##### 



SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549


FORM 10-Q

[x]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the quarterly period ended June 30, 2003,or[  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the transition period from ________ to _________


Commission file number:   033-53742-14

WARNER COMMUNICATIONS INC.

(Exact name of registrant as specified in its charter)


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


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


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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]





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WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
INDEX TO FORM 10-Q

PagePart I. Financial InformationManagements Discussion and Analysis of Results of Operations and Financial Condition
    
    
    1Item 4.  Controls
and Procedures
    
    
    15Consolidated Financial Statements:Consolidated Balance Sheet at June 30, 2003 and December 31, 2002
    
    
    16Consolidated Statement of Operations for the three and six months ended June 30, 2003 and 2002
    
    
    17Consolidated Statement of Cash Flows for the six months ended June 30, 2003 and 2002
    
    
    19Consolidated Statement of Shareholders Equity for the six months ended June 30, 2003 and 2002
    
    
    20Notes to Consolidated Financial Statements
    
    
    21Part II. Other InformationItem 1. Legal Proceedings
    
    
    34Item 6. Exhibits and Reports on Form 8-K
    
    
    34






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##### 



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

INTRODUCTION

Warner Communications Inc. (WCI), wholly-owned subsidiary of AOL Time
Warner Inc. (AOL Time Warner), classifies its business interests into three
fundamental areas: Filmed Entertainment,consisting principally of interests in
filmed entertainment and television production; Networks,consisting
principally of interests in cable television and broadcast network programming;
and Music,consisting principally of interests in recorded music, music
publishing and CD and DVD manufacturing.

American Television and Communications Corporation (ATC), a wholly owned
subsidiary of AOL Time Warner, does not conduct independent business
operations. The financial position and results of operations of ATC are
principally derived from its investments in WCI, Time Warner Entertainment
Company, L.P. (TWE), Time Warner Companies, Inc. (TW Companies), Turner
Broadcasting System Inc. (TBS) and Time Warner Telecom Inc. (Time Warner
Telecom) all of which are accounted for using the equity-method of
accounting.

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 WCIs and ATCs (collectively, the Companies) financial
condition, changes in financial condition and results of operations. The MD&A
is organized as follows:



| |  |  | Executive summary.This section provides a brief summary of WCIs
results of operations for the three and six months ended June 30, 2003
and WCIs financial condition and liquidity as of and for the six month
period ending June 30, 2003.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Business developments.This section provides a description of
business developments that the Companies believe are important to
understand the results of operations, as well as to anticipate future
trends in those operations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | WCIs results of operations. This section provides an analysis of
WCIs results of operations for the three and six months ended June 30,
2003 compared to the same periods in 2002. As only WCI has independent
business operations, the results of ATC are not discussed. This analysis
is presented on both a consolidated and a segment basis. In addition, a
brief description is provided of significant transactions and events
that impact the comparability of the results being analyzed.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Financial condition and liquidity. This section provides an analysis
of the Companies financial condition and WCIs cash flows as of and for
the six months ended June 30, 2003.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

As discussed in more detail below, the restructuring of TWE, which
occurred on March 31, 2003 (the TWE Restructuring), has significantly
impacted the operations of WCI. Pursuant to accounting principles generally
accepted in the United States, the information included herein has been
adjusted to reflect the impact of the TWE Restructuring and other transfers of
assets under common control (e.g., the former film and television libraries of
Metro-Goldwyn-Mayer, Inc. and RKO Pictures (the Library
division)), for all
periods presented.

Use of Operating Income (Loss)
before Depreciation and Amortization

WCI utilizes Operating Income (Loss) before Depreciation and Amortization,
among other measures, to evaluate the performance of its businesses. Operating
Income (Loss) before Depreciation and Amortization is considered an important
indicator of the operational strength of WCIs businesses. Operating Income
(Loss) before Depreciation and Amortization eliminates the uneven effect across
all business segments of considerable amounts of non-cash depreciation of
tangible assets and amortization of certain intangible assets that were
recognized in business combinations. A limitation of this measure, however, is
that it does not reflect the costs of certain capitalized tangible and
intangible assets used in generating revenues in WCIs businesses. Management
evaluates the costs of such tangible and intangible assets through other
financial measures such as capital expenditures and investment spending.

1



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##### 



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

Operating Income (Loss) before Depreciation and Amortization should be
considered in addition to, not as a substitute for WCIs Operating Income
(Loss), Net Income (Loss) and various cash flow measures (e.g., Cash Provided
by Operations), respectively, as well as other measures of financial
performance reported in accordance with accounting principles generally
accepted in the United States.

EXECUTIVE SUMMARY

Revenues
for the three and six months ended June 30, 2003 increased 11%
over the same period in 2002 to $4.189 billion and $7.888 billion,
respectively, due to revenue increases at all business segments.
Both the three and six month periods reflect revenue gain at all
business segments. Such revenue gains were evidenced through increased
Subscription, Advertising and Content revenues which more than offset by a
decline in Other revenues.

WCI had net income of $752 million for the three months ended June 30,
2003 compared to $401 million in 2002. For the six months ended June 30, 2003,
net income was $1.026 billion compared to net income before the cumulative
effect of an accounting change of $499 million.

The
improvement in net income for both the three and six month periods
ended June 30, 2003 over the comparable prior year periods reflects
improvements in Operating Income, lower interest expense, increased equity in
pretax income of TWC Inc. and higher investment and other gains and
lower investment impairments in 2003. In particular, the three month period ended June
30, 2003 reflects investment gains of approximately $531 million (approximately
$567 million for the six months ended June 30, 2003) primarily consisting of
the gain on the sale of WCIs 50% interest in Comedy Partners,
L.P. (Comedy Central). This compares to
investment gains of approximately $96 million for the three and six months
ended June 30, 2002. Additionally, both the three months and six months ended
June 30, 2003 reflect lower investment impairment charges than
in 2002, as the
six month period in 2002 included approximately $345 million of investment
impairment charges associated with the writedown of WCIs 20% ownership
interest in Time Warner Telecom.

WCI
had Operating Income of $512 million for the three months ended June
30, 2003 compared to $427 million in 2002. For the six months ended June 30,
2003, Operating Income was $861 million compared to Operating Income of $720
million for the six months ended June 30, 2002. The increases reflect higher
business segment Operating Income before Depreciation and Amortization
partially offset by increases in depreciation and amortization expense.

Operating Income before Depreciation and Amortization increased $124
million for the three months ended June 30, 2003 and $211 million for the six
months ended June 30, 2003 over the same periods in 2002. Included in these
results were a gain on disposition of certain assets and merger and
restructuring costs, which are discussed below. Excluding these items,
Operating Income before Depreciation and Amortization for the three and six
months ended June 30, 2003 improved as a result of increases at the Filmed
Entertainment and Networks while the Music segment showed an increase for the
three months and remained flat for the six month period.

For the three month and six month periods ended June 30, 2003,
depreciation expense increased principally due to increases at the Music
segment. For both the three and six months ended June 30, 2003, amortization
expense increased principally due to increases at the Music and Filmed
Entertainment segments. The increase at the Music segment is principally
related to the reduction in the amortization period of music publishing
copyrights and record catalog from 20 to 15 years. For the Filmed Entertainment
segment, the increase relates to an upward adjustment to the carrying value the
film library assets due to the TWE Restructuring.

For
the first six months of 2003, WCI generated $439 million in Cash Flow
from Operations as compared to $986 million in the same period in 2002.
Cash Flow from Operations was impacted unfavorably by a
decrease in cash generated by working capital.

2



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##### 



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

BUSINESS DEVELOPMENTS

Description of Business

Sale of Music Manufacturing

In July 2003, AOL Time Warner announced a definitive agreement to sell
Warner Music Groups DVD and CD manufacturing, printing, packaging, physical
distribution and merchandising businesses for $1.05 billion in cash to Cinram
International Inc. (Cinram). This agreement includes the following
businesses: WEA Manufacturing Inc., Warner Music Manufacturing Europe GmbH, Ivy
Hill Corporation, Giant Merchandising and the physical distribution operations
of Warner-Elektra-Atlantic Corporation (WEA Corp.). The sales and marketing
operations of WEA Corp. will remain as part of Warner Music Group (WMG).

In addition, AOL Time Warner will enter into long-term arrangements
effective at the closing under which Cinram will provide manufacturing,
printing, packaging and physical distribution for WCIs DVDs and CDs in North
America and Europe. Had the sale and other agreements described above occurred
at the beginning of 2003, Operating Income before Depreciation and Amortization
for WCI for the six months ended June 30, 2003 would have been reduced by
approximately $130 million. Similarly, depreciation and
amortization would have been reduced by approximately
$30 million resulting in a reduction in Operating Income of approximately $100 million. This transaction is expected to close by the end
of 2003, but is subject to the applicable regulatory reviews in the United
States and other countries and other customary closing conditions. The music
manufacturing business has been classified as held for sale and accordingly, we
have stopped depreciating and amortizing the manufacturing assets
effective July 2003.

TWE Restructuring

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

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

3



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##### 



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

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

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

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

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

The additional ownership interests acquired by WCI in the TWE
Restructuring have been accounted for as a step acquisition and are reflected
in the accompanying balance sheet as of June 30, 2003.
The purchase price allocation is preliminary as WCI is in the process
of completing a valuation study to identify and value the net assets
acquired.

4



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##### 



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

WCIS RESULTS OF OPERATIONS

Transactions Affecting Comparability of Results of Operations

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

Three Months Ended
    
    Six Months Ended6/30/03
    
    6/30/02
    
    6/30/03
    
    6/30/02(millions)Merger and restructuring costs
    
    $
    (6
    )
    
    $
    
    
    
    $
    (6
    )
    
    $
    (5
    )Gain on disposal of assets
    
    
    43
    
    
    
    
    
    
    
    43
    
    
    
    Impact on Operating Income
    
    
    37
    
    
    
    
    
    
    
    37
    
    
    
    (5
    )Investment gains
    
    
    531
    
    
    
    96
    
    
    
    567
    
    
    
    96Impairment of investments
    
    
    (36
    )
    
    
    (105
    )
    
    
    (54
    )
    
    
    (353
    )Impact on other income (expense), net
    
    
    495
    
    
    
    (9
    )
    
    
    513
    
    
    
    (257
    )Pretax impact
    
    
    532
    
    
    
    (9
    )
    
    
    550
    
    
    
    (262
    )Income tax impact
    
    
    (224
    )
    
    
    4
    
    
    
    (231
    )
    
    
    105After-tax impact
    
    $
    308
    
    
    $
    (5
    )
    
    $
    319
    
    
    $
    (157
    )


For the six months ended June 30, 2003, these items included (i) merger
and restructuring costs of $6 million (Note 3), (ii) a $43 million gain on the
sale of WCIs interests in a consolidated UK theater chain, (iii) approximately
$567 million in gains related to certain unconsolidated investments, including
a $513 million gain from the sale of WCIs interest in Comedy Central, and (iv)
non-cash charges of $54 million, which consists of $55 million to reduce the
carrying value of certain investments that experienced other-than-temporary
declines in market value, offset in part by $1 million of gains to reflect
market fluctuations in equity derivative instruments. Included in the
$55 million charge relating to other-than-temporary declines in value
is a $33 million non-cash charge to reduce the carrying value of
WCIs
investment in ntv KG (NTV-Germany) (Note 4).

For the six months ended June 30, 2002, these items included (i) merger
and restructuring costs of $5 million which occurred in the first quarter (Note
3), (ii) approximately $96 million in gains on the sale of certain investments
and (iii) a non-cash charge of $353 million, which consists of $361 million to
reduce the carrying value of certain investments that experienced
other-than-temporary declines in market value, offset in part by $8 million of
gains to reflect market fluctuations in equity derivative instruments. Included
in the $353 million charge relating to other-than-temporary declines in value
is a $345 million non-cash charge to reduce the carrying value of WCIs
investment in Time Warner Telecom, a 20% owned equity investment (Note 4).

