receivable sold under these facilities are
excluded from receivables in the accompanying consolidated balance sheet.

As proceeds for the accounts receivable sold to the qualifying SPE, WCI
receives cash, for which there is no obligation to repay, and an
interest-bearing retained beneficial interest, which is included in receivables
on the accompanying consolidated balance sheet. In addition, WCI services the
Pooled Receivables on behalf of the qualifying SPE. Income received by WCI in
exchange for this service is equal to the prevailing market rate for such
services and has not been material in any period. The retained beneficial
interest, which has been adjusted to reflect the portion that is not expected
to be collectible, bear an interest rate that varies with the prevailing market
interest rates. For this reason, and because the accounts receivables
underlying the retained ownership interest that are sold to the qualifying SPE
are generally short term in nature, the fair value of the notes receivable
approximated its carrying value at December 31, 2002. However, notes receivable
may become uncollectible to the extent the qualifying SPE has credit losses and
operating expenses. The retained beneficial interest related to the sale of
Pooled Receivables to a qualifying SPE is reflected in account receivables, net
on WCIs consolidated balance sheet and was $591 million at December 31, 2002.
In 2002, additional net proceeds received from WCIs accounts receivable by
utilizing its accounts receivable securitization programs were $141 million.

In January 2003, the FASB issued FIN 46, which requires variable interest
entities (commonly referred to as SPEs) to be consolidated by the primary
beneficiary of the entity if certain criteria are met. FIN 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 become effective for WCI during the
third quarter of 2003. Although WCI has not completed its review, WCI
anticipates that the adoption of FIN 46 will not have a significant impact on
its consolidated financial statements.

Backlog Securitization Facility

WCI also has a backlog securitization facility, which effectively provides
for the accelerated receipt of up to $500 million of cash on available
licensing contracts. Assets securitized under this facility consist of cash
contracts for the licensing of theatrical

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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

and television product for broadcast network and syndicated television
exhibition, under which revenues have not been recognized because such product
is not available for telecast until a later date (Backlog Contracts). In
connection with this securitization facility, WCI sells, on a revolving and
nonrecourse basis, certain of its Backlog Contracts (Pooled Backlog
Contracts) to a qualifying SPE, which in turn sells a percentage ownership
interest in the Pooled Backlog Contracts to a third-party commercial paper
conduit sponsored by a financial institution. As of March 31, 2003 and December
31, 2002, WCI did not have any unused capacity under this facility.

Because the Backlog Contracts securitized under this facility consist of
cash contracts for the licensing of theatrical and television product that have
already been produced, the recognition of revenue for such completed product is
dependent only upon the commencement of the availability period for telecast
under the terms of the licensing agreements. Accordingly, the proceeds received
under the program are classified as deferred revenues in long-term liabilities
in the accompanying consolidated balance sheet. The amount of related deferred
revenue reflected on WCIs accompanying consolidated balance sheet, related to
the backlog securitization facility, was $659 million at
March 31, 2003 (of which $22 million was classified as
current) and $705 million at December 31, 2002 (of which
$19 million was classified as current). Total filmed entertainment backlog contracts
outstanding were approximately $3.4 billion at March 31, 2003 and $3.2 billion
at December 31, 2002.

Rating Triggers and Financial Covenants

The
financing arrangements with certain SPEs discussed above contain customary covenants. A breach of such
covenants in the financing arrangements that continues beyond any grace period
constitutes a termination event which can limit the facility as a future
source of liquidity; however, there would be no claims on WCI for the
receivables or backlog contracts previously sold. WCI is not subject
to any other covenants as a result of the other financing
arrangements discussed above.

As of March 31, 2003 and through the date of this filing, WCI was in
compliance with all covenants. Management does not foresee that WCI will have
any difficulty complying with the covenants currently in place in the
foreseeable future.

7.  INCOME TAXES

Domestic and foreign pretax income (loss) are as follows:

Three Months Ended March 31,2003
    
    2002WCI
    
    ATC
    
    WCI
    
    ATC(millions)Domestic
    
    $
    338
    
    
    $
    114
    
    
    $
    (14
    )
    
    $
    (153
    )Foreign
    
    
    121
    
    
    
    
    
    
    
    112
    
    
    
    Total
    
    $
    459
    
    
    $
    114
    
    
    $
    98
    
    
    $
    (153
    )


Income taxes (benefits) are as set forth below:

Three Months Ended March 31,2003
    
    2002WCI
    
    ATC
    
    WCI
    
    ATC(millions)FederalCurrent
    
    $
    99
    
    
    $
    38
    
    
    $
    54
    
    
    $
    7Deferred
    
    
    (27
    )
    
    
    
    
    
    
    (108
    )
    
    
    (56
    )State and LocalCurrent
    
    
    39
    
    
    
