SECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2002, 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 001-12878

TIME WARNER ENTERTAINMENT COMPANY, L.P.

 

| Delaware      (State or other jurisdiction of      incorporation or organization) |   | 13-3666692      (I.R.S. Employer      Identification Number) |
|-----------------------------------------------------------------------------------|--------|--------------------------------------------------------------|

|   | **American Television and Communications Corporation          Warner Communications Inc.**(Exact name of registrant as specified          in its charter) | Delaware          Delaware          (State or other jurisdiction of          incorporation or organization) | 13-2922502          13-2696809          (I.R.S. Employer          Identification Number) |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|

75 Rockefeller PlazaNew York, New York 10019(212) 484-8000(Address, including zip code, and telephone number, includingarea 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      

**TIME WARNER ENTERTAINMENT COMPANY, L.P.AND TWE GENERAL PARTNERS**

**INDEX TO FORM 10-Q**
   **Page**   **TWE** **TWEGeneralPartners**             **PART I. FINANCIAL INFORMATION**           Management's discussion and analysis of results of operations and financial condition   1    25    Consolidated balance sheets at March 31, 2002 and December 31, 2001   11    33    Consolidated statements of operations for the three months ended March 31, 2002 and 2001   12    34    Consolidated statements of cash flows for the three months ended March 31, 2002 and 2001   13    35    Consolidated statements of partnership capital and shareholders' equity for the three months ended March 31, 2002 and 2001   14    36    Notes to consolidated financial statements   15    37              **PART II. OTHER INFORMATION**   48               

**TIME WARNER ENTERTAINMENT COMPANY,  L.P.  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 Time Warner Entertainment Company, L.P.'s (''TWE'' or the ''Company'') 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 TWE's businesses, as well as recent developments that the Company believes    are important in understanding the results of operations, as well as to anticipate    future trends in those operations.
-    Results    of operations.  This section provides an analysis    of the Company's results of operations for the first quarter of 2002 relative    to that of 2001. This analysis is presented on both a consolidated and segment    basis. In addition, a brief description is provided of transactions and events    that impact the comparability of the results being analyzed.
-    Financial    condition and liquidity.  This section provides    an analysis of the Company's financial condition and cash flows as of and    for the three months ended March 31, 2002.
-    Caution    concerning forward-looking statements.  This    section discusses how certain forward-looking statements made by the Company    throughout MD&A and in the consolidated financial statements are based    on management's present expectations about future events and are inherently    susceptible to uncertainty and changes in circumstances.

**OVERVIEW**

******Description of Business**

****          AOL Time Warner Inc. (''AOL Time Warner'') is the world's first Internet-powered media and entertainment communications company. The Company 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.

          A majority of AOL Time Warner's interests in filmed entertainment, television production, broadcast network programming and cable television systems, and a portion of its interests in cable television programming, are held through Time Warner Entertainment Company, L.P. (''TWE''). AOL Time Warner owns general and limited partnership interests in TWE consisting of 74.49% of the pro rata priority capital (''Series A Capital'') and residual equity capital (''Residual Capital''), and 100% of the junior priority capital (''Series B Capital''). The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE are held by MediaOne TWE Holdings, Inc., a subsidiary of AT&T Corp. (''AT&T''). Due to the Company's 100% ownership of the Series B Capital, AOL Time Warner's interest in TWE exceeds 74.49%.

          TWE classifies its business interests into  three fundamental areas: *Cable*,  consisting principally of interests in cable television systems; *Filmed  Entertainment*, consisting principally of interests  in filmed entertainment and          

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**TIME WARNER ENTERTAINMENT COMPANY,  L.P.MANAGEMENT'S DISCUSSION AND ANALYSISOF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**
televisionproduction; and *Networks*,consisting principally of interests in cable television and broadcast networkprogramming. TWE also manages the cable properties owned by AOL Time Warner andthe combined cable television operations are conducted under the name of TimeWarner Cable.
**Use of EBITDA**

****          TWE evaluates operating performance based on several factors, including its primary financial measure of operating income (loss) before noncash depreciation of tangible assets and amortization of intangible assets (''EBITDA''). TWE considers EBITDA an important indicator of the operational strength and performance of its businesses, including the ability to provide cash flows to service debt and fund capital expenditures. In addition, EBITDA eliminates the uneven effect across all business segments of considerable amounts of noncash depreciation of tangible assets and amortization of intangible assets recognized in business combinations accounted for by the purchase method. As such, the following comparative discussion of the results of operations of TWE includes, among other factors, an analysis of changes in business segment EBITDA. However, EBITDA should be considered in addition to, not as a substitute for, operating income (loss), net income (loss) and other measures of financial performance reported in accordance with generally accepted accounting principles.

**Recent Developments**

*****Ownership Interest in TWE*

**          In addition to its existing interest in TWE, AT&T has an option to obtain up to an additional 6.33% of Series A Capital and Residual Capital interests. The determination of the amount of additional interests that AT&T is eligible to acquire is based on the compounded annual growth rate of TWE's adjusted Cable EBITDA, as defined in the option agreement, over the life of the option. The option is exercisable at any time through 2005. The option exercise price is dependent upon the year of exercise and, assuming the full amount of the option is vested, ranges from an exercise price of approximately $1.4 billion currently to $1.8 billion in 2005. Either AT&T or TWE may elect that the exercise price be paid with partnership interests rather than cash. AT&T initiated a process by which an independent investment banking firm has determined the amount by which AT&T would increase its interest in TWE if it were to exercise the option and were to pay the exercise price with partnership interests rather than cash. On April 19, 2002, AT&T delivered to TWE a notice of the exercise of the option on a cashless basis effective May 31, 2002. The exercise of this option will increase AT&T's interest by approximately 2.1% to approximately 27.6% of the Series A Capital and Residual Capital of TWE.

          AT&T also has the right, during 60 day exercise periods occurring once every 18 months, to request that TWE incorporate and register its stock in an initial public offering. If AT&T exercises such right, TWE can decline to incorporate and register its stock, in which case AT&T may cause TWE to purchase AT&T 's interest at the price at which an appraiser believes such stock could be sold in an initial public offering, subject to certain adjustments. In February 2001, AT&T delivered to TWE a notice requesting that TWE reconstitute itself as a corporation and register AT&T's partnership interests for public sale. The parties are in discussions regarding this registration rights process and alternatives thereto. The Company cannot at this time predict the outcome or effect, if any, of these discussions.

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**TIME WARNER ENTERTAINMENT COMPANY, L.P.MANAGEMENT'S DISCUSSION AND ANALYSISOF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**

*Investment in the TWE-Advance/Newhouse Partnership*

**          The  TWE-Advance/Newhouse Partnership (''TWE-A/N'') is owned approximately 64.8%  by TWE, the managing partner, 33.3% by the Advance/Newhouse Partnership (''Advance/Newhouse'')  and 1.9% indirectly by AOL Time Warner. The financial position and operating  results of TWE-A/N have been consolidated by TWE and the partnership interest  owned by Advance/Newhouse is reflected in TWE's consolidated financial statements  as minority interest. In accordance with the partnership agreement, TWE or Advance/Newhouse  can initiate a restructuring of the partnership, in which Advance/Newhouse would  withdraw from the partnership and receive one-third of the partnership's assets  and liabilities. On or after March 31, 2002, either TWE or Advance/Newhouse  can state its intention to cause a restructuring. If the parties are unable  to agree on a restructuring or other acceptable alternative within 60 days of  the date of delivery of a restructuring notice, then TWE-A/N will be restructured  by the withdrawal of Advance/Newhouse from TWE-A/N, with Advance/Newhouse receiving  one-third of the assets and liabilities of TWE-A/N. TWE and Advance/Newhouse  are engaged in discussions regarding the future structure of TWE-A/N. While  the Company is unable to predict the outcome of these discussion at this time,  one possible outcome is the withdrawal of Advance/Newhouse from TWE-A/N. In  addition, Advance/Newhouse can require TWE to purchase its equity interest for  fair value at specified intervals following the death of both of its principle  shareholders.

          As of March 31, 2002, TWE-A/N owned cable television systems (or interests therein) serving approximately 7.0 million subscribers, of which 5.9 million subscribers were served by consolidated, wholly owned cable television systems and 1.1 million subscribers were served by unconsolidated, partially owned cable television systems. Additionally, TWE-A/N had approximately $9 billion in total assets and approximately $1.6 billion of net debt. For the three months ended March 31, 2002, TWE-A/N contributed revenues, EBITDA and operating income of $1.0 billion, $449 million and $278 million, respectively, to the results of TWE compared to $849 million, $388 million and $222 million, respectively, for the three months ended March 31, 2001. TWE-A/N's operating income in the first quarter of 2001 includes approximately $30 million of amortization that did not continue in 2002 as a result of applying a new accounting standard for goodwill and other intangible assets. If Advance/Newhouse withdraws from the partnership and receives one-third of the partnership's assets and liabilities, the impact on TWE's Cable segment would be a corresponding reduction in assets, liabilities and results of operations. However, the ultimate impact would depend upon the specific assets and liabilities withdrawn from the partnership, including the mix of consolidated and unconsolidated cable television systems. The impact on TWE's consolidated net income would be substantially mitigated, if not entirely offset, because the earnings of TWE-A/N attributable to Advance/Newhouse's current one-third interest are reflected as minority interest expense in the accompanying consolidated statement of operations.

*Investment in Road Runner*

          As  of March 31, 2002, Road Runner, a high-speed cable modem Internet service provider,  was owned by TWI Cable Inc. (a wholly owned subsidiary of AOL Time Warner),  TWE and TWE-A/N, with TWE owning approximately 51% on a fully attributed basis  (i.e., after considering the portion attributable to the minority partners of  TWE-A/N). AOL Time Warner's interest in Road Runner continues to be accounted  for using the equity method of accounting because of certain approval rights  held by Advance/Newhouse, a partner in TWE-A/N. As previously discussed, TWE  and Advance/Newhouse are engaged in discussions regarding the future structure  of TWE-A/N. The Company is also having discussions with Advance/Newhouse regarding  their interest in Road Runner, which is held through TWE-A/N. While the Company  is unable to predict the outcome of these discussions at this time, one possible  outcome is that TWE may acquire Advance/Newhouse's interest in Road Runner,  either as a part of any

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**TIME WARNER ENTERTAINMENT COMPANY, L.P.MANAGEMENT'S DISCUSSION AND ANALYSISOF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**
restructuring of TWE-A/N that may occur or in a separate transaction. The acquisition of Advance/Newhouse's interest in Road Runner would result in the assets, liabilities and results of operations of Road Runner being consolidated and presented with the results of operations of TWE's Cable segment. As of March 31, 2002, Road Runner had total assets of approximately $180 million, with no debt. For the three months ended March 31, 2002, Road Runner had revenues, an EBITDA loss and operating loss of approximately $69 million, $28 million and $40 million, respectively, compared to $53 million, $49 million and $68 million, respectively, for the three months ended March 31, 2001.
**RESULTS OF OPERATIONSTransactions Affecting Comparability of Results of Operations**

*******Pro Forma Item***

**********          TWE's results for 2002 have been impacted by certain transactions and events that cause them not to be comparable to the results reported in 2001. In order to make the 2001 operating results more comparable to the 2002 presentation and make an analysis of 2002 and 2001 more meaningful, the following discussion of results of operations and changes in financial condition and liquidity is based on pro forma financial information for 2001 that has been adjusted for the item discussed in the following paragraph.
-  New Accounting  Standard for Goodwill and Other Intangible Assets.  During  2001, the Financial Accounting Standards Board (''FASB'') issued Statement of  Financial Accounting Standards 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 (Note 3). FAS 142 does not  require retroactive restatement for all periods presented, however, the pro  forma information for 2001 assumes that FAS 142 was in effect beginning January  1, 2001.

***New Accounting Standard***

**********          In addition to the pro forma adjustment previously discussed, in the first quarter of 2002, the Company adopted new accounting guidance that requires retroactive restatement of all periods presented to reflect the new accounting provisions; therefore, this adjustment impacts both pro forma and historical results. This adjustment is discussed below.

*Reimbursement of ''Out-of-Pocket'' Expenses*

**          In  November 2001, the FASB Staff issued as interpretive guidance Emerging Issues  Task Force (''EITF'') Topic No. D-103, ''Income Statement Characterization of  Reimbursements Received for 'Out-of-Pocket' Expenses Incurred'' (''Topic  D-103''). Topic D-103 requires that reimbursements received for out-of-pocket  expenses be classified as revenue on the income statement and was effective  for TWE in the first quarter of 2002. This change in revenue classification impacts TWE's Cable segment, resulting  in an increase in both revenues and costs of approximately $59 million on both  a pro forma and historical basis in the first quarter of 2001.

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**TIME WARNER ENTERTAINMENT COMPANY,  L.P.MANAGEMENT'S DISCUSSION AND ANALYSISOF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**

***Other Significant Transactions and Nonrecurring Items***

**********          As more fully described herein and in the related footnotes to the accompanying consolidated financial statements, the comparability of TWE's operating results has been affected by certain significant transactions and nonrecurring items in each period.

          As previously discussed, the Company adopted, effective January 1, 2002, new accounting rules for goodwill and certain intangible assets. Among the requirements of the new rules is that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques. During the first quarter of 2002, the Company completed its impairment review and recorded a $22 billion noncash pretax charge for the impairment of goodwill, all of which was generated in the Merger. The charge reflects the decline in AOL Time Warner's stock price since the Merger was announced in January 2000, is nonoperational in nature and is reflected as a cumulative effect of an accounting change in the accompanying consolidated financial statements (Note 3). In order to enhance comparability, the Company compares current year results to the prior year exclusive of this charge.