Consolidated Results

Revenues.Consolidated revenues increased 11% to $4.189 billion for the
three months ended June 30, 2003. For the six months ended June 30, 2003,
consolidated revenues increased 11% to $7.888 billion. As shown below, these
increases were led by growth in Subscription, Advertising and Content revenues,
offset in part by a decline in Other revenues:

Three Months Ended
    
    Six Months Ended6/30/03
    
    6/30/02
    
    % Change
    
    6/30/03
    
    6/30/02
    
    % Change(millions)
    
    (millions)Subscription
    
    $
    626
    
    
    $
    607
    
    
    
    3
    %
    
    $
    1,255
    
    
    $
    1,202
    
    
    
    4
    %Advertising
    
    
    168
    
    
    
    130
    
    
    
    29
    %
    
    
    306
    
    
    
    238
    
    
    
    29
    %Content
    
    
    3,228
    
    
    
    2,860
    
    
    
    13
    %
    
    
    5,975
    
    
    
    5,314
    
    
    
    12
    %Other
    
    
    167
    
    
    
    182
    
    
    
    (8
    )%
    
    
    352
    
    
    
    357
    
    
    
    (1
    )%Total revenues
    
    $
    4,189
    
    
    $
    3,779
    
    
    
    11
    %
    
    $
    7,888
    
    
    $
    7,111
    
    
    
    11
    %


For the three and six months ended June 30, 2003, the increase in
Subscription revenues was principally due to an increase at HBO primarily
driven by an increase in the number of subscribers and higher rates. The
improvement in Advertising revenues for the three and six months ended June 30,
2003 was primarily related to growth at The WB Network.

For the three months ended June 30, 2003, the increase in Content revenues
was principally due to improved results at the Filmed Entertainment segment
primarily related to the strength of The Matrix Reloadedand additional
international television availabilities, and the Music segment, related to the
strength of new releases in the current quarter and the favorable effects of
foreign exchange rates. For the six months ended June 30, 2003, the 12% increase in
Content revenues related primarily to the Filmed Entertainment segment and
higher ancillary sales of HBO programming at the Networks segment.

5



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##### 



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

The decline in Other revenues for the three months ended June 30, 2003 was
primarily due to declines at the Filmed Entertainment and Music segments. The
decline in Other revenues for the six months ended June 30, 2003 related
primarily to an increase in the relative revenues received from other WCI
segments, which are eliminated upon consolidation.

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

Reconciliation of Operating Income before Depreciation and Amortization to
Operating Income and Net Income

The following table reconciles Operating Income before Depreciation and
Amortization to Operating Income and net income (loss) for purposes of the
discussions that follow:

Three Months Ended
    
    Six Months Ended6/30/03
    
    6/30/02
    
    % Change
    
    6/30/03
    
    6/30/02
    
    % Change(millions)
    

    (millions)Operating Income before Depreciation and
Amortization
    
    $
    698
    
    
    $
    574
    
    
    
    22
    %
    
    $
    1,223
    
    
    $
    1,012
    
    
    
    21
    %Depreciation
    
    
    (69
    )
    
    
    (54
    )
    
    
    28
    %
    
    
    (134
    )
    
    
    (109
    )
    
    
    23
    %Amortization
    
    
    (117
    )
    
    
    (93
    )
    
    
    26
    %
    
    
    (228
    )
    
    
    (183
    )
    
    
    25
    %Operating Income
    
    
    512
    
    
    
    427
    
    
    
    20
    %
    
    
    861
    
    
    
    720
    
    
    
    20
    %Equity in pretax income of TWC Inc.
    
    
    267
    
    
    
    258
    
    
    
    3
    %
    
    
    375
    
    
    
    369
    
    
    
    2
    %Interest expense, net
    
    
    (6
    )
    
    
    (61
    )
    
    
    90
    %
    
    
    (44
    )
    
    
    (104
    )
    
    
    58
    %Other income (expense), net
    
    
    525
    
    
    
    28
    
    
    NM
    
    
    565
    
    
    
    (235
    )
    
    
    NMIncome before income taxes and
cumulative effect of accounting change
    
    
    1,298
    
    
    
    652
    
    
    
    99
    %
    
    
    1,757
    
    
    
    750
    
    
    
    134
    %Income
tax expense
    
    
    (546
    )
    
    
    (251
    )
    
    
    118
    %
    
    
    (731
    )
    
    
    (251
    )
    
    
    191
    %Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,628
    )
    
    
    100
    %Net income (loss)
    
    $
    752
    
    
    $
    401
    
    
    
    88
    %
    
    $
    1,026
    
    
    $
    (27,129
    )
    
    
    NM


Operating Income before Depreciation and Amortization.Operating Income
before Depreciation and Amortization increased 22% to $698 million for the
three months ended June 30, 2003 from $574 million in 2002. For the six months
ended June 30, 2003, Operating Income before Depreciation and Amortization
increased 21% to $1.223 billion from $1.012 billion in 2002.

Included in these results were several items affecting comparability,
including a gain on the disposition of certain assets and merger and
restructuring costs, which are discussed below. Excluding these items,
Operating Income before Depreciation and Amortization for the three and six
months ended June 30, 2003 increased as a result of improvements at the Filmed
Entertainment and Networks segments. Excluding impairment charges and gains and
losses on the disposition of assets, the year-over-year rate of growth in both
Operating Income before Depreciation and Amortization and Operating Income is
expected to slow in the second half of 2003 in comparison to the first half as
WCI faces difficult prior year comparisons in its Filmed Entertainment and
Networks segments. The segment variations are discussed in detail under
Business Segment Results below.

Gain on Disposition of Assets.For the three and six months ended June 30,
2003, Operating Income before Depreciation and Amortization included a $43
million gain related to the sale of a UK theater chain at the Filmed
Entertainment segment.

Merger and Restructuring Costs.For the six months ended June 30, 2003
and June 30, 2002, Operating Income before Depreciation and Amortization
included merger and restructuring costs of $6 million (all of which was
incurred in the second quarter) and $5 million (none of which was incurred in
the second quarter), respectively, at the Music segment. These costs related to
various employee and contractual terminations (Note 3).

Corporate Operating Loss before Depreciation and Amortization.WCIs
Corporate Operating Loss before Depreciation and Amortization increased to
losses of $12 million and $29 million for the three and six months ended June
30, 2003, respectively, from losses of $2 million and $14 million in comparable
prior periods, respectively.

6



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##### 



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

Depreciation
Expense.For the three months ended June 30, 2003 depreciation
expense increased to $69 million from $54 million in 2002 and for the six
months ended June 30, 2003, increased to $134 million, from $109 million in
2002 principally due to increases at the Music segment.

Amortization Expense.For the three months ended June 30, 2003,
amortization expense increased to $117 million from $93 million in 2002 and to
$228 million for the six months ended June 30, 2003, from $183 million in the
same period in 2002. The increase in amortization expense was principally due
to increases at the Music and Filmed Entertainment segments. The increase at
the Music segment is principally related to the reduction in the amortization
period of music publishing copyrights and recorded music catalog from 20 to 15
years. For the Filmed Entertainment segment, the increase relates to the
preliminary step up in value on the film library assets due to the TWE
Restructuring.

Operating Income.
For the three months ended June 30, 2003, Operating Income
increased to $512 million from
$427 million in 2002 and
to $861 million for the six months ended June 30, 2003,
from $720 million in the same period in 2002.
The improvement in Operating Income related to an increase in business segment
Operating Income before Depreciation and Amortization noted above, offset in
part by an increase in depreciation and amortization expense at the Music and
Filmed Entertainment segments as previously discussed.

Equity in Pretax Income
of TWC Inc.Equity in pretax income of TWC Inc. increased to
$267 million for the three months ended June 30, 2003 from $258 million in 2002 and
to $375 million for the six months ended June 30, 2003 from
$369 million in 2002 primarily due to an increase in pretax income of TWC
Inc.

Interest Expense, Net.Interest expense, net, decreased to $6 million for
the three months ended June 30, 2003, from $61 million in 2002 and to $44
million for the six months ended June 30, 2003, from
$104 million in 2002, primarily as a
result of lower intercompany interest expense as well as lower
interest recorded on a litigation settlement that was paid in April
2003.

Other Income (Expense), Net.Other income, net detail is shown in the
table below:

Three Months Ended
    
    Six Months Ended6/30/03
    
    6/30/02
    
    6/30/03
    
    6/30/02(millions)
    
    (millions)Investment related gains
    
    $
    531
    
    
    $
    96
    
    
    $
    567
    
    
    $
    96Loss on writedown of investments
    
    
    (36
    )
    
    
    (105
    )
    
    
    (54
    )
    
    
    (353
    )All other
    
    
    30
    
    
    
    37
    
    
    
    52
    
    
    
    22Other income (expense), net
    
    $
    525
    
    
    $
    28
    
    
    $
    565
    
    
    $
    (235
    )


For the three and six months ended June 30, 2003, gains related to
unconsolidated investments were $531 million and $567 million, respectively, as
compared to $96 million for the three and six months ended June 30, 2002. For
2003, the $567 million included a $513 million gain on the sale of WCIs
interest in Comedy Central. Other income (expense), net also included $49
million ($14 million in the second quarter) related to gains on the sale of a
consolidated international theater chain. For the three and six months ended
June 30, 2002, WCIs investment related gains represented a $96 million gain
from the sale of a portion of WCIs interest in The Columbia House Company
Partnerships (Columbia House).

For the three and six months ended June 30, 2003, WCI recorded non-cash
charges of $36 million and $54 million, respectively, to reduce the carrying
value of certain investments that experienced other-than-temporary declines in
value and to reflect market fluctuations in equity derivative instruments. For
the three and six months ended June 30, 2002, WCI recorded charges of $105
million and $353 million, respectively. Included in the 2003
charge was a $33 million writedown related to an investment in NTV-Germany. Included
in the $353 million charge for the six months ended June 30, 2002, was a $345
million ($90 million in the three month period) charge to reduce the carrying
value of WCIs investment in Time Warner Telecom Inc. (Note 4).

Excluding the impact of the items discussed above, other income (expense),
net, improved in 2003 as compared to the prior year primarily from an increase
in income from equity method investees.

Income Tax Provision.WCI had income tax expense of $546 million for the
three months ended June 30, 2003, compared to $251 million in 2002. WCIs
pretax income before cumulative effect of accounting change in the three month
period was $1.298 billion in 2003 compared to $652 million in 2002. Applying
the 35% U.S. federal statutory rate to pretax income would result in
income tax expense of $454 million in 2003 and $228 million in 2002.
However, WCIs actual income tax expense (benefit) differs from these amounts
primarily as a result of several factors, including state and local income
taxes and foreign income taxed at different rates.

7



---



##### 



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

WCI had income tax expense of $731 million for the six months ended June
30, 2003, compared to $251 million in 2002. WCIs pretax income before
cumulative effect of accounting change in the six month period was $1.757
billion in 2003 compared to $750 million in 2002. Applying the 35% U.S.
federal statutory rate to pretax income would result in income tax expense of
$615 million in 2003 and $263 million in 2002. However, WCIs actual income tax
expense (benefit) differs from these amounts primarily as a result of several
factors, including state and local income taxes and foreign income taxed at
different rates.

Net Income (Loss). WCI had net income of $752 million for the three months
ended June 30, 2003 compared to $401 million in 2002. For the six months ended
June 30, 2003, net income was $1.026 billion compared to a
net loss of $27.129
billion in 2002. Net loss for the six months ended June 30, 2002 included a
$27.628 billion charge relating to the cumulative effect of an accounting
change. Excluding this item, WCIs net income before the cumulative effect of
an accounting change was $499 million in 2002.

As noted above, net income for the three months ended June 30, 2003
included approximately $531 million in pretax gains related to certain
investments, including a $513 million gain on the sale of Comedy Central. These
gains were offset in part by non-cash pretax charges of $36 million to reduce
the carrying value of certain investments that experienced other-than-temporary
declines in value including $33 million for NTV-Germany. In addition, net
income reflects $6 million of pretax merger and restructuring costs.

For the six months ended June 30, 2003, net income included approximately
$567 million in pretax gains on the sale of certain investments, including the
$513 million gain on Comedy Central noted above. This was offset in part by
non-cash pretax charges of $54 million to reduce the carrying value of certain
investments that experienced other-than-temporary declines in value and to
reflect market fluctuations in equity derivative instruments and $6 million of
pretax merger and restructuring costs.

Net loss for the six months ended June 30, 2002 included a $27.628 billion
charge relating to a cumulative effect of an accounting change upon adoption of
FAS 142 in 2002. Excluding this item, the WCIs net income before the
cumulative effect of an accounting change was $499 million in 2002. As noted
above, net income before the cumulative effect of an accounting change for 2002
includes pretax charges of $353 million relating to the writedown of
investments and pretax charges of $5 million relating to merger and
restructuring costs.