    9
    
    
    
    22
    
    
    
    1Deferred
    
    
    (7
    )
    
    
    
    
    
    
    (27
    )
    
    
    (14
    )ForeignCurrent(a)
    
    
    85
    
    
    
    
    
    
    
    66
    
    
    
    Deferred
    
    
    (4
    )
    
    
    
    
    
    
    (7
    )
    
    
    Total
    
    $
    185
    
    
    $
    47
    
    
    $
    
    
    
    $
    (62
    )




---

|(a) |  | Includes foreign withholding taxes set forth below.
|--- |  | ---------------------------------------------------

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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Foreign withholding taxes included in the foreign tax provision are as
follows:

WCI(millions)2003
    
    $
    362002
    
    
    34


No U.S. income or foreign withholding taxes have been recorded by WCI on
the permanently reinvested earnings of foreign subsidiaries totaling
approximately $1 billion at March 31, 2003. If such earnings were to be
repatriated, it is expected that any additional U.S. income tax would be offset
by the utilization of the accompanying foreign tax credits.

The differences between the income tax (tax benefit) expected for WCI at
the U.S. federal statutory income tax rate and the total income taxes provided
are as follows:

Three
Months Ended March 31,2003
    
    2002(millions)Taxes on income at U.S. federal statutory rate
    
    $
    161
    
    
    $
    34Nondeductible expenses
    
    
    19
    
    
    
    3Foreign income taxed at different rates, net of U.S. foreign tax credits
    
    
    (15
    )
    
    
    (34
    )State and local taxes, net
    
    
    20
    
    
    
    (3
    )$
    185
    
    
    $
    


The relationship between income taxes and income before income taxes for
ATC is principally affected by certain financial statement expenses that are
not deductible for income tax purposes.

As a result of the application of the purchase method of accounting,
certain intangible assets and investments accounted for under the equity method
of accounting were adjusted to their fair value. Since the
tax basis of these assets remained unchanged as a result of the Merger, the
Companies recognized deferred taxes which
relate to recorded music and film intangibles and equity investments in 2003
and 2002, respectively.

Components
of WCIs net deferred tax liability of $3.3 billion at
March 31, 2003 are attributable to differences in accounting for depreciable and amortizable assets for
financial statement and income tax purposes.

8.  BENEFIT PLANS

WCI and its subsidiaries have defined benefit pension plans covering most
domestic employees. Pension benefits are based on formulas that reflect the
employees years of service and compensation levels during their employment
period. AOL Time Warners common stock value represents approximately 5% of
fair value of plan assets at December 31, 2002. After consummation of the
Merger, participation in WCIs defined benefit pension plans was limited to
employees who previously participated in these plans. A summary of activity for
WCIs defined benefit pension plans is as follows:

Year EndedDecember 31, 2002(millions)Components of Pension ExpenseService cost
    
    $
    13Interest cost
    
    
    21Expected return on plan assets
    
    
    (21
    )Net amortization and deferral
    
    
    3Total pension expense
    
    $
    16


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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

December 31, 2002(millions)Change in Projected Benefit ObligationProjected benefit obligation at beginning of period
    
    $
    288Service cost
    
    
    13Interest cost
    
    
    21Actuarial loss
    
    
    30Benefits paid
    
    
    (12
    )Amendments to plan provisions
    
    
    27Projected benefit obligation at end of period
    
    $
    367Change in Plan AssetsFair value of plan assets at
beginning of period
    
    $
    248Actual return on plan assets
    
    
    (36
    )Employer contribution
    
    
    27Benefits paid
    
    
    (11
    )Fair value of plan assets at
end of period(a)
    
    $
    228Underfunded projected benefit
obligation
    
    $
    (139
    )Additional
minimum liability(b)
    
    
    (113
    )Unrecognized actuarial
(gain) loss(c)
    
    
    150Unrecognized prior service cost
    
    
    30Prepaid (accrued) pension expense
    
    $
    (72
    )




---

|(a) |  | Includes approximately 4 million shares of AOL Time Warner common stock
at December 31, 2002.
|--- |  | ---------------------------------------------------------------------------------------------



|(b) |  | The additional minimum liability is primarily offset by a $83 million
reduction of other comprehensive income and a $30 million intangible
asset in the consolidated balance sheet.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | Reflects primarily an actual loss on plan assets that significantly
exceeded the assumed rate of return in 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------

December 31, 2002Weighted-Average Pension AssumptionsDiscount rate
    
    
    6.75
    %Expected return on plan assets
    
    
    9.00
    %Rate of compensation increase
    
    
    4.50
    %


Included above are projected benefit obligations and accumulated benefit
obligations for unfunded defined benefit pension plans of $46 million and $44
million as of December 31, 2002, respectively. As of December 31, 2002, the
projected benefit obligation, accumulated benefit obligation, and fair value of
plan assets were $367 million, $300 million, and $228 million, respectively,
for plans where the accumulated benefit obligation exceeded the fair value of
plan assets.

