##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2002

Commission file number 001-12878



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TIME WARNER ENTERTAINMENT COMPANY,
L.P.

(Exact name of registrant as specified in its
charter)


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

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

75 Rockefeller Plaza

New York, NY 10019


(212) 484-8000


(Address, including zip code, and telephone
number, including area code, of principal executive
offices)




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Securities registered pursuant to
Section 12(b) of the Act:

|                                  |  |                        
|--------------------------------- |  | -----------------------
|                                  |  | Name of each exchange  
|Title of each class               |  | on which registered    
|                                  |  |                        
|7 1/4% Senior Debentures due 2008 |  | New York Stock Exchange

Securities registered pursuant to
Section 12(g) of the Act:

None


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, and (2) has been
subject to such filing requirements for the past
90 days.     Yes þ          No o

Indicate by check mark if the registrant is an
accelerated filer (as defined in Exchange Act
Rule 12b-2).     No þ

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     þ

Documents Incorporated by Reference:

None




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TABLE OF CONTENTS



|                                                                                                                              |  |  |  |  |  |  |  | 
|----------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                                                                                                       
|CABLE                                                                                                                        
|FILMED ENTERTAINMENT                                                                                                         
|NETWORKS                                                                                                                     
|REGULATION AND LEGISLATION                                                                                                   
|DESCRIPTION OF CERTAIN PROVISIONS OF THE TWE PARTNERSHIP AGREEMENT                                                           
|DESCRIPTION OF CERTAIN PROVISIONS OF THE TWE-A/N PARTNERSHIP AGREEMENT                                                       
|DESCRIPTION OF CERTAIN PROVISIONS OF AGREEMENTS RELATED TO TWC INC.                                                          
|CURRENCY RATES AND REGULATIONS                                                                                               
|EMPLOYEES                                                                                                                    
|BUSINESSES OF THE AOL TIME WARNER GENERAL PARTNERS                                                                           
|MUSIC                                                                                                                        
|OTHER                                                                                                                        
|PART II                                                                                                                      
|PART III                                                                                                                     
|SUMMARY COMPENSATION TABLE                                                                                                   
|PART IV                                                                                                                      
|SIGNATURES                                                                                                                   
|CERTIFICATIONS                                                                                                               
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION                                                   
|TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
|FINANCIAL CONDITION AND LIQUIDITY                                                                                            
|CRITICAL ACCOUNTING POLICIES                                                                                                 
|RISK FACTORS AND CAUTION CONCERNING FORWARD-LOOKING STATEMENTS                                                               
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                   
|TIME WARNER ENTERTAINMENT COMPANY, L.P. SELECTED FINANCIAL INFORMATION                                                       
|SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS                                                                             
|TWE GENERAL PARTNERS MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION                   
|TWE GENERAL PARTNERS SELECTED FINANCIAL INFORMATION                                                                          
|SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS OF WCI                                                                      
|EX-3.4(I)(II) REST. CERTIFICATE OF INCORPORATION                                                                             
|EX-21 SUBSIDIARIES                                                                                                           
|EX-23.1 CONSENT OF ERNST & YOUNG LLP                                                                                         
|EX-99.1 SECTION 906 CERTIFICATIONS                                                                                           
|EX-99.1 SECTION 906 CERTIFICATIONS                                                                                           



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##### Table of Contents






PART I

Item 1.     Business

Time Warner Entertainment Company, L.P.
(TWE) is engaged principally in three fundamental
areas of business:



| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | Cable, consisting principally of interests in
    cable television systems and high speed data services;            
|
| |  | Filmed Entertainment, consisting principally of
    interests in filmed entertainment and television production; and
|
| |  | Networks, consisting principally of interests in
    cable television and broadcast network programming.            

TWE is a Delaware limited partnership that was
formed in 1992. Prior to the completion of a restructuring of
the TWE partnership (see below), AOL Time Warner Inc. (AOL
Time Warner), through its wholly owned subsidiaries, owns
general and limited partnership interests in 72.36% of the pro
rata priority capital (Series A Capital) and
residual equity capital of TWE and 100% of the junior priority
capital. As a result of the November 2002 merger of Comcast
Corporation (Comcast) and AT&T Corp.s
(AT&T) broadband businesses, including
AT&Ts interest in TWE, the remaining 27.64% limited
partnership interests in the Series A Capital and residual
equity capital of TWE is held by two trusts (the Comcast
Trusts), all of the beneficial interests of which are
owned by a subsidiary of Comcast. See TWE
Restructuring, below, for a discussion of the equity
interests in TWE upon the completion of a restructuring of the
partnership.

During the second quarter of 2002, prior to the
completion of Comcasts acquisition of AT&Ts
interests, AT&T exercised a one-time option to increase its
ownership in the Series A Capital and Residual Capital of
TWE. As a result, on May 31, 2002, AT&Ts interest
in the Series A Capital and Residual Capital of TWE
increased by approximately 2.13% to approximately 27.64% and AOL
Time Warners corresponding interest in the Series A
Capital and Residual Capital of TWE decreased by a like amount,
to 72.36%.

TWE
Restructuring

In August 2002, AOL Time Warner, Comcast and
AT&T announced that they had agreed to restructure TWE. The
restructuring (the TWE Restructuring) is expected to
be completed on March 31, 2003.

The TWE Restructuring will result in the
following: (i) AOL Time Warner will acquire complete
ownership of TWEs content assets (including Warner Bros.
and Home Box Office, which will become separate, wholly owned
subsidiaries of AOL Time Warner); (ii) all of AOL Time
Warners directly-owned cable television system interests
will be contributed to a separate company which will become a
majority-owned subsidiary of AOL Time Warner and will be renamed
Time Warner Cable Inc. (TWC Inc. or
TWC); (iii) TWE will become a subsidiary of TWC
Inc. and will continue to own the cable television system
interests previously owned by it; (iv) Comcast will receive
$2.1 billion in cash and AOL Time Warner equity securities
valued at $1.5 billion; (v) a Comcast Trust will also
retain a 21% economic interest in Time Warner Cable, 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; and (vi) AOL
Time Warner will retain an overall 79% economic interest in the
cable business, 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 and a
$2.4 billion preferred component. For additional
information with respect to the TWE Restructuring, see
Managements Discussion and Analysis of Results of
Operations and Financial Condition, Recent
Developments. set forth at pages F-3 and F-4 herein
and Note 1 to TWEs consolidated financial statements
set forth at pages F-34 and F-35 herein.

The AOLTW
General Partners

Prior to the completion of the TWE Restructuring,
Warner Communications Inc. (WCI, a subsidiary of AOL
Time Warner) and American Television and Communications
Corporation (ATC, a subsidiary of

1



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AOL Time Warner) are the two general partners of
TWE (the AOLTW General Partners). TWE does not have
any ownership interest in the businesses or assets of the AOLTW
General Partners.


The principal assets of the AOLTW General
Partners currently include, in addition to their interests in
TWE: WCIs ownership of substantially all of the Warner
Music Group (WMG), which produces and distributes
recorded music, owns and administers music copyrights and
manufactures and prints CDs and DVDs; WCIs 50% interest in
DC Comics, a New York general partnership which is 50% owned by
TWE (DC Comics); WCIs 99.95% aggregate
interest in Warner Entertainment Japan Inc., a corporation
organized under the laws of Japan (Warner Japan);
certain securities of Turner Broadcasting System, Inc.
(TBS) which in the aggregate represent an equity
interest of approximately 10.6% in TBS; a 34% aggregate interest
in Time Warner Telecom Inc.; and 7.66% of the common stock of
Time Warner Companies, Inc., the assets of which consist
primarily of investments in its consolidated and unconsolidated
subsidiaries, including TWE.

Upon the completion of the TWE Restructuring, TWC
Inc. will be the general partner of TWE and WCI and one of the
Comcast Trusts will be the limited partners of TWE. For
additional information with respect to the changes in TWEs
organization following the completion of the TWE Restructuring,
see Description of Certain Provisions of the TWE
Partnership Agreement at pages 17 through 20 herein.

TWE-A/N
Partnership

In 1995, TWE formed a cable television joint
venture with the Advance/Newhouse Partnership
(Advance/Newhouse) known as the Time Warner
Entertainment-Advance/Newhouse Partnership
(TWE-A/N). During 2002, TWE and Advance/Newhouse
Partnership (Advance/Newhouse) completed the
restructuring of the partnership known as the Time Warner
Entertainment-Advance/Newhouse Partnership
(TWE-A/N). As part of the TWE-A/N restructuring (the
TWE-A/N Restructuring), cable systems and their
related assets and liabilities serving 2.1 million
subscribers as of December 31, 2002, located primarily in
Florida (the A/N Systems), were transferred to a
subsidiary of TWE-A/N. Advance/Newhouse has authority for the
supervision of the day-to-day operations of the subsidiary,
subject to some exceptions requiring action by unanimous
consent, and TWE will continue to exercise various management
functions, including oversight of programming and certain
engineering-related services. TWE has deconsolidated the
financial position and operating results of the A/N Systems for
all periods. Under the new TWE-A/N Partnership Agreement,
effective August 1, 2002, Advance/Newhouses interest
in TWE-A/N tracks only the economic performance of the A/N
Systems, while TWE retains the economic interests and associated
liabilities in the remaining TWE-A/N cable systems.

Also, in connection with the TWE-A/N
Restructuring, AOL Time Warner effectively acquired
Advance/Newhouses 17% interest in Road Runner, a high
speed cable modem Internet service provider. As a result of the
termination of Advance/Newhouses minority rights in Road
Runner, TWE has consolidated the financial position and results
of operations of Road Runner with the financial position and
results of operations of TWEs Cable segment, effective
January 1, 2002. See Note 4, Cable-Related
Transactions and Investments  Restructuring of
TWE-A/N and Road Runner Partnership, to TWEs
consolidated financial statements set forth at pages F-50
through F-52.

For additional information with respect to
TWE-A/N, See Description of Certain Provisions of the
TWE-A/N Partnership Agreement at pages 20 through 22
herein.

AOL-Time
Warner Merger

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 or
the AOL-Time Warner Merger). As a result of the
Merger, America Online and Time Warner each became wholly owned
subsidiaries of AOL Time Warner.

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Caution
Concerning Forward-Looking Statements

This Annual Report on Form 10-K includes
certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements are based on managements current
expectations and are naturally subject to uncertainty and
changes in circumstances. Actual results may vary materially
from the expectations contained herein due to changes in
economic, business, competitive, technological and/or regulatory
factors. More detailed information about those factors is set
forth on pages F-     and
F- herein. TWE is under no obligation to (and expressly
disclaims any such obligation to) update or alter its
forward-looking statements whether as a result of new
information, subsequent events or otherwise.

Available
Information and Website

TWEs annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to such reports filed with the
Securities and Exchange Commission (SEC) pursuant to
Sections 13(a) or 15(d) of the Securities Exchange Act are
available on the SECs Website at www.sec.gov. TWE does not
have a Website.




CABLE

TWEs Cable business consists principally of
interests in cable television systems that provide video
programming and high speed data services to customers under the
name Time Warner Cable. As a result of the TWE Restructuring
which is expected to be completed on March 31, 2003, Time
Warner Cable Inc. (TWC Inc.), will become an
82.1%-owned subsidiary of AOL Time Warner and will own or manage
all of AOL Time Warners and TWEs cable television
systems. Of the 10.9 million basic subscribers served by
Time Warner Cable at December 31, 2002, 1.7 million
are in systems that will be owned by TWC Inc. directly or
through wholly owned subsidiaries of AOL Time Warner and
9.2 million are in systems that will continue to be owned
or managed by TWE or TWE-A/N. Following the TWE Restructuring,
TWE will become a 94.3%-owned subsidiary of TWC Inc. (with AOL
Time Warner holding a partnership interest in TWE representing a
1% residual equity interest and a $2.4 billion preferred
component). All of these systems will continue to provide
services under the Time Warner Cable brand name.

As a result of the TWE-A/N Restructuring, which
was completed on December 31, 2002, cable systems which served
2.1 million subscribers, primarily located in Florida, were
transferred to a subsidiary of TWE-A/N, and
Advance/Newhouses interest in TWE-A/N was converted into
an interest that tracks the economic performance of these A/N
Systems. Advance/Newhouse has authority for supervision of the
day-to-day operations of the subsidiary, subject to some
exceptions, including limitations on the incurrence of
indebtedness, and TWE will continue to exercise various
management functions, including oversight of programming and
certain engineering-related matters. Time Warner Cable oversees
the management of, and retains the economic interests and
associated liabilities in, the remaining systems owned by
TWE-A/N. TWE has deconsolidated the financial position and
operating results of the A/N Systems for all periods.

Time Warner Cables cable systems include
systems serving 1.2 million subscribers that are part of
Texas Cable Partners (TCP), a 50-50 joint venture
between Comcast and TWE-A/N, and systems serving 306,000
subscribers that are part of Kansas City Cable Partners
(KCCP), a 50-50 joint venture between Comcast and
TWE. TWEs investments in these joint ventures are
accounted for using the equity method. TWE receives a fee for
managing the TCP and KCCP systems.

For additional information with respect to the
TWE and TWE-A/N restructurings, see Managements
Description and Analyses of Results of Operations and Financial
Condition, Recent Developments and Note 4
Cable-Related Transactions and Investments, to
TWEs consolidated financial statements set forth at
pages F-50 through F-52 herein.

3



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Systems Operations

Time Warner Cable is the second largest operator
of cable television systems in the U.S. As of December 31,
2002, Cable systems owned or managed by Time Warner Cable passed
approximately 18.5 million homes, and provided basic cable
service to 10.9 million subscribers and high speed data
services to 2.5 million residential and commercial
subscribers. Time Warner Cable operates large clustered and
technologically advanced cable systems. As of December 31,
2002, more than 73% of its subscribers were in
19 geographic clusters, each serving more than
300,000 subscribers, and approximately 99% of its cable
systems were capable of carrying two-way broadband services,
with approximately 97% having been upgraded to 750MHz or higher.
Time Warner Cable is an industry leader in developing and
rolling-out new products and services, such as video-on-demand,
subscription video-on-demand, high-definition television, home
networking and set-top boxes with integrated digital video
recorders. See Advanced Cable Services below.

Franchises

Cable systems are constructed and operated under
non-exclusive franchises granted by state or local governmental
authorities. Franchises typically contain many conditions, such
as time limitations on commencement or completion of
construction; service requirements, including number of
channels; provision of free services to schools and other public
institutions; and the maintenance of insurance and indemnity
bonds. Cable franchises are subject to various federal, state
and local regulations. See Regulation and
Legislation below.

Video
Programming

Video programming is generally made available to
customers through packages of different programming services
provided for prescribed monthly fees. The available analog
channel capacity of Time Warner Cables systems has
expanded as system upgrades are completed, with most systems
offering around 70 analog channels. Customers receiving
Time Warner Cables digital services may elect to receive
up to 150 video and audio channels, including expanded
pay-per-view and premium channel options as well as other
programming products.

Video programming available to customers includes
local and distant broadcast television stations, cable
programming services like CNN, A&E and ESPN, and premium
cable services like HBO, Showtime and Starz! The terms and
conditions of carriage of programming services are generally
established through affiliation agreements between the
programmers and Time Warner Cable. Most programming services
impose a monthly license fee per subscriber upon the cable
operator and these fees typically increase over time. Time
Warner Cables programming costs have risen in recent
years, see Managements Discussion and Analysis of Results
of Operations, Business Segment Results 
Cable. Time Warner Cable sometimes has the right to cancel
contracts and generally has the right not to renew them. Time
Warner Cable may not always be able to renew contracts when it
wishes to do so. Time Warner Cable also must periodically obtain
retransmission consent for permission to carry local broadcast
stations that have so elected. Time Warner Cable cannot be
assured that each station will grant such consent on reasonable
terms. It is unknown whether the loss of any one popular
supplier would have a material adverse effect on Time Warner
Cables operations.

Video
Programming Charges and Advertising

Video subscribers to Time Warner Cables
cable systems are typically charged monthly subscription fees
based on the level of service selected and, in some cases,
equipment usage fees. Subscription revenues account for most of
Time Warner Cables revenues. Although regulation of
certain cable programming rates ended in 1999, rates for
basic programming as well as for equipment rentals
and installation services continue to be subject to regulation
pursuant to federal law. See Regulation and
Legislation below.

Video subscribers may also elect to receive
premium channels for an additional monthly fee with discounts
generally available for the purchase of packages of more than
one premium service. Pay-per-view movies and special events are
charged on a per-view basis.

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Time Warner Cable also generates revenue by
selling advertising time to a variety of national, regional and
local businesses. Cable television operators receive an
allocation of scheduled advertising time on certain cable
programming services into which the operator can insert
commercials. The clustering of Time Warner Cables systems
expands the share of viewers that Time Warner Cable reaches
within a local DMA (Designated Market Area), which helps local
ad sales personnel to compete more effectively with broadcast
and other media. In addition, in many locations, contiguous
cable system operators have formed advertising interconnects to
deliver locally inserted commercials across wider geographic
areas, replicating the reach of the broadcast stations as much
as possible. As of December 31, 2002, 15 of Time Warner
Cables 34 divisions participated in local cable
advertising interconnects.

A portion of Time Warner Cables advertising
revenues come from sales to other AOL Time Warner segments and
from sales to programming vendors in support of their channel
launches. For the past two years, these sales to programming
vendors have represented a substantial portion of Time Warner
Cables total advertising revenues. However, these
advertising revenues have decreased in recent periods as the
number of new programming service launches has declined. TWE
expects this trend to continue and expects sales of advertising
to other AOL Time Warner segments to decline significantly in
2003. See Managements Discussion and Analysis of Results
of Operations and Financial Condition Business Segment
Results  Cable.

Local News
Channels

Time Warner Cable operates, alone or in
partnerships, 24-hour local news channels in New York City (NY1
News), Albany, NY (News 9 Albany), Rochester, NY (R/News),
Charlotte and Raleigh, NC (Carolina News 14), Austin
(News 8 Austin) and Houston, TX (News 24 Houston).
These channels have developed into attractive vehicles for local
advertising and provide Time Warner Cable with an important
connection to the communities in which the channels operate.
Preparations are underway to launch news channels in San
Antonio, TX and Syracuse, NY.

Advanced Cable Services



| |                             
| | ----------------------------
| | Digital Programming Services



| |                      
| | ---------------------
| | Digital Video Service

As of December 31, 2002, Time Warner Cable
had more than 3.7 million digital service subscribers and
all of Time Warner Cables 34 divisions were upgraded to
accommodate digital cable. Digital subscribers receive
significantly expanded cable network options, CD-quality audio
music services, more pay-per-view choices, more channels of
multiplexed premium services and other features such as enhanced
parental control options. The digital set-top boxes delivered to
subscribing customers also offers a digital interactive program
guide and access to Time Warner Cables video on demand
offerings.



| |                   
| | ------------------
| | On Demand Services

As of December 31, 2002, Time Warner Cable
offered video on demand services in 32 of its 34 divisions.
Video on demand enables digital subscribers to instantaneously
purchase movies and other programming, and to utilize VCR-like
functions (such as pause, rewind and fast-forward) while
watching these programs. Subscribers are charged for video on
demand on a per-use basis.

As of December 2002, Time Warner Cable offered
subscription video on demand in 32 of its 34 divisions.
Subscription video on demand provides digital customers the
ability to view an array of content associated with a particular
content provider. Subscription video on demand uses the same
technology and offers the same features as video on demand, but
subscriber access is charged on a monthly rather than a per-use
basis. Subscription video on demand is currently offered in
connection with premium channels such as HBO and it is expected
that other programming will be available over time.

5



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| |     
| | ----
| | HDTV

Pursuant to FCC regulation, television broadcast
stations have been granted additional over-the-air spectrum to
provide, under a prescribed rollout schedule, high definition
and digital television signals to the public. Time Warner Cable
believes its upgraded hybrid fiber optic/coaxial cable
architecture provides a technologically superior means of
distributing HDTV signals. To date, Time Warner Cable has agreed
to carry the high definition television signals and other
digital signals broadcast by television stations owned and
operated by the ABC, CBS, NBC and Fox networks, and also by
nearly all public television stations in Time Warner
Cables operating areas. Time Warner Cable is seeking high
definition carriage arrangements with other broadcasters. Time
Warner Cable is also carrying the HDTV versions of HBO and
Showtime in certain areas.



| |                        
| | -----------------------
| | Digital Video Recorders

Beginning in August, 2002, Time Warner Cable
began to offer customers in some of its systems set-top boxes
with integrated digital video recorders, or DVRs,
for an additional monthly charge. DVR users can record
programming on a hard drive built into the set-top box through
the interactive program guide and view the recorded programing
using VCR-like functions such as pause, rewind and fast-forward.
Furthermore, DVRs give users the ability to pause even
live television. Time Warner Cable intends to expand
the deployment of DVR-enabled set-top boxes during 2003.



| |                         
| | ------------------------
| | High Speed Data Services



| |                  
| | -----------------
| | Internet Services

Time Warner Cables residential customers
can choose from a variety of ISPs, including TWEs Road
Runner and America Onlines AOL For Broadband services.
High speed data customers connect their personal computers (PCs)
to Time Warner Cables two-way hybrid fiber optic/coaxial
plant using a cable modem. High speed data customers pay a flat
monthly fee for access to their ISPs features, which
typically include Internet access and email. Time Warner Cable
also offers a home networking option for an additional monthly
fee, which allows a customer to connect multiple PCs to a single
cable modem.

As of December 31, 2002, Time Warner Cable
had 2.5 million high speed data subscribers. High speed
data subscribers include residential subscribers, as well as
commercial and bulk (e.g., apartment buildings and universities)
subscribers. Due to their nature, commercial and bulk
subscribers are charged a different amount than residential
subscribers.

Time Warner Cable offers its Road Runner branded,
high speed data service to both residential and commercial
customers. In connection with the TWE-A/N Restructuring, TWE and
an affiliate of AOL Time Warner effectively acquired
Advance/Newhouses 17% interest in Road Runner thereby
increasing AOL Time Warners ownership to approximately 82%
on a fully attributed basis. As a result of the termination of
Advance/Newhouses minority rights in Road Runner, TWE
consolidated Road Runner with its results retroactive to
January 1, 2002. As of December 31, 2002, the Road
Runner service was carried in all of Time Warner Cables 34
divisions.

Time Warner Cables provision of the AOL For
Broadband service and its obligation to make multiple ISP
services available to its customers are subject to compliance
with the terms of the FTC Consent Decree and the FCC Order
entered in connection with the regulatory clearance of the
AOL-Time Warner Merger. (See Regulation and
Legislation below, for a description of these terms).



| |               
| | --------------
| | Voice Services

Commencing in 2002, Time Warner Cable has engaged
in voice services trials utilizing a technology known as Voice
over Internet Protocol or VoIP. These trials enable
participating Time Warner Cable residential high speed data
users to make and receive calls using a traditional telephone
handset connected to a cable modem. Time Warner Cable expects to
begin the commercial launch of VoIP service in some of its
divisions in 2003.

6



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Competition

Time Warner Cables video and high speed
data services face strong competition from a wide variety of
alternative delivery sources. In the future, technological
advances will most likely increase the number of alternatives
available to its customers. In general, Time Warner Cables
video and high speed data business faces competition from other
information and entertainment providers, as well as competition
from other media for advertising dollars.

DBS.Time Warner
Cables video services face competition from satellite
services, such as DirecTV and the Dish Network, which offer
satellite-delivered pre-packaged programming services that can
be received by relatively small and inexpensive receiving
dishes. The video services provided by these satellite providers
are comparable, in many respects, with Time Warner Cables
analog and digital video services. In many metropolitan areas,
satellite services now also include local broadcast signals.

Online
Competition.Time Warner Cables
high speed data service faces competition from a variety of
companies that offer other forms of online services,
including DSL high speed data service and dial-up services over
ordinary telephone lines. Monthly prices of dial-up services are
typically less expensive than broadband services. Other
developing new technologies, such as Internet service via
satellite or wireless connections, also compete with cable and
cable modem services.

Overbuilds.Under
the Cable Television Consumer Protection and Competition Act of
1992, franchising authorities are prohibited from unreasonably
refusing to award additional franchises. As a result, from time
to time, Time Warner Cable faces competition from overlapping
cable systems operating in its franchise areas, including
municipally-owned systems.

SMATV (Satellite master antenna
television).Additional competition
comes from private cable television systems servicing
condominiums, apartment complexes and certain other multiple
dwelling units, often on an exclusive basis, with local
broadcast signals and many of the same satellite-delivered
program services offered by franchised cable television systems.
Some SMATV operators now offer voice and high speed Internet
services.

MMDS/Wireless Cable (Multichannel microwave
distribution services).Time Warner
Cable faces competition from wireless cable operators, including
digital wireless operators, who use terrestrial microwave
technology to distribute video programming. Some MMDS operators
now offer voice and high speed Internet services.

Telephone Companies.Time Warner Cable also faces competition from telephone
companies. Under the 1996 Telecommunications Act, telephone
companies are now free to enter the retail video distribution
business within their local exchange service areas, including
through satellite, MMDS and SMATV, as traditional franchised
cable system operators or as operators of open video
systems subject to local authorizations and local fees.

Consumer Electronics
Manufacturers.To the extent that Time
Warner Cables products and services converge with theirs,
Time Warner Cable may compete with the manufacturers of consumer
electronics products.

Additional
Competition.In addition to
multichannel video providers, cable television systems compete
with all other sources of news, information and entertainment,
including over-the-air television broadcast reception, live
events, movie theaters, home video products and the Internet.

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FILMED ENTERTAINMENT

TWEs Filmed Entertainment businesses
produce and distribute theatrical motion pictures, television
shows, animation and other programming, distribute home video
product and license rights to TWEs programs and
characters. All of the foregoing businesses are principally
conducted by Warner Bros., which is a division of TWE. Following
the completion of the TWE Restructuring, the Warner Bros.
division will become a wholly owned subsidiary of AOL Time
Warner.

Warner Bros. Feature Films

Warner Bros. Pictures produces feature films both
wholly on its own and under co-financing arrangements with
others, and also distributes completed films produced and
financed by others. The terms of Warner Bros. Pictures
agreements with independent producers and other entities are
separately negotiated and vary depending upon the production,
the amount and type of financing by Warner Bros., the media and
territories covered, the distribution term and other factors.

Warner Bros. Pictures strategy focuses on
offering a diverse slate of films with a mix of genres, talent
and budgets that includes four to six event movies
per year. In response to the rising cost of producing theatrical
films, Warner Bros. Pictures has entered into a number of joint
venture agreements with other companies to co-finance films,
decreasing its financial risk while in most cases retaining
substantially all worldwide distribution rights. During 2002,
Warner Bros. Pictures released a total of 26 original motion
pictures for theatrical exhibition, of which 6 were wholly
financed by Warner Bros. Pictures and 20 that were financed with
or by others. A total of 25 motion pictures are currently slated
to be released during 2003, of which 7 are wholly financed by
Warner Bros. Pictures and 18 financed with or by others.

Warner Bros. Pictures joint venture
arrangements include a joint venture with Village Roadshow
Pictures to co-finance the production of motion pictures; and an
arrangement with Gaylord Entertainment (Gaylord) to
co-finance the production of motion pictures with medium to high
budgets, and with Gaylords wholly owned subsidiary,
Pandora Investments SARL, to co-finance the production of lower
budget pictures.

Warner Bros. Pictures has distribution servicing
agreements with Morgan Creek Productions Inc. (Morgan
Creek) through December 2003 pursuant to which, among
other things, Warner Bros. provides domestic distribution
services for all Morgan Creek motion pictures and certain
foreign distribution services for selected motion pictures in
selected territories. Warner Bros. Pictures has a distribution
arrangement with Franchise Entertainment LLC under which, for
certain motion pictures, it has domestic distribution rights and
foreign distribution rights in selected territories.
Additionally, Warner Bros. has an exclusive distribution
arrangement with Alcon Entertainment (Alcon) for
distribution of all of Alcons motion pictures in domestic
and certain foreign territories, and an exclusive worldwide
distribution arrangement with the newly created Shangri-La
Entertainment, LLC.

Home
Video

Warner Home Video (WHV) distributes
for home video use DVDs and videocassettes containing filmed
entertainment product produced or otherwise acquired by Warner
Bros. Pictures, Castle Rock, New Line, Home Box Office, Turner
Broadcasting System, Inc. (TBS) and WarnerVision.

WHV also distributes other companies
product, including DVDs and videocassettes for BBC, PBS and
National Geographic in the U.S., ICON in the UK and Australia,
and France Television and Canal+ in France.

WHV sells and/or licenses its product in the U.S.
and in major international territories to retailers and/or
wholesalers through its own sales forces, with warehousing and
fulfillment handled by divisions of Warner Music Group and third
parties. In some countries, WHVs product is distributed
through licensees. DVD product is replicated by Warner Music
Group companies and third parties. Video-cassette product is

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manufactured under contract with independent
duplicators. WHV released 25 titles on DVD and videocassette in
the U.S. in 2002 that generated sales of more than one million
units each.


Since inception of the DVD format, WHV has
released over 1,500 DVD titles in the U.S. and international
markets, led by worldwide sales of Harry Potter and the
Sorcerers Stone, which has sold 23 million DVD
units. DVD is the fastest selling consumer electronics product
of all time, with an installed base at December 31, 2002 of
over 40 million households in the U.S. and an additional
55.4 million households internationally (including China).

Television

Warner Bros. is one of the worlds leading
suppliers of television programming, distributing programming in
more than 175 countries and in more than 40 languages.
Warner Bros. both develops and produces new television series,
made-for-television movies, mini-series, reality-based
entertainment shows and animation programs and also distributes
television programming for exhibition on all media. The
distribution library owned or managed by Warner Bros. currently
has more than 6,500 feature films, approximately 38,000
television titles, and 14,000 animated titles (including 1,500
classic animated shorts).

Warner Bros. television programming is
primarily produced by Warner Bros. Television
(WBTV), which produces primetime dramatic and comedy
programming for the major networks, and Telepictures Productions
(Telepictures), which specializes in reality-based
and talk/variety series for the syndication and primetime
markets. During the 2002-03 season, WBTV produced hits such as
Smallville, Gilmore Girlsand Everwoodfor The WB
Network and ER, Friends, The West Wing, The Drew Carey Show,
George Lopez, Third Watchand Without a Trace.
Telepictures has primetime hits The Bachelorand The
Bacheloretteas well as first-run syndication staples such
as Extra.

Warner Bros.Animation is responsible for the creation, development and
production of contemporary television and feature film
animation, as well as for the creative use and production of
classic animated characters from Warner Bros., TBSs
and DC Comics libraries, including Looney Tunesand
the Hanna-Barbera libraries.

Backlog

Backlog represents the future revenue not yet
recorded from cash contracts for the licensing of theatrical and
television programming for pay cable, network, basic cable and
syndicated television exhibition. Backlog for all of TWEs
filmed entertainment companies amounted to $3.2 billion at
December 31, 2002, compared to $3.5 billion at
December 31, 2001 (including amounts relating to the
intercompany licensing of film product to TWEs cable
television networks of $405 million and $433 million
as of December 31, 2002 and December 31, 2001,
respectively). The backlog excludes advertising barter contracts.

Consumer
Products

Warner Bros. Consumer Products licenses rights in
both domestic and international markets to the names,
likenesses, images, logos and other representations of
characters and copyrighted material from the films and
television series produced or distributed by Warner Bros.,
including the superhero characters of DC Comics, Hanna-Barbera
characters, classic films and the literary and feature film
phenomenon, Harry Potter.

Competition

The production and distribution of theatrical
motion pictures, television and animation product and
videocassettes/DVDs are highly competitive businesses, as each
vies with the other, as well as with other forms of
entertainment and leisure time activities, including video
games, the Internet and other computer-related activities for
consumers attention. Furthermore, there is increased
competition in the television industry evidenced by the
increasing number and variety of broadcast networks and basic
cable and pay television services now available. Despite this
increasing variety of networks and services, access to primetime
and syndicated television slots has actually tightened as
networks and owned and operated stations increasingly

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source programming from content producers aligned
with or owned by their parent companies. There is active
competition among all production companies in these industries
for the services of producers, directors, writers, actors and
others and for the acquisition of literary properties. With
respect to the distribution of television product, there is
significant competition from independent distributors as well as
major studios. Piracy and unauthorized recording, transmission
and distribution of content are increasing challenges. Revenues
for filmed entertainment product depend in part upon general
economic conditions, but the competitive position of a producer
or distributor is still greatly affected by the quality of, and
public response to, the entertainment product it makes available
to the marketplace.


Warner Bros. also competes in its character
merchandising and other licensing activities with other
licensors of character, brand and celebrity names.




NETWORKS

TWEs Networks business consists principally
of the multichannel HBO and Cinemax pay television programming
services (collectively, the Home Box Office
Services), operated by the Home Box Office division of TWE
(Home Box Office). The WB Television Network
(The WB), a broadcast television network, is
operated as a limited partnership in which WB Communications
(currently a subsidiary of TWE) holds a 77% interest in the
network and is the networks managing general partner. Upon
the completion of the TWE Restructuring, both Home Box Office
and WB Communications will become wholly owned subsidiaries of
AOL Time Warner.

Home Box Office

HBO, operated by the Home Box Office division of
TWE, is the nations most widely distributed pay television
service, which together with its sister service, Cinemax, had
approximately 39 million subscriptions as of
December 31, 2002. Both HBO and Cinemax are made available
in a multichannel format and through the newly introduced
subscription video on demand enhancement, which enables
participating digital cable subscribers to choose programs at a
time of their choice with VCR-like functionality. Through
various joint ventures, HBO-branded services are distributed in
Latin America, Asia and Eastern Europe.

The Home Box Office Services distribute their
programming via cable and other distribution technologies,
including satellite distribution and generally enter into
separate multi-year agreements, known as affiliation agreements,
with distributors that have agreed to carry them. Distributors
that have agreed to carry a cable network or service are known
as affiliates. The Home Box Office Services are commercial-free
and generate revenue principally from monthly subscriptions paid
by affiliates for subscribers who are generally free to cancel
their subscriptions at any time. The Home Box Office Services
and their affiliates engage in ongoing marketing and promotional
activities to retain existing subscribers and acquire new
subscribers. Although the Home Box Office Services believe
prospects of continued carriage and marketing of their
respective Networks by the larger affiliates are good, the loss
of one or more of them as distributors of any individual network
or service could have a material adverse effect on their
respective businesses. The recent combination of Comcast and
AT&T Broadband, two of the largest multiple-system cable
operators that distribute the Home Box Office Services, reflects
a growing consolidation among the Services distributors.
In addition, one of the larger DBS services has been seeking a
buyer. This trend towards consolidation could impact the Home
Box Office Services prospects for securing carriage
agreements on favorable terms.

A major portion of the programming on HBO and
Cinemax consists of recently released, uncut and uncensored
theatrical motion pictures. Home Box Offices practice has
been to negotiate licensing agreements of varying duration for
such programming with major motion picture studios, and
independent producers and distributors in order to ensure
continuing access to theatrical motion pictures. These
agreements typically grant pay television exhibition rights to
recently released and certain older films owned by the
particular studio, producer or distributor in exchange for a
negotiated fee, which may be a function of, among other things,
the films box office performances.

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HBO also defines itself by the exhibition of
award-winning original movies and mini-series, dramatic and
comedy series, such as The Sopranos, Sex and the City,and Six Feet Underand boxing matches, sports
documentaries and sports news programs, as well as concerts,
comedy specials, family programming and documentaries. HBO
received 24 Primetime Emmy Awards® in 2002 in a variety of
categories, including Best Miniseries, Best Made for Television
Movie and Best Directing for both Drama and Comedy Series.

Home Box Office has also increased its
involvement in the financing and production of theatrical motion
pictures, including the surprise hit My Big Fat Greek Weddingand the critically praised Real Women Have Curves.

A division of Home Box Office produces
Everybody Loves Raymond,now in its seventh season on CBS
and its first syndication cycle. Home Box Office also develops
and produces programming for other networks. HBO Sports, a
division of Home Box Office, operates HBO Pay-Per-View, an
entity that distributes pay-per-view prize fights and other
pay-per-view events. HBO Video, also a division of Home Box
Office, distributes videocassettes and DVDs of a number of
HBOs original movies, miniseries and dramatic and comedy
series, including Band of Brothers, The Sopranosand
Sex and the City.

The WB Television Network

The WB provides a national group of affiliated
television stations with 13 hours of prime time plus 2
additional hours of Sunday access programming during six days of
the week (Sunday through Friday). The WBs programming is
primarily aimed at teens and young adults. The networks
line-up of programs includes established series such as 7th
Heaven, Everwood, Dawsons Creek, Charmed, Reba,
Smallville and Gilmore Girls. As of December 31,
2002, Kids WB!, a programming service for young
viewers, presented 14 hours of animated programming per week,
including Yu-Gih-Oh and Pokemon.

As of December 31, 2002, 84 primary and
8 secondary affiliates provide coverage for The WB in the
top 100 television markets. Additional coverage reaching
approximately 8.5 million homes in smaller markets is
provided by The WB 100+ Station Group, a venture between
The WB and local broadcasters under which WB programming is
disseminated over the facilities of local cable operators.

Advertising revenue on The WB is comprised of
consumer advertising, which is sold exclusively on a national
basis, with local affiliates of The WB selling local
advertising. Advertising contracts generally have terms of one
year or less. Advertising revenue is generated from a wide
variety of categories, including financial and business
services, food and beverages, automotive, entertainment and
office supplies and equipment. Advertising revenue is a function
of the size and demographics of the audience delivered, the
CPM, which is the cost per thousand viewers
delivered, and the number of units of time sold. Units sold and
CPMs are influenced by the quantitative and qualitative
characteristics of the audience of each network as well as
overall advertiser demand in the marketplace.

Tribune Broadcasting owns a 22.25% interest in
The WB and the balance is held by WB Communications, a
division of TWE. Following the completion of the TWE
Restructuring, WB Communications will be a wholly owned
subsidiary of AOL Time Warner.

Other Network Interests

TWE has held a 50% interest in Comedy Central, an
advertiser-supported basic cable television service that
provides comedy programming. Following the completion of the TWE
Restructuring, such interest will be held by a wholly owned
subsidiary of AOL Time Warner. Comedy Central was available in
approximately 81 million homes as of December 31, 2002.

TWE has held a 50% interest in Court TV, which
was available in approximately 75 million homes as of
December 31, 2002. Following the completion of the TWE
Restructuring, such interest will be held by a wholly owned
subsidiary of AOL Time Warner. Court TV is an
advertiser-supported basic cable television service whose
programming aims to provide an informative and entertaining view
of the American system of

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justice. Focusing on investigative
television, Court TV broadcasts trials by day and original
programs such as Forensic Files and popular off-network
series such as NYPD Blue in the evening.


Competition

Each of TWEs networks competes with other
television programming services for marketing and distribution
by cable and other distribution systems. All of the networks
compete for viewers attention and audience share with all
other forms of programming provided to viewers, including
broadcast networks, local over-the-air television stations,
other pay and basic cable television services, home video,
pay-per-view services, online activities and other forms of
news, information and entertainment. In addition, the networks
face competition for programming with those same commercial
television networks, independent stations, and pay and basic
cable television services, some of which have exclusive
contracts with motion picture studios and independent motion
picture distributors. The WB competes for advertising with
numerous direct competitors and other media.




REGULATION AND LEGISLATION

TWEs cable television system, cable and
broadcast television network and original programming businesses
are subject, in part, to regulation by the Federal
Communications Commission (FCC), and the cable
television system business is also subject to regulation by some
state governments and substantially all local governments where
TWE has cable systems. In addition, in connection with
regulatory clearance of the AOL-Time Warner merger, AOL Time
Warner and its subsidiaries, including TWEs cable system
and Internet businesses are subject to compliance with the terms
of the Consent Decree (the Consent Decree) issued by
the Federal Trade Commission (FTC), the Order to
Hold Separate issued by the FTC, the Memorandum Opinion and
Order (Order) issued by the FCC. TWE is also subject
to an FTC consent decree (the Turner Consent Decree)
as a result of the FTCs approval of Time Warners
acquisition of Turner Broadcasting System, Inc. in 1996. The
terms of the Order to Hold Separate entered by the FTC in
connection with the AOL-Time Warner Merger (which terms were
described in TWEs Annual Report on Form 10-K for the
year ended December 31, 2000) have been satisfied.

The following is a summary of the terms of these
orders as well as current significant federal, state and local
laws and regulations affecting the growth and operation of these
businesses. In addition, various legislative and regulatory
proposals under consideration from time to time by Congress and
various federal agencies have in the past materially affected,
and may in the future materially affect, TWE.

FTC Consent Decree

On December 14, 2000, the FTC issued a
consent decree in connection with the AOL Time Warner Merger.
The consent decree provided that, with the exception of Road
Runner, Time Warner Cable is not permitted to launch an
affiliated ISP, like the AOL Broadband service, in its
20 largest divisions, until it launched the EarthLink
service, an unaffiliated ISP, on those systems. The consent
decree also provided that Time Warner Cable had to enter into
agreements with two additional unaffiliated ISPs within
90 days after launching an affiliated ISP. In addition, the
consent decree required that, in its remaining divisions, Time
Warner Cable had to enter into agreements with three
unaffiliated providers within 90 days after launching an
affiliated ISP. Each of these agreements had to be approved by
the FTC.

Time Warner Cable has now entered into, and
received FTC approval for, agreements with the required number
of unaffiliated ISPs in all covered divisions. If any of the
required agreements expires or is terminated during the term of
the consent decree, Time Warner Cable will be required to
replace it with another approved agreement. Although offering
multiple ISPs was required by the terms of the consent decree,
Time Warner Cable has entered into agreements with unaffiliated
ISPs beyond the number required by the consent decree.

The consent decree also requires that Time Warner
Cables FTC-approved agreements contain a provision that
requires Time Warner Cable to give notice to the unaffiliated
ISPs whenever AOL Time

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Warner enters into an AOL For Broadband
affiliation agreement with any one of six specified cable
operators. In that event, Time Warner Cable is required to give
each unaffiliated ISP the option to adopt all terms and
conditions of the relevant AOL For Broadband affiliation
agreement. In addition, the consent decree requires that AOL
Time Warner continue to offer and promote DSL service in areas
served by Time Warner Cable to the same extent and on terms
similar to the terms offered in areas not served by Time Warner
Cable. TWEs obligations under the consent decree expire on
April 17, 2006.


FCC Memorandum Opinion and Order

On January 11, 2001, the FCC issued an Order
imposing certain requirements over a five-year period regarding
Time Warner Cables provision of multiple ISPs.
Specifically, the Order requires Time Warner Cable to provide
ISP customers with a list of available ISPs upon request, to
allow ISPs to determine the content on their first screen, and
to allow ISPs to have direct billing arrangements with the
subscribers they obtain. The Order prohibits Time Warner Cable
from requiring customers to go through an affiliated ISP to
reach an unaffiliated ISP, from requiring ISPs to include
particular content, and from discriminating on the basis of
affiliation with regard to technical system performance.

The FCCs Order also imposes conditions
regarding possible future enhancements to America Onlines
instant messaging service. The Order prohibits America Online
from offering advanced instant messaging services
(which are defined as streaming video applications that are not
upgrades to America Onlines current instant messaging
products) that utilize a names and presence database
(NPD) over Time Warner Cable broadband facilities
unless America Online satisfies one of three conditions:
(i) America Online implements an industry-wide standard for
server-to-server interoperability; (ii) America Online
contracts with at least one unaffiliated provider of NPD based
instant messaging services before offering advanced
instant messaging and, within 180 days thereafter, enters into
two additional such contracts; or (iii) America Online
demonstrates that these conditions no longer serve the public
interest due to materially changed circumstances. AOL Time
Warner must also report to the FCC, every 180 days, its
progress toward Instant Messaging interoperability. Conditions
relating to AOLs instant messaging expire January 22,
2006.

In addition, the FCCs Order prohibits TWE
from entering into any agreement with Comcast (formerly
AT&T) that gives any ISP affiliated with AOL Time Warner
exclusive carriage rights on any former AT&T cable system
for broadband ISP services or that affects Comcasts
ability to offer rates or other carriage terms to ISPs that are
not affiliated with AOL Time Warner.

Turner FTC Consent Decree

TWE is also subject to the terms of a consent
decree (the Turner Consent Decree) entered in
connection with the FTCs approval of the acquisition of
Turner Broadcasting System, Inc. (TBS) by Time
Warner in 1996. Certain requirements imposed by the Turner
Consent Decree, such as carriage commitments for Time Warner
Cable for the rollout of at least one independent national news
video programming service, have been fully satisfied by TWE.
Various other conditions remain in effect, including certain
restrictions which prohibit TWE from offering programming upon
terms that (1) condition the availability of, or the
carriage terms for, the HBO service upon whether a multichannel
video programming distributor carries a video programming
service affiliated with TBS; and (2) condition the
availability of, or the carriage terms for, CNN, TBS
Superstation and TNT upon whether a multichannel video
programming distributor carries any video programming service
affiliated with TWE. The Turner Consent Decree also imposes
certain restrictions on the terms by which a Turner video
programming service may be offered to an unaffiliated
programming distributor that competes in areas served by Time
Warner Cable.

Other conditions of the Turner Consent Decree
prohibit Time Warner Cable from requiring, as a condition of
carriage, that any national video programming vendor provide a
financial interest in its programming service or that such
programming vendor provide exclusive rights against any other
multichannel programming distributor. In addition, Time Warner
Cable may not discriminate on the basis of affiliation in the
selection, terms or conditions of carriage for national video
programming vendors.

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The Turner Consent Decree also requires that any
AOL Time Warner stock held by Liberty Media Corporation
(Liberty Media), its former corporate parent,
Tele-Communications, Inc. (TCI), which was merged
with AT&T in 1999, as well as by the late Bob Magness and
John C. Malone as individuals, be non-voting except that such
securities are entitled to a vote of one-one hundredth (1/100)
of a vote per share owned when voting with the outstanding
common stock on the election of directors and a vote equal to
the vote of the common stock with respect to corporate matters
that would adversely change the rights or terms of these
non-voting securities. Upon the sale of these non-voting
securities to any independent third party, the securities may be
converted into voting stock of AOL Time Warner. The Turner
Consent Decree also prohibits Liberty Media, TCI (now Comcast),
the late Bob Magness and John C. Malone as individuals, from
holding ownership interests, collectively, of more than 9.2% of
the fully diluted equity of AOL Time Warner. In 2002, Liberty
Media sought to eliminate these restrictions from the Turner
Consent Decree; the petition was denied by the FTC without
prejudice on July 17, 2002. The Turner Consent Decree will
expire in February 2007.

Cable System Regulation



| |                                           
| | ------------------------------------------
| | Communications Act and FCC
    Regulation.

The Communications Act and the regulations and
policies of the FCC affect significant aspects of Time Warner
Cables cable system operations, including subscriber
rates; carriage of broadcast television stations, as well as the
way Time Warner Cable sells its program packages to subscribers;
the use of cable systems by franchising authorities and other
third parties; cable system ownership; and use of utility poles
and conduits.

Subscriber Rates.The Communications Act and the FCCs rules regulate rates
for basic cable service and equipment in communities that are
not subject to effective competition, as defined by
federal law. Where there is no effective competition, federal
law authorizes franchising authorities to regulate the monthly
rates charged by the operator for the minimum level of video
programming service, referred to as basic service, which
generally includes local broadcast channels and public access or
governmental channels required by the franchise. This kind of
regulation also applies to the installation, sale and lease of
equipment used by subscribers to receive basic service, such as
set-top boxes and remote control units. In many localities, Time
Warner Cable is no longer subject to this rate regulation,
either because the local franchising authority has not asked the
FCC for permission to regulate or because the FCC has found that
there is effective competition.

Carriage of Broadcast Television Stations and
Other Programming Regulation.The
Communications Act and the FCCs regulations contain
broadcast signal carriage requirements that allow local
commercial television broadcast stations to elect once every
three years to require a cable system to carry their stations,
subject to some exceptions, or to negotiate with cable systems
the terms by which the cable systems may carry their stations,
commonly called retransmission consent. The most
recent election by broadcasters was due on October 1, 2002
and became effective on January 1, 2003.

The Communications Act and the FCCs
regulations require a cable operator to devote up to one-third
of its activated channel capacity for the mandatory carriage of
local commercial television stations. The Communications Act and
the FCCs regulations give local non-commercial television
stations mandatory carriage rights, but non-commercial stations
do not have the option to negotiate retransmission consent for
the carriage of their signals by cable systems. Additionally,
cable systems must obtain retransmission consent for all
distant commercial television stations except for
commercial satellite-delivered independent
superstations, commercial radio stations, and some
low-power television stations.

FCC regulations require Time Warner Cable to
carry the signals of both commercial and non-commercial local
digital-only broadcast stations and the digital signals of local
broadcast stations that return their analog spectrum to the
government and convert to a digital broadcast format. The
FCCs rules give digital-only broadcast stations discretion
to elect whether the operator will carry the stations
signal in a digital or converted analog format, and the rules
also permit broadcasters with both analog and digital signals to
tie the carriage of their digital signals to the carriage of
their analog signals as a retransmission consent condition. The
FCC is continuing to consider further modifications to its
digital broadcast signal carriage requirements.