          Revenue and EBITDA by business segment are as follows (in millions):
  **Three Months Ended March 31**  **Revenues** **EBITDA**  **2002Historical** **2001**(a)(b)**Pro Forma** **2001**(b)**Historical** **2002Historical** **2001**(a)**Pro Forma** **2001Historical**                         Cable    $1,736     $1,446     $1,446     $728     $661     $661  Filmed Entertainment   1,673    1,603    1,603    138    100    100  Networks   782    724    724    169    158    158  Corporate   —    —    —      (20)     (19)     (19)Intersegment elimination     (164)     (172)     (172)   —    —    —                          Total revenues and EBITDA    $4,027     $3,601     $3,601     $1,015     $900     $900  Depreciation and amortization   —    —    —      (344)     (277)     (922)                         Total revenues and operating income (loss)    $4,027     $3,601     $3,601     $671     $623       $(22)                                                  

(a)
In order to enhance comparability, pro      forma financial information for 2001 assumes that the adoption of FAS 142      had occurred at the beginning of 2001.
(b)
Revenues reflect the provisions	of Topic D-103 that were adopted by the Company in the first quarter      of 2002, which require retroactive restatement of 2001 to reflect the new      accounting provisions. As a result, the impact of Topic      D-103 was to increase revenues and costs by equal amounts of approximately      $59 million for the first quarter of 2001.
**Consolidated  Results**

****          TWE had revenues of $4.027 billion, income before the cumulative effect of an accounting change of $380 million and a net loss of $21.383 billion in 2002, compared to revenues of $3.601 billion and net income of $333 million on a pro forma basis in 2001 (revenues of $3.601 billion and net loss of $350 million on a historical basis).

***          Revenues.***TWE's revenues increased to $4.027 billion in 2002, compared to $3.601 billion in 2001. This increase was driven by an increase in Subscription revenues of 15% to $2.109 billion and an increase in Content and Other revenues by 10% to $1.623 billion. Advertising and Commerce revenues were relatively flat at $295 million.
          Asdiscussed more fully below, the increase in Subscription revenues was principallydue to an increase in the number of subscribers and an increase in subscriptionrates at both the Cable and Networks segments. The increase in Content and Otherrevenues was principally due to increased international theatrical results atthe Filmed 
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**TIME WARNER ENTERTAINMENT COMPANY, L.P.MANAGEMENT'S DISCUSSION AND ANALYSISOF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**

Entertainment segment. Advertising and Commerce  revenues were relatively flat as increases at the Cable segment were offset  by lower results due to the closure of the Studio Stores at the Filmed Entertainment  segment.

***          Depreciation and Amortization.***Depreciation and amortization increased to $344 million in 2002 from $277 million on a pro forma basis in 2001 ($922 million on a historical basis). This increase was due to an increase in depreciation, primarily due to higher capital spending at the Cable segment.

***          Interest  Expense, Net.***Interest expense, net, decreased  to $110 million in 2002, compared to $153 million on both a pro forma and historical  basis in 2001, principally as a result of lower market interest rates in 2002.  Included in interest expense, net, was interest income of $6 million in 2002 and  $8 million on both a pro forma and historical basis in 2001.

***          Other Expense, Net.***Other expense, net, increased to $33 million in 2002, compared to $4 million on a pro forma basis in 2001 ($40 million on a historical basis). Other expense, net, increased primarily due to higher losses on certain investments accounted for using the equity method of accounting at the Cable segment and the absence in 2002 of pretax gains on the exchange of various consolidated cable television systems on a pro forma and historical basis in 2001 of TWE-A/N (attributable to the minority owners of TWE-A/N).

***          Minority Interest.***Minority interest expense increased to $109 million in 2002, compared to $101 million in 2001 ($103 million on a historical basis). Minority interest expense increased principally due to the allocation of higher net income to TWE's minority partners, which was partially offset by the absence in 2002 of an allocation of pretax gains related to the exchange of various unconsolidated cable television systems in 2001 at TWE-A/N attributable to the minority owners of TWE-A/N.

***          Income Tax Expense.***As a U.S. partnership, TWE is not subject to U.S. federal income taxation. Income and withholding taxes of $39 million in 2002 and $32 million on both a pro forma and historical basis in 2001 have been provided for the operations of TWE's domestic and foreign subsidiary corporations.

***          Net Income (Loss) Before the Cumulative Effect of an Accounting Change.***TWE's net income before the cumulative effect of an accounting change increased to $380 million in 2002, compared to $333 million on a pro forma basis in 2001 (net loss of $350 million on a historical basis). TWE's net income before the cumulative effect of an accounting change increased due to higher EBITDA and decrease in interest expense, offset in part by increases in depreciation expense, minority interest and other expense.

**Business Segment Results**

*******          Cable.***Revenues increased 20% to $1.736 billion  in 2002, compared to $1.446 billion on both a pro forma and historical basis  in 2001. EBITDA increased 10% to $728 million in 2002 from $661 million on both  a pro forma and historical basis in 2001. Revenues increased due to a 17% increase  in Subscription revenues (from $1.346 billion to $1.574 billion) and a 62% increase  in Advertising and Commerce revenues (from $100 million to $162 million). The  increase in Subscription revenues was due to higher basic cable rates, an increase  in subscribers to high-speed data services, an increase in digital cable subscribers  and, to a lesser degree, the increase in basic cable subscribers. Similarly,  digital cable subscribers managed by TWE increased by 68% to 3.6 million and  high-speed data subscribers managed by TWE increased by 86% to 2.2 million in  2002 over the prior year comparable period. The increase in Advertising and  Commerce revenues was primarily related to advertising purchased by programming  vendors to promote their channel launches ($42 million in 2002 versus $17 million  in 2001) and a general increase in general third-party advertising sales. 

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**TIME WARNER ENTERTAINMENT COMPANY,  L.P.MANAGEMENT'S DISCUSSION AND ANALYSISOF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**

          EBITDA increased principally as a result of the revenue gains, offset in part by increases in programming and other operating costs. The increase in programming costs of approximately 28% generally relates to programming rate increases across both the basic and digital services, the current year addition of new programming services and higher basic and digital subscriber levels. Programming costs are expected to continue to increase as general programming rates increase and digital services continue to be rolled out. 

***          Filmed Entertainment.***Revenues increased 4% to $1.673 billion in 2002, compared to $1.603 billion on both a pro forma and historical basis in 2001. EBITDA increased 38% to $138 million in 2002, compared to $100 million on both a pro forma and historical basis in 2001. The revenue increase was primarily related to the international theatrical success of *Harry Potter and the Sorcerer's Stone* and *Ocean's Eleven* and higher worldwide consumer products licensing results, offset in part by reduced commerce revenues related to the closure of its Studio Stores, lower worldwide home video activity and reduced television license fees caused by the timing of product availability.

          EBITDA increased principally due to improvements related to the mix in theatrical product, primarily related to the profitability of *Harry Potter and the Sorcerer's Stone.*

***          Networks.***Revenues increased 8% to $782 million in 2002, compared to $724 million on both a pro forma and historical basis in 2001. EBITDA increased 7% to $169 million in 2002 from $158 million on both a pro forma and historical basis in 2001. Revenues grew primarily due to an increase in Subscription revenues and an increase in Content and Other revenues at HBO, offset in part by a decrease in Advertising and Commerce revenues at The WB Network.

          For HBO, Subscription revenues benefited from an increase in the number of subscribers and higher rates. Content and Other revenues benefited from higher home video sales of HBO's original programming. For The WB Network, the decrease in Advertising and Commerce revenues was driven by lower prime time ratings, partially offset by higher rates.

          EBITDA increased due to improved results at HBO, offset in part by lower results at The WB Network. For HBO, the increase in EBITDA was principally due to the increase in revenues. For The WB Network, the EBITDA decline was principally due to lower Advertising and Commerce revenues and higher program license fees, offset in part by a decrease in marketing costs.

**FINANCIAL CONDITION AND LIQUIDITYMarch 31, 2002**

******Current Financial Condition**

****          At  March 31, 2002, TWE had $7.6 billion of debt, $397 million of cash and equivalents  (net debt of $7.2 billion, defined as total debt less cash and cash equivalents)  and $37 billion of partnership capital, compared to $8.1 billion of debt, $250  million of cash and equivalents (net debt of $7.8 billion) and $65.4 billion  of partnership capital at December 31, 2001.

          As  discussed in more detail below, management believes that TWE's operating cash  flow, cash and equivalents, borrowing capacity under committed bank credit agreements  including agreements with AOL Time 

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**TIME WARNER ENTERTAINMENT COMPANY, L.P.MANAGEMENT'S DISCUSSION AND ANALYSISOF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**
Warner and availability underits commercial paper program are sufficient to fund its capital and liquidityneeds for the foreseeable future.
**Cash Flows**

*****Operating Activities*

**          During the first three months of 2002, TWE's cash provided by operations amounted to $1.332 billion and reflected $1.015 billion of EBITDA, less $128 million of net interest payments and $38 million of net income taxes paid. Cash flow from operations also reflects a reduction in other working capital requirements of $483 million.

          Cash provided by operations of $600 million on a pro forma basis for the first three months of 2001 reflected $900 million of EBITDA, less $163 million of net interest payments and $66 million of net income taxes paid. Cash flow from operations also reflects an increase in other working capital requirements of $71 million. 

          The growth in cash flow from operations is being driven primarily by the increase in EBITDA, lower income taxes and interest paid, and improvements in working capital, partially offset by an increase in payments to settle restructuring and merger-related liabilities. On a historical basis in the first quarter of 2001, there was $600 million of cash provided by operations.

*Investing Activities*

**          Cash used by investing activities was $587 million for the first three months of 2002, compared to $1.117 billion on both a pro forma and historical basis in 2001. The cash used by investing activities in 2002 reflects approximately $196 million of cash used for acquisitions and investments and $391 million of capital expenditures.

          The cash used by investing activities of $1.117 billion on both a pro forma and historical basis for the first three months of 2001 reflects $605 million of cash used for acquisitions and investments and $512 million of capital expenditures. The decrease in cash used by investing activities reflects lower acquisition spending and lower capital expenditures.

*Financing Activities*

**          Cash used by financing activities was $598 million for the first three months of 2002. This compares to cash provided by financing activities of $595 million on both a pro forma and historical basis in 2001. The use of cash in 2002 primarily resulted from approximately $400 million of net payments on borrowings and capital distributions of $198 million.

          Cash  provided by financing activities of $595 million on both a pro forma and historical  basis for the first three months of 2001 primarily resulted from approximately  $810 million of net incremental borrowings, offset in part by $215 million of  capital distributions. The reduction in cash from financing activities reflects  a decline in borrowings.

*TWE Cash Flow Restrictions*

**          The  assets and cash flows of TWE are restricted by certain borrowing and partnership  agreements and are unavailable to AOL Time Warner except through the payment  of certain fees, reimbursements, cash distributions 

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**TIME WARNER ENTERTAINMENT COMPANY, L.P.MANAGEMENT'S DISCUSSION AND ANALYSISOF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**

****and  loans, which are subject to limitations. Under its bank credit agreement, TWE  is permitted to incur additional indebtedness to make loans, advances, distributions  and other cash payments to AOL Time Warner, subject to its individual compliance  with the cash flow coverage and leverage ratio covenants contained therein.

**Capital Expenditures**

****          TWE's overall capital expenditures for the three months ended March 31, 2002 was $391 million, a decrease of $121 million over capital expenditures on both a pro forma and historical basis for 2001 of $512 million. TWE's capital expenditures and the related decrease in capital expenditures is due principally to the Cable segment. Over the past three years, the Cable segment has been engaged in a plan to upgrade the technological capability and reliability of its cable television systems and develop new services, which management believes will position the business for sustained, long-term growth. Capital expenditures by the Cable segment amounted to $371 million the three months ended March 31, 2002, compared to $489 million for the three months ended March 31, 2001. As more systems are upgraded, the fixed portion of Cable's capital expenditures is replaced with spending that varies based on the number of new subscribers. Capital expenditures by the Cable segment is expected to continue to be funded by the Cable segment's operating cash flow.

**Caution Concerning Forward-Looking Statements**

****          The Securities and Exchange Commission (the ''SEC'') encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This document contains such ''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 such forward-looking statements. Those forward-looking statements are based on management's present expectations about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and TWE is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of such changes, new information, future events or otherwise.

          TWE operates in highly competitive, consumer driven and rapidly changing media and entertainment businesses that are dependent on government regulation and economic, political and social conditions in the countries in which they operate, consumer demand for their products and services, technological developments and (particularly in view of technological changes) protection of their intellectual property rights. TWE's actual results could differ materially from management's expectations because of changes in such factors. Other factors could also cause actual results to differ from those contained in the forward-looking statements, including those identified in TWE's other filings with the SEC and the following:
- For TWE's cable business, more aggressive than expected    competition from new technologies and other types of video programming distributors,    including DBS and DSL; increases in government regulation of basic cable or    equipment rates or other terms of service (such as ''digital must-carry,''    open access or common carrier requirements); government regulation of other    services, such as broadband cable modem service; increased difficulty in obtaining    franchise renewals; the failure of new equipment (such as digital set-top    boxes) or services (such as digital cable, high-speed online services, telephony    over cable or video-on-demand) to appeal to enough consumers or to be available    at prices consumers are willing to pay, to function as expected and to be    delivered in a timely fashion; fluctuations in    spending levels by advertisers and consumers; and greater than expected increases    in programming or other costs. 
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**TIME WARNER ENTERTAINMENT COMPANY,    L.P.    MANAGEMENT'S DISCUSSION AND ANALYSIS    OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**
 For TWE's filmed    entertainment businesses generally, their ability to continue to attract and    select desirable talent and scripts at manageable costs; general increases    in production costs; fragmentation of consumer leisure and entertainment time    (and its possible negative effects on the broadcast and cable networks, which    are significant customers of these businesses); continued popularity of merchandising;    the potential repeal of the Sonny Bono Copyright Term Extension Act; the uncertain    impact of technological developments, which may facilitate piracy of the Company's    copyrighted works; and 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 TWE's network    businesses, greater than expected programming or production costs; public    and cable operator resistance to price increases (and the negative impact    on premium programmers of increases in basic cable rates); increased regulation    of distribution agreements; the sensitivity of network advertising to economic    cyclicality and to new media technologies; the impact of consolidation among    cable and satellite distributors; piracy of programming by means of Internet    peer-to-peer file sharing; the impact of personal video recorder ''ad-stripping''    functions on advertising sales; 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.