Certain domestic employees of WCI participate in multi-employer pension
plans as to which the expense amounted to $26 million in 2002. Employees of
WCIs operations in foreign countries participate to varying degrees in local
pension plans, which in the aggregate are not significant.

Certain employees of WCI participate in defined benefit plans of AOL Time
Warner. Pension benefits under those plans are based on formulas that reflect
the employees years of service and compensation levels during their employment
period. For the year ended December 31, 2002, WCI made no contribution and
recognized expense of $16 million related to these plans.

WCI employees also generally participate in certain defined contribution
plans, including savings and profit sharing plans, as to which the expense
amounted to $16 million in 2002. Contributions to the savings plans are based
upon a percentage of the employees elected contributions.

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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

9.  DERIVATIVE INSTRUMENTS

WCI participates in AOL Time Warners hedging program and uses derivative
financial instruments principally to manage the risk that changes in foreign
currency exchange rates will affect the amount of unremitted or future
royalties and license fees to be received from the sale of U.S. copyrighted
products abroad and to manage equity price risk in WCIs investment holdings.
The following is a summary of WCIs foreign currency risk management strategy
and the effect of this strategy on WCIs consolidated financial statements.

Foreign Currency Risk Management

AOL Time Warner uses foreign exchange contracts primarily to hedge the
risk that unremitted or future royalties and license fees owed to WCI domestic
companies for the sale or anticipated sale of U.S. copyrighted products abroad
may be adversely affected by changes in foreign currency exchange rates.
Foreign exchange contracts are used primarily by WCI to hedge the risk that
unremitted or future royalties and license fees owed to WCI domestic companies
for the sale or anticipated sale of U.S. copyrighted products abroad may be
adversely affected by changes in foreign currency exchange rates. Similarly,
AOL Time Warner enters into foreign exchange contracts to hedge WCIs film
production costs abroad. As part of its overall strategy to manage the level of
exposure to the risk of foreign currency exchange rate fluctuations, primarily
exposure to changes in the value of the British pound, Japanese yen, and
European currency, AOL Time Warner hedges a portion of its foreign currency
exposures anticipated over the ensuing fifteen-month period (the hedging
period), including those related to WCI. The hedging period for royalties and
license fees covers revenues expected to be recognized over the ensuing
twelve-month period, however there is often a lag between the time that revenue
is recognized and the transfer of foreign-denominated revenues back into U.S.
dollars. Therefore, the hedging period covers a fifteen-month period. To hedge
this exposure, AOL Time Warner uses foreign exchange contracts that generally
have maturities of three months to fifteen months to provide continuing
coverage throughout the hedging period. WCI is reimbursed by or reimburses AOL
Time Warner for contract gains and losses related to WCIs foreign currency
exposure. At December 31, 2002, WCI had effectively hedged approximately 75% of
the estimated net foreign currency exposures that principally relate to
anticipated cash flows for royalties and license fees to be remitted to the
U.S. over the hedging period.

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

At December 31, 2002, AOL Time Warner had contracts for the sale of $1.588
billion and the purchase of $1.341 billion of foreign currencies at fixed
rates. Of AOL Time Warners $247 million net sale contract position, $1.424
billion of the foreign exchange sale contracts and $1.162 billion of the
foreign exchange purchase contracts related to WCIs foreign currency exposure.
Included in WCIs foreign currency exposure were net contracts for the sale of
$45 million of Canadian dollars, $155 million of Japanese yen, $428 million of
European currency and net contracts for the purchase of $356 million of the
British pound. WCI had deferred approximately $18 million of net losses on
foreign exchange contracts at December 31, 2002, which is expected to be
substantially recognized in income over the next twelve months. For the year
ended December 31, 2002, WCI recognized $4 million in gains on foreign exchange
contracts, which were or are expected to be largely offset by corresponding
decreases and increases, respectively, in the dollar value of foreign currency
royalty and license fee payments that have been or are anticipated to be
received in cash from the sale of U.S. copyrighted products abroad. During
2002, WCI did not recognize any gains or losses as a result of the
discontinuance of cash flow hedges because it was probable that the original
forecasted transaction would not occur within the specified time period. AOL
Time Warner places foreign currency contracts with a number of major financial
institutions in order to minimize counterparty credit risk.

10.  SEGMENT INFORMATION

WCI classifies its business interests into three fundamental areas: Filmed
Entertainment,consisting principally of interests in filmed entertainment and
television production; Networks,consisting principally of interests in cable
television and broadcast network programming; and Music, consisting principally
of interests in recorded music, music publishing and CD and DVD manufacturing.