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The Communications Act also permits franchising
authorities to require cable operators to set aside channels for
public, educational and governmental access programming.
Moreover, it requires a cable system with 36 or more activated
channels to designate a significant portion of its channel
capacity for commercial leased access by third parties to
provide programming that may compete with services offered by
the cable operator. The FCC regulates various aspects of such
third-party commercial use of channel capacity on our cable
systems, including the rates and some terms and conditions of
the commercial use.

High Speed Internet
Access.From time to time, industry
groups, telephone companies, and ISPs have sought local, state
and federal regulations that would require cable operators to
sell capacity on their systems to ISPs under a common carrier
regulatory scheme. Cable operators have successfully challenged
regulations requiring this forced access, although
courts that have considered these cases have employed varying
legal rationales in rejecting these regulations.

On March 15, 2002, the FCC released an order
in which it determined that cable-modem service constitutes an
information service rather than a cable
service or a telecommunications service, as
those terms are used in the Communications Act. According to the
FCC, this conclusion may permit but does not require it to
impose multiple ISP requirements. The FCC has begun
a rulemaking proceeding to consider whether it may and should do
so and whether local franchising authorities should be permitted
to do so. Several ISPs have appealed the FCCs order in
federal court. If the ISPs prevail, cable operators may become
subject to a requirement that they carry any ISP desiring
carriage.

In the wake of the FCCs March 2002 order,
Time Warner Cable, along with most other multiple system
operators, stopped collecting and paying franchise fees on
cable-modem revenues. However, the FCC has initiated a
rulemaking to explore the consequences of its March 2002 order.
In addition, several local franchising authorities have appealed
the order in federal court, arguing that the FCC should have
held that cable-modem service is a cable service.
Some local franchising authorities have also claimed that cable
operators failure to pay franchise fees on cable-modem
services revenue constitutes a breach of their franchise
agreement. To date, only a few local franchising authorities
have filed lawsuits. Time Warner Cable is a defendant in one
such lawsuit.

Ownership
Limitations.There are various rules
prohibiting joint ownership of cable systems and other kinds of
communications facilities. Local telephone companies generally
may not acquire more than a small equity interest in an existing
cable system in the telephone companys service area. In
addition, cable operators may not have more than a small
interest in multichannel multipoint distribution
services facilities or satellite master antenna
television systems in their service areas. Finally, the
FCC has been exploring whether it should prohibit cable
operators from holding ownership interests in satellite
operators.

The Communications Act also required the FCC to
adopt reasonable limits on the number of subscribers
a cable operator may reach through systems in which it holds an
ownership interest. In September 1993, the FCC adopted a rule
that was later amended to prohibit any cable operator from
serving more than 30% of all cable, satellite and other
multi-channel subscribers nationwide. The Communications Act
also required the FCC to adopt reasonable limits on
the number of channels that cable operators may fill with
programming services in which they hold an ownership interest.
In September 1993, the FCC imposed a limit of 40% of a cable
operators first 75 activated channels. In March 2001, a
federal appeals court struck down both limits. The FCC is
currently exploring whether it should re-impose any limits. Time
Warner Cable believes that it is unlikely that the FCC will
adopt limits as stringent as those struck down.

Pole Attachment
Regulation.The Communications Act
requires that utilities provide cable systems and
telecommunications carriers with nondiscriminatory access to any
pole, conduit or right-of-way controlled by the utility. The
Communications Act also requires the FCC to regulate the rates,
terms and conditions imposed by public utilities for cable
systems use of utility pole and conduit space unless state
authorities demonstrate to the FCC that they adequately regulate
pole attachment rates, as is the case in some states in which
Time Warner Cable operates. In the absence of state regulation,
the FCC administers pole attachment rates on a formula basis.
The FCCs original rate formula governs the maximum rate
utilities may charge for attachments to their poles and conduit
by cable operators providing only cable services. The FCC also
adopted a second rate formula that became effective in February
2001 and governs the maximum rate utilities may

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charge for attachments to their poles and conduit
by companies providing telecommunications services, including
cable operators. Any increase in attachment rates resulting from
the FCCs new rate formula is being phased in (in equal
annual installments) over a five-year period that began in
February 2001. The U.S. Supreme Court has upheld the FCCs
jurisdiction to regulate the rates, terms and conditions of
cable operators pole attachments that are being used to
provide both cable service and high speed data service.


Other Regulatory Requirements of the
Communications Act and the FCC.The
Communications Act also includes provisions regulating customer
service, subscriber privacy, marketing practices, equal
employment opportunity, technical standards and equipment
compatibility, antenna structure notification, marking,
lighting, emergency alert system requirements and the collection
from cable operators of annual regulatory fees, which are
calculated based on the number of subscribers served and the
types of FCC licenses held.

There are also some regulatory requirements
applicable to set-top boxes. Currently, many cable subscribers
rent from their cable operator a set-top box that performs both
signal-reception functions and conditional-access security
functions. The lease rates cable operators charge for this
equipment are subject to rate regulation to the same extent as
basic cable service. In 1996, Congress enacted a statute seeking
to allow subscribers to use set-top boxes obtained from
third-party retailers. The most important of the FCCs
implementing regulations requires cable operators to offer
separate equipment providing only the conditional-access
security function, so that subscribers can purchase boxes
providing other functions from other sources and to cease
placing into service new set-top boxes that have integrated
conditional-access security. These regulations are scheduled to
go into effect on January 1, 2005. Cable operators and
consumer-electronics companies recently entered into a
standard-setting agreement relating to interoperability between
cable systems and reception equipment. Among other things, the
agreement envisions consumer electronics devices with a slot for
a conditional-access security card provided by the cable
operator. The FCC has invited comment on whether it should issue
regulations to implement that agreement. Meanwhile, industry
groups are in the process of negotiating additional agreements.

Compulsory Copyright Licenses for Carriage of
Broadcast Stations, Music Performance
Licenses.Time Warner Cables
cable systems provide subscribers with, among other things,
local and distant television broadcast stations. Time Warner
Cable generally does not obtain a license to use this
programming directly from program owners. Instead, it obtains
this programming pursuant to a compulsory license provided by
federal law, which requires it to make payments to a copyright
pool. The elimination or substantial modification of the cable
compulsory license could adversely affect Time Warner
Cables ability to obtain suitable programming and could
substantially increase the cost of programming that remains
available for distribution to its subscribers.

When Time Warner Cable obtains programming from
third parties, it generally obtains licenses that include any
necessary authorizations to transmit the music included in it.
When Time Warner Cable creates its own programming and provides
various other programming or related content, including local
origination programming and advertising that it inserts into
cable-programming networks, it is required to obtain any
necessary music performance licenses directly from the rights
holders. These rights are generally controlled by three music
performance rights organizations, each with rights to the music
of various artists. Time Warner Cable generally has obtained the
necessary licenses, either through executed licenses or through
procedures established by consent decrees entered into by some
of the music performance rights organizations.



| |                           
| | --------------------------
| | State and Local Regulation

Cable operators operate their systems under
non-exclusive franchises. Franchises are awarded, and cable
operators are regulated, by municipal or other local franchising
authorities. In some states, there is cable regulation at the
state level as well. Time Warner Cable believes it generally has
good relations with state and local cable regulators.

Franchise agreements typically require payment of
franchise fees and contain regulatory provisions addressing,
among other things, upgrades, service quality, cable service to
schools and other public institutions, insurance and indemnity
bonds. The terms and conditions of cable franchises vary from
jurisdiction to jurisdiction. The Communications Act provides
protections against many unreasonable terms. In particular,

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the Communications Act imposes a ceiling on
franchise fees of five percent of revenues derived from cable
service. Time Warner Cable generally passes the franchise fee on
to its subscribers, listing it as a separate item on the bill.


Franchise agreements usually have a term of ten
to 15 years from the date of grant, although some renewals
may be for shorter terms. Franchises usually are terminable only
if the cable operator fails to comply with material provisions.
Time Warner Cable has not had a franchise terminated due to
breach. After a franchise agreement expires, a franchising
authority may seek to impose new and more onerous requirements,
including requirements to upgrade facilities, to increase
channel capacity and to provide various new services. Federal
law, however, provides significant substantive and procedural
protections for cable operators seeking renewal of their
franchises. In addition, although Time Warner Cable occasionally
reaches the expiration date of a franchise agreement without
having a written renewal or extension, it generally has the
right to continue to operate, either by agreement with the
franchising authority or by law, while continuing to negotiate a
renewal. In the past, substantially all of the material
franchises relating to its systems have been renewed by the
relevant local franchising authority, though sometimes only
after significant time and effort. Despite its efforts and the
protections of federal law, some Time Warner Cable franchises
may not be renewed, and it may be required to make significant
additional investments in its cable systems in response to
requirements imposed in the course of the franchise renewal
process.

Franchises usually require the consent of
franchising authorities prior to the sale, assignment, transfer
or change of control of a cable system. Federal law imposes
various limitations on the conditions local authorities may
impose and requires localities to act on such requests within
120 days.



| |                        
| | -----------------------
| | Regulation of Telephony

As of March 1, 2003, it was unclear whether
and to what extent regulators will subject Voice over Internet
Protocol (VoIP) service provided by cable operators
to the same regulations that apply to regular telephone service
provided by regular telephone companies. In particular, it is
unclear whether and to what extent the access charge
and universal service rules that apply to regular
telephone service will also apply to VoIP service. Finally, it
is possible that regulators will allow utility pole owners to
charge cable operators offering VoIP service higher rates for
pole rental than for traditional cable service and cable-modem
service.

Network Regulation

Under the Act and its implementing regulations,
vertically integrated cable programmers like the Turner Networks
and the Home Box Office Services, are generally prohibited from
offering different prices, terms, or conditions to competing
unaffiliated multichannel video programming distributors unless
the differential is justified by certain permissible factors set
forth in the regulations. The rules also place certain
restrictions on the ability of vertically integrated programmers
to enter into exclusive distribution arrangements with cable
operators. Certain other federal laws also contain provisions
relating to violent and sexually explicit programming, including
relating to the voluntary promulgation of ratings by the
industry and requiring manufacturers to build television sets
with the capability of blocking certain coded programming (the
so-called V-chip).




DESCRIPTION OF CERTAIN PROVISIONS OF
THE

TWE PARTNERSHIP AGREEMENT


In August 2002, AOL Time Warner, AT&T and
Comcast, which in November 2002 acquired AT&Ts
broadband business, including AT&Ts interest in TWE,
entered into an agreement with respect to the TWE Restructuring,
which is expected to be completed on March 31, 2003. The
TWE Partnership Agreement will be amended in connection with the
TWE Restructuring (as amended, the New TWE Partnership
Agreement). The following description summarizes certain
provisions of the TWE Partnership Agreement relating to the
ongoing operations of TWE both before and after the completion
of the TWE Restructuring. Such description does not purport to
be complete and is subject to, and is qualified in its entirety
by reference

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to, the provisions of the TWE Partnership
Agreement as in effect immediately prior to the completion of
the TWE Restructuring (hereinafter referred to as the
original TWE Partnership Agreement) and the New TWE
Partnership, as applicable.


Management and Operations of TWE

Partners.Under the
original TWE Partnership Agreement, the limited partnership
interests in TWE are held by the Class A Partners,
consisting of two Comcast Trusts and two wholly owned
subsidiaries of AOL Time Warner. The general partnership
interests in TWE are held by the Class B Partners,
consisting of wholly owned subsidiaries of AOL Time Warner (the
AOLTW General Partners).

Following the TWE Restructuring, the partnership
interests in TWE will be recapitalized with one of the Comcast
Trusts holding a partnership interest representing a 4.7%
residual equity interest in TWE, with a subsidiary of AOL Time
Warner holding a partnership interest consisting of a
$2.4 billion preferred component and a 1% residual equity
interest in TWE and with TWC Inc. holding a partnership interest
representing a 94.3% residual equity interest in TWE.

Upon the completion of the TWE Restructuring, TWC
Inc. will be the general partner of TWE and a subsidiary of AOL
Time Warner and one of the Comcast Trusts will be the limited
partners of TWE. The designations Class A
Partner and Class B Partner will no
longer apply.

Board of Representatives.Under the original TWE Partnership
Agreement, the business and affairs of TWE are managed under the
direction of a board of representatives (the Board of
Representatives or the Board). Both AOL Time
Warner and the Comcast Trusts are entitled to appoint
representatives to the Board. The AOL Time Warner
representatives control all Board decisions except for certain
limited, significant matters affecting TWE as a whole, which
matters also require the approval of the Comcast Trusts
representatives. The managing general partners, both of which
are wholly owned subsidiaries of AOL Time Warner, may take any
action without the approval or consent of the Board if such
action otherwise may be authorized by the AOL Time Warner
representatives without the approval of the Comcast Trusts
representatives.

Following the completion of the TWE
Restructuring, TWC Inc., as the general partner of TWE, will
have the exclusive authority to manage the business and affairs
of TWE, subject to certain protections over extraordinary
actions afforded the Comcast Trust under the New TWE Partnership
Agreement. These protections consist of consent rights over the
dissolution or liquidation of TWE and the transfer of control of
TWE to a third party, in each case, prior to the second
anniversary of the closing of the TWE Restructuring, and the
right to approve of certain amendments to the New TWE
Partnership Agreement.

Day-to-Day Operations.TWE is, and will continue to be
following the closing of the TWE Restructuring, managed on a
day-to-day basis by the officers of TWE.

Certain Covenants

Covenant Not to Compete.Under the original TWE Partnership
Agreement, AOL Time Warner and its controlled affiliates are
prohibited from competing or owning an interest in the principal
lines of business of TWE  cable television systems,
pay cable programming networks and filmed entertainment, subject
to certain exceptions (which include TBS and its businesses).
The New TWE Partnership Agreement does not contain such
prohibitions.

Transactions with Affiliates.Under the original TWE Partnership
Agreement, subject to agreed upon exceptions for certain types
of arrangements, TWE has agreed not to enter into transactions
with any partner or any of its affiliates other than on an
arms-length basis. The New TWE Partnership Agreement will
require that transactions between TWC Inc., as the managing
partner, and TWE be conducted on an arms-length basis,
with management, corporate or similar services being provided by
TWC Inc. on a no mark-up basis with fair allocations of
administrative costs and general overhead.

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Registration Rights and Other Exit
Rights

Registration Rights under TWE Partnership
Agreement.Both AOL Time Warner and
the Comcast Trusts have registration rights under the original
TWE Partnership Agreement. The parties have agreed not to
exercise any of their registration rights pending the closing of
the TWE Restructuring. Following the closing of the TWE
Restructuring, the New TWE Partnership Agreement will not
provide for registration rights in respect of their interests in
TWE.

Sale and Appraisal Rights of Comcast Trust.Under a partnership interest sale
agreement (the Partnership Interest Sale Agreement)
to be entered in connection with the closing of the TWE
Restructuring, at any time following the second anniversary of
the closing of the TWE Restructuring, the Comcast Trust holding
a limited partnership interest in TWE has the right to require
TWC Inc. to purchase all or a portion of its partnership
interest in TWE at an appraised fair market value, subject to a
right of first refusal in favor of AOL Time Warner. The fair
market value of the interest will be determined separately by
two investment banks, one appointed by the Comcast Trust and one
appointed by TWC Inc. If the higher of the two valuations
presented by the investment banks is within 110% of the lower
valuation, then the fair market value of the offered partnership
interest will be the average of the two valuations. If the
higher valuation is not within 110% of the lower valuation, a
third investment bank selected by the other two investment
banks, or, if they are unable to agree on a third investment
bank, an investment bank selected by the American Arbitration
Association will choose one of the two valuations to be the fair
market value of the offered partnership interest, and that
determination will be final and binding.

Following the second anniversary of the closing
of the TWE Restructuring, the Comcast Trust also has the right,
at any time, to sell all or a portion of its interest in TWE to
a third party in a bona fide transaction, subject to a right of
first refusal, first, in favor of AOL Time Warner and, second,
in favor of TWC Inc. If TWC Inc. and AOL Time Warner do not
collectively elect to purchase all of the Comcast Trusts
offered partnership interest, the Comcast Trust may proceed with
the sale of the offered partnership interest to that third party
on terms no more favorable than those offered to TWC Inc. and
AOL Time Warner, if that third party agrees to be bound by the
same terms and conditions applicable to the Comcast Trust as a
limited partner in TWE and under the Partnership Interest Sale
Agreement.

The purchase price payable by TWC Inc. or AOL
Time Warner as consideration for the Comcast Trusts
partnership interest may be cash; common stock, if the common
stock of the purchaser is then publicly traded, or a combination
of both. Any AOL Time Warner or TWC Inc. common stock issued to
purchase the Comcast Trusts partnership interests will be
valued based on the average of the volume-weighted trading price
of the common stock for a period of time prior to issuance and
will be entitled to registration rights.

Redemption of Preferred
Component.The preferred component of
AOL Time Warners partnership interest must be redeemed by
TWE following the 20th anniversary of the closing of the TWE
Restructuring.

Certain Put Rights of the Class A
Partners

The put rights held by the TWE Class A
Partners under the original TWE Partnership Agreement that are
triggered upon a change of control of AOL Time Warner will
terminate upon the closing of the TWE Restructuring.

Restrictions on Transfer

The original TWE Partnership Agreement prevents
the general partners and limited partners of TWE from
transferring their partnership interests, subject to a variety
of exceptions.

Following the TWE Restructuring, the New TWE
Partnership Agreement will provide that TWC Inc. and AOL Time
Warner may generally transfer their partnership interests in TWE
at any time, except that TWC Inc. may not transfer control of
TWE before the third anniversary of the TWE Restructuring.

The New TWE Partnership Agreement will provide
that the Comcast Trust may not transfer its partnership interest
in TWE at any time prior to the second anniversary of the
closing of the TWE

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Restructuring and, after that, the Comcast Trust
may only transfer its partnership interest pursuant to the
Partnership Interest Sale Agreement.


Following the TWE Restructuring, no transfer of
partnership interests may be made by any partner through
securities markets, and no transfer may be made by any partner
if the transfer causes TWE to have more than 100 partners or
would result in, or have a material risk of, TWE being treated
as a corporation for federal income tax purposes.




DESCRIPTION OF CERTAIN PROVISIONS OF
THE

TWE-A/N PARTNERSHIP AGREEMENT


The following description summarizes certain
provisions of the TWE-A/N Partnership Agreement relating to the
ongoing operations of TWE-A/N. Such description does not purport
to be complete and is subject to, and is qualified in its
entirety by reference to, the provisions of the TWE-A/N
Partnership Agreement.

Partners of TWE-A/N

As of March 1, 2003, the general partnership
interests in TWE-A/N are held by TWE, Paragon Communications, an
indirect wholly owned subsidiary of AOL Time Warner
(Paragon and, together with TWE, the AOLTW
Partners), and Advance/Newhouse Partnership, a wholly
owned subsidiary of Advance Publications Inc. and Newhouse
Broadcasting Corporation (A/N). The AOLTW Partners
also hold preferred partnership interests. As part of the TWE
Restructuring, expected to be completed on March 31, 2003,
the interests held by Paragon will be transferred to TWC Inc.

Recent Restructuring of TWE-A/N

The TWE-A/N cable television joint venture was
formed by TWE and Advance/Newhouse in December, 1995. A
restructuring of the partnership was completed during 2002. As a
result of this restructuring, cable systems and their related
assets and liabilities serving 2.1 million subscribers as
of December 31, 2002, located primarily in Florida (the
A/N Systems), were transferred to a subsidiary of
TWE-A/N (the A/N Subsidiary). As part of the
restructuring, effective August 1, 2002, A/Ns
interest in TWE-A/N was converted into an interest that tracks
the economic performance of the A/N Systems, while AOL Time
Warner and TWE retain the economic interests and associated
liabilities in the remaining TWE-A/N cable systems. Also, in
connection with the restructuring, AOL Time Warner effectively
acquired A/Ns interest in Road Runner. All of the systems
owned by TWE-A/N and the A/N Subsidiary continue to support
multiple ISPs, including AOL for Broadband, Road Runner and
EarthLink. TWE-A/Ns financial results, other than the
results of the A/N Systems, are consolidated with TWEs.
(For additional information, see Managements Discussion
and Analysis of Results of Operations and Financial Condition,
Recent Developments  Restructuring of TWE-A/N
and Road Runner Partnerships at pages F-4 through F-5).

Management and Operations of TWE-A/N

Management Powers and Services
Agreement.Subject to the requirement
to act by unanimous consent with respect to some actions as
described below, TWE is the managing partner, with exclusive
management rights of TWE-A/N, other than with respect to the A/N
Systems. As managing partner, TWE manages TWE-A/N, other than
the A/N Systems, on a day-to-day basis. Also, subject to the
requirement to act by unanimous consent with respect to some
actions as described below, A/N has authority for the
supervision of the day-to-day operations of the A/N Subsidiary
and the A/N systems. TWE entered into a services agreement with
A/N and the A/N Subsidiary under which TWE agreed to exercise
various management functions, including oversight of programming
and certain engineering-related services. TWE and A/N also
agreed to periodically discuss cooperation with respect to new
product development.

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Actions Requiring Unanimous
Consent.Some actions cannot be taken
by TWE-A/N, TWE or A/N without the unanimous consent of the
AOLTW Partners and A/N or the unanimous consent of an executive
committee consisting of members designated by the AOLTW Partners
and A/N. These actions include, among other things:



| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | any merger, consolidation or disposition of all
    or substantially all of the assets of TWE-A/N (excluding the A/N
    Subsidiary) or the A/N Subsidiary;
|
| |  | any liquidation or dissolution of TWE-A/N or the
    A/N Subsidiary;                                                                                       
|
| |  | specified incurrences of debt by TWE-A/N or by
    the A/N Subsidiary; and                                                                                 
|
| |  | admission of a new partner or other issuances of
    equity interests in TWE-A/N or the A/N Subsidiary.                                                    

Restrictions on Transfer

AOLTW Partners.Any
AOLTW Partner is generally permitted to directly or indirectly
dispose of its entire partnership interest at any time so long
as the transferee is a wholly owned affiliate of TWE (in the
case of transfers by TWE) or TWE, AOL Time Warner or a wholly
owned affiliate of TWE or AOL Time Warner (in the case of
transfers by Paragon). In addition, the partnership interests of
TWE-A/N held by Paragon may be transferred directly or
indirectly to any permitted transferee of partnership interests
of TWE-A/N held by TWE so long as AOL Time Warner controls such
transferee and continues to own, directly or indirectly, at
least (a) 43.75% of the residual equity capital of TWE, if
such disposition occurs prior to the date on which TWEs
Class A Partners have received cash distributions of $500
million per $1 billion of investment, or (b) 35% of
the residual equity capital of TWE if such disposition occurs
after such date (the AOLTW Minimum Interest). The
AOLTW Partners are also allowed to transfer their partnership
interests in TWE-A/N pursuant to certain types of restructurings
or liquidations of TWE. AOL Time Warner and its subsidiaries,
including TWE, are generally allowed to issue equity interests
so long as AOL Time Warner continues to own, directly or
indirectly, at least the AOLTW Minimum Interest.

A/N Partner.A/N is
generally permitted to directly or indirectly dispose of its
entire partnership interest at any time so long as the transfer
is to certain members of the Newhouse family or certain
affiliates of A/N. A/N is also allowed to transfer its
partnership interest pursuant to certain restructurings of A/N.

Restructuring Rights of the Partners

TWE and A/N each have the right to cause TWE-A/N
to be restructured at any time. Upon a restructuring, TWE-A/N
would be required to distribute the A/N Subsidiary with all of
the A/N Systems to A/N in complete redemption of A/Ns
interests in TWE-A/N, and A/N would be required to assume all
liabilities of the A/N Subsidiary and the A/N Systems. Following
such a restructuring, TWEs obligations to provide
management services would terminate. As of the date of this
annual report, neither TWE nor A/N has delivered notice of the
intent to cause a restructuring of TWE-A/N.

Rights of First Offer

TWEs Regular Right of First
Offer.Subject to exceptions, A/N and
its affiliates are obligated to grant TWE a right of first offer
with respect to any sale of assets of the A/N systems.

TWEs Special Right of First
Offer.Within a specified time period
following the first, seventh, thirteenth and nineteenth
anniversaries of the deaths of two specified members of the
Newhouse family (those deaths have not yet occurred), A/N has
the right to deliver notice to TWE stating that it wishes to
transfer some or all of the assets of the A/N systems, thereby
granting TWE the right of first offer to purchase the specified
assets. Following delivery of this notice, an appraiser will
determine the value of the assets proposed to be transferred.
Once the value of the assets has been determined, A/N has the
right to terminate its offer to sell the specified assets. If
A/N does not terminate its offer, TWE will have the right to
purchase the specified assets at a price equal to the value of
the specified assets determined by the appraiser. If TWE does not

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exercise its right to purchase the specified
assets, A/N has the right to sell the specified assets to an
unrelated third party within 180 days on substantially the
same terms as were available to TWE.





DESCRIPTION OF CERTAIN PROVISIONS OF
AGREEMENTS

RELATED TO TWC INC.


The following description summarizes certain
provisions of agreements related to, and constituent documents
of, TWC that will affect and govern the ongoing operations of
TWC following the TWE Restructuring. Such description does not
purport to be complete and is subject to, and is qualified in
its entirety by reference to, the provisions of such agreements
and constituent documents.

Management and Operation of TWC

Stockholders of TWC.In the TWE Restructuring, AOL Time
Warner and its subsidiaries will receive shares of Class A
common stock of TWC, which generally has one vote per share, and
shares of Class B common stock of TWC, which generally has
ten votes per share, which together will represent 89.3% of the
voting power of TWC and 82.1% of the equity of TWC. A Comcast
Trust will receive shares of Class A common stock of TWC
representing the remaining 10.7% of the voting power and 17.9%
of the equity of TWC. The Class B common stock will not be
convertible into Class A common stock. The Class A
common stock and the Class B common stock will vote
together as a single class on all matters, except with respect
to the election of directors and certain matters described below.

Board of Directors of TWC.Following the TWE Restructuring, the
Class A common stock will vote, as a separate class, with
respect to the election of the Class A directors of TWC
(the Class A Directors), and the Class B
common stock will vote, as a separate class, with respect to the
election of the Class B directors of TWC (the Class B
Directors). Pursuant to the restated certificate of
incorporation of TWC (the Restated Certificate of
Incorporation) to be filed at the closing of the TWE
Restructuring, the Class A Directors must represent not less
than one-sixth and not more than one-fifth of the directors of
TWC, and the Class B Directors must represent not less than
four-fifths of the directors of TWC. Because of its share
holdings, AOL Time Warner will be able to cause the election of
all Class A Directors and Class B Directors, subject
to certain restrictions on the identity of these directors
discussed below.

Following the TWE Restructuring but prior to any
initial public offering of TWC, the Restated Certificate of
Incorporation will require that there be at least two
independent directors on the board of directors of TWC. In
addition, a parent agreement (the Parent Agreement)
among AOL Time Warner, TWC and Comcast will provide that, prior
to the initial public offering of TWC, at least 50% of the
independent directors be, at the time of their nomination,
reasonably satisfactory to the Comcast Trust. To the extent
possible, all such independent directors will be Class A
Directors. For three years following the initial public offering
of TWC, the Restated Certificate of Incorporation will require
that at least 50% of the board of directors of TWC consist of
independent directors.

Protections of Minority Class A Common
Stockholders.Following the TWE
Restructuring, the approval of the holders of a majority of the
voting power of the then outstanding shares of Class A
common stock held by persons other than AOL Time Warner will be
necessary in connection with:



| |   |                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | any merger, consolidation or business combination
    of TWC in which the holders of Class A common stock do not
    receive per share consideration identical to that received by
    the holders of Class B common stock (other than with
    respect to voting power) or which would adversely affect the
    Class A common stock relative to the Class B common
    stock;
|
| |  | any change to the Restated Certificate of
    Incorporation that would have a material adverse effect on the
    rights of the holders of the Class A common stock in a
    manner different from the effect on the holders of the
    Class B common stock;                                                                                                                   
|
| |  | any change to the provisions of the Restated
    Certificate of Incorporation that would affect the right of the
    Class A common stock to vote as a class in connection with
    any merger as discussed above;                                                                                                                                                             

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| |   |                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | any change to the Restated Certificate of
    Incorporation that would alter the number of independent
    directors required on the TWC board of directors; and                                                                                  
|
| |  | through and until the fifth anniversary of the
    completion of any initial public offering of TWC, any change to
    provisions of TWCs by-laws concerning restrictions on
    transactions between TWC and AOL Time Warner and its affiliates.

Matters Affecting the Relationship between AOL
Time Warner and TWC

Indebtedness Approval
Right.For so long as the indebtedness
of TWC is attributable to AOL Time Warner, in AOL Time
Warners reasonable judgment, TWC, its subsidiaries and
entities that it manages will not, without the consent of AOL
Time Warner, create, incur or guarantee any indebtedness,
including preferred equity, or rental obligations if its ratio
of indebtedness plus six times its annual rental expense to
EBITDA plus rental expense, or EBITDAR, then exceeds
or would exceed 3:1.

Other AOL Time Warner
Rights.Under the Parent Agreement, as
long as AOL Time Warner has the right to elect more than a
majority of the directors of TWC, TWC must obtain AOL Time
Warners consent before it enters into any agreement that
binds or purports to bind AOL Time Warner or its affiliates or
that would subject TWC to significant penalties or restrictions
as a result of any action or omission of AOL Time Warner; or
adopts a stockholder rights plan, becomes subject to
Section 203 of the Delaware General Corporation Law, adopts
a fair price provision or takes any similar action.

AOL Time Warner
Standstill.Under the Parent
Agreement, AOL Time Warner has agreed that for three years
following the completion of any initial public offering of TWC,
AOL Time Warner will not make or announce a tender offer or
exchange offer for the Class A common stock of TWC without
the approval of a majority of the independent directors of TWC;
and for ten years following any initial public offering of TWC,
AOL Time Warner will not enter into any business combination
with TWC, including a short-form merger, without the approval of
a majority of the independent directors of TWC.

Transactions between AOL Time Warner and
TWC.The by-laws of TWC will provide
that AOL Time Warner may only enter into transactions with TWC
and its subsidiaries, including TWE, that are on terms that, at
the time of entering into such transaction, are substantially as
favorable to TWC or its subsidiaries as they would be able to
receive in a comparable arms-length transaction with a
third party. Any such transaction involving reasonably
anticipated payments or other consideration of $50 million
or greater will also require the prior approval of a majority of
the independent directors of TWC.



| |                                       
| | --------------------------------------
| | TWC Registration Rights
    Agreements

TWC Registration Rights Agreement with Comcast
Trust.At the closing of the TWE
Restructuring, a Comcast Trust will enter into a registration
rights agreement with TWC relating to its shares of Class A
common stock, as well as any common stock of TWC that it or
another Comcast Trust may receive in connection with any sale of
a partnership interest in TWE under the Partnership Interest
Sale Agreement (see Description of Certain Provisions of
the TWE Partnership Agreement  Registration Rights
and Other Exit Rights, above).

Subject to several exceptions, including
TWCs right to defer a demand registration under some
circumstances, the Comcast Trust may require that TWC register
for public resale under the Securities Act of 1933 all shares of
Class A common stock it requests be registered. The Comcast
Trust may demand five registrations so long as the securities
being registered in each registration statement are reasonably
expected to produce aggregate proceeds of $250 million or
more. TWC will not be obligated to effect more than one demand
registration on behalf of the Comcast Trust in any 270-day
period, nor will TWC be obligated to effect a demand
registration on behalf of the Comcast Trust if it has received
proceeds in excess of $250 million (or 10% of TWCs
market capitalization) from private placements of and hedging
transactions relating to TWCs common stock in the
preceding 270-day period. Any registered hedging transaction or
other monetization with respect to TWC common stock will be
deemed to constitute a demand registration. In addition, the
Comcast Trust will have piggyback registration
rights subject to customary restrictions on any

23



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##### Table of Contents



registration for TWCs account or the
account of another stockholder, and TWC and AOL Time Warner will
be permitted to piggyback on the Comcast Trusts demand
registrations. Under the registration rights agreement, the
Comcast Trust may not engage in any private placement or hedging
transaction until the earlier of the first anniversary of the
closing of the TWE Restructuring and the date upon which TWC
shall have sold at least $2.1 billion worth of common stock.


If any registration requested by the Comcast
Trust or AOL Time Warner is in the form of a firm underwritten
offering, and if the managing underwriter of the offering
determines that the number of securities to be offered would
jeopardize the success of the offering, the number of shares
included in the offering shall be determined as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | first, securities to be offered for TWCs
    account must be included until TWC has sold $2.1 billion
    worth of securities, whether through public offerings, private
    placements or hedging transactions;                                                                                                                                                                               
|
| |  | second, securities to be offered for the account
    of the Comcast Trust must be included until it has sold
    $3.0 billion worth of securities; and                                                                                                                                                                                                                                          
|
| |  | third, TWC and the Comcast Trust will have equal
    priority, and AOL Time Warner will have last priority until the
    earlier of (x) the fifth anniversary of the closing of the
    TWE Restructuring and (y) the date the Comcast Trust holds
    less than $250 million of TWC common stock. After that
    date, TWC, the Comcast Trust and AOL Time Warner will have equal
    priority.

Registration Rights Agreement between TWC and
AOL Time Warner.At the closing of the
TWE Restructuring, AOL Time Warner and TWC will enter into a
registration rights agreement relating to AOL Time Warners
shares of TWC common stock. Subject to several exceptions,
including TWCs right to defer a demand registration under
some circumstances, AOL Time Warner may, under that agreement,
require that TWC register for public resale under the Securities
Act of 1933 all shares of common stock that AOL Time Warner
requests be registered. AOL Time Warner may demand an unlimited
number of registrations. In addition, AOL Time Warner will be
granted piggyback registration rights subject to
customary restrictions, and TWC will be permitted to piggyback
on AOL Time Warners registrations. Any registration
statement filed under the agreement is subject to the cut-back
priority discussed above. AOL Time Warner will not, until the
fifth anniversary of the closing of the TWE Restructuring,
dispose of its shares of TWC common stock other than in
registered offerings.

In connection with the registrations described
above under both registration rights agreements, TWC will
indemnify the selling stockholders and bear all fees, costs and
expenses, except underwriting discounts and selling commissions.




CURRENCY RATES AND REGULATIONS

TWEs foreign operations are subject to the
risk of fluctuation in currency exchange rates and to exchange
controls. TWE cannot predict the extent to which such controls
and fluctuations in currency exchange rates may affect its
operations in the future or its ability to remit dollars from
abroad. See Note 1, Organization and Summary of
Significant Accounting Policies  Foreign Currency
Translation and Note 12, Derivative Financial
Instruments  Foreign Currency Risk Management
to TWEs consolidated financial statements set forth at
pages F-41 and F-65 through F-66, respectively, herein. For
a discussion of revenues of international operations, see
Note 13, Segment Information to TWEs
consolidated financial statements set forth on page F-70
herein.




EMPLOYEES

At December 31, 2002, TWE employed a total
of approximately 31,200 persons.

24



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##### Table of Contents






BUSINESSES OF THE AOL TIME WARNER GENERAL
PARTNERS

Prior to the completion of the TWE Restructuring,
WCI and ATC are the General Partners of TWE. WCI conducts
substantially all of AOL Time Warners vertically
integrated worldwide recorded music business and worldwide music
publishing business under the umbrella name Warner Music Group.
ATC does not conduct operations independent of its ownership in
TWE and certain other investments.




MUSIC

In the United States and around the world, WCI,
through its wholly owned Warner Music Group division
(WMG), is in the business of discovering and signing
musical artists and manufacturing, packaging, distributing and
marketing their recorded music, and also in the DVD
manufacturing and printing businesses.

Recorded Music

In the United States, WMGs recorded music
business is principally conducted through WMGs Warner
Bros. Records Inc., Atlantic Recording Corporation, Elektra
Entertainment Group Inc. and Word Entertainment and their
affiliated labels, as well as through the WEA Inc. companies.
WMGs recorded music activities are also conducted through
its Warner Music International division in over
70 countries outside the United States through various
subsidiaries, affiliates and non-affiliated licensees.

The WEA Inc. companies include WEA Manufacturing
Inc., which manufactures compact discs (CDs), CD-ROMs and DVDs
principally for WMGs record labels and Warner Home Video,
but also for other outside companies; Ivy Hill Corporation,
which produces printed material and packaging for WMGs
recorded music products as well as for a wide variety of other
consumer products; and Warner-Elektra-Atlantic Corporation
(WEA Corp.), which markets and distributes
WMGs and third-party recorded music products to retailers
and wholesale distributors. WMG also owns a majority interest in
Alternative Distribution Alliance (ADA), an
independent distribution company specializing in alternative
rock, metal, hip hop and dance music with a focus on new or
developing artists.

Domestic

WMGs major record labels in the United
StatesWarner Bros., Atlantic, Elektra and Wordeach
with a distinct identity, discover, sign and develop recording
artists. The labels scout and sign talent in many different
musical genres, including pop, rock, jazz, country, R&B, hip
hop, rap, reggae, Latin, alternative, folk, blues, gospel and
Christian music. The January 2002 acquisition of Word
Entertainment, a major Christian music company, has
significantly expanded the divisions presence in that
genre. In July 2002, Word Entertainment became 20% owned by an
affiliate of Curb Records, a prominent Nashville-based
independent record label, as part of a transaction in which Curb
entered into a long-term multi-territory distribution
arrangement with various WMG affiliates. Among the artists that
resulted in significant United States sales for WMG during 2002
were: Josh Groban, Enya, Kid Rock, Faith Hill, Red Hot Chili
Peppers, Linkin Park, Missy Elliott, P.O.D., Michelle Branch and
Nappy Roots.

WMG is a vertically integrated music company.
After an artist has entered into a contract with a WMG label, a
master recording of the artists music is produced and
provided to WMGs manufacturing operation, WEA
Manufacturing, which replicates the music primarily on CDs. WEA
Manufacturing also manufactures a significant number of DVDs
worldwide. Ivy Hill prints material that is included with CDs,
DVDs and audio cassettes and creates packaging for them. WEA
Corp. and ADA, WMGs United States distribution arms,
market and sell product and deliver it, either directly or
through sub-distributors and wholesalers, to thousands of record
stores, mass merchants and other retailers throughout the
country. Product is also increasingly being sold directly to
consumers through Internet retailers such as Amazon.com. Sales
by WMG labels, as well as by the music industry generally, have
been adversely affected by piracy and parallel imports and also
by Internet sites and technologies that allow consumers to
download quality sound reproductions from the Internet without
authorization from the rights owner.

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##### Table of Contents



WMGs Warner Strategic Marketing division
(which includes Warner Special Products, Warner Television
Marketing, Warner Music Group Soundtracks and Rhino
Entertainment Company) specializes in marketing WMGs
catalog through compilations and reissues of previously released
music and video titles; licensing tracks to third parties for
various uses and through coordinating film and television
soundtrack opportunities between WMG record labels and the film
and television studios of both Warner Bros. and third parties.

WMG also has entered into joint venture
arrangements pursuant to which WMG companies manufacture,
distribute and market (in most cases, domestically and
internationally) recordings owned by joint ventures, such as
Maverick Records and Lava Records. Since 1991, WMG and Sony
Music Entertainment Inc. have operated The Columbia House
Company, a direct marketer of CDs, DVDs and audio and
videocassettes in North America, through a 50/50 joint venture.
In June 2002, WMG and Sony Music each sold 85% of their
ownership interests in Columbia House to an affiliate of The
Blackstone Group as part of a leveraged buyout, thereby reducing
WMGs interest to 7.5%.

WMG has continued to actively pursue new media
opportunities and to license new business models in the digital
arena. In 2001, Bertelsmann and EMI joined WMG and RealNetworks
as shareholders in MusicNet, an online subscription music
distribution platform that functions as a wholesaler and is
implemented by online services that interface with individual
consumers. As of November 2002, MusicNet had obtained licenses
from all five major music companies, enabling it to offer a
broad musical repertoire. In addition to the subscription
service licenses granted by WMG in 2001 to Echo Networks,
MusicNet, OD2 and Listen.com, in 2002 WMG entered into
subscription service licenses with FullAudio, Streamwaves.com
and pressplay.

In late 2002, WMG and AT&T Wireless announced
that AT&T Wireless would be selling ring tones featuring the
music of WMG artists to certain AT&T Wireless subscribers
that use cellular handsets supporting such functionality. As
part of such arrangement, WMG is hosting a wireless website that
allows such subscribers to access certain WMG artists
promotional content. WMG entered into a similar arrangement with
Sprint PCS in early 2003 and expects to enter into additional
arrangements with a goal of developing new wireless promotional
and commercial opportunities for WMG and its artists. WMG has
also been a driving force in establishing the DVD Audio format,
launched in fall 2000, which improves on the CD by providing
higher fidelity and six-channel surround sound. As of the end of
2002, WMG has released more than 80 titles in this format.

WMGs Giant Merchandising is a leading
supplier of screen printed and embellished apparel focusing on
music entertainment merchandising, retail licenses and private
label marketing and distribution. Among Giants major
customers in 2002 were Paul McCartney, Cher, Aerosmith, Harley
Davidson, Hard Rock Cafe, Nike and Reebok.

International

The Warner Music International (WMI)
division of WMG operates through various subsidiaries and
affiliates and their non-affiliated licensees in over 70
countries around the world. WMI engages in the same activities
as WMGs domestic labels, discovering and signing artists
and manufacturing, packaging, distributing and marketing their
recorded music. The artists signed to WMI and its affiliates
number more than a thousand. Significant album sales for WMI in
2002 were generated by the following artists and soundtracks:
Alanis Morissette, Linkin Park, David Gray, Phil Collins, Laura
Pausini, Mana, Rip Slyme, Red Hot Chili Peppers and Lord of
the Rings.

In most cases, WMI also markets and distributes
the records of those artists for whom WMGs domestic record
labels have international rights. In certain countries, WMI
licenses to unaffiliated third-party record labels the right to
distribute its records. WMI operates a plant in Germany that
manufactures CDs and DVDs for its affiliated companies, as well
as for outside companies and, as part of a joint venture,
operates a plant in Australia that manufactures CDs.

26



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##### Table of Contents



Music Publishing

WMGs music publishing division,
Warner/Chappell, owns or controls the rights to more than one
million musical compositions, including numerous pop music hits,
American standards, folk songs and motion picture and theatrical
compositions. Its catalog includes works from a diverse range of
artists and composers including Madonna, Staind, Nickelback,
India.Arie, Barry Gibb, Dido, Moby, George and Ira Gershwin and
Cole Porter. Warner/Chappell also administers the music of
several television and motion picture companies, including
Lucasfilm, Ltd. and Hallmark Entertainment.

Warner/Chappell also owns Warner Bros.
Publications, one of the worlds largest publishers of
printed music. Warner Bros. Publications markets publications
throughout the world containing works of such artists as Shania
Twain, The Grateful Dead and Led Zeppelin and containing works
from the Zomba and Universal music publishing catalogs.

The principal sources of revenues to
Warner/Chappell are royalties for the use of its compositions on
CDs, DVDs, ring tones, music videos, the Internet and in
television commercials; license fees paid for the use of its
musical compositions on radio, television, in motion pictures
and in other public performances; and sales of published sheet
music and song books.

Competition

The revenues of a company in the recording
industry depend upon public acceptance of a companys
recording artists and their music. Although WMG is one of the
largest recorded music companies in the world, its competitive
position is dependent on its continuing ability to attract and
develop talent that can achieve a high degree of public
acceptance. The competition among record companies for such
talent is intense, as is the competition among companies to sell
the recordings created by these artists. The recorded music
business continues to be adversely affected by the bankruptcies
of record wholesalers and retailers, counterfeiting of CDs,
piracy and parallel imports and also by Internet sites and
technologies that allow consumers to download quality sound
reproductions from the Internet without authorization from the
rights owner. In response, the recorded music industry has
engaged in efforts to develop secure technologies for digital
music delivery, to battle piracy through litigation and
legislation and to establish legitimate new media business
models.

Competition in the music publishing business is
also intense. Although WMGs music publishing business is
one of the largest on a worldwide basis, it competes with every
other music publishing company in acquiring musical compositions
and in having them recorded and performed. In addition, the vast
majority of WMGs music publishing revenues are subject to
rate regulation either by government entities or by collecting
societies throughout the world. WMG also competes for consumer
attention with other non-musical media such as home video and
video games.




OTHER

Time Warner Telecom

Time Warner Telecom Inc. (Time Warner
Telecom) is a fiber facilities-based integrated
communications provider that sells last-mile bandwidth and
telecommunications services on its own fiber optic network to
medium and large businesses in selected metropolitan areas
across the United States. Time Warner Telecom was formed in 1998
through a restructuring of the business telephony operations of
Time Warner Cable. The AOLTW General Partners aggregate
equity interest in Time Warner Telecom as of December 31,
2002 was 34%.

DC Comics and Mad Magazine

DC Comics, which has been owned 50-50 by TWE and
WCI, publishes more than 50 regularly issued comics magazines
featuring such popular characters as Superman, Batman, Wonder
Womanand The Sandman.DC Comics also derives
revenues from motion pictures, television, product licensing and
books.

27



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##### Table of Contents



Following completion of the TWE Restructuring, DC
Comics will be 100% owned by WCI and a subsidiary of WCI.


WCI owns 100% of E.C. Publications, Inc., the
publisher of MAD, a humor and satirical magazine which is
regularly published 12 times a year and also in periodic special
editions.

Turner Broadcasting System, Inc.

In October 1996, Time Warner consummated the
acquisition of TBS by acquiring the remaining approximately 80%
interest in TBS not already owned by Time Warner. The AOLTW
General Partners collectively own a 10.6% economic interest in
TBS. Through its subsidiaries, TBS owns and operates domestic
and international entertainment networks, including TBS
Superstation, Turner Network Television (TNT), Cartoon Network
and Turner Classic Movies; and news networks, including CNN,
Headline News, CNN International (CNNI) and CNN en Español.
TBS also has interests in sports franchises and motion picture
operations.

Warner Japan

WCI currently owns, directly and indirectly, an
aggregate 99.95% interest in Warner Japan, which conducts a
number of businesses in Japan, including home video
distribution, theatrical film and television distribution and
merchandising businesses, as well as recorded music production,
promotion and distribution. Pursuant to distribution and
merchandising agreements entered into between TWE and Warner
Japan, Warner Japan receives distribution fees generally
comparable to those currently received by TWE for performing
distribution services for unaffiliated third parties.



|        |           
|------- | ----------
|Item 2. | Properties

Networks  HBO, Filmed Entertainment
and Cable

The following table sets forth certain
information as of December 31, 2002 with respect to
principal properties (over 250,000 square feet in area) owned or
leased by TWEs Networks  HBO, Filmed
Entertainment and Cable businesses, all of which TWE considers
adequate for its present needs, and all of which were
substantially used by TWE.

|                                                    |  |                                                                                                                                                                                                                        |  |                                                     |           |                                       |               |  |               | 
|--------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------- | --------- | ------------------------------------- | ------------- |  | ------------- | 
|                                                    |  |                                                                                                                                                                                                                        |  | Approximate                                         |           |                                      
|                                                    |  |                                                                                                                                                                                                                        |  | Square Feet                                         |           | Type of Ownership                    
|Location                                            |  | Principal Use                                                                                                                                                                                                          |  | Floor Space/Acres                                   |           | Expiration Date of Lease             
|                                                    |  |                                                                                                                                                                                                                        |  |                                                     |           |                                      
|New York, NY
    1100 and 1114 Ave. of the Americas |  | Business offices (HBO)                                                                                                                                                                                                 |  | 350,000 sq. ft. and 275,600 sq. ft.                 |           | Leased by TWE. Lease expires in 2018.
|Burbank, CA
    The Warner Bros. Studio             |  | Sound stages, administrative, technical and
    dressing room structures, screening theaters, machinery and
    equipment facilities, back lot and parking lot and other Burbank
    properties (Filmed Entertainment) |  | 3,303,000 sq. ft. of improved space on 158 acres(a) |           |                                       | Owned by TWE. | 
|                                                   
|Valencia, CA
    Undeveloped land                   |  | Location filming (Filmed Entertainment)                                                                                                                                                                                |  |                                                     | 232 acres |                                       |               |  | Owned by TWE. | 



---



|    |  |                                                                                                                                    
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Ten acres consist of various parcels adjoining
    The Warner Bros. Studio, with mixed commercial, office and
    residential uses.