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

10    

**TIME WARNER ENTERTAINMENT COMPANY, L.P.CONSOLIDATED BALANCE SHEET**
    **March 31,2002Historical(unaudited)** **December 31,2001Historical**   **(millions)****ASSETS**        **Current assets**        Cash and equivalents    $397     $250  Receivables, including      $409 and $501 million due from AOL    Time Warner, less      allowances of $907 and $910 million   2,550    3,480  Inventories   948    852  Prepaid expenses   350    326           Total current assets   4,245    4,908  Noncurrent inventories and film costs   2,250    2,187  Investments, including available-for-sale securities   2,235    2,308  Property, plant and equipment   8,646    8,573  Intangible assets subject to amortization   2,438    2,464  Intangible assets not subject to amortization   22,359    22,356  Goodwill   12,425    41,004  Other assets   1,283    1,258           Total assets    $55,881     $85,058           **LIABILITIES AND PARTNERS' CAPITAL**        **Current liabilities**        Accounts payable    $1,968     $2,218  Participations payable   1,095    1,014  Programming costs payable   492    455  Debt due within one year   2    2  Other current liabilities, including $918 and $666 million due    to AOL Time Warner   2,367    2,616           Total current liabilities   5,924    6,305  Long-term debt, including      $554 million due to AOL Time Warner at    March 31, 2002   7,642    8,049  Other long-term liabilities,      including $198 and $446 million due to    AOL Time Warner   2,854    3,108  Minority interests   2,239    2,191  **Partners' capital**        Contributed capital   60,012    66,793  Accumulated other      comprehensive loss, net     (25)     (6)Partnership deficit     (22,765)     (1,382)         Total partners' capital   37,222    65,405           Total liabilities and partners' capital    $55,881     $85,058                    
See accompanying notes.

11    

**TIME WARNER ENTERTAINMENT COMPANY, L.P.CONSOLIDATED STATEMENT OF OPERATIONSThree Months Ended March 31,(Unaudited)**
   **2002Historical** **2001(a)      Pro Forma****** **2001Historical** **              (millions)**Revenues:     Subscriptions    $2,109     $1,830     $1,830      Advertising      and commerce   295    299    299      Content      and other    1,623     1,472     1,472               Total revenues(b)   4,027    3,601    3,601  Cost of revenues(b)     (2,656)     (2,317)     (2,317)Selling, general and administrative(b)     (663)     (625)     (625)Amortization of goodwill and other intangible assets     (37)     (36)     (681)             Operating income (loss)   671    623      (22)Interest expense, net(b)     (110)     (153)     (153)Other expense, net(b)     (33)     (4)     (40)Minority interest     (109)     (101)     (103)             Income (loss) before income taxes and cumulative effect of          accounting change   419    365      (318)Income taxes     (39)     (32)     (32)             Income (loss) before cumulative effect of accounting change   380    333      (350)Cumulative effect of accounting change     (21,763)   —    —              Net income (loss)      $(21,383)    $333       $(350)                          

(a)In order to enhance comparability, pro forma statements      for 2001 are presented supplementally as if FAS 142 had been applied at      the beginning of 2001 (Note 1).
(b)
Includes the following income (expenses) resulting      from transactions with the partners of TWE and other related companies:         Revenues     $223      $207      $207           Cost      of revenues      (127)      (123)      (123)         Selling, general      and administrative      (35)      (36)      (36)         Interest expense, net    4     3     3           Other expense, net    —     5     5                
See accompanying notes.

 

12    

**TIME WARNER ENTERTAINMENT COMPANY,  L.P.  CONSOLIDATED STATEMENT OF CASH FLOWS  (Unaudited)**
  **Three      Months Ended March 31,**  **2002      Historical** **2001(a)      Pro Forma****** **2001      Historical**  **(millions)**             **OPERATIONS**            Net income (loss)       $(21,383)     $333        $(350)Adjustments for noncash      and nonoperating items:                 Cumulative      effect of accounting change    21,763     —     —     Depreciation      and amortization    344     277     922      Amortization      of film costs    396     452     452      Equity      in losses of investee companies after distributions    42     12     48  Changes in operating      assets and liabilities    170       (474)      (472)                Cash provided by operations    1,332     600     600                  **INVESTING ACTIVITIES**            Investments and acquisitions      (196)      (605)      (605)Capital expenditures      (391)      (512)      (512)                Cash used by investing      activities      (587)      (1,117)      (1,117)                **FINANCING ACTIVITIES**            Borrowings    980     819     819  Debt repayments      (1,380)      (9)      (9)Capital and other      distributions      (198)      (215)      (215)                Cash provided (used)      by financing activities      (598)    595     595                  **INCREASE IN CASH      AND EQUIVALENTS**    147     78     78  **CASH AND EQUIVALENTS      AT BEGINNING OF PERIOD**    250     306     306                  **CASH AND EQUIVALENTS      AT END OF PERIOD**     $397       $384      $384                               
(a)In order to enhance comparability, pro      forma statements for 2001 are presented supplementally as if FAS 142 had      been applied at the beginning of 2001 (Note 1).
 

See accompanying notes.

13    

**TIME WARNER ENTERTAINMENT COMPANY, L.P.CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL(Unaudited)**
  **Three      Months      Ended March 31,**  **2002      Historical** **2001      Historical** **(millions)**         **BALANCE AT BEGINNING      OF PERIOD**     $65,405      $6,926  Allocation of a portion      of the purchase price in connection with America Online-    Time Warner merger      to TWE    —     59,518  Reallocation of TWE      goodwill to other segments of AOL Time Warner upon    adoption of FAS 142      (6,857)    —            Balance at beginning      of period, adjusted to give effect to the America Online-    Time Warner Merger      and reallocation of goodwill upon adoption of FAS 142    58,548     66,444  Net loss      (21,383)      (350)Other comprehensive      income (loss)      (19)    14             Comprehensive loss      (21,402)      (336)Distributions    74       (345)Other    2       (2)           **BALANCE AT END      OF PERIOD**     $37,222      $65,761                      
See accompanying notes.

14    

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

******1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

******Description of Business**

****           AOL Time Warner Inc. (''AOL Time  Warner'') is the world's first Internet-powered media and entertainment communications  company. The Company 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.

           A majority of AOL Time Warner's interests in filmed entertainment, television production, broadcast network programming and cable television systems, and a portion of its interests in cable television programming, are held through Time Warner Entertainment Company, L.P. (''TWE''). AOL Time Warner owns general and limited partnership interests in TWE consisting of 74.49% of the pro rata priority capital (''Series A Capital'') and residual equity capital (''Residual Capital''), and 100% of the junior priority capital (''Series B Capital''). The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE are held by MediaOne TWE Holdings, Inc., a subsidiary of AT&T Corp. (''AT&T''). Due to the Company's 100% ownership of the Series B Capital, AOL Time Warner's economic interest in TWE exceeds 74.49%.

           TWE, a Delaware limited partnership, classifies its business interests into three fundamental areas: *Cable,*consisting principally of interests in cable television systems; *Filmed Entertainment,*consisting principally of interests in filmed entertainment and television production; and *Networks,*consisting principally of interests in cable television and broadcast network programming.

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

**Basis of Presentation**

*Interim Financial Statements*

****           The accompanying consolidated financial statements are unaudited but, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles applicable to interim periods. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements of TWE, included in its Form 10-K for the year ended December 31, 2001 (the ''2001 Form 10-K'').

15    

**TIME WARNER ENTERTAINMENT COMPANY, L.P.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(Unaudited)**

*Basis of Consolidation*

****           The consolidated financial statements of TWE include 100% of the assets, liabilities, revenues, expenses, income, loss and cash flows of all companies in which TWE has a controlling voting interest, as if TWE and its subsidiaries were a single company. Intercompany transactions between the consolidated companies have been eliminated.

*Revenue Classification Changes*

**           In  November 2001, the Financial Accounting Standards Board (''FASB'') Staff issued  as interpretive guidance EITF Topic No. D-103, ''Income Statement Characterization  of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred'' (''Topic  D-103''). Topic D-103 requires that reimbursements received for out-of-pocket  expenses be classified as revenue on the income statement and was effective  for TWE in the first quarter of 2002. The new guidance requires retroactive  restatement of all periods presented to reflect the new accounting provisions.  This change in revenue classification will impact TWE's Cable segment, resulting  in an increase in both revenues and costs of approximately $59 million on both  a pro forma and historical basis in the first quarter of 2001.

*Accounting for Business Combinations*

**           In July 2001, the FASB issued Statements of Financial Accounting Standards (''Statement'') No. 141, ''Business Combinations'' and No. 142, ''Goodwill and Other Intangible Assets'' (''FAS 142''). These standards change the accounting for business combinations by, among other things, prohibiting the prospective use of pooling-of-interests accounting and requiring companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life. Instead, goodwill and intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment. The new standards generally were effective for TWE in the first quarter of 2002 and for purchase business combinations consummated after June 30, 2001. Upon adoption of FAS 142 in the first quarter of 2002, TWE recorded a one-time, noncash charge of approximately $22 billion to reduce the carrying value of its goodwill. Such charge is nonoperational in nature and is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations. For additional discussion on the impact of adopting FAS 142, see Note 3.

*Reclassifications*

****           Certain reclassifications have been made to the prior year's financial information to conform to the March 31, 2002 presentation.

**2. MERGER AND RESTRUCTURING COSTS**

******America Online-Time Warner Merger**

****           In  connection with the Merger, TWE has reviewed its operations and implemented  several plans to restructure its operations (''restructuring plans''). As part  of the restructuring plans, TWE recorded a restructuring liability of approximately  $301 million during 2001. The restructuring accruals relate to costs to exit  and consolidate certain activities at TWE, 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.

16    

**TIME WARNER ENTERTAINMENT COMPANY, L.P.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(Unaudited)**

 

           Of the total restructuring costs, $107 million related to work force reductions and represented employee termination benefits. Because certain employees can defer receipt of termination benefits for up to 24 months, cash payments will continue after the employee has been terminated. Termination payments of approximately $19 million were made in 2001 (none of which was in the first quarter) and an additional $13 million was made in the first quarter of 2002. As of March 31, 2002, the remaining liability of approximately $75 million was classified as a current liability in the accompanying consolidated balance sheet.

           The restructuring charge also includes approximately $194 million associated with exiting certain activities. Specifically, TWE has exited certain under-performing operations, including the Studio Store operations included in the Filmed Entertainment segment. The restructuring accrual associated with exiting activities specifically includes incremental costs and contractual 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 exiting activities were approximately $88 million in 2001 ($5 million of which was paid in the first quarter) and an additional $25 million was paid in the first quarter of 2002. As of March 31, 2002, the remaining liability of $81 million was primarily classified as a current liability in the accompanying consolidated balance sheet.

           Selected information relating to the restructuring plans follows (in millions):
  **EmployeeTermination** **Exit Costs** **Total**             Initial accruals    $107      $194      $301  Cash paid—2001     (19)     (88)     (107)             Restructuring liability as of December 31, 2001    $88      $106      $194  Cash paid—2002     (13)     (25)     (38)             Restructuring liability as of March 31, 2002    $75      $81      $156                            
 

**3. GOODWILL AND INTANGIBLE ASSETS**

****           As  discussed in Note 1, in January  2002, TWE 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. The Company will  perform its annual impairment review during the fourth quarter of each year,  commencing with the fourth quarter of 2002.

           Under FAS 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The Company's reporting units are generally consistent with the operating segments underlying the segments identified in Note 6—Segment Information. This methodology differs from TWE'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, TWE recorded a one-time, noncash  charge of approximately $22 billion to reduce the carrying value of its goodwill.  Such charge is nonoperational in nature and is reflected as a cumulative effect  of an accounting change in the accompanying consolidated statement of 

17    

**TIME WARNER ENTERTAINMENT COMPANY, L.P.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(Unaudited)**

operations. In calculating the impairment  charge, the fair value of the impaired reporting units underlying the segments  were estimated using either a discounted cash flow methodology or recent comparable  transactions.

           The  FAS 142 goodwill impairment is associated solely with goodwill resulting from  the Merger. The amount of the impairment primarily reflects 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 the entity as a whole  be assigned to all of the Company's 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,  effective January 1, 2002, $6.857 billion of the goodwill generated in the Merger,  which was previously allocated to the TWE segments, has been reallocated to  other segments of AOL Time Warner.