Information as to the operations of WCI in each of its business segments
is set forth below based on the nature of the products and services offered.
WCI evaluates performance based on several factors, of which the primary
financial measure is operating

42



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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

income (loss) before non-cash depreciation of assets, amortization of
intangible assets and impairment write-downs related to goodwill and intangible
assets (EBITDA). Additionally, WCI has provided a summary of operating income
(loss) by segment.

The accounting policies of the business segments are the same as those
described in the summary of significant accounting policies (Note 1).
Intersegment sales are accounted for at fair value as if the sales were to
third parties.

Three Months Ended March 31,2003
    
    2002(millions)RevenuesFilmed Entertainment
    
    $
    1,960
    
    
    $
    1,773Networks
    
    
    1,051
    
    
    
    782Music
    
    
    914
    
    
    
    947Intersegment elimination
    
    
    (226
    )
    
    
    (170
    )Total revenues
    
    $
    3,699
    
    
    $
    3,332


Intersegment Revenues

In the normal course of business, the WCI segments enter into
transactions with one another. The most common types of intersegment
transactions include:



| |  | The Filmed Entertainment segment generating content revenue by licensing television and theatrical programming to the
Networks segment;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | The Networks segment generating advertising revenue by cross-promoting the products and services of all WCI segments;
|- |  | ---------------------------------------------------------------------------------------------------------------------



| |  | The Music segment generating other revenue by manufacturing DVDs for the Filmed Entertainment segment.
|- |  | ------------------------------------------------------------------------------------------------------

These intersegment transactions are recorded by each segment at fair
value as if the transactions were to third parties and, therefore, impact
segment performance. While intersegment transactions are treated like
third-party transactions to determine segment performance, the revenues (and
corresponding expenses recognized by the segment that is counterparty to the
transaction) are eliminated in consolidation and, therefore, do not themselves
impact consolidated results. Revenues recognized by WCIs segments on
intersegment transactions are as follows:

Three Months Ended March 31,2003
    
    2002(millions)Intersegment Revenues:Filmed Entertainment
    
    $
    104
    
    
    $
    101Networks
    
    
    12
    
    
    
    7Music
    
    
    110
    
    
    
    62Total intersegment revenues
    
    $
    226
    
    
    $
    170


Three Months Ended March 31,2003
    
    2002(millions)EBITDAFilmed Entertainment
    
    $
    235
    
    
    $
    190Networks
    
    
    220
    
    
    
    169Music
    
    
    87
    
    
    
    91Corporate
    
    
    (17
    )
    
    
    (12
    )Total EBITDA
    
    $
    525
    
    
    $
    438


43



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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Three Months Ended March 31,2003
    
    2002(millions)Depreciation of Property, Plant and EquipmentFilmed Entertainment
    
    $
    19
    
    
    $
    18Networks
    
    
    6
    
    
    
    7Music
    
    
    38
    
    
    
    28Corporate
    
    
    2
    
    
    
    2Total depreciation
    
    $
    65
    
    
    $
    55


Three Months Ended March 31,2003
    
    2002(millions)Amortization of Intangible AssetsFilmed Entertainment
    
    $
    45
    
    
    $
    44Networks
    
    
    3
    
    
    
    3Music
    
    
    63
    
    
    
    43Total amortization
    
    $
    111
    
    
    $
    90


Three
Months Ended March 31,2003
    
    2002(millions)Operating Income (Loss)Filmed Entertainment
    
    $
    171
    
    
    $
    128Networks
    
    
    211
    
    
    
    159Music
    
    
    (14
    )
    
    
    20Corporate
    
    
    (19
    )
    
    
    (14
    )Total operating income
    
    $
    349
    
    
    $
    293


March 31, 2003
    
    December 31, 2002(millions)AssetsFilmed Entertainment
    
    $
    16,033
    
    
    $
    16,014Networks
    
    
    11,398
    
    
    
    10,619Music
    
    
    5,788
    
    
    
    6,080Corporate(a)
    
    
    19,631
    
    
    
    17,769Total Assets
    
    $
    52,850
    
    
    $
    50,482




|   
|---
|(a)

11.  COMMITMENTS AND CONTINGENCIES

Commitments

WCIs total rent expense amounted to $182 million in 2002. The minimum net
rental commitments under noncancellable long-term operating leases are:
2003-$162 million; 2004-$156 million; 2005-$157 million; 2006-$151 million;
2007-$150 million; and after 2007-$779 million. Additionally, WCI recognized
sublease income of approximately $19 million in 2002 and as of December 31,
2002, WCI had future sublease income commitments of approximately $155 million.