In addition to these items, the 2003 results as compared to 2002 benefited
from the overall increase in WCIs operating performance, lower
interest expense and higher other income, net, offset in part by
increases in depreciation and amortization expense.

Business Segment Results

Filmed Entertainment. Revenues, Operating Income before Depreciation and
Amortization, depreciation, amortization and Operating Income of the Filmed
Entertainment segment for the three and six months ended June 30, 2003 and 2002
are as follows:

Three Months Ended
    
    Six Months Ended6/30/03
    
    6/30/02
    
    % Change
    
    6/30/03
    
    6/30/02
    
    % Change(millions)
    
    (millions)Revenues:Advertising
    
    $
    2
    
    
    $
    2
    
    
    
    
    
    
    $
    4
    
    
    $
    4
    
    
    
    Content
    
    
    2,426
    
    
    
    2,138
    
    
    
    13
    %
    
    
    4,317
    
    
    
    3,854
    
    
    
    12
    %Other
    
    
    40
    
    
    
    47
    
    
    
    (15
    )%
    
    
    107
    
    
    
    102
    
    
    
    5
    %Total revenues
    
    $
    2,468
    
    
    $
    2,187
    
    
    
    13
    %
    
    $
    4,428
    
    
    $
    3,960
    
    
    
    12
    %Operating Income before Depreciation
and Amortization
    
    $
    384
    
    
    $
    285
    
    
    
    35
    %
    
    $
    619
    
    
    $
    475
    
    
    
    30
    %Depreciation
    
    
    (22
    )
    
    
    (18
    )
    
    
    22
    %
    
    
    (41
    )
    
    
    (36
    )
    
    
    14
    %Amortization
    
    
    (52
    )
    
    
    (45
    )
    
    
    16
    %
    
    
    (97
    )
    
    
    (89
    )
    
    
    9
    %Operating Income
    
    $
    310
    
    
    $
    222
    
    
    
    40
    %
    
    $
    481
    
    
    $
    350
    
    
    
    37
    %


8



---



##### 



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

For the three and six months ended June 30, 2003, the increase in total
revenues was driven by increases in Content revenues of 13% and 12%,
respectively. The Content revenue increase was primarily related to the
worldwide box office success of The Matrix Reloaded, higher worldwide DVD revenues, revenues related to the extension
of the original basic cable broadcasting rights of Seinfeldto the Turner
entertainment networks and additional international television availabilities.
These increases were offset in part by the absence of the Rosie ODonnell Show,
and lower worldwide VHS revenues.

Operating Income before Depreciation and Amortization and Operating Income
increased for the three and six months ended June 30, 2003 due primarily to the
higher revenues described above and improved margin contributions from the
theatrical business, offset in part by fair value adjustments on certain future
theatrical releases. In addition, Operating Income before Depreciation and
Amortization and Operating Income includes a $43 million gain related to the
sale of a consolidated theater chain in the UK.

The increase in Operating Income for the three and six months ended June
30, 2003 is due primarily to the aforementioned changes in Operating Income
before Depreciation and Amortization offset in part by higher depreciation due
to general fixed asset additions and higher amortization expense relating to
the upward adjustment to the carrying value of the film library assets due to
the TWE Restructuring, which closed on March 31, 2003.

WCI anticipates the rate of growth in both Operating Income before
Depreciation and Amortization and Operating Income to slow in the second half
of 2003 in comparison to that experienced in the first half of 2003. The first
half of 2003 benefited from year-over-year improvements in worldwide theatrical
box office results as well as a nonrecurring gain on the sale of assets. The
second half of 2003 will reflect year-over-year declines in television
syndication as well as higher costs from episodic television production. The
increase in episodic television production will benefit future years, if such
programming proves to be commercially successful.

Networks.Revenues, Operating Income before Depreciation and Amortization,
depreciation, amortization and Operating Income of the Networks segment for the
three and six months ended June 30, 2003 and 2002 are as follows:

Three Months Ended
    
    
    
    
    

    Six Months Ended6/30/03
    
    6/30/02
    
    % Change
    
    6/30/03
    
    6/30/02
    
    % Change(millions)
    
    
    
    
    
    (millions)Revenues:Subscription
    
    $
    626
    
    
    $
    607
    
    
    
    3
    %
    
    $
    1,255
    
    
    $
    1,202
    
    
    
    4
    %Advertising
    
    
    173
    
    
    
    141
    
    
    
    23
    %
    
    
    314
    
    
    
    252
    
    
    
    25
    %Content
    
    
    113
    
    
    
    98
    
    
    
    15
    %
    
    
    391
    
    
    
    174
    
    
    
    125
    %Other
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    Total revenues
    
    $
    914
    
    
    $
    846
    
    
    
    8
    %
    
    $
    1,965
    
    
    $
    1,628
    
    
    
    21
    %Operating Income before Depreciation
and Amortization
    
    $
    221
    
    
    $
    189
    
    
    
    17
    %
    
    $
    441
    
    
    $
    358
    
    
    
    23
    %Depreciation
    
    
    (6
    )
    
    
    (6
    )
    
    
    
    
    
    
    (12
    )
    
    
    (13
    )
    
    
    (8
    )%Amortization
    
    
    (4
    )
    
    
    (3
    )
    
    
    33
    %
    
    
    (7
    )
    
    
    (6
    )
    
    
    17
    %Operating Income
    
    $
    211
    
    
    $
    180
    
    
    
    17
    %
    
    $
    422
    
    
    $
    339
    
    
    
    24
    %


For the three and six months ended June 30, 2003, the increase in
Subscription revenues was due to increases in the number of subscribers and
rates higher at HBO.

For the three and six months ended June 30, 2003, the
increase in Advertising revenues was driven by The WB Network, which benefited
from higher advertising rates, higher ratings and the impact of an expanded
Sunday night schedule that began in September 2002.

The increase in Content
revenues for the three months ended June 30, 2003 was primarily related to
higher ancillary sales of HBO programming. The increase for the six months
ended June 30, 2003 was primarily due to HBOs first quarter 2003 home video
release of My Big Fat Greek Weddingand higher ancillary sales of HBO
programming.

Operating Income before Depreciation and Amortization for the three and
six months ended June 30, 2003 improved due to the increase in total revenues
described above as well as lower marketing expenses and bad debt provisions
taken by HBO related to a cable operator. These improvements were partially offset
by higher programming costs. For the six months ended June 30, 2003, the
increase was related to the same factors noted above for the three month
period, offset in part by higher first quarter distribution costs driven by the
increase in Content revenues at HBO. Operating Income increased for the three
and six months ended June 30, 2003 primarily related to the changes in
Operating Income before Depreciation and Amortization noted above.

9



---



##### 



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

Before any gain on asset disposals, the year-over-year rates of growth in
both Operating Income before Depreciation and Amortization and Operating Income
is expected to slow in the second half of 2003 as compared to the first half as
the Networks segment faces more difficult prior year comparisons.

Music.Revenues, Operating Income before Depreciation and Amortization,
depreciation, amortization and Operating Income (Loss) of the Music segment for
the three and six months ended June 30, 2003 and 2002 are as follows:

Three Months Ended
    
    
    
    
    

    Six Months Ended6/30/03
    
    6/30/02
    
    % Change
    
    6/30/03
    
    6/30/02
    
    % Change(millions)
    
    
    
    
    
    (millions)Revenues:Content
    
    $
    793
    
    
    $
    711
    
    
    
    12
    %
    
    $
    1,481
    
    
    $
    1,474
    
    
    
    Other
    
    
    258
    
    
    
    261
    
    
    
    (1
    )%
    
    
    484
    
    
    
    445
    
    
    
    9
    %Total revenues
    
    $
    1,051
    
    
    
    972
    
    
    
    8
    %
    
    $
    1,965
    
    
    $
    1,919
    
    
    
    2
    %Operating Income before Depreciation and
Amortization
    
    $
    105
    
    
    $
    102
    
    
    
    3
    %
    
    $
    192
    
    
    $
    193
    
    
    
    (1
    )%Depreciation
    
    
    (38
    )
    
    
    (28
    )
    
    
    36
    %
    
    
    (76
    )
    
    
    (56
    )
    
    
    36
    %Amortization
    
    
    (61
    )
    
    
    (45
    )
    
    
    36
    %
    
    
    (124
    )
    
    
    (88
    )
    
    
    41
    %Operating Income (Loss)
    
    $
    6
    
    
    $
    29
    
    
    
    (79
    )%
    
    $
    (8
    )
    
    $
    49
    
    
    
    (116
    )%


For the three months ended June 30, 2003, the 12% increase in Content
revenues was primarily related to increased domestic recorded music sales due
to new releases in the current quarter from artists including Linkin Park,
Madonna, Staind, Cherand Fleetwood Mac, strong carryover sales and a $41
million favorable impact of foreign currency exchange rates primarily related
to the strengthening of the Euro relative to the U.S. dollar,
partially offset by the industry-wide impact of piracy on worldwide
music sales, which is expected to continue. For the six
months ended June 30, 2003, Content revenues were up slightly due to a $91
million favorable impact of foreign currency exchange rates primarily related
to the strengthening of the Euro relative to the U.S. dollar and the strong
performance of new releases in the second quarter, substantially offset by
declines in international sales due to the industrywide impact of piracy on
worldwide music sales, which is expected to continue. As of June 30, 2003, the
Music segment had year-to-date domestic album market share of 18.9% as compared
to year-to-date market share of 17.0% at December 31, 2002 and 17.6% as of June
30, 2002.

For the three months ended June 30, 2003, Other revenues declined
marginally primarily due to lower DVD selling prices which were partially
offset by an $8 million favorable impact of foreign currency exchange rates and
by higher DVD manufacturing volume. For the six months ended June 30, 2003,
Other revenues increased primarily related to an increase in the worldwide DVD
manufacturing volume, and an $18 million favorable impact of foreign currency
exchange rates, offset in part by lower DVD manufacturing prices.

For the three months ended June 30, 2003, the 3% increase in Operating
Income before Depreciation and Amortization was due to the increase in domestic
recorded music revenue in the current quarter, improved margins on DVD
manufacturing related to the decline of certain raw material prices, higher DVD
volume and less manufacturing outsourcing. These increases were partially
offset by increased marketing costs and lower results in its music publishing
business and international recorded music operations, due in part to higher
royalty advance write-offs, and a $6 million restructuring charge due primarily
to the elimination of positions in Japan and Warner Strategic Marketing. For
the six months ended June 30, 2003, Operating Income before Depreciation and
Amortization was essentially flat due to difficult conditions for recorded
music in international territories, the aforementioned restructuring and
royalty advance write-offs and lower publishing revenues related to the overall
decline in the music industry. These amounts were partially offset by
improvements in DVD manufacturing as discussed above as well as a $12
million net benefit related to accrual reversals, including lower than expected
employee compensation costs related to the restructuring of
compensation plans.

For the three and six months ended June 30, 2003, the change in Operating
Income (Loss) in 2003 is due primarily to the aforementioned changes in
Operating Income before Depreciation and Amortization as well as higher
depreciation and amortization expense. The increase in amortization expense is
principally related to the reduction in the amortization period of recorded
music catalog and music publishing copyrights from 20 to 15 years. The change
in the amortization period resulted from WCIs annual impairment review of
goodwill and other intangible assets as of December 31, 2002, where it was
determined that these assets, useful life was
shorter than originally anticipated. The change in the useful life decreased
operating income by approximately $13 million and $25 million for the three
and six month periods ended June 30, 2003, respectively, and net
income by approximately $7 million and $15 million,
respectively.

10



---



##### 



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

In July 2003, AOL Time Warner announced a definitive agreement to sell
Warner Music Groups DVD and CD manufacturing, printing, packaging, physical
distribution and merchandising businesses for $1.05 billion in cash to Cinram.
This agreement includes the following
businesses: WEA Manufacturing Inc., Warner Music Manufacturing Europe GmbH, Ivy
Hill Corporation, Giant Merchandising and the physical distribution operations
of Warner-Elektra-Atlantic Corporation (WEA Corp.). The sales and marketing
operations of WEA Corp. will remain as part of Warner Music Group
(WMG).