           A summary of changes in the Company's goodwill during the quarter, and total assets at March 31, 2002, by business segment is as follows (in millions):
  **Goodwill** **Total Assets**  **January      1,      2002**(1)(2)**** **Acquisitions &Adjustments** **Impairments** **March 31,2002** **March 31,2002**                     Cable    $19,048      $—        $(16,768)    $2,280     32,482  Filmed Entertainment   6,165     19       (2,851)   3,333     12,570  Networks(3)   8,934     22       (2,144)   6,812     10,203  Corporate   —     —     —     —     626                       Total    $34,147      $41       $(21,763)    $12,425      $55,881                                            

(1)Reflects the reallocation of goodwill      of $6.857 billion to other segments of AOL Time Warner under FAS 142.(2)In addition to the goodwill      identified above, AOL Time Warner has recognized goodwill associated with      deferred tax liabilities related to TWE's assets and liabilities. Neither      the deferred tax liabilities nor the corresponding goodwill are recorded      in TWE's standalone financial statements because TWE is not subject to U.S.      Federal income taxation.(3)Includes impairments at HBO ($1.933 billion)      and The WB Network ($211 million).
           As of March 31, 2002 and December 31, 2001,  the Company's intangible assets and related accumulated amortization consisted  of the following (in millions):
  **As of March 31, 2002** **As of December, 31, 2001**  **Gross** **AccumulatedAmortization** **Net** **Gross** **AccumulatedAmortization** **Net**                         *Intangible assets subject to amortization:*                        Film library    $2,529        $(173)    $2,356      $2,529        $(138)    $2,391  Customer lists and other intangible assets   215       (133)   82     204       (131)   73                           Total    $2,744        $(306)    $2,438      $2,733        $(269)    $2,464                           *Intangible assets not subject to amortization:*                        Cable television franchises    $21,914        $(1,644)    $20,270      $21,911        $(1,644)    $20,267  Brands, trademarks and other intangible assets   2,150       (61)   2,089     2,150       (61)   2,089                           Total    $24,064        $(1,705)    $22,359      $24,061        $(1,705)    $22,356                                                               The Company recorded amortization expense of $37 million during the first quarter of 2002 compared to $36 million on a pro forma basis during the first quarter of 2001. 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: 2002: 
18    

**TIME WARNER ENTERTAINMENT COMPANY, L.P.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(Unaudited)**

$156  million; 2003: $156 million; 2004: $150 million; 2005: $150 million; and 2006:  $150 million. As acquisitions and dispositions occur in the future and as purchase  price allocations are finalized, these amounts may vary.

           During the first quarter of 2002, the Company acquired the following intangible assets:
  **millions** **Weighted AverageAmortization Period**         Other intangible assets    $11     10-15 years  Cable television franchises   3     Indefinite           Total    $14                        
           The 2001 results on a historical basis do not reflect the provisions of FAS 142. Had TWE adopted FAS 142 on January  1, 2001, the historical net income (loss) would have been changed to the adjusted amounts indicated below:
   **Three MonthsEnded March 31, 2001**   **(millions)**   **Net income(loss)**         As reported—historical basis      $(350)   Add: Goodwill amortization   413     Add: Intangible amortization   232     Add: Equity investee goodwill amortization   36     Minority interest impact   2     Income tax impact   —          Adjusted    $333              
19    

**TIME WARNER ENTERTAINMENT COMPANY, L.P.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(Unaudited)**

**4. INVENTORIES**

****           Inventories and film costs consist of:
  **March 31, 2002** **December 31, 2001**  **(millions)**         Programming costs, less amortization    $1,358     $1,285  Merchandise   178    158  Film costs—Theatrical:             Released,      less amortization   659    650      Completed      and not released   193    285      In      production   433    346      Development      and pre-production   39    36  Film costs—Television:             Released,      less amortization   168    123      Completed      and not released   142    95      In      production   24    59      Development      and pre-production   4    2           Total inventories and film costs(a)   3,198    3,039  Less current portion of inventory   948    852           Total noncurrent inventories and film costs    $2,250     $2,187                    
(a)Does not include $2.356 billion and $2.391 billion of film library costs as of March 31, 2002 and December 31, 2001, respectively which are included in intangible assets subject to amortization on the accompanying consolidated balance sheet. See Note 3.
**5. PARTNERS' CAPITAL**

****           TWE is required to make distributions to reimburse the partners for income taxes at statutory rates based on their allocable share of taxable income, and to reimburse AOL Time Warner for stock options granted to employees of TWE based on the amount by which the market price of AOL Time Warner common stock exceeds the option exercise price on the exercise date or, with respect to options granted prior to the TWE capitalization on June 30, 1992, the greater of the exercise price or the $9.25 market price of AOL Time Warner common stock (adjusted for the Merger) at the time of the TWE capitalization. TWE accrues a stock option distribution and a corresponding liability with respect to unexercised options when the market price of AOL Time Warner common stock increases during the accounting period, and reverses previously accrued stock option distributions and the corresponding liability when the market price of AOL Time Warner common stock declines.

           During the three months ended March 31, 2002, TWE accrued $159 million of tax-related distributions and reversed previous stock option distribution accruals of $233 million, based on closing prices of AOL Time Warner common stock of $23.65 at March 28, 2002 and $32.10 at December 31, 2001. During the three months ended March 31, 2001, TWE accrued $35 million of tax-related distributions and $310 million of stock option distributions as a result of an increase at that time in the market price of AOL Time Warner common stock. During the three months ended March 31, 2002, TWE paid distributions to the AOL Time Warner General Partners in the amount of $174 million, consisting of $159 million of tax-related distributions and $15 million of stock option related distributions. During the three months ended March 31, 2001, TWE paid the AOL Time Warner General Partners distributions in the amount of $198 million, consisting of $35 million of tax-related distributions and $163 million of stock option related distributions.

20    

**TIME WARNER ENTERTAINMENT COMPANY, L.P.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(Unaudited)**

**6. SEGMENT INFORMATION**

****           TWE classifies its business interests into three fundamental areas: *Cable*, consisting principally of interests in cable television systems; *Filmed Entertainment*, consisting principally of interests in filmed entertainment and television production; and *Networks*, consisting principally of interests in cable television and broadcast network programming.

           TWE's  results for 2002 have been impacted by certain transactions and events that  cause them not to be comparable to the results reported in 2001. In order to  make the 2001 operating results more comparable to the 2002 presentation and  make an analysis of 2002 and 2001 more meaningful, supplemental pro forma operating  results for 2001 have been presented as if FAS 142 had been applied at the beginning  of 2001.

           The accounting policies of the business segments are the same as those described in the summary of significant accounting policies under Note 1 in the 2001 Form 10-K. Intersegment sales are accounted for at fair value as if the sales were to third parties.
  **Three      Months Ended March 31,** **2002    Historical**  **2001(a)    Pro Forma**  **2001(a)    Historical** **(millions)**             **Revenues**            Cable     $1,736     1,446      $1,446 Filmed Entertainment    1,673     1,603     1,603 Networks    782     724     724 Intersegment elimination      (164)      (172)      (172)                      Total      revenues     $4,027      $3,601      $3,601                              

(a)Revenues reflect the provisions      of Topic D-103 that were adopted by the Company in the first quarter of      2002, which require retroactive restatement of 2001 to reflect the new accounting      provisions. As a result, the impact of Topic D-103 was to increase revenues      and costs by equal amounts of approximately $59 million for the first quarter      of 2001.
**Intersegment Revenues**

****           In the normal course of business, the TWE segments enter into transactions with one another. The most common types of intercompany transactions include:
-   The Filmed Entertainment    segment generating content revenue by licensing television and theatrical    programming to the Networks segment;
-   The Networks segment    generating subscription revenues by selling cable network programming to the    Cable segment; and
-   The Cable and Networks    segments generating advertising and commerce revenue by cross-promoting the    products and services of all TWE segments.

           These intercompany transactions are recorded by each segment at fair value as if the transactions were with third parties and, therefore, impact segment performance. While intercompany 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 TWE's segments on intercompany transactions are as follows:

21    

**TIME WARNER ENTERTAINMENT COMPANY, L.P.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(Unaudited)**
  **Three      Months Ended March 31,**  **2002      Historical** **2001      Pro Forma** **2001      Historical**  **(millions)****Intercompany      Revenues**            Cable     $1      $1      $1  Filmed      Entertainment    97     94     94  Networks    66    77     77                        Total      intercompany revenues     $164      $172      $172                                 **Three      Months Ended March 31,**  **2002      Historical** **2001      Pro Forma** **2001      Historical**  **(millions)****EBITDA**(a)            Cable     $728      $661      $661  Filmed Entertainment    138     100     100  Networks    169     158     158  Corporate      (20)      (19)      (19)                      Total      EBITDA     $1,015      $900      $900                               

(a)EBITDA represents operating income (loss) before noncash depreciation of tangible assets and amortization of intangible assets. After deducting depreciation and amortization, TWE's operating income was $671 million in 2002 and $623 million in 2001 (operating loss of $22 million on a	historical basis).  **Three Months Ended March 31,**  **2002Historical** **2001Pro Forma** **2001Historical**  **(millions)****Depreciation      of Property, Plant and Equipment**            Cable     $280      $211      $211  Filmed      Entertainment    18     21     21  Networks    7     8     8  Corporate    2     1     1                        Total      depreciation     $307      $241      $241                                 **Three Months Ended March 31,**  **2002Historical** **2001Pro Forma** **2001Historical**  **(millions)****Amortization of Intangible Assets**(a)            Cable    $1     $—     $488  Filmed Entertainment   34    34    98  Networks   2    2    95                     Total      amortization    $37     $36     $681                            
(a)Includes amortization relating to business combinations accounted      for by the purchase method, substantially all of which arose in the merger      of America Online and Time Warner in 2001.

           As  discussed in Note 3, when FAS 142 is initially applied, all goodwill recognized  on the Company's consolidated balance sheet on that date is reviewed for impairment  using the new guidance. Before performing the review for impairment, the new  guidance requires that all goodwill deemed to relate to the entity as a whole  be assigned to all of the Company's reporting units (generally, the AOL Time  Warner operating segments), including the reporting units of the acquirer. This  differs from the previous accounting rules, which required goodwill to be assigned  only to the businesses of the company acquired. As a result, $6.857 billion  of the goodwill generated in the 

22    

**TIME WARNER ENTERTAINMENT COMPANY, L.P.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(Unaudited)**

Merger originally allocated to the TWE segments  was reallocated to other segments of AOL Time Warner resulting in a change in  segment assets. Following are TWE's assets by business segment, reflecting the  reallocation of goodwill in accordance with FAS 142, as of March 31, 2002 and  December 31, 2001:
  **March 31,2002Historical** **December 31,2001      Historical**  **(millions)****Assets**        Cable    $32,482     $56,760  Filmed Entertainment   12,570    16,394  Networks   10,203    11,225  Corporate   626    679                 Total      assets    $55,881     $85,058                    
**7. COMMITMENTS AND CONTINGENCIES**

****           In *Six Flags Over Georgia LLC et al. v. Time Warner Entertainment Company et al.*, following a trial in December 1998, the jury returned a verdict for plaintiffs and against defendants, including TWE, on plaintiffs' claims for breaches of fiduciary duty. The jury awarded plaintiffs approximately $197 million in compensatory damages and $257 million in punitive damages, and interest began accruing on those amounts at the Georgia annual statutory rate of twelve percent. The Company paid the compensatory damages with accrued interest during the first quarter of 2001. Payment of the punitive damages portion of the award with accrued interest was stayed by the United States Supreme Court on March 1, 2001 pending the disposition of a certiorari petition with that Court, which was filed by TWE on June 15, 2001. On October 1, 2001, the United States Supreme Court granted TWE's petition, vacated the decision by the Georgia Court of Appeals affirming the punitive damages award, and remanded the matter to the Georgia Court of Appeals for further consideration. The Georgia Court of Appeals affirmed and reinstated its earlier decision regarding the punitive damage award on March 29, 2002. On April 18, 2002, the defendants filed a petition of certiorari to the Georgia Supreme Court seeking review of the decision of the Georgia Court of Appeals and a decision on whether the court will hear the appeal is expected later in 2002.

           On April 8, 2002, three former employees of certain subsidiaries of AOL Time Warner Inc. filed *Henry Spann et al. v. AOL Time Warner Inc. et al.*, a purported class action, in the United States District Court for the Central District of California. Plaintiffs have named as defendants, among others, AOL Time Warner Inc., the Company, Warner-Elektra-Atlantic Corporation, 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 the Employee Retirement Income Security Act (''ERISA''). Due to its preliminary status, the Company is unable to predict the outcome of the case or reasonably estimate a range of possible loss.