Firm Commitments

WCI
has commitments under certain firm contractual arrangements
(firm commitments) to make future payments for goods and
services. These firm commitments secure the future rights to various
assets and services to be used in the normal course of operations.
For example, WCI is contractually committed to make certain minimum
lease payments for the use of property under operating lease
agreements or make payments to music artists for future album
deliveries. In accordance with current accounting rules, the future
rights and obligations pertaining to firm commitments contracts are
not reflected as assets or liabilities on the accompanying
consolidated balance sheet.

The
following table summarizes WCIs material firm commitments at
December 31, 2002 and the timing and effect that such
obligations are expected to have on WCIs liquidity and cash flow in
future periods. Amounts are not materially different at
March 31, 2003. It should be noted that although there are a
number of firm commitments made by WCI in the normal course of
business, the following table represents the more significant of
those firm commitments. WCI expects to fund the firm commitments with
operating cash flow generated in the normal course of business.

44



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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

2007Firm Commitments and Outstanding Debt
    
    2003
    
    2004-2006
    
    and thereafter
    
    Total(millions)Programming and production deals
    
    $
    1,261
    
    
    $
    1,858
    
    
    $
    2,715
    
    
    $
    5,834Net operating leases
    
    
    162
    
    
    
    464
    
    
    
    929
    
    
    
    1,555Talent contracts and other firm commitments
    
    
    259
    
    
    
    383
    
    
    
    118
    
    
    
    760Total firm commitments
    
    
    1,682
    
    
    
    2,705
    
    
    
    3,762
    
    
    
    8,149Total principal outstanding on long-term debt
    
    
    5
    
    
    
    2
    
    
    
    880
    
    
    
    887Total firm commitments and outstanding debt
    
    $
    1,687
    
    
    $
    2,707
    
    
    $
    4,642
    
    
    $
    9,036


Following is a description of WCIs firm commitments at December 31, 2002:



| |  | The Networks segment (HBO and The WB Network) enters into agreements with studios to air movies and licensed and original series they produce.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  | Operating lease obligations primarily relate to the minimum lease rental obligations for WCIs real estate and operating equipment in various locations around
the world.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Contingent Commitments

WCI
also has certain contractual arrangements that would require WCI to
make payments or provide funding if certain circumstances occur
(contingent commitments). For example, WCI has guaranteed
certain lease obligations of joint venture investees. In this
circumstance, WCI would be required to make payments due under the
lease to the lessor in the event of default by the joint venture
investee. WCI does not expect that these contingent commitments will
result in any material amounts being paid by WCI in the foreseeable
future.

The following table summarizes
separately WCIs contingent commitments at December 31,
2002. Amounts are not materially different at March 31, 2003.
The timing of amounts presented in the table represents when the
maximum contingent commitment will expire and does not necessarily
mean that WCI expects to incur an obligation to make any payments
during that timeframe.

Expiration of CommitmentsTotal
    
    
    
    
    
    
    
    
    
    2007Nature of Contingent Commitments at December 31, 2002
    
    Commitments
    
    2003
    
    2004-2006
    
    and thereafter(millions)Guarantees
    
    $
    4,156
    
    
    $
    62
    
    
    $
    310
    
    
    $
    3,784Letters of credit and other contingent commitments
    
    
    42
    
    
    
    10
    
    
    
    1
    
    
    
    31Total contingent commitments
    
    $
    4,198
    
    
    $
    72
    
    
    $
    311
    
    
    $
    3,815


Prior
to the TWE restructuring, TWE had various contingent commitments,
including guarantees, related to the content businesses. In
connection with the TWE restructuring, some of these commitments were
not readily transferable with their applicable business and
they remain contingent commitments of TWE. AOL Time Warner and WCI
have agreed, on a joint and several basis, to
indemnify TWE from and against any and all of these contingent
liabilities, but TWE remains a party to these commitments. These
contingent commitments are included in the table above.

Guarantees
include guarantees that WCI has provided on certain of TWEs
debt and accrued interest, which was $2.283 billion at March 31, 2003
and $1.950 billion as of December 31, 2002 (Note 6), as well as
guarantees on certain lease and
operating commitments entered into by formerly owned entities and joint
ventures in which WCI was or is a venture partner.