In addition, AOL Time Warner will enter into
long-term agreements effective at the closing under which Cinram will provide
manufacturing, printing, packaging and physical distribution for WCIs DVDs and
CDs in North America and Europe. Had the sale and other agreements described
above occurred at the beginning of 2003, Operating Income before Depreciation
and Amortization for WCI for the six months ended June 30, 2003 would have been
reduced by approximately $130 million. Similarly, depreciation
and amortization would have
been reduced by approximately $30 million resulting in a
reduction in Operating Income of approximately $100 million. This transaction is expected to
close by the end of 2003, but is subject to the applicable regulatory reviews
in the United States and other countries and other customary closing
conditions. As of July 2003, music manufacturing business has been classified as held for
sale and accordingly, we have stopped depreciating and amortizing the
manufacturing assets.

Given the uncertainty facing the music industry in general and the impact
of any potential restructurings and asset disposals with the Music segment, it
is difficult to determine whether the current quarters growth in Operating
Income before Depreciation and Amortization can be sustained over the remainder
of the year.

FINANCIAL CONDITION AND LIQUIDITY

June 30, 2003

Current Financial Condition

At June 30, 2003, WCI had $996 million of related party debt, $643 million
of cash and cash equivalents (net debt of $353 million, defined as total debt
less cash and cash equivalents) and $39.876 billion of shareholders equity.
This compares to $887 million of related party debt, $179 million of cash and
cash equivalents (net debt of $708 million) and $34.551 billion of
shareholders equity at December 31, 2002.

In April 2003, WCI sold its 50% interest in Comedy Central for $1.225
billion in cash, and recognized a gain of $513 million. In addition, in July
2003, WCI agreed to sell its CD and DVD manufacturing and distribution business
for approximately $1.05 billion in cash. This transaction is expected to close
by the end of 2003, subject to the applicable regulatory reviews in the United
States and other countries and other customary closing conditions.

At
June 30, 2003, ATC had $15.965 billion of shareholders equity. This
compares to $14.472 billion of shareholders equity at December 31, 2002. ATC
had no cash or equivalents or any debt outstanding at June 30, 2003 and
December 31, 2002.

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

Cash Flows

WCIs cash and cash equivalents increased to $643 million as of June 30,
2003 from $179 million as of December 31, 2002. See below for a discussion of
the change.

Operating Activities

Cash
provided by operations decreased to $439 million for the first six
months of 2003, compared to $986 million in 2002. The decline in cash flow from
operations is primarily related to a decrease in cash generated by working
capital and an increase in cash taxes paid, offset in part by an increase in
Operating Income before Depreciation and Amortization. The changes in working
capital are subject to wide fluctuations based on the timing of cash
transactions related to production schedules, collection of sales proceeds and
similar items.

11



---



##### 



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

Sources of cash provided by operations are as follows:

Six Months Ended June 30,2003
    
    2002(millions)Operating Income before Depreciation and Amortization
    
    $
    1,223
    
    
    $
    1,012Net interest payments
    
    
    (6
    )
    
    
    (7
    )Net income taxes paid
    
    
    (1,048
    )
    
    
    (412
    )All other, including working capital changes
    
    
    270
    
    
    
    393Cash provided by operations
    
    $
    439
    
    
    $
    986


Investing Activities

Cash provided (used) by investing activities increased to cash provided of
$1.023 billion for the first six months of 2003, compared to cash used by
investing activities of $245 million in 2002. The increase in cash provided
(used) by investing activities is primarily due to an increase in investment
proceeds, primarily related to cash proceeds of $1.225 billion from the sale of
its interest in Comedy Central, offset in part by an increase in capital
expenditures and higher level of cash used for investments and acquisitions.

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

Six Months Ended June 30,2003
    
    2002(millions)Investments and acquisitions, net of cash acquired
    
    $
    (220
    )
    
    $
    (195
    )Capital expenditures
    
    
    (127
    )
    
    
    (105
    )Investment proceeds related to Comedy Central
    
    
    1,225
    
    
    
    Other investment proceeds
    
    
    145
    
    
    
    55Cash provided (used) by investing activities
    
    $
    1,023
    
    
    $
    (245
    )


Financing Activities

Cash
used by financing activities increased to $998 million for the
first six months of 2003 compared to $748 million in 2002. The increase in cash
used by financing activities is principally due to an increase in
amounts due from AOL Time Warner, a decrease in dividends offset by an increase
in cash received from other financing activities.

Sources of cash used by financing activities are as follows:

Six Months Ended June 30,2003
    
    2002(millions)Dividends
    
    $
    (22
    )
    
    $
    (25
    )Increase in due from AOL Time Warner
    
    
    (976
    )
    
    
    (723
    )Cash (used) by financing activities
    
    $
    (998
    )
    
    $
    (748
    )


Financing Arrangements

Borrowing Arrangements with TW Companies

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

12



---



##### 



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

Filmed Entertainment Backlog

Backlog represents the amount of future revenue not yet recorded from cash
contracts for the licensing of theatrical and television product for pay cable,
basic cable, network and syndicated television exhibition. Backlog for WCIs
Filmed Entertainment segment was approximately $3.2 billion each at June 30,
2003 and December 31, 2002, including amounts relating to the licensing of film
product to WCIs Networks segment of approximately $301 million at June 30,
2003 and approximately $405 million at December 31, 2002.

RISK FACTORS AND CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

Risk Factors

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

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



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



| |  |  | WCIs music business may be adversely affected by technological
developments, such as Internet peer-to-peer file sharing and CD-R
activity, that facilitate the piracy of music; by its inability to
enforce WCIs intellectual property rights in digital environments; and
by its failure to develop a successful business model applicable to a
digital online environment.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Caution Regarding Forward-Looking Statements

The SEC encourages companies to disclose forward-looking information so
that investors can better understand a companys future prospects and make
informed investment decisions. This document contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995, particularly statements anticipating future growth in revenues,
Operating Income before Depreciation and Amortization and cash flow. Words such
as anticipates, estimates, expects, projects, intends, plans,
believes and words and terms of similar substance used in connection with any
discussion of future operating or financial performance identify
forward-looking statements. These forward-looking statements are based on
managements present expectations and beliefs about future events. As with any
projection or forecast, they are inherently susceptible to uncertainty and
changes in circumstances, and the Companies are under no obligation to, and
expressly disclaim any obligation to, update or alter its forward-looking
statements whether as a result of such changes, new information, subsequent
events or otherwise.

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

For WCIs Filmed Entertainment businesses:



| |  | the ability to continue to attract and select desirable talent and scripts at manageable costs;
|- |  | -----------------------------------------------------------------------------------------------

13



---



##### 



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



| |  | general increases in production costs;
|- |  | --------------------------------------

| |  | fragmentation of consumer leisure and entertainment time and its possible
negative effects on the broadcast and cable networks, which are
significant customers of these businesses;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | continued popularity of merchandising;
|- |  | --------------------------------------

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

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

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

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

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

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

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

For WCIs Networks businesses:



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

| |  | public or cable operator resistance to price increases and the negative
impact on premium programmers of increases in basic cable rates;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------

| |  | increased regulation of distribution agreements;
|- |  | ------------------------------------------------

| |  | the sensitivity of network advertising to economic cyclicality and to new media technologies;
|- |  | ---------------------------------------------------------------------------------------------

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

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

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

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

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

For WCIs Music business:



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

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

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

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

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

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

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

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

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

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

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

14



---



##### 



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION

Item 4.    Controls and Procedures

WCI and ATC, under the supervision and with the participation of its
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the Exchange Act)) as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer of each of WCI and ATC concluded that its disclosure
controls and procedures are effective in timely making known to them material
information relating to such Company and its consolidated subsidiaries required
to be disclosed in its reports filed or submitted under the Exchange Act. WCI
and ATC have investments in certain unconsolidated entities. As WCI and ATC do
not control or manage these entities, its disclosure controls and procedures
with respect to such entities are necessarily substantially more limited than
those it maintains with respect to its consolidated subsidiaries. There have
not been changes in the internal control over financial reporting during the
quarter ended June 30, 2003 that have materially affected, or are reasonably
likely to materially affect, WCIs or ATCs internal control over financial reporting.

15



---



##### 



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

WCI
    
    ATCJune 30,
    
    December 31,
    
    June 30,
    
    December 31,2003
    
    2002(a)
    
    2003
    
    2002(a)(millions)ASSETSCurrent assetsCash and equivalents
    
    $
    643
    
    
    $
    179
    
    
    $
    
    
    
    $
    Receivables, including $1.115 billion and $742 million due
from AOL Time Warner, less allowances of $1.425 billion
and $1.454 billion
    
    
    3,826
    
    
    
    4,294
    
    
    
    
    
    
    
    Inventories
    
    
    1,058
    
    
    
    1,002
    
    
    
    
    
    
    
    Other current assets
    
    
    1,199
    
    
    
    1,146
    
    
    
    
    
    
    
    Total current assets
    
    
    6,726
    
    
    
    6,621
    
    
    
    
    
    
    
    Noncurrent inventories and film costs
    
    
    2,153
    
    
    
    2,205
    
    
    
    
    
    
    
    Investment in TWC Inc.
    
    
    13,734
    
    
    
    12,245
    
    
    
    
    
    
    
    Investment in TWE
    
    
    
    
    
    
    
    
    
    
    2,601
    
    
    
    2,597Investment in WCI
    
    
    
    
    
    
    
    
    
    
    11,904
    
    
    
    10,636Investment in ATC
    
    
    1,063
    
    
    
    1,001
    
    
    
    
    
    
    
    Other investments, including available-for-sale securities
    
    
    3,825
    
    
    
    4,285
    
    
    
    1,146
    
    
    
    1,122Property, plant and equipment
    
    
    1,647
    
    
    
    1,660
    
    
    
    
    
    
    
    Intangible assets subject to amortization
    
    
    6,178
    
    
    
    5,962
    
    
    
    
    
    
    
    Intangible assets not subject to amortization
    
    
    2,880
    
    
    
    2,880
    
    
    
    
    
    
    
    Goodwill
    
    
    12,934
    
    
    
    12,134
    
    
    
    
    
    
    
    Other assets
    
    
    1,155
    
    
    
    1,217
    
    
    
    317
    
    
    
    120Total assets
    
    $
    52,295
    
    
    $
    50,210
    
    
    $
    15,968
    
    
    $
    14,475LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    1,175
    
    
    $
    1,700
    
    
    $
    
    
    
    $
    Participations payable
    
    
    2,737
    
    
    
    2,609
    
    
    
    
    
    
    
    Other current liabilities
    
    
    1,843
    
    
    
    2,267
    
    
    
    
    
    
    
    Total current liabilities
    
    
    5,755
    
    
    
    6,576
    
    
    
    
    
    
    
    Long-term debt, due to AOL Time Warner
    
    
    994
    
    
    
    882
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    3,002
    
    
    
    3,367
    
    
    
    
    
    
    
    Other long-term liabilities
    
    
    2,656
    
    
    
    2,980
    
    
    
    3
    
    
    
    3Minority interests
    
    
    12
    
    
    
    1,854
    
    
    
    
    
    
    
    Shareholders equity
    
    
    39,876
    
    
    
    34,551
    
    
    
    15,965
    
    
    
    14,472Total liabilities and shareholders equity
    
    $
    52,295
    
    
    $
    50,210
    
    
    $
    15,968
    
    
    $
    14,475




---

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

See accompanying notes.

16



---



##### 



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended June 30,
(Unaudited)

WCI
    
    ATC2003
    
    2002(a)
    
    2003
    
    2002(a)(millions)Revenues:Subscription
    
    $
    626
    
    
    $
    607
    
    
    $
    
    
    
    $
    Advertising
    
    
    168
    
    
    
    130
    
    
    
    
    
    
    
    Content
    
    
    3,228
    
    
    
    2,860
    
    
    
    
    
    
    
    Other
    
    
    167
    
    
    
    182
    
    
    
    
    
    
    
    Total revenues(b)
    
    
    4,189
    
    
    
    3,779
    
    
    
    
    
    
    
    Cost of revenues(b)
    
    
    (2,667
    )
    
    
    (2,453
    )
    
    
    
    
    
    
    Selling, general and administrative(b)
    
    
    (930
    )
    
    
    (806
    )
    
    
    
    
    
    
    Gain on disposal of assets
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    Amortization of intangible assets
    
    
    (117
    )
    
    
    (93
    )
    
    
    
    
    
    
    Merger and restructuring costs
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    Operating Income
    
    
    512
    
    
    
    427
    
    
    
    
    
    
    
    Equity in pretax income of TWC Inc.
    