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

23    

**TIME WARNER ENTERTAINMENT COMPANY, L.P.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(Unaudited)**

**8. ADDITIONAL FINANCIAL INFORMATION**

******Cash Flows**

****           Additional financial information with respect to cash (payments) and receipts are as follows:
  **Three Months Ended March 31,**  **2002Historical** **2001Pro Forma** **2001Historical**  **(millions)**Cash payments      made for interest     $(130)     $(171)     $(171 )Interest      income received    2     8     8                  Cash interest      expense, net     $(128)     $(163)     $(163 )                Cash payments      made for income taxes     $(39)     $(67)     $(67 )Income      tax refunds received    1     1     1                  Cash taxes,      net     $(38)     $(66)     $(66 )                             
**Other Expense, Net**

****           Other expense, net, consists of:
  **Three Months Ended March 31,**  **2002Historical** **2001Pro Forma** **2001Historical**  **(millions)**Other investment-related activity, principally net losses on equity investees      $(33)    $3       $(33)Losses on asset securitization programs     (4)     (6)     (6)Miscellaneous   4      (1)     (1)                   Total      other expense, net      $(33)      $(4)      $(40)                          
**Other Current Liabilities**

****           Other current liabilities consist of:
  **March 31,2002Historical** **December 31,2001Historical**         Accrued expenses    $1,813     $1,940  Accrued compensation   156    275  Deferred revenues   330    350  Accrued income taxes   68    51                 Total    $2,367     $2,616                    
24    

**TWE GENERAL PARTNERSMANAGEMENT'S DISCUSSION AND ANALYSISOF 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. (''WCI'') and  American Television and Communications Corporation (''ATC''), (collectively,  the ''General Partners'') 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 General Partners' businesses,    as well as recent developments that the General Partners believe are important    in understanding their results of operations, as well as to anticipate future    trends in those operations.
- Results of operations.  This    section provides an analysis of WCI's results of operations for the first    quarter of 2002 relative to that of 2001. WCI is the only General Partner    with independent business operations, therefore the results of ATC are not    discussed. In addition, a brief description is provided of transactions and    events that impact the comparability of the results being analyzed.
- Financial condition and liquidity.  This    section provides an analysis of WCI's financial condition and cash flows as    of and for the three months ended March 31, 2002.
- Caution concerning forward-looking statements.     This section discusses how certain forward-looking    statements made by the General Partners throughout MD&A are based on management's    present expectations about future events and are inherently susceptible to    uncertainty and changes in circumstances.

**OVERVIEW**

******Description of Business**

****          On June 30, 1992, thirteen direct or indirect subsidiaries of Time Warner Companies, Inc. (''TW Companies'') contributed the assets and liabilities or the rights to the cash flows of substantially all of TW Companies' Filmed Entertainment, Cable Networks and Cable businesses to Time Warner Entertainment Company, L.P., a Delaware limited partnership (''TWE''), for general partnership interests, and each general partner guaranteed a pro rata portion of substantially all of TWE's debt and accrued interest based on the relative fair value of the net assets each contributed to TWE (the ''General Partner Guarantees'') (See Note 7). Since then, eleven of the thirteen original general partners have been merged or dissolved into the other two. WCI and ATC are the two remaining general partners of TWE. They have succeeded to the general partnership interests and have assumed the General Partner Guarantees of the eleven former general partners.

          The General Partners in the aggregate hold 63.27% of the pro rata priority capital (''Series A Capital'') and residual equity capital (''Residual Capital'') of TWE and 100% of the junior priority capital (''Series B Capital'') of TWE. TW Companies holds, directly or indirectly, 11.22% of the Series A Capital and Residual Capital limited partnership interests. The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE are held by MediaOne TWE Holdings, Inc., a subsidiary of AT&T Corp. (''AT&T'').

         

25

**TWE GENERAL PARTNERS  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**

           WCI conducts substantially all of  AOL Time Warner's music operations, which include copyrighted music from many  of the world's leading recording artists that is produced and distributed by  a family of established record labels such as Warner Bros. Records, Atlantic  Records, Elektra Entertainment and Warner Music International. The financial  position and results of operations of ATC are principally derived from its investments  in TWE, TW Companies, Turner Broadcasting System, Inc. and Time Warner Telecom  Inc. (''Time Warner Telecom''), and its revolving credit agreement with TW Companies.  Capitalized terms are as defined and described in the accompanying consolidated  financial statements, or elsewhere herein.

          On January 11, 2001, America Online, Inc. (''America Online'') and Time Warner Inc. (''Time Warner'') merged to form AOL Time Warner, the world's first Internet-powered media and communications company (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 become an indirect, wholly owned, subsidiary of AOL Time Warner. The Merger was accounted for by AOL Time Warner as an acquisition of Time Warner under the purchase method of accounting for business combinations. Under the purchase method of accounting, the estimated cost of approximately $147 billion to acquire Time Warner, including transaction costs, was allocated to its underlying net assets, including the net assets of the General Partners and the net assets of TWE to the extent acquired, based on their respective estimated fair values. Any excess of the purchase price over estimated fair values of the net assets acquired was recorded as goodwill.

**Use of EBITDA**

****          WCI, the only General Partner with independent business operations, evaluates operating performance based on several factors, including its primary financial measure of operating income (loss) before noncash depreciation of tangible assets and amortization of intangible assets (''EBITDA''). WCI considers EBITDA an important indicator of the operational strength and performance of its businesses, including the ability to provide cash flows to service debt and fund capital expenditures. In addition, EBITDA eliminates the effect of considerable amounts of noncash depreciation of tangible assets and amortization of intangible assets recognized in business combinations accounted for by the purchase method. As such, the following comparative discussion of the results of operations of WCI includes, among other measures, an analysis of changes in EBITDA. However, EBITDA should be considered in addition to, not as a substitute for, operating income (loss), net income (loss) and other measures of financial performance reported in accordance with generally accepted accounting principles.

**Recent Developments**

*Investment in TWE*

**          In  addition to its existing interest in TWE, AT&T has an option to obtain up  to an additional 6.33% of Series A Capital and Residual Capital interests. The  determination of the amount of additional interests that AT&T is eligible  to acquire is based on the compounded annual growth rate of TWE's adjusted Cable  EBITDA, as defined in the option agreement, over the life of the option. The  option is exercisable at any time through 2005. The option exercise price is  dependent upon the year of exercise and, assuming the full amount of the option  is vested, ranges from an exercise price of approximately $1.4 billion currently  to $1.8 billion in 2005. Either AT&T or TWE may elect that the exercise  price be paid with partnership interests rather than cash. AT&T initiated  a process by which an independent investment banking firm has determined the  amount by which AT&T would increase its interest in TWE if it were to exercise  the option and were to pay the exercise price with partnership interests rather  than cash. On April 19, 2002, AT&T delivered to TWE a notice of the  exercise of the option on a cashless basis effective May 31, 2002. The  exercise of this option will increase AT&T's interest by approximately 2.1%  to approximately 27.6%.

26

**TWE GENERAL PARTNERS  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**
 of the Series A Capital and Residual Capital of TWE and reduce WCI's and ATC's interest in the Series A Capital by approximately 1.1% and .7%, respectively
          AT&T also has the right, during 60 day exercise periods occurring once every 18 months, to request that TWE incorporate and register its stock in an initial public offering. If AT&T exercises such right, TWE can decline to incorporate and register its stock, in which case AT&T may cause TWE to purchase AT&T's interest at the price at which an appraiser believes such stock could be sold in an initial public offering, subject to certain adjustments. In February 2001, AT&T delivered to TWE a notice requesting that TWE reconstitute itself as a corporation and register AT&T's partnership interests for public sale. The parties are in discussions regarding this registration rights process and alternatives thereto. TWE cannot at this time predict the outcome or effect, if any, of these discussions.

*Acquisition of Word Entertainment*

          In January 2002, WCI completed its purchase of Word Entertainment (''Word'') from Gaylord Entertainment Company for approximately $84 million in cash. Word is a leader in the multi-faceted contemporary Christian music industry with over 30 active artists on several record labels, approximately 45 songwriters under contract and a catalog containing more than 75,000 masters. The acquisition was accounted for using the purchase method of accounting for business combinations.

**RESULTS OF OPERATIONS**

**Transactions Affecting Comparability of Results of Operations**

*******New Accounting Standards***

**********          In the first quarter of 2002, the General Partners adopted new accounting guidance in several areas, some of which require retroactive restatement of all periods presented to reflect the new accounting provisions.

*Goodwill and Other Intangible Assets*

**          During  2001, the Financial Accounting Standards Board (''FASB'') issued Statement of  Financial Accounting Standards 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. WCI has provided  pro forma information for 2001 assuming that FAS 142 was in effect beginning  January 1, 2001 (Note 5).

*Reimbursement of ''Out-of-Pocket'' Expenses*

**          In  November 2001, the FASB Staff issued as interpretive guidance Emerging Issues  Task Force (''EITF'') Topic No. D-103, ''Income Statement Characterization  of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred'' (''Topic D-103'').  Topic D-103 requires that reimbursements received for out-of-pocket expenses  be classified as revenue on the income statement and was effective for the General  Partners in the first quarter of 2002. The new guidance requires retroactive  restatement of all periods presented to reflect the new accounting provisions.  This change in revenue classification impacts WCI, resulting in an increase  in both revenues and costs of approximately $31 million in the first quarter  of 2001.

**

27

**TWE GENERAL PARTNERS  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**
*Emerging Issues Task Force Issue No. 01-09*
**          In April 2001, the FASB's EITF reached a final consensus on EITF Issue No. 00-25, ''Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products,'' which was later codified along with other similar issues, into EITF 01-09, ''Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products'' (''EITF 01-09''). EITF 01-09 was effective for the General Partners in the first quarter of 2002. EITF 01-09 clarifies the income statement classification of costs incurred by a vendor in connection with the reseller's purchase or promotion of the vendor's products, resulting in certain cooperative advertising and product placement costs previously classified as selling expenses to be reflected as a reduction of revenues earned from that activity. The new guidance impacts WCI and requires retroactive restatement of all periods presented to reflect the new accounting provisions. As a result of applying the provisions of EITF 01-09, WCI's revenues and costs each were reduced by an equal amount of approximately $8 million in the first quarter of 2001.

***Other Significant Transactions and Nonrecurring Items—General Partners***

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

          As previously discussed, the General Partners adopted, effective January 1, 2002, new accounting rules for goodwill and certain intangible assets. Among the requirements of the new rules is that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques. During the first quarter of 2002, the General Partners individually completed their impairment reviews, resulting in WCI recording an approximate $19 billion noncash charge and ATC recording an approximate $10 billion noncash charge for the impairment of goodwill, all of which was generated in the Merger. Approximately $14 billion of WCI's charge and all of ATC's charge was the result of goodwill impairment charges recorded at TWE and certain AOL Time Warner consolidated subsidiaries, which are accounted for by the General Partners under the equity method of accounting. These charges reflect overall market declines since the Merger was announced in January 2000, are non-operational in nature and are reflected as a cumulative effect of an accounting change in the accompanying consolidated financial statements (Note 5).

          In  addition to the impairment charges of approximately $19 billion for WCI and  approximately $10 billion for ATC to reflect the cumulative effect of an accounting  change, the General Partners' operating results for the three months ended March 31,  2002 included (i) merger and restructuring costs of approximately $4 million  at WCI (Note 3) and (ii) noncash pretax charges of approximately $258  million at WCI and approximately $175 million at ATC to reduce the carrying  value of certain investments that experienced other-than-temporary declines  in market value, including $255 million at WCI and $175 million at ATC related  to the write-down of the General Partners' respective investments in Time Warner  Telecom, an equity investee (Note 4).

          For the three months ended March 31, 2001, WCI's operating results included a noncash pretax charge of approximately $9 million to reduce the carrying value of certain investments that experienced other-than-temporary declines in market value.

28

**TWE GENERAL PARTNERS  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**

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

***Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001***

**********          WCI  had revenues of $947 million and income before the cumulative effect of an accounting  change of $12 million in 2002, compared to revenues of $904 million and a net  loss of $388 million in 2001. EBITDA, excluding the $4 million of merger and  restructuring charges in 2002, increased 2% to $96 million in 2002 from $94  million in 2001. Operating income was $21 million in 2002 compared to an operating  loss of $134 million in 2001. Revenues increased primarily due to higher worldwide  sales as well as the impact of the acquisition of Word Entertainment in January 2002,  offset in part by the negative effect of changes in foreign currency exchange  rates on international revenues. The increase in EBITDA is due primarily to  the revenue increase. The increase in operating income was principally due to  a reduction in amortization associated with the adoption of FAS 142 as previously  discussed. As of March 31, 2002, WCI's music operations had increased its  domestic album market share to 18.0%, compared to 15.7% at March 31, 2001.

**          Equity  in Pretax Income (Loss) of TWE.**WCI's equity  in the pretax income of TWE was income of $228 million in 2002, compared to  a loss of $136 million in 2001. TWE's pretax income increased in 2002 as compared  to 2001 principally as a result of a decrease in amortization expense resulting  from the adoption of FAS 142.

**          Interest  Expense, Net.**Interest expense, net, was $8  million in 2002 compared to zero in 2001. The increase was principally the result  of the recognition of interest associated with a long-term liability for artist  contracts.

**          Other  Expense, Net.**Other expense, net, excluding  the significant transactions and nonrecurring items previously discussed, was  $1 million in 2002, compared to $99 million in 2001. The decrease in other expense,  net was principally the result of a decrease in losses from certain investments  accounted for under the equity method of accounting. In 2001, these losses primarily  related to the amortization of goodwill and intangible assets associated with  these investments. In 2002, under FAS 142, the amortization of goodwill  and indefinite lived intangible assets associated with these investments ceased.

**          Income  Tax Provision.**The relationship between income  before income taxes and income tax expense for the General Partners is principally  affected by certain financial statement expenses that are not deductible for  income tax purposes and foreign income taxed at different rates. Income tax  expense for each of the General Partners includes all income taxes related to  its allocable share of partnership income and its equity in the income tax expense  of corporate subsidiaries of TWE.

29

**TWE GENERAL PARTNERS  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**

**FINANCIAL CONDITION AND LIQUIDITYMarch 31, 2002**

*******Financial Condition***

          WCI  had $27.6 billion of equity at March 31, 2002, compared to $57.4 billion of  equity at December 31, 2001. Cash and equivalents decreased to zero at  March 31, 2002, compared to $40 million at December 31, 2001. WCI  had no borrowings outstanding to TW Companies under its revolving credit agreement  at the end of either period.