28



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##### Table of Contents



AOL Time Warner General Partners

The following table sets forth certain
information as of December 31, 2002 with respect to the
principal properties of WCI and its subsidiaries (over 250,000
square feet in area), all of which WCI considers adequate for
its present needs, and all of which were substantially used by
WCI. ATC, the other AOL Time Warner General Partner, does not
own or lease any properties material to its business.

|                                         |  |                                                                      |  |             |           |                          |  |                                       |  | 
|---------------------------------------- |  | -------------------------------------------------------------------- |  | ----------- | --------- | ------------------------ |  | ------------------------------------- |  | 
|                                         |  |                                                                      |  | Approximate |           |                         
|                                         |  |                                                                      |  | Square Feet |           | Type of Ownership       
|Location                                 |  | Principal Use                                                        |  | Floor Space |           | Expiration Date of Lease
|                                         |  |                                                                      |  |             |           |                         
|Olyphant, PA East Lackawanna Ave         |  | Manufacturing, warehouses, distribution and
    office space (Music) |  |             | 1,012,850 |                          |  | Owned and occupied by WCI.           
|Aurora, IL 948 Meridian Lake             |  | Offices/warehouse (Music)                                            |  |             | 602,000   |                          |  | Owned and occupied by WCI.           
|Alsdorf, Germany Max- Planck Strasse 1-9 |  | Manufacturing, distribution and office space
    (Music)             |  |             | 269,000   |                          |  | Owned and occupied by WCI.           
|Terre Haute, Indiana 4025 3rd Pkwy       |  | Manufacturing and office space (Music)                               |  |             | 269,000   |                          |  | Leased by WCI. Lease expires in 2011.

Item 3.     Legal
Proceedings

TWE or the AOLTW General Partners are parties to
various litigation matters, including:

On June 24, 1997, plaintiffs in Six Flags
Over Georgia LLC et al. v. Time Warner Entertainment Company,
L.P. et al., filed an amended complaint in the Superior
Court of Gwinnett County, Georgia, claiming that, inter alia,
defendants, which include TWE, violated their fiduciary duties
in operating the Six Flags Over Georgia theme park. On
December 18, 1998, following a trial, a jury returned a
verdict in favor of plaintiffs. The total awarded to plaintiffs
was approximately $454 million in compensatory and punitive
damages. The case was appealed to the Georgia Court of Appeals,
which affirmed the trial courts judgment, and denied
reconsideration. The Supreme Court of Georgia denied certiorari
on January 18, 2001. On February 28, 2001, the
compensatory damages portion of the award plus accrued interest
was paid to plaintiffs. On March 1, 2001, the United States
Supreme Court granted a stay as to payment of the punitive
damages part of the jurys original award, pending the
resolution of a petition for certiorari to be filed by TWE,
which was filed on June 15, 2001. On October 1, 2001,
the United States Supreme Court granted certiorari, vacated the
opinion of the Georgia Court of Appeals and remanded the case
for further consideration as to punitive damages. On
March 29, 2002, the Georgia Court of Appeals affirmed and
reinstated its earlier decision regarding the punitive damage
award. On April 18, 2002, TWE filed a petition for
certiorari to the Georgia Supreme Court seeking review of the
decision of the Georgia Court of Appeals, which was denied on
September 16, 2002. The Georgia Supreme Court subsequently
denied TWEs motion for reconsideration of its
September 16th ruling. Plaintiffs have agreed not to pursue
payment of the punitive damages award and accrued interest until
the resolution of TWEs petition for writ of certiorari to
the United States Supreme Court, which TWE filed on
December 23, 2002. The petition is pending.

On April 8, 2002, three former employees of
certain subsidiaries of WMG 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 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. The AOLTW General Partners intend
to defend against this lawsuit vigorously. The AOLTW General
Partners are unable to predict the outcome of this suit 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, judgements and investigations,

29



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##### Table of Contents



claims and changes in those matters (including
those matters described above), and developments or assertions
by or against TWE or the AOLTW General Partners relating to
intellectual property rights and intellectual property licenses,
could have a material adverse effect such companys
business, financial condition and operating results.




|        |                                                         
|------- | --------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders.

Not applicable.




PART II



|        |                                                                           
|------- | --------------------------------------------------------------------------
|Item 5. | Market For Registrants Common Equity
    and Related Stockholder Matters.

Not applicable.



|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.

The selected financial information of TWE and the
AOLTW General Partners for the five years ended
December 31, 2003 is set forth at pages F-76 and F-142
herein and is incorporated herein by reference.



|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations.

The information set forth under the caption
Managements Discussion and Analysis at
pages F-2 through F-29 and at pages F-79 through F-100
herein is incorporated herein by reference.



|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk.

The information set forth under the caption
Market Risk Management at pages F-20 through
F-21 and page F-89 through F-90 herein is incorporated
herein by reference.



|        |                                                 
|------- | ------------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data.

The consolidated financial statements and
supplementary data at pages F-30 through F-74 of TWE and
the report of independent auditors thereon set forth at
page F-75 herein, and the consolidated financial statements
set forth at pages F-101 through F-140 of the AOLTW General
Partners and the report of independent auditors thereon set
forth at page F-141 herein, are incorporated herein by
reference.

Quarterly Financial Information set forth at
page F-77 herein is incorporated herein by reference.



|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements with
    Accountants on Accounting and Financial
    Disclosure.

Not applicable.




PART III

Item 10.     Directors
and Executive Officers of the Registrant

Representatives and Directors

Set forth below is the name and age of each
member of the Board of Representatives of TWE and each person
who is a director of one or both of the AOLTW General Partners,
such persons present principal occupation or employment,
the name of the corporation or other organization in which such
occupation or employment is conducted and the name and principal
business of any corporation or other organization in which such
person held a material position or office or engaged in a
material occupation or employment during the last five years and
such position, office, occupation or employment.
Mr. Parsons became a member of the Board of Representatives
of TWE on February 1, 1995, Messrs. Case and Novack
became members of the Board of Representatives of TWE as of
January 12, 2001 and Messrs. Bewkes and Logan became
members of

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##### Table of Contents



the Board of Representatives of TWE on
July 18, 2002. The selection of TWEs Board of
Representatives prior to the completion of the TWE Restructuring
is governed by the TWE Partnership Agreement. Comcast, through
the Comcast Trusts, has elected not to appoint any
representatives to the Board of Representatives of TWE and will
not do so prior to the completion of the TWE Restructuring.
After the TWE Restructuring, TWC Inc., as the general partner of
TWE, will manage the business and affairs of TWE. See
Description of Certain Provisions of the TWE Partnership
Agreement  Management and Operations of TWE.
Mr. Parsons became a director of each AOLTW General Partner
on February 1, 1995. Messrs. Bewkes and Logan became
directors of each AOLTW General Partner on July 31, 2002.


For a general discussion of the duties of the
executive officers and representatives of TWE, see
Description of Certain Provisions of the TWE Partnership
Agreement  Management and Operations of TWE.

|                   |  |                   |                  |     |  |                                    |    |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------------ |  | ----------------- | ---------------- | --- |  | ---------------------------------- | -- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                   |  | Director and/or   |                  |     |  | Principal Occupations or Positions
|Name               |  | Representative of |                  | Age |  | During the Past Five Years        
|                   |  |                   |                  |     |  |                                   
|Stephen M. Case    |  |                   | TWE              |     |  |                                    | 44 |  |  | Chairman of the Board of TWE and AOL Time Warner
    since the consummation of the Merger. Mr. Case has
    announced that he will step down as Chairman of the Board of TWE
    and AOL Time Warner in May 2003. A co-founder of America Online,
    Mr. Case had been Chairman of the Board of America Online
    from October 1995 and CEO of America Online from April 1993,
    having served in other executive positions at America Online
    since 1985. Mr. Case is also a director of AOL Time Warner.                                                                                    
|                  
|Richard D. Parsons |  |                   | TWE, WCI and ATC |     |  |                                    | 54 |  |  | Chief Executive Officer of TWE and AOL Time
    Warner since May 2002 and will also become Chairman of the Board
    of TWE and AOL Time Warner in May 2003; prior to May 2002, he
    was Co-Chief Operating Officer of both companies from the
    consummation of the Merger. Prior to the Merger,
    Mr. Parsons was President of TWE and Time Warner from
    February 1995. He served as a director of ATC, then an 82%-owned
    subsidiary of Time Warner, from 1989 until 1991 and is currently
    also a director of AOL Time Warner, Citigroup Inc. and Estee
    Lauder Companies, Inc.
|                  
|Kenneth J. Novack  |  |                   | TWE              |     |  |                                    | 61 |  |  | Vice Chairman of TWE and AOL Time Warner since
    the consummation of the Merger; prior to that, he served as Vice
    Chairman of America Online from May 1998. Mr. Novack served
    as Of Counsel to the Boston-based law firm of Mintz, Levin,
    Cohn, Ferris, Glovsky and Popeo, PC after his retirement as a
    member of that firm in August 1998 through March 2001.
    Mr. Novack joined Mintz Levin in 1966 and served on its
    executive committee from 1970 until his retirement. Mr. Novack
    is also a director of AOL Time Warner.                                           

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|                  |  |                   |                  |     |  |                                    |    |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----------------- |  | ----------------- | ---------------- | --- |  | ---------------------------------- | -- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                  |  | Director and/or   |                  |     |  | Principal Occupations or Positions
|Name              |  | Representative of |                  | Age |  | During the Past Five Years        
|                  |  |                   |                  |     |  |                                   
|Jeffrey L. Bewkes |  |                   | TWE, WCI and ATC |     |  |                                    | 50 |  |  | Chairman, Entertainment & Networks Group of
    TWE and AOL Time Warner since July 2002; prior to that,
    Mr. Bewkes served as Chief Executive Officer of the Home
    Box Office division of TWE from May 1995 and President and Chief
    Operating Officer for the preceding five years.                                                                                                                                                                   
|                 
|Don Logan         |  |                   | TWE, WCI and ATC |     |  |                                    | 59 |  |  | Chairman, Media & Communications Group of TWE
    and AOL Time Warner since July 2002; prior to that,
    Mr. Logan served as Chairman and Chief Executive Officer of
    Time Inc., AOL Time Warners publishing subsidiary, from
    August 1994, and as its President and Chief Operating Officer
    from June 1992. Prior to that, he held various executive
    positions with Southern Progress Corporation, which was acquired
    by Time Inc. in 1985.

Executive Officers

Set forth below is the name and age of the
executive officers of TWE and each of the AOLTW General
Partners, such persons present principal occupation or
employment, the name of the corporation or other organization in
which such occupation or employment is conducted and the name
and principal business of any corporation or other organization
in which such person held a material position or office or
engaged in a material occupation or employment during the last
five years and such position, office, occupation or employment.
Mr. Parsons became an executive officer of the AOLTW
General Partners on February 1, 1995. The remaining
executive officers of TWE became executive officers of ATC as of
January 12, 2001 and of WCI as of February 2, 2001 or,
if later, on the date they became executive officers of TWE.

|                   |  |     |    |                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------------ |  | --- | -- | ------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                   |  |     |    | Principal Occupations or            
|Name               |  | Age |    | Positions During the Past Five Years
|                   |  |     |    |                                     
|Stephen M. Case    |  |     | 44 |                                      |  | See  Representatives and
    Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Richard D. Parsons |  |     | 54 |                                      |  | See  Representatives and
    Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Kenneth J. Novack  |  |     | 61 |                                      |  | See  Representatives and
    Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Jeffrey L. Bewkes  |  |     | 50 |                                      |  | See  Representatives and
    Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Don Logan          |  |     | 59 |                                      |  | See  Representatives and
    Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                  
|Paul T. Cappuccio  |  |     | 41 |                                      |  | Executive Vice President, General Counsel and
    Secretary of TWE and AOL Time Warner since the consummation of
    the Merger; prior to that, he served as Senior Vice President
    and General Counsel of America Online from August 1999. Before
    joining America Online, from 1993 to 1999, Mr. Cappuccio
    was a partner at the Washington, D.C. office of the law firm of
    Kirkland & Ellis. Mr. Cappuccio was also an Associate
    Deputy Attorney General at the U.S. Department of Justice from
    1991 to 1993.
|                  
|Adolf DiBiasio     |  |     | 61 |                                      |  | Executive Vice President of Strategy and
    Investments of TWE and AOL Time Warner since May 2001; prior to
    that, Mr. DiBiasio was a Senior Director at McKinsey &
    Company, management consultants, for more than 30 years.                                                                                                                                                                                                                                                                                                 

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|                      |  |     |    |                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--------------------- |  | --- | -- | ------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                      |  |     |    | Principal Occupations or            
|Name                  |  | Age |    | Positions During the Past Five Years
|                      |  |     |    |                                     
|Patricia Fili-Krushel |  |     | 49 |                                      |  | Executive Vice President of Administration of TWE
    and AOL Time Warner since July 2001; prior to that, she was
    Chief Executive Officer of WebMD Health division of WebMD
    Corporation, an Internet portal providing health information and
    service for the consumer, from April 2000 to July 2001 and
    President of ABC Television Network from July 1998 to April
    2000. Prior to that, she was President, ABC Daytime from 1993 to
    1998.                                                                                                                                                                                                                                  
|                     
|Robert M. Kimmitt     |  |     | 55 |                                      |  | Executive Vice President of Global &
    Strategic Policy of TWE and AOL Time Warner since July 2001;
    prior to that, he was President and Vice Chairman of Commerce
    One, Inc., an electronic commerce company, from March 2000 to
    June 2001, having served as Vice Chairman and Chief Operating
    Officer from February 2000. Previously, Mr. Kimmitt was a
    partner in the Washington, D.C.-based law firm of Wilmer, Cutler
    & Pickering from 1997 to 2000. He had previously been
    managing director at Lehman Brothers, an international financial
    services firm, from 1993 to 1997. Mr. Kimmitt also served
    as the U.S. Ambassador to Germany from 1991 to 1993.
|                     
|Michael Lynton        |  |     | 43 |                                      |  | Executive Vice President of TWE and Executive
    Vice President of AOL Time Warner and President, AOL Time Warner
    International, since May 2002; prior to that, Mr. Lynton served
    as President, AOL International, at America Online. Prior to
    joining America Online in 1999, Mr. Lynton was Chairman and
    Chief Executive Officer of the Penguin Group of Pearson plc, an
    international media company, beginning in September 1996. Prior
    to his tenure at Pearson, Mr. Lynton held various executive
    positions at the Walt Disney Company from 1987.                                                                                                                 
|                     
|Wayne H. Pace         |  |     | 56 |                                      |  | Executive Vice President and Chief Financial
    Officer of TWE and AOL Time Warner since November 2001; prior to
    that, he was Vice Chairman, Chief Financial and Administrative
    Officer of TBS from March 2001, having held other executive
    positions, including Chief Financial Officer, at TBS since July
    1993. Prior to joining TBS, Mr. Pace was an audit partner
    with Price Waterhouse, now PricewaterhouseCoopers, an
    international accounting firm.                                                                                                                                                                                                                 

Compliance with Section 16(a) of the
Exchange Act.

Not Applicable.

Item 11.     Executive
Compensation

In 2002, the executive officers of TWE and the
AOLTW General Partners were compensated by AOL Time Warner for
services provided in most cases to AOL Time Warner pursuant to
employment agreements with AOL Time Warner and received no
additional compensation from TWE or any of the AOLTW General
Partners. AOL Time Warner provided the services of such
executive officers to TWE and was reimbursed for such services
pursuant to arrangements set forth in the TWE Partnership
Agreement. See Item 13 Certain Relationships and
Related Transactions  Corporate Services.
Members of the Board of Representatives of TWE and directors of
the AOLTW General Partners are not additionally compensated for
such activities.

33



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##### Table of Contents



Executive Compensation Summary Table

The following table presents information
concerning total compensation paid to the two individuals who
served as Chief Executive Officer during 2002, each of the four
most highly compensated executive officers of AOL Time Warner
and TWE who served in such capacities on December 31, 2002
and Mr. Pittman, who served as an executive officer during
2002 (collectively, the named executive officers).
Prior to the consummation of the Merger on January 11, 2001
(the Merger Date), certain of these executive
officers functioned as executive officers of, and were
compensated by, America Online or Time Warner, as the case may
be. Prior to the Merger, America Onlines fiscal year ended
on June 30. In connection with the Merger, America Online
changed its fiscal year to a calendar year. As a result, the
compensation shown for Messrs. Case, Novack and Pittman
prior to 2001 is that paid with respect to America Onlines
prior fiscal year and the last six months of 2000 (the
Transition Period). All information related to
common stock has been adjusted to reflect the exchange ratios of
common stock of Time Warner and America Online for common stock
of AOL Time Warner (AOL Time Warner Common Stock) in
the Merger and AOL Time Warners assumption of the relevant
America Online and Time Warner stock-based benefit plans in
connection with the Merger.




SUMMARY COMPENSATION TABLE

|                      |                                          |                     |       |                  |  |            |           |                 |  |                 |           |                  |  |   |         |         |  |  |           |           |  |   |        |         | 
|--------------------- | ---------------------------------------- | ------------------- | ----- | ---------------- |  | ---------- | --------- | --------------- |  | --------------- | --------- | ---------------- |  | - | ------- | ------- |  |  | --------- | --------- |  | - | ------ | ------- | 
|                      |                                          |                     |       | Long-Term        |  |           
|                      |                                          | Annual Compensation |       | Compensation(10) |  |           
|                      |                                          |                     |       |                  |  |           
|                      |                                          |                     |       | Securities       |  |           
|Name and Principal    |                                          |                     |       | Other Annual     |  | Underlying |           | All Other      
|Position              |                                          | Year                |       | Salary           |  | Bonus(8)   |           | Compensation(9) |  | Options Awarded |           | Compensation(11)
|                      |                                          |                     |       |                  |  |            |           |                 |  |                 |           |                 
|Stephen M. Case(1)    |                                          |                     | 2002  |                  |  | $          | 1,000,000 |                 |  | $               | 0         |                  |  | $ | 277,555 |         |  |  | 0         |           |  | $ | 2,250  |        
|                      | Chairman of the                          |                     |       | 2001             |  |            |           | 1,000,000       |  |                 |           | 0                |  |   |         |        |  |  |           | 4,000,000 |  |   |        | 2,250   | 
|                      | Board                                    |                     |       | T.P.*            |  |            |           | 383,333         |  |                 |           | 0                |  |   |         |        |  |  |           | 1,750,000 |  |   |        | 0       | 
|                      |                                          |                     | 2000  |                  |  |            | 725,000   |                 |  |                 | 1,125,000 |                  |  |   |        |         |  |  | 3,000,000 |           |  |   | 5,165  |        
|Richard D. Parsons(2) |                                          |                     | 2002  |                  |  | $          | 1,000,000 |                 |  | $               | 0         |                  |  | $ | 178,980 |         |  |  | 300,000   |           |  | $ | 85,183 |        
|                      | Chief Executive                          |                     |       | 2001             |  |            |           | 1,000,000       |  |                 |           | 0                |  |   |         | 166,597 |  |  |           | 3,500,000 |  |   |        | 77,913  | 
|                      | Officer                                  |                     |       | 2000             |  |            |           | 750,000         |  |                 |           | 6,000,000        |  |   |         | 146,535 |  |  |           | 525,000   |  |   |        | 476,935 | 
|Kenneth J. Novack(3)  |                                          |                     | 2002  |                  |  | $          | 1,000,000 |                 |  | $               | 0         |                  |  | $ | 200,257 |         |  |  | 0         |           |  | $ | 2,250  |        
|                      | Vice Chairman                            |                     |       | 2001             |  |            |           | 1,000,000       |  |                 |           | 0                |  |   |         | 165,790 |  |  |           | 2,000,000 |  |   |        | 250     | 
|                      |                                          |                     | T.P.* |                  |  |            | 258,333   |                 |  |                 | 275,000   |                  |  |   |        |         |  |  | 1,000,000 |           |  |   | 0      |        
|                      |                                          |                     | 2000  |                  |  |            | 433,333   |                 |  |                 | 506,000   |                  |  |   |        |         |  |  | 1,000,000 |           |  |   | 6,620  |        
|Jeffrey L. Bewkes(4)  |                                          |                     | 2002  |                  |  | $          | 1,000,000 |                 |  | $               | 5,000,000 |                  |  | $ | 86,560  |         |  |  | 650,000   |           |  | $ | 61,297 |        
|                      | Chairman, Entertainment & Networks Group |                     |       |                  |  |            |           |                 |  |                 |           |                  |  |   |         |         |  |  |           |           |  |   |        |         | 
|Don Logan(5)          |                                          |                     | 2002  |                  |  | $          | 1,000,000 |                 |  | $               | 5,000,000 |                  |  | $ | 475,925 |         |  |  | 650,000   |           |  | $ | 36,139 |        
|                      | Chairman, Media & Communications Group   |                     |       |                  |  |            |           |                 |  |                 |           |                  |  |   |         |         |  |  |           |           |  |   |        |         | 
|Gerald M. Levin(6)    |                                          |                     | 2002  |                  |  | $          | 1,000,000 |                 |  | $               | 0         |                  |  | $ | 285,058 |         |  |  | 0         |           |  | $ | 35,002 |        
|                      | Former Chief                             |                     |       | 2001             |  |            |           | 1,000,000       |  |                 |           | 0                |  |   |         | 237,602 |  |  |           | 4,000,000 |  |   |        | 47,031  | 
|                      | Executive Officer                        |                     |       | 2000             |  |            |           | 1,000,000       |  |                 |           | 10,000,000       |  |   |         | 226,620 |  |  |           | 750,000   |  |   |        | 571,277 | 
|Robert W. Pittman(7)  |                                          |                     | 2002  |                  |  | $          | 769,230   |                 |  | $               | 0         |                  |  | $ | 288,837 |         |  |  | 210,000   |           |  | $ | 2,250  |        
|                      | Former Chief                             |                     |       | 2001             |  |            |           | 1,000,000       |  |                 |           | 0                |  |   |         | 399,611 |  |  |           | 3,500,000 |  |   |        | 504,736 | 
|                      | Operating Officer                        |                     |       | T.P.*            |  |            |           | 358,333         |  |                 |           | 550,000          |  |   |         | 56,520  |  |  |           | 1,500,000 |  |   |        | 0       | 
|                      |                                          |                     | 2000  |                  |  |            | 683,334   |                 |  |                 | 1,050,000 |                  |  |   | 60,965  |         |  |  | 2,500,000 |           |  |   | 810    |        



---



| |   |                                                               
| | - | --------------------------------------------------------------
| | * | Transition Period  July 1, 2000
    through December 31, 2000



| |     |                                                                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Mr. Case became Chairman of the Board of AOL
    Time Warner on the Merger Date. Prior to that, he served as
    Chairman of the Board and Chief Executive Officer of America
    Online.

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Mr. Parsons became Chief Executive Officer
    of AOL Time Warner on May 16, 2002, having served as Co-Chief
    Operating Officer of AOL Time Warner from the Merger Date. Prior
    to that, he served as President of Time Warner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | (3) | Mr. Novack became Vice Chairman of AOL Time
    Warner on the Merger Date. Prior to that, he served as Vice
    Chairman of America Online.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (4) | Mr. Bewkes became Chairman, Entertainment
    & Networks Group of AOL Time Warner on July 18, 2002.
    Prior to that, Mr. Bewkes was Chief Executive Officer of
    AOL Time Warners Home Box Office division (not an
    executive officer of AOL Time Warner). The compensation shown in
    the table includes compensation received from Home Box Office.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | (5) | Mr. Logan became Chairman, Media &
    Communications Group of AOL Time Warner on July 18, 2002.
    Prior to that, Mr. Logan was Chairman and Chief Executive
    Officer of AOL Time Warners Time Inc. subsidiary (not an
    executive officer of AOL Time Warner). The compensation shown in
    the table includes compensation received from Time Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (6) | Mr. Levin served as Chief Executive Officer
    of AOL Time Warner from February 2000 until his retirement from
    the position of Chief Executive Officer in May 2002. He
    continues to serve as an employee in an advisory capacity. He
    served as Chairman of the Board and Chief Executive Officer of
    Time Warner from January 1993 to the Merger Date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | (7) | Mr. Pittman served as Co-Chief Operating
    Officer of AOL Time Warner from the Merger Date and served as
    Chief Operating Officer of AOL Time Warner from May 16,
    2002 until his resignation in July 2002. Prior to that, he
    served as President and Chief Operating Officer of America
    Online.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (8) | One quarter of the stock option award of each
    named executive officer in 2001, other than Messrs. Bewkes
    and Logan, was made in lieu of a cash bonus for 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | (9) | In accordance with SEC rules, amounts totaling
    less than $50,000 have been omitted. The amounts of personal
    benefits shown in this column for 2002 that represent more than
    25% of the applicable executives total Other Annual
    Compensation include financial services of $100,000 to each of
    Messrs. Parsons, Novack, Levin and Pittman, $99,213 to
    Mr. Case and $39,186 to Mr. Bewkes;
    transportation-related benefits of $178,342 to Mr. Case,
    $74,768 to Mr. Parsons, $47,374 to Mr. Bewkes,
    $371,029 to Mr. Logan and $172,656 to Mr. Levin;
    $50,880 to Mr. Novack for insurance coverage (see
    Note 11(b)); and $167,192 to Mr. Pittman as
    reimbursement for the payment of taxes related to life insurance
    coverage provided in 2001. For security reasons, certain
    executive officers are subject to mandated transportation
    procedures.



|     |                                                                                                                                                                                                                                                                              
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | None of the stock options reflected was awarded
    with tandem stock appreciation rights. None of such executive
    officers was awarded restricted stock during the relevant period
    and, as of December 31, 2002, no named executive officer
    held any such shares.
|    
|(11) | The amounts shown in this column for 2002 include
    the following:                                                                                                                                                                                                         



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (a) Pursuant
    to the AOL Time Warner Savings Plan (the Savings
    Plan), a defined contribution plan available generally to
    employees of AOL Time Warner, for the 2002 plan year, each of
    the named executive officers deferred a portion of his annual
    compensation and AOL Time Warner contributed $2,000 for the
    first $3,000 so deferred by the executive (Matching
    Contribution). These Matching Contributions were invested
    under the Savings Plan in an AOL Time Warner Common Stock fund.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | (b) AOL
    Time Warner maintains a program of life and disability insurance
    generally available to all salaried employees on the same basis.
    This group term life insurance coverage was reduced to $50,000
    for each of Messrs. Parsons, Novack, Logan and Levin, who
    were given a cash payment equal to the cost of replacing such
    reduced coverage under a voluntary group program available to
    employees generally. Such payments are included in the
    Other Annual Compensation column. In addition,
    during 2002, AOL Time Warner maintained for certain members of
    senior management, including the named executive officers,
    certain supplemental life insurance benefits and paid premiums
    for this supplemental coverage of approximately $250 each. AOL
    Time Warner also maintained split-dollar life insurance policies
    on the lives of Messrs. Parsons, Bewkes, Logan and Levin
    and paid the following

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | amounts allocated to the term portion of the
    split-dollar coverage for 2002: Mr. Parsons, $5,242;
    Mr. Bewkes, $3,227; Mr. Logan, $4,811; and
    Mr. Levin, $25,846. The actuarial equivalent of the value
    of the premiums paid by AOL Time Warner for 2002 based on
    certain assumptions regarding interest rates and periods of
    coverage are: Mr. Parsons, $82,933; Mr. Bewkes,
    $59,047; Mr. Logan, $33,889; and Mr. Levin, $32,752.
    The premium on one of two policies for Mr. Logan was not
    paid in 2002 pursuant to an extended grace period. It is
    anticipated that AOL Time Warner will recover the net after-tax
    cost of the premiums on these policies or the cash surrender
    value thereof. For a description of life insurance coverage for
    certain executive officers provided pursuant to the terms of
    their employment agreements, see Employment
    Arrangements.

Stock Option Grants During 2002

The following table sets forth certain
information with respect to employee options to purchase shares
of AOL Time Warner Common Stock (options) awarded
during 2002 to the named executive officers. All such options
were nonqualified options. No stock appreciation rights, alone
or in tandem with such stock options, were awarded in 2002.

STOCK OPTION GRANTS IN 2002

|                   |  |                      |         |            |  |             |    |            |  |            |       |  |  |  |         |  |  |   |           | 
|------------------ |  | -------------------- | ------- | ---------- |  | ----------- | -- | ---------- |  | ---------- | ----- |  |  |  | ------- |  |  | - | --------- | 
|                   |  |                      |         |           
|                   |  | Individual Grants(1) |         |           
|                   |  |                      |         |           
|                   |  |                      |         | Percent of |  |             |    |           
|                   |  | Number of            |         | Total      |  |             |    |           
|                   |  | Securities           |         | Options    |  |             |    |           
|                   |  | Underlying           |         | Granted to |  | Exercise    |    |            |  | Grant Date
|                   |  | Options              |         | Employees  |  | or Base     |    | Expiration |  | Present   
|Name               |  | Granted              |         | in 2002    |  | Price($/sh) |    | Date       |  | Value(2)  
|                   |  |                      |         |            |  |             |    |            |  |           
|Stephen M. Case    |  |                      | 0       |            |  |             |   |            |  |            |      |  |  |  |        |  |  |   |          | 
|Richard D. Parsons |  |                      | 300,000 |            |  |             | .3 | %          |  | $          | 18.88 |  |  |  | 5/15/12 |  |  | $ | 2,141,678 | 
|Kenneth J. Novack  |  |                      | 0       |            |  |             |   |            |  |            |      |  |  |  |        |  |  |   |          | 
|Jeffrey L. Bewkes  |  |                      | 500,000 |            |  |             | .4 | %          |  | $          | 26.65 |  |  |  | 2/14/12 |  |  | $ | 5,099,513 | 
|                   |  |                      | 150,000 |            |  |             | .1 | %          |  | $          | 12.46 |  |  |  | 7/17/12 |  |  |   | 706,714   | 
|Don Logan          |  |                      | 500,000 |            |  |             | .4 | %          |  | $          | 26.65 |  |  |  | 2/14/12 |  |  | $ | 5,099,513 | 
|                   |  |                      | 150,000 |            |  |             | .1 | %          |  | $          | 12.46 |  |  |  | 7/17/12 |  |  |   | 706,714   | 
|Gerald M. Levin    |  |                      | 0       |            |  |             |   |            |  |            |      |  |  |  |        |  |  |   |          | 
|Robert W. Pittman  |  |                      | 210,000 |            |  |             | .2 | %          |  | $          | 18.88 |  |  |  | 5/15/12 |  |  | $ | 1,499,174 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Options for executive officers have been awarded
    pursuant to plans approved by the stockholders, except for the
    awards made to Messrs. Bewkes and Logan in February 2002 before
    they became executive officers of AOL Time Warner. The terms are
    governed by the plans and the recipients option agreement.
    The option exercise price is the fair market value of AOL Time
    Warner Common Stock on the date of grant. The options shown in
    the table become exercisable in installments of 25% on the first
    four anniversaries of the date of grant, subject to acceleration
    upon the occurrence of certain events. Payment of the exercise
    price of an option may be made in cash and/or full shares of AOL
    Time Warner Common Stock already owned by the holder of the
    option. The payment of withholding taxes due upon exercise of an
    option may generally be made in cash and/or full shares of AOL
    Time Warner Common Stock.
|   
|(2) | These amounts represent the estimated present
    value of stock options at the respective date of grant,
    calculated using the Black-Scholes option pricing model, based
    upon the following assumptions used in developing the grant
    valuations: an expected volatility of 52.9% based on the
    historical volatility of AOL Time Warner Common Stock; an
    expected term to exercise of .47 years after vesting; a
    risk-free rate of return of 4.20% for the first awards listed
    for Messrs. Bewkes and Logan and 3.70% for the other
    awards; and a dividend yield of 0%. The actual value of the
    options, if any, realized by an officer will depend on the
    extent to which the market value of the AOL Time Warner Common
    Stock exceeds the exercise price of the option on the date the
    option is exercised. Consequently, there is no assurance that
    the value                                                                       

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| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | realized by an officer will be at or near the
    value estimated above. These amounts should not be used to
    predict stock performance.

Option Exercises and Values in 2002

The following table sets forth as to each of the
named executive officers information on option exercises during
2002 and the status of his options on December 31, 2002:
(i) the number of shares of AOL Time Warner Common Stock
underlying options exercised during 2002; (ii) the
aggregate dollar value realized upon exercise of such options;
(iii) the total number of shares of AOL Time Warner Common
Stock underlying exercisable and nonexercisable stock options
held on December 31, 2002; and (iv) the aggregate
dollar value of in-the-money exercisable and nonexercisable
stock options on December 31, 2002. The number of shares
covered and the option exercise prices have been adjusted to
reflect the exchange ratios of common stock of America Online
and Time Warner for AOL Time Warner Common Stock on the Merger
Date and AOL Time Warners assumption on the Merger Date of
the option plans and agreements under which the options were
awarded.

AGGREGATE OPTION EXERCISES DURING
2002

and


OPTION VALUES ON DECEMBER 31, 2002


|                     |  |            |           |              |  |                             |            |                         |  |             |             |                |  |  |           |  |  |   |             |   |  |   |        | 
|-------------------- |  | ---------- | --------- | ------------ |  | --------------------------- | ---------- | ----------------------- |  | ----------- | ----------- | -------------- |  |  | --------- |  |  | - | ----------- | - |  | - | ------ | 
|                     |  |            |           |              |  |                             |            |                         |  |            
|                     |  |            |           |              |  |                             |            | Dollar Value of        
|                     |  | Number of  |           |              |  | Number of Shares Underlying |            | Unexercised            
|                     |  | Shares     |           |              |  | Unexercised Options on      |            | In-the-Money           
|                     |  | Underlying |           | Dollar Value |  | 12/31/02(5)                 |            | Options on 12/31/02*(5)
|                     |  | Options    |           | Realized on  |  |                             |            |                        
|Name                 |  | Exercised  |           | Exercise     |  | Exercisable                 |            | Nonexercisable          |  | Exercisable |             | Nonexercisable
|                     |  |            |           |              |  |                             |            |                         |  |             |             |               
|Stephen M. Case(1)   |  |            | 909,108   |              |  | $                           | 25,225,474 |                         |  |             | 18,765,592  |                |  |  | 3,875,000 |  |  | $ | 99,381,574  |   |  | $ | 0      | 
|Richard D. Parsons   |  |            |          |              |  | $                           |           |                         |  |             | 3,600,003   |                |  |  | 3,099,997 |  |  | $ | 246,000     |   |  | $ | 0      | 
|Kenneth J. Novack    |  |            | 48,000    |              |  | $                           | 1,089,480  |                         |  |             | 5,663,000(2 | )              |  |  | 2,000,000 |  |  | $ | 6,025,990(2 | ) |  | $ | 0      | 
|Jeffrey L. Bewkes    |  |            |          |              |  |                             |           |                         |  |             | 2,927,093   |                |  |  | 2,462,499 |  |  | $ | 1,564,255   |   |  | $ | 96,000 | 
|Don Logan(3)         |  |            |          |              |  |                             |           |                         |  |             | 2,972,500   |                |  |  | 1,812,500 |  |  | $ | 159,496     |   |  | $ | 96,000 | 
|Gerald M. Levin(1)   |  |            | 1,500,000 |              |  | $                           | 19,910,000 |                         |  |             | 8,816,254   |                |  |  | 3,249,997 |  |  | $ | 3,772,800   |   |  | $ | 0      | 
|Robert W. Pittman(4) |  |            | 1,500,000 |              |  | $                           | 20,646,750 |                         |  |             | 17,377,255  |                |  |  |          |  |  | $ | 66,074,321  |   |  | $ | 0      | 



---



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Calculated using the fair market value of
    $13.10 per share of AOL Time Warner Common Stock on
    December 31, 2002 minus the option exercise price.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The options exercised by each of
    Messrs. Case and Levin would have expired in 2003. In
    connection with the exercise of these options, Mr. Levin
    used AOL Time Warner Common Stock to pay the taxes due and
    retained the remainder of the shares received upon exercise and
    Mr. Case retained, and continues to hold, all of the shares
    received upon exercise.                                                                                                                                                                                                                              
|   
|(2) | Includes 855,812 exercisable options that
    Mr. Novack transferred to grantor retained annuity trusts
    for the benefit of members of his family. At December 31,
    2002, these options had a value of $1,150,813.                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(3) | Includes 144,996 exercisable options that
    Mr. Logan transferred to a family-owned limited
    partnership. At December 31, 2002, these options had a
    value of $159,496.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(4) | All of the options exercised by Mr. Pittman
    were held by a family-owned limited partnership. His year-end
    holdings include 797,255 exercisable options that
    Mr. Pittman transferred to a family-owned limited
    partnership. At December 31, 2002, these options had a
    value of $9,169,121.                                                                                                                                                                                                                                                                                                       
|   
|(5) | All options awarded prior to 2000 held by
    Messrs. Parsons, Bewkes, Logan and Levin became immediately
    exercisable in full upon the approval by Time Warners
    board of directors of the Merger on January 9, 2000. All
    options awarded prior to 2000 held by Messrs. Case and
    Novack became immediately exercisable in full on the Merger Date
    and all such options held by Mr. Pittman became immediately
    exercisable on the first anniversary of the Merger Date. All
    options awarded to Mr. Pittman in or after 2000 became
    immediately exercisable in full in September 2002.

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The option exercise price of all the options held
by the named executive officers is the fair market value of the
AOL Time Warner Common Stock on the date of grant except for
(1) half of the regular annual options awarded to
Messrs. Parsons and Levin in 1996 through 2000, half of the
options awarded to each of the named executive officers, except
Messrs. Bewkes and Logan, in 2001 and 1,500,000 of
Mr. Levins options awarded in 1993, half of which
have an exercise price 25% above the fair market value of the
common stock on the date of grant and the other half of which
have an exercise price 50% above such fair market value and
(2) options awarded to Messrs. Case and Pittman in
1997 which have an exercise price 30% above the fair market
value of the common stock on the date of grant. All such
nonqualified options permit a portion of each award to be
transferred by gift directly or indirectly to members of the
holders immediate family. The stock option agreements may
permit optionees to defer receipt of the shares of AOL Time
Warner Common Stock receivable upon exercise of options governed
by such stock option agreements to a future date elected by the
optionee, thereby deferring the recognition of income by the
optionee (and AOL Time Warners tax deduction) until such
future date. During the deferral period, the shares are not
outstanding, do not vote and do not pay dividends; however, AOL
Time Warner has agreed to pay the optionee dividend equivalents
during the deferral period, to the extent dividends are paid.

The options held by the named executive officers
remain exercisable for three months to five years in the event
their employment is terminated without cause or as a result of
AOL Time Warners breach of an employment agreement. For
some executive officers, some of their options remain
exercisable for the full term of the options if their employment
is terminated for any reason other than for cause, including
death. Otherwise, options may generally be exercised for one or
three years after death or total disability (depending on their
date of grant) and some options may be exercised for five years
after retirement. All options terminate either immediately or
one month after the holders employment is terminated for
cause. The terms of the options shown in the chart are generally
ten years, although 960,000 options held by Mr. Levin and
188,592 options held by Mr. Bewkes have a term of
15 years from the date of their award in 1989.

Employment Arrangements

AOL Time Warner is a party to employment
agreements with Messrs. Parsons, Novack, Bewkes, Logan and
Levin. The expiration dates of these agreements are:
Mr. Parsons  January 31, 2005;
Mr. Novack  December 31, 2003;
Mr. Bewkes  December 31, 2003;
Mr. Logan  December 31, 2004; and
Mr. Levin  December 31, 2005. AOL Time Warner
also was a party to an employment agreement with
Mr. Pittman that did not have a fixed term.

Among other things, the agreements with
Messrs. Parsons and Novack each provide for a fixed term of
employment in a specified executive post; minimum annual salary
of $1 million and participation in AOL Time Warner stock
option and other compensation and benefit plans, including
$50,000 of group term life insurance. These agreements do not
provide for the payment of an annual cash bonus. The agreements
with Messrs. Bewkes and Logan were entered into with the
divisions for which they served as Chairman and Chief Executive
Officer prior to their election as executive officers of AOL
Time Warner in July 2002. These agreements, which have been
assumed by AOL Time Warner, provide for a minimum annual salary
of $1 million, an annual cash bonus of not less than
$2.75 million with respect to Mr. Bewkes and a
discretionary cash bonus in a target amount of $3 million
with respect to Mr. Logan, and participation in AOL Time
Warner stock option and other compensation and benefit plans,
including group life insurance. In addition, the agreements with
Messrs. Parsons, Bewkes, Logan and Levin provide for
(1) life insurance benefits in the amount of $5 million,
$4 million, $4 million and $6 million,
respectively, to be provided by split-dollar policies for the
life of the executive under which AOL Time Warner recovers an
amount equal to the net after-tax cost of the premiums paid by
AOL Time Warner or the policies cash surrender value,
(2) for Messrs. Parsons and Levin, a cash payment
equal to the premium for coverage under a Group Universal Life
(GUL) insurance program made available by AOL Time
Warner in an amount equal to twice the executives salary,
minus $50,000 and (3) for Mr. Logan, a cash payment
equal to two times the premium he would have to pay to obtain
life insurance under AOL Time Warners GUL insurance
program in an amount equal to twice his salary.
Mr. Novacks agreement provides for a cash payment
equal to two times the premium for $4 million of GUL
insurance coverage.

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The agreements with Messrs. Parsons, Novack,
Bewkes, Logan and Levin include a narrow definition of the
cause for which an executives employment may
be terminated and in that event, the executive will only receive
earned and unpaid base salary accrued through such date of
termination.

These agreements provide that in the event of AOL
Time Warners material breach or termination of the
executives employment without cause, the executive will be
entitled to elect either (a) to receive a lump-sum payment
equal to the present value of the compensation otherwise payable
during the remaining portion of the executives term of
employment or a specified minimum period of time if less than
such remains in the term of the agreement or (b) to remain
an employee of AOL Time Warner through the end of such period
and, without having to perform any services, receive such
compensation as if there had been no breach or termination.
These executives are not required to mitigate damages after such
a termination, other than as necessary to prevent AOL Time
Warner from losing any tax deductions to which it otherwise
would have been entitled for any payments deemed to be
contingent on a change of control under the Internal
Revenue Code. These agreements also provide that in the event of
AOL Time Warners material breach or termination of the
executives employment without cause, a portion or all of
the unvested stock options granted to such executive will vest
and vested stock options will remain exercisable for a period of
time longer than would generally apply to stock options awarded
by AOL Time Warner.

Mr. Parsons agreement allows him,
effective on or after January 1, 2002 and with not less
than six months prior notice to AOL Time Warner, to
terminate his executive position and become an advisor to AOL
Time Warner for the remainder of the agreement term. In that
case his advisory compensation would be equal to $500,000 per
year.

Mr. Logans agreement allows him to
elect in September 2003 to terminate his active employment with
AOL Time Warner effective as of January 1, 2004 and become
an advisor to AOL Time Warner through June 30, 2007 at an
annual salary equal to $1.25 million, but with no bonus. If
he remains with AOL Time Warner through the December 31,
2004 term of the agreement, Mr. Logan can elect to become
an advisor to AOL Time Warner thereafter through
December 31, 2009 at an annual salary equal to
$1.25 million.

Mr. Bewkes agreement also provides
that if he and AOL Time Warner have not reached written
agreement regarding his employment with AOL Time Warner by the
end of the term, then Mr. Bewkes may elect to
(a) leave AOL Time Warner with a lump sum payment in
exchange for additional limits on his ability to accept
employment with competitors of AOL Time Warner following his
departure, (b) leave AOL Time Warner without a lump sum
payment and without being subject to such additional limits on
his ability to compete with AOL Time Warner, or (c) remain
an employee of AOL Time Warner for an additional 6 or
12 months.

If Messrs. Parsons, Novack, Bewkes, Logan or
Levin should become disabled during the term of his employment
agreement, the executive will receive full salary for six months
and then 75% thereof through the end of the employment term. Any
such payments will be reduced by amounts received from
Workers Compensation, Social Security and disability
insurance policies maintained by AOL Time Warner.

If an executive dies during the term of an
employment agreement, the executives beneficiaries will
receive the executives earned and unpaid salary to the
last day of the month in which the death occurs.

Mr. Levins agreement allowed him,
effective on or after May 1, 2002 and with not less than
five months prior notice to AOL Time Warner, to terminate
his position as Chief Executive Officer and become an advisor to
AOL Time Warner through December 31, 2005. His advisory
compensation will be $1 million per year, which was equal
to his annual salary. Mr. Levin delivered this notice to
AOL Time Warner in December 2001, stepped down as Chief
Executive Officer in May 2002 and is currently serving as an
advisor to AOL Time Warner.

In October 1996, America Online entered into an
employment agreement with Mr. Pittman which did not have a
fixed term and which AOL Time Warner assumed. This agreement
provided that, in the event Mr. Pittmans employment
agreement were terminated under certain circumstances, including
by him for a good reason or by AOL Time Warner other than for
cause, he would become a consultant of AOL Time Warner for a
term of two years, subject to the terms and conditions of a
consulting agreement. Pursuant to the

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terms of this agreement, Mr. Pittman will be
a consultant to AOL Time Warner for the two years ending
September 30, 2004. As part of an agreement entered into in
connection with his departure, Mr. Pittman agreed to forego
the $1 million annual consulting fee he would have received
under the consulting agreement and AOL Time Warner agreed that
stock options granted to him after September 1, 1998 will
remain exercisable through September 30, 2007.
Mr. Pittman is subject to the terms of a
confidentiality/non-competition/proprietary rights agreement
that remains in effect for the term of the consulting agreement.


In addition, prior to 2001, pursuant to their
employment agreements then in place, Time Warner made
contributions for each of Messrs. Parsons, Bewkes, Logan
and Levin to separate non-current compensation accounts in a
grantor trust or under its deferred compensation plan. Effective
beginning January 2001, AOL Time Warner terminated these
contributions, but existing accounts will continue to be
invested and paid out following termination of employment in
accordance with their terms.

Time Warner Pension Plan 
AOLTW

The Time Warner Employees Pension Plan, as
amended (the Old Pension Plan), which provides
benefits to eligible employees, including officers, of AOL Time
Warner and certain of its subsidiaries, was amended effective as
of January 1, 2000, as described below, and was renamed and
assumed by AOL Time Warner in connection with the Merger (the
Amended Pension Plan and, together with the Old
Pension Plan, the Pension Plans). Because of certain
grandfathering provisions, the benefit of participants with a
minimum of ten years of benefit service whose age and years of
benefit service equal or exceed 65 years as of
January 1, 2000, including Messrs. Bewkes and Levin,
will be determined under either the provisions of the Old
Pension Plan or the Amended Pension Plan, whichever produces the
greater benefit.

Under the Amended Pension Plan, a participant
accrues benefits equal to the sum of 1.25% of a
participants average annual compensation (defined as the
highest average annual compensation for any five consecutive
full calendar years of employment, which includes regular
salary, overtime and shift differential payments, and
non-deferred bonuses paid according to a regular program) not in
excess of his covered compensation up to the applicable average
Social Security wage base and 1.67% of his average annual
compensation in excess of such covered compensation multiplied
by his years of benefit service (not in excess of 30).
Compensation for purposes of calculating average annual
compensation under the Pension Plans is limited to $200,000 per
year for 1988 through 1993, $150,000 per year for 1994 through
2001 and $200,000 per year for 2002 and thereafter (each subject
to adjustments provided in the Internal Revenue Code of 1986, as
amended). Eligible employees become vested in all benefits under
the Pension Plans on the earlier of five years of service or
certain other events.

Under the Old Pension Plan, a participant accrues
benefits on the basis of 1 2/3% of the average annual
compensation (defined as the highest average annual compensation
for any five consecutive full and partial calendar years of
employment, which includes regular salary, overtime and shift
differential payments, and non-deferred bonuses paid according
to a regular program) for each year of service up to
30 years and  1/2% for each year of service over 30.
Annual pension benefits under the Old Pension Plan are reduced
by a Social Security offset determined by a formula that takes
into account benefit service up to 35 years, covered
compensation up to the average Social Security wage base and a
disparity factor based on the age at which Social Security
benefits are payable (the Social Security Offset).
Under both of the Pension Plans, the pension benefit of
participants on December 31, 1977 in the former Time
Employees Profit-Sharing Savings Plan (the Profit
Sharing Plan) is further reduced by a fixed amount
attributable to a portion of the employer contributions and
investment earnings credited to such employees account
balances in the Profit Sharing Plan as of such date (the
Profit Sharing Plan Offset).

Under the Amended Pension Plan, employees who are
at least 62 years old and have completed at least ten years
of service may elect early retirement and receive the full
amount of their annual pension. Under the Old Pension Plan,
employees who are at least 60 years old and have completed
at least ten years of service may elect early retirement and
receive the full amount of their annual pension (early
retirement). An early retirement supplement is payable to
an employee terminating employment at age 55 and before
age 60, after 20 years of service, equal to the
actuarial equivalent of such persons accrued benefit, or,
if greater, an annual

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amount equal to the lesser of 35% of such
persons average compensation determined under the Old
Pension Plan or such persons accrued benefit at
age 60 plus Social Security benefits at age 65. The
supplement ceases when the regular pension commences at
age 60.


Federal law limits both the amount of
compensation that is eligible for the calculation of benefits
and the amount of benefits derived from employer contributions
that may be paid to participants under both of the Pension
Plans. However, as permitted by the Employee Retirement Income
Security Act of 1974, as amended (ERISA), AOL Time
Warner has adopted the Time Warner Excess Benefit Pension
Plan  AOLTW (the Excess Plan). The Excess
Plan provides for payments by AOL Time Warner of certain amounts
which employees of AOL Time Warner would have received under the
Pension Plans if eligible compensation were limited to $250,000
in 1994 (increased 5% per year thereafter, to a maximum of
$350,000) and there were no payment restrictions. For purposes
of the Excess Plan, the $200,000 limit (as indexed for years
after 1989) on eligible compensation will only apply to
compensation received in 1988 through 1993; the $250,000 limit
(as adjusted) will apply to compensation received in 1994 and
thereafter.