    
    267
    
    
    
    258
    
    
    
    
    
    
    
    Interest income (expense), net
    
    
    (6
    )
    
    
    (61
    )
    
    
    48
    
    
    
    Other income, net(b)
    
    
    525
    
    
    
    28
    
    
    
    300
    
    
    
    91Income before income taxes and cumulative effect
of accounting change
    
    
    1,298
    
    
    
    652
    
    
    
    348
    
    
    
    91Income tax expense
    
    
    (546
    )
    
    
    (251
    )
    
    
    (139
    )
    
    
    (37
    )Income before cumulative effect of accounting change
    
    
    752
    
    
    
    401
    
    
    
    209
    
    
    
    54Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    752
    
    
    $
    401
    
    
    $
    209
    
    
    $
    54




---

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

Revenue
    
    $
    224
    
    
    $
    253
    
    
    $
    
    
    
    $
    Cost of revenues
    
    
    (20
    )
    
    
    (35
    )
    
    
    
    
    
    
    Selling, general and administrative
    
    
    24
    
    
    
    3
    
    
    
    
    
    
    
    Interest income (expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income, net
    
    
    (20
    )
    
    
    (6
    )
    
    
    
    
    
    
    


See accompanying notes.

17



---



##### 



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended June 30,
(Unaudited)

WCI
    
    ATC2003
    
    2002(a)
    
    2003
    
    2002(a)(millions)Revenues:Subscription
    
    $
    1,255
    
    
    $
    1,202
    
    
    $
    
    
    
    $
    Advertising
    
    
    306
    
    
    
    238
    
    
    
    
    
    
    
    Content
    
    
    5,975
    
    
    
    5,314
    
    
    
    
    
    
    
    Other
    
    
    352
    
    
    
    357
    
    
    
    
    
    
    
    Total revenues(b)
    
    
    7,888
    
    
    
    7,111
    
    
    
    
    
    
    
    Cost of revenues(b)
    
    
    (5,056
    )
    
    
    (4,648
    )
    
    
    
    
    
    
    Selling, general and administrative(b)
    
    
    (1,780
    )
    
    
    (1,555
    )
    
    
    
    
    
    
    Gain on disposal of assets
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    Amortization of intangible assets
    
    
    (228
    )
    
    
    (183
    )
    
    
    
    
    
    
    Merger and restructuring costs
    
    
    (6
    )
    
    
    (5
    )
    
    
    
    
    
    
    Operating Income
    
    
    861
    
    
    
    720
    
    
    
    
    
    
    
    Equity in pretax income of TWC Inc.
    
    
    375
    
    
    
    369
    
    
    
    
    
    
    
    Interest income (expense), net
    
    
    (44
    )
    
    
    (104
    )
    
    
    48
    
    
    
    Other income (expense), net(b)
    
    
    565
    
    
    
    (235
    )
    
    
    414
    
    
    
    (62
    )Income (loss) before income taxes and cumulative effect
of accounting change
    
    
    1,757
    
    
    
    750
    
    
    
    462
    
    
    
    (62
    )Income tax benefit (expense)
    
    
    (731
    )
    
    
    (251
    )
    
    
    (186
    )
    
    
    25Income (loss) before cumulative effect of accounting change
    
    
    1,026
    
    
    
    499
    
    
    
    276
    
    
    
    (37
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (27,628
    )
    
    
    
    
    
    
    (7,085
    )Net income (loss)
    
    $
    1,026
    
    
    $
    (27,129
    )
    
    $
    276
    
    
    $
    (7,122
    )




---

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

Revenue
    
    $
    563
    
    
    $
    543
    
    
    $
    
    
    
    $
    Cost of revenues
    
    
    (58
    )
    
    
    (55
    )
    
    
    
    
    
    
    Selling, general and administrative
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    Other income, net
    
    
    8
    
    
    
    8
    
    
    
    
    
    
    
    


See accompanying notes.

18



---



##### 



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
(Unaudited)

WCI
    
    ATC2003
    
    2002(a)
    
    2003
    
    2002(a)(millions)OPERATIONSNet income (loss)
    
    $
    1,026
    
    
    $
    (27,129
    )
    
    $
    276
    
    
    $
    (7,122
    )Adjustments for noncash and nonoperating items:Cumulative effect of accounting change
    
    
    
    
    
    
    27,628
    
    
    
    
    
    
    
    7,085Depreciation and amortization
    
    
    362
    
    
    
    292
    
    
    
    
    
    
    
    Amortization of film costs
    
    
    1,068
    
    
    
    855
    
    
    
    
    
    
    
    Loss on write-down of investments
    
    
    55
    
    
    
    361
    
    
    
    
    
    
    
    237Net gain on sale of investments
    
    
    (610
    )
    
    
    (96
    )
    
    
    
    
    
    
    Equity in pretax income of TWC Inc.
    
    
    (375
    )
    
    
    (369
    )
    
    
    
    
    
    
    Excess of distributions over equity in TWE
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Equity in income of investee companies after distributions
    
    
    (46
    )
    
    
    (31
    )
    
    
    (412
    )
    
    
    (172
    )Changes in operating assets and liabilities
    
    
    (1,041
    )
    
    
    (525
    )
    
    
    140
    
    
    
    (24
    )Cash provided by operations
    
    
    439
    
    
    
    986
    
    
    
    
    
    
    
    INVESTING ACTIVITIESInvestments and acquisitions
    
    
    (220
    )
    
    
    (195
    )
    
    
    
    
    
    
    Capital expenditures
    
    
    (127
    )
    
    
    (105
    )
    
    
    
    
    
    
    Investment proceeds from available-for-sale securities
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Other investment proceeds
    
    
    1,368
    
    
    
    55
    
    
    
    
    
    
    
    Cash provided (used) by investing activities
    
    
    1,023
    
    
    
    (245
    )
    
    
    
    
    
    
    FINANCING ACTIVITIESDividends
    
    
    (22
    )
    
    
    (25
    )
    
    
    
    
    
    
    Increase in due from AOL Time Warner
    
    
    (976
    )
    
    
    (723
    )
    
    
    
    
    
    
    Cash used by financing activities
    
    
    (998
    )
    
    
    (748
    )
    
    
    
    
    
    
    INCREASE IN CASH AND EQUIVALENTS
    
    
    464
    
    
    
    (7
    )
    
    
    
    
    
    
    CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    179
    
    
    
    215
    
    
    
    
    
    
    
    CASH AND EQUIVALENTS AT END OF PERIOD
    
    $
    643
    
    
    $
    208
    
    
    $
    
    
    
    $
    




---

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

See accompanying notes.

19



---



##### 



WARNER COMMUNICATIONS INC. AND
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
Six Months Ended June 30,
(Unaudited)

WCI
    
    ATC2003
    
    2002(a)
    
    2003
    
    2002(a)(millions)BALANCE AT BEGINNING OF PERIOD(a)
    
    $
    34,551
    
    
    $
    81,927
    
    
    $
    14,472
    
    
    $
    25,317Net income (loss)
    
    
    1,026
    
    
    
    (27,129
    )
    
    
    276
    
    
    
    (7,122
    )Change in foreign currency translation
    
    
    147
    
    
    
    9
    
    
    
    
    
    
    
    Other comprehensive income
    
    
    10
    
    
    
    (1
    )
    
    
    5
    
    
    
    Comprehensive income (loss)
    
    
    1,183
    
    
    
    (27,121
    )
    
    
    281
    
    
    
    (7,122
    )Reallocation of goodwill among AOL Time Warner segments
upon adoption of FAS 142
    
    
    
    
    
    
    (11,097
    )
    
    
    
    
    
    
    (3,089
    )Allocation of a portion of the purchase price in connection with
the TWE Restructuring
    
    
    3,696
    
    
    
    
    
    
    
    278
    
    
    
    Distributions to/from AOL Time Warner
    
    
    (1,457
    )
    
    
    (244
    )
    
    
    790
    
    
    
    19Dividends
    
    
    (22
    )
    
    
    (389
    )
    
    
    
    
    
    
    (88
    )Dilution
of interest in Time Warner Entertainment, L.P. (net of
$236 million and $55 million income tax impact)
    
    
    
    
    
    
    (355
    )
    
    
    
    
    
    
    (83
    )Contribution of consideration by AOLTW for the purchase of
Comcasts interest in TWE
    
    
    1,818
    
    
    
    
    
    
    
    411
    
    
    
    Other
    
    
    107
    
    
    
    186
    
    
    
    (267
    )
    
    
    129BALANCE AT END OF PERIOD
    
    $
    39,876
    
    
    $
    42,907
    
    
    $
    15,965
    
    
    $
    15,083


---

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



See accompanying notes.

20



---



##### 



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



|1. |  | DESCRIPTION OF BUSINESS, BUSINESS DEVELOPMENTS AND BASIS OF PRESENTATION
|-- |  | ------------------------------------------------------------------------

Description of Business

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

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

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

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

Distributions
to/from AOL Time Warner represent cash distributions or contributions
from AOL Time Warner and are reflected as a component of
Shareholders Equity.

BUSINESS DEVELOPMENTS

Description of Business

Sale of Music Manufacturing

In July 2003, AOL Time Warner announced a definitive agreement to sell
Warner Music Groups DVD and CD manufacturing, printing, packaging, physical
distribution and merchandising businesses for $1.05 billion in cash to Cinram
International Inc. (Cinram). This agreement includes the following
businesses: WEA Manufacturing Inc., Warner Music Manufacturing Europe GmbH, Ivy
Hill Corporation, Giant Merchandising and the physical distribution operations
of Warner-Elektra-Atlantic Corporation (WEA Corp.). The sales and marketing
operations of WEA Corp. will remain as part of Warner Music Group (WMG).

In addition, AOL Time Warner will enter into long-term agreements
effective at the closing under which Cinram will provide manufacturing,
printing, packaging and physical distribution for WCIs DVDs and CDs in North
America and Europe. Had the sale and other agreements described above occurred
at the beginning of 2003, Operating Income before Depreciation and Amortization
for WCI for the six months ended June 30, 2003, would have been reduced by
approximately $130 million. Similarly, depreciation and
amortization would have been reduced by approximately
$30 million resulting in a reduction in Operating Income of
approximately $100 million. This transaction is expected to close by the end
of 2003, but is subject to the applicable regulatory reviews in the United
States and other countries and other customary closing conditions. The music
manufacturing business has been classified as held for sale and accordingly, we
have stopped depreciating and amortizing the manufacturing assets
effective July 2003.

The carrying amount of major classes of assets and liabilities are
approximately as follows:

21



---



##### 



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

June 30, 2003
    
    December 31, 2002(in millions)Net receivables
    
    $
    75
    
    
    $
    194Inventory
    
    
    63
    
    
    
    61Other current assets
    
    
    21
    
    
    
    12Property, plant and equipment, net
    
    
    373
    
    
    
    374Other assets
    
    
    4
    
    
    
    Total Assets
    
    $
    536
    
    
    $
    641Current liabilities
    
    $
    176
    
    
    $
    225Non-current liabilities
    
    
    9
    
    
    
    10Total liabilities
    
    $
    185
    
    
    $
    235


TWE Restructuring

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

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

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

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

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

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

The additional ownership interests acquired by WCI in the TWE
Restructuring have been accounted for as a step acquisition and are reflected
in the accompanying balance sheet as of June 30, 2003. The total
purchase consideration for this step acquisition is approximately
$4.6 billion. This consists of debt assumed, the mandatorily
convertible preferred stock issued and an interest in certain cable
systems that were previously wholly owned by AOL Time Warner with an
approximate value of $1.0 billion.

22



---



##### 



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

As
of June 30, 2003, the purchase consideration has been preliminarily allocated
to tangible and intangible assets as follows (millions):

Fair value of tangible net assets acquired
    
    $
    1,818Intangible assets subject to amortization
    
    
    420Goodwill
    
    
    680Investment
    
    
    313Fixed Assets
    
    
    20


As
of March 31, 2003, WCI allocated approximately $1.4 billion
to goodwill. In the second quarter of 2003, WCI reallocated $313 million of
goodwill to investments and $420 million to intangible assets subject to
amortization and $20 million to fixed assets. The remaining goodwill balance of $680 million
is recorded in the Networks and Filmed Entertainment segments in the amount of
$385 million and $295 million, respectively. Of the $420 million in intangible
assets subject to amortization, $5 million has been amortized in the second
quarter of 2003. Such intangible assets are amortized over a period of
approximately 20 years.

As previously stated the purchase allocations noted above are preliminary
and additional work needs to be completed to finalize the allocation.
Accordingly, there may be changes to the allocations noted above.