Contingencies

On June 24, 1997, plaintiffs in Six Flags Over Georgia LLC et al. v. Time
Warner Entertainment Company, L.P.,filed an amended complaint in the Superior
Court of Gwinnett County, Georgia, claiming that, inter alia, defendants, which
include TWE, violated their fiduciary duties in operating the Six Flags Over
Georgia theme park. On December 18, 1998, following a trial, a jury returned a
verdict in favor of plaintiffs. The total awarded to plaintiffs was
approximately $454 million in compensatory and punitive damages. The case was
appealed to the Georgia Court of Appeals, which affirmed the trial courts
judgment, and denied reconsideration. The Supreme Court of Georgia denied
certiorari on January 18, 2001. On February 28, 2001, the compensatory damages
portion of the award plus accrued interest was paid to plaintiffs. On March 1,
2001, the United States Supreme Court granted a stay as to payment of the
punitive damages part of the jurys original award, pending the resolution of a
petition for certiorari to be filed by TWE, which was filed on June 15, 2001.
On October 1, 2001, the United States Supreme Court granted certiorari, vacated
the opinion of the Georgia Court of Appeals and remanded the case for further
consideration as to punitive damages. On March 29, 2002, the Georgia Court of
Appeals affirmed and reinstated its earlier decision regarding the punitive
damage award. On April 18, 2002, TWE filed a petition for certiorari to the
Georgia Supreme Court seeking review of the decision of the Georgia Court of
Appeals, which was denied on September 16, 2002. The Georgia Supreme Court
subsequently denied TWEs motion for reconsideration of its September 16th
ruling. TWE filed a petition for writ of certiorari to the United States
Supreme Court, which was denied on April 21, 2003. The punitive damages
portion of the award plus accrued interest totalling
$391 million has been paid and the litigation is
now concluded.

On April 8, 2002, three former employees of certain subsidiaries of AOL
Time Warner filed Henry Spann et al. v. AOL Time Warner Inc. et al.,a
purported class action, in the U. S. District Court for the Central District of
California. Plaintiffs have named

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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

as defendants, among others, AOL Time Warner, TWE, WEA Corp., WEA
Manufacturing Inc., Warner Bros. Records, Atlantic Recording Corporation,
various pension plans sponsored by the companies and the administrative
committees of those plans. Plaintiffs allege that defendants miscalculated the
proper amount of pension benefits owed to them and other class members as
required under the plans in violation of ERISA. The lawsuit has been
transferred to the U. S. District Court for the Southern District of New York.
Due to the preliminary status of this matter, WCI is unable to predict the
outcome of this suit.

As
of May 12, 2003, three putative class action lawsuits have been
filed alleging violations of ERISA in the U.S. District Court
for the Southern District of New York on behalf of current and former
participants in the AOL Time Warner Savings Plan, the AOL Time Warner
Thrift Plan and/or the Time Warner Cable Savings Plan (the
Plans), which may include employees of companies within
WCI. Collectively, these lawsuits name as defendants AOL Time Warner,
certain current and former directors and officers of AOL Time Warner
and members of the Administrative Committees of the Plans. The
lawsuits allege that AOL Time Warner and other defendants breached
certain fiduciary duties to Plan participants by, inter alia,
continuing to offer AOL Time Warner stock as an investment under the
Plans, and by failing to disclose, among other things, that AOL Time
Warner was experiencing declining advertising revenues and that AOL
Time Warner was inappropriately inflating advertising revenues
through various transactions. The complaints seek unspecified damages
and unspecified equitable relief. The ERISA actions have been
consolidated with other AOL Time Warner-related
shareholder lawsuits and derivative actions under the caption In
re AOL Time Warner Inc. Securities and ERISA
Litigation in the Southern District of New York. AOL Time Warner
intends to defend against these lawsuits vigorously. The Company is
unable to predict the outcome of these cases or reasonably estimate a
range of possible loss.

The costs and other effects of pending or future litigation, governmental
investigations, legal and administrative cases and proceedings (whether civil
or criminal), settlements, judgments and investigations, claims and changes in
those matters (including those matters described above), and developments or
assertions by or against WCI relating to intellectual property rights and
intellectual property licenses, could have a material adverse effect on WCIs
business, financial condition and operating results.

12.  RELATED PARTY TRANSACTIONS

Transactions with AOL Time Warner

In the normal course of conducting their businesses, WCI has various
transactions with AOL Time Warner and its subsidiaries. For example, employees
of WCI participate in various AOL Time Warner medical, stock option and other
benefit plans, for which WCI is charged its allocable share of plan expenses,
including administrative costs. (ATC does not have a significant number of
employees). In addition, AOL Time Warner provides WCI with certain corporate
services, including accounting, tax, legal and administration, for which WCI
pays a fee. The consolidated financial statements of WCI also include
transactions with AOL Time Warner relating to domestic income taxes or tax
benefits.

WCIs Filmed Entertainment segment has various service agreements with AOL
Time Warners Filmed Entertainment segment, pursuant to which WCIs Filmed
Entertainment segment provides certain management and distribution services for
AOL Time Warners theatrical, television and animated product, as well as
certain services for administrative and technical support.