The following table shows the estimated annual
pension payable upon retirement to employees in specified
remuneration and years-of-service classifications under the
Amended Pension Plan. The amount of the estimated annual pension
is based upon a pension formula which applies to all
participants in both the Amended Pension Plan and the Excess
Plan. The amounts shown in the table do not reflect the effect
of the previously-described Profit Sharing Plan Offset. The
estimated amounts are based on the assumption that payments
under the Amended Pension Plan will commence upon normal
retirement (generally age 65) or early retirement, that the
Amended Pension Plan will continue in force in its present form,
that the maximum compensation is $350,000 and that no joint and
survivor annuity will be payable (which would on an actuarial
basis reduce benefits to the employee but provide benefits to a
surviving beneficiary). Amounts calculated under the pension
formula which exceed ERISA limits will be paid under the Excess
Plan from AOL Time Warners assets and are included in the
amounts shown in the following table.

|                               |         |                                                       |        |        |  |    |        |        |  |    |        |         |  |   |        |         |  |   |        |         | 
|------------------------------ | ------- | ----------------------------------------------------- | ------ | ------ |  | -- | ------ | ------ |  | -- | ------ | ------- |  | - | ------ | ------- |  | - | ------ | ------- | 
|                               |         |                                                      
|                               |         | Estimated Annual Pension for Years of Benefit Service
|Highest Consecutive            |         |                                                      
|Five Year Average Compensation |         | 10                                                    |        | 15     |  | 20 |        | 25     |  | 30
|                               |         |                                                       |        |        |  |    |        |        |  |   
|$200,000                       |         | $                                                     | 31,553 |        |  | $  | 47,330 |        |  | $  | 63,107 |         |  | $ | 78,883 |         |  | $ | 94,660 |        
|                               | 250,000 |                                                       |        | 39,903 |  |    |        | 59,855 |  |    |        | 79,807  |  |   |        | 99,758  |  |   |        | 119,710 | 
|                               | 300,000 |                                                       |        | 48,253 |  |    |        | 72,380 |  |    |        | 96,507  |  |   |        | 120,633 |  |   |        | 144,760 | 
|                               | 350,000 |                                                       |        | 56,603 |  |    |        | 84,905 |  |    |        | 113,207 |  |   |        | 141,508 |  |   |        | 169,810 | 
|                               | 400,000 |                                                       |        | 56,603 |  |    |        | 84,905 |  |    |        | 113,207 |  |   |        | 141,508 |  |   |        | 169,810 | 

The amount of covered compensation that would be
considered in the determination of the highest five consecutive
full or partial years of compensation under the Pension Plans
and the Excess Plan for each of Messrs. Case, Parsons,
Novack, Bewkes, Logan and Levin is limited as a result of the
imposition of the limitations on eligible compensation. However,
because combined payments under the Pension Plans and the Excess
Plan are based on the highest average annual compensation for
any five consecutive full or partial calendar years of
employment (taking into account the compensation limits only for
1988 and thereafter), the compensation used for determining
benefits under such Plans for Mr. Levin (and employees who
participated in the Pension Plan prior to 1988) will include
eligible compensation in years prior to 1988 which exceeded
these limits. The estimated annual benefits payable under the
Amended Pension Plan and the Excess Plan, as of February 1,
2003, would be based on average compensation of $350,000 for
Mr. Case; $331,394 for Mr. Parsons; $350,000 for
Mr. Novack; $331,394 for Mr. Bewkes; $331,394 for
Mr. Logan; and $729,248 for Mr. Levin, with 2.1, 8.2,
2.1, 22.9, 32.8 and 30.8 years of benefit service,
respectively. In addition, pursuant to his employment agreement,
Mr. Parsons will be entitled to receive supplemental
payments from AOL Time Warner that will achieve a total
retirement benefit equal to what he would have received if he
had five additional years of benefit service under the Amended
Pension Plan. Mr. Pittman is not eligible to participate in
the Pension Plans. However, as a result of
Mr. Pittmans previous employment by Time Warner, at
age 65, he is entitled to start receiving an annual benefit
of $21,978 under the Amended Pension Plan and the Excess Plan.
The estimated annual pension payable to each Mr. Levin and
Mr. Bewkes under the Old Pension Plan and the Excess Plan
upon retirement based on the indicated remuneration and years of
service would be

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$361,891 and $177,302, respectively. These
amounts are greater than the estimated annual benefit payable
under the Amended Pension Plan and the Excess Plan.


Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

Ownership by Partners of TWE

The table below sets forth, as of March 15,
2003, the pro rata priority capital and residual equity
interests of each AOLTW General Partner and each Limited Partner
in TWE. Subsidiaries of AOL Time Warner and the AOLTW General
Partners collectively own 72.36% of the pro rata priority
capital and residual equity capital and 100% of the priority
capital interests junior to the pro rata priority capital
interests. Each AOLTW General Partner is a direct or indirect
wholly owned subsidiary of AOL Time Warner. The TWE Holdings
Trusts are Delaware statutory trusts all of the beneficial
interests of which are held indirectly by Comcast Corporation.

|                                                   |  |          |        |  
|-------------------------------------------------- |  | -------- | ------ | -
|                                                   |  | Residual
|                                                   |  | Equity  
|                                                   |  | Interest
|                                                   |  |         
|AOL Time Warner General Partners                   |  |          |        |  
|American Television and Communications Corporation |  |          | 30.48  | %
|Warner Communications Inc.                         |  |          | 41.88  | %
|Limited Partners                                   |  |          |        |  
|TWE Holdings I Trust                               |  |          | 2.86   | %
|TWE Holdings III Trust                             |  |          | 24.78  | %
|                                                   |  |          |        |  
|                                                   |  |          | 100.00 | %
|                                                   |  |          |        |  

The address of the principal executive offices of
each of the companies listed above is as follows: Warner
Communications Inc.: 75 Rockefeller Plaza, New York, New
York 10019; American Television and Communications Corporation:
290 Harbor Drive, Stamford, Connecticut 06902; and TWE
Holdings Trusts, c/o Edith H. Holiday, Operating Trustee,
801 West Street, 2nd Floor, Wilmington, Delaware 19801.

42



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##### Table of Contents



Security Ownership of Certain Beneficial
Owners

Set forth below is the name, address, stock
ownership and voting power of each person or group of persons
known by TWE to own beneficially securities of AOL Time Warner
having more than 5% of the voting power of any class of AOL Time
Warners voting securities and, unless otherwise indicated,
is based on information provided to AOL Time Warner as of
January 31, 2003 by the beneficial owner. Subsidiaries of
AOL Time Warner collectively own 72.36% of the pro rata priority
capital and residual equity partnership interests in TWE.

|                                           |                         |              |             |            |  |            |       |   |  |  |     |   | 
|------------------------------------------ | ----------------------- | ------------ | ----------- | ---------- |  | ---------- | ----- | - |  |  | --- | - | 
|                                           |                         | Shares       |             |            |  |           
|                                           |                         | of Stock     |             |            |  | Percent of
|                                           |                         | Beneficially |             | Percent of |  | Voting    
|Name and Address of Beneficial Owner       |                         | Owned        |             | Class      |  | Power     
|                                           |                         |              |             |            |  |           
|AOL Time Warner Common Stock               |                         |              |             |            |  |            |       |   |  |  |     |  
|Capital Research and Management Company(1) |                         |              | 305,020,820 |            |  |            | 7.1   | % |  |  | 7.1 | %
|                                           | 333 South Hope Street   |              |             |            |  |            |       |   |  |  |     |   | 
|                                           | Los Angeles, CA 90071   |              |             |            |  |            |       |   |  |  |     |   | 
|FMR Corp.(2)                               |                         |              | 217,653,377 |            |  |            | 5.0   |   |  |  | 5.0 |  
|                                           | 82 Devonshire Street    |              |             |            |  |            |       |   |  |  |     |   | 
|                                           | Boston, MA 02109        |              |             |            |  |            |       |   |  |  |     |   | 
|AOL Time Warner Series LMCN-V
    Stock    |                         |              |             |            |  |            |       |   |  |  |     |  
|Liberty Media Corporation(3)               |                         |              | 171,185,826 |            |  |            | 100.0 |   |  |  | *   |  
|                                           | 12300 Liberty Boulevard |              |             |            |  |            |       |   |  |  |     |   | 
|                                           | Englewood, CO 80112     |              |             |            |  |            |       |   |  |  |     |   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(1) | Beneficial ownership is as of December 31,
    2002. Capital Research and Management Company, an investment
    adviser, has filed with the SEC a statement on Schedule 13G
    dated February 10, 2003 to the effect that (a) it
    (directly or indirectly) has sole dispositive power over all
    these shares, (b) it has voting power over none of these
    shares and (c) all of the reported shares are held for the
    benefit of its clients.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(2) | Beneficial ownership is as of December 31,
    2002. FMR Corp., a holding company, has filed with the SEC a
    statement on Schedule 13G dated February 14, 2003 to
    the effect that (a) it (directly or indirectly) has sole
    dispositive power over all these shares, (b) it has sole
    voting power over 15,315,805 of these shares and no shared
    voting power, (c) these shares are held principally by
    Fidelity Management & Research Company, a wholly-owned
    investment adviser, (d) the shares of AOL Time Warner
    Common Stock reported as beneficially owned include
    114,926 shares of AOL Time Warner Common Stock reported as
    issuable upon the conversion of $19,700,000 principal amount of
    3% Convertible Subordinated Notes due 2019 of America Online and
    1,311,440 shares of AOL Time Warner Common Stock issuable
    upon conversion of securities of other issuers (these shares
    have been excluded from the calculation of voting power),
    (e) these shares are, for the most part, held by investment
    companies and institutional accounts managed by subsidiaries of
    FMR Corp. and (f) the family of Edward C.
    Johnson 3d, including Mr. Johnson, the Chairman of FMR
    Corp., and his daughter Abigail Johnson, a director, and trusts
    for the family members benefit may be deemed to form a
    controlling group with respect to FMR Corp.
|   
|(3) | Consists of shares beneficially owned by Liberty
    Media Corporation through its direct and indirect subsidiaries.
    Under certain circumstances, each share of Series LMCN-V
    Stock is convertible into one share of AOL Time Warner Common
    Stock; such circumstances are not currently present. Each share
    of Series LMCN-V Stock currently has 1/100 of a vote with
    respect to the election of directors and class voting rights on
    limited other matters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Security Ownership of Management

The following table sets forth as of
January 31, 2003 information concerning the beneficial
ownership of AOL Time Warner Common Stock for each current
representative of TWE and each current member of the

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board of directors of one or more of the AOLTW
General Partners, each of the persons named in the Summary
Compensation Table above and for all current representatives,
directors and executive officers of TWE and the AOLTW General
Partners as a group.


|                                                                                                                 |  |                                    |            |           |  |            |            |  |  |  |     |  
|---------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ---------- | --------- |  | ---------- | ---------- |  |  |  | --- | -
|                                                                                                                 |  |                                   
|                                                                                                                 |  | Common Stock Beneficially Owned(1)
|                                                                                                                 |  |                                   
|                                                                                                                 |  | Number of                          |            | Option    |  | Percent of
|Name                                                                                                             |  | Shares                             |            | Shares(2) |  | Class     
|                                                                                                                 |  |                                    |            |           |  |           
|Jeffrey L. Bewkes(8)                                                                                             |  |                                    | 24,825     |           |  |            | 3,739,592  |  |  |  | *   |  
|Stephen M. Case(3)(8)                                                                                            |  |                                    | 12,471,741 |           |  |            | 19,765,592 |  |  |  | *   |  
|Gerald M. Levin(4)                                                                                               |  |                                    | 165,010    |           |  |            | 8,566,251  |  |  |  | *   |  
|Don Logan(8)                                                                                                     |  |                                    | 59,664     |           |  |            | 3,585,000  |  |  |  | *   |  
|Kenneth J. Novack(5)(8)                                                                                          |  |                                    | 4,840      |           |  |            | 6,163,000  |  |  |  | *   |  
|Richard D. Parsons(6)(8)                                                                                         |  |                                    | 38,435     |           |  |            | 4,650,000  |  |  |  | *   |  
|Robert W. Pittman(7)                                                                                             |  |                                    | 15,309     |           |  |            | 16,377,255 |  |  |  | *   |  
|All current representatives, directors and
    executive officers (11 persons) as a
    group(2),(3),(5),(6),(8) |  |                                    | 12,658,818 |           |  |            | 43,183,790 |  |  |  | 1.3 | %



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Represents beneficial ownership of less than one
    percent of the issued and outstanding AOL Time Warner Common
    Stock on January 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(1) | Beneficial ownership as reported in the above
    table has been determined in accordance with Rule 13d-3 of
    the Securities Exchange Act of 1934. Unless otherwise indicated,
    beneficial ownership represents both sole voting and sole
    investment power. This table does not include, unless otherwise
    indicated, any shares of AOL Time Warner Common Stock or other
    equity securities of AOL Time Warner which may be held by
    pension and profit-sharing plans of other corporations or
    endowment funds of educational and charitable institutions for
    which various representatives, directors and officers serve as
    directors or trustees. As of January 31, 2003, the only
    equity securities of AOL Time Warner beneficially owned by the
    named persons or group were shares of AOL Time Warner Common
    Stock and options to purchase AOL Time Warner Common Stock.
|   
|(2) | Reflects shares of AOL Time Warner Common Stock
    subject to options to purchase AOL Time Warner Common Stock
    issued by AOL Time Warner which, on January 31, 2003, were
    unexercised but were exercisable on or within 60 days after
    that date. These shares are excluded from the column headed
    Number of Shares. 144,996 of the stock options shown
    for Mr. Logan have been transferred to a limited
    partnership owned by members of his family and 211,700 of the
    stock options shown for Mr. Novack have been transferred to
    grantor retained annuity trusts for the benefit of members of
    his family.                                                                                                                                                                                                                                                                      
|   
|(3) | Includes 243,752 shares of AOL Time Warner
    Common Stock held by Mr. Cases wife and
    1,199,550 shares of AOL Time Warner Common Stock held by
    the Stephen M. Case Foundation. Mr. Case and his wife
    are the sole directors of this Foundation but do not exercise
    day-to-day investment authority. Mr. Case disclaims
    beneficial ownership of shares held by his wife and the
    Stephen M. Case Foundation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(4) | Includes 45,000 shares of AOL Time Warner
    Common Stock held by Mr. Levins wife and
    approximately 33,877 shares of AOL Time Warner Common Stock
    held by a trust under the AOL Time Warner Savings Plan for his
    benefit. Mr. Levin disclaims beneficial ownership of shares
    held by his wife.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(5) | Includes 375 shares of AOL Time Warner
    Common Stock held by an irrevocable trust for the benefit of
    Mr. Novacks children, one of whom is a minor, and
    525 shares of AOL Time Warner Common Stock held by the
    Novack Family Foundation of which Mr. Novack and his wife
    are two of nine trustees. Mr. Novack disclaims beneficial
    ownership of shares held by the trust and the Novack Family
    Foundation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(6) | Includes 200 shares of AOL Time Warner
    Common Stock held by Mr. Parsons wife and
    2,000 shares of AOL Time Warner Common Stock held by The
    Parsons Family Foundation, Inc. of which Mr. Parsons                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | is one of six directors. Mr. Parsons
    disclaims beneficial ownership of shares held by his wife and
    The Parsons Family Foundation, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(7) | Includes 1,920 shares of AOL Time Warner Common
    Stock held by the Pittman Family Foundation of which
    Mr. Pittman and his wife are the sole trustees and
    approximately 106 shares of AOL Time Warner Common Stock
    held by a trust under the AOL Time Warner Savings Plan for his
    benefit. Mr. Pittman disclaims beneficial ownership of the
    shares held by the Pittman Family Foundation.                                                                                                                                                                                                                                                                                   
|   
|(8) | Includes (a) an aggregate of approximately
    42,720 shares of AOL Time Warner Common Stock held by a trust
    under the AOL Time Warner Savings Plan for the benefit of
    current directors and executive officers of AOL Time Warner
    (including 462 shares for Mr. Case, 24,825 shares
    for Mr. Bewkes, 14,529 shares for Mr. Logan,
    417 shares for Mr. Novack, and 946 shares for
    Mr. Parsons), (b) an aggregate of 243,952 shares
    of AOL Time Warner Common Stock beneficially owned by certain
    relatives of such persons and (c) an aggregate of 356,696
    stock options that have been transferred to entities for the
    benefit of relatives of such persons.

Item 13.     Certain
Relationships and Related Transactions

Corporate Services

AOL Time Warner provides TWE with corporate
support services and facilities (including, without limitation,
internal accounting, financial, tax, legal and similar
administrative and other services) as may be necessary or
appropriate for TWE to conduct the businesses that were
contributed to TWE in the manner that such businesses were
conducted by Time Warner and its subsidiaries prior to the
capitalization of TWE on June 30, 1992 (the TWE
Capitalization). As compensation and reimbursement for the
cost of providing such services and facilities, TWE paid AOL
Time Warner fees in the amount of $105 million,
$77 million and $74 million in 2002, 2001 and 2000,
respectively.

Option Reimbursement

Upon the exercise of options to purchase
securities of AOL Time Warner by any officer or other employee
of TWE or of any strategic venture of TWE,
including, without limitation, Warner Japan, or of AOL Time
Warner or any of its subsidiaries who in such capacity performs
substantially all of his or her duties on behalf of TWE or any
such strategic venture, TWE or such strategic
venture must reimburse AOL Time Warner for the amount by
which the market price of such securities on the exercise date
exceeds the exercise price, or with respect to options granted
prior to the TWE Capitalization, the greater of the exercise
price and the market price of such securities as of the TWE
Capitalization (such reimbursement is hereinafter called a
Stock Option Distribution). At December 31,
2002, TWE had accrued $8 million of Stock Option
Distributions payable to AOL Time Warner. Such amount, which is
not payable until the underlying options are exercised and then
only subject to limitations on cash distributions in accordance
with the TWE credit agreement, will be adjusted in subsequent
accounting periods based on changes in the quoted market prices
for the underlying securities. Such amount would increase
(decrease) by approximately $54 million for each one dollar
increase (decrease) in the closing price of AOL Time Warner AOL
Time Warner Common Stock. See Notes 10 and 11 to the TWE
consolidated financial statements included herein.

Warner Japan Distribution Agreements

Concurrently with the closing of the Warner Japan
transaction, TWE and Warner Japan entered into distribution and
merchandising agreements pursuant to which TWE granted to Warner
Japan the right to engage in theatrical and non-theatrical,
television and home video distribution in Japan as well as the
right to engage in the licensing and merchandising of TWEs
copyrights and trademarks in Japan. Such agreements provide that
Warner Japan will receive distribution fees generally comparable
to those currently received by TWE for performing distribution
services for unaffiliated third parties.

45



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##### Table of Contents



Other Arrangements and Transactions

The TWE Partnership Agreement expressly permits
Time Warner and TWE to continue certain arrangements and
transactions that prior to the TWE Capitalization existed
between Time Warner and certain of the subsidiaries of Time
Warner that contributed assets to TWE at the TWE Capitalization,
to the extent that such arrangements and transactions relate to
the businesses that were contributed. The TWE Partnership
Agreement also permits Time Warner to enter into additional
similar arrangements and transactions with TWE in the ordinary
course of business consistent with past practice as well as any
new arrangements and transactions with TWE on an
arms-length basis. For additional information regarding
such arrangements, see Note 15 to TWEs consolidated
financial statements included herein and Note 16 to the
AOLTW General Partners consolidated financial statements
included herein.

For information with respect to the revolving
credit agreements between the General Partners and Time Warner
Companies, Inc., see Note 8 to the AOLTW General
Partners consolidated financial statements included herein.

Item 14.     Controls
and Procedures

Within the 90-day period prior to the filing of
this report, TWE, 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 TWEs disclosure
controls and procedures (as defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934 (the Exchange
Act)). Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that
TWEs disclosure controls and procedures are effective in
timely making known to them material information relating to TWE
and TWEs consolidated subsidiaries required to be
disclosed in TWEs reports filed or submitted under the
Exchange Act. TWE has investments in certain unconsolidated
entities. As TWE does 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 been no significant changes in TWEs internal controls
or in other factors that could significantly affect the internal
controls subsequent to the date TWE completed its evaluation.




PART IV

Item 15.     Exhibits,
Financial Statement Schedules, and Reports On
Form 8-K

(a)(1)-(2) Financial Statements and
Schedules:

The consolidated financial statements and
schedules set forth in the accompanying Index to Consolidated
Financial Statements and Other Financial Information at
page F-1 herein are filed as part of this report and are
incorporated herein by reference.

All other financial statement schedules are
omitted because the required information is not applicable, or
because the information required is included in the consolidated
financial statements and notes thereto.

(3) Exhibits:

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

(b) Reports on Form 8-K.

TWE and the AOLTW General Partners filed the
following report on Form 8-K during the quarter ended
December 31, 2002 and in 2003 through March 21, 2003:

|    |  |        |   |             |  |                                                                                                              |  |                  
|--- |  | ------ | - | ----------- |  | ------------------------------------------------------------------------------------------------------------ |  | -----------------
|    |  | Item # |   | Description |  | Date                                                                                                        
|    |  |        |   |             |  |                                                                                                             
|(i) |  |        | 5 |             |  | Reporting the closing of the Time Warner
    Entertainment  Advance/Newhouse Partnership
    restructuring. |  | December 31, 2002

46



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934,
each of the Registrants has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly
authorized.



| |                                        
| | ---------------------------------------
| | TIME WARNER ENTERTAINMENT COMPANY, L.P.

| |     |                            
| | --- | ---------------------------
| | By: | Warner Communications Inc.,

| |                   
| | ------------------
| | as General Partner



| |     |                  
| | --- | -----------------
| | By: | /s/ WAYNE H. PACE

| |                                                                       
| | ----------------------------------------------------------------------
| |                                                                       
| | Name:     Wayne H. Pace                                               
| | Title:        Executive
    Vice President and Chief Financial Officer
|
| | AMERICAN TELEVISION AND COMMUNICATIONS
    CORPORATION (ATC)        
| | WARNER COMMUNICATIONS INC. (WCI)                                    



| |     |                  
| | --- | -----------------
| | By: | /s/ WAYNE H. PACE

| |                                                                       
| | ----------------------------------------------------------------------
| |                                                                       
| | Name:     Wayne H. Pace                                               
| | Title:        Executive
    Vice President and Chief Financial Officer

Date: March 28, 2003

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons in the capacities indicated on March 28,
2003.

|                                           |  |                                                                                                         
|------------------------------------------ |  | --------------------------------------------------------------------------------------------------------
|Signature                                  |  | Title                                                                                                   
|                                           |  |                                                                                                         
|                                          
|/s/ RICHARD D. PARSONS(Richard D. Parsons) |  | Director of ATC and WCI and Chief Executive
    Officer of each Registrant (Principal Executive Officer)
|                                          
|/s/ WAYNE H. PACE(Wayne H. Pace)           |  | Executive Vice Pres. and Chief Financial Officer
    of each Registrant (Principal Financial Officer)   
|                                          
|/s/ JAMES W. BARGE(James W. Barge)         |  | Senior Vice Pres. and Controller of each
    Registrant (Principal Accounting Officer)                  
|                                          
|/s/ JEFFREY BEWKES(Jeffrey Bewkes)         |  | Director of ATC and WCI                                                                                 
|                                          
|/s/ DON LOGAN(Don Logan)                   |  | Director of ATC and WCI                                                                                 

47



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##### Table of Contents






CERTIFICATIONS

I, Richard D. Parsons, certify that:

1. I have reviewed this annual report on
Form 10-K of Time Warner Entertainment Company, L.P. and
its General Partners, American Television and Communications
Corporation and Warner Communications Inc.;

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

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

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



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b. evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c. presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

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



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b. any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

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



| |                         
| | ------------------------
| | /s/ RICHARD D. PARSONS  
| |                         
| | Name: Richard D. Parsons

| |        |                        
| | ------ | -----------------------
| | Title: | Chief Executive Officer

| |                                             
| | --------------------------------------------
| | Time Warner Entertainment Company, L.P.     
| | American Television and Communications      
| | Corporation 
     Warner Communications Inc.

Date: March 28, 2003



---



##### Table of Contents



I, Wayne H. Pace, certify that:

1. I have reviewed this annual report on
Form 10-K of Time Warner Entertainment Company, L.P. and
its General Partners, American Television and Communications
Corporation and Warner Communications Inc.;

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

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

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



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b. evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c. presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

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



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b. any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

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



| |                    
| | -------------------
| | /s/ WAYNE H. PACE  
| |                    
| | Name: Wayne H. Pace

| |        |                        
| | ------ | -----------------------
| | Title: | Chief Financial Officer

| |                                        
| | ---------------------------------------
| | Time Warner Entertainment Company, L.P.
| | American Television and Communications 
| | Corporation                            
| | Warner Communications Inc.             

Date: March 28, 2003



---



##### Table of Contents



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




INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS


AND OTHER FINANCIAL INFORMATION


|                                                                                          |                                                               |      |      |          |  |  |       |       | 
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ---- | ---- | -------- |  |  | ----- | ----- | 
|                                                                                          |                                                               |     
|                                                                                          |                                                               | Page
|                                                                                          |                                                               |     
|                                                                                          |                                                               |      |      | TWE     
|                                                                                          |                                                               |      |      | General 
|                                                                                          |                                                               | TWE  |      | Partners
|                                                                                          |                                                               |      |      |         
|Managements Discussion and Analysis of
    Results of Operations and Financial Condition |                                                               |      | F-2  |          |  |  | F-79  |      
|Consolidated Financial Statements:                                                        |                                                               |      |      |          |  |  |       |      
|                                                                                          | Balance Sheet                                                 |      |      | F-30     |  |  |       | F-101 | 
|                                                                                          | Statement of Operations                                       |      |      | F-31     |  |  |       | F-102 | 
|                                                                                          | Statement of Cash Flows                                       |      |      | F-32     |  |  |       | F-103 | 
|                                                                                          | Statement of Partnership Capital and
    Shareholders Equity |      |      | F-33     |  |  |       | F-104 | 
|                                                                                          | Notes to Consolidated Financial Statements                    |      |      | F-34     |  |  |       | F-106 | 
|Report of Independent Auditors                                                            |                                                               |      | F-75 |          |  |  | F-141 |      
|Selected Financial Information                                                            |                                                               |      | F-76 |          |  |  | F-142 |      
|Quarterly Financial Information                                                           |                                                               |      | F-77 |          |  |  |      |      
|Financial Statement
    Schedule II  Valuation and Qualifying
    Accounts               |                                                               |      | F-78 |          |  |  | F-144 |      

F-1



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##### Table of Contents






TIME WARNER ENTERTAINMENT COMPANY,
L.P.

MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION


INTRODUCTION

Managements discussion and analysis of
results of operations and financial condition
(MD&A) is provided as a supplement to the
accompanying consolidated financial statements and footnotes to
help provide an understanding of Time Warner Entertainment
Company, L.P.s (TWE or the
Company) financial condition, changes in financial
condition and results of operations. The MD&A is organized
as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Overview.This
    section provides a general description of TWEs businesses,
    as well as recent developments that have either occurred during
    2002 or early 2003 that the Company believes are important in
    understanding the results of operations, as well as to
    anticipate future trends in those operations.                                                                                                                                                                                                                                              
|
| |  | Results of
    operations.This section provides an
    analysis of the Companys results of operations for all
    three years presented in the accompanying consolidated statement
    of operations. This analysis is presented on both a consolidated
    and segment basis. In addition, a brief description is provided
    of significant transactions and events that impact the
    comparability of the results being analyzed.                                                                                                                                      
|
| |  | Financial condition and
    liquidity.This section provides an
    analysis of the Companys cash flows, as well as a
    discussion of the Companys outstanding debt and
    commitments, both firm and contingent, that existed as of
    December 31, 2002. Included in the discussion of
    outstanding debt is a discussion of the amount of financial
    capacity available to fund the Companys future
    commitments, as well as a discussion of other financing
    arrangements.                                                                               
|
| |  | Market risk
    management.This section discusses how
    the Company manages exposure to potential loss arising from
    adverse changes in interest rates, foreign currency exchange
    rates and changes in the market value of investments.                                                                                                                                                                                                                                                                                                                              
|
| |  | Critical accounting
    policies.This section discusses those
    accounting policies that are considered important to the
    Companys financial condition and results, and require
    significant judgment and estimates on the part of management in
    their application. In addition, all of the Companys
    significant accounting policies, including the critical
    accounting policies, are summarized in Note 1 to the
    accompanying consolidated financial statements.                                                                                   
|
| |  | Risk factors and caution concerning
    forward-looking statements.This
    section provides a description of risk factors that could
    adversely affect the operations, business or financial results
    of the Company or its business segments and how certain
    forward-looking statements made by the Company in this report,
    including throughout MD&A and in the consolidated financial
    statements, are based on managements present expectations
    about future events and are inherently susceptible to
    uncertainty and changes in circumstances.

OVERVIEW

Description of Business

AOL Time Warner is the worlds leading media
and entertainment company. The Company was formed in connection
with the merger of America Online, Inc. (America
Online) and Time Warner Inc. (Time Warner),
which was consummated on January 11, 2001 (the
Merger). As a result of the Merger, America Online
and Time Warner each became a wholly owned subsidiary of AOL
Time Warner.

A majority of AOL Time Warners interests in
the Filmed Entertainment and Cable segments, and a portion of
its interests in the Networks segment, are held through Time
Warner Entertainment Company, L.P. (TWE). Prior to
the change in ownership relating to the exercise of an option
held by AT&T Corp. (AT&T), which is
discussed below, AOL Time Warner owned general and limited
partnership interests in TWE consisting of 74.49% of the pro
rata priority capital (Series A Capital) and
residual equity capital

F-2



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


(Residual Capital), and 100% of the
junior priority capital (Series B Capital). The
remaining 25.51% limited partnership interests in the
Series A Capital and Residual Capital of TWE were held by
subsidiaries of AT&T.

During the second quarter of 2002, AT&T
exercised a one-time option to increase its ownership in the
Series A Capital and Residual Capital of TWE. As a result,
on May 31, 2002, AT&Ts interest in the
Series A Capital and Residual Capital of TWE increased by
approximately 2.13% to approximately 27.64% and AOL Time
Warners corresponding interest in the Series A
Capital and Residual Capital of TWE decreased by approximately
2.13% to approximately 72.36%. AT&Ts interest in TWE
was acquired by Comcast Corp. (Comcast) upon
consummation of the merger of Comcast and AT&Ts
broadband businesses in November 2002.

TWE classifies its business interests into three
fundamental areas: Cable, consisting principally of
interests in cable television systems; Filmed
Entertainment, consisting principally of interests in filmed
entertainment and television production; and Networks,
consisting principally of interests in cable television and
broadcast network programming. TWE also manages the cable
properties wholly-owned by AOL Time Warner and the combined
cable television operations are conducted under the name of Time
Warner Cable.

Use of EBITDA

TWE evaluates operating performance based on
several factors, including its primary financial measure of
operating income (loss) before non-cash depreciation of tangible
assets, amortization of intangible assets and impairment
write-downs related to goodwill and intangible assets
(EBITDA). TWE considers EBITDA an important
indicator of the operational strength and performance of its
businesses, including the ability to provide cash flows to
service debt and fund capital expenditures. In addition, EBITDA
eliminates the uneven effect across all business segments of
considerable amounts of non-cash depreciation of tangible assets
and amortization of certain intangible assets deemed to have
finite useful lives that were recognized in business
combinations accounted for by the purchase method. As such, the
following comparative discussion of the results of operations of
TWE includes, among other measures, an analysis of changes in
business segment EBITDA. However, EBITDA should be considered in
addition to, not as a substitute for, operating income (loss),
net income (loss) and other measures of financial performance
reported in accordance with accounting principles generally
accepted in the United States. In addition, EBITDA should not be
used as a substitute for the Companys cash flow measures
(e.g., operating cash flow), which are discussed in detail under
Financial Condition and Liquidity.

Recent Developments

Restructuring of TWE

In August 2002, AOL Time Warner and AT&T
announced that they had agreed to restructure TWE. The
restructuring is expected to be completed on March 31,
2003. The TWE restructuring will result in the following:
(i) AOL Time Warner will acquire complete ownership of
TWEs content assets (including Warner Bros. and Home Box
Office, which will become separate, wholly owned subsidiaries of
the Company); (ii) all of AOL Time Warners
directly-owned cable television system interests will be
contributed to a separate company which will become a
majority-owned subsidiary of AOL Time Warner and will be renamed
Time Warner Cable Inc. (TWC Inc.); (iii) TWE
will become a subsidiary of TWC Inc. and will continue to own
the cable television system interests it previously owned;
(iv) Comcast will receive $2.1 billion in cash, which
the Company anticipates will be funded through a new credit
facility at TWC Inc. that has not yet been established, and AOL
Time Warner equity securities valued at $1.5 billion;
(v) a Comcast Trust will also retain a 21% economic
interest in the Companys cable business, 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; and (vi) AOL
Time Warner will retain an overall 79% economic interest in the
cable business, through an 82.1% ownership interest in TWC Inc.
(representing an 89.3% voting interest) and

F-3



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


a partnership interest in TWE representing a 1%
residual equity interest and a $2.4 billion preferred
component.

Based upon its 89.3% controlling voting interest
in TWC Inc., AOL Time Warner will consolidate the results of TWC
Inc. for accounting purposes. At the closing of the
restructuring, it is anticipated that TWC Inc. will have
approximately $8.1 billion in consolidated net debt and
preferred equity, including the $2.4 billion preferred
interest held by AOL Time Warner. Subject to market and other
conditions, AOL Time Warner expects to complete an initial
public offering of TWC Inc. common stock during 2003. It is
anticipated that the first $2.1 billion of net proceeds
raised in any such offering would be used to pay off TWC Inc.
debt incurred to fund the $2.1 billion cash payment to
Comcast. Thereafter, Comcast will have certain priority
registration rights with respect to its stake in TWC Inc.
(Note 1).

Restructuring of TWE-Advance/Newhouse and Road
Runner Partnerships

Prior to August 1, 2002, the
TWE-Advance/Newhouse Partnership (TWE-A/N) was owned
approximately 64.8% by TWE, the managing partner, 33.3% by the
Advance/Newhouse Partnership (Advance/Newhouse) and
1.9% indirectly by AOL Time Warner. The financial position and
operating results of TWE-A/N were consolidated by TWE, and the
partnership interest owned by Advance/Newhouse was reflected in
the consolidated financial statements of TWE as minority
interest. In addition, prior to August 1, 2002, Road
Runner, a high-speed cable modem Internet service provider, was
owned by TWI Cable Inc. (a wholly-owned subsidiary of AOL Time
Warner), TWE and TWE-A/N, with TWE owning approximately 65% on a
fully attributed basis (i.e., after considering the portion
attributable to TWI Cable and Advance/Newhouse). TWEs
interest in Road Runner was accounted for using the equity
method of accounting because of certain approval rights held by
Advance/Newhouse.

On June 24, 2002, TWE and Advance/Newhouse
agreed to restructure TWE-A/N, which, on August 1, 2002
(the Debt Closing Date), resulted in
Advance/Newhouse assuming responsibility for the day-to-day
operations of certain TWE-A/N cable systems serving
approximately 2.1 million subscribers located primarily in
Florida (the Advance/Newhouse Systems). On the Debt
Closing Date, Advance/Newhouse and its affiliates arranged for a
new credit facility, which is independent of and not guaranteed
by AOL Time Warner, to support the Advance/Newhouse Systems and
assumed and repaid approximately $780 million of TWE-A/Ns
senior indebtedness. As a result, TWE has deconsolidated the
financial position and operating results of these systems.
Additionally, all prior period results associated with the
Advance/Newhouse Systems, including the historical minority
interest allocated to Advance/Newhouses interest in
TWE-A/N, have been reflected as a discontinued operation for all
periods presented. Under the new TWE-A/N Partnership Agreement,
effective as of the Debt Closing Date, Advance/Newhouses
partnership interest tracks only the economic performance of the
Advance/Newhouse Systems, including associated liabilities,
while TWE retains substantially all of the economic interests in
the other TWE-A/N assets and liabilities. The restructuring was
completed on December 31, 2002.

As part of the restructuring of TWE-A/N, on the
Debt Closing Date, AOL Time Warner effectively acquired
Advance/Newhouses attributable interest in Road Runner,
thereby increasing its ownership to approximately 82% on a fully
attributed basis. As a result of the termination of
Advance/Newhouses minority rights in Road Runner, TWE has
consolidated the financial position and results of operations of
Road Runner with the financial position and results of
operations of TWEs Cable segment. As permitted under
generally accepted accounting principles, the Company has
consolidated the results of Road Runner retroactive to the
beginning of 2002.

In connection with the TWE-A/N restructuring, TWE
recognized a non-cash pretax gain of approximately
$1.2 billion. The gain was calculated as the difference
between the fair value received in the restructuring (e.g.,
TWEs increased economic interest in the TWE-A/N cable
systems remaining under the

F-4



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


management of TWE) and the carrying value
surrendered (e.g. the carrying value of TWEs interest in
the Advance/Newhouse Systems). In order to determine fair value,
in addition to internal analysis, the Company obtained an
appraisal from an independent valuation firm. The gain was
mitigated because a portion of TWEs investment in TWE-A/N
that related to AOL Time Warners interests was recently
adjusted to fair value as part of purchase accounting for the
Merger. The gain is included as part of discontinued operations
in the accompanying consolidated statement of operations for
year ended December 31, 2002.

$10 Billion Revolving Credit
Facilities

In July 2002, AOL Time Warner, together with
certain of its consolidated subsidiaries, including TWE, entered
into two new senior unsecured long-term revolving bank credit
agreements with an aggregate borrowing capacity of $10 billion
(the 2002 Credit Agreements) and terminated two
existing bank credit facilities with an aggregate borrowing
capacity of $12.5 billion (the Old Credit
Agreements), which were scheduled to expire during 2002.
The 2002 Credit Agreements are comprised of a $6 billion
five-year revolving credit facility and a $4 billion
364-day revolving credit facility, borrowings under which may be
extended for a period up to two years following the initial term
(Note 7).

Pension Funding Liability

During the fourth quarter of 2002, the Company
recorded a liability for the unfunded accumulated benefit
obligation of approximately $90 million. This liability
represents the excess of the accumulated benefit obligation
under the Companys qualified defined benefit pension plans
over the fair value of the plans assets. In accordance
with generally accepted accounting principles, this liability
was established by a charge to shareholders equity,
resulting in no effect to the accompanying consolidated
statement of operations. In early 2003, the Company made cash
contributions to plan assets of approximately $42 million,
which resulted in a funded status of approximately 75% relative
to the projected benefit obligation (Note 11).

RESULTS OF OPERATIONS

Transactions Affecting Comparability of
Results of Operations

Consolidation of Road Runner

In August 2002, AOL Time Warner effectively
acquired Advance/Newhouses 17% indirect ownership interest
in Road Runner. As a result of the termination of
Advance/Newhouses minority rights in Road Runner, TWE has
consolidated the financial position and results of operations of
Road Runner with the financial position and results of
operations of TWEs Cable segment. As permitted under
generally accepted accounting principles, the Company has
consolidated the results of Road Runner retroactive to the
beginning of 2002.

Discontinued Operations

As previously discussed in Restructuring of
TWE-Advance/Newhouse and Road Runner Partnerships, the
Companys results of operations have been adjusted to
reflect the results of the Advance/Newhouse Systems as a
discontinued operation for all periods presented herein. For
2002, for the six months ended June 30, 2002 (e.g., the
most recent reported period prior to the deconsolidation), the
net impact of the deconsolidation of these systems was a
reduction of Cables previously reported revenues, EBITDA
and operating income of $715 million, $333 million and
$206 million, respectively. For the year ended
December 31, 2001, the net impact of the deconsolidation of
these systems was a reduction of Cables revenues, EBITDA
and operating income of $1.247 billion, $571 million
and $313 million, respectively. For the year ended
December 31, 2000, the net impact of the deconsolidation of
these systems was a reduction of the Cable segments
previously reported revenues, EBITDA and operating income of
$1.058 billion,

F-5



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


$484 million and $256 million,
respectively. In addition, during 2002, the Company recognized a
non-cash pretax gain of $1.2 billion relating to the
restructuring. As of December 31, 2001, the
Advance/Newhouse Systems had current assets and total assets of
approximately $64 million and $2.7 billion,
respectively, and current liabilities and total liabilities of
approximately $210 million and $963 million,
respectively, including debt assumed on the Debt Closing Date.

New Accounting Principles

In addition to the transactions previously
discussed, in the first quarter of 2002, the Company adopted new
accounting guidance in several areas, which are discussed below.



| |                                                                     
| | --------------------------------------------------------------------
| | New Accounting Standard for Goodwill and Other
    Intangible Assets

During 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 142 Goodwill and Other
Intangible Assets (FAS 142), which requires
that, effective January 1, 2002, goodwill, including the
goodwill included in the carrying value of investments accounted
for using the equity method of accounting, and certain other
intangible assets deemed to have an indefinite useful life,
cease amortizing. The new rules also require that goodwill and
certain intangible assets be assessed for impairment using fair
value measurement techniques. During the first quarter of 2002,
the Company completed its initial impairment review and recorded
a $21.763 billion non-cash charge for the impairment of
goodwill, substantially all of which was generated in the
Merger. The charge reflects overall market declines since the
Merger was announced in January 2000, is non-operational in
nature and is reflected as a cumulative effect of an accounting
change in the accompanying consolidated statement of operations
(Note 2).

During the fourth quarter of 2002, the Company
performed its annual impairment review for goodwill and other
intangible assets and recorded an additional non-cash charge of
$2.355 billion, which is recorded as a component of
operating income (loss) in the accompanying consolidated
statement of operations. The $2.355 billion includes
charges to reduce the carrying value of goodwill at the Cable
segment and reflects current market conditions in the cable
television industry, as evidenced by the decline in the stock
prices of comparable cable television companies.

The impairment charges are non-cash in nature and
do not affect the Companys liquidity or result in the
non-compliance with respect to any debt covenants contained in
the Companys 2002 Credit Agreements.



| |                                              
| | ---------------------------------------------
| | Reimbursement of Out-of-Pocket
    Expenses

In January 2002, the FASB Staff reached a
consensus on Emerging Issues Task Force (EITF) Issue
No. 01-14, Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses
Incurred (EITF 01-14). EITF 01-14
requires that reimbursements received for out-of-pocket expenses
be classified as revenue on the income statement.
EITF 01-14 was effective for TWE in the first quarter of
2002 and required retroactive restatement of all periods
presented to reflect the new accounting provisions. This change
in revenue classification impacts TWEs Cable segment. As a
result of applying the guidance of EITF 01-14, TWEs
revenues and costs presented herein were retroactively increased
by an equal amount of $196 million in 2001 and
$171 million in 2000.

Significant Transactions and Other Items
Affecting Comparability

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

F-6



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


For the year ended December 31, 2002, these
items included (i) a non-cash charge of $2.355 billion
to reduce the carrying value of goodwill (Note 2),
(ii) non-cash charges of $363 million to reduce the
carrying value of TWEs investments in certain
unconsolidated cable television system joint ventures
(Note 5) and (iii) a $6 million gain on the sale
of consolidated cable television systems, which is reflected in
the EBITDA of the Companys Cable segment (Note 13).

For the year ended December 31, 2000, these
items included (i) a $50 million charge relating to the Six
Flags Entertainment Corporation (Six Flags)
litigation (Note 14), (ii) a net investment-related
gain of approximately $65 million, principally related to
additional proceeds received in 2000 in connection with the 1999
sale of an interest in CanalSatellite, a satellite television
platform servicing France and Monaco (Note 5), (iii) a
charge of approximately $35 million relating to a
restructuring of the Road Runner joint venture, originally
formed with AT&T to operate Time Warner Cables and
AT&Ts high-speed online businesses (Note 4) and
(iv) a non-cash charge of approximately $524 million
shown separately in the accompanying consolidated statement of
operations related to the cumulative effect of an accounting
change in connection with the adoption of a new film accounting
standard (Note 1).

2002 vs. 2001

Revenue, EBITDA and operating income
(loss) by business segment are as follows:

|                         |  |                         |        |            |  |               |        |         |  |         |       |         |  |   |       |   |  |   |        |   |  |   |      |  
|------------------------ |  | ----------------------- | ------ | ---------- |  | ------------- | ------ | ------- |  | ------- | ----- | ------- |  | - | ----- | - |  | - | ------ | - |  | - | ---- | -
|                         |  |                        
|                         |  | Year Ended December 31,
|                         |  |                        
|                         |  |                         |        |           
|                         |  |                         |        |            |  | Operating    
|                         |  | Revenues                |        | EBITDA(a)  |  | Income (Loss)
|                         |  |                         |        |            |  |              
|                         |  | 2002                    |        | 2001(b)(c) |  | 2002          |        | 2001(c) |  | 2002(d) |       | 2001(c)
|                         |  |                         |        |            |  |               |        |         |  |         |       |        
|                         |  |                        
|                         |  | (millions)             
|Cable(e)                 |  | $                       | 5,907  |            |  | $             | 4,983  |         |  | $       | 2,333 |         |  | $ | 2,191 |   |  | $ | (1,046 | ) |  | $ | (456 | )
|Filmed Entertainment     |  |                         | 7,682  |            |  |               | 6,889  |         |  |         | 844   |         |  |   | 691   |   |  |   | 637    |   |  |   | 219  |  
|Networks                 |  |                         | 3,413  |            |  |               | 3,024  |         |  |         | 849   |         |  |   | 703   |   |  |   | 811    |   |  |   | 291  |  
|Corporate                |  |                         |       |            |  |               |       |         |  |         | (84   | )       |  |   | (78   | ) |  |   | (94    | ) |  |   | (85  | )
|Intersegment elimination |  |                         | (577   | )          |  |               | (554   | )       |  |         |      |         |  |   |      |   |  |   |       |   |  |   |     |  
|                         |  |                         |        |            |  |               |        |         |  |         |       |         |  |   |       |   |  |   |        |   |  |   |      |  
|Total                    |  | $                       | 16,425 |            |  | $             | 14,342 |         |  | $       | 3,942 |         |  | $ | 3,507 |   |  | $ | 308    |   |  | $ | (31  | )
|                         |  |                         |        |            |  |               |        |         |  |         |       |         |  |   |       |   |  |   |        |   |  |   |      |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | EBITDA represents operating income
    (loss) before depreciation expense of $1.129 billion
    in 2002 and $870 million in 2001, amortization expense of
    $150 million in 2002 and $2.668 billion in 2001 and an
    impairment write-down related to goodwill of $2.355 billion
    in 2002.                                                                                          
|   
|(b) | Revenues reflect the provisions of
    EITF 01-14 that were adopted by the Company in the first
    quarter of 2002, which require retroactive restatement of 2001
    results to reflect the new accounting provisions. As a result,
    the impact of EITF 01-14 was to increase revenues and costs
    of the Cable segment by equal amounts of approximately
    $196 million for 2001.
|   
|(c) | The results for 2001 do not reflect the results
    of significant transactions in 2002, including the consolidation
    of Road Runner, or the adoption of FAS 142 on
    January 1, 2002.                                                                                                                                                                                                



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(d) | During 2002, the Company recognized a
    $2.355 billion non-cash charge relating to the impairment
    of goodwill at the Cable segment, which is recorded as a
    component of operating income (Note 1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(e) | As a result of Advance/Newhouse assuming
    responsibility for the day-to-day operations of the
    Advance/Newhouse Systems in 2002, the Cable segments
    results reflect the deconsolidation of the operating results of
    the Advance/Newhouse Systems for all periods presented. For
    2002, for the six months ended June 30, 2002 (e.g., the
    most recent reported period prior to the deconsolidation), the
    net impact of the deconsolidation of these systems was a
    reduction of the Cable segments previously reported
    revenues, EBITDA and operating income of $715 million,
    $333 million and $206 million, respectively. For 2001,
    the net impact of the deconsolidation of these systems was a
    reduction of the Cable segments revenues, EBITDA and
    operating income of $1.247 billion, $571 million and
    $313 million, respectively. In addition, the Cable
    segments EBITDA for 2002 includes a $6 million gain
    on the sale of consolidated cable television systems.

Consolidated Results

Revenues.Revenues increased to
$16.425 billion in 2002, compared to $14.342 billion
in 2001. The overall increase in revenues was driven by an
increase in Subscription revenues of 15% to $7.554 billion
and an

F-7



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


increase in Content and Other revenues of 17% to
$7.676 billion. Advertising and Commerce revenues of
$1.195 billion in 2002 were relatively flat.