Basis of Presentation

TWE Restructuring

As discussed above, the TWE Restructuring has significantly impacted the
operations of WCI due to the acquisition of the Content Businesses. Pursuant to
accounting principles generally accepted in the United States, the information
included herein has been adjusted to reflect the impact of the TWE
Restructuring and other transfers of assets under common control (e.g., the
Library division) for all periods presented.

Interim Financial Statements

The accompanying consolidated financial statements are unaudited but, in
the opinion of management, contain all the adjustments (consisting of those of
a normal recurring nature) considered necessary to present fairly the financial
position and the results of operations and cash flows for the periods presented
in conformity with accounting principles generally accepted in the United
States applicable to interim periods. The accompanying consolidated financial
statements should be read in conjunction with the consolidated
financial statements of WCI and ATC, included in the Form 8-K/A,
filed on June 13, 2003 (the 2003 Form 8-K/A)
and the Form 8-K,
filed on April 14, 2003,
respectively, as well as their Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003, filed on May 15, 2003 (the
March 31, 2003 Form 10-Q). The 2003
Form 8-K/A supercedes the financial statements of WCI presented
in its Annual Report on Form 10-K for the year ended December 31,
2002 (the 2002 Form 10-K) as the consolidation of TWEs Content Businesses has resulted in
significant changes to the financial statements and certain of
WCIs annual disclosures in the 2002 Form
10-K. As such, where, appropriate, the notes to the consolidated interim
financial statements included in the March 31, 2003 Form 10-Q included certain
annual disclosures as of December 31, 2002, which were restated to include the
impact of consolidating the TWE Content Businesses and other transfers of
assets under common control and did not differ materially at March 31, 2003.

Stock-Based Compensation

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

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

23



---



##### 



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

In accordance with APB 25 and related interpretations, compensation
expense for stock options is recognized in income based on the excess, if any,
of the quoted market price of the stock at the grant date of the award or other
measurement date over the amount an employee must pay to acquire the stock.
Generally, the exercise price for stock options granted to employees equals or
exceeds the fair market value of AOL Time Warner common stock at the date of
grant, thereby resulting in no recognition of compensation expense by WCI. For
awards that generate compensation expense as defined under APB 25, WCI
calculates the amount of compensation expense and recognizes the expense over
the vesting period of the award.

Had compensation cost for AOL Time Warners stock option plans been
determined based on the fair value method set forth in FAS 123, WCIs net
income (loss) would have been changed to the pro forma amounts indicated below:

Three Months Ended June 30,
    
    Six Months Ended June 30,2003
    
    2002
    
    2003
    
    2002(millions)Net income (loss), as reported
    
    $
    752
    
    
    $
    401
    
    
    $
    1,026
    
    
    $
    (27,129
    )Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    (27
    )
    
    
    (40
    )
    
    
    (59
    )
    
    
    (83
    )Pro forma net income (loss)
    
    $
    725
    
    
    $
    361
    
    
    $
    967
    
    
    $
    (27,212
    )


New Accounting Principles

Variable Interest Entities

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

Exit and Disposal Activities

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

Multiple Element Arrangements

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

24



---



##### 



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

Consideration Received from a Vendor by a Customer

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

Guarantees

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

Derivative Instruments

In April 2003, the FASB issued FASB Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities (FAS 149).
FAS 149 amends and clarifies financial accounting and reporting for derivative
instruments including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133 (FAS 133), Accounting for Derivative Instruments and
Hedging Activities.

This statement is effective for contracts entered into or modified after
June 30, 2003. Management does not believe that adoption of this statement
will have a material impact on the consolidated financial statements.

Certain Financial Instruments with Characteristics of Both Liabilities and Equity

In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity
(FAS 150). FAS 150 requires that an issuer classify certain financial
instruments as a liability (or an asset in some circumstances) because that
financial instrument embodies an obligation of the issuer. The remaining
provisions of FAS 150 revise the definition of a liability to encompass certain
obligations that a reporting entity can or must settle by issuing its own
equity shares, depending on the nature of the relationship established between
the holder and the issuer. FAS 150 will be effective for WCI in the third
quarter of 2003. Management does not believe that adoption of this statement
will have a material impact on the consolidated financial statements.

Reclassifications

Certain reclassifications have been made to the prior years financial
information to conform to the June 30, 2003 presentation.



|2. |  | GOODWILL AND INTANGIBLE ASSETS
|-- |  | ------------------------------

In January 2002, WCI adopted the provisions of FASB Statement No. 142
Goodwill and Other Intangible Assets (FAS 142), which requires companies to
stop amortizing goodwill, including the goodwill included in the carrying value
of investments accounted for using the equity method of accounting, 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 using fair value measurement techniques.

Under FAS 142, goodwill impairment is deemed to exist if the net book
value of a reporting unit exceeds its estimated fair value. WCIs reporting
units are generally consistent with the operating segments underlying the
segments identified in Note 7  Segment Information. This methodology differs from WCIs previous policy, as
permitted under accounting standards existing at that time, of using
undiscounted cash flows on an enterprisewide basis to determine if goodwill is
recoverable.

25



---



##### 



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

Upon adoption of FAS 142 in the first quarter of 2002, WCI and ATC
recorded one-time, noncash charges of $27.628 billion (including
$16.427 billion relating to its equity investment in TWC Inc.) and $7.085 billion,
respectively, to reduce the carrying value of its goodwill. Such charges are
nonoperational in nature and are reflected as a cumulative effect of an
accounting change in the accompanying consolidated statement of operations. In
calculating the impairment charges, the fair value of the impaired reporting
units underlying the segments and the reporting units underlying the Companies
investments accounted for using the equity method of accounting, were estimated
using either a discounted cash flow methodology, market comparisons, recent
comparable transactions or a combination thereof.

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

A summary of changes in WCIs goodwill during the year ended December 31,
2002 and the six months ended June 30, 2003, and total assets at June 30, 2003,
by business segment is as follows (millions):

GoodwillTotal AssetsJanuary 1,
    
    Acquisitions &
    
    Cumulative Effect of
    
    4th Quarter
    
    December 31,
    
    Acquisitions &
    
    June 30,
    
    June 30,2002
    
    Adjustments(a)
    
    Accounting Change(e)
    
    Impairment
    
    2002
    
    Adjustments(b)
    
    2003
    
    2003Filmed Entertainment(c)
    
    $
    8,636
    
    
    $
    (8
    )
    
    $
    (3,691
    )
    
    $
    
    
    
    $
    4,937
    
    
    $
    283
    
    
    $
    5,220
    
    
    $
    16,250Networks(d)
    
    
    9,277
    
    
    
    64
    
    
    
    (2,144
    )
    
    
    
    
    
    
    7,197
    
    
    
    512
    
    
    
    7,709
    
    
    
    10,886Music
    
    
    5,477
    
    
    
    (35
    )
    
    
    (4,796
    )
    
    
    (646
    )
    
    
    
    
    
    
    5
    
    
    
    5
    
    
    
    6,299Corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,860Total
    
    $
    23,390
    
    
    $
    21
    
    
    $
    (10,631
    )
    
    $
    (646
    )
    
    $
    12,134
    
    
    $
    800
    
    
    $
    12,934
    
    
    $
    52,295




---

|(a) |  | Includes goodwill created in acquisitions consummated in 2002, as well as
adjustments to WCIs preliminary purchase price allocation for several
acquisitions consummated in 2001.                                                                                                                                                                                                                                                                                                                                                
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Relates primarily to WCIs acquisition of Comcasts 27.64% interest in
the TWE content assets as part of the TWE Restructuring. The additional
goodwill reflects a preliminary purchase price allocation, which is
subject to adjustment as WCI refines its valuation analysis. In the
second quarter of 2003, WCI reallocated $313 million of goodwill to
investments and $420 million to intangible assets subject to
amortization. In addition, there were $6 million in incremental
acquisition costs that increased goodwill.
|   
|(c) |  | Includes impairments at Warner Bros. ($2.851 billion) and the Library
division ($840 million).                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(d) |  | Includes impairments at HBO ($1.933 billion) and The WB Network ($211
million).                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(e) |  | The impairment charge does not include approximately $16.997 billion
related to goodwill impairments associated with equity investees.                                                                                                                                                                                                                                                                                                                                                                                            

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

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

26



---



##### 



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

As of June 30, 2003
    
    As of December 31, 2002Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    Amortization(a)
    
    Net
    
    Gross
    
    Amortization(a)
    
    NetIntangible assets subject to amortization:Music catalogues and copyrights(b)
    
    $
    3,227
    
    
    $
    (460
    )
    
    $
    2,767
    
    
    $
    3,189
    
    
    $
    (323
    )
    
    $
    2,866Film library(c)
    
    
    3,849
    
    
    
    (466
    )
    
    
    3,383
    
    
    
    3,429
    
    
    
    (366
    )
    
    
    3,063Customer lists and other intangible
assets
    
    
    56
    
    
    
    (28
    )
    
    
    28
    
    
    
    56
    
    
    
    (23
    )
    
    
    33Total
    
    $
    7,132
    
    
    $
    (954
    )
    
    $
    6,178
    
    
    $
    6,674
    
    
    $
    (712
    )
    
    $
    5,962Intangible assets not subject to
amortization:Brands, trademarks and other intangible
assets
    
    $
    2,997
    
    
    $
    (117
    )
    
    $
    2,880
    
    
    $
    2,997
    
    
    $
    (117
    )
    
    $
    2,880Total
    
    $
    2,997
    
    
    $
    (117
    )
    
    $
    2,880
    
    
    $
    2,997
    
    
    $
    (117
    )
    
    $
    2,880




---

|(a) |  | Accumulated amortization for intangible assets not subject to
amortization relates to amortization expense recognized prior to the
adoption of FAS 142.          
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | During 2003, the useful life related to music catalogues and copyrights
was reduced to 15 years from 20 years.                                                   
|   
|(c) |  | The change in film library relates to the restructuring of TWE, which
resulted in the preliminary step-up of the carrying value as part of the
TWE Restructuring.

WCI recorded amortization expense of $117 million for the quarter ended
June 30, 2003 compared to $93 million for the quarter ended June 30, 2002.
Based on the current amount of intangible assets subject to amortization, the
estimated amortization expense for each of the succeeding 5 years are as
follows: 2003: $487 million; 2004: $507 million; 2005: $507 million; 2006: $488
million; and 2007: $479 million. As acquisitions and dispositions occur in the
future and as purchase price allocations are finalized, these amounts may vary.

For the six month period ended June 30, 2003, WCI acquired $13 million in
intangible assets that are subject to an amortization period of 11 years.



|3. |  | MERGER AND RESTRUCTURING COSTS
|-- |  | ------------------------------

Merger Costs Capitalized as Cost of Acquisition

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

Of
the total restructuring accrual, approximately $316 million related to
work force reductions and represented employee termination benefits. Employee
termination costs occurred across most WCI business units and ranged from
senior executives to line personnel. The total number of employees initially
identified to be involuntarily terminated or relocated approximated 2,900. As
of December 31, 2002, all of the terminations had occurred. Because certain
employees can defer receipt of termination benefits, cash payments may continue
after the employee has been terminated (generally for periods up to 24 months).
Employee termination payments of $67 million were made in 2001, $101 million
were made in 2002 ($26 million of which was paid in the second quarter of 2002)
and $27 million were made during the first six months of 2003 ($13 million of
which was paid in the second quarter of 2003). In addition during 2002, there
were non-cash reductions in the restructuring accrual of $55 million ($15
million of which occurred in the second quarter), as actual employee
termination payments were less than amounts originally estimated. As of June
30, 2003, the remaining liability of approximately $66 million was primarily
classified as a current liability in the accompanying consolidated balance
sheet.

The restructuring charge also includes approximately $161 million
associated with exiting certain activities, primarily related to lease and
contract termination costs. Specifically, WCI has exited certain
under-performing operations, including the Studio Stores operations included in
the Filmed Entertainment segment. The restructuring charge associated with
other exit activities specifically includes incremental costs and contractual
termination obligations for items such as lease termination payments and
other facility exit costs incurred as a direct result of these plans, which
will not have future benefits. Payments related to exit activities were

27



---



##### 



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

approximately $78 million in 2001, $28 million in 2002 ($5 million of
which was paid in the second quarter of 2002) and $14 million during the first
six months of 2003 ($9 million of which was paid in the second quarter). As of
June 30, 2003, the remaining liability of $41 million was primarily classified
as a current liability in the accompanying consolidated balance sheet.