AOL Time Warners Networks segment has license agreements with WCI,
pursuant to which the cable networks have acquired broadcast rights to certain
film and television product. In addition, WCIs Music segment provides home
videocassette distribution services to certain AOL Time Warner operations and certain WCI
units place advertising in magazines published by AOL Time Warners Publishing
segment.

For the
year ended December 31, 2002, revenue, cost of revenue and selling, general and
administrative expenses from transactions with AOL Time Warner were
$394 million,
$10 million and $32 million, respectively.

Transactions with Equity Method Investees

In
addition, WCI has had transactions with the Columbia House Company
partnership and some of its music joint ventures and with certain unconsolidated
investees accounted for under the equity method of accounting of both WCI and
AOL Time Warner, generally with respect to sales of products and services in
the ordinary course of business. Such transactions include the licensing of
broadcast rights to film and television product by the Filmed Entertainment
segment. For the year ended December 31, 2002, revenue, cost of revenue and selling, general and
administrative expenses from the aforementioned transactions were $247 million,
$92 million and $3 million, respectively.

Transactions with Comcast

WCI has also entered into various transactions with Comcast, a minority
owner of TWC Inc., and its subsidiaries, primarily related to the sale of
programming to Comcast cable systems by the Networks segment. These
transactions are executed on terms comparable to those of unrelated third
parties. For the year ended December 31, 2002,

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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

revenue from the aforementioned
transactions was $378 million.
This amount reflects transactions with only those cable systems in which
Comcast had an ownership interest during the periods covered.

Other Transactions

In addition to the above transactions in the normal course of business, in
January 2003, WCI acquired an additional 11% interest in The WB Network from
certain executives of The WB Network for $128 million.

13.  ADDITIONAL FINANCIAL INFORMATION

Additional financial information with respect to cash (payments) and
receipts are as follows:

Three Months Ended March 31,2003
    
    2002WCI
    
    ATC
    
    WCI
    
    ATC(millions)Cash payments made for interest
    
    $
    (9
    )
    
    $
    
    
    
    $
    (10
    )
    
    $
    Interest income received
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    Cash payments made for interest, net
    
    $
    (6
    )
    
    $
    
    
    
    $
    (7
    )
    
    $
    Cash payments made for income taxes
    
    $
    (210
    )
    
    $
    (47
    )
    
    $
    (131
    )
    
    $
    (9
    )Income tax refunds received
    
    
    1
    
    
    
    
    
    
    
    3
    
    
    
    Cash payments made for income taxes, net
    
    $
    (209
    )
    
    $
    (47
    )
    
    $
    (128
    )
    
    $
    (9
    )


Interest Expense, Net

Interest expense, net, consists of:

Three Months Ended March 31,2003
    
    2002WCI
    
    ATC
    
    WCI
    
    ATC(millions)Interest income
    
    $
    3
    
    
    $
    
    
    
    $
    3
    
    
    $
    Interest expense
    
    
    (41
    )
    
    
    
    
    
    
    (46
    )
    
    
    Total interest expense, net
    
    $
    (38
    )
    
    $
    
    
    
    $
    (43
    )
    
    $
    


Other Income (Expense), Net

Other income (expense), net, consists of:

Three Months Ended March 31,2003
    
    2002WCI
    
    ATC
    
    WCI
    
    ATC(millions)Net investment losses(a)
    
    $
    (18
    )
    
    $
    
    
    
    $
    (248
    )
    
    $
    (175
    )Gains (losses) on equity method investees
    
    
    45
    
    
    
    114
    
    
    
    (2
    )
    
    
    19Gain on sale of investments
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    Minority interest expense
    
    
    (21
    )
    
    
    
    
    
    
    (6
    )
    
    
    Miscellaneous
    
    
    (2
    )
    
    
    
    
    
    
    (7
    )
    
    
    3Total other income (expense), net
    
    $
    40
    
    
    $
    114
    
    
    $
    (263
    )
    
    $
    (153
    )




| |     |  |                                                                                                                                                                                                                                                                                                                            
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| | (a) |  | Includes a non-cash pretax charge for WCI and ATC to reduce the carrying
value of certain investments for other-than-temporary declines in value
of approximately $18 million and zero, respectively, for the
quarter ended March 31, 2003 and $248 million and
$175 million for the
quarter ended March 31, 2002 (Note 4).

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##### Table of Contents



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Other Current Liabilities

Other current liabilities consist of:

March 31 2003
    
    December 31 2002(millions)Accrued expenses
    
    $
    1,779
    
    
    $
    1,580Accrued compensation
    
    
    168
    
    
    
    349Deferred revenues
    
    
    234
    
    
    
    232Accrued income taxes
    
    
    20
    
    
    
    101Total other current liabilities
    
    $
    2,201
    
    
    $
    2,262


48



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##### Table of Contents






Part II. Other Information




Item 1.  Legal Proceedings.