As discussed more fully below, the increase in
Subscription revenues was principally due to increases in the
number of subscribers and in subscription rates at the Cable and
Networks segments, as well as the consolidation of Road Runner.
The increase in Content and Other revenues was principally due
to increased revenue at the Filmed Entertainment segment related
to improved international theatrical and worldwide home video
results. The flat Advertising and Commerce revenues reflected an
increase in advertising at the Networks and Cable segments,
offset by a decrease in commerce revenues at the Filmed
Entertainment segment, due to the closure of the Filmed
Entertainment Studio Stores.

Intersegment
Revenues.TWEs intersegment
revenues increased to $577 million in 2002 compared to
$554 million in 2001. Intersegment revenues principally
reflected film and television product sold by the Filmed
Entertainment segment to the Networks segment and the sale of
programming by the Networks segment to the Cable segment. Since
intersegment revenues are eliminated in consolidation, they do
not impact the Companys consolidated results.

EBITDA.TWEs EBITDA increased to $3.942 billion in 2002 from
$3.507 billion in 2001. The increase was principally a
result of an increase in EBITDA at the Companys business
segments, which is discussed in detail under Business
Segment Results, offset in part by an increase in
corporate expenses.

Depreciation
Expense.Depreciation expense
increased to $1.129 billion in 2002 from $870 million
in 2001 principally due to increases at the Cable segment
($1.018 billion in 2002 compared to $747 million in
2001). The increase in depreciation expense at the Cable segment
reflects higher levels of capital spending related to the
roll-out of digital services over the past three years resulting
in increased capital spending on customer premise equipment,
which is depreciated over a shorter useful life.

Amortization
Expense.Amortization expense
decreased to $150 million in 2002 from $2.668 billion
in 2001. The amortization expense in 2001 primarily reflected
amortization of goodwill and other intangible assets recorded in
the Merger. The decrease in amortization expense in 2002 was due
to the adoption of FAS 142, which resulted in goodwill and
certain intangible assets ceasing to be amortized.

Operating Income
(Loss).TWEs operating
income was $308 million in 2002 compared to an operating
loss of $31 million in 2001. The improvement in operating
income related to a decrease in amortization expense, due to the
adoption of FAS 142, and an increase in business segment
EBITDA, which is discussed in detail under Business
Segment Results, offset in part by a non-cash charge of
$2.355 billion to reduce the carrying value of goodwill, as
well as an increase in depreciation expense.

Interest Expense,
Net.Interest expense, net,
decreased to $401 million in 2002, from $530 million
in 2001, due principally to lower market interest rates and
lower average debt outstanding in 2002.

Other Expense,
Net.Other expense, net, increased
to $357 million in 2002 from $346 million in 2001,
principally due to pretax charges of $363 million to reduce
the carrying value of TWEs investments in certain
unconsolidated cable television joint ventures (Note 5) and
the absence in 2002 of gains on the sale of unconsolidated cable
systems, offset by a reduction of losses from equity method
investees, primarily related to reduced amortization associated
with the adoption of FAS 142.

Depending upon general market conditions and the
performance of individual investments in the TWEs
portfolio, the Company may be required in the future to record
additional non-cash charges to reduce the carrying value of
individual investments to their fair value for
other-than-temporary declines. Any such charges would be
unrelated to the Companys core operations and would be
recorded in other expense, net (Note 5). Excluding equity
method investees, as of December 31, 2002, the fair value
and carrying value of the Companys portfolio were
$158 million and $155 million, respectively.

F-8



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


Minority Interest Income
(Expense).AOL Time Warner had
$28 million of minority interest expense in 2002, compared
to $36 million of minority interest income in 2001.
Minority interest expense in 2002 primarily reflects the
adoption of FAS 142, which resulted in a reduction of
amortization expense at the Companys partially owned
consolidated investees, thereby resulting in an increase in the
minority interest expense, as more income is attributable to
minority partners.

Income Tax
Provision.As a U.S. partnership,
TWE is generally not subject to U.S. federal and state income
taxation. Income and withholding taxes of $157 million in
2002 and $127 million in 2001, have been provided for the
operations of TWEs domestic and foreign subsidiary
corporations.

Net Loss.TWEs net loss increased to $21.219 billion in 2002
compared to $1.032 billion in 2001. The 2002 results
reflect the $21.763 billion cumulative effect of an
accounting change, $1.179 billion gain on discontinued
operations and $2.355 billion charge to reduce the carrying
value of goodwill. In addition to the impact of these items,
TWEs 2002 results benefited from a reduction in
amortization expense, due to the adoption of FAS 142, and an
increase in EBITDA, offset in part by an increase in
depreciation expense.

Business Segment Results

Cable.Revenues increased 19% to $5.907 billion in 2002 compared
to $4.983 billion in 2001. EBITDA increased 6% to
$2.333 billion in 2002 from $2.191 billion in 2001.
Operating loss was $1.046 billion in 2002 compared to
$456 million in 2001.

Revenues increased due to a 18% increase in
Subscription revenues (from $4.530 billion to
$5.348 billion) and a 23% increase in Advertising and
Commerce revenues (from $453 million to $559 million).
The increase in Subscription revenues was due to higher basic
cable rates and increases in high-speed data services
subscribers, digital cable subscribers and basic cable
subscribers, as well as the impact of the consolidation of Road
Runner in 2002. In 2002, high-speed data subscribers managed by
TWE increased by 63% to 2.509 million, digital cable
subscribers managed by TWE increased by 36% to
3.747 million and basic cable subscribers increased by 1.3%
to 10.914 million. In addition, total customer
relationships, representing the number of customers managed by
TWE that receive at least one level of service, increased by 3%
to approximately 11.2 million as of December 31, 2002
compared to approximately 10.9 million as of
December 31, 2001 and revenue generating units,
representing the total of all analog video, digital video,
high-speed data and telephony customers, increased by 14% to
approximately 17.2 million in 2002 compared to
approximately 15.0 million in 2001. The Companys
subscriber amounts include subscribers at both consolidated
entities and investees accounted for under the equity method of
accounting, which are managed by the Company. High speed data
subscribers include residential subscribers, as well as
commercial and bulk (e.g., apartment buildings and universities)
subscribers. As of December 31, 2002, there were 2.426
million residential and bulk subscribers, and 83 thousand
commercial subscribers. Due to their nature, commercial and bulk
subscribers are charged at different amounts than residential
subscribers. If the number of commercial and bulk high-speed
data subscribers was equivalized (e.g., calculated by dividing
commercial and bulk high-speed data revenue by the average rate
charged to residential customers) the Companys total
high-speed data subscribers would have increased 65% to
2.613 million.

The increase in Advertising and Commerce revenues
was primarily related to an increase in the intercompany sale of
advertising to non-TWE business segments of AOL Time Warner
(from $37 million to $107 million), an increase in
advertising purchased by programming vendors to promote their
channels, including new channel launches (from $87 million
to $102 million) and a 6% increase in general third-party
advertising revenues. The Company expects intercompany
advertising revenue to be minimal in 2003. The Company also
expects advertising purchased by programming vendors to decline
by more than 70% in 2003 primarily due to fewer new channel
launches.

F-9



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


EBITDA increased principally as a result of the
revenue gains as well as a $6 million gain on the sale of
consolidated cable systems, offset in part by increases in
programming and other operating costs and the consolidation of
Road Runner in 2002. The increase in video programming costs of
over 20% relates to general programming rate increases across
both basic and digital services, the addition of new programming
services and higher basic and digital subscriber levels. Video
programming costs have risen in recent years and will continue
to rise, although at a lower rate than during 2002, primarily
due to the expiration of introductory and promotional periods
under programming affiliation agreements, the need to procure
additional quality programming for more extensive programming
packages, the migration of premium channels to the standard
tier, industry-wide programming cost increases (especially for
sports programming) and inflation-indexed or negotiated license
fees increases. Other operating costs increased as a result of
the roll out of new services and higher property taxes
associated with the upgrade of cable plants. The increase in
operating loss was due to the $2.355 billion goodwill
impairment charge and the increase in depreciation expense,
offset in part by an increase in EBITDA and a decrease in
amortization expense, due to the adoption of FAS 142. The
Company anticipates that EBITDA and operating income of the
Cable segment in 2003 will be negatively impacted by an
approximate $18 million increase in pension expense.

Filmed
Entertainment.Revenues increased
12% to $7.682 billion in 2002, compared to
$6.889 billion in 2001. EBITDA increased 22% to
$844 million in 2002, compared to $691 million in
2001. Operating income increased to $637 million in 2002,
compared to $219 million in 2001.

The increase in revenue was primarily related to
improved worldwide home video and international theatrical
results, offset in part by declines in television and reduced
commerce revenues related to the closure of its Studio Stores in
2001. The improved results reflect the worldwide theatrical
success of Harry Potter and the Chamber of Secrets, as
well as the worldwide home video and international theatrical
results of Harry Potter and the Sorcerers Stone,
Oceans Elevenand Scooby Doo: The Movie.

EBITDA increased primarily due to the revenue
increases, offset in part by higher theatrical film costs,
including higher advertising and distribution costs. Operating
income increased primarily due to the EBITDA increases and a
decrease in amortization expense due to the adoption of
FAS 142.

Networks.Revenues increased 13% to
$3.413 billion in 2002, compared to $3.024 billion in
2001. EBITDA increased 21% to $849 million in 2002 from
$703 million in 2001. Operating income increased to
$811 million, compared to $291 million in 2001.

Revenues grew primarily due to an increase in
Subscription revenues at HBO, an increase in Advertising and
Commerce revenues at The WB Network and an increase in
Content and Other revenues at HBO. EBITDA and operating income
increased due to improved results at HBO and The WB Network.

For HBO, Subscription revenues benefited from an
increase in the number of subscribers and higher rates. Content
and Other revenues benefited from higher home video sales of
HBOs original programming and higher licensing and
syndication revenue from the broadcast comedy series
Everybody Loves Raymond. For The WB Network, the increase
in Advertising and Commerce revenues was driven by higher
advertising rates.

For HBO, the increase in EBITDA was principally
due to the increase in revenues and reduced costs relating to
the finalization of certain licensing agreements, offset in part
by an allowance for doubtful accounts established on receivables
from Adelphia Communications, a major cable television operator,
higher write-offs of development costs and increased programming
costs. For The WB Network, the EBITDA increase was principally
due to higher Advertising and Commerce revenues, offset in part
by higher program license fees.

For HBO and The WB Network, the increase in
operating income was primarily due to an increase in EBITDA and
a decrease in amortization expense, due to the adoption of FAS
142.

F-10



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


2001 vs. 2000

Revenue, EBITDA and Operating income (loss) by
business segment are as follows:

|                         |  |                        |        |           |  |               |        |      |  |      |       |      |  |   |       |   |  |   |      |   |  |   |       |  
|------------------------ |  | ---------------------- | ------ | --------- |  | ------------- | ------ | ---- |  | ---- | ----- | ---- |  | - | ----- | - |  | - | ---- | - |  | - | ----- | -
|                         |  |                       
|                         |  | Year Ended December 31
|                         |  |                       
|                         |  |                        |        |          
|                         |  |                        |        |           |  | Operating    
|                         |  | Revenues               |        | EBITDA(a) |  | Income (Loss)
|                         |  |                        |        |           |  |              
|                         |  | 2001(b)                |        | 2000(b)   |  | 2001          |        | 2000 |  | 2001 |       | 2000
|                         |  |                        |        |           |  |               |        |      |  |      |       |     
|                         |  |                       
|                         |  | (millions)            
|Cable(c)                 |  | $                      | 4,983  |           |  | $             | 4,314  |      |  | $    | 2,191 |      |  | $ | 1,960 |   |  | $ | (456 | ) |  | $ | 951   |  
|Filmed Entertainment     |  |                        | 6,889  |           |  |               | 6,609  |      |  |      | 691   |      |  |   | 585   |   |  |   | 219  |   |  |   | 378   |  
|Networks                 |  |                        | 3,024  |           |  |               | 2,723  |      |  |      | 703   |      |  |   | 512   |   |  |   | 291  |   |  |   | 474   |  
|Corporate                |  |                        |       |           |  |               |       |      |  |      | (78   | )    |  |   | (75   | ) |  |   | (85  | ) |  |   | (81   | )
|Intersegment elimination |  |                        | (554   | )         |  |               | (468   | )    |  |      |      |      |  |   |      |   |  |   |     |   |  |   |      |  
|                         |  |                        |        |           |  |               |        |      |  |      |       |      |  |   |       |   |  |   |      |   |  |   |       |  
|Total                    |  | $                      | 14,342 |           |  | $             | 13,178 |      |  | $    | 3,507 |      |  | $ | 2,982 |   |  | $ | (31  | ) |  | $ | 1,722 |  
|                         |  |                        |        |           |  |               |        |      |  |      |       |      |  |   |       |   |  |   |      |   |  |   |       |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | EBITDA represents operating income
    (loss) before depreciation expense of $870 million in
    2001 and $757 million in 2000 and amortization expense of
    $2.668 billion in 2001 and $503 million in 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(b) | Revenues reflect the provisions of EITF 01-14
    that were adopted by the Company in the first quarter of 2002,
    which require retroactive restatement of 2001 and 2000 results
    to reflect the new accounting provisions. As a result, the
    impact of EITF 01-14 was to increase revenues and costs by
    equal amounts of $196 million in 2001 and $171 million
    in 2000.                                                                                                                                                                                                                                                                                                                                                                                          
|(c) | As a result of Advance/Newhouse assuming
    responsibility for the day-to-day operations of the
    Advance/Newhouse systems in 2002, the Cable segments
    results reflect the deconsolidation of the operating results of
    the Advance/Newhouse Systems for all periods presented. For
    2001, the net impact of the deconsolidation of these systems was
    a reduction of the Cable segments reported revenues,
    EBITDA and operating income of $1.247 billion,
    $571 million and $313 million, respectively. For 2000,
    the net impact of the deconsolidation of these systems was a
    reduction of the Cable segments previously reported
    revenues, EBITDA and operating income of $1.058 billion,
    $484 million and $256 million, respectively.

Consolidated Results

Revenues.TWEs revenues increased to
$14.342 billion in 2001 compared to $13.178 billion in
2000. This overall increase in revenues was driven by an
increase in subscription revenues of 12% to $6.591 billion,
an increase in content and other revenues of 7% to
$6.563 billion, and an increase in advertising and commerce
revenues of 4% to $1.188 billion.

As discussed more fully below, the increase in
Subscription revenues was principally due to an increase in the
number of subscribers and subscription rates at the Cable and
Networks segments. The increase in Advertising and Commerce
revenues was principally due to the increased advertising at the
Cable segment and The WB Network, partially offset by lower
Commerce revenues due to the absence of revenues from the Filmed
Entertainment Studio Stores operations, which the Company closed
in 2001. The increase in Content and Other revenues was
principally due to increased revenues at the Filmed
Entertainment segment related to the theatrical successes of
Harry Potter and the Sorcerers Stone, Oceans
Elevenand Cats & Dogs.

EBITDA.TWEs EBITDA increased to
$3.507 billion in 2001 from $2.982 billion in 2000. The
increase was principally a result of an increase in EBITDA at
the Companys business segments, which is discussed in
detail under Business Segment Results, offset in
part by a slight increase in corporate expenses.

Intersegment Revenues.TWEs intersegment revenues
increased to $554 million in 2001 compared to $468 million
in 2000. Intersegment revenues principally reflected film and
television product sold by the Filmed Entertainment segment to
the Networks segment and the sale of programming by the
Networks segment to the Cable segment. Since Intersegment
revenues are eliminated in consolidation, they do not impact the
Companys consolidated results.

Depreciation Expense.Depreciation expense increased to
$870 million in 2001 from $757 million in 2000. The
increase in depreciation expense of $113 million primarily
relates to an increase at the Cable segment due

F-11



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


to higher levels of capital spending related to
the rollout of digital services over the last several years and
increased capital spending on equipment that varies with the
number of new subscribers and is depreciated over a shorter life.

Amortization Expense.Amortization expense increased to
$2.668 billion in 2001 from $503 million in 2000. The
increase in amortization expense primarily relates to goodwill
and other intangible assets recorded in the Merger.

Operating Income (Loss).TWEs operating loss was
$31 million in 2001, compared to operating income of
$1.722 billion in 2000. The decrease primarily related to
an increase in both depreciation and amortization expense, which
is discussed above, offset in part by an increase in EBITDA.

Interest Expense, Net.Interest expense, net, decreased
to $530 million in 2001, from $612 million in 2000,
principally due to lower market interest rates in 2001.

Other Expense, Net.Other expense, net, increased to
$346 million in 2001 from $228 million in 2000 due
primarily to higher losses from equity method investees, related
to the amortization of goodwill included in the carrying value
of such investments, which resulted from the Merger, offset in
part by gains on the sale of unconsolidated cable television
systems in 2001.

Minority Interest Income.Minority interest income decreased
to $36 million in 2001, compared to $82 million in 2000.
Minority interest income decreased principally due to the higher
allocation of losses in 2000 to a minority partner in The
WB Network.

Income Tax Provision.As a U.S. partnership, TWE is
generally not subject to U.S. federal and state income
taxation. Income and withholding taxes of $127 million in
2001 and $157 million in 2000 have been provided for the
operations of TWEs domestic and foreign subsidiary
corporations.

Net Income (Loss).TWEs net loss was
$1.032 billion in 2001, compared to net income of
$229 million in 2000. The decrease was primarily due to
higher depreciation and amortization expense, offset in part by
an increase in business segment EBITDA and the absence in 2001
of the cumulative effect of an accounting change recognized in
2000.

Business Segment Results

Cable.Revenues increased to
$4.983 billion in 2001, compared to $4.314 billion in 2000.
EBITDA increased to $2.191 billion in 2001 from
$1.960 billion in 2000. Operating loss was
$456 million in 2001, compared to operating income of
$951 million in 2000.

Revenues increased due to a 14% increase in
Subscription revenues (from $3.975 billion to
$4.530 billion) and a 34% increase in Advertising and
Commerce revenues (from $339 million to $453 million).
The increase in Subscription revenues was due to higher basic
cable rates, an increase in subscribers to high-speed online
services, an increase in digital cable subscribers and to a
lesser degree a marginal increase in basic cable subscribers.
The increase in Advertising and Commerce revenues was primarily
related to advertising purchased by programming vendors to
promote their channel launches, the sale of advertising to other
non-TWE business segments of AOL Time Warner and a general
increase in advertising sales.

EBITDA increased principally as a result of the
revenue gains and improved margins related to the high-speed
online services, offset in part by a greater than 20% increase
in programming costs related to general programming rate
increases across both the basic and digital services and the
roll-out of digital services, including the addition of new
channels that are available only in the digital service. The
decrease in operating income primarily relates to an increase in
depreciation and amortization expense, offset in part by an
increase in EBITDA.

F-12



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


Filmed Entertainment.Revenues increased to
$6.889 billion in 2001, compared to $6.609 billion in
2000. EBITDA increased to $691 million in 2001 from
$585 million in 2000. Operating income decreased to
$219 million in 2001, compared to $378 million in 2000.

Revenues increased related to the theatrical
successes of Harry Potter and the Sorcerers Stone,
Oceans Elevenand Cats & Dogs. Revenues
also benefited from the increased domestic distribution of
theatrical product, principally due to higher DVD sales, and
syndication revenues to broadcast Friends. This benefit
was offset in part by lower revenues in Warner Bros.
retail operations, related to the closure of its Studio Stores.
EBITDA increased principally due to the increased revenues,
reduced losses from the closure of the Studio Store operations
and reduced expenses for online development, offset in part by
higher film costs, including higher advertising and distribution
costs, because of an increase in the performance, number and
timing of new theatrical releases in comparison to the prior
year. Operating income decreased principally due to an increase
in amortization expense, offset in part by an increase in EBITDA.

Networks.Revenues increased to
$3.024 billion in 2001, compared to $2.723 billion in
2000. EBITDA increased to $703 million in 2001 from $512
million in 2000. Operating income decreased to $291 million
in 2001, compared to $474 million in 2000.

Revenues grew primarily due to an increase in
Subscription revenues and an increase in Content and Other
revenues at HBO and an increase in Advertising and Commerce
revenues at The WB Network. For HBO, Subscription revenues
benefited from an increase in the number of subscribers and
higher rates. Content and Other revenues benefited from higher
home video sales of HBOs original programming. For The WB
Network, the increase in Advertising and Commerce revenues was
driven by increased advertising rates and ratings in key
demographic groups. For HBO, the increase in EBITDA was
principally due to the increase in revenues and increased cost
savings from HBOs overhead cost management program. For
The WB Network, the EBITDA improvement was principally due
to the increase in Advertising and Commerce revenues. Operating
income decreased principally due to an increase in amortization
expense, offset in part by an increase in EBITDA.




FINANCIAL CONDITION AND LIQUIDITY

December 31, 2002

Current Financial Condition

At December 31, 2002, TWE had approximately
$7.0 billion of debt, $1.0 billion of cash and
equivalents (net debt of approximately $6.0 billion,
defined as total debt less equivalents) and $37.1 billion
of partners capital. This compares to approximately
$8.1 billion of debt, $250 million of cash and
equivalents (net debt of approximately $7.8 billion) and
$65.4 billion of partners capital at
December 31, 2001.

In January 2003, pursuant to a previously
negotiated agreement and as previously disclosed, TWE acquired
an additional 11% interest in The WB Network from certain
executives of The WB Network, for $128 million in
cash. The Company also made cash contributions to its defined
benefit pension plan of $42 million in January 2003.

As discussed in more detail below, management
believes that TWEs operating cash flow, cash and
equivalents, borrowing capacity under its credit agreements,
including agreements with AOL Time Warner and availability under
its commercial paper program, are sufficient to fund its capital
and liquidity needs for the foreseeable future.

F-13



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


Cash Flows

Operating Activities

TWEs cash provided by operating activities
amounted to $4.012 billion in 2002 compared to
$2.585 billion in 2001. The growth in cash flows from
operations related to a $829 million improvement in working
capital, an increase of $435 million in EBITDA and a
reduction in both taxes and interest paid. The improvements in
working capital are related to reduced working capital needs in
the current period compared to increased working capital needs
in the prior period. Working capital needs are subject to wide
fluctuations based on the timing of cash transactions related to
production schedules, the acquisition of programming, collection
of sales proceeds and other similar items. The current period
benefits may reverse in future periods.

Cash provided by operations of
$4.012 billion in 2002 reflected $3.942 billion of
EBITDA, less $381 million of net interest payments and
$153 million of net taxes paid. Cash flow from operations
also reflects a reduction in other working capital requirements
of $604 million.

Cash provided by operations of
$2.585 billion in 2001 reflected $3.507 billion of
EBITDA, less $527 million of net interest payments and
$170 million of net taxes paid. Cash flow from operations
also reflects an increase in other working capital requirements
of $225 million.

Investing Activities

Cash used by investing activities was
$2.107 billion in 2002, compared to $2.908 billion
2001. The decrease principally resulted from a decrease in cash
used for acquisitions and investments, primarily related to
reduced cash payments made in connection with funding of equity
method investments.

Cash used by investing activities of
$2.107 billion in 2002 reflected $297 million of cash
used for acquisitions and investments and $1.895 billion of
total capital expenditures, offset in part by $85 million
of proceeds received from the sale of investments.

Cash used by investing activities of
$2.908 billion in 2001 reflected $931 million of cash used
for acquisitions and investments and $2.012 billion of
total capital expenditures, offset in part by $35 million
of proceeds received from the sale of investments.

Financing Activities

Cash used by financing activities was
$1.143 billion in 2002, compared to cash provided by
financing activities of $267 million in 2001. The increase
in cash used in financing activities in 2002 primarily resulted
from net payments made on borrowings in 2002, compared to net
borrowings in 2001, and an increase in total distributions.

Cash used by financing activities was
$1.143 billion in 2002 primarily reflected net incremental
debt repayments of $589 million and $538 million of
total capital and other distributions.

Cash provided by financing activities of
$267 million in 2001 primarily reflected net incremental
borrowings of $685 million and $418 million of capital
and other distributions.

Capital Expenditures

TWEs overall capital spending for 2002 was
$1.895 billion, a decrease of $117 million from
capital spending in 2001 of $2.012 billion. Capital
expenditures from continuing operations were $1.689 billion
in 2002 compared to $1.604 billion in 2001. TWEs
total capital spending and the increase in capital spending from
continuing operations is due principally to the Cable segment.
Over the past three years, the Cable segment has been engaged in
a plan to upgrade the technological capability and reliability
of its cable

F-14



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


television systems and develop new services,
which management believes will position the business for
sustained, long-term growth. Capital spending by the Cable
segment from continuing operations was $1.555 billion in
2002, compared to $1.467 billion in 2001. The Company has
essentially completed such upgrades and therefore anticipates a
decrease in capital expenditures at the Cable segment in 2003.

$10 Billion Revolving Credit
Facilities

In July 2002, AOL Time Warner, together with
certain of its consolidated subsidiaries, entered into two new
senior unsecured long-term revolving bank credit agreements with
an aggregate borrowing capacity of $10 billion (the
2002 Credit Agreements) and terminated two existing
bank credit facilities with an aggregate borrowing capacity of
$12.5 billion (the Old Credit Agreements),
which were scheduled to expire during 2002. The 2002 Credit
Agreements are comprised of a $6 billion five-year
revolving credit facility and a $4 billion 364-day
revolving credit facility, borrowings under which may be
extended for a period up to two years following the initial
term. The borrowers under the 2002 Credit Agreements are AOL
Time Warner, TWE, TWE-A/N and AOL Time Warner Finance Ireland.
The obligations of each of AOL Time Warner and AOL Time Warner
Finance Ireland are guaranteed by America Online, Time Warner,
Turner Broadcasting System, Inc. (TBS) and Time
Warner Companies, Inc. (TW Companies), directly
or indirectly. The obligation of AOL Time Warner Finance Ireland
is guaranteed by AOL Time Warner. Borrowings bear interest at
specific rates, generally based on the credit rating for each of
the borrowers, which is currently equal to LIBOR plus .625%,
including facility fees of .10% and .125% on the total
commitments of the 364-day and five-year facilities,
respectively. In addition, the Company is required to pay an
additional usage fee of .0625% if the two facilities in the
aggregate have more than 33% outstanding and .125% if the
facilities have more than 66% outstanding. The 2002 Credit
Agreements provide same-day funding, multi-currency capability
and letter of credit availability. They contain a maximum
leverage ratio covenant of 5.0 times for each of TWE and
TWE-A/N, but do not contain any credit ratings-based defaults or
covenants, nor an ongoing covenant or representation
specifically relating to a material adverse change in the
Companys financial condition or results of operations.
Borrowings may be used for general business purposes and unused
credit is available to support commercial paper borrowings. As
of December 31, 2002, $1.458 billion was outstanding
under these facilities. As of December 31, 2001,
$2.290 billion was outstanding under the Old Credit
Agreements.

In January 2003, the Company received unanimous
approval to amend its 2002 Credit Agreements, effective upon
closing of the TWE restructuring. The amendments will
(i) replace the $50 billion net worth covenant in each
of the credit facilities within the 2002 Credit Agreements with
an interest coverage covenant of 2.0 times cash interest
expense, (ii) remove TWE-A/N as a borrower under all the
credit facilities and TWE as a borrower under the five-year
revolving credit facility and (iii) divide the
$4 billion 364-day revolving credit facility into a
separate $2.5 billion revolving credit facility for AOL
Time Warner and AOL Time Warner Finance Ireland and a
$1.5 billion revolving credit facility for TWE (and TWC
Inc. following any initial public offering of its stock or
registered public issuance of its debt). Other terms of the
364-day credit facility were amended to reflect this bifurcation
and the stand-alone nature of the $1.5 billion TWE credit
facility. As part of the same consent, the maturity of the
$1.5 billion TWE credit facility was extended from
July 7, 2003 to January 7, 2004, while the length of
the optional extension period was reduced from two years to one
year.

Outstanding Debt and Other Financing
Arrangements

Outstanding Debt and Available Financial
Capacity

At December 31, 2002, TWE had total
committed capacity, defined as maximum available borrowings
under existing debt arrangements and cash and short-term
investments, of $16.298 billion. Of this committed
capacity, $6.645 billion was available to fund future
contractual obligations and approximately $6.955 billion

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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


was outstanding as debt (Note 7). At
December 31, 2002, total committed capacity, unused
capacity and outstanding debt were as follows:

|                                                           |       |            |        |          |  |             |       |       |  |   |       |       | 
|---------------------------------------------------------- | ----- | ---------- | ------ | -------- |  | ----------- | ----- | ----- |  | - | ----- | ----- | 
|                                                           |       | Committed  |        | Unused   |  | Outstanding
|                                                           |       | Capacity   |        | Capacity |  | Debt       
|                                                           |       |            |        |          |  |            
|                                                           |       |           
|                                                           |       | (millions)
|Bank credit agreement and commercial paper
    programs(a) |       | $          | 10,801 |          |  | $           | 6,645 |       |  | $ | 1,458 |      
|Fixed-rate public debt                                     |       |            | 3,394  |          |  |             |      |       |  |   | 3,394 |      
|Due to AOL Time Warner                                     |       |            | 2,084  |          |  |             |      |       |  |   | 2,084 |      
|Other fixed-rate obligations(b)                            |       |            | 19     |          |  |             |      |       |  |   | 19    |      
|                                                           |       |            |        |          |  |             |       |       |  |   |       |      
|                                                           | Total |            | $      | 16,298   |  |             | $     | 6,645 |  |   | $     | 6,955 | 
|                                                           |       |            |        |          |  |             |       |       |  |   |       |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | A portion of bank credit agreement and commercial
    paper programs committed capacity can be used by non-TWE,
    AOL Time Warner segments. At December 31, 2002,
    $2.7 billion of committed capacity was used by non-TWE
    segments. Committed capacity and unused capacity also includes
    cash and short- term investments of approximately
    $1 billion less $211 million of outstanding letters of
    credit.
|(b) | Includes debt due within one year of
    $8 million.                                                                                                                                                                                                                                                                                                                                                                           

Other Financing Arrangements

From time to time, TWE enters into various other
financing arrangements with special purpose entities
(SPEs). These arrangements include facilities which
provide for the accelerated receipt of cash on certain accounts
receivable and backlog licensing contracts. TWE employs these
arrangements because they provide a cost-efficient form of
financing, as well as an added level of diversification of
funding sources. TWE is able to realize cost efficiencies under
these arrangements since the assets securing the financing are
held by a legally separate, bankruptcy-remote SPE, and provides
direct security for the funding being provided. These facilities
generally have relatively short-term maturities (1 to
5 years), which is taken into account in determining the
maximum efficiency for the Companys overall capital
structure. The Companys maturity profile of its
outstanding debt and other financing arrangements is relatively
long-term, with a weighted average maturity of approximately
10 years. The assets and financing associated with these
arrangements generally qualify for off-balance sheet treatment
(Note 7).

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

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



---



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

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

F-16



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


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

Rating Triggers and Financial
Covenants

Each of the Companys bank credit agreements
and financing arrangements with SPEs, contain customary
covenants. A breach of such covenants in the bank credit
agreements that continues beyond any grace period can constitute
a default, which can limit the ability to borrow and can give
rise to a right of the lenders to terminate the facility and/or
require immediate payment of any outstanding debt. A breach of
such covenants in the financing arrangements with SPEs that
continues beyond any grace period can constitute a termination
event which can limit the facility as a future source of
liquidity; however, there would be no claims on the Company for
the receivables or backlog contracts previously sold.
Additionally, in the event that the Companys credit
ratings decrease, the cost of maintaining the bank credit
agreements and facilities and of borrowing increases and,
conversely, if the ratings improve, such costs decrease.

As of December 31, 2002 and through the date
of this filing, the Company was in compliance with all
covenants. Management does not foresee that the Company will
have any difficulty complying with the covenants currently in
place in the foreseeable future. As discussed in more detail in
Note 1 to the accompanying consolidated financial
statements, the Company took a one-time, non-cash charge of
$21.763 billion upon adoption FAS 142. In addition,
TWE took a non-cash charge of $2.355 billion in the fourth
quarter of 2002 to reduce the carrying value of goodwill and
other intangible assets. This charge did not result in a
violation of any of the Companys covenants.

During 2003, the Company received unanimous
consent from its bank group to amend its 2002 Credit Facilities.
The amendment will, among other changes, replace the
Companys covenant to maintain at least $50 billion of
GAAP net worth with an interest coverage covenant of 2.0 times
cash interest expense. The amendment will be effective upon the
closing of the TWE restructuring.



| |                                  
| | ---------------------------------
| | Contractual and Other Obligations



| |                 
| | ----------------
| | Firm Commitments

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

F-17



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


The following table summarizes separately the
Companys material firm commitments at December 31,
2002 and the timing and effect that such obligations are
expected to have on the Companys liquidity and cash flow
in future periods. In addition, the table reflects the timing of
principal payments on outstanding debt, which has been
previously discussed under Outstanding Debt and Available
Financial Capacity. The Company expects to fund the firm
commitments with operating cash flow generated in the normal
course of business.

|                                      |                                               |            |       |           |  |                |       |       |  |   |       |        |  |   |        |        | 
|------------------------------------- | --------------------------------------------- | ---------- | ----- | --------- |  | -------------- | ----- | ----- |  | - | ----- | ------ |  | - | ------ | ------ | 
|                                      |                                               |            |       |           |  | 2007           |       |      
|Firm Commitments and Outstanding Debt |                                               | 2003       |       | 2004-2006 |  | and thereafter |       | Total
|                                      |                                               |            |       |           |  |                |       |      
|                                      |                                               |           
|                                      |                                               | (millions)
|Programming and production deals      |                                               | $          | 2,178 |           |  | $              | 5,076 |       |  | $ | 5,455 |        |  | $ | 12,709 |       
|Operating leases                      |                                               |            | 144   |           |  |                | 388   |       |  |   | 947   |        |  |   | 1,479  |       
|Other firm commitments                |                                               |            | 163   |           |  |                | 57    |       |  |   | 10    |        |  |   | 230    |       
|                                      |                                               |            |       |           |  |                |       |       |  |   |       |        |  |   |        |       
|                                      | Total firm commitments                        |            | $     | 2,485     |  |                | $     | 5,521 |  |   | $     | 6,412  |  |   | $      | 14,418 | 
|                                      | Total principal outstanding on long-term debt |            |       |          |  |                |       | 2,370 |  |   |       | 4,367  |  |   |        | 6,737  | 
|                                      |                                               |            |       |           |  |                |       |       |  |   |       |        |  |   |        |       
|                                      | Total firm commitments and outstanding debt   |            | $     | 2,485     |  |                | $     | 7,891 |  |   | $     | 10,779 |  |   | $      | 21,155 | 
|                                      |                                               |            |       |           |  |                |       |       |  |   |       |        |  |   |        |       

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Networks segment (HBO and The WB Network)
    enters into agreements with movie studios to air movies they
    produce. In addition, the Cable segment enters into commitments
    to purchase programming from cable network providers to provide
    service to its subscribers (e.g. programming deals). The
    commitments represent an estimate of future programming costs
    based on per subscriber rates contained in contracts existing as
    of December 31, 2002 applied to the number of consolidated
    subscribers on that date. Such amounts are subject to
    variability based on changes in the number of future
    subscribers, the extension of existing contracts, and the
    entering into of new contracts. These arrangements are
    collectively referred to as programming and production deals.
|
| |  | Operating lease obligations primarily relate to
    the minimum lease rental obligations for the Companys real
    estate and operating equipment in various locations around the
    world.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Other firm commitments include obligations to
    actors and directors. In addition, other firm commitments
    includes a payment of $128 million made in January 2003 to
    acquire an additional 11% interest in The WB Network.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



| |                       
| | ----------------------
| | Contingent Commitments

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

The following table summarizes separately the
Companys contingent commitments at December 31, 2002.
The timing of amounts presented in the table represents when the
maximum contingent commitment

F-18



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


will expire and does not necessarily mean that
the Company expects to incur an obligation to make any payments
during that timeframe.

|                                                   |                              |             |       |                           |  |           |    |                |  |   |     |     |  |   |       |       | 
|-------------------------------------------------- | ---------------------------- | ----------- | ----- | ------------------------- |  | --------- | -- | -------------- |  | - | --- | --- |  | - | ----- | ----- | 
|                                                   |                              |             |       |                          
|                                                   |                              |             |       | Expiration of Commitments
|                                                   |                              |             |       |                          
|                                                   |                              | Total       |       |                           |  | 2007     
|Nature of Contingent Commitments                   |                              | Commitments |       | 2003                      |  | 2004-2006 |    | and thereafter
|                                                   |                              |             |       |                           |  |           |    |               
|                                                   |                              |            
|                                                   |                              | (millions) 
|Guarantees                                         |                              | $           | 2,637 |                           |  | $         | 62 |                |  | $ | 444 |     |  | $ | 2,131 |      
|Letters of credit and other contingent commitments |                              |             | 170   |                           |  |           | 8  |                |  |   | 1   |     |  |   | 161   |      
|                                                   |                              |             |       |                           |  |           |    |                |  |   |     |     |  |   |       |      
|                                                   | Total contingent commitments |             | $     | 2,807                     |  |           | $  | 70             |  |   | $   | 445 |  |   | $     | 2,292 | 
|                                                   |                              |             |       |                           |  |           |    |                |  |   |     |     |  |   |       |      

Following is a description of the Companys
contingent commitments at December 31, 2002:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Guarantees include guarantees the Company has
    provided on certain lease and operating commitments entered into
    by formerly owned entities and joint ventures in which TWE is a
    venture partner.                                                                                                                                                                                                                                                                                                   
|
| |  | The Cable segment provides letters of credit for
    several of its joint ventures. Should these joint ventures
    default on their debts, TWE would be obligated to cover these
    costs to the extent of the letters of credit. In addition, the
    Company provides for letters of credit and surety bonds related
    to insurance premiums and the Cable segment provides for letters
    of credit and surety bonds that are required by certain local
    governments when cable is being installed.



| |           
| | ----------
| | 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 are not expected to
have a material impact on the Companys consolidated
financial statements. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods
ending after December 15, 2002; therefore, the Company has
modified its disclosures herein as required.



| |                          
| | -------------------------
| | Equity Method Investments

Except as otherwise discussed above, TWE does not
guarantee the debt of any of its investments accounted for using
the equity method of accounting. However, for certain of these
investments, TWE may continue to provide funding in excess of
amounts currently invested.



| |                             
| | ----------------------------
| | 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 Warner
Bros. was approximately $3.2 billion at December 31,
2002, compared to approximately $3.5 billion at
December 31, 2001 (including amounts relating to the
licensing of film product to TWEs Networks segment of
approximately $405 million at December 31, 2002 and
approximately $433 million at December 31, 2001).

Because backlog generally relates to contracts
for the licensing of theatrical and television product which
have already been produced, the recognition of revenue for such
completed product is principally only

F-19



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


dependent upon the commencement of the
availability period for telecast under the terms of the related
licensing agreement. Cash licensing fees are collected
periodically over the term of the related licensing agreements
or, as referenced above and discussed in more detail in Note 7
to the accompanying consolidated financial statements, on an
accelerated basis using a $500 million securitization
facility. The portion of backlog for which cash has not already
been received has significant off-balance sheet asset value as a
source of future funding. Of the approximately $3.2 billion
of backlog relating to Warner Bros. as of December 31,
2002, TWE has recorded $694 million of deferred revenue on
the accompanying consolidated balance sheet, representing cash
received through the utilization of the securitization facility
and other advanced payments. The backlog excludes filmed
entertainment advertising barter contracts, which are also
expected to result in the future realization of revenues and
cash through the sale of advertising spots received under such
contracts.

MARKET RISK MANAGEMENT

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



| |                   
| | ------------------
| | Interest Rate Risk

TWE has entered into variable-rate debt that, at
December 31, 2002, had an outstanding balance of
approximately $1.458 billion. Based on TWEs
variable-rate obligations outstanding at December 31, 2001,
each 25 basis point increase or decrease in the level of
interest rates would, respectively, increase or decrease
TWEs annual interest expense and related cash payments by
approximately $4 million. Such potential increases or
decreases are based on certain simplifying assumptions,
including a constant level of variable-rate debt for all
maturities and an immediate, across-the-board increase or
decrease in the level of interest rates with no other subsequent
changes for the remainder of the period.

TWE has entered into fixed-rate public debt that,
at December 31, 2002, had an outstanding balance of
approximately $3.394 billion and a fair value of
$3.610 billion. Based on TWEs fixed-rate debt
obligations outstanding at December 31, 2001, a 25 basis
point increase or decrease in the level of interest rates would
decrease or increase the fair value of the fixed-rate debt by
approximately $8 million. Such potential increases or
decreases are based on certain simplifying assumptions,
including a constant level and rate of fixed-rate debt for all
securities and an immediate across-the-board increase or
decrease in the level of interest rates with no other subsequent
changes for the remainder of the period.



| |                      
| | ---------------------
| | Foreign Currency Risk

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

F-20



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


ber 31, 2002, AOL Time Warner had contracts
for the sale of $1.588 billion and the purchase of $1.341
billion of foreign currencies at fixed rates. Of AOL Time
Warners $247 million net sale contract position,
$811 million of foreign currency exchange sale contracts
and $732 million of the foreign exchange purchase contracts
related to TWEs foreign currency exposure, including net
contracts for the sale of $73 million Canadian dollars,
$65 million of Japanese yen and $176 million of
European currency and for the purchase of $203 million of
the British pound. At December 31, 2001, TWE had contracts
for the sale of $320 million and the purchase of
$130 million of foreign currencies at fixed rates at
December 31, 2001.

Based on AOL Time Warners outstanding
foreign exchange contracts related to TWEs exposure at
December 31, 2002, each 5% devaluation of the U.S. dollar
as compared to the level of foreign exchange rates for
currencies under contract at December 31, 2002 would result
in approximately $4 million of net unrealized losses on
foreign exchange contracts. Conversely, a 5% appreciation of the
U.S. dollar as compared to the level of foreign exchange rates
for currencies under contract at December 31, 2002 would
result in $4 million of net unrealized gains on contracts.
Consistent with the nature of the economic hedge provided by
such foreign exchange contracts, such unrealized gains or losses
largely would be offset by corresponding decreases or increases,
respectively, in the dollar value of future foreign currency
license fee payments that would be received in cash within the
hedging period from the sale of U.S. copyrighted products abroad.

Equity Risk

The Company is exposed to market risk as it
relates to changes in market value of its investments. The
Company invests in equity instruments of public and private
companies for operational and strategic business purposes, many
of which are Internet and technology companies. These securities
are subject to significant fluctuations in fair market value due
to volatility of the stock market and the industries in which
the companies operate. These securities, which are classified in
Investments, including available-for-sale securities
on the accompanying consolidated balance sheet, include
equity-method investments, investments in private securities,
available-for-sale securities, restricted securities and equity
derivative instruments. As of December 31, 2002, the
Company had $16 million of cost-method investments,
primarily relating to private equity securities,
$142 million of fair value investments, including
$141 million of investments in public equity securities
held for purposes other than trading and $1 million of
equity derivative instruments, and $2.345 billion of
investments accounted for using the equity method of accounting.




CRITICAL ACCOUNTING POLICIES

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

Accounting for Goodwill and Other Intangible
Assets

During 2001, the FASB issued FAS 142, which
requires that, effective January 1, 2002, goodwill,
including the goodwill included in the carrying value of
investments accounted for using the equity method of accounting,
and certain other intangible assets deemed to have an indefinite
useful life, cease amortizing. FAS 142 requires that
goodwill and certain intangible assets be assessed for
impairment using fair value measurement techniques.
Specifically, goodwill impairment is determined using a two-step
process. The first step of the goodwill impairment test is used
to identify potential impairment by comparing the fair value of a

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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


reporting unit (generally, the Companys
operating segment) with its net book value (or carrying amount),
including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is
considered not impaired and the second step of the impairment
test is unnecessary. If the carrying amount of a reporting unit
exceeds its fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment
loss, if any. The second step of the goodwill impairment test
compares the implied fair value of the reporting units
goodwill with the carrying amount of that goodwill. If the
carrying amount of the reporting units goodwill exceeds
the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess. The implied fair
value of goodwill is determined in the same manner as the amount
of goodwill recognized in a business combination. That is, the
fair value of the reporting unit is allocated to all of the
assets and liabilities of that unit (including any unrecognized
intangible assets) as if the reporting unit had been acquired in
a business combination and the fair value of the reporting unit
was the purchase price paid to acquire the reporting unit. The
impairment test for other intangible assets consists of a
comparison of the fair value of the intangible asset with its
carrying value. If the carrying value of the intangible asset
exceeds its fair value, an impairment loss is recognized in an
amount equal to that excess.

Determining the fair value of a reporting unit
under first step of the goodwill impairment test and determining
the fair value of individual assets and liabilities of a
reporting unit (including unrecognized intangible assets) under
the second step of the goodwill impairment test is judgmental in
nature and often involves the use of significant estimates and
assumptions. Similarly, estimates and assumptions are used in
determining the fair value of other intangible assets. These
estimates and assumptions could have a significant impact on
whether or not an impairment charge is recognized and also the
magnitude of any such charge. To assist in the process of
determining goodwill impairment, the Company obtains appraisals
from independent valuation firms. In addition to the use of
independent valuation firms, the Company performs internal
analyses and considers other market information that is publicly
available. Estimates of fair value are primarily determined
using discounted cash flows and market comparisons and recent
transactions. These approaches use significant estimates and
assumptions including projected future cash flows (including
timing), discount rate reflecting the risk inherent in future
cash flows, perpetual growth rate, determination of appropriate
market comparables and the determination of whether a premium or
discount should be applied to comparables.

During the first quarter of 2002, upon adoption
of FAS 142, the Company completed its initial impairment review
and recorded a $21.763 billion non-cash pre-tax charge for
the impairment of goodwill, substantially all of which was
generated in the Merger. During the fourth quarter of 2002, the
Company performed its annual impairment review and recorded an
additional $2.355 billion charge to reduce the carrying value of
goodwill. The $21.763 billion charge is reflected as a
cumulative effect of an accounting change and the
$2.355 billion charge is reflected as a component of
operating income in the accompanying consolidated statement of
operations.

As previously discussed, the TWEs
$2.355 billion goodwill impairment charge recognized in the
fourth quarter of 2002, reflected the fair value of the
Companys operating divisions as of December 31, 2002.
As

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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


encouraged by FRR 60, the following table
illustrates the hypothetical goodwill impairment charge assuming
both an increase and decrease in the fair value of each of the
Companys operating divisions by 10%.

|                     |  |                        |       |                   |  |                        |       |  |  |   |       | 
|-------------------- |  | ---------------------- | ----- | ----------------- |  | ---------------------- | ----- |  |  | - | ----- | 
|                     |  | Assuming 10%           |       | Actual 4thQuarter |  | Assuming 10%          
|                     |  | Increase in Fair Value |       | Impairment Charge |  | Decrease in Fair Value
|                     |  |                        |       |                   |  |                       
|                     |  |                       
|                     |  | (millions)            
|Cable(a)             |  | $                      | 2,355 |                   |  | $                      | 2,355 |  |  | $ | 2,355 | 
|Filmed Entertainment |  |                        |      |                   |  |                        |      |  |  |   |      | 
|Networks             |  |                        |      |                   |  |                        |      |  |  |   | 369   | 
|                     |  |                        |       |                   |  |                        |       |  |  |   |       | 
|Total                |  | $                      | 2,355 |                   |  | $                      | 2,355 |  |  | $ | 2,724 | 
|                     |  |                        |       |                   |  |                        |       |  |  |   |       | 



---



|    |                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Assuming a decline in fair value of 10% would not
    impact the amount of goodwill impairment because the carrying
    amount of goodwill was reduced to zero as a result of the actual
    fourth quarter impairment charge. The analysis does not consider
    any potential impairments relating to indefinite lived
    intangibles.

Investments

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

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

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

While TWE has recognized all declines that are
believed to be other-than-temporary, which were not material in
2002, it is reasonably possible that individual investments in
the Companys portfolio may experience an
other-than-temporary decline in value in the future if the
underlying investee experiences poor operating results or the
U.S. equity markets experience future broad declines in value.

F-23



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


Revenue and Cost Recognition

There are two areas related to revenue and cost
recognition which incorporate significant judgment and estimates
by management  the accounting for multiple-element
arrangements and the amortization of film costs resulting from
the determination of revenue ultimates under the film accounting
rules.

Multiple-Element Transactions

Multiple-Element transactions within TWE fall
broadly into two categories:



|   |                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | Contemporaneous purchases and sales. In these
    transactions, TWE is selling a product or service to a customer
    and at the same time purchasing goods or services from that
    customer or making an investment in the customer;
|  
|2. | Sales of multiple products or services. In these
    transactions, TWE is selling multiple products or services to a
    counterparty.                                                                                                 

Contemporaneous Purchases and Sales

In the normal course of business, TWE enters into
transactions where it is purchasing a product, service or making
an investment in a vendor and at the same time it is negotiating
a contract for the sale of advertising to the vendor. For
example, when negotiating programming arrangements with cable
networks, TWE will, at times, simultaneously negotiate for the
sale of advertising to the cable network. This arrangement may
be documented in one contract or may be documented in two
separate contracts; whether there are one or two contracts,
these arrangements are negotiated simultaneously. In accounting
for these arrangements, TWE looks to the guidance contained in
the following authoritative literature:



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | APB Opinion No. 29, Accounting for
    Nonmonetary Transactions (APB 29); and                 
| |  | EITF 01-09, Accounting for
    Consideration Given by a Vendor to a Customer
    (EITF 01-09).