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

EmployeeTermination
    
    Exit Costs
    
    TotalInitial accruals
    
    $
    316
    
    
    $
    161
    
    
    $
    477Cash paid  2001
    
    
    (67
    )
    
    
    (78
    )
    
    
    (145
    )Restructuring liability as of December 31, 2001
    
    
    249
    
    
    
    83
    
    
    
    332Cash paid  2002
    
    
    (101
    )
    
    
    (28
    )
    
    
    (129
    )Non-cash reductions(a)  2002
    
    
    (55
    )
    
    
    
    
    
    
    (55
    )Restructuring liability as of December 31, 2002
    
    
    93
    
    
    
    55
    
    
    
    148Cash paid  2003(b)
    
    
    (27
    )
    
    
    (14
    )
    
    
    (41
    )Restructuring liability as of June 30, 2003
    
    $
    66
    
    
    $
    41
    
    
    $
    107




---

|(a) |  | Non-cash reductions represent adjustments to the restructuring accrual,
and a corresponding reduction in goodwill, as actual costs related to
employee terminations and other exit costs were less than originally
estimated.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Of the amount paid in 2003, $22 million was paid in the second quarter.                                                                                                                                                      

Restructuring Costs

2003 Restructuring Costs

For the six months ended June 30, 2003, WCI incurred restructuring costs
related to various employee and contractual terminations of $6 million at the
Music segment, all of which were incurred in the second quarter of 2003.
Employees terminated ranged from senior executives to line personnel. The
number of employees expected to be terminated is approximately 62. As of June
30, 2003, none of the terminations had occurred, but they are expected to occur
later this year. No payments have been paid against this accrual as of June
30, 2003.

2002 Restructuring Costs

During the year ended December 31, 2002, WCI incurred and accrued other
restructuring costs of $8 million (none of which was expensed in the second
quarter of 2002) related to various contractual terminations and
obligations,
including certain contractual employee termination benefits, of WCIs Music
segment. WCI had recorded approximately $20 million of restructuring costs
(including $13 million incurred between the music operations November 30th
year-end and WCIs December 31, 2002 year-end), which were partially offset by
the reversal of a previously recorded accrual of $12 million as a result of it
no longer being probable that the related contractual employee termination
benefits would be paid by WCI.

Included in the 2002 restructuring charge was approximately $16 million
(none of which was expensed in the second quarter) related to work force
reductions and represented employee termination benefits. The number of
employees expected to be terminated was approximately 165. As of June 30, 2003,
approximately 55 of the terminations had occurred. The remaining 110
terminations are expected to occur by the end of 2003. The severed employees
principally related to WCIs U.S. and Canadian music distribution operations.

The remaining $4 million (none of which was expensed during the second
quarter) primarily related to incremental costs and contractual termination
obligations for items such as lease termination payments and other facility
exit costs.

As of June 30, 2003, $13 million has been paid against these accruals
(none of which was paid in the second quarter). The remaining $7 million is
primarily classified as a current liability in the accompanying consolidated
statement of operations.

28



---



##### 



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

EmployeeTermination
    
    Exit Costs
    
    Total(in millions)Initial Accruals
    
    $
    16
    
    
    $
    4
    
    
    $
    20Cash paid  2002
    
    
    (3
    )
    
    
    (1
    )
    
    
    (4
    )Remaining liability as of December 31, 2002
    
    
    13
    
    
    
    3
    
    
    
    16Cash paid  2003(a)
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )Remaining liability as of June 30, 2003
    
    $
    4
    
    
    $
    3
    
    
    $
    7




| | (a) |  | None of the amount paid in 2003 was paid in the second quarter.
| | --- |  | ---------------------------------------------------------------



|4. |  | INVESTMENTS
|-- |  | -----------

Investment Gains

During the six months ended June 30, 2003, WCI recognized gains from
certain investments of approximately $567 million, including a $513 million
gain on the sale of Comedy Central and a $49 million gain from the sale of
WCIs equity interest in certain international theater chains. During the six
months ended June 30, 2002, WCI recognized gains from certain investments of
approximately $96 million, relating to the sale of a portion of AOL Time
Warners interest in the Columbia House Company Partnerships (Columbia
House). These gains are included in other income (expense), net in the
accompanying consolidated statement of operations.

In connection with the sale of
WCIs investment in Columbia House in 2002, Warner Music Group and Warner Home
Video entered into music and video licensing arrangements with
Columbia House. WCI believes that the terms of the licensing
arrangements are at market rates and accordingly, none of the proceeds
were allocated to the arrangements.

Investment Write-Downs

The Companies have experienced declines in the value of certain publicly
traded and privately held investments and investments accounted for using the
equity method of accounting. As a result, the Companies have recorded non-cash
pretax charges to reduce the carrying value of certain investments that
experienced other-than-temporary declines in value and to reflect market
fluctuations in equity derivative instruments.

These
charges were approximately $36 million and $0 for WCI and ATC,
respectively, in the second quarter of 2003 and $54 million and $0,
respectively, for the six months ended June 30, 2003. This compares to $105
million and $62 million for WCI and ATC, respectively, in the second quarter of
2002 and $353 million and $237 million, respectively, for the six months ended
June 30, 2002. WCIs charges included gains related to market
fluctuations on equity derivatives instruments of $1 million for the six months
ended June 30, 2003, and $8 million for the six month period ended
June 30, 2002. The portion of the above charges
relating to publicly traded securities for WCI was $1 million in the second
quarter of 2003 and $2 million in the first six months ended June 30, 2003
compared to $95 million in the second quarter of 2002 and $350 million in the
first six months ended June 30, 2002. All of the above charges in 2002 related
to publicly traded securities for ATC. These charges are included in other
income (expense), net in the accompanying consolidated statements of
operations.

Included in the charges taken by WCI and ATC in 2002, were charges of $90
million and $62 million, respectively, in the second quarter of 2002 and $345
million and $237 million, respectively, for the first six months of 2002 to
reduce WCIs 20% interest and ATCs 14% investment in Time Warner Telecom,
which was written up in connection with the Merger. As of December 31, 2002,
the carrying value of the Companies investments in Time Warner Telecom had
been reduced to $0 as a result of the impairment charges and the Companies
shares of Time Warner Telecoms losses pursuant to the equity method of
accounting. The Companies do not have any funding commitments related to Time
Warner Telecom.

29



---



##### 



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



|5. |  | INVENTORIES AND FILM COSTS
|-- |  | --------------------------

Inventories and film costs consist of:

June 30,
    
    December 31,2003
    
    2002(millions)Programming costs, less amortization
    
    $
    1,376
    
    
    $
    1,314Merchandise and recorded music
    
    
    297
    
    
    
    285Film costs-TheatricalReleased, less amortization
    
    
    508
    
    
    
    602Completed and not released
    
    
    43
    
    
    
    96In production
    
    
    605
    
    
    
    470Development and pre-production
    
    
    35
    
    
    
    39Film costs-Television:Released, less amortization
    
    
    259
    
    
    
    160Completed and not released
    
    
    77
    
    
    
    165In production
    
    
    
    
    
    
    71Development and pre-production
    
    
    11
    
    
    
    5Total inventories and film costs(a)
    
    
    3,211
    
    
    
    3,207Less current portion of inventory(b)
    
    
    1,058
    
    
    
    1,002Total noncurrent inventories and film costs
    
    $
    2,153
    
    
    $
    2,205




---

|(a) |  | Does not include $3.382 billion and $3.063 billion of net film library
costs as of June 30, 2003 and December 31, 2002, respectively, which are
included in intangible assets subject to amortization on the accompanying
consolidated balance sheet.                                                                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Current inventory as of June 30, 2003 and December 31, 2002 is comprised
primarily of programming inventory at the Networks segment ($761 million
and $717 million, respectively) and videocassettes and DVDs at the Filmed
Entertainment segment ($168 million and $154 million, respectively) and
compact discs at the Music segment ($129 million and $131 million,
respectively)



|6. |  | OTHER FINANCING ARRANGEMENTS
|-- |  | ----------------------------

Borrowing Arrangements with TW Companies

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

Debt Guarantees

WCI and ATC each have guaranteed a portion of approximately $3.889 billion
of TWEs public and private debt and accrued interest at June 30, 2003, based
on the relative fair value of the net assets WCI and ATC (or their
predecessors) contributed to TWE prior to the TWE Restructuring. Such
indebtedness is recourse to WCI and ATC only to the extent of their respective
guarantee. The indenture pursuant to which TWEs notes and debentures have been
issued (the Indenture) requires the consent of a majority of such holders to
effect a termination of these guarantees; however, the Indenture permits WCI
and ATC to engage in mergers and consolidations, and there are no restrictions
on the ability of WCI or ATC to transfer assets, other than its ownership
interests in TWE or TWC Inc., to parties that are not guarantors.

The portion of TWE debt and accrued interest at June 30, 2003 that was
guaranteed by WCI and ATC, individually and on a consolidated basis, is set
forth below:

30



---



##### 



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

Total Guaranteed byWCI and ATC%
    
    Amount(dollars in millions)WCI
    
    
    59.27
    
    
    $
    2,305ATC
    
    
    40.73
    
    
    
    1,584Total
    
    
    100.00
    
    
    $
    3,889




|7. |  | SEGMENT INFORMATION
|-- |  | -------------------

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

Information as to the operations of WCI in each of its business segments
is set forth below based on the nature of the products and services offered.
Although, WCI evaluates performance based on several factors, of
which the primary financial measure is Operating Income (Loss) before
noncash depreciation of tangible assets, and amortization of intangible assets (Operating
Income before Depreciation and Amortization). Additionally, WCI has provided a
summary of Operating Income (Loss) by segment.

The accounting policies of the business segments are the same as those
described in the summary of significant accounting policies under Note 1 in
WCIs 2002 Form 10-K. Intersegment sales are accounted for at fair value as if
the sales were to third parties.

Three Months Ended June 30,
    
    Six Months Ended June 30,2003
    
    2002
    
    2003
    
    2002(millions)
    
    (millions)RevenuesFilmed Entertainment
    
    $
    2,468
    
    
    $
    2,187
    
    
    $
    4,428
    
    
    $
    3,960Networks
    
    
    914
    
    
    
    846
    
    
    
    1,965
    
    
    
    1,628Music
    
    
    1,051
    
    
    
    972
    
    
    
    1,965
    
    
    
    1,919Intersegment elimination
    
    
    (244
    )
    
    
    (226
    )
    
    
    (470
    )
    
    
    (396
    )Total revenues
    
    $
    4,189
    
    
    $
    3,779
    
    
    $
    7,888
    
    
    $
    7,111


Intersegment Revenues

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



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



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



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

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

Three Months Ended June 30,
    
    Six Months Ended June 30,2003
    
    2002
    
    2003
    
    2002(millions)
    
    (millions)Intersegment RevenuesFilmed Entertainment
    
    $
    100
    
    
    $
    86
    
    
    $
    204
    
    
    $
    187Networks
    
    
    11
    
    
    
    15
    
    
    
    23
    
    
    
    22Music
    
    
    133
    
    
    
    125
    
    
    
    243
    
    
    
    187Total revenues
    
    $
    244
    
    
    $
    226
    
    
    $
    470
    
    
    $
    396


31



---



##### 



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

Three Months Ended June 30,
    
    Six Months Ended June 30,2003
    
    2002
    
    2003
    
    2002(millions)
    
    (millions)Operating Income before Depreciation
and Amortization(a)Filmed Entertainment
    
    $
    384
    
    
    $
    285
    
    
    $
    619
    
    
    $
    475Networks
    
    
    221
    
    
    
    189
    
    
    
    441
    
    
    
    358Music
    
    
    105
    
    
    
    102
    
    
    
    192
    
    
    
    193Corporate
    
    
    (12
    )
    
    
    (2
    )
    
    
    (29
    )
    
    
    (14
    )Total Operating Income before Depreciation
and Amortization
    
    $
    698
    
    
    $
    574
    
    
    $
    1,223
    
    
    $
    1,012




---

|(a) |  | Operating Income before Depreciation and Amortization for the three and
six months ended June 30, 2003, includes gains on disposal of assets of
$43 million for the Filmed Entertainment segment.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Three Months Ended June 30,
    
    Six Months Ended June 30,2003
    
    2002
    
    2003
    
    2002(millions)
    
    (millions)Depreciation of Property, Plant
and EquipmentFilmed Entertainment
    
    $
    22
    
    
    $
    18
    
    
    $
    41
    
    
    $
    36Networks
    
    
    6
    
    
    