                    ATC  had $15.3 billion of equity at March 31, 2002, compared to $28.3 billion at  December 31, 2001. Although ATC has no independent operations, it is expected  that additional tax-related and other distributions from TWE, as well as availability  under ATC's revolving credit agreement with TW Companies, will continue to be  sufficient to satisfy ATC's obligations with respect to its tax sharing agreement  with TW Companies for the foreseeable future.

***Cash Flows***

**********          In  the first three months of 2002, WCI's cash provided by operations amounted to  $328 million and reflected $92 million of EBITDA, $71 million of noncash depreciation  and amortization expense, $103 million of distributions from TWE, $60 million  of net income tax refunds (including $73 million paid to TW Companies under  a tax sharing agreement) and $2 million related to a decrease in other working  capital requirements. In the first three months of 2001, cash provided by WCI's  operations of $429 million reflected $94 million of EBITDA, $228 million of  noncash depreciation and amortization expense, $117 million of distributions  from TWE, $2 million of net income tax refunds (including $32 million paid to  TW Companies under a tax sharing agreement) less $12 million related to an increase  in other working capital requirements.

          Cash used by investing activities increased to $133 million in the first three months of 2002, compared to $40 million in the first three months of 2001 primarily due to an increase in investments and acquisitions, including the acquisition of Word.

          Cash  used by financing activities increased to $235 million in the first three months  of 2002, compared to $233 million in the first three months of 2001 as a result  of increased advances to TW Companies, offset in part by a decrease in dividends.

          Management believes that WCI's operating cash flow and borrowing availability under its revolving credit agreement with TW Companies are sufficient to fund its capital and liquidity needs for the foreseeable future without cash distributions from TWE above those permitted by existing agreements.

          WCI and ATC have no claims on the assets and cash flows of TWE except through the payment of certain reimbursements and cash distributions. During the three months ended March 31, 2002, the General Partners received an aggregate $174 million of distributions from TWE, consisting of $159 million of tax-related distributions and $15 million of stock option related distributions. During the three months ended March 31, 2001, the General Partners received an aggregate $198 million of distributions, consisting of $35 million of tax-related distributions and $163 million of stock option related distributions. Of such aggregate distributions, WCI received $103 million during the three months ended March 31, 2002 and $117 million in 2001 and ATC received $71 million during the three months ended March 31, 2002 and $81 million in 2001.

30

**TWE GENERAL PARTNERS  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**

**CAUTION CONCERNING 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 such ''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 such forward-looking statements. Those forward-looking statements are based on management's present expectations about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the General Partners are under no obligation to (and expressly disclaim any such obligation to) update or alter its forward-looking statements whether as a result of such changes, new information, future events or otherwise.

          The General Partners operate in highly competitive, consumer-driven and rapidly changing media and entertainment businesses. These businesses are affected by government regulation, economic, 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 General Partners' actual results could differ materially from management's expectations because of changes in such factors. Other factors and risks could also cause actual results to differ from those contained in the forward-looking statements, including those identified in other filings with the SEC and the following, which includes factors and risks inherent in the General Partners' investment in TWE:
-  For TWE's cable business, more aggressive than    expected competition from new technologies and other types of video programming    distributors, including DBS and DSL; increases in government regulation of    basic cable or equipment rates or other terms of service (such as ''digital    must-carry,'' open access or common carrier requirements); government regulation    of other services, such as broadband cable modem service; increased difficulty    in obtaining franchise renewals; the failure of new equipment (such as digital    set-top boxes) or services (such as digital cable, high-speed online services,    telephony over cable or video-on-demand) to appeal to enough consumers or    to be available at prices consumers are willing to pay, to function as expected    and to be delivered in a timely fashion; fluctuations in spending levels by    advertisers and consumers; and greater than expected increases in programming    or other costs.
-   For TWE's filmed    entertainment businesses generally, their ability to continue to attract and    select desirable talent and scripts at manageable costs; general increases    in production costs; fragmentation of consumer leisure and entertainment time    (and its possible negative effects on the broadcast and cable networks, which    are significant customers of these businesses); continued popularity of merchandising;    the potential repeal of the Sonny Bono Copyright Term Extension Act; the uncertain    impact of technological developments which may facilitate piracy of the Company's    copyrighted works; and 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 TWE's network businesses, greater than expected    programming or production costs; public and cable operator resistance to price    increases (and the negative impact on premium programmers of increases in    basic cable rates); increased regulation of distribution agreements; the    sensitivity of network advertising to economic 

31

**TWE GENERAL PARTNERS  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)**
cyclicality and to new media    technologies; the impact of consolidation among cable and satellite distributors;    piracy of programming by means of Internet peer-to-peer file sharing; the    impact of personal video recorder ''ad-stripping'' functions on advertising    sales; 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.
- For WCI's music business, its 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; its ability to continue to enforce its intellectual property rights    in digital environments; piracy of programming by means of Internet peer-to-peer    file sharing; its ability to develop a successful business model applicable    to a digital online environment; the potential repeal of Subsection (6)    of California Labor Code Section 2855 regarding the maximum length of    personal service contracts; the potential repeal of the Sonny Bono Copyright    Term Extension Act; risks associated with foreign currency exchange rates;    and the overall strength of global music sales.

          In addition, the General Partners' overall financial strategy, including growth in operations, maintaining its financial ratios and a strong balance sheet, could be adversely affected by increased interest rates, failure to meet earnings expectations, significant acquisitions or other transactions, economic slowdowns and changes in the General Partners' plans, strategies and intentions.

32

**TWE GENERAL PARTNERSCONSOLIDATED BALANCE SHEETS**
  **WCI** **ATC**  **March 31,2002** **December 31,2001** **March 31,2002** **December 31,2001**  **(Unaudited)**     **(Unaudited)**      **(millions, except per share amounts)****ASSETS**                **Current      assets**                Cash and      equivalents     $—      $40      $—      $— Receivables,      less allowances of $342 and $355 million    677     944     —     — Inventories    134     121     —     — Prepaid      expenses    754     708     —     —                      Total      current assets    1,565     1,813     —     —                          Investments      in and amounts due to and from TWE    19,968      36,834     13,702     25,292  Investments      in TW Companies    103     103     60     60  Other      investments    3,787     6,084     1,417     3,047  Intangible      assets subject to amortization    2,960     2,926     —     — Intangible      assets not subject to amortization    1,643      1,643     —     — Goodwill    1,074     11,799     262     262  Other      assets, primarily property, plant and equipment    618     621     —     —                      Total      assets     $31,718      $61,823      $15,441      $28,661                       **LIABILITIES      AND SHAREHOLDERS' EQUITY**                **Current      liabilities**                Accounts      payable     $228      $222      $—      $— Royalties      payable    887     891     —     — Other      current liabilities    705     894     —     —                      Total      current liabilities    1,820     2,007     —     —                          Deferred      income taxes    1,520     1,656     53     124  Other      long-term liabilities, including $117, $264, $98 and $199 million, respectively,                due to TW Companies    795     736      98     199                           **Shareholders'      equity**                Common      stock    1     1     1     1  Preferred      stock of WCI, $.01 par value, 90,000 shares outstanding and $90            million liquidation preference    —     —     —     — Paid-in      capital    49,347     60,162     26,261     29,773  Retained      deficit      (20,771)      (1,969)      (10,164)      (657)                          28,577     58,194     16,098     29,117                           Due from      TW Companies, net      (408)      (184)      (472)      (443)Reciprocal      interest in TW Companies stock      (586)      (586)      (336)      (336)                     Total      shareholders' equity    27,583     57,424     15,290     28,338                       Total      liabilities and shareholders' equity     $31,718      $61,823       $15,441      $28,661                       
See accompanying notes.

33

**TWE GENERAL PARTNERSCONSOLIDATED STATEMENTS OF OPERATIONSThree Months Ended March 31,(Unaudited)**
  **WCI** **ATC**  **2002** **2001** **2002** **2001**  **(millions)**Content and other revenues(a)    $947      $904     $—     $—                  Cost of revenues(a)     (543)     (405)   —    — Selling, general and administrative(a)     (340)     (427)   —    — Amortization of goodwill and other intangibles     (43)     (206)   —    —                  Operating income (loss)   21      (134)   —    — Equity in pretax income (loss) of TWE(a)   228       (136)   155      (93)Interest expense, net     (8)   —    —    — Other expense, net(a)     (259)     (108)     (172)     (72)                 Loss before income taxes and cumulative effect of accounting change     (18)     (378)     (17)     (165)Income tax benefit (expense)(a)   30      (10)   22    1                   Income (loss) before cumulative effect of accounting change   12      (388)   5      (164)Cumulative effect of accounting change     (18,962)   —      (9,603)   —                  Net loss      $(18,950)      $(388)      $(9,598)      $(164)                 

(a)Includes the following income (expenses) resulting from transactions with AOL Time Warner, TW Companies, TWE or equity investees of the General Partners:         Revenues         $55          $49          $—          $—          Cost      of revenues          (2)          (1)      —       —          Selling,      general and administrative      (4)      19       —       —          Equity      in pretax income (loss) of TWE          (20)          (22)      —       —          Other      expense, net      18       18       —       —          Income      tax benefit (expense)      73       32       36       12       
See accompanying notes.

34

**TWE GENERAL PARTNERSCONSOLIDATED STATEMENTS OF CASH FLOWSThree Months Ended March 31,(Unaudited)**
  **WCI** **ATC**  **2002** **2001** **2002** **2001**  **(millions)****OPERATIONS**                Net loss      $(18,950)      $(388)      $(9,598)      $(164)Adjustments for noncash and nonoperating items:                     Cumulative      effect of accounting change    18,962    —     9,603    —     Depreciation      and amortization    71     228     —     —     Excess      (deficiency) of distributions over equity in pretax	          income of TWE      (125)   253       (84)   174      Equity      in losses of other investee companies after	          distributions    1     110     172     72  Changes in operating assets and liabilities    369    226     (58)   9                   Cash provided by operations    328    429     35    91                   **INVESTING ACTIVITIES**                Investments and acquisitions      (116)     (18)   —     — Capital expenditures      (17)     (22)   —     —                  Cash used by investing activities      (133)     (40)   —     —                  **FINANCING ACTIVITIES**                Dividends      (11)     (99)     (6)     (66)Increase in amounts due from TW Companies, net      (224)     (134)     (29)     (25)                 Cash used by financing activities      (235)     (233)     (35)     (91)                 **INCREASE (DECREASE) IN CASH AND EQUIVALENTS**     (40)   156     —     — **CASH AND EQUIVALENTS AT BEGINNING OF PERIOD**   40     36     —     —                  **CASH AND EQUIVALENTS AT END OF PERIOD**    $—      $192      $—      $—                  
See accompanying notes.

35

**TWE GENERAL PARTNERSCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITYThree Months Ended March 31,(Unaudited)**
  **WCI** **ATC**  **2002** **2001** **2002** **2001**  **(millions)****BALANCE AT BEGINNING OF PERIOD**    $57,424      $8,776      $28,338      $2,075  Allocation of a portion of the purchase price of the America    Online-Time Warner merger to WCI and ATC    —     52,949     —     28,221  Reallocation of goodwill      among AOL Time Warner segments    upon adoption of FAS 142      (10,815)   —       (3,512)   —                  Balance at beginning of period, adjusted to give effect to the    America Online-Time Warner Merger and reallocation of    goodwill upon adoption of FAS 142    46,609    61,725     24,826    30,296                                               Net loss      (18,950)     (388)     (9,598)     (164)Other comprehensive income (loss)    11     10       (4)   4                   Comprehensive loss      (18,939)     (378)     (9,602)     (160)                                             (Increase) decrease in stock option distribution liability to    TW Companies    138       (184)   95       (126)Dividends      (2)     (2)   —     — Transfers to TW Companies, net      (224)     (134)     (29)     (25)Other    1       (1)   —     —                  **BALANCE AT END OF PERIOD**    $27,583     $61,026      $15,290     $29,985                   
See accompanying notes.

36

**TWE GENERAL PARTNERSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

******1. DESCRIPTION OF BUSINESS AND  BASIS OF PRESENTATION**

*******Description of Business***

**********          On June 30, 1992, thirteen direct or indirect subsidiaries of Time Warner Companies, Inc. (''TW Companies'') contributed the assets and liabilities or the rights to the cash flows of substantially all of TW Companies' Filmed Entertainment, Networks and Cable businesses to Time Warner Entertainment Company, L.P., a Delaware limited partnership (''TWE''), for general partnership interests, and each general partner guaranteed a pro rata portion of substantially all of TWE's debt and accrued interest based on the relative fair value of the net assets each contributed to TWE (the ''General Partner Guarantees,'' see Note 7). Since then, eleven of the thirteen original general partners have been merged or dissolved into the other two. Warner Communications Inc. (''WCI'') and American Television and Communications Corporation (''ATC'') are the two remaining general partners of TWE. They have succeeded to the general partnership interests and have assumed the General Partner Guarantees of the eleven former general partners. WCI, ATC and, where appropriate, the former general partners are referred to herein as the ''General Partners.''

          WCI conducts substantially all of TW Companies's music operations, which include copyrighted music from many of the world's leading recording artists that is produced and distributed by a family of established record labels such as Warner Bros. Records, Atlantic Records, Elektra Entertainment and Warner Music International. ATC does not conduct operations independent of its ownership interests in TWE and certain other investments.

          On January 11, 2001, America Online, Inc. (''America Online'') and Time Warner Inc. (''Time Warner'') merged to form AOL Time Warner Inc. (''AOL Time Warner''), the world's first Internet-powered media and communications company (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.