TWE measures these transactions based on the
respective fair values of the goods or services purchased and
the goods or services sold. If TWE is unable to determine the
fair value of one or more of the element(s) being purchased,
then revenue recognition is limited to the total consideration
received for the products or services sold less the amounts paid
that can be supported. For example, if TWE sells advertising to
a customer for $10 million in cash and contemporaneously
enters into an arrangement to acquire software for
$2 million from the same customer, but fair value for the
software cannot be reliably determined, TWE would limit the
amount of revenue recognized related to the advertising sold to
$8 million. As another example, if TWE sells advertising to
a customer for $10 million in cash and contemporaneously
invests $2 million in the equity of that same customer, but
fair value for the equity investment is only determined to be
$1 million, TWE would limit the amount of revenue
recognized related to the advertising sold to $9 million.
Accordingly, the judgments made in accounting for these
arrangements impact the period revenues, expenses and net income
over the term of the contract.

In applying the above guidance, one of the key
judgments is determining the fair value of the respective
elements. In determining the fair value of the respective
elements, the TWE refer to quoted market prices, historical
transactions or comparable cash transactions. For example, in
determining the fair value of a non-publicly traded equity
security purchased at the same time TWE sells a good or a
service to an investee, TWE would look to what other investors,
which do not have other contemporaneous transactions, have paid
in the most recent round of financings with the investee. If the
investment is publicly traded, fair value would be determined by
reference to quoted market prices. In addition, the stated terms
of a transaction are considered to be at fair value to the
extent that price protection in the form of most favored nation
clauses or similar provisions has been received.

F-24



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


Finally, in a contemporaneous purchase and sale
transaction, evidence of fair value for one element of a
transaction will provide support for the fair value of the other
element of a transaction. For example, if TWE sells advertising
to a customer and contemporaneously invests in the equity of
that same customer, evidence of the fair value of the investment
would implicitly support the fair value of the advertising sold
since there are only two elements in the arrangement.

Sales of Multiple Products or
Services

TWEs policy for revenue recognition in
instances where there are multiple elements being sold at the
same time to the same counterparty is in accordance with the
Frequently Asked Question Guide on SAB 110 and is similar
to the principles underlying the recently finalized EITF Issue
No. 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. Specifically, if TWE enters into
sales contracts for the sale of multiple products or services,
then they evaluate whether or not they have objective fair value
evidence for each element of the transaction. If objective fair
value evidence for each element of the transaction exists, then
each element of the transaction is accounted for independently
as it is being delivered based on the relevant revenue
recognition accounting policies. However, if the objective fair
value for one or more elements of the transaction are unable to
be determined, TWE generally recognizes advertising revenue on a
straight line-basis over the term of the agreement.

Filmed Entertainment Revenues and
Costs

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

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

Gross Versus Net Revenue Recognition

In the normal course of business, the Company
acts an intermediary or agent with respect to certain payments
received from third parties. For example, the Filmed
Entertainment segment distributes films on behalf of independent
film producers and our Cable segment collects taxes on behalf of
franchising authorities.

The accounting issue encountered in these
arrangements is whether the Company should report revenue based
on the gross amount billed to the ultimate customer
or on the net amount received from the customer
after commissions and other payments to third parties. To the
extent revenues are recorded gross, any commissions or other
payments to third parties are recorded as expenses so that the
net amount (gross

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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


revenues, less expenses) flows through operating
income. Accordingly, the impact on operating income is the same,
whether the Company records the revenue on a gross or net basis.
For example, the Companys Cable segment includes franchise
taxes in a cable subscribers monthly cable bill and remits
these amounts to the local franchising authorities. Should the
Cable segment record gross revenues received from the customer
(e.g. including the franchise taxes) or should they record the
net revenues they keep excluding franchise taxes submitted to
the local authorities? In either case, the impact on operating
income is the same.

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

In determining whether the Company serves as
principal or agent in these arrangements the Company follows the
guidance in EITF 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent
(EITF 99-19). Pursuant to such guidance, the
Company serves as the principal in transactions in which it has
substantial risks and rewards of ownership. The indicators that
the Company has substantial risks and rewards of ownership are
as follows:



|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
| | The Company is the supplier of the products or
    services to the customer;                
| | The Company has inventory risk for a product
    before it is sold;                         
| | The Company has latitude in establishing prices;                                            
| | The Company has the contractual relationship with
    the ultimate customer;                
| | The Company modifies the product purchased to
    meet the ultimate customer specifications;
| | The Company has discretion in supplier selection;
    and                                   
| | The Company has credit risk.                                                                

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



|  |                                                                                                
|- | -----------------------------------------------------------------------------------------------
| | The supplier (not TWE) is responsible for
    providing the product or service to the customer;
| | The supplier (not TWE) has latitude in
    establishing prices;                                
| | The amount the Company earns is fixed; and                                                     
| | The supplier (not TWE) has credit risk.                                                        

Based on the above criteria and for our more
significant transactions that we evaluated, the Filmed
Entertainment segment records revenue from the distribution of
films on behalf of independent film producers on a gross basis
and the Cable segment records revenue from the collection of
franchise fees on a gross basis.

Sales Returns and Uncollectible
Accounts

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

Similarly, management evaluates accounts
receivables to determine if they will ultimately be collected.
In performing this evaluation, significant judgments and
estimates are involved, including an analysis of

F-26



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


specific risks on a customer-by-customer basis
for larger accounts and customers, and an analysis of
receivables aging that determines the percent that has
historically been uncollected by aged category. Based on this
information, management reserves an amount that is believed to
be uncollectible.




RISK FACTORS AND CAUTION CONCERNING
FORWARD-LOOKING STATEMENTS

Risk Factors

If the events discussed in these risk factors
occur, the Companys business, financial condition, results
of operations or cash flows could be materially adversely
affected. In such case, the market price of the Companys
common stock could decline.

Technological developments may adversely
affect the Companys competitive position and limit its
ability to protect its valuable intellectual property
rights.TWE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:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Companys cable business may be
    adversely affected by more aggressive than expected competition
    from alternate technologies such as satellite and DSL; by the
    failure to choose technologies appropriately; by the failure of
    new equipment, such as digital set-top boxes or digital video
    recorders, or services, such as digital cable, high- speed data
    services and video-on-demand, to appeal to enough consumers or
    to be available at prices consumers are willing to pay, to
    function as expected and to be delivered in a timely fashion;
|
| |  | The Company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                                                                                                                    

Caution Regarding Forward-Looking
Statements

The SEC encourages companies to disclose
forward-looking information so that investors can better
understand a companys future prospects and make informed
investment decisions. This document contains
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, particularly
statements anticipating future growth in revenues, EBITDA and
cash flow. Words such as anticipates,
estimates, expects,
projects, intends, plans,
believes and words and terms of similar substance
used in connection with any discussion of future operating or
financial performance identify forward-looking statements. These
forward-looking statements are based on managements
present expectations and beliefs about future events. As with
any projection or forecast, they are inherently susceptible to
uncertainty and changes in circumstances, and the Company is
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, future events or
otherwise.

TWE operates 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. TWEs 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 TWE or
its

F-27



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


business segments in the future and could also
cause actual results to differ from those contained in the
forward-looking statements, including those identified in
TWEs other filings with the SEC and the following:

For TWEs cable business:



|  |                                                                                                                                                                                                                                                                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | more aggressive than expected competition from
    new technologies and other types of video programming
    distributors, including satellite and DSL;                                                                                                                                                                                               
| | increases in government regulation of basic cable
    or equipment rates or other terms of service, such as
    digital must-carry, open access or common carrier
    requirements; government regulation of other services, such as
    broadband cable modem service;                                                                             
| | increased difficulty in obtaining franchise
    renewals;                                                                                                                                                                                                                                                                                             
| | the failure of new equipment, such as digital
    set-top boxes or digital video recorders, or services, such as
    digital cable, high-speed data services or video-on-demand, to
    appeal to enough consumers or to be available at prices
    consumers are willing to pay, to function as expected and to be
    delivered in a timely fashion;
| | theft of service from interception of cable
    transmissions;                                                                                                                                                                                                                                                                                        
| | fluctuations in spending levels by advertisers
    and consumers; and                                                                                                                                                                                                                                                                                 
| | greater than expected increases in programming or
    other costs.                                                                                                                                                                                                                                                                                    

For TWEs filmed entertainment businesses:



|  |                                                                                                                                                                                                 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the ability to continue to attract and select
    desirable talent and scripts at manageable costs;                                                                                             
| | general increases in production costs;                                                                                                                                                          
| | fragmentation of consumer leisure and
    entertainment time and its possible negative effects on the
    broadcast and cable networks, which are significant customers of
    these businesses;
| | continued popularity of merchandising;                                                                                                                                                          
| | the uncertain impact of technological
    developments that may facilitate piracy of its copyrighted works;                                                                                     
| | the ability to develop 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 TWEs network 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.

F-28



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


For TWE generally, the overall financial
strategy, including growth in operations, maintaining financial
ratios and a strong balance sheet, could be adversely affected
by decreased liquidity in the capital markets, including any
reduction in the ability to access either the capital markets
for debt securities or bank financings, significant acquisitions
or other transactions, economic slowdowns, the risk of war, and
changes in the Companys plans, strategies and intentions.
In addition, lower than expected valuations associated with the
cash flows and revenues at its segments may result in its
inability to realize the value of recorded intangibles and
goodwill at those segments.

F-29



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.

CONSOLIDATED BALANCE SHEET


December 31,


(millions)


|                                                                                                                                  |  |      |         |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------ | -
|                                                                                                                                  |  | 2002 |         | 2001
|                                                                                                                                  |  |      |         |     
|ASSETS                                                                                                                            |  |      |         |      |  |   |        |  
|Current assets                                                                                                                    |  |      |         |      |  |   |        |  
|Cash and equivalents                                                                                                              |  | $    | 1,012   |      |  | $ | 250    |  
|Receivables, including $657 and $501 million
    due from AOL Time Warner, less allowances of $1.177 billion
    and $910 million |  |      | 3,778   |      |  |   | 3,480  |  
|Inventories                                                                                                                       |  |      | 871     |      |  |   | 852    |  
|Prepaid expenses                                                                                                                  |  |      | 442     |      |  |   | 326    |  
|                                                                                                                                  |  |      |         |      |  |   |        |  
|Total current assets                                                                                                              |  |      | 6,103   |      |  |   | 4,908  |  
|Noncurrent inventories and film costs                                                                                             |  |      | 2,189   |      |  |   | 2,187  |  
|Investments, including available-for-sale
    securities                                                                          |  |      | 2,503   |      |  |   | 2,308  |  
|Property, plant and equipment                                                                                                     |  |      | 7,641   |      |  |   | 8,573  |  
|Intangible assets subject to amortization                                                                                         |  |      | 2,341   |      |  |   | 2,464  |  
|Intangible assets not subject to amortization                                                                                     |  |      | 22,518  |      |  |   | 22,356 |  
|Goodwill                                                                                                                          |  |      | 10,129  |      |  |   | 41,004 |  
|Other assets                                                                                                                      |  |      | 931     |      |  |   | 1,258  |  
|                                                                                                                                  |  |      |         |      |  |   |        |  
|Total assets                                                                                                                      |  | $    | 54,355  |      |  | $ | 85,058 |  
|                                                                                                                                  |  |      |         |      |  |   |        |  
|LIABILITIES AND PARTNERS
    CAPITAL                                                                                             |  |      |         |      |  |   |        |  
|Current liabilities                                                                                                               |  |      |         |      |  |   |        |  
|Accounts payable                                                                                                                  |  | $    | 2,354   |      |  | $ | 2,218  |  
|Participations payable                                                                                                            |  |      | 1,343   |      |  |   | 1,014  |  
|Programming costs payable                                                                                                         |  |      | 439     |      |  |   | 455    |  
|Debt due within one year                                                                                                          |  |      | 8       |      |  |   | 2      |  
|Other current liabilities, including $1.187 and
    $1.022 billion due to
    AOL Time Warner                                     |  |      | 2,713   |      |  |   | 2,616  |  
|                                                                                                                                  |  |      |         |      |  |   |        |  
|Total current liabilities                                                                                                         |  |      | 6,857   |      |  |   | 6,305  |  
|Long-term debt, including $2.084 and
    $1.734 billion due to
    AOL Time Warner                                                |  |      | 6,947   |      |  |   | 8,049  |  
|Other long-term liabilities, including $8 and
    $446 million due to
    AOL Time Warner                                         |  |      | 2,546   |      |  |   | 3,108  |  
|Minority interests                                                                                                                |  |      | 888     |      |  |   | 2,191  |  
|                                                                                                                                 
|Partners capital                                                                                                                 |  |      |         |      |  |   |        |  
|Contributed capital                                                                                                               |  |      | 59,936  |      |  |   | 66,793 |  
|Accumulated other comprehensive income (loss), net                                                                                |  |      | (166    | )    |  |   | (6     | )
|Partnership deficit                                                                                                               |  |      | (22,653 | )    |  |   | (1,382 | )
|                                                                                                                                  |  |      |         |      |  |   |        |  
|Total partners capital                                                                                                           |  |      | 37,117  |      |  |   | 65,405 |  
|                                                                                                                                  |  |      |         |      |  |   |        |  
|Total liabilities and partners capital                                                                                           |  | $    | 54,355  |      |  | $ | 85,058 |  
|                                                                                                                                  |  |      |         |      |  |   |        |  

See accompanying notes.

F-30



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.

CONSOLIDATED STATEMENT OF OPERATIONS


Years Ended December 31,


(millions)


|                                                                                                                    |                          |      |         |       |  |      |        |       |  |   |        |       | 
|------------------------------------------------------------------------------------------------------------------- | ------------------------ | ---- | ------- | ----- |  | ---- | ------ | ----- |  | - | ------ | ----- | 
|                                                                                                                    |                          | 2002 |         | 2001  |  | 2000
|                                                                                                                    |                          |      |         |       |  |     
|Revenues:                                                                                                           |                          |      |         |       |  |      |        |       |  |   |        |      
|                                                                                                                    | Subscriptions            |      | $       | 7,554 |  |      | $      | 6,591 |  |   | $      | 5,869 | 
|                                                                                                                    | Advertising and commerce |      |         | 1,195 |  |      |        | 1,188 |  |   |        | 1,147 | 
|                                                                                                                    | Content and other        |      |         | 7,676 |  |      |        | 6,563 |  |   |        | 6,162 | 
|                                                                                                                    |                          |      |         |       |  |      |        |       |  |   |        |      
|Total revenues(a)                                                                                                   |                          |      | 16,425  |       |  |      | 14,342 |       |  |   | 13,178 |      
|Cost of revenues(a)                                                                                                 |                          |      | (11,204 | )     |  |      | (9,327 | )     |  |   | (8,499 | )    
|Selling, general and administrative(a)                                                                              |                          |      | (2,408  | )     |  |      | (2,378 | )     |  |   | (2,454 | )    
|Amortization of goodwill and other intangible
    assets                                                            |                          |      | (150    | )     |  |      | (2,668 | )     |  |   | (503   | )    
|Impairment of goodwill                                                                                              |                          |      | (2,355  | )     |  |      |       |       |  |   |       |      
|                                                                                                                    |                          |      |         |       |  |      |        |       |  |   |        |      
|Operating income (expense)                                                                                          |                          |      | 308     |       |  |      | (31    | )     |  |   | 1,722  |      
|Interest expense, net                                                                                               |                          |      | (401    | )     |  |      | (530   | )     |  |   | (612   | )    
|Other expense, net(a)                                                                                               |                          |      | (357    | )     |  |      | (346   | )     |  |   | (228   | )    
|Minority interest income (expense)                                                                                  |                          |      | (28     | )     |  |      | 36     |       |  |   | 82     |      
|                                                                                                                    |                          |      |         |       |  |      |        |       |  |   |        |      
|Income (loss) before income tax expense,
    discontinued
    operations and cumulative effect of accounting change |                          |      | (478    | )     |  |      | (871   | )     |  |   | 964    |      
|Income tax expense                                                                                                  |                          |      | (157    | )     |  |      | (127   | )     |  |   | (157   | )    
|                                                                                                                    |                          |      |         |       |  |      |        |       |  |   |        |      
|Income (loss) before discontinued operations
    and
    cumulative effect of accounting change                     |                          |      | (635    | )     |  |      | (998   | )     |  |   | 807    |      
|Discontinued operations, net of tax                                                                                 |                          |      | 1,179   |       |  |      | (34    | )     |  |   | (54    | )    
|                                                                                                                    |                          |      |         |       |  |      |        |       |  |   |        |      
|Income (loss) before cumulative effect of
    accounting change                                                     |                          |      | 544     |       |  |      | (1,032 | )     |  |   | 753    |      
|Cumulative effect of accounting change                                                                              |                          |      | (21,763 | )     |  |      |       |       |  |   | (524   | )    
|                                                                                                                    |                          |      |         |       |  |      |        |       |  |   |        |      
|Net income (loss)                                                                                                   |                          | $    | (21,219 | )     |  | $    | (1,032 | )     |  | $ | 229    |      
|                                                                                                                    |                          |      |         |       |  |      |        |       |  |   |        |      



---



|    |                                                                                                 
|--- | ------------------------------------------------------------------------------------------------
|(a) | Includes the following income (expenses)
    resulting from transactions with related companies:

|                                    |  |   |      |   |  |   |      |   |  |   |      |  
|----------------------------------- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|Revenue                             |  | $ | 935  |   |  | $ | 934  |   |  | $ | 677  |  
|Cost of revenues                    |  |   | (322 | ) |  |   | (445 | ) |  |   | (276 | )
|Selling, general and administrative |  |   | (287 | ) |  |   | (221 | ) |  |   | (210 | )
|Interest income (expense), net      |  |   | 12   |   |  |   | 31   |   |  |   | (7   | )
|Other income (expense), net         |  |   | 6    |   |  |   | 8    |   |  |   | 19   |  

F-31



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.

CONSOLIDATED STATEMENT OF CASH FLOWS


Years Ended December 31,


(millions)


|                                                                                                                                    |                                                                |      |         |        |   |      |        |        |   |   |        |        |  
|----------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ---- | ------- | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                                                                                                                    |                                                                | 2002 |         | 2001   |   | 2000
|                                                                                                                                    |                                                                |      |         |        |   |     
|OPERATIONS                                                                                                                          |                                                                |      |         |        |   |      |        |        |   |   |        |       
|Net income (loss)(a)                                                                                                                |                                                                | $    | (21,219 | )      |   | $    | (1,032 | )      |   | $ | 229    |       
|Adjustments for noncash and nonoperating items:                                                                                     |                                                                |      |         |        |   |      |        |        |   |   |        |       
|                                                                                                                                    | Cumulative effect of accounting change                         |      |         | 21,763 |   |      |        |       |   |   |        | 524    |  
|                                                                                                                                    | Impairment of goodwill                                         |      |         | 2,355  |   |      |        |       |   |   |        |       |  
|                                                                                                                                    | Depreciation and amortization                                  |      |         | 1,279  |   |      |        | 3,538  |   |   |        | 1,260  |  
|                                                                                                                                    | Amortization of film costs                                     |      |         | 1,917  |   |      |        | 1,916  |   |   |        | 1,676  |  
|                                                                                                                                    | Gain on sale of investments                                    |      |         | (38    | ) |      |        | (4     | ) |   |        | 1      |  
|                                                                                                                                    | Equity in losses of investee companies after
    distributions |      |         | 22     |   |      |        | 334    |   |   |        | 275    |  
|Changes in operating assets and liabilities:                                                                                        |                                                                |      |         |        |   |      |        |        |   |   |        |       
|                                                                                                                                    | Receivables                                                    |      |         | (432   | ) |      |        | (414   | ) |   |        | (310   | )
|                                                                                                                                    | Inventories                                                    |      |         | (1,937 | ) |      |        | (2,074 | ) |   |        | (1,829 | )
|                                                                                                                                    | Accounts payable and other liabilities                         |      |         | 659    |   |      |        | (140   | ) |   |        | 394    |  
|                                                                                                                                    | Other balance sheet changes                                    |      |         | 444    |   |      |        | (139   | ) |   |        | (122   | )
|Adjustments for noncash and nonoperating items,
    and changes in operating assets and liabilities for discontinued
    operations |                                                                |      | (801    | )      |   |      | 600    |        |   |   | 478    |       
|                                                                                                                                    |                                                                |      |         |        |   |      |        |        |   |   |        |       
|Cash provided by operations                                                                                                         |                                                                |      | 4,012   |        |   |      | 2,585  |        |   |   | 2,576  |       
|                                                                                                                                    |                                                                |      |         |        |   |      |        |        |   |   |        |       
|INVESTING ACTIVITIES                                                                                                                |                                                                |      |         |        |   |      |        |        |   |   |        |       
|Investments and acquisitions                                                                                                        |                                                                |      | (297    | )      |   |      | (913   | )      |   |   | (421   | )     
|Investments in available-for-sale securities                                                                                        |                                                                |      |        |        |   |      | (18    | )      |   |   |       |       
|Capital expenditures from continuing operations                                                                                     |                                                                |      | (1,689  | )      |   |      | (1,604 | )      |   |   | (1,512 | )     
|Capital expenditures from discontinued operations                                                                                   |                                                                |      | (206    | )      |   |      | (408   | )      |   |   | (414   | )     
|Investment proceeds from available-for-sale
    securities                                                                          |                                                                |      |        |        |   |      | 3      |        |   |   |       |       
|Other investment proceeds                                                                                                           |                                                                |      | 85      |        |   |      | 32     |        |   |   | 209    |       
|                                                                                                                                    |                                                                |      |         |        |   |      |        |        |   |   |        |       
|Cash used by investing activities                                                                                                   |                                                                |      | (2,107  | )      |   |      | (2,908 | )      |   |   | (2,138 | )     
|                                                                                                                                    |                                                                |      |         |        |   |      |        |        |   |   |        |       
|FINANCING ACTIVITIES                                                                                                                |                                                                |      |         |        |   |      |        |        |   |   |        |       
|Borrowings                                                                                                                          |                                                                |      | 3,524   |        |   |      | 3,226  |        |   |   | 2,850  |       
|Debt repayments                                                                                                                     |                                                                |      | (4,113  | )      |   |      | (2,541 | )      |   |   | (2,399 | )     
|Capital and other distributions from discontinued
    operations, net                                                               |                                                                |      | (11     | )      |   |      | (59    | )      |   |   | (52    | )     
|Capital and other distributions from continuing
    operations                                                                      |                                                                |      | (527    | )      |   |      | (359   | )      |   |   | (1,048 | )     
|Other                                                                                                                               |                                                                |      | (16     | )      |   |      |       |        |   |   |       |       
|                                                                                                                                    |                                                                |      |         |        |   |      |        |        |   |   |        |       
|Cash provided (used) by financing activities                                                                                        |                                                                |      | (1,143  | )      |   |      | 267    |        |   |   | (649   | )     
|                                                                                                                                    |                                                                |      |         |        |   |      |        |        |   |   |        |       
|INCREASE (DECREASE) IN CASH AND
    EQUIVALENTS                                                                                     |                                                                |      | 762     |        |   |      | (56    | )      |   |   | (211   | )     
|CASH AND EQUIVALENTS AT BEGINNING OF
    PERIOD                                                                                     |                                                                |      | 250     |        |   |      | 306    |        |   |   | 517    |       
|                                                                                                                                    |                                                                |      |         |        |   |      |        |        |   |   |        |       
|CASH AND EQUIVALENTS AT END OF
    PERIOD                                                                                           |                                                                | $    | 1,012   |        |   | $    | 250    |        |   | $ | 306    |       
|                                                                                                                                    |                                                                |      |         |        |   |      |        |        |   |   |        |       



---



|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Includes net income (loss) from discontinued
    operations of $1.179 billion in 2002, $(34) million in
    2001 and $(54) million in 2000.

See accompanying notes.

F-32



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.

CONSOLIDATED STATEMENT OF PARTNERSHIP
CAPITAL


|                                                                                                              |                      |             |        |             |  |           |         |         |   |   |         |         |  
|------------------------------------------------------------------------------------------------------------- | -------------------- | ----------- | ------ | ----------- |  | --------- | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                              |                      |             |        | Partnership |  | Total    
|                                                                                                              |                      | Contributed |        | Earnings    |  | Partners
|                                                                                                              |                      | Capital     |        | (Deficit)   |  | Capital  
|                                                                                                              |                      |             |        |             |  |          
|                                                                                                              |                      |            
|                                                                                                              |                      | (Millions) 
|BALANCE AT DECEMBER 31, 1999                                                                                  |                      | $           | 7,338  |             |  | $         | (189    | )       |   | $ | 7,149   |        
|Net income                                                                                                    |                      |             |       |             |  |           | 229     |         |   |   | 229     |        
|Foreign currency translation adjustments                                                                      |                      |             |       |             |  |           | (44     | )       |   |   | (44     | )      
|Unrealized losses on securities                                                                               |                      |             |       |             |  |           | (44     | )       |   |   | (44     | )      
|Realized and unrealized gains on derivative
    financial instruments                                         |                      |             |       |             |  |           | 8       |         |   |   | 8       |        
|                                                                                                              |                      |             |        |             |  |           |         |         |   |   |         |        
|                                                                                                              | Comprehensive income |             |        |            |  |           |         | 149     |   |   |         | 149     |  
|Stock option and tax-related distributions                                                                    |                      |             |       |             |  |           | (392    | )       |   |   | (392    | )      
|Other                                                                                                         |                      |             | 11     |             |  |           | 9       |         |   |   | 20      |        
|                                                                                                              |                      |             |        |             |  |           |         |         |   |   |         |        
|BALANCE AT DECEMBER 31, 2000                                                                                  |                      |             | 7,349  |             |  |           | (423    | )       |   |   | 6,926   |        
|Allocation of a portion of the purchase price in
    connection with America Online-Time Warner merger to TWE |                      |             | 59,444 |             |  |           | 74      |         |   |   | 59,518  |        
|                                                                                                              |                      |             |        |             |  |           |         |         |   |   |         |        
|Balance at December 31, 2000, adjusted to
    give effect of America Online-Time Warner merger                |                      |             | 66,793 |             |  |           | (349    | )       |   |   | 66,444  |        
|Net loss                                                                                                      |                      |             |       |             |  |           | (1,032  | )       |   |   | (1,032  | )      
|Foreign currency translation adjustments                                                                      |                      |             |       |             |  |           | 1       |         |   |   | 1       |        
|Unrealized losses on securities                                                                               |                      |             |       |             |  |           | (7      | )       |   |   | (7      | )      
|                                                                                                              |                      |             |        |             |  |           |         |         |   |   |         |        
|                                                                                                              | Comprehensive loss   |             |        |            |  |           |         | (1,038  | ) |   |         | (1,038  | )
|Stock option and tax-related distributions                                                                    |                      |             |       |             |  |           | (82     | )       |   |   | (82     | )      
|Other                                                                                                         |                      |             |       |             |  |           | 81      |         |   |   | 81      |        
|                                                                                                              |                      |             |        |             |  |           |         |         |   |   |         |        
|BALANCE AT DECEMBER 31, 2001                                                                                  |                      |             | 66,793 |             |  |           | (1,388  | )       |   |   | 65,405  |        
|                                                                                                              |                      |             |        |             |  |           |         |         |   |   |         |        
|Reallocation of TWE goodwill to other segments of
    AOL Time Warner upon adoption of FAS 142.               |                      |             | (6,857 | )           |  |           |        |         |   |   | (6,857  | )      
|Net loss                                                                                                      |                      |             |       |             |  |           | (21,219 | )       |   |   | (21,219 | )      
|Unfunded Accumulated Benefit Obligation                                                                       |                      |             |       |             |  |           | (183    | )       |   |   | (183    | )      
|Derivatives FX Gain/Loss                                                                                      |                      |             |       |             |  |           | (21     | )       |   |   | (21     | )      
|Foreign currency translation adjustments                                                                      |                      |             |       |             |  |           | 35      |         |   |   | 35      |        
|Unrealized gain on securities                                                                                 |                      |             |       |             |  |           | 9       |         |   |   | 9       |        
|                                                                                                              |                      |             |        |             |  |           |         |         |   |   |         |        
|                                                                                                              | Comprehensive loss   |             |        |            |  |           |         | (21,379 | ) |   |         | (21,379 | )
|Distributions                                                                                                 |                      |             |       |             |  |           | (60     | )       |   |   | (60     | )      
|Other                                                                                                         |                      |             |       |             |  |           | 8       |         |   |   | 8       |        
|                                                                                                              |                      |             |        |             |  |           |         |         |   |   |         |        
|BALANCE AT DECEMBER 31, 2002                                                                                  |                      | $           | 59,936 |             |  | $         | (22,819 | )       |   | $ | 37,117  |        
|                                                                                                              |                      |             |        |             |  |           |         |         |   |   |         |        

See accompanying notes.

F-33



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




|   |                                                                
|-- | ---------------------------------------------------------------
|1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT
    ACCOUNTING POLICIES

Description of Business and Basis of
Presentation

Description of Business

AOL Time Warner Inc. (AOL Time
Warner) is the worlds leading media and
entertainment company. AOL Time Warner was formed in connection
with the merger of America Online, Inc. (America
Online) and Time Warner Inc. (Time Warner)
which was consummated on January 11, 2001 (the
Merger). As a result of the Merger, America Online
and Time Warner each became a wholly-owned subsidiary of AOL
Time Warner.

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, are held through Time
Warner Entertainment Company, L.P. (TWE or the
Company). Prior to the change in ownership relating
to the exercise of an option held by AT&T Corp.
(AT&T) which is discussed below, AOL Time Warner
owned general and limited partnership interests in TWE
consisting of 74.49% of the pro rata priority capital
(Series A Capital) and residual equity capital
(Residual Capital), and 100% of the junior priority
capital (Series B Capital). The remaining
25.51% limited partnership interests in the Series A
Capital and Residual Capital of TWE were held by subsidiaries of
AT&T. AT&Ts interest in TWE was recently acquired
by Comcast Corp. (Comcast) upon consummation of the
merger of Comcast and AT&Ts broadband business in
November 2002.

During the second quarter of 2002, AT&T
exercised a one-time option to increase its ownership in the
Series A Capital and Residual Capital of TWE. As a result,
on May 31, 2002, AT&Ts interest in the
Series A Capital and Residual Capital of TWE increased by
approximately 2.13% to approximately 27.64% and AOL Time
Warners corresponding interest in the Series A and
Residual Capital of TWE decreased by approximately 2.13% to
approximately 72.36%. In accordance with Staff Accounting
Bulletin No. 51, Accounting for Sales of Stock of a
Subsidiary, AOL Time Warner has reflected the pretax
impact of the dilution of its interest in TWE of approximately
$690 million as an adjustment to paid-in-capital.

In August 2002, AOL Time Warner and AT&T
announced that they had agreed to restructure TWE. The
restructuring is expected to be completed on March 31,
2003. The TWE restructuring will result in the following:
(i) AOL Time Warner will acquire complete ownership of
TWEs content assets (including Warner Bros. and Home Box
Office, which will become separate, wholly owned subsidiaries of
the Company); (ii) all of AOL Time Warners
directly-owned cable television system interests will be
contributed to a separate company which will become a
majority-owned subsidiary of AOL Time Warner and will be renamed
Time Warner Cable Inc. (TWC Inc.); (iii) TWE
will become a subsidiary of TWC Inc. and will continue to own
the cable television system interests it previously owned;
(iv) Comcast will receive $2.1 billion in cash, which
the Company anticipates will be funded through a new credit
facility at TWC Inc. that has not yet been established and AOL
Time Warner equity securities valued at $1.5 billion;
(v) a Comcast Trust will also retain a 21% economic
interest in the Companys cable business, 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; and (vi) AOL
Time Warner will retain an overall 79% economic interest in the
cable business, 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 and a
$2.4 billion preferred component.

Based upon its controlling voting interest in
Time Warner Cable Inc., AOL Time Warner will consolidate the
results of Time Warner Cable Inc. for accounting purposes. At
the closing of the restructuring, it is anticipated that Time
Warner Cable Inc. will have approximately $8.1 billion in
consolidated net debt and preferred equity. Subject to market
conditions, AOL Time Warner plans to conduct an initial public
offering of Time Warner Cable Inc. soon after the restructuring.
It is anticipated that the first $2.1 billion raised in any such
offering would be used to repay Time Warner Cable Inc.s
debt incurred to fund the $2.1 billion cash

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


payment to Comcast. Thereafter, Comcast will have
certain priority registration rights with respect to its stake
in Time Warner Cable Inc.

TWE, a Delaware limited partnership, classifies
its business interests into three fundamental areas:
Cable, consisting principally of interests in cable
television systems; Filmed Entertainment, consisting
principally of interests in filmed entertainment and television
production; and Networks, consisting principally of
interests in cable television and broadcast network programming.
TWE also manages the cable properties wholly-owned by AOL Time
Warner and the combined cable television operations are
conducted under the name of Time Warner Cable.

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

Basis of Presentation

Restructuring of TWE-Advance/Newhouse and
Road Runner Partnerships

Prior to August 1, 2002, the
TWE-Advance/Newhouse Partnership (TWE-A/N) was owned
approximately 64.8% by TWE, the managing partner, 33.3% by the
Advance/Newhouse Partnership (Advance/Newhouse) and
1.9% indirectly by AOL Time Warner. The financial position and
operating results of TWE-A/N were consolidated by AOL Time
Warner and TWE, and the partnership interest owned by
Advance/Newhouse was reflected in the consolidated financial
statements of AOL Time Warner and TWE as minority interest. In
addition, prior to August 1, 2002, Road Runner, a
high-speed cable modem Internet service provider, was owned by
TWI Cable Inc. (a wholly-owned subsidiary of AOL Time Warner),
TWE and TWE-A/N, with AOL Time Warner owning approximately 65%
on a fully attributed basis (i.e., after considering the portion
attributable to the minority partners of TWE and TWE-A/N).
TWEs interest in Road Runner was accounted for using the
equity method of accounting because of certain approval rights
held by Advance/Newhouse.

On June 24, 2002, TWE and Advance/Newhouse
agreed to restructure TWE-A/N, which, on August 1, 2002
(the Debt Closing Date), resulted in
Advance/Newhouse assuming responsibility for the day-to-day
operations of certain TWE-A/N cable systems serving
approximately 2.1 million subscribers located primarily in
Florida (the Advance/Newhouse Systems). The
restructuring is anticipated to be completed by the end of 2002,
upon the receipt of certain regulatory approvals. On the Debt
Closing Date, Advance/Newhouse and its affiliates arranged for a
new credit facility to support the Advance/Newhouse Systems and
assumed and repaid approximately $780 million of TWE-A/Ns
senior indebtedness. As of the Debt Closing Date,
Advance/Newhouse assumed responsibility for the day-to-day
operations of the Advance/Newhouse Systems. As a result, TWE has
deconsolidated the financial position and operating results of
these systems. Additionally, all prior period results associated
with the Advance/Newhouse Systems, including the historical
minority interest allocated to Advance/Newhouses interest
in TWE-A/N, have been reflected as a discontinued operation for
all periods presented. Under the new TWE-A/N Partnership
Agreement, effective as of the Debt Closing Date,
Advance/Newhouses partnership interest tracks only the
economic performance of the Advance/Newhouse Systems, including
associated liabilities, while AOL Time Warner retains all of the
economic interests in the other TWE-A/N assets and liabilities.
The restructuring was completed in December 2002.

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


As part of the restructuring of TWE-A/N, on the
Debt Closing Date, AOL Time Warner acquired
Advance/Newhouses interest in Road Runner, thereby
increasing TWEs ownership to approximately 82% on a fully
attributed basis. As a result of the termination of
Advance/Newhouses minority rights in Road Runner, TWE has
consolidated the financial position and results of operations of
Road Runner with the financial position and results of
operations of TWEs Cable segment. As permitted under
generally accepted accounting principles, the Company has
consolidated the results of Road Runner retroactive to the
beginning of 2002.

In connection with the TWE-A/N restructuring, TWE
recognized a non-cash pretax gain of approximately
$1.2 billion, which related to the difference between the
carrying value of TWEs interest in the Advance/Newhouse
Systems and the fair value of TWEs acquired interest in
the non-Advance/Newhouse Systems. The gain was mitigated because
a portion of TWEs investment in TWE-A/N, relating to AOL
Time Warner, was recently adjusted to fair value as part of
purchase accounting for the Merger. The gain is included as part
of discontinued operations in the accompanying consolidated
statement of operations for year ended December 31, 2002.

America Online-Time Warner
Merger

The Merger has been accounted for by AOL Time
Warner as an acquisition of Time Warner under the purchase
method of accounting for business combinations. Under the
purchase method of accounting, the cost of approximately
$147 billion to acquire Time Warner, including transaction
costs, was allocated to its underlying net assets, including the
net assets of TWE to the extent acquired, based on their
respective estimated fair values. The excess of the purchase
price over the estimated fair values of the net assets acquired
was recorded as goodwill. This allocation includes intangible
assets, such as film and television libraries, cable television
franchises and brands and trademarks.

Discontinued Operations

The Companys results of operations have
been adjusted to reflect the results of the Advance/Newhouse
Systems as a discontinued operation for all periods presented
herein. For 2002, for the six months ended June 30, 2002
(e.g., the most recent reported period prior to the
deconsolidation), the net impact of the deconsolidation of these
systems was a reduction of Cables previously reported
revenues, EBITDA and operating income of $715 million, $333
million and $206 million, respectively. For the year ended
December 31, 2001, the net impact of the deconsolidation of
these systems was a reduction of Cables revenues, EBITDA
and operating income of $1.247 billion, $571 million
and $313 million, respectively. For the year ended
December 31, 2000, the net impact of the deconsolidation of
these systems was a reduction of the Cable segments
previously reported revenues, EBITDA and operating income of
$1.058 billion, $484 million and $256 million,
respectively. In addition, during 2002, the Company recognized a
non-cash pretax gain of $1.2 billion relating to the
restructuring. As of December 31, 2001, the
Advance/Newhouse Systems had current assets and total assets of
approximately $64 million and $2.7 billion,
respectively, and current liabilities and total liabilities of
approximately $210 million and $963 million,
respectively, including debt assumed on the Debt Closing Date.

New Accounting Principles

Cumulative Effect of Change in Film Accounting
Principle

In June 2000, TWE adopted American Institute of
Certified Public Accountants (AICPA) Statement of
Position (SOP) 00-2, Accounting by Producers
and Distributors of Films (SOP 00-2). SOP 00-2
established new film accounting standards, including changes in
revenue recognition and accounting for advertising, development
and overhead costs. Specifically, SOP 00-2 requires advertising
costs for theatrical and television product to be expensed as
incurred. This compares to TWEs previous policy of first
capitalizing

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


and then expensing advertising costs for
theatrical product over the related revenue streams. In
addition, SOP 00-2 requires development costs for abandoned
projects and certain indirect overhead costs to be charged
directly to expense, instead of those costs being capitalized to
film costs, which was required under the previous accounting
model. SOP 00-2 also requires all film costs to be classified in
the balance sheet as noncurrent assets.

TWE adopted the provisions of SOP 00-2,
retroactively to the beginning of 2000. As a result, TWEs
net income includes a one-time, non-cash charge of
$524 million, primarily to reduce the carrying value of its
film inventory. This charge has been reflected as a cumulative
effect of an accounting change in the accompanying consolidated
statement of operations.

Revenue Classification Changes

Reimbursement of Out-of-Pocket
Expenses

In January 2002, the Financial Accounting
Standards Board (FASB) Staff reached a consensus on
Emerging Issues Task Force (EITF) Issue
No. 01-14, Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses
Incurred (EITF 01-14). EITF 01-14 requires
that reimbursements received for out-of-pocket expenses be
classified as revenue on the income statement and EITF 01-14 was
effective for TWE in the first quarter of 2002 and required
retroactive restatement of all periods presented to reflect the
new accounting provisions. This change in revenue classification
impacts TWEs Cable segment. As a result of applying the
guidance of EITF 01-14, TWEs revenues and costs presented
herein were retroactively increased by an equal amount of
$196 million in 2001 and $171 million in 2000.

Accounting for Goodwill and Other Intangible
Assets

During 2001, FASB issued Statement of Financial
Accounting Standards No. 142 Goodwill and Other Intangible
Assets (FAS 142), which requires that,
effective January 1, 2002, goodwill, including the goodwill
included in the carrying value of investments accounted for
using the equity method of accounting, and certain other
intangible assets deemed to have an indefinite useful life,
cease amortizing. The new rules also require that goodwill and
certain intangible assets be assessed for impairment using fair
value measurement techniques. During the first quarter of 2002,
the Company completed its initial impairment review and recorded
a $21.763 billion non-cash pretax charge for the impairment
of goodwill, substantially all of which was generated in the
Merger. The charge reflects overall market declines since the
Merger was announced in January 2000, is non-operational in
nature and is reflected as a cumulative effect of an accounting
change in the accompanying consolidated financial statements
(Note 2).

During the fourth quarter of 2002, the Company
performed its annual impairment review for goodwill and other
intangible assets and recorded an additional non-cash charge of
$2.355 billion, which is recorded as a component of
operating income in the accompanying consolidated statement of
operations. The $2.355 billion charge reflects a reduction
in the carrying value of goodwill at the Cable segment and
reflects current market conditions in the cable television
industry, as evidenced by the decline in the stock prices of
comparable cable television companies.

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

Variable Interest Entities

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46), which
requires variable interest entities (commonly referred to as
SPEs) to be consolidated by the primary beneficiary of the
entity if certain criteria are met. FIN 46 is effective

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


immediately for all new variable interest
entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 become
effective for the Company during the third quarter of 2003. The
Company anticipates that the adoption of FIN 46 will not
result in a material impact to TWE.

Stock-Based Compensation

In December 2002, the FASB issued Statement
No. 148, Accounting for Stock-Based Compensation,
Transition and Disclosure (FAS 148). FAS
148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for
stock-based employee compensation. 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 are effective for
fiscal years ended beginning 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 the Companys consolidated financial statements,
however, the Company has modified its disclosures herein as
provided for in the new standard.

Exit and Disposal Activities

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

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 Company believes 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
Companys consolidated financial statements.

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. Management does not
expect the provisions of EITF 02-16 to have a material
impact on the Companys consolidated financial statements.

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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 are not expected
to have a material impact on the Companys consolidated
financial statements. The disclosure requirements of FIN 45
are effective for financial statements of interim or annual
periods ending after December 15, 2002; therefore, the
Company has modified its disclosures herein as required.

Asset Retirement Obligations

In July 2001, the FASB issued Statement
No. 143, Accounting for Asset Retirement
Obligations (FAS 143). FAS 143 addresses
the accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. FAS 143 became effective for TWE in
the first quarter of 2002. The provisions of FAS 143 did
not have a material impact on TWEs consolidated financial
statements.

Impairment or Disposal of Long-Lived
Assets

In August 2001, the FASB issued Statement
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (FAS 144). FAS 144
clarifies the accounting for the impairment of long-lived assets
and for long-lived assets to be disposed of, including the
disposal of business segments and major lines of business.
FAS 144 became effective for TWE in the first quarter of
2002. The provisions of FAS 144 did not have a material
impact on TWEs consolidated financial statements.

Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities

In September 2000, FASB issued Statement
No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities 
a Replacement of FASB Statement No. 125
(FAS 140). FAS 140 revises the criteria
for accounting for securitizations and other transfers of
financial assets and collateral. In addition, FAS 140
requires certain additional disclosures. Except for the new
disclosure provisions, which were effective for the year ended
December 31, 2000, FAS 140 was effective for the
transfer of financial assets occurring after March 31,
2001. The provisions of FAS 140 did not have a significant
effect on TWEs consolidated financial statements.

Summary of Significant Accounting
Policies

Basis of Consolidation and Accounting for
Investments

The consolidated financial statements include
100% of the assets, liabilities, revenues, expenses, income,
loss and cash flows of TWE and all companies in which TWE has a
controlling voting interest (subsidiaries), as if
TWE and its subsidiaries were a single company. Intercompany
accounts and transactions between the consolidated companies
have been eliminated. Significant accounts and transactions
between TWE and its partners and affiliates are disclosed as
related party transactions (Note 15).

Investments in companies in which TWE has
significant influence, but less than a controlling voting
interest, are accounted for using the equity method. This is
generally presumed to exist when TWE owns between 20% and 50% of
the investee. However, in certain circumstances, TWEs
ownership percentage exceeds 50% but TWE accounts for the
investment using the equity method because the minority

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


shareholders hold certain rights which allow them
to participate in the day-to-day operations of the business.
Under the equity method, only TWEs investment in and
amounts due to and from the equity investee are included in the
consolidated balance sheet; only TWEs share of the
investees earnings is included in the consolidated
operating results; and only the dividends, cash distributions,
loans or other cash received from the investee, additional cash
investments, loan repayments or other cash paid to the investee,
are included in the consolidated cash flows. In circumstances
where the Companys ownership in an investee is in the form
of a preferred security or otherwise senior security, TWEs
share in the investees income or loss is determined by
applying the equity method of accounting using the
hypothetical-liquidation-at-book-value method. Under
the hypothetical-liquidation-at-book-value method, the
investors share of earnings or losses is determined based
on changes in the investors claim in the net book value of
the investee. Additionally, the carrying value of investments
accounted for using the equity method of accounting are adjusted
downward to reflect any other-than-temporary declines in value.

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

The effect of any changes in TWEs ownership
interests resulting from the issuance of capital by consolidated
subsidiaries or equity investees to unaffiliated parties is
included in income.

TWE has certain accounts receivable facilities
that provide for the accelerated receipt of cash on available
accounts receivables and licensing contracts. These
securitization transactions are accounted for as a sale in
accordance with FAS 140 because the Company relinquished
control of the receivables. Since the Company has relinquished
control over these receivables and does not control the
Qualifying SPE that holds the receivables, the amounts held in
these securitization facilities are not included in the
consolidated financial statements of the Company.

Investment Impairments

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

In evaluating the factors above for
available-for-sale securities, management presumes a decline in
value to be other-than-temporary if the quoted market price of
the security is 20% or more below the investments cost
basis for a period of six months or more (the 20%
criteria) or the quoted market price of the security is
50% or more below the securitys cost basis at any quarter
end (the 50% criteria). However, the presumption of
an other-than-temporary decline in these instances may be
overcome if there is persuasive evidence indicating that the
decline is temporary in nature (e.g., strong operating
performance of investee,

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


historical volatility of investee, etc.).
Additionally, there may be instances where impairment losses are
recognized even if the 20% and 50% criteria are not satisfied
(e.g., plan to sell the security in the near term and the fair
value is below the Companys cost basis).

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

Foreign Currency Translation

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

Use of Estimates

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

Significant estimates inherent in the preparation
of the accompanying consolidated financial statements include
managements forecast of anticipated revenues and cash
flows from investments and the distribution of theatrical and
television product in order to evaluate the ultimate
recoverability of accounts receivable, film inventory and
investments recorded as assets in the consolidated balance
sheet. Accounts receivable and sales of home video product in
the filmed entertainment industry are subject to customers
rights to return unsold items. In addition, significant
estimates have been used in accounting for business combinations
accounted for using the purchase method of accounting.
Management periodically reviews such estimates and it is
reasonably possible that managements assessment of
recoverability of accounts receivable, individual films and
television product, and investments may change based on actual
results and other factors.

Revenues and Costs

Cable

Cable revenues are principally derived from video
and high speed data subscriber fees and advertising. Subscriber
fees are recorded as revenue in the period the service is
provided and advertising revenues, including advertising
purchased by programmers, are recognized in the period that the
advertisements are exhibited. Video programming costs are
recorded as the services are provided. Launch fees received by
the Company from programming vendors are recognized as a
reduction of expense over the life of the related programming
arrangement. Fees received from programming vendors representing
the reimbursement of marketing costs are recognized as a
reduction of marketing expenses in the period such reimbursement
are received.

Networks

Network revenues are primarily derived from
subscriber fees and advertising. Subscriber fees are recorded as
revenue in the period the service is provided and advertising
revenues are recognized in the period that the advertisements
are exhibited. The costs of rights to exhibit feature films and
other programming on

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


pay cable services during one or more
availability periods (programming costs) generally
are recorded as inventory when the programming is initially
available for exhibition, and are allocated to the appropriate
availability periods and amortized as the programming is
exhibited.

Filmed Entertainment

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

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

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

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

Barter Transactions

TWE enters into transactions that exchange
advertising for advertising. Such transactions are recorded at
the estimated fair value of the advertising received or given in
accordance with the provisions of the EITF Issue No. 99-17,
Accounting for Advertising Barter Transactions. In
addition, TWE enters into transactions that exchange advertising
for products and services, which are accounted for similarly.
Revenue from barter transactions is recognized when advertising
is provided, and services received are charged to expense when

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


used. Barter transactions are not material to the
Companys consolidated statement of operations for all
periods.