    6
    
    
    
    12
    
    
    
    13Music
    
    
    38
    
    
    
    28
    
    
    
    76
    
    
    
    56Corporate
    
    
    3
    
    
    
    2
    
    
    
    5
    
    
    
    4Total depreciation
    
    $
    69
    
    
    $
    54
    
    
    $
    134
    
    
    $
    109


Three Months Ended June 30,
    
    Six Months Ended June 30,2003
    
    2002
    
    2003
    
    2002(millions)
    
    (millions)Amortization of Intangible AssetsFilmed Entertainment
    
    $
    52
    
    
    $
    45
    
    
    $
    97
    
    
    $
    89Networks
    
    
    4
    
    
    
    3
    
    
    
    7
    
    
    
    6Music
    
    
    61
    
    
    
    45
    
    
    
    124
    
    
    
    88Total amortization
    
    $
    117
    
    
    $
    93
    
    
    $
    228
    
    
    $
    183


Three Months Ended June 30,
    
    Six Months Ended June 30,2003
    
    2002
    
    2003
    
    2002(millions)
    
    (millions)Operating Income (Loss)Filmed Entertainment
    
    $
    310
    
    
    $
    222
    
    
    $
    481
    
    
    $
    350Networks
    
    
    211
    
    
    
    180
    
    
    
    422
    
    
    
    339Music
    
    
    6
    
    
    
    29
    
    
    
    (8
    )
    
    
    49Corporate
    
    
    (15
    )
    
    
    (4
    )
    
    
    (34
    )
    
    
    (18
    )Total Operating Income
    
    $
    512
    
    
    $
    427
    
    
    $
    861
    
    
    $
    720


June 30,
    
    December 31,2003
    
    2002(millions)AssetsFilmed Entertainment
    
    $
    16,250
    
    
    $
    16,014Networks
    
    
    10,886
    
    
    
    10,619Music
    
    
    6,299
    
    
    
    6,080Corporate(a)
    
    
    18,860
    
    
    
    17,497Total Assets
    
    $
    52,295
    
    
    $
    50,210




---

|(a) |  | Consists principally of cash, cash equivalents and other investments.
|--- |  | ---------------------------------------------------------------------

32



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##### 



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



|8. |  | CONTINGENCIES
|-- |  | -------------

Contingencies

On April 8, 2002, three former employees of certain subsidiaries of AOL
Time Warner filed Henry Spann et al. v. AOL Time Warner Inc. et al.,a
purported class action, in the U.S. District Court for the Central District of
California. Plaintiffs have named as defendants, among others, AOL Time Warner,
TWE, WEA Corp., WEA Manufacturing Inc., Warner Bros. Records, Atlantic
Recording Corporation, various pension plans sponsored by the companies and the
administrative committees of those plans. Plaintiffs allege that defendants
miscalculated the proper amount of pension benefits owed to them and other
class members as required under the plans in violation of ERISA. The lawsuit
has been transferred to the U.S. District Court for the Southern District of
New York. Due to the preliminary status of this matter, WCI is unable to
predict the outcome of this suit or reasonably estimate a possible range of
loss.

As
of August 11, 2003, three putative class action lawsuits have been
filed alleging violations of ERISA in the U.S. District Court for the Southern
District of New York on behalf of current and former participants in the AOL
Time Warner Savings Plan, the AOL Time Warner Thrift Plan and/or the Time
Warner Cable Savings Plan (the Plans), which may include employees of
companies within WCI. Collectively, these lawsuits name as defendants AOL Time
Warner, certain current and former directors and officers of AOL Time Warner
and members of the Administrative Committees of the Plans. The lawsuits allege
that AOL Time Warner and other defendants breached certain fiduciary duties to
Plan participants by, inter alia,continuing to offer AOL Time Warner stock as
an investment under the Plans, and by failing to disclose, among other things,
that AOL Time Warner was experiencing declining advertising revenues and that
AOL Time Warner was inappropriately inflating advertising revenues through
various transactions. The complaints seek unspecified damages and unspecified
equitable relief. The ERISA actions have been consolidated with other AOL Time
Warner-related shareholder lawsuits and derivative actions under the caption In
re AOL Time Warner Inc. Securities and ERISA Litigationin the Southern
District of New York. On July 3, 2003, plaintiffs filed a consolidated amended
complaint naming additional defendants, including America Online, Inc., certain
current and former officers, directors and employees of AOL Time Warner,
certain current and former members of the Administrative and Investment
Committees of the Plans and Fidelity Management Trust Company. AOL Time Warner
intends to defend against these lawsuits vigorously. WCI is unable to
predict the outcome of these cases or reasonably estimate a range of possible
loss.

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

33



---



##### 



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



|9. |  | ADDITIONAL FINANCIAL INFORMATION
|-- |  | --------------------------------

Cash Flows

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

Six Months Ended June 30,2003
    
    2002WCI
    
    ATC
    
    WCI
    
    ATC(millions)Cash payments made for interest
    
    $
    (13
    )
    
    $
    
    
    
    $
    (15
    )
    
    $
    Interest income received
    
    
    7
    
    
    
    
    
    
    
    8
    
    
    
    Cash payments made for interest, net
    
    $
    (6
    )
    
    $
    
    
    
    $
    (7
    )
    
    $
    Cash payments made for income taxes
    
    $
    (1,056
    )
    
    $
    (186
    )
    
    $
    (431
    )
    
    $
    (71
    )Income tax refunds received
    
    
    8
    
    
    
    
    
    
    
    19
    
    
    
    Cash payments made for income taxes, net
    
    $
    (1,048
    )
    
    $
    (186
    )
    
    $
    (412
    )
    
    $
    (71
    )


Interest Income (Expense), Net

Interest income (expense), net, consists of:

Three Months Ended June 30,
    
    Six Months Ended June 30,2003
    
    2002
    
    2003
    
    2002WCI
    
    ATC
    
    WCI
    
    ATC
    
    WCI
    
    ATC
    
    WCI
    
    ATC(millions)
    
    (millions)Interest income
    
    $
    11
    
    
    $
    48
    
    
    $
    6
    
    
    $
    
    
    
    $
    14
    
    
    $
    48
    
    
    $
    9
    
    
    $
    Interest expense
    
    
    (17
    )
    
    
    
    
    
    
    (67
    )
    
    
    
    
    
    
    (58
    )
    
    
    
    
    
    
    (113
    )
    
    
    Total interest income (expense), net
    
    $
    (6
    )
    
    $
    48
    
    
    $
    (61
    )
    
    $
    
    
    
    $
    (44
    )
    
    $
    48
    
    
    $
    (104
    )
    
    $
    


Other Income (Expense), Net

Other income (expense), net, consists of:

Three Months Ended June 30,
    
    Six Months Ended June 30,2003
    
    2002
    
    2003
    
    2002WCI
    
    ATC
    
    WCI
    
    ATC
    
    WCI
    
    ATC
    
    WCI
    
    ATC(millions)
    
    (millions)Net investment gains (losses)(a)
    
    $
    495
    
    
    $
    
    
    
    $
    (9
    )
    
    $
    (62
    )
    
    $
    513
    
    
    $
    
    
    
    $
    (257
    )
    
    $
    (237
    )Income (losses) on equity investees
    
    
    25
    
    
    
    302
    
    
    
    55
    
    
    
    157
    
    
    
    70
    
    
    
    416
    
    
    
    53
    
    
    
    176Minority interest income (expense)
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    (17
    )
    
    
    Miscellaneous
    
    
    5
    
    
    
    (2
    )
    
    
    (7
    )
    
    
    (4
    )
    
    
    3
    
    
    
    (2
    )
    
    
    (14
    )
    
    
    (1
    )Total other income (expense), net
    
    $
    525
    
    
    $
    300
    
    
    $
    28
    
    
    $
    91
    
    
    $
    565
    
    
    $
    414
    
    
    $
    (235
    )
    
    $
    (62
    )




---

|(a) |  | Includes a non-cash pretax charge for WCI and ATC to reduce the
carrying value of certain investments for other-than-temporary declines
in value and to reflect market fluctuations in equity derivative
instruments of approximately $36 million and $0, respectively, for the
quarter ended June 30, 2003 and $105 million and $62 million,
respectively, for the quarter ended June 30, 2002 (Note 4). In addition,
the six months ended June 30, 2003, includes a non-cash pretax charge
for WCI and ATC to reduce the carrying value of certain investments for
other-than-temporary declines in value and to reflect market
fluctuations in equity derivative instruments of approximately $54 million
and $0, respectively, as compared to $353 million and $237
million, respectively, for the six months ended June 30, 2002.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

34



---



##### 



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

Other Current Liabilities

Other current liabilities consist of:

June 30, 2003
    
    December 31, 2002(millions)Accrued expenses
    
    $
    1,390
    
    
    $
    1,675Accrued compensation
    
    
    225
    
    
    
    349Deferred revenues
    
    
    225
    
    
    
    232Accrued income taxes
    
    
    3
    
    
    
    11Total other current liabilities
    
    $
    1,843
    
    
    $
    2,267


35



---



##### 



Part II.    Other Information

Item 1.    Legal Proceedings.

As
of August 11, 2003, three putative class action lawsuits have been
filed alleging violations of ERISA in the U.S. District Court for the Southern
District of New York on behalf of current and former participants in the AOL
Time Warner Savings Plan, the AOL Time Warner Thrift Plan and/or the Time
Warner Cable Savings Plan (the Plans), which may include employees of
companies within WCI. Collectively, these lawsuits name as defendants AOL Time
Warner, certain current and former directors and officers of AOL Time Warner
and members of the Administrative Committees of the Plans. The lawsuits allege
that AOL Time Warner and other defendants breached certain fiduciary duties to
Plan participants by, inter alia, continuing to offer AOL Time Warner stock as
an investment under the Plans, and by failing to disclose, among other things,
that AOL Time Warner was experiencing declining advertising revenues and that
AOL Time Warner was inappropriately inflating advertising revenues through
various transactions. The complaints seek unspecified damages and unspecified
equitable relief. The ERISA actions have been consolidated with other AOL Time
Warner-related shareholder lawsuits and derivative actions under the caption In
re AOL Time Warner Inc. Securities and ERISA Litigationin the Southern
District of New York. On July 3, 2003, plaintiffs filed a consolidated amended
complaint naming additional defendants, including America Online, Inc., certain
current and former officers, directors and employees of AOL Time Warner,
certain current and former members of the Administrative and Investment
Committees of the Plans and Fidelity Management Trust Company. AOL Time Warner
intends to defend against these lawsuits vigorously. The Company is unable to
predict the outcome of these cases or reasonably estimate a range of possible
loss.

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

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

(a) Exhibits.

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

(b) Reports on Form 8-K.

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

Item #
    
    Description
    
    Date(i)
    
    2, 7
    
    Form 8-K reporting (i) the closing of the TWE
Restructuring and related transactions (Item 2) and (ii) unaudited pro forma financial information reflecting
the disposition by ATC of interests in TWE (Item 7)
    
    March 28, 2003(ii)
    
    2, 7
    
    Form 8-K/A amending the Report on Form 8-K dated
March 28, 2003 (filed on April 14, 2003)
to include the following financial information related
to the closing of the TWE Restructuring (Item 2): (i) financial statements of TWEs content businesses
acquired by WCI and financial statements of Time Warner
Cable reflecting WCIs increase in equity interests in AOL
Time Warners cable business (Item 7), (ii) financial
statements of WCI reflecting ATCs acquisition of an equity
interest in WCI (Item 7) and (iii) unaudited pro forma financial
information of WCI reflecting WCIs acquisition of the
TWE content assets and liabilities and WCIs increase
in ownership interest in AOL Time Warners cable business
(Item 7)
    
    March 28, 2003


36



---



##### 



SIGNATURE

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

|                      |                                                                                     
|--------------------- | ------------------------------------------------------------------------------------
|                      | AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
WARNER COMMUNICATIONS INC.       
|                      |                                                                                     
|Date:
August 14, 2003 | /s/ Wayne H. Pace
Wayne H. Pace
Executive Vice President
and Chief Financial Officer





---



##### 



EXHIBIT INDEXPursuant to Item 601 of Regulation S-K

Exhibit No.
    
    Description of Exhibit31.1
    
    Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, with respect to the registrants Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003.31.2
    
    Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, with respect to the registrants Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003.32.
    
    Certification of Principal Executive Officer and Principal Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with
respect to the registrants Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003.