Reference is made to Six Flags Over Georgia et al. v. Time Warner
Entertainment Company, L.P., et al.described on page 29 of the Companies
Annual Report on Form 10-K for the year ended December 31, 2002. TWEs
petition for writ of certiorari to the United States Supreme Court filed on
December 23, 2002 was denied on April 21, 2003. The punitive damages portion
of the award plus accrued interest totalling $391 million has been paid, and the litigation has been
concluded.

As
of May 12, 2003, three putative class action lawsuits have been filed
alleging violations of ERISA in the U.S. District Court for the
Southern District of New York on behalf of current and former
participants in the AOL Time Warner Savings Plan, the AOL Time Warner
Thrift Plan and/or the Time Warner Cable Savings Plan (the
Plans), which may include employees of companies within
WCI. Collectively, these lawsuits name as defendants AOL Time Warner,
certain current and former directors and officers of AOL Time Warner
and members of the Administrative Committees of the Plans. The
lawsuits allege that AOL Time Warner and other defendants breached
certain fiduciary duties to Plan participants by, inter alia,
continuing to offer AOL Time Warner stock as an investment under the
Plans, and by failing to disclose, among other things, that AOL Time
Warner was experiencing declining advertising revenues and that AOL
Time Warner was inappropriately inflating advertising revenues
through various transactions. The complaints seek unspecified damages
and unspecified equitable relief. The ERISA actions have been
consolidated with other AOL Time Warner-related
shareholder lawsuits and derivative actions under the caption In
re AOL Time Warner Inc. Securities and ERISA
Litigation in the Southern District of New York. AOL Time Warner
intends to defend against these lawsuits vigorously. The Company is
unable to predict the outcome of these cases or reasonably estimate a
range of possible loss.

The
costs and other effects of pending or future litigation, governmental
investigations, legal and administrative cases and proceedings (whether civil
or criminal), settlements, judgments and investigations, claims and changes in
those matters (including those matters described above), and
developments or assertions by or against WCI relating to intellectual
property rights and intellectual property licenses, could have a material
effect on the Companies business, financial condition and operating results.




Item 2.  Changes in Securities and Use of Proceeds.

In connection with the TWE Restructuring, during the first quarter of
2003, WCI issued an aggregate of 78.062 shares of common stock, par value
$1.00 per share, of WCI (Common Stock) to various subsidiaries of AOL Time
Warner in exchange for assets transferred to WCI. The issuance of the Common
Stock was not registered under the Securities Act of 1933 pursuant to an
exemption from registration under Section 4(2) of the Securities Act. WCI
remains an indirect wholly owned subsidiary of AOL Time Warner.




Item 6.  Exhibits and Reports on Form 8-K.

(a) Exhibits.

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

(b) Reports
on Form 8-K.

WCI and ATC filed the following reports on Form 8-K.

Item #
    
    Description
    
    Date(i)
    
    
    5
    
    
    Reporting the closing of the Time Warner
Entertainment-Advance/Newhouse Partnership
restructuring.
    
    December 31, 2002(ii)
    
    
    2, 7
    
    
    Reporting (i) the closing of the TWE Restructuring
and related transactions (Item 2) and (ii) unaudited
pro forma financial information reflecting the disposition
by ATC of interests in TWE (Item 7).
    
    March 28, 2003


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##### Table of Contents






SIGNATURES

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

AMERICAN TELEVISION AND COMMUNICATIONS
CORPORATION
WARNER COMMUNICATIONS INC.By:
    
    /s/ Wayne H. PaceName:
Title:
    
    Wayne H. Pace
Executive Vice President and
Chief Financial Officer


Dated: May 15, 2003

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##### Table of Contents



CERTIFICATIONS

I, Richard D. Parsons, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of American Television
and Communications Corporation and Warner Communications Inc.;
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

By:
    
    
    
    /s/ Richard D.
ParsonsName:
Title:
    
    Richard D. Parsons
Chief Executive Officer
American Television and Communications Corporation
Warner Communications Inc.


Date: May 15, 2003

51



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##### Table of Contents



CERTIFICATIONS

I, Wayne H. Pace, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of American Television
and Communications Corporation and Warner Communications Inc.;
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

By:
    
    
    

/s/          Wayne
H. PaceName:
Title:
    
    Wayne H. Pace
Chief Financial Officer
American Television and Communications Corporation
Warner Communications Inc.


Date: May 15, 2003

52



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##### Table of Contents



EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K Exhibit No.
    
    Description of Exhibit99.1
    
    Certification of Principal Executive Officer and Principal Financial
Officer of each of WCI and ATC pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, with respect to their Quarterly Report on Form
10-Q for the quarter ended March 31, 2003.


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