***Basis of Presentation***

********Interim Financial Statements**

****          The accompanying consolidated financial statements are unaudited but, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles applicable to interim periods. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the General Partners included in TWE's Annual Report on Form 10-K for the year ended December 31, 2001.

**Revenue Classification Changes**

*****Reimbursement of ''Out-of-Pocket'' Expenses*

**          In  November 2001, the FASB Staff issued as interpretive guidance Emerging Issues  Task Force (''EITF'') Topic No. D-103, ''Income Statement Characterization of  Reimbursements Received for 'Out-of-Pocket' Expenses Incurred'' (''Topic D-103'').  Topic D-103 requires that reimbursements received for out-of-pocket expenses  be classified as revenue on the income statement and was effective  for the General Partners in the first quarter of 2002. 

37

**TWE GENERAL PARTNERS  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)  (Unaudited)**

 The new guidance requires retroactive restatement  of all periods presented to reflect the new accounting provisions. This change  in revenue classification impacts WCI, resulting in an increase in both revenues  and costs of approximately $31 million in the first quarter of 2001.

*Emerging Issues Task Force Issue No. 01-09*

**          In April 2001, the FASB's EITF reached a final consensus on EITF Issue No. 00-25, ''Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products,'' which was later codified along with other similar issues, into EITF 01-09, ''Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products'' (''EITF 01-09''). EITF 01-09 was effective for the General Partners in the first quarter of 2002. EITF 01-09 clarifies the income statement classification of costs incurred by a vendor in connection with the reseller's purchase or promotion of the vendor's products, resulting in certain cooperative advertising and product placement costs previously classified as selling expenses to be reflected as a reduction of revenues earned from that activity. The new guidance impacts WCI and requires retroactive restatement of all periods presented to reflect the new accounting provisions. As a result of applying the provisions of EITF 01-09, WCI's revenues and costs each were reduced by an equal amount of approximately $8 million in the first quarter of 2001.

*Accounting for Business Combinations*

**          In  July 2001, the FASB issued Statements of Financial Accounting Standards (''Statement'')  No. 141, ''Business Combinations'' and No. 142, ''Goodwill and Other  Intangible Assets'' (''FAS 142''). These standards change the accounting  for business combinations by, among other things, prohibiting the prospective  use of pooling-of-interests accounting and requiring companies to stop amortizing  goodwill and certain intangible assets with an indefinite useful life. Instead,  goodwill and intangible assets deemed to have an indefinite useful life will  be subject to an annual review for impairment. The new standards generally were  effective for the General Partners in the first quarter of 2002 and for purchase  business combinations consummated after June 30, 2001. Upon adoption of  FAS 142 in the first quarter of 2002, WCI and ATC recorded one-time, noncash  charges of approximately $19 billion and $10 billion, respectively, for the  impairment of goodwill, substantially all of which was generated in the Merger.  Approximately $14 billion of WCI's charge and all of ATC's charge were the result  of goodwill impairment charges recorded at TWE and certain AOL Time Warner consolidated  subsidiaries, which are accounted for by the General Partners under the equity  method of accounting. These charges are non-operational in nature and are reflected  as a cumulative effect of an accounting change in the accompanying consolidated  statements of operations. For additional discussion on the impact of adopting  FAS 142, see Note 5.

*Reclassifications*

**          Certain reclassifications have been made to the prior year's financial statements to conform to the March 31, 2002 presentation.

**2. WORD ENTERTAINMENT ACQUISITION**

****          In  January 2002, WCI completed its purchase of Word Entertainment (''Word'') from  Gaylord Entertainment Company for approximately $84 million in cash. Word is  a leader in the multi-faceted contemporary Christian music industry with over  30 active artists on several record labels, approximately 45 songwriters under  contract and a catalog containing more than 75,000 masters. The acquisition  was accounted for using the purchase method of accounting for business combinations.

38

**TWE GENERAL PARTNERS  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)  (Unaudited)**

          WCI is currently in the process of allocating the purchase price paid to acquire Word. Based upon a preliminary purchase price allocation, as of March 31, 2002, approximately $10 million has been allocated to copyrights, approximately $20 million has been allocated to music catalogues and approximately $20 million of the purchase price has been allocated to goodwill.

**3. MERGER-RELATED COSTS**

*******Merger Costs***

**********          In accordance with generally accepted accounting principles, WCI generally treats merger costs relating to business combinations accounted for using the purchase method of accounting as additional purchase price paid. However, certain merger costs do not meet the criteria for capitalization and are expensed as incurred. Merger costs both capitalized and expensed are discussed in more detail in the following paragraphs.

*Merger Costs Capitalized as a Cost of Acquisition*

**          In connection with the Merger, WCI has reviewed its operations and implemented several plans to restructure its operations (''restructuring plans''). As part of the restructuring plans, WCI accrued an initial restructuring liability of approximately $312 million during the first quarter of 2001. WCI adjusted these restructuring liabilities downward by $3 million during 2001 as it refined its restructuring plans. The restructuring accruals relate to costs to exit and consolidate certain activities at WCI, as well as costs to terminate employees of WCI. Such amounts were recognized as liabilities assumed in the purchase business combination and, accordingly, resulted in additional goodwill being recorded in connection with the Merger.

          Of the total restructuring accruals, $261 million related to work force reductions and represented employee termination benefits. Because certain employees can defer receipt of termination benefits for up to 24 months, cash payments will continue after the employee has been terminated. Termination payments of approximately $52 million were made in 2001 (none of which was paid in the first quarter) and an additional $32 million was paid in the first quarter of 2002. As of March 31, 2002, the remaining liability of approximately $177 million was primarily classified as a current liability in WCI's accompanying balance sheet.

          The restructuring accrual also includes approximately $48 million associated with exiting certain activities. The restructuring accrual associated with exiting activities specifically includes incremental costs and contractual 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 exiting activities were approximately $7 million in 2001 (none of which was paid in the first quarter) and an additional $6 million was paid in the first quarter of 2002. As of March 31, 2002, the remaining liability of $35 million was primarily classified as a long-term liability in WCI's accompanying consolidated balance sheet.

39

**TWE GENERAL PARTNERS  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)  (Unaudited)**

          Selected information relating to the restructuring costs included in the allocation of the cost to acquire Time Warner follows (in millions):
  **EmployeeTermination** **OtherExit Costs** **Total**             Initial accruals    $261      $48      $309  Cash paid—2001     (52)     (7)     (59)             Restructuring liability as of December 31, 2001   209     41     250  Cash paid—2002     (32)     (6)     (38)             Restructuring liability as of March 31, 2002    $177      $35      $212                            
*Merger Costs Expensed as Incurred*

**          During  2002, the restructuring plans included approximately $4 million of merger costs  that were expensed as incurred, all of which were paid by March 31, 2002,  and are included in operating income (loss) in the accompanying consolidated  statement of operations.

          During 2001, the restructuring plans included approximately $37 million of merger costs, relating to the renegotiation of various contractual commitments, that were expensed as incurred and included in operating income (loss) in the accompanying consolidated statement of operations (none of which was recognized in the first quarter). As of March 31, 2002, approximately $11 million of the $37 million had not been paid and is primarily classified as a current liability in the accompanying consolidated balance sheet.

**4. INVESTMENTS**

**Investment Write-Downs**

****          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, WCI and ATC experienced significant declines in the value of certain privately held investments, restricted securities and investments accounted for using the equity method of accounting. As a result, WCI and ATC recorded noncash pretax charges to reduce the carrying value of certain investments that experienced other-than-temporary declines of approximately $258 million at WCI and approximately $175 million at ATC in the first quarter of 2002.

          Included  in the 2002 charge is a charge of approximately $255 million at WCI and $175  million at ATC to reduce the General Partners' respective investment in Time  Warner Telecom Inc. (''Time Warner Telecom'') for a decline deemed to be other  than temporary. Time Warner Telecom is a leading fiber facilities-based provider  of metropolitan and regional optical broadband networks and services to business  customers. The value of both WCI's and ATC's investment in Time Warner Telecom  was adjusted upward in the Merger by approximately $992 million and $682 million,  respectively, to their estimated fair values. Since the date of the Merger,  Time Warner Telecom's share price has declined significantly, resulting in impairment  charges of approximately $542 million for WCI and

40

**TWE GENERAL PARTNERS  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)  (Unaudited)**

 $372 million for ATC in 2001 and approximately  $255 million for WCI and $175 million for ATC in the first quarter of 2002.

          Since  March 31, 2002, there has been a further decline in the fair value of the  General Partners' investment in Time Warner Telecom. As a result, as of May 2,  2002, the fair value of WCI's and ATC's investment in Time Warner Telecom has  declined by approximately $71 million and $49 million, respectively, representing  a further decline from the Merger-adjusted value noted above. Consistent with  its policy, management will continually evaluate whether sucha decline in fair value should be considered  to be other-than-temporary. Depending on the future performance of Time Warner  Telecom, the General Partners may be required to record an additional significant  noncash charge to write down its investment to fair value due to a decline that  is deemed to be other-than-temporary. Any such additional charge would be unrelated  to the General Partners' core operations and would be recorded in other income  (expense), net.          As of March 31, 2002, Time Warner Telecom was owned 44% by AOL Time Warner, including approximately 20% by WCI and approximately 14% by ATC, 14% by the Advance/Newhouse minority partners to TWE-A/N and 42% by other third parties. The General Partners' interests in Time Warner Telecom are being accounted for under the equity method of accounting. For the year ended December 31, 2001, Time Warner Telecom had revenues, operating loss and net loss of $738 million, $30 million and $81 million, respectively. On May 7, 2002, Time Warner Telecom announced in its earnings release that revenues, operating loss and net loss for the first three months of 2002 were $169 million, $19 million and $43 million, respectively.
**5. GOODWILL AND INTANGIBLE ASSETS**

****          As discussed in Note 1, in January 2002, the General Partners 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. The General Partners will perform their annual impairment review during the fourth quarter of each year, commencing with the fourth quarter of 2002.

          Under FAS 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. For purposes of applying the provisions of FAS 142, both WCI and ATC are considered one reporting unit. This methodology differs from the General Partners' previous policy, as permitted under accounting standards existing at that time, of using undiscounted cash flows on an enterprise-wide basis to determine if goodwill is recoverable.

          Upon  adoption of FAS 142 in the first quarter of 2002, WCI recorded an approximate  $19 billion noncash charge and ATC recorded an approximate $10 billion noncash  charge relating to the impairment of goodwill, all of which was generated in  the Merger. Approximately $5 billion of WCI's charge related to its wholly owned  music business, while the remaining approximately $14 billion of WCI's charge  and all of ATC's charge were the result of goodwill impairment charges recorded  at TWE and certain other AOL Time Warner consolidated subsidiaries, which are  accounted for by the General Partners under the equity method of accounting.  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 charge, the fair value of WCI's music  business and the reporting units underlying the General Partners' investments  in TWE and certain AOL Time Warner

 

 

41

**TWE GENERAL PARTNERS  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)  (Unaudited)**

consolidated subsidiaries accounted  for under the equity method of accounting were estimated using either the expected  present value of future cash flows of the reporting unit or recent comparable  transactions.

          The  FAS 142 goodwill impairment is associated solely with goodwill resulting  from the AOL Time Warner Merger. The amount of the impairment primarily reflects  the overall market declines since the AOL Time Warner 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 AOL Time Warner's reporting  units, including the reporting unit 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 has  been reallocated from WCI's music business and the reporting units underlying  the General Partners' investments in TWE and certain AOL Time Warner consolidated  subsidiaries accounted for under the equity method of accounting to other segments  of AOL Time Warner.

          A  summary of changes in the WCI's goodwill during the quarter is as follows (in  millions):
  **Goodwill**  **January      1,      2002**(1)**** **Acquisitions      &      Adjustments**(2)**** **Impairments**(3)**** **March      31,      2002**                 Total      $5,857       $13         $(4,796)     $1,074                                        
(1)Reflects the reallocation of $5.942      billion of goodwill to other segments of AOL Time Warner under FAS 142.(2)Acquisitions primarily relate to WCI's      preliminary purchase price allocation for the acquisition of Word. In addition,      the ultimate goodwill associated with certain acquisitions continues to      be adjusted as the value of the assets and liabilities acquired are finalized.(3)The impairment charge does not include      approximately $14 billion related to goodwill impairments associated with      investments accounted for under the equity method of accounting.
        As  of March 31, 2002 and December 31, 2001, WCI's intangible assets and  related accumulated amortization consisted of the following (in millions):
  **As      of March 31, 2002** **As of December 31, 2001**  **Gross** **AccumulatedAmortization** **Net** **Gross** **AccumulatedAmortization** **Net**                         *Intangible assets subject to amortization:*                        Music catalogues and copyrights(1)$3,156     $(196)  $2,960    $3,079     $(153)  $2,926                    *Intangible assets not subject to amortization:*                        Brands and trademarks(1)$1,700     $(57)  $1,643    $1,700     $(57)  $1,643                                             ****

(1)Amount represents intangible assets      related to WCI's music operations.
 

          WCI recorded amortization expense of $43 million during the first quarter of 2002 compared to $206 million during the first quarter of 2001. 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: 2002: $174 million; 2003: $170 million; 2004: $170 million; 2005: $170 million; and 2006: $156 million. As acquisitions and dispositions occur in the future and as purchase price allocations are finalized, these amounts may vary.