Multiple-Element Arrangements

TWE enters into transactions where it is
purchasing a product, service or making an investment in a
vendor and at the same time it is negotiating a contract for the
sale of advertising to the vendor. For example, when negotiating
programming arrangements with cable networks, TWE will, at
times, simultaneously negotiate for the sale of advertising to
the cable network. This arrangement may be documented in one
contract or may be documented in two separate contracts; whether
there are one or two contracts, these arrangements are
negotiated simultaneously. In accounting for these arrangements,
TWE looks to the guidance contained in the following
authoritative literature.



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | APB Opinion No. 29, Accounting for
    Nonmonetary Transactions (APB 29); and                 
| |  | EITF 01-09, Accounting for
    Consideration Given by a Vendor to a Customer
    (EITF 01-09).

TWE measures these transactions based on the
respective fair values of the goods or services purchased and
the goods or services sold. If TWE is unable to determine the
fair value of one or more of the element(s) being purchased,
then revenue recognition is limited to the total consideration
received for the products or services sold less amounts paid.
The accounting for these transactions requires significant
judgments and estimates, which are further discussed in Critical
Accounting Policies.

Advertising Costs

TWE expenses advertising costs for theatrical and
television product as incurred in accordance with AICPA
SOP 00-2. In accordance with AICPA SOP 93-7,
Reporting on Advertising Costs, other advertising
costs, including advertising associated with the launch of new
cable channels and products, are expensed upon the first
exhibition of the advertisement. Advertising expense was
$1.8 billion in 2002, $1.5 billion on historical basis
in 2001 and $1.3 billion in 2000.

Cash and Equivalents

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

Derivative and Financial Instruments

Effective July 1, 1998, TWE adopted FASB
Statement No. 133, as amended by FASB Statement
No. 138, Accounting for Derivative Instruments and
Hedging Activities (FAS 133).
FAS 133 requires that all derivative instruments be
recognized on the balance sheet at fair value. In addition,
FAS 133 provides that for derivative instruments that
qualify for hedge accounting, changes in the fair value will
either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or
recognized in the accompanying consolidated statement of
partnership capital as a component of accumulated other
comprehensive income (loss) until the hedged item is
recognized in earnings, depending on whether the derivative is
being used to hedge changes in fair value or cash flows. The
ineffective portion of a derivatives change in fair value
will be immediately recognized in earnings. The adoption of FAS
133 did not have a material effect on TWEs consolidated
financial statements (Note 12).

The carrying value of TWEs financial
instruments approximates fair value, except for differences with
respect to long-term, fixed-rate debt (Note 7) and certain
differences relating to investments accounted for at cost and
other financial instruments that are not significant
(Note 5). The fair value of financial instruments is
generally determined by reference to market values resulting
from trading on a national securities exchange or

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


in an over-the-counter market. In cases where
quoted market prices are not available, fair value is based on
estimates using present value or other valuation techniques.

Property, Plant and Equipment

Property, plant and equipment are stated at cost.
Additions to cable property, plant and equipment generally
include material, labor, overhead and interest. Depreciation is
provided generally on the straight-line method over useful lives
ranging up to thirty years for buildings and improvements and up
to sixteen years for furniture, fixtures and other equipment.
For cable television plant upgrades and cable converters and
modems, depreciation is provided generally over useful lives of
16 and 3-5 years, respectively. Property, plant and
equipment consists of:

|                                        |                               |              |       |        |   |   |       |        |  
|--------------------------------------- | ----------------------------- | ------------ | ----- | ------ | - | - | ----- | ------ | -
|                                        |                               |             
|                                        |                               | December 31,
|                                        |                               |             
|                                        |                               | 2002         |       | 2001  
|                                        |                               |              |       |       
|                                        |                               |             
|                                        |                               | (millions)  
|Land and buildings                      |                               | $            | 895   |        |   | $ | 923   |       
|Cable television equipment              |                               |              | 7,695 |        |   |   | 8,769 |       
|Furniture, fixtures and other equipment |                               |              | 1,356 |        |   |   | 1,252 |       
|                                        |                               |              |       |        |   |   |       |       
|                                        | Less accumulated depreciation |              |       | (2,305 | ) |   |       | (2,371 | )
|                                        |                               |              |       |        |   |   |       |       
|Total                                   |                               | $            | 7,641 |        |   | $ | 8,573 |       
|                                        |                               |              |       |        |   |   |       |       

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

Goodwill and Other Intangible Assets

As a creator and distributor of branded
information and entertainment copyrights, TWE has a significant
and growing number of intangible assets, including goodwill,
cable television franchises, film and television libraries and
other copyrighted products and trademarks. In accordance with
generally accepted accounting principles, TWE does not recognize
the fair value of internally generated intangible assets. Costs
incurred to create and produce copyrighted product, such as
feature films and television series, generally are either
expensed as incurred, or capitalized as tangible assets, as in
the case of cash advances and inventoriable product costs.
However, accounting recognition is not given to any increasing
asset value that may be associated with the collection of the
underlying copyrighted material. Additionally, costs incurred to
create or extend brands generally result in losses over an
extended development period and are recognized as a reduction of
income as incurred, while any corresponding brand value created
is not recognized as an intangible asset in the consolidated
balance sheet. On the other hand, intangible assets acquired in
business combinations accounted for by the purchase method of
accounting are capitalized and amortized over their expected
useful life as a non-cash charge against future results of
operations. As of January 1, 2001, in connection with the
Merger, the intangible assets of Time Warner, including the
significant value of internally generated intangible assets of
TWE to the extent acquired, were recorded at fair value on AOL
Time Warners and TWEs consolidated balance sheets.
However, increases in the fair value of TWEs intangible
assets to the extent they werent acquired in the Merger or
increases in the fair value or creation of intangible assets
related to TWE businesses subsequent to the consummation of the
Merger, are not reflected on AOL Time Warners or
TWEs consolidated balance sheet.

As discussed previously, FAS 142, which became
effective on January 1, 2002, required that goodwill and
certain other intangible assets deemed to have an indefinite
useful life cease amortization. As a result, a

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


substantial portion of the Companys
goodwill and intangible assets, including cable and television
franchises and brands and trademarks cease amortizing. However,
TWE continues to amortize intangible assets that are deemed to
have a finite useful life, including film and television
libraries and customer lists which are amortized over weighted
average useful lives of 17 and 5 years, respectively.
Amortization of goodwill and intangible assets was
$150 million in 2002, $2.668 billion in 2001 and
$503 million in 2000. Accumulated amortization of goodwill
and intangible assets at December 31, 2002 was
$2.175 billion, $3.859 billion in 2001 and
$4.445 billion in 2000.

TWE periodically reviews the carrying value of
acquired intangible assets, including goodwill, to determine
whether impairment may exist. FAS 142 requires that
goodwill and certain intangible assets be assessed for
impairment using fair value measurement techniques.
Specifically, goodwill impairment is determined using a two-step
process. The first step of the goodwill impairment test is used
to identify potential impairment by comparing the fair value of
a reporting unit with its carrying amount, including goodwill.
If the fair value of a reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered not
impaired and the second step of the impairment test is
unnecessary. If the carrying amount of a reporting unit exceeds
its fair value, the second step of the goodwill impairment test
is performed to measure the amount of impairment loss, if any.
The second of the goodwill impairment test compares the implied
fair value of the reporting units goodwill with the
carrying amount of that goodwill. If the carrying amount of the
reporting units goodwill exceeds the implied fair value of
that goodwill, an impairment loss is recognized in an amount
equal to that excess. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill
recognized in a business combination. That is, the fair value of
the reporting unit is allocated to all of the assets and
liabilities of that unit (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business
combination and the fair value of the reporting unit was the
purchase price paid to acquire the reporting unit. The
impairment test for other intangible assets not subject to
amortization consists of a comparison of the fair value of the
intangible asset with its carrying value. If the carrying value
of the intangible asset exceeds its fair value, an impairment
loss is recognized in an amount equal to that excess. For
intangible assets subject to amortization, to the extent the
fair value of the intangible asset, determined based upon the
estimated future cash flows attributable to the asset less
estimated future cash outflows, are less than the carrying
amount, an impairment loss is recognized. The determination of
impairment of goodwill and other intangible assets requires
significant judgments and estimates, which is further discussed
under Critical Accounting Policies.

Income Taxes

As a Delaware limited partnership, TWE is
generally not subject to U.S. federal and state income taxation.
However, certain of TWEs operations are conducted by
subsidiary corporations that are subject to domestic or foreign
taxation. Income taxes are provided on the income of such
corporations using the liability method prescribed by FASB
Statement No. 109, Accounting for Income Taxes.
Under the liability method, deferred income taxes reflect the
tax effect of net operating loss and investment carryforwards
and the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial
statement and income tax purposes, as determined under enacted
tax laws and rates. The financial effect of changes in tax laws
or rates is accounted for in the period of enactment. The
subsequent realization of net operating loss and investment tax
credit carryforwards acquired in acquisitions accounted for
using the purchase method of accounting is recorded as a
reduction of goodwill.

Stock-Based Compensation

AOL Time Warner has various stock option plans
under which it may grant options to purchase AOL Time Warner
common stock to employees of AOL Time Warner and TWE. The
Company 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

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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. AOL Time Warner has elected to continue to apply
APB 25 in accounting for its stock option incentive plans
(Note 11).

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

As previously discussed, in 2002 the FASB issued
FAS 148. FAS 148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation.
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 are 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.

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

|                        |                                                                                                                     |                          |         |      |   |      |        |     |   |   |     |      |  
|----------------------- | ------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------- | ---- | - | ---- | ------ | --- | - | - | --- | ---- | -
|                        |                                                                                                                     |                         
|                        |                                                                                                                     | Years Ended December 31,
|                        |                                                                                                                     |                         
|                        |                                                                                                                     | 2002                     |         | 2001 |   | 2000
|                        |                                                                                                                     |                          |         |      |   |     
|                        |                                                                                                                     |                         
|                        |                                                                                                                     | (millions)              
|Net income, as reported |                                                                                                                     | $                        | (21,219 | )    |   | $    | (1,032 | )   |   | $ | 229 |     
|                        | Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards |                          |         | (297 | ) |      |        | (69 | ) |   |     | (146 | )
|                        |                                                                                                                     |                          |         |      |   |      |        |     |   |   |     |     
|Pro forma net income    |                                                                                                                     | $                        | (21,516 | )    |   | $    | (1,101 | )   |   | $ | 83  |     
|                        |                                                                                                                     |                          |         |      |   |      |        |     |   |   |     |     

Comprehensive Income (Loss)

Comprehensive income (loss), which is reported on
the accompanying consolidated statement of partnership capital
as a component of accumulated other comprehensive income (loss),
consists of net income (loss) and other gains and losses
affecting partners capital that, under accounting
principles generally accepted in the United States are excluded
from net income (loss). For TWE, such items consist primarily of
unrealized gains and losses on marketable equity investments and
foreign currency translation gains and losses.

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following summary sets forth the components
of other comprehensive income (loss) accumulated in
partners capital:

|                             |  |               |    |                |  |            |    |             |  |               |     |   |  |   |      |   |  |   |      |  
|---------------------------- |  | ------------- | -- | -------------- |  | ---------- | -- | ----------- |  | ------------- | --- | - |  | - | ---- | - |  | - | ---- | -
|                             |  | Foreign       |    | Net            |  | Derivative |    | Unfunded    |  | Accumulated  
|                             |  | Currency      |    | Unrealized     |  | Financial  |    | Accumulated |  | Other        
|                             |  | Translation   |    | Gains (Losses) |  | Instrument |    | Benefit     |  | Comprehensive
|                             |  | Losses        |    | on Securities  |  | Losses     |    | Obligation  |  | Income (Loss)
|                             |  |               |    |                |  |            |    |             |  |              
|                             |  |              
|                             |  | (In millions)
|Balance at December 31, 2000 |  | $             |   |                |  | $          |   |             |  | $             |    |   |  | $ |     |   |  | $ |     |  
|2001 activity                |  |               | 1  |                |  |            | (7 | )           |  |               |    |   |  |   |     |   |  |   | (6   | )
|                             |  |               |    |                |  |            |    |             |  |               |     |   |  |   |      |   |  |   |      |  
|Balance at December 31, 2001 |  |               | 1  |                |  |            | (7 | )           |  |               |    |   |  |   |     |   |  |   | (6   | )
|2002 activity                |  |               | 35 |                |  |            | 9  |             |  |               | (21 | ) |  |   | (183 | ) |  |   | (160 | )
|                             |  |               |    |                |  |            |    |             |  |               |     |   |  |   |      |   |  |   |      |  
|Balance at December 31, 2002 |  | $             | 36 |                |  | $          | 2  |             |  | $             | (21 | ) |  | $ | (183 | ) |  | $ | (166 | )
|                             |  |               |    |                |  |            |    |             |  |               |     |   |  |   |      |   |  |   |      |  

Reclassifications

Certain reclassifications have been made to the
prior years consolidated financial statements to conform
to the 2002 presentation.

2.     GOODWILL AND
INTANGIBLE ASSETS

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

Under FAS 142, goodwill impairment is deemed
to exist if the net book value of a reporting unit exceeds its
estimated fair value. The Companys reporting units are
generally consistent with the operating segments underlying the
segments identified in Note 13  Segment Information.
This methodology differs from TWEs previous policy, as
permitted under accounting standards existing at that time, of
using undiscounted cash flows on an enterprisewide basis to
determine if goodwill is recoverable.

Upon adoption of FAS 142 in the first
quarter of 2002, TWE recorded a one-time, noncash charge of
$21.763 billion to reduce the carrying value of its
goodwill. Such charge is nonoperational in nature and is
reflected as a cumulative effect of an accounting change in the
accompanying consolidated statement of operations. In
calculating the impairment charge, the fair value of the
impaired reporting units underlying the segments were estimated
using either a discounted cash flow methodology, market
comparisons or recent comparable transactions or a combination
thereof.

The $21.763 billion goodwill impairment is
associated solely with goodwill resulting from the Merger. The
amount of the impairment primarily reflects the decline in AOL
Time Warners stock price since the Merger was announced
and valued for accounting purposes in January of 2000. Prior to
performing the review for impairment, FAS 142 required that
all goodwill deemed to be related to the entity as a whole be
assigned to all of the Companys reporting units, including
the reporting units of the acquirer. This differs from the
previous accounting rules where goodwill was assigned only to
the businesses of the company acquired. As a result, effective
January 1, 2002, $6.857 billion of the goodwill
generated in the Merger, which was previously allocated to the
TWE segments, has been reallocated on a relative fair value
basis to other segments of AOL Time Warner.

During the fourth quarter of 2002, the Company
performed its annual impairment review for goodwill and other
intangible assets and recorded an additional charge of
approximately $2.355 billion, which is recorded as a
component of operating income in the accompanying consolidated
statement of operations. The $2.355 billion is reflective
of the overall decline in market values and includes charges to
reduce the carrying value of goodwill at the Cable segment.

F-47



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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The approximate $2.355 billion charge at the
Cable segment reflects current market conditions in the cable
television industry, as evidenced by the decline in the stock
prices of comparable cable television companies.

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

|                     |  |            |        |                |  |                      |     |             |  |              |         |              |  |   |        |   |  |   |        |  |  |   |        | 
|-------------------- |  | ---------- | ------ | -------------- |  | -------------------- | --- | ----------- |  | ------------ | ------- | ------------ |  | - | ------ | - |  | - | ------ |  |  | - | ------ | 
|                     |  |            |        |               
|                     |  | Goodwill   |        |               
|                     |  |            |        | Total Assets  
|                     |  | January 1, |        | Acquisitions & |  | Cumulative Effect of |     | 4th Quarter |  | December 31, |         | December 31,
|                     |  | 2002(a)(b) |        | Adjustments(d) |  | Accounting Change    |     | Impairment  |  | 2002         |         | 2002        
|                     |  |            |        |                |  |                      |     |             |  |              |         |             
|Cable                |  | $          | 19,048 |                |  | $                    | 75  |             |  | $            | (16,768 | )            |  | $ | (2,355 | ) |  | $ |       |  |  | $ | 29,990 | 
|Filmed Entertainment |  |            | 6,165  |                |  |                      | 6   |             |  |              | (2,851  | )            |  |   |       |   |  |   | 3,320  |  |  |   | 13,276 | 
|Networks(c)          |  |            | 8,934  |                |  |                      | 20  |             |  |              | (2,144  | )            |  |   |       |   |  |   | 6,809  |  |  |   | 10,240 | 
|Corporate            |  |            |       |                |  |                      |    |             |  |              |        |              |  |   |       |   |  |   |       |  |  |   | 849    | 
|                     |  |            |        |                |  |                      |     |             |  |              |         |              |  |   |        |   |  |   |        |  |  |   |        | 
|Total                |  | $          | 34,147 |                |  | $                    | 101 |             |  | $            | (21,763 | )            |  | $ | (2,355 | ) |  | $ | 10,129 |  |  | $ | 54,355 | 
|                     |  |            |        |                |  |                      |     |             |  |              |         |              |  |   |        |   |  |   |        |  |  |   |        | 





|    |  |                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Reflects the reallocation of goodwill of
    $6.857 billion to other segments of AOL Time Warner under
    FAS 142.                                                                                                                                                                                                                                                                            
|(b) |  | In addition to the goodwill identified above, AOL
    Time Warner has recognized goodwill associated with deferred tax
    liabilities related to TWEs assets and liabilities.
    Neither the deferred tax liabilities nor the corresponding
    goodwill are recorded in TWEs standalone financial
    statements because TWE is generally not subject to U.S. Federal
    income taxation.
|(c) |  | Includes impairments at HBO ($1.933 billion)
    and The WB Network ($211 million).                                                                                                                                                                                                                                                                                                            
|(d) |  | Includes goodwill created in acquisitions
    consummated in 2002 as well as adjustments to TWEs
    preliminary purchase price allocation for several acquisitions
    consummated in 2001.                                                                                                                                                                                                  

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

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

|                                                   |  |                         |        |                         |  |     |        |       |  |                 |        |     |  |   |        |  |  |   |        |   |  |   |        | 
|-------------------------------------------------- |  | ----------------------- | ------ | ----------------------- |  | --- | ------ | ----- |  | --------------- | ------ | --- |  | - | ------ |  |  | - | ------ | - |  | - | ------ | 
|                                                   |  |                         |        |                        
|                                                   |  | As of December 31, 2002 |        | As of December 31, 2001
|                                                   |  |                         |        |                        
|                                                   |  |                         |        | Accumulated             |  |     |        |       |  | Accumulated     |        |    
|                                                   |  | Gross                   |        | Amortization(a)         |  | Net |        | Gross |  | Amortization(a) |        | Net
|                                                   |  |                         |        |                         |  |     |        |       |  |                 |        |    
|Intangible assets subject to
    amortization:     |  |                         |        |                         |  |     |        |       |  |                 |        |     |  |   |        |  |  |   |        |   |  |   |        | 
|Film library                                       |  | $                       | 2,529  |                         |  | $   | (276   | )     |  | $               | 2,253  |     |  | $ | 2,529  |  |  | $ | (138   | ) |  | $ | 2,391  | 
|Customer lists and other intangible assets         |  |                         | 193    |                         |  |     | (105   | )     |  |                 | 88     |     |  |   | 204    |  |  |   | (131   | ) |  |   | 73     | 
|                                                   |  |                         |        |                         |  |     |        |       |  |                 |        |     |  |   |        |  |  |   |        |   |  |   |        | 
|Total                                              |  | $                       | 2,722  |                         |  | $   | (381   | )     |  | $               | 2,341  |     |  | $ | 2,733  |  |  | $ | (269   | ) |  | $ | 2,464  | 
|                                                   |  |                         |        |                         |  |     |        |       |  |                 |        |     |  |   |        |  |  |   |        |   |  |   |        | 
|Intangible assets not subject to
    amortization: |  |                         |        |                         |  |     |        |       |  |                 |        |     |  |   |        |  |  |   |        |   |  |   |        | 
|Cable television franchises (b)                    |  | $                       | 21,685 |                         |  | $   | (1,256 | )     |  | $               | 20,429 |     |  | $ | 21,911 |  |  | $ | (1,644 | ) |  | $ | 20,267 | 
|Brands, trademarks and other intangible assets     |  |                         | 2,150  |                         |  |     | (61    | )     |  |                 | 2,089  |     |  |   | 2,150  |  |  |   | (61    | ) |  |   | 2,089  | 
|                                                   |  |                         |        |                         |  |     |        |       |  |                 |        |     |  |   |        |  |  |   |        |   |  |   |        | 
|Total                                              |  | $                       | 23,835 |                         |  | $   | (1,317 | )     |  | $               | 22,518 |     |  | $ | 24,061 |  |  | $ | (1,705 | ) |  | $ | 22,356 | 
|                                                   |  |                         |        |                         |  |     |        |       |  |                 |        |     |  |   |        |  |  |   |        |   |  |   |        | 



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Accumulated amortization for intangible assets
    not subject to amortization relates to amortization expense
    recognized prior to the adoption of FAS 142.                                                                                                                                                                                                                                                                                                                  
|   
|(b) |  | The change in cable television franchises
    primarily relates to the restructuring of TWE-A/N, which
    resulted in the deconsolidation of the gross and accumulated
    amortization balances relating to the cable television franchise
    intangible assets of the Advance/Newhouse Systems. The decline
    in the gross balance was offset in part by the increase in the
    carrying value of Comcasts indirect interest in TWE-A/N as
    part of the restructuring.

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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The Company recorded amortization expense of
$150 million for the year ended 2002 compared to
$2.668 billion for the year ended of 2001. Based on the
current amount of intangible assets subject to amortization, the
estimated amortization expense for each of the succeeding
5 years are as follows: 2003: $149 million; 2004:
$144 million; 2005: $183 million; 2006:
$183 million; and 2007: $144 million. As acquisitions
and dispositions occur in the future and as purchase price
allocations are finalized, these amounts may vary.

During the year ended of 2002, the Company
acquired the following intangible assets (in millions):

|                                                                |  |   |     |                     |  |  |             | 
|--------------------------------------------------------------- |  | - | --- | ------------------- |  |  | ----------- | 
|                                                                |  |   |     | Weighted Average   
|                                                                |  |   |     | Amortization Period
|                                                                |  |   |     |                    
|Other intangible assets subject to amortization                 |  | $ | 27  |                     |  |  | 10-15 years | 
|Cable television franchises not subject to
    amortization (a) |  |   | 890 |                     |  |  | Indefinite  | 
|                                                                |  |   |     |                     |  |  |             | 
|Total                                                           |  | $ | 917 |                     |  |  |             | 
|                                                                |  |   |     |                     |  |  |             | 





|    |  |                                                                                                                                                                                                 
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | The increase in cable television franchises
    primarily relates to the increase in the carrying value of
    Comcasts interest in TWE-A/N as part of a restructuring of
    that partnership.

The 2001 and 2000 results on a historical basis
do not reflect the provisions of FAS 142. Had TWE adopted
FAS 142 on January 1, 2000, the historical net income
(loss) would have been changed to the adjusted amounts indicated
below:

|                                           |  |                   |        |                   |  |   |     | 
|------------------------------------------ |  | ----------------- | ------ | ----------------- |  | - | --- | 
|                                           |  |                  
|                                           |  | Year Ended       
|                                           |  |                  
|                                           |  | December 31, 2001 |        | December 31, 2000
|                                           |  |                   |        |                  
|                                           |  |                  
|                                           |  | (millions)       
|                                           |  | Net income        |        | Net income       
|                                           |  | (loss)            |        | (loss)           
|                                           |  |                   |        |                  
|As reported  historical basis             |  | $                 | (1,032 | )                 |  | $ | 229 | 
|Add: Goodwill amortization                 |  |                   | 1,673  |                   |  |   | 119 | 
|Add: Intangible amortization               |  |                   | 853    |                   |  |   | 324 | 
|Add: Equity investee goodwill amortization |  |                   | 133    |                   |  |   | 44  | 
|Discontinued operations                    |  |                   | 41     |                   |  |   | 62  | 
|                                           |  |                   |        |                   |  |   |     | 
|Adjusted                                   |  | $                 | 1,668  |                   |  | $ | 778 | 
|                                           |  |                   |        |                   |  |   |     | 

3.     MERGER-RELATED
COSTS

America Online-Time Warner Merger

In connection with the Merger, TWE has reviewed
its operations and implemented several plans to restructure its
operations (restructuring plans). As part of the
restructuring plans, TWE recorded a restructuring liability of
$301 million during 2001. The restructuring accruals relate
to costs to exit and consolidate certain activities at TWE, as
well as costs to terminate employees across various business
units. Such amounts were recognized as liabilities assumed in
the purchase business combination and included in the allocation
of the cost to acquire Time Warner. Accordingly, such amounts
resulted in additional goodwill being recorded in connection
with the Merger.

Of the total restructuring costs,
$107 million related to work force reductions and
represented employee termination benefits. Employee termination
costs occurred across most TWE business units and ranged from
senior executives to line personnel. The number of employees
initially identified to be involuntarily terminated or relocated
approximated 1,600. As of December 31, 2002, approximately
800 of the terminations had occurred. The remaining 800
terminations are no longer expected to occur. Because certain
employees can defer receipt of termination benefits, cash
payments may continue after the employee has been terminated

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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(generally for periods up to 24 months).
Employee termination payments of $19 million were made in
2001 and $29 million were made in 2002. In addition during
2002, there were non-cash reductions in the restructuring
accrual of $36 million, as actual employee termination
payments were less than amounts originally estimated. As of
December 31, 2002, the remaining liability of approximately
$23 million was classified as a current liability in the
accompanying consolidated balance sheet.

The restructuring charge also includes
approximately $194 million associated with exiting certain
activities. Specifically, TWE has exited certain
under-performing operations, including the Studio Stores
operations included in the Filmed Entertainment segment. The
restructuring accrual associated with exit activities
specifically includes incremental costs and contractual
termination obligations for items such as leasehold termination
payments and other facility exit costs incurred as a direct
result of these plans, which will not have future benefits.
Payments related to exit activities were approximately
$88 million in 2001 and $80 million were paid in 2002.
In addition, there were non-cash reductions in the restructuring
accrual of approximately $11 million, as actual termination
payments were more than amounts originally estimated. As of
December 31, 2002, the remaining liability of
$37 million was primarily classified as a current liability
in the accompanying consolidated balance sheet.

Selected information relating to the
restructuring plans follows (in millions):

|                                                    |  |             |     |            |  |       |     |   |  |   |      |  
|--------------------------------------------------- |  | ----------- | --- | ---------- |  | ----- | --- | - |  | - | ---- | -
|                                                    |  | Employee    |     |            |  |      
|                                                    |  | Termination |     | Exit Costs |  | Total
|                                                    |  |             |     |            |  |      
|Initial accruals                                    |  | $           | 107 |            |  | $     | 194 |   |  | $ | 301  |  
|Cash paid  2001                                    |  |             | (19 | )          |  |       | (88 | ) |  |   | (107 | )
|                                                    |  |             |     |            |  |       |     |   |  |   |      |  
|Restructuring liability as of December 31,
    2001 |  | $           | 88  |            |  | $     | 106 |   |  | $ | 194  |  
|Cash paid  2002                                    |  |             | (29 | )          |  |       | (80 | ) |  |   | (109 | )
|Noncash reductions(a)  2002                        |  |             | (23 | )          |  |       | (2  | ) |  |   | (25  | )
|                                                    |  |             |     |            |  |       |     |   |  |   |      |  
|Restructuring liability as of December 31,
    2002 |  | $           | 36  |            |  | $     | 24  |   |  | $ | 60   |  
|                                                    |  |             |     |            |  |       |     |   |  |   |      |  



---



|    |                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Noncash 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.

Restructuring Costs

During the year ended December 31, 2002, TWE
incurred and accrued other restructuring costs of
$13 million that related to work force reductions and
represented employee termination benefits. The number of
employees expected to be terminated was approximately 210. As of
December 31, 2002, substantially all the terminations had
occurred. The severed employees spanned the major departments
and divisions of TWE and ranged from senior executives to line
personnel. As of December 31, 2002, $2 million has
been paid against these accruals. The remaining $11 million
is primarily classified as a current liability in the
accompanying consolidated statement of operations.

4.     CABLE-RELATED
TRANSACTIONS AND INVESTMENTS

Restructuring of TWE-Advance/Newhouse and Road
Runner Partnership

Prior to August 1, 2002, the TWE-A/N was
owned approximately 64.8% by TWE, the managing partner, 33.3% by
the Advance/Newhouse Partnership (Advance/Newhouse)
and 1.9% indirectly by AOL Time Warner. The financial position
and operating results of TWE-A/N were consolidated by TWE, and
the partnership interest owned by Advance/Newhouse was reflected
in the consolidated financial statements of TWE as minority
interest. In addition, prior to August 1, 2002, Road
Runner, a high-speed cable modem Internet service provider, was
owned by TWI Cable Inc. (a wholly owned subsidiary of AOL Time
Warner), TWE and TWE-A/N, with AOL Time Warner owning
approximately 65% on a fully attributed basis (i.e.,

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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


after considering the portion attributable to the
minority partners of TWE and TWE-A/N). AOL Time Warners
interest in Road Runner was accounted for using the equity
method of accounting because of certain approval rights held by
Advance/Newhouse.

On June 24, 2002, TWE and Advance/Newhouse
agreed to restructure TWE-A/N, which, on August 1, 2002,
(the Debt Closing Date) resulted in Advance/Newhouse
assuming responsibility for the day-to-day operations of certain
TWE-A/N cable systems serving approximately 2.1 million
subscribers located primarily in Florida (the
Advance/Newhouse Systems). On the Debt Closing Date,
Advance/Newhouse and its affiliates arranged for a new credit
facility, which is independent of and not guaranteed by AOL Time
Warner, to support the Advance/Newhouse Systems and assumed and
repaid approximately $780 million of TWE-A/Ns senior
indebtedness. As of the Debt Closing Date, Advance/Newhouse
assumed responsibility for the day-to-day operations of the
Advance/Newhouse Systems. As a result, TWE has deconsolidated
the financial position and operating results of these systems.
Additionally, all prior period results associated with the
Advance/Newhouse Systems, including the historical minority
interest allocated to Advance/Newhouses interest in
TWE-A/N, have been reflected as a discontinued operation for all
periods presented. Under the new TWE-A/N Partnership Agreement,
effective as of the Debt Closing Date, Advance/Newhouses
partnership interest tracks only the economic performance of the
Advance/Newhouse Systems, including associated liabilities,
while TWE retains all of the economic interests in the other
TWE-A/N assets and liabilities. The restructuring was completed
on December 31, 2002.

Road Runner Restructuring

The high-speed online businesses of Time Warner
Cable and AT&T were managed in a separate venture
(Road Runner) in which the common equity interests
were collectively owned 68.6% by TWI Cable Inc., TWE and TWE-A/N
and 31.4% by AT&T. In addition, Microsoft Corp. and Compaq
Computer Corp. each owned a preferred equity interest in Road
Runner that was convertible into a 10% common equity interest
(the Preferred Equity Interests). In December 2000,
Time Warner announced that the ownership of Road Runner would be
restructured. As a result of the restructuring, TWE recognized a
one-time restructuring charge of $35 million in 2000
related to employee severance and payments to terminate
contracts. This charge is included in other expense, net, in the
accompanying consolidated statement of operations. Subsequent to
the restructuring, Road Runner was owned by TWI Cable Inc., TWE
and TWE-A/N, with TWE owning approximately 68% on a fully
attributed basis (i.e., after considering the portion
attributable to the minority partners of TWE-A/N). As of
December 31, 2001, TWEs interest in Road Runner
continued to be accounted for using the equity method of
accounting because of certain approval rights held by
Advance/Newhouse, a partner in TWE-A/N.

As previously discussed, as part of the
restructuring of TWE-A/N, on the Debt Closing Date, AOL Time
Warner effectively acquired Advance/Newhouses attributable
interest in Road Runner, thereby increasing its ownership to
approximately 82% on a fully attributed basis. As a result of
the termination of Advance/Newhouses minority rights in
Road Runner, TWE has consolidated the financial position and
results of operations of Road Runner with the financial position
and results of operations of TWEs Cable segment. As
permitted under generally accepted accounting principles, the
Company has consolidated the results of Road Runner retroactive
to the beginning of 2002.

In connection with the TWE-A/N restructuring, TWE
recognized a non-cash pretax gain of approximately
$1.2 billion. The gain was calculated as the difference
between the fair value received in the restructuring (e.g.,
TWEs increased economic interest in the TWE-A/N cable
systems remaining under the management of TWE) and the carrying
value surrendered (e.g. the carrying value of TWEs
interest in the Advance/Newhouse Systems). In order to determine
fair value, in addition to internal analysis, the Company
obtained an appraisal from an independent valuation firm. The
gain was mitigated because a portion of TWEs investment in
TWE-A/N that related to AOL Time Warners interests was
recently adjusted to fair value as

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


part of purchase accounting for the Merger. The
gain is included as part of discontinued operations in the
accompanying consolidated statement of operations for year ended
December 31, 2002.

Cable Television System Joint
Ventures

Time Warner Cable has a 50% interest in a number
of unconsolidated cable television systems that served an
aggregate 1.6 million subscribers and had combined debt of
approximately $2.1 billion as of December 31, 2002.
Unconsolidated cable television joint ventures include AOL Time
Warners investment in Texas Cable Partners, L.P.,
(Texas Cable) which as of December 31, 2002 served
approximately 1.2 million subscribers, and Kansas City
Cable Partners (Kansas City Cable), which as of
December 31, 2002 served approximately 306,000 subscribers.
As of December 31, 2002, Texas Cable and Kansas City Cable
had outstanding debt of approximately $1.764 billion
(including $268 million due to TWE) and $399 million,
respectively.

5.     INVESTMENTS,
INCLUDING AVAILABLE-FOR-SALE SECURITIES

TWEs investments, including
available-for-sale securities consist of:

|                                                                    |       |              |       |       |  |   |       |       | 
|------------------------------------------------------------------- | ----- | ------------ | ----- | ----- |  | - | ----- | ----- | 
|                                                                    |       |             
|                                                                    |       | December 31,
|                                                                    |       |             
|                                                                    |       | 2002         |       | 2001 
|                                                                    |       |              |       |      
|                                                                    |       |             
|                                                                    |       | (millions)  
|Equity method investments                                           |       | $            | 2,345 |       |  | $ | 2,084 |      
|Cost-method investments                                             |       |              | 16    |       |  |   | 13    |      
|Fair-value method investments, including
    derivative instruments |       |              | 142   |       |  |   | 211   |      
|                                                                    |       |              |       |       |  |   |       |      
|                                                                    | Total |              | $     | 2,503 |  |   | $     | 2,308 | 
|                                                                    |       |              |       |       |  |   |       |      





| |     |                                                                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | The fair value of TWEs cost-method and
    fair-value investments, including equity derivative instruments,
    was approximately $158 million at December 31, 2002,
    and $224 million at December 31, 2001.

Investment Writedowns

The carrying value of the Companys
investments in its unconsolidated cable television system joint
ventures was adjusted upward in the Merger by over
$1 billion. During 2002, the value of these investments
experienced a decline in value and during the fourth quarter,
management determined that the decline in value was
other-than-temporary and recorded an impairment charge of
$363 million to reduce the carrying value of certain
investments to fair value. In determining fair value, the
Company considered the per subscriber valuation of consolidated
cable television systems that was used to determine the goodwill
impairment charge at the Cable segment in the fourth quarter of
2002, as well as per subscriber valuations of unrelated cable
television companies.

Equity-Method Investments

At December 31, 2002, investments accounted
for using the equity method and the voting ownership percentage
held by TWE on a fully attributed basis included: Comedy
Partners, L.P. (50% owned), certain cable system joint ventures
and certain international cable and programming joint ventures
(generally 25-50% owned) and Courtroom Television Network LLC
(50% owned). In 2001 and 2000, equity investee information was
additionally provided for Road Runner, which is no longer
accounted for under the equity

F-52



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


method of accounting as of December 31, 2002. A
summary of combined financial information as reported by the
equity investees of TWE is set forth below:

|                                                    |  |                          |       |      |  |      |       |   |  |   |       |  
|--------------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                    |  |                         
|                                                    |  | Years Ended December 31,
|                                                    |  |                         
|                                                    |  | 2002                     |       | 2001 |  | 2000
|                                                    |  |                          |       |      |  |     
|                                                    |  |                         
|                                                    |  | (millions)              
|Operating Results:                                  |  |                          |       |      |  |      |       |   |  |   |       |  
|Revenues                                            |  | $                        | 2,143 |      |  | $    | 1,701 |   |  | $ | 1,589 |  
|Operating income (loss)                             |  |                          | 322   |      |  |      | (58   | ) |  |   | 33    |  
|Net income (loss)                                   |  |                          | 149   |      |  |      | (183  | ) |  |   | (260  | )
|                                                   
|Balance Sheet:                                      |  |                          |       |      |  |      |       |   |  |   |       |  
|Current assets                                      |  |                          | 415   |      |  |      | 356   |   |  |   | 352   |  
|Total assets                                        |  |                          | 3,570 |      |  |      | 3,464 |   |  |   | 3,103 |  
|Current liabilities                                 |  |                          | 632   |      |  |      | 599   |   |  |   | 1,067 |  
|Long-term debt                                      |  |                          | 2,065 |      |  |      | 2,108 |   |  |   | 2,018 |  
|Total liabilities                                   |  |                          | 2,886 |      |  |      | 2,904 |   |  |   | 3,170 |  
|Total shareholders equity or partners
    capital |  |                          | 684   |      |  |      | 560   |   |  |   | (67   | )

The above table represents the combined financial
information of entities in which TWE has an investment accounted
for using the equity method of accounting. These amounts are not
the amounts reflected on the Companys accompanying
consolidated financial statements. Consistent with TWEs
accounting policy for investments accounted for using the equity
method of accounting, as described in Note 1, TWE has included
approximately $2.345 billion in Investments, including
available-for-sale securities on the accompanying
consolidated balance sheet, representing TWEs investment
in and amounts due to and from the equity investee. Similarly,
the Company has recorded $24 million of income in other
expense, net, in the accompanying consolidated statement of
operations, representing the Companys share in the pretax
income (loss) of the investees.

As discussed in Note 1, under the purchase
method of accounting, the cost to acquire Time Warner was
allocated to its underlying net assets, including investments
accounted for using the equity method of accounting, based on
their estimated fair values. As a result, TWEs investments
accounted for using the equity method of accounting were
adjusted upward by approximately $1.6 billion, including
over $1 billion relating to investments in certain cable
television joint ventures. These adjustments, which approximate
the difference between TWEs carrying value in the
investees and the Companys underlying equity in the net
assets of the investees, were amortized on a straight-line basis
over a weighted-average useful life of 17 years. However,
as discussed in Note 1, upon adoption of FAS 142 in the
first quarter of 2002, AOL Time Warner ceased amortizing
goodwill included in the carrying value of investments accounted
for under the equity method of accounting.

Gains on Sale of Interest in
CanalSatellite

During 2000, Warner Bros. recognized a net
pretax, investment-related gain of approximately
$65 million, principally relating to additional proceeds
received in 2000 in connection with the 1999 sale of an interest
in CanalSatellite. This gain has been included in other expense,
net, in the accompanying consolidated statement of operations in
2000.

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


6.     INVENTORIES
AND FILM COSTS

Inventories and film costs consist of:

|                                            |                                |              |       |      |  |   |       |     | 
|------------------------------------------- | ------------------------------ | ------------ | ----- | ---- |  | - | ----- | --- | 
|                                            |                                |             
|                                            |                                | December 31,
|                                            |                                |             
|                                            |                                | 2002         |       | 2001
|                                            |                                |              |       |     
|                                            |                                |             
|                                            |                                | (millions)  
|Programming costs, less amortization        |                                | $            | 1,314 |      |  | $ | 1,285 |    
|Merchandise                                 |                                |              | 154   |      |  |   | 158   |    
|Film costs  Theatrical:                    |                                |              |       |      |  |   |       |    
|                                            | Released, less amortization    |              |       | 602  |  |   |       | 650 | 
|                                            | Completed and not released     |              |       | 94   |  |   |       | 285 | 
|                                            | In production                  |              |       | 458  |  |   |       | 346 | 
|                                            | Development and pre-production |              |       | 39   |  |   |       | 36  | 
|Film costs  Television:                    |                                |              |       |      |  |   |       |    
|                                            | Released, less amortization    |              |       | 160  |  |   |       | 123 | 
|                                            | Completed and not released     |              |       | 165  |  |   |       | 95  | 
|                                            | In production                  |              |       | 69   |  |   |       | 59  | 
|                                            | Development and pre-production |              |       | 5    |  |   |       | 2   | 
|                                            |                                |              |       |      |  |   |       |    
|Total inventories and film costs(a)         |                                |              | 3,060 |      |  |   | 3,039 |    
|Less current portion of inventory(b)        |                                |              | 871   |      |  |   | 852   |    
|                                            |                                |              |       |      |  |   |       |    
|Total noncurrent inventories and film costs |                                | $            | 2,189 |      |  | $ | 2,187 |    
|                                            |                                |              |       |      |  |   |       |    





| |     |                                                                                                                                                                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Does not include $2.253 billion and
    $2.391 billion of net film library costs as of
    December 31, 2002 and December 31, 2001, respectively,
    which are included in intangible assets subject to amortization
    on the accompanying consolidated balance sheet. See Note 2.                         
| | (b) | Current inventory as of December 31, 2002
    and December 31, 2001 is comprised of programming inventory
    at the Networks segment ($717 million and
    $694 million, respectively) and videocassettes and DVDs at
    the Filmed Entertainment segment ($154 million and
    $158 million, respectively).

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

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


7.     LONG-TERM DEBT
AND OTHER FINANCING ARRANGEMENTS



| |               
| | --------------
| | Long-Term Debt

Long-term debt consists of:

|                                                                   |  |               |      |            |  |           |           |          |  |                  |        |      |  |   |       |  |  |   |       |   |  |   |       |  
|------------------------------------------------------------------ |  | ------------- | ---- | ---------- |  | --------- | --------- | -------- |  | ---------------- | ------ | ---- |  | - | ----- |  |  | - | ----- | - |  | - | ----- | -
|                                                                   |  | Weighted      |      |            |  |           |           |          |  |                 
|                                                                   |  | Average       |      |            |  |           |           |          |  | Outstanding Debt
|                                                                   |  | Interest Rate |      |            |  | 2002      |           | 2002     |  | at December 31, 
|                                                                   |  | at December   |      |            |  | Committed |           | Unused   |  |                 
|                                                                   |  | 31, 2002      |      | Maturities |  | Capacity  |           | Capacity |  | 2002             |        | 2001
|                                                                   |  |               |      |            |  |           |           |          |  |                  |        |     
|                                                                   |  |               |      |            |  |           |           |          |  |                 
|                                                                   |  |               |      |            |  |           |           |          |  | (millions)      
|Bank credit agreement debt and commercial paper
    programs(a)(b) |  |               | 1.92 | %          |  |           | 2004-2007 |          |  | $                | 10,801 |      |  | $ | 6,645 |  |  | $ | 1,458 |   |  | $ | 2,290 |  
|Fixed-rate public debt                                             |  |               | 7.49 | %          |  |           | 2008-2033 |          |  |                  | 3,394  |      |  |   |      |  |  |   | 3,394 |   |  |   | 4,011 |  
|Due to AOL Time Warner                                             |  |               | 1.53 | %          |  |           | 2004      |          |  |                  | 2,084  |      |  |   |      |  |  |   | 2,084 |   |  |   | 1,734 |  
|Other fixed-rate obligations(c)                                    |  |               |     |            |  |           |          |          |  |                  | 19     |      |  |   |      |  |  |   | 19    |   |  |   | 16    |  
|                                                                   |  |               |      |            |  |           |           |          |  |                  |        |      |  |   |       |  |  |   |       |   |  |   |       |  
|Total                                                              |  |               |      |            |  |           |           |          |  |                  | 16,298 |      |  |   | 6,645 |  |  |   | 6,955 |   |  |   | 8,051 |  
|Debt due within one year(d)                                        |  |               |      |            |  |           |           |          |  |                  | (8     | )    |  |   |      |  |  |   | (8    | ) |  |   | (2    | )
|                                                                   |  |               |      |            |  |           |           |          |  |                  |        |      |  |   |       |  |  |   |       |   |  |   |       |  
|Total long-term debt                                               |  |               |      |            |  |           |           |          |  | $                | 16,290 |      |  | $ | 6,645 |  |  | $ | 6,947 |   |  | $ | 8,049 |  
|                                                                   |  |               |      |            |  |           |           |          |  |                  |        |      |  |   |       |  |  |   |       |   |  |   |       |  





| |     |                                                                                                                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Committed capacity and unused capacity includes
    approximately $1.0 billion of cash and short-term investments
    less $211 million of outstanding letters of credit.                                                                                
| | (b) | Portion of bank credit agreement and commercial
    paper programs committed capacity can be used by non-TWE,
    AOL Time Warner segments. At December 31, 2002,
    approximately $2.7 billion of committed capacity was used
    by non-TWE segments.
| | (c) | Includes obligations under capital leases.                                                                                                                                                                                                               
| | (d) | Debt due within one year relates to other
    fixed-rate obligations.                                                                                                                                                                                    

Bank Credit Agreements and Commercial Paper
Programs

$10 Billion Revolving Credit
Facilities

In July 2002, AOL Time Warner, together with
certain of its consolidated subsidiaries, entered into two new
senior unsecured long-term revolving bank credit agreements with
an aggregate borrowing capacity of $10 billion (the
2002 Credit Agreements) and terminated two existing
bank credit facilities with an aggregate borrowing capacity of
$12.5 billion (the Old Credit Agreements),
which were scheduled to expire during 2002. The 2002 Credit
Agreements are comprised of a $6 billion five-year
revolving credit facility and a $4 billion 364-day
revolving credit facility, borrowings under which may be
extended for a period up to two years following the initial
term. The borrowers under the 2002 Credit Agreements are AOL
Time Warner, TWE, TWE-A/N and AOL Time Warner Finance Ireland.
The obligations of each of AOL Time Warner and AOL Time Warner
Finance Ireland are guaranteed by America Online, Time Warner,
Turner Broadcasting System, Inc. (TBS) and Time
Warner Companies, Inc. (TW Companies), directly or
indirectly. The obligation of AOL Time Warner Finance Ireland is
guaranteed by AOL Time Warner. Borrowings bear interest at
specific rates, generally based on the credit rating for each of
the borrowers, which is currently equal to LIBOR plus .625%,
including facility fees of .10% and .125% on the total
commitments of the 364-day and five-year facilities,
respectively. In addition, the Company is required to pay an
additional usage fee of .0625% if the two facilities in the
aggregate have more than 33% outstanding and .125% if the
facilities have more than 66% outstanding. The 2002 Credit
Agreements provide same-day funding, multi-currency capability
and letter of credit availability. They contain a maximum
leverage ratio covenant of 5.0 times for each of TWE and
TWE-A/N, but do not contain any credit ratings-based defaults or
covenants, nor an ongoing covenant or representation
specifically relating to a material adverse change in the
Companys financial condition or results of operations.
Borrowings may be used for general business purposes and unused
credit is available to support commercial paper borrowings. As
of December 31, 2002, $1.458 billion was

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


outstanding under these facilities. As of
December 31, 2001, $2.290 billion was outstanding
under the Old Credit Agreements.

In January 2003, the Company received
unanimous approval to amend its 2002 Credit Agreements,
effective upon closing of the TWE restructuring. The amendments
will (i) replace the $50 billion net worth covenant in
each of the credit facilities within the 2002 Credit Agreements
with an interest coverage covenant of 2.0 times cash interest
expense, (ii) remove TWE-A/N as a borrower under all the
credit facilities and TWE as a borrower under the five-year
revolving credit facility and (iii) divide the
$4 billion 364-day revolving credit facility into a
separate $2.5 billion revolving credit facility for AOL
Time Warner and AOL Time Warner Finance Ireland and a $1.5
billion revolving credit facility for TWE (and TWC Inc.
following any initial public offering of its stock or registered
public issuance of its debt). Other terms of the 364-day credit
facility were amended to reflect this bifurcation and the
stand-alone nature of the $1.5 billion TWE credit facility.
As part of the same consent, the maturity of the
$1.5 billion TWE credit facility was extended from
July 7, 2003 to January 7, 2004, while the length of
the optional extension period was reduced from two years to one
year.

Fixed-Rate Public Borrowings

From 1992 through 1993, TWE had various public
debt offerings. The maturities of these outstanding offerings
ranged from 10 to 40 years and the interest rates range
from 7.25% to 10.15%. At December 31, 2002 and 2001, the
total debt outstanding from these offerings was approximately
$3.394 billion and $4.011, respectively.