42

**TWE GENERAL PARTNERS  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)  (Unaudited)**

          During the first quarter of 2002, WCI acquired the following intangible assets:
   **millions**  **Weighted AverageAmortization Period**           Music catalogues and copyrights    $77    15 years         
          The 2001 results do not reflect the provisions of FAS 142. Had WCI and ATC adopted FAS 142 on January 1, 2001, the net income (loss) would have been changed to the adjusted amounts indicated below:
   **Three      Months      Ended March 31, 2001**   **(millions)**    **WCI**   **ACT**     As reported—historical      basis       $(388) $(164)    Add: Goodwill      amortization    148    —     Add: Intangible      amortization    14    —     Add: TWE goodwill and intangible amortization         405    278  Add: Equity investee goodwill amortization  107   78  Income tax impact  (210)  (142)              Adjusted       $76   $50                    
**6. INVESTMENT IN TWE**

****          The General Partners' investment in and amounts due to and from TWE at March 31, 2002 and December 31, 2001 consists of the following:
    **March      31, 2002** **WCI********ATC**   **(millions)**    Investment in TWE     $19,775      $13,621     Stock option related      distributions due from TWE    117     81     Other net receivables      due from TWE    76     —                 Total     $19,968      $13,702                           **December      31, 2001** **WCI********ATC**   **(millions)**    Investment      in TWE     $36,490       $25,110      Stock option      related distributions due from TWE    264      182      Other      net receivables due from TWE    80      —                 Total     $36,834       $25,292                        
          The  General Partners' respective investments in TWE declined significantly during  the quarter, primarily the result of the General Partners' share of TWE's $21.763  billion cumulative effect of an accounting change relating to the adoption of  FAS 142. In addition, upon the adoption of FAS 142, $6.857 billion  of goodwill at TWE generated in the Merger was reallocated to other segments  of AOL Time Warner thereby reducing TWE's net assets. For a more comprehensive description of the impact of these items on TWE, see the accompanying TWE consolidated financial statements.

43

**TWE GENERAL PARTNERS  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)  (Unaudited)**

**Partnership Structure and Allocation of Income**

****          TWE is a Delaware limited partnership that was capitalized on June 30, 1992 to own and operate substantially all of the Filmed Entertainment-Warner Bros., Cable Networks-HBO and Cable businesses previously owned by the General Partners. The General Partners in the aggregate hold 63.27% of the pro rata priority capital (''Series A Capital'') and residual equity capital (''Residual Capital'') of TWE and 100% of the junior priority capital (''Series B Capital'') of TWE. TW Companies, directly or indirectly, holds 11.22% of the Series A Capital and Residual Capital limited partnership interests. The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE are held by MediaOne TWE Holdings, Inc., a subsidiary of AT&T Corp.

          In addition to its existing interest in TWE, AT&T has an option to obtain up to an additional 6.33% of Series A Capital and Residual Capital interests. The determination of the amount of additional interests that AT&T is eligible to acquire is based on the compounded annual growth rate of TWE's adjusted Cable EBITDA, as defined in the option agreement, over the life of the option. The option is exercisable at any time through 2005. The option exercise price is dependent upon the year of exercise and, assuming the full amount of the option is vested, ranges from an exercise price of approximately $1.4 billion currently to $1.8 billion in 2005. Either AT&T or TWE may elect that the exercise price be paid with partnership interests rather than cash. AT&T initiated a process by which an independent investment banking firm has determined the amount by which AT&T would increase its interest in TWE if it were to exercise the option and were to pay the exercise price with partnership interests rather than cash. On April 19, 2002, AT&T delivered to TWE a notice of the exercise of the option on a cashless basis effective May 31, 2002. The exercise of this option will increase AT&T's interest by approximately 2.1% to approximately 27.6% of the Series A Capital and Residual Capital of TWE and reduce WCI's and ATC's interest in the Series A Capital by approximately 1.1% and .7%, respectively.

          AT&T  also has the right, during 60 day exercise periods occurring once every 18 months,  to request that TWE incorporate and register its stock in an initial public  offering. If AT&T exercises such right, TWE can decline to incorporate and register  its stock, in which case AT&T may cause TWE to purchase AT&T's interest at the  price at which an appraiser believes such stock could be sold in an initial  public offering, subject to certain adjustments. In February 2001, AT&T delivered  to TWE a notice requesting that TWE reconstitute itself as a corporation and  register AT&T's partnership interests for public sale. The parties are in discussions  regarding this registration rights process and alternatives thereto. TWE cannot  at this time predict the outcome or effect, if any, of these discussions.

          The TWE partnership agreement provides for special allocations of income, loss and distributions of partnership capital, including priority distributions in the event of liquidation. A portion of TWE's net income has been allocated to the limited partnership interests.

**Summarized Financial Information of TWE**

****          TWE's summarized financial information for 2002 includes the impact of the adoption of FAS 142 effective January 1, 2002, which causes the 2002 summarized financial information to not be comparable to 2001. Accordingly, in order to enhance comparability and make an analysis of 2002 more meaningful, pro forma financial information for 2001 has been provided supplementally as if FAS 142 had been in effect beginning January 1, 2001. In addition, TWE's historical financial information for 2001 has been restated for the impact of Topic D-103 and EITF 01-09. For a more comprehensive description of the impact of these items on TWE, see the accompanying TWE consolidated financial statements.

44

**TWE GENERAL PARTNERS  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)  (Unaudited)**
  **Three Months Ended March 31,**  **2002Historical** **2001Pro Forma** **2001Historical**  **(millions)****Operating Statement Information**            Revenues    $4,027     $3,601     $3,601 Operating income (loss)   671    623      (22)Interest expense, net     (110)     (153)     (153)Other expense, net     (33)     (4)     (40)Minority interest     (109)     (101)     (103)Income (loss) before income taxes and cumulative effect of an accounting change   419    365      (318)Income (loss) before cumulative effect of an accounting change   380    333      (350)Net income (loss)    (21,383)   333      (350)                            **Three      Months Ended March 31,**  **2002      Historical** **2001      Pro Forma** **2001      Historical**  **(millions)****Cash Flow Information**            Cash provided by operations     $1,332      $600      $600 Investments and acquisitions      (196)      (605)      (605)Capital expenditures      (391)      (512)      (512)Borrowings    980     819     819  Debt repayments      (1,380)      (9)      (9)Capital distributions      (198)      (215)      (215)Increase in cash and      equivalents    147     78     78                  **March      31,      2002      Historical** **December      31,      2001      Historical**   **(millions)** **Balance      Sheet Information**         Cash and      equivalents     $397       $250   Total      current assets    4,245           4,908        Total      assets    55,881           85,058        Total      current liabilities    5,924           6,305        Long-term      debt    7,642           8,049        Minority      interests    2,239           2,191        Partners'      capital    37,222           65,405                 
**Capital Distributions**

****          The  assets and cash flows of TWE are restricted by the TWE partnership and credit  agreements and are unavailable for use by the partners except through the payment  of certain fees, reimbursements, cash distributions and loans, which are subject  to limitations. At March 31, 2002 and December 31, 2001, the General  Partners had recorded $198 million and $446 million, respectively, of stock  option related distributions due from TWE, based on closing prices of AOL Time  Warner stock of $23.65 at March 28, 2002 and $32.10 as of December 31,  2001. The General Partners are paid when the options are exercised. The General  Partners also receive tax-related distributions from TWE on a current basis.  During the three months ended March 31, 2002, the General Partners received  cash distributions from TWE in the amount of $174 million, consisting of $159  million of tax-related distributions and $15 million of stock option related  distributions. During the three months ended March 31, 2001, the General  Partners received cash distributions from TWE in the amount of $198 million,  consisting of $35 million of tax-related distributions and $163 million of stock  option related distributions. Of such aggregate distributions, WCI

45

**TWE GENERAL PARTNERS  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)  (Unaudited)**
 received $103 million during the first three months of 2002 and $117 million in 2001 and ATC received $71 million during the first three months of 2002 and $81 million in 2001.
**7. GENERAL PARTNER GUARANTEES**

****          Each General Partner has guaranteed a pro rata portion of approximately $5.0 billion of TWE's public debt, borrowings under its commercial paper program and certain bank debt, including accrued interest at March 31, 2002, based on the relative fair value of the net assets each General Partner (or its predecessor) contributed to TWE. Such indebtedness is recourse to each General Partner only to the extent of its guarantee. There are no restrictions on the ability of the General Partner guarantors to transfer assets, other than TWE assets, to parties that are not guarantors.

          The portion of TWE debt and accrued interest at March 31, 2002 that was guaranteed by each General Partner is set forth below:
   **Total      Guaranteed by      Each General Partner** **General      Partner** **%** **Amount**   **(dollars      in millions)** WCI    59.27           $2,963.4   ATC    40.73        2,036.4                 Total    100.00           $4,999.8                          
**8. COMMITMENTS AND CONTINGENCIES**

****          In *Six Flags Over Georgia LLC et al. v. Time Warner Entertainment Company et al.,* following a trial in December 1998, the jury returned a verdict for plaintiffs and against defendants, including TWE, on plaintiffs' claims for breaches of fiduciary duty. The jury awarded plaintiffs approximately $197 million in compensatory damages and $257 million in punitive damages, and interest has been accruing on those amounts at the Georgia annual statutory rate of twelve percent. TWE paid the compensatory damages with accrued interest during the first quarter of 2001. Payment of the punitive damages portion of the award with accrued interest was stayed by the United States Supreme Court on March 1, 2001 pending the disposition of a certiorari petition with that Court, which was filed by TWE on June 15, 2001. On October 1, 2001, the United States Supreme Court granted TWE's petition, vacated the decision by the Georgia Court of Appeals affirming the punitive damages award, and remanded the matter to the Georgia Court of Appeals for further consideration. The Georgia Court of Appeals affirmed and reinstated its earlier decision regarding the punitive damage award on March 29, 2002. On April 18, 2002, the defendants filed a petition of certiorari to the Georgia Supreme Court seeking review of the decision of the Georgia Court of Appeals and a decision on whether the court will hear the appeal is expected later in 2002.

          On  April 8, 2002, three former employees of certain subsidiaries of AOL Time Warner  Inc. filed *Henry Spann et al. v. AOL Time Warner  Inc. et al.,*a purported class action, in the  United States District Court for the Central District of California. Plaintiffs  have named as defendants, among others, AOL Time Warner Inc., Warner-Elektra-Atlantic  Corporation, 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 the Employee Retirement Income Security Act  (''ERISA''). Due to its preliminary status, WCI is unable to predict the outcome  of the case or reasonably estimate a range of possible loss.

46

**TWE GENERAL PARTNERS  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)  (Unaudited)**

          WCI is subject to a number of state and federal class action lawsuits as well as an action brought by a number of state Attorneys General alleging unlawful horizontal and vertical agreements to fix the prices of compact discs by the major record companies. Although WCI believes that, as to each of these actions, the cases have no merit, adverse jury verdicts could result in a material loss. WCI is unable to predict the outcomes of the litigation and cannot reasonably estimate a range of possible loss given the current status of the cases. Two competition investigations also are currently pending in Europe. WCI is cooperating in these investigations, but is unable to predict their outcomes given their current status.

          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 or TWE relating

 to intellectual property rights and intellectual  property licenses, could have a material adverse effect on WCI's business, financial  condition and operating results.

**9. ADDITIONAL FINANCIAL INFORMATION**

****          Additional financial information with respect to cash flows is as follows:
   **Three      Months Ended March 31,**   **2002** **2001**   **WCI** **ATC** **WCI** **ATC**   **(millions)** Cash payments made      for interest     $3      $—      $3      $—  Interest income received    2     —     3     —  Net cash refunds for      income taxes    60     36     2     12   Tax-related distributions      received from TWE    94     65     20     15   Noncash capital distributions,      net      (138)      (95)      (184)      (126)                  
47

**Part II. Other Information**

******Item 1. Legal Proceedings.**

****          Reference is made to *Six Flags Over Georgia LLC et al. v. Time Warner Entertainment Company, L.P. et al.*described on page 38 of TWE's 2001 Form 10-K for the year ended December 31, 2001 (the ''2001 Form 10-K''). On March 29, 2002, the Georgia Court of Appeals reinstated its prior decision against the defendants, which had affirmed the original punitive damages award in its entirety. On April 18, 2002, the defendants filed a petition for certiorari to the Georgia Supreme Court seeking review of the decision of the Georgia Court of Appeals.

          On April 8, 2002, three former employees of certain subsidiaries of AOL Time Warner Inc. filed *Henry Spann et al. v. AOL Time Warner Inc. et al.,*a purported class action, in the United States District Court for the Central District of California. Plaintiffs have named as defendants, among others, AOL Time Warner Inc., TWE, Warner-Elektra-Atlantic Corporation, 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 the Employee Retirement Income Security Act (''ERISA''). Due to its preliminary status, TWE is unable to predict the outcome of the case or reasonably estimate a range of possible loss.

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

****          (a) Exhibits.

          None.

          (b) Reports on Form 8-K.

          No Current Report on Form 8-K was filed by TWE during the quarter ended March 31, 2002.

48

**TIME WARNER ENTERTAINMENT COMPANY, L.P.AND TWE GENERAL PARTNERSSIGNATURES**

****          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.
 TIME      WARNER      ENTERTAINMENT      COMPANY,      L.P.      By: Warner Communications Inc.,               as General Partner By             /s/ Wayne H. Pace                      Name: Wayne H. Pace      Title:    Executive Vice President and                 Chief Financial Officer AMERICAN      TELEVISIONAND      COMMUNICATIONS     CORPORATION      WARNER      COMMUNICATIONS      INC. By             /s/ Wayne H. Pace                      Name: Wayne H. Pace      Title:    Executive Vice President and                 Chief      Financial Officer
Dated: May 9, 2002