Debt Guarantees

Each AOL Time Warner General Partner has
guaranteed a pro rata portion of approximately $3.3 billion
of TWEs debt and accrued interest at December 31,
2002, based on the relative fair value of the net assets each
AOL Time Warner General Partner (or its predecessor) contributed
to TWE (the AOL Time Warner General Partner
Guarantees). Such indebtedness is recourse to each AOL
Time Warner General Partner only to the extent of its guarantee.
The indenture pursuant to which TWEs notes and debentures
have been issued (the Indenture) requires the
majority consent of the holders of the notes and debentures to
terminate the AOL Time Warner General Partner Guarantees. There
are generally no restrictions on the ability of the AOL Time
Warner General Partner guarantors to transfer material assets,
other than TWE assets, to parties that are not guarantors. In
addition approximately $1.168 billion of TWE-A/Ns
debt and accrued interest at December 31, 2002 has been
guaranteed by TWI Cable Inc. and certain of its subsidiaries.

Interest Expense and Maturities

Interest expense amounted to $426 million in
2002, $554 million in 2001 and $634 million in 2000.
The weighted average interest rate on TWEs total debt was
4.54% and 3.74% at December 31, 2002 and 2001,
respectively. The Company recognized interest income of
$25 million in 2002, $24 million in 2001 and
$22 million in 2000.

Annual repayments of long-term debt for the five
years subsequent to December 31, 2002 consist of
$2.370 billion due in 2004 and $1.167 billion due in
2007, all of which is bank debt. This includes all borrowings
under the Bank Credit Agreement, as well as any commercial paper
borrowings supported thereby. After 2007, no more than
$1 billion matures in any one year. TWE has the intent and
ability to continue to refinance its borrowings on a long-term
basis through arrangements with AOL Time Warner.

Fair Value of Debt

Based on the level of interest rates prevailing
at December 31, 2002 and 2001, the fair value of TWEs
fixed-rate debt exceeded its carrying value by approximately
$216 million in 2002 and $241 million in 2001.

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Unrealized gains or losses on debt do not result
in the realization or expenditure of cash and generally are not
recognized for financial reporting purposes unless the debt is
retired prior to its maturity.

Other Financing Arrangements

From time to time, the Company enters into
various other financing arrangements with special purpose
entities (SPEs). These arrangements include
facilities which provide for the accelerated receipt of cash on
certain accounts receivable and backlog licensing contracts. TWE
employs these arrangements because they provide a cost-efficient
form of financing, including certain tax benefits, as well as an
added level of diversification of funding sources. TWE is able
to realize cost efficiencies under these arrangements since the
assets securing the financing are held by a legally separate,
bankruptcy-remote SPE and provides direct security for the
funding being provided. These facilities generally have
relatively short-term maturities (1 to 5 years), which is
taken into account in determining the maximum efficiency for the
Companys overall capital structure. The Companys
maturity profile of its outstanding debt and other financing
arrangements is relatively long-term, with a weighted average
maturity of approximately 10 years. The assets and
financing associated with these arrangements, which are
discussed in more detail in the following paragraphs, generally
qualify for off-balance sheet treatment.

Accounts Receivable Securitization
Facilities

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

As proceeds for the accounts receivable sold to
the qualifying SPE, TWE receives cash, for which there is no
obligation to repay, and an interest-bearing retained beneficial
interest, which is included in receivables on the accompanying
consolidated balance sheet. In addition, TWE services the Pooled
Receivables on behalf of the qualifying SPE. Income received by
AOL Time Warner in exchange for this service is equal to the
prevailing market rate for such services and has not been
material in any period. The retained beneficial interest, which
has been adjusted to reflect the portion that is not expected to
be collectible, bear an interest rate that varies with the
prevailing market interest rates. For this reason, and because
the accounts receivables underlying the retained ownership
interest that are sold to the qualifying SPE are generally short
term in nature, the fair value of the notes receivable
approximated its carrying value at December 31, 2002 and at
December 31, 2001. The retained beneficial interest related
to the sale of Pooled Receivables to a qualifying SPE is
reflected in account receivables, net on the Companys
consolidated balance sheet and was $481 million at
December 31, 2002 and $416 million at December 31,
2001. In 2002, additional net proceeds received from TWEs
accounts receivable by utilizing its accounts receivable
securitization programs were not material. In 2001 and 2000,
additional net proceeds received from TWEs accounts
receivable by utilizing its accounts receivable securitization
programs were $116 million and $174 million,
respectively.

Backlog Securitization Facility

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

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

Because the Backlog Contracts securitized under
this facility consist of cash contracts for the licensing of
theatrical and television product that have already been
produced, the recognition of revenue for such completed product
is dependent only upon the commencement of the availability
period for telecast under the terms of the licensing agreements.
Accordingly, the proceeds received under the program are
classified as deferred revenues in long-term liabilities in the
accompanying consolidated balance sheet. The amount of related
deferred revenue reflected on TWEs accompanying
consolidated balance sheet, related to the backlog
securitization facility, was $500 million at December 31,
2002 and $442 million at December 31, 2001. Total
filmed entertainment backlog contracts outstanding were
approximately $3.2 billion at December 31, 2002 and
approximately $3.8 billion at December 31, 2001.

Rating Triggers and Financial
Covenants

Each of the Companys borrowing facilities
discussed above, including financing arrangements with SPEs,
contain customary covenants. A breach of such covenants in the
bank credit agreement that continues beyond any grace period can
constitute a default, which can limit the ability to borrow and
can give rise to a right of the lenders to terminate the
facility and/or require immediate payment of outstanding debt. A
breach of such covenants in the financing arrangements with SPEs
that continues beyond any grace period can constitute a
termination event which can limit the facility as a future
source of liquidity; however, there would be no claims on the
Company for the receivables or backlog contracts previously
sold. Additionally, in the event that the Companys credit
ratings decrease, the cost of maintaining the facilities and of
borrowing increases and, conversely, if the ratings improve,
such costs decrease.

As of December 31, 2002 and through the date
of this filing, the Company was in compliance with all
covenants. Management does not foresee that the Company will
have any difficulty complying with the covenants currently in
place in the foreseeable future. As discussed in more detail in
Note 1 to the accompanying consolidated financial statements,
the Company recorded a non-cash charge of $21.763 billion
upon adoption of FAS 142. In addition, TWE recorded a charge of
$2.355 billion in the fourth quarter of 2002 to reduce the
carrying value of goodwill. These charges did not result in a
violation of any of the Companys covenants.

During 2003, the Company received unanimous
consent from its bank group to amend its 2002 Credit Facilities.
The amendment will, among other changes, replace the
Companys covenant to maintain at least $50 billion of
GAAP net worth with an interest coverage covenant of
2.0 times cash interest expense. The amendment will be
effective upon the closing of the TWE restructuring.

Film Sale-Leaseback Transactions

From time to time the Company has entered into
arrangements with investors in which certain films are sold and
leased back. The sale-leaseback of the films allows the
investors to claim certain international tax benefits of
ownership of the film master negatives while the Company
maintains control over all exploitation rights and privileges to
the films. Such entities are capitalized with the
investors capital and debt and the investors participate
in all of the profits or losses of the entities. The present
value to these entities of the future revenue streams
attributable to these transactions is $1.3 billion as of
December 31, 2002. The Company does not consolidate nor
participate in the operating results of the entities. The
Company retains certain proceeds of the transactions as
consideration for entering into the sale-leaseback transactions,
and records the considera-

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


tion received as a reduction of corresponding
film costs. The benefit to the Company from these transactions
that was recognized as a reduction to film cost amortization in
2002 totaled $47 million.

8.     INCOME
TAXES

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

|         |  |                          |      |      |  |      |      |   |  |   |     | 
|-------- |  | ------------------------ | ---- | ---- |  | ---- | ---- | - |  | - | --- | 
|         |  |                         
|         |  | Years Ended December 31,
|         |  |                         
|         |  | 2002                     |      | 2001 |  | 2000
|         |  |                          |      |      |  |     
|         |  |                         
|         |  | (millions)              
|Domestic |  | $                        | (610 | )    |  | $    | (951 | ) |  | $ | 811 | 
|Foreign  |  |                          | 132  |      |  |      | 80   |   |  |   | 153 | 
|         |  |                          |      |      |  |      |      |   |  |   |     | 
|Total    |  | $                        | (478 | )    |  | $    | (871 | ) |  | $ | 964 | 
|         |  |                          |      |      |  |      |      |   |  |   |     | 

As a partnership, TWE is generally not subject to
U.S. federal, state or local income taxation. However, certain
of TWEs operations are conducted by subsidiary
corporations that are subject to domestic or foreign taxation.
Income taxes (benefits) of TWE and subsidiary corporations
are as set forth below:

|                   |            |                          |     |      |   |      |     |     |  |   |     |     |  
|------------------ | ---------- | ------------------------ | --- | ---- | - | ---- | --- | --- |  | - | --- | --- | -
|                   |            |                         
|                   |            | Years Ended December 31,
|                   |            |                         
|                   |            | 2002                     |     | 2001 |   | 2000
|                   |            |                          |     |      |   |     
|                   |            |                         
|                   |            | (millions)              
|Federal:           |            |                          |     |      |   |      |     |     |  |   |     |    
|                   | Current    |                          | $   | 3    |   |      | $   | 3   |  |   | $   | 13  |  
|                   | Deferred   |                          |     | 8    |   |      |     | 3   |  |   |     | (6  | )
|Foreign:           |            |                          |     |      |   |      |     |     |  |   |     |    
|                   | Current(a) |                          |     | 138  |   |      |     | 106 |  |   |     | 139 |  
|                   | Deferred   |                          |     | (9   | ) |      |     | 11  |  |   |     | (11 | )
|State and local:   |            |                          |     |      |   |      |     |     |  |   |     |    
|                   | Current    |                          |     | 17   |   |      |     | 4   |  |   |     | 13  |  
|                   | Deferred   |                          |     |     |   |      |     |    |  |   |     | 9   |  
|                   |            |                          |     |      |   |      |     |     |  |   |     |    
|Total income taxes |            | $                        | 157 |      |   | $    | 127 |     |  | $ | 157 |    
|                   |            |                          |     |      |   |      |     |     |  |   |     |    





| |     |                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------
| | (a) | Includes foreign withholding taxes of
    $81 million in 2002, $69 million in 2001 and
    $78 million in 2000.

The financial statement basis of TWEs
assets exceeds the corresponding tax basis by approximately
$37 billion at December 31, 2002, principally as a
result of differences in goodwill and accounting for depreciable
and amortizable assets for financial statement and income tax
purposes.

9.     PARTNERS
CAPITAL

Partnership Capital and Allocation of
Income

Each partners interest in TWE generally
consists of the undistributed priority capital and residual
equity amounts that were initially assigned to that partner, or
its predecessor, based on the estimated fair value of the net
assets each contributed to TWE (Undistributed Contributed
Capital), plus, with respect to the priority capital
interests only, any undistributed priority capital return. The
priority capital return consists of net partnership income
allocated to date in accordance with the provisions of the TWE
partnership agreement and the right to be allocated additional
partnership income which, together, provides for the various
priority capital rates of return as specified in the following
table. The sum of Undistributed Contributed Capital and the
undistributed priority capital return is referred to herein as
Cumulative Priority Capital. Cumulative Priority

F-59



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Capital is not necessarily indicative of the fair
value of the underlying priority capital interests, principally
due to above-market rates of return on certain priority capital
interests as compared to securities of comparable credit risk
and maturity, such as the 13.25% rate of return on the
Series B Capital interest owned 100% by the AOL Time Warner
General Partners. Furthermore, the ultimate realization of
Cumulative Priority Capital could be affected by the fair value
of TWE, which is subject to fluctuation.

A summary of the priority of Undistributed
Contributed Capital, AOL Time Warners ownership of
Undistributed Contributed Capital and Cumulative Priority
Capital at December 31, 2002 and priority capital rates of
return thereon is as set forth below:

|                                              |  |               |     |            |  |              |      |             |  |         |       |     |  |  |        |   |  |  |       |  
|--------------------------------------------- |  | ------------- | --- | ---------- |  | ------------ | ---- | ----------- |  | ------- | ----- | --- |  |  | ------ | - |  |  | ----- | -
|                                              |  |               |     |            |  | Priority     |      |             |  |        
|                                              |  | Undistributed |     | Cumulative |  | Capital      |      | % Owned     |  |        
|                                              |  | Contributed   |     | Priority   |  | Rates of     |      | by AOL      |  |        
|Priority of Undistributed Contributed Capital |  | Capital(a)    |     | Capital    |  | Return(b)    |      | Time Warner |  | Comcast
|                                              |  |               |     |            |  |              |      |             |  |        
|                                              |  |               |     |            |  |             
|                                              |  | (billions)    |     |            |  | (ownership%)
|Series A Capital                              |  | $             | 5.6 |            |  | $            | 22.0 |             |  |         | 13.00 | %   |  |  | 72.36  | % |  |  | 27.64 | %
|Series B Capital                              |  |               | 2.9 | (c)        |  |              | 11.4 |             |  |         | 13.25 | %   |  |  | 100.00 | % |  |  |      |  
|Residual Capital                              |  |               | 3.3 | (c)        |  |              | 3.3  | (d)         |  |         |      | (d) |  |  | 72.36  | % |  |  | 27.64 | %



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Excludes partnership income or loss allocated
    thereto.                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(b) | To the extent income allocations are concurrently
    distributed, the priority capital rates of return on the
    Series A Capital and Series B Capital are 11.00% and
    11.25%, respectively.                                                                                                                                                                                                                                                                      
|   
|(c) | The Undistributed Contributed Capital relating to
    the Series B Capital has priority over the priority returns
    on the Series A Capital. The Undistributed Contributed
    Capital relating to the Residual Capital has priority over the
    priority returns on the Series B Capital and the
    Series A Capital.                                                                                                                                             
|   
|(d) | Residual Capital is not entitled to stated
    priority rates of return and, as such, its Cumulative Priority
    Capital is equal to its Undistributed Contributed Capital.
    However, in the case of certain events such as the liquidation
    or dissolution of TWE, Residual Capital is entitled to any
    excess of the then fair value of the net assets of TWE over the
    aggregate amount of Cumulative Priority Capital and special tax
    allocations.

The Undistributed Contributed Capital generally
is based on the fair value of the net assets that each partner
initially contributed to the partnership. For purposes of
allocating partnership income or loss to the partners,
partnership income or loss is based on the fair value of the net
assets contributed to the partnership and results in
significantly less partnership income, or results in partnership
losses, in contrast to the net income reported by TWE for
financial statement purposes, which also is based on the
historical cost of contributed net assets.

Under the TWE partnership agreement, partnership
income, to the extent earned, is first allocated to the
partners capital accounts so that the economic burden of
the income tax consequences of partnership operations is borne
as though the partnership were taxed as a corporation
(special tax allocations). After any special tax
allocations, partnership income is allocated to the
Series A Capital and Series B Capital, in order of
priority, at rates of 13.00% and 13.25% per annum, respectively,
and finally to the Residual Capital. Partnership losses
generally are allocated first to eliminate prior allocations of
partnership income to, and then to reduce the Undistributed
Contributed Capital of, the Residual Capital, Series B
Capital and Series A Capital, in that order, and then to
reduce any special tax allocations. To the extent partnership
income is insufficient to satisfy all special allocations in a
particular accounting period, the right to receive additional
partnership income necessary to provide for the various priority
capital rates of return is carried forward until satisfied out
of future partnership income, including any partnership income
that may result from any liquidation, sale or dissolution of TWE.

TWE reported a net loss of $21.219 billion
and $1.032 billion for the year ended December 31,
2002 and 2001, respectively. In 2002, this loss included a
$21.763 billion non-cash charge related to the cumulative
effect of an accounting change and a $2.355 billion
impairment charge for goodwill, each of which was allocated from
AOL Time Warner. In addition, in 2002 there was a
$1.182 billion gain attributed to the minority partners of
TWE in connection with the restructuring of TWE-A/N
(Note 4). Because of the priority rights over allocations
of income/loss and distributions of TWE held by the AOL Time
Warner

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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


General Partners, of the remaining
$1.717 billion of TWEs income, $1.488 billion
was allocated to AOL Time Warner and $229 million was
allocated to the minority partners of TWE, including
$6 million of pretax gains attributable to Comcast that
were recognized in connection with the sale or exchange of
various cable television systems at TWE. For 2001,
$1.015 billion of TWEs net loss was allocated to AOL
Time Warner and $17 million was allocated to the minority
partners of TWE, net of $28 million of pretax gains
attributable to Comcast that were recognized in connection with
the sale or exchange of various cable television systems at TWE.

Capital Distributions

The assets and cash flows of TWE are restricted
by the TWE partnership and credit agreements. As such, they are
unavailable for use by the partners except through the payment
of certain fees, reimbursements, cash distributions and loans,
which are subject to limitations. Under the 2002 Credit
Agreements, TWE is permitted to incur additional indebtedness to
make loans, advances, distributions and other cash payments to
its partners, subject to its individual compliance with the
leverage ratio covenant contained therein.

At December 31, 2002 and 2001, the AOL Time
Warner General Partners had recorded $8 million and
$446 million respectively, of stock option related
distributions due from TWE, based on closing prices of AOL Time
Warner common stock of $13.10 and $32.10, respectively. AOL Time
Warner is paid when the options are exercised. The AOL Time
Warner General Partners also receive tax-related distributions
from TWE on a current basis. During 2002, the AOL Time Warner
General Partners received distributions from TWE in the amount
of $497 million, consisting of $473 million of
tax-related distributions and $24 million of stock option
related distributions. During 2001, the AOL Time Warner General
Partners received distributions from TWE in the amount of
$317 million, consisting of $53 million of tax-related
distributions and $264 million of stock option related
distributions. In addition to the tax and stock option
distributions, TWE may make other capital distributions to its
partners that are also subject to certain limitations contained
in the TWE partnership and credit agreements.

10.     STOCK-BASED
COMPENSATION PLANS

Effect of America Online-Time Warner Merger on
Stock-Based Compensation Plans

In connection with Time Warners agreement
to merge with America Online entered into in January 2000, all
Time Warner stock options and restricted stock outstanding at
that time became fully vested, pursuant to the terms of Time
Warners stock option and restricted stock plans. In
addition, on January 11, 2001, the date the Merger was
consummated, each outstanding equity security of Time Warner was
converted into 1.5 units of an equivalent equity security of AOL
Time Warner. See Note 1 for a summary of the terms of the Merger.

Stock Option Plans

AOL Time Warner has various stock option plans
under which AOL Time Warner may grant options to purchase AOL
Time Warner common stock to employees of AOL Time Warner and
TWE. Such options have been granted to employees of TWE with
exercise prices equal to, or in excess of, fair market value at
the date of grant. Accordingly, in accordance with APB 25 and
related interpretations, compensation cost generally has not
been recognized by AOL Time Warner, nor charged to TWE, related
to such stock option plans. Generally, the options become
exercisable over a four-year vesting period and expire ten years
from the date of grant. Had compensation cost for Time
Warners stock option plans been determined based on the
fair

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


value method set forth in FAS 123, TWEs
allocable share of compensation cost would have decreased its
net income to the pro forma amounts indicated below:

|                        |                                                                                                                     |                          |         |      |   |      |        |     |   |   |     |      |  
|----------------------- | ------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------- | ---- | - | ---- | ------ | --- | - | - | --- | ---- | -
|                        |                                                                                                                     |                         
|                        |                                                                                                                     | Years Ended December 31,
|                        |                                                                                                                     |                         
|                        |                                                                                                                     | 2002                     |         | 2001 |   | 2000
|                        |                                                                                                                     |                          |         |      |   |     
|                        |                                                                                                                     |                         
|                        |                                                                                                                     | (millions)              
|Net income, as reported |                                                                                                                     | $                        | (21,219 | )    |   | $    | (1,032 | )   |   | $ | 229 |     
|                        | Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards |                          |         | (297 | ) |      |        | (69 | ) |   |     | (146 | )
|                        |                                                                                                                     |                          |         |      |   |      |        |     |   |   |     |     
|Pro forma net income    |                                                                                                                     | $                        | (21,516 | )    |   | $    | (1,101 | )   |   | $ | 83  |     
|                        |                                                                                                                     |                          |         |      |   |      |        |     |   |   |     |     

For purposes of applying FAS 123, the fair
value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions (which, for 2000 reflect the impact
of the announced Merger) used for grants to TWE employees in
2002, 2001 and 2000: dividend yields of 0% in all years;
expected volatility of 52.9%, 59.3% and 46.3%, respectively;
risk-free interest rates of 4.12%, 4.8% and 6.4%, respectively;
and expected terms to exercise of .47 years after vesting
for 2002 and 1.0 years after vesting for 2001 and 2000.

The weighted average fair value of an option
granted to TWE employees during the year was $9.62 in 2002,
$25.38 in 2001 and $28.05 in 2000.

A summary of stock option activity with respect
to employees of TWE is as follows:

|                             |  |           |         |                  |  |   |       | 
|---------------------------- |  | --------- | ------- | ---------------- |  | - | ----- | 
|                             |  | Thousands |         | Weighted-Average
|                             |  | of Shares |         | Exercise Price  
|                             |  |           |         |                 
|Balance at December 31, 1999 |  |           | 67,209  |                  |  | $ | 17.11 | 
|Granted                      |  |           | 7,251   |                  |  |   | 57.23 | 
|Exercised                    |  |           | (6,522  | )                |  |   | 13.53 | 
|Cancelled(a)                 |  |           | 1,502   |                  |  |   | 16.99 | 
|                             |  |           |         |                  |  |   |       | 
|Balance at December 31, 2000 |  |           | 69,440  |                  |  |   | 21.63 | 
|Granted(b)                   |  |           | 37,200  |                  |  |   | 46.13 | 
|Exercised                    |  |           | (10,800 | )                |  |   | 13.06 | 
|Cancelled(a)                 |  |           | (394    | )                |  |   | 40.19 | 
|                             |  |           |         |                  |  |   |       | 
|Balance at December 31, 2001 |  |           | 95,446  |                  |  |   | 31.98 | 
|Granted                      |  |           | 21,790  |                  |  |   | 25.19 | 
|Exercised                    |  |           | (2,185  | )                |  |   | 9.95  | 
|Cancelled(a)                 |  |           | (10,329 | )                |  |   | 35.56 | 
|                             |  |           |         |                  |  |   |       | 
|Balance at December 31, 2002 |  |           | 104,722 |                  |  | $ | 30.67 | 
|                             |  |           |         |                  |  |   |       | 





| |     |                                                                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Includes all options cancelled and forfeited
    during the year, as well as options related to employees who
    have been transferred out of and into TWE to and from non-TWE
    AOL Time Warner segments.         
|
| | (b) | In 2001, a special Founders Grant was
    issued to most individuals who were employees of TWE during the
    year the Merger was consummated, only a portion of which is
    expected to be recurring in the future.

|            |  |              |        |      |  |      |        |  |  |  |        | 
|----------- |  | ------------ | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|            |  |             
|            |  | December 31,
|            |  |             
|            |  | 2002         |        | 2001 |  | 2000
|            |  |              |        |      |  |     
|            |  |             
|            |  | (thousands) 
|Exercisable |  |              | 59,476 |      |  |      | 54,442 |  |  |  | 62,415 | 
|            |  |              |        |      |  |      |        |  |  |  |        | 

F-62



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following table summarizes information about
stock options outstanding with respect to employees of TWE at
December 31, 2002:

|                         |       |                     |        |                     |  |           |      |             |  |           |       |       |  |  |        |        |  |   |       |       | 
|------------------------ | ----- | ------------------- | ------ | ------------------- |  | --------- | ---- | ----------- |  | --------- | ----- | ----- |  |  | ------ | ------ |  | - | ----- | ----- | 
|                         |       |                     |        |                    
|                         |       | Options Outstanding |        | Options Exercisable
|                         |       |                     |        |                    
|                         |       |                     |        | Weighted-           |  |           |      |            
|                         |       |                     |        | Average             |  | Weighted- |      |             |  | Weighted-
|                         |       | Number              |        | Remaining           |  | Average   |      | Number      |  | Average  
|                         |       | Outstanding         |        | Contractual         |  | Exercise  |      | Exercisable |  | Exercise 
|Range of Exercise Prices |       | at 12/31/02         |        | Life                |  | Price     |      | at 12/31/02 |  | Price    
|                         |       |                     |        |                     |  |           |      |             |  |          
|                         |       | (thousands)         |        |                     |  |           |      | (thousands) |  |          
|Under $10.               |       |                     | 559    |                     |  |           | 1.18 |             |  | $         | 8.58  |       |  |  | 559    |        |  | $ | 8.58  |      
|$10.01 to $15.00         |       |                     | 29,389 |                     |  |           | 2.76 |             |  | $         | 13.28 |       |  |  | 28,494 |        |  | $ | 13.29 |      
|$15.01 to $20.00         |       |                     | 6,484  |                     |  |           | 5.40 |             |  | $         | 16.74 |       |  |  | 4,412  |        |  | $ | 16.17 |      
|$20.01 to $30.00         |       |                     | 22,979 |                     |  |           | 8.08 |             |  | $         | 25.65 |       |  |  | 6,139  |        |  | $ | 23.03 |      
|$30.01 to $45.00         |       |                     | 10,883 |                     |  |           | 7.57 |             |  | $         | 37.96 |       |  |  | 6,292  |        |  | $ | 38.49 |      
|$45.01 to $50.00         |       |                     | 26,806 |                     |  |           | 7.91 |             |  | $         | 47.62 |       |  |  | 9,062  |        |  | $ | 47.36 |      
|$50.01 to $60.00         |       |                     | 7,438  |                     |  |           | 7.51 |             |  | $         | 56.18 |       |  |  | 4,384  |        |  | $ | 56.85 |      
|$60.01 to $90.00         |       |                     | 184    |                     |  |           | 7.25 |             |  | $         | 64.00 |       |  |  | 134    |        |  | $ | 64.00 |      
|                         |       |                     |        |                     |  |           |      |             |  |           |       |       |  |  |        |        |  |   |       |      
|                         | Total |                     |        | 104,722             |  |           |      | 6.25 years  |  |           | $     | 30.67 |  |  |        | 59,476 |  |   | $     | 25.64 | 
|                         |       |                     |        |                     |  |           |      |             |  |           |       |       |  |  |        |        |  |   |       |      

TWE reimburses AOL Time Warner for the use of AOL
Time Warner stock options on the basis described in Note 9.

11.     BENEFIT
PLANS

TWE and its subsidiaries have defined benefit
pension plans covering most domestic employees. Pension benefits
are based on formulas that reflect the employees years of
service and compensation levels during their employment period.
AOL Time Warners common stock whose value represents
approximately 5% and 10% of fair value of plan assets at
December 31, 2002 and 2001, respectively. After
consummation of the Merger, participation in TWEs defined
benefit pension plans was limited to employees who previously
participated in these plans. A summary of activity for
TWEs defined benefit pension plans is as follows:

|                               |  |              |     |      |  |      |     |   |  |   |     |  
|------------------------------ |  | ------------ | --- | ---- |  | ---- | --- | - |  | - | --- | -
|                               |  |             
|                               |  | Years Ended 
|                               |  | December 31,
|                               |  |             
|                               |  | 2002         |     | 2001 |  | 2000
|                               |  |              |     |      |  |     
|                               |  |             
|                               |  | (millions)  
|Components of Pension Expense  |  |              |     |      |  |      |     |   |  |   |     |  
|Service cost                   |  | $            | 39  |      |  | $    | 36  |   |  | $ | 39  |  
|Interest cost                  |  |              | 48  |      |  |      | 45  |   |  |   | 41  |  
|Expected return on plan assets |  |              | (50 | )    |  |      | (46 | ) |  |   | (48 | )
|Net amortization and deferral  |  |              | 7   |      |  |      |    |   |  |   | (12 | )
|                               |  |              |     |      |  |      |     |   |  |   |     |  
|Total pension expense          |  | $            | 44  |      |  | $    | 35  |   |  | $ | 20  |  
|                               |  |              |     |      |  |      |     |   |  |   |     |  

F-63



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                  |  |              |      |      |  |   |     |  
|------------------------------------------------- |  | ------------ | ---- | ---- |  | - | --- | -
|                                                  |  |             
|                                                  |  | December 31,
|                                                  |  |             
|                                                  |  | 2002         |      | 2001
|                                                  |  |              |      |     
|                                                  |  |             
|                                                  |  | (millions)  
|Change in Projected Benefit
    Obligation        |  |              |      |      |  |   |     |  
|Projected benefit obligation at beginning of year |  | $            | 636  |      |  | $ | 538 |  
|Service cost                                      |  |              | 39   |      |  |   | 36  |  
|Interest cost                                     |  |              | 48   |      |  |   | 45  |  
|Actuarial loss                                    |  |              | 73   |      |  |   | 45  |  
|Benefits paid                                     |  |              | (17  | )    |  |   | (19 | )
|Amendments to plan provisions                     |  |              | 27   |      |  |   | (9  | )
|Impact of TWE-AN restructuring                    |  |              | (19  | )    |  |   |    |  
|                                                  |  |              |      |      |  |   |     |  
|Projected benefit obligation at end of year       |  | $            | 787  |      |  | $ | 636 |  
|                                                  |  |              |      |      |  |   |     |  
|Change in Plan Assets                             |  |              |      |      |  |   |     |  
|Fair value of plan assets at beginning of year    |  | $            | 587  |      |  | $ | 506 |  
|Actual return on plan assets                      |  |              | (82  | )    |  |   | (41 | )
|Employer contribution                             |  |              | 27   |      |  |   | 137 |  
|Benefits paid                                     |  |              | (15  | )    |  |   | (15 | )
|Impact of TWE-AN restructuring                    |  |              | (21  | )    |  |   |    |  
|                                                  |  |              |      |      |  |   |     |  
|Fair value of plan assets at end of
    year(a)   |  |              | 496  |      |  |   | 587 |  
|                                                  |  |              |      |      |  |   |     |  
|Underfunded projected benefit obligation          |  |              | (291 | )    |  |   | (49 | )
|Additional minimum liability(b)                   |  |              | (214 | )    |  |   | (5  | )
|Unrecognized actuarial (gain) loss(c)             |  |              | 333  |      |  |   | 130 |  
|Effects of settlement accounting                  |  |              | (7   | )    |  |   |    |  
|Unrecognized prior service cost                   |  |              | 30   |      |  |   | 3   |  
|                                                  |  |              |      |      |  |   |     |  
|Prepaid (accrued) pension expense                 |  | $            | (149 | )    |  | $ | 79  |  
|                                                  |  |              |      |      |  |   |     |  



---



|    |                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Includes AOL Time Warner common stock of
    approximately 4 million in 2002 and 2001, respectively.                                                                                            
|(b) | The additional minimum liability is primarily
    offset by a $183 million reduction of other comprehensive
    income and a $31 million intangible asset in the
    consolidated balance sheet.
|(c) | Reflects primarily an actual loss on plan assets
    that significantly exceeded the assumed rate of return in 2002.                                                                            

|                                     |  |              |      |      |  |      |      |   |  |  |      |  
|------------------------------------ |  | ------------ | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                     |  |             
|                                     |  | December 31,
|                                     |  |             
|                                     |  | 2002         |      | 2001 |  | 2000
|                                     |  |              |      |      |  |     
|Weighted-Average Pension Assumptions |  |              |      |      |  |      |      |   |  |  |      |  
|Discount rate                        |  |              | 6.75 | %    |  |      | 7.50 | % |  |  | 7.75 | %
|Expected return on plan assets       |  |              | 9    | %    |  |      | 9    | % |  |  | 9    | %
|Rate of compensation increase        |  |              | 4.5  | %    |  |      | 4.5  | % |  |  | 5    | %

Included above are projected benefit obligations
and accumulated benefit obligations for unfunded defined benefit
pension plans of $67 million and $60 million as of
December 31, 2002, respectively; and $34 million and
$41 million as of December 31, 2001, respectively. As
of December 31, 2002, the projected benefit obligation,
accumulated benefit obligation and fair value of plan assets
were $786 million, $644 million, and
$494 million, respectively, for plans where the accumulated
benefit obligation exceeded the fair value of plan assets.

Certain domestic employees of TWE participate in
multi-employer pension plans as to which the expense amounted to
$43 million in 2002, $36 million in 2001 and
$36 million in 2000. Employees of TWEs operations in
foreign countries participate to varying degrees in local
pension plans, which in the aggregate are not significant.

F-64



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


TWE employees also generally participate in
certain defined contribution plans, including savings and profit
sharing plans, as to which the expense amounted to
$38 million in 2002, $35 million in 2001 and
$38 million in 2000. Contributions to the savings plans are
based upon a percentage of the employees elected
contributions.

Pension Funding Liability

During the fourth quarter of 2002, the Company
recorded a liability for the unfunded accumulated benefit
obligation of approximately $90 million. This liability
represents the excess of the accumulated benefit obligation
under the Companys qualified defined benefit pension plans
over the fair value of the plans assets. In accordance
with GAAP, this liability was established by a charge to
shareholders equity, resulting in no effect to the
accompanying consolidated statement of operations. In early
2003, the Company made cash contributions to plan assets of
approximately $42 million, which resulted in a funded
status of approximately 75% relative to the projected benefit
obligation.

12.     DERIVATIVE
INSTRUMENTS

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

Foreign Currency Risk Management

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

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

At December 31, 2002, AOL Time Warner had
contracts for the sale of $1.588 billion and the purchase of
$1.341 billion of foreign currencies at fixed rates. Of AOL
Time Warners $247 million net sale contract

F-65



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


position, $811 million of the foreign exchange
sale contracts and $732 million of the foreign exchange
purchase contracts related to TWEs foreign currency
exposure. Included in TWEs foreign currency exposure were
net contracts for the sale of $73 million of Canadian
dollars, $65 million of Japanese yen, $176 million of
European currency and net contracts for the purchase of
$203 million of the British pound. Of AOL Time
Warners net sale contract position of $239 million of
foreign currencies at December 31, 2001, $320 million
of the foreign exchange sale contracts and $130 million of
the foreign exchange purchase contracts related to TWEs
foreign currency exposure. Included in TWEs foreign
currency exposure were net contracts for the sale of
$139 million of European currency, $51 million of
Japanese yen, and net contracts for the purchase of
$11 million of the British pound. TWE had deferred
approximately $21 million of net losses on foreign exchange
contracts at December 31, 2002, which is expected to be
substantially recognized in income over the next twelve months.
For the years ended December 31, 2002, 2001 and 2000, TWE
recognized $9 million, $9 million and $12 million in
gains, respectively, on foreign exchange contracts, which were
or are expected to be largely offset by corresponding decreases
and increases, respectively, in the dollar value of foreign
currency license fee payments that have been or are anticipated
to be received in cash from the sale of U.S. copyrighted
products abroad. AOL Time Warner places foreign currency
contracts with a number of major financial institutions in order
to minimize counterparty credit risk.

13.     SEGMENT
INFORMATION

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

Information as to the operations of TWE in
different business segments is set forth below based on the
nature of the products and services offered. TWE evaluates
performance based on several factors, of which the primary
financial measure is operating income (loss) before non-cash
depreciation of tangible assets and amortization of goodwill and
intangible assets (EBITDA). Additionally, the
Company has provided a summary of operating income (loss) by
segment.

The accounting policies of the business segments
are the same as those described in the summary of significant
accounting policies (Note 1). Intersegment sales are
accounted for at fair value as if the sales were to third
parties. While intercompany transactions are treated like
third-party transactions to determine segment performance, the
revenues (and corresponding expenses recognized by the segment
that is counterparty to the transaction) are eliminated in
consolidation and therefore, do not themselves impact
consolidated results.

|                         |                |                         |       |        |  |      |       |        |  |   |       |        | 
|------------------------ | -------------- | ----------------------- | ----- | ------ |  | ---- | ----- | ------ |  | - | ----- | ------ | 
|                         |                |                        
|                         |                | Year Ended December 31,
|                         |                |                        
|                         |                | 2002                    |       | 2001   |  | 2000
|                         |                |                         |       |        |  |     
|                         |                |                        
|                         |                | (millions)             
|Revenues(a)              |                |                         |       |        |  |      |       |        |  |   |       |       
|Cable(b)                 |                | $                       | 5,907 |        |  | $    | 4,983 |        |  | $ | 4,314 |       
|Filmed Entertainment     |                |                         | 7,682 |        |  |      | 6,889 |        |  |   | 6,609 |       
|Networks                 |                |                         | 3,413 |        |  |      | 3,024 |        |  |   | 2,723 |       
|Intersegment elimination |                |                         | (577  | )      |  |      | (554  | )      |  |   | (468  | )     
|                         |                |                         |       |        |  |      |       |        |  |   |       |       
|                         | Total Revenues |                         | $     | 16,425 |  |      | $     | 14,342 |  |   | $     | 13,178 | 
|                         |                |                         |       |        |  |      |       |        |  |   |       |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Revenues reflect the provisions of EITF 01-14
    that were adopted by the Company in 2002, which require
    retroactive restatement of 2001 and 2000 results to reflect the
    new accounting provisions. As a result, the net impact of EITF
    01-14 was to increase revenues and costs by equal amounts of
    $196 million for 2001 and reduce revenues and costs by an
    equal amount of $171 million in 2000.                                                                                                      
|   
|(b) | As a result of Advance/Newhouse assuming
    responsibility for the day-to-day operations of the
    Advance/Newhouse Systems in 2002, the Cable segments
    results reflect the deconsolidation of the operating results of
    the Advance/Newhouse Systems for all periods presented. For
    2002, 2001, and 2000 the net impact of the deconsolidation of
    these systems is a reduction of the Cable segments
    previously reported revenues of $715 million,
    $1.247 billion and $1.058 billion, respectively.

F-66



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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Intersegment Revenues

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



|  |                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | The Filmed Entertainment segment generating
    content revenue by licensing television and theatrical
    programming to the Networks segment;      
| | The Networks segment generating subscription
    revenues by selling cable network programming to the Cable
    segment;                             
| | The Cable and Networks segments generating
    advertising and commerce revenue by cross-promoting the products
    and services of all TWE segments.

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

|                       |                             |                         |     |      |  |      |     |     |  |   |     |     | 
|---------------------- | --------------------------- | ----------------------- | --- | ---- |  | ---- | --- | --- |  | - | --- | --- | 
|                       |                             |                        
|                       |                             | Year Ended December 31,
|                       |                             |                        
|                       |                             | 2002                    |     | 2001 |  | 2000
|                       |                             |                         |     |      |  |     
|                       |                             |                        
|                       |                             | (millions)             
|Intersegment Revenues: |                             |                         |     |      |  |      |     |     |  |   |     |    
|Cable                  |                             | $                       | 7   |      |  | $    | 2   |     |  | $ |    |    
|Filmed Entertainment   |                             |                         | 323 |      |  |      | 326 |     |  |   | 148 |    
|Networks               |                             |                         | 247 |      |  |      | 226 |     |  |   | 320 |    
|                       |                             |                         |     |      |  |      |     |     |  |   |     |    
|                       | Total intersegment revenues |                         | $   | 577  |  |      | $   | 554 |  |   | $   | 468 | 
|                       |                             |                         |     |      |  |      |     |     |  |   |     |    

|                     |              |                         |       |       |  |      |       |       |  |   |       |       | 
|-------------------- | ------------ | ----------------------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                     |              |                        
|                     |              | Year Ended December 31,
|                     |              |                        
|                     |              | 2002                    |       | 2001  |  | 2000
|                     |              |                         |       |       |  |     
|                     |              |                        
|                     |              | (millions)             
|EBITDA(a)            |              |                         |       |       |  |      |       |       |  |   |       |      
|Cable(b)             |              | $                       | 2,333 |       |  | $    | 2,191 |       |  | $ | 1,960 |      
|Filmed Entertainment |              |                         | 844   |       |  |      | 691   |       |  |   | 585   |      
|Networks             |              |                         | 849   |       |  |      | 703   |       |  |   | 512   |      
|Corporate            |              |                         | (84   | )     |  |      | (78   | )     |  |   | (75   | )    
|                     |              |                         |       |       |  |      |       |       |  |   |       |      
|                     | Total EBITDA |                         | $     | 3,942 |  |      | $     | 3,507 |  |   | $     | 2,982 | 
|                     |              |                         |       |       |  |      |       |       |  |   |       |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | EBITDA represents business segment operating
    income before non-cash depreciation of tangible assets and
    amortization of intangible assets. The impairment writedowns
    relating to goodwill and intangible assets were
    $2.355 billion for Cable. After deducting depreciation,
    amortization of intangible assets and impairment writedowns
    related to goodwill and intangible assets.. TWEs operating
    income (loss) was $308 million in 2002, $(31) million on a
    in 2001 and $1.722 billion in 2000.
|   
|(b) | As a result of Advance/Newhouse assuming
    responsibility for the day-to-day operations of the
    Advance/Newhouse Systems in 2002, the Cable segments
    results reflect the deconsolidation of the operating results of
    the Advance/Newhouse Systems for all periods presented. For
    2002, 2001 and 2000 the net impact of the deconsolidation of
    these systems is a reduction of the Cable segments
    previously reported EBITDA of $333 million,
    $571 million and $484, respectively.                   

F-67



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                  |                    |                         |       |       |  |      |     |     |  |   |     |     | 
|------------------------------------------------- | ------------------ | ----------------------- | ----- | ----- |  | ---- | --- | --- |  | - | --- | --- | 
|                                                  |                    |                        
|                                                  |                    | Year Ended December 31,
|                                                  |                    |                        
|                                                  |                    | 2002                    |       | 2001  |  | 2000
|                                                  |                    |                         |       |       |  |     
|                                                  |                    |                        
|                                                  |                    | (millions)             
|Depreciation of Property, Plant and
    Equipment |                    |                         |       |       |  |      |     |     |  |   |     |    
|Cable(a)                                          |                    | $                       | 1,018 |       |  | $    | 747 |     |  | $ | 633 |    
|Filmed Entertainment                              |                    |                         | 74    |       |  |      | 83  |     |  |   | 85  |    
|Networks                                          |                    |                         | 27    |       |  |      | 33  |     |  |   | 33  |    
|Corporate                                         |                    |                         | 10    |       |  |      | 7   |     |  |   | 6   |    
|                                                  |                    |                         |       |       |  |      |     |     |  |   |     |    
|                                                  | Total depreciation |                         | $     | 1,129 |  |      | $   | 870 |  |   | $   | 757 | 
|                                                  |                    |                         |       |       |  |      |     |     |  |   |     |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The Cable segments results reflect the
    deconsolidation of the operating results of the Advance/Newhouse
    systems for all periods presented. For 2002, 2001 and 2000, the
    net impact of the deconsolidation of these systems are a
    reduction of the Cable segments depreciation of
    $125 million, $218 million and $166 million,
    respectively.

|                                         |                    |                         |     |      |  |      |       |       |  |   |     |     | 
|---------------------------------------- | ------------------ | ----------------------- | --- | ---- |  | ---- | ----- | ----- |  | - | --- | --- | 
|                                         |                    |                        
|                                         |                    | Year Ended December 31,
|                                         |                    |                        
|                                         |                    | 2002                    |     | 2001 |  | 2000
|                                         |                    |                         |     |      |  |     
|                                         |                    |                        
|                                         |                    | (millions)             
|Amortization of Intangible
    Assets(a) |                    |                         |     |      |  |      |       |       |  |   |     |    
|Cable(b)                                 |                    | $                       | 6   |      |  | $    | 1,900 |       |  | $ | 376 |    
|Filmed Entertainment                     |                    |                         | 133 |      |  |      | 389   |       |  |   | 122 |    
|Networks                                 |                    |                         | 11  |      |  |      | 379   |       |  |   | 5   |    
|                                         |                    |                         |     |      |  |      |       |       |  |   |     |    
|                                         | Total amortization |                         | $   | 150  |  |      | $     | 2,668 |  |   | $   | 503 | 
|                                         |                    |                         |     |      |  |      |       |       |  |   |     |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Includes amortization relating to business
    combinations accounted for by the purchase method, substantially
    all of which arose in the merger of America Online and Time
    Warner in 2001.                                                                                                                                                              
|(b) | The Cable segments results reflect the
    deconsolidation of the operating results of the Advance/Newhouse
    systems for all periods presented. For 2002, 2001 and 2000, the
    net impact of the deconsolidation of these systems are a
    reduction of the Cable segments amortization of
    $2 million, $40 million and $62 million,
    respectively.

|                        |                               |                         |        |      |  |      |      |     |   |   |     |       | 
|----------------------- | ----------------------------- | ----------------------- | ------ | ---- |  | ---- | ---- | --- | - | - | --- | ----- | 
|                        |                               |                        
|                        |                               | Year Ended December 31,
|                        |                               |                        
|                        |                               | 2002(a)                 |        | 2001 |  | 2000
|                        |                               |                         |        |      |  |     
|                        |                               |                        
|                        |                               | (millions)             
|Operating Income (Loss) |                               |                         |        |      |  |      |      |     |   |   |     |      
|Cable(b)                |                               | $                       | (1,046 | )    |  | $    | (456 | )   |   | $ | 951 |      
|Filmed Entertainment    |                               |                         | 637    |      |  |      | 219  |     |   |   | 378 |      
|Networks                |                               |                         | 811    |      |  |      | 291  |     |   |   | 474 |      
|Corporate               |                               |                         | (94    | )    |  |      | (85  | )   |   |   | (81 | )    
|                        |                               |                         |        |      |  |      |      |     |   |   |     |      
|                        | Total operating income (loss) |                         | $      | 308  |  |      | $    | (31 | ) |   | $   | 1,722 | 
|                        |                               |                         |        |      |  |      |      |     |   |   |     |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Operating income (loss) in 2002 includes
    impairment write-downs related to goodwill of
    $2.355 billion for Cable.                                                                                                                                                                                                                                                                                                                                                                                                                      
|(b) | As a result of Advance/Newhouse assuming
    responsibility for the day-to-day operations of the
    Advance/Newhouse Systems in 2002, the Cable segments
    results reflect the deconsolidation of the operating results of
    the Advance/Newhouse Systems for all periods presented. For
    2002, 2001 and 2000, the net impact of the deconsolidation of
    these systems is a reduction of the Cable segments
    previously reported operating income (loss) of
    $206 million, $313 million and $256 million,
    respectively.

As discussed in Notes 2, when FAS 142
was initially applied, all goodwill recognized on the
Companys consolidated balance sheet on that date was
reviewed for impairment using the new guidance. Before
performing the review for impairment, the new guidance required
that all goodwill deemed to relate to the entity as a whole be
assigned to all of the Companys reporting units
(generally, the AOL Time Warner operating segments), including
the reporting units of the acquirer. This differs from the
previous accounting rules, which required goodwill to be
assigned only to the businesses of the company acquired. As a
result,

F-68



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


$6.857 billion of the goodwill generated in
the Merger originally allocated to the TWE segments was
reallocated on January 1, 2002, to other segments of AOL
Time Warner resulting in a change in segment assets. Following
are TWEs assets by business segment, reflecting the
January 1, 2002 reallocation of goodwill in accordance with
FAS 142:

TWEs assets have significantly increased
since December 31, 2000 due to the consummation of the
Merger and the allocation of the $147 billion cost to
acquire Time Warner to the underlying net assets of Time Warner,
including the net assets of TWE to the extent acquired, based on
their respective estimated fair values. Any excess of the
purchase price over estimated fair value of the net assets
acquired was recorded as goodwill and allocated among AOL Time
Warners business segments, including the business segments
of TWE. As such, TWEs assets by business segment are as
follows:

|                     |              |                         |        |        |  |   |        |        | 
|-------------------- | ------------ | ----------------------- | ------ | ------ |  | - | ------ | ------ | 
|                     |              |                        
|                     |              | Year Ended December 31,
|                     |              |                        
|                     |              | 2002                    |        | 2001  
|                     |              |                         |        |       
|                     |              |                        
|                     |              | (millions)             
|Assets               |              |                         |        |        |  |   |        |       
|Cable                |              | $                       | 29,990 |        |  | $ | 56,694 |       
|Filmed Entertainment |              |                         | 13,276 |        |  |   | 16,375 |       
|Networks             |              |                         | 10,240 |        |  |   | 11,212 |       
|Corporate(a)         |              |                         | 849    |        |  |   | 777    |       
|                     |              |                         |        |        |  |   |        |       
|                     | Total Assets |                         | $      | 54,355 |  |   | $      | 85,058 | 
|                     |              |                         |        |        |  |   |        |       



---



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

Information as to TWEs capital expenditures
is as follows:

|                     |              |                         |       |       |  |      |       |       |  |   |       |       | 
|-------------------- | ------------ | ----------------------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                     |              |                        
|                     |              | Year Ended December 31,
|                     |              |                        
|                     |              | 2002                    |       | 2001  |  | 2000
|                     |              |                         |       |       |  |     
|                     |              |                        
|                     |              | (millions)             
|Capital Expenditures |              |                         |       |       |  |      |       |       |  |   |       |      
|Cable(a)             |              | $                       | 1,555 |       |  | $    | 1,467 |       |  | $ | 1,379 |      
|Filmed Entertainment |              |                         | 112   |       |  |      | 93    |       |  |   | 96    |      
|Networks             |              |                         | 19    |       |  |      | 17    |       |  |   | 21    |      
|Corporate            |              |                         | 3     |       |  |      | 27    |       |  |   | 16    |      
|                     |              |                         |       |       |  |      |       |       |  |   |       |      
|                     | Total Assets |                         | $     | 1,689 |  |      | $     | 1,604 |  |   | $     | 1,512 | 
|                     |              |                         |       |       |  |      |       |       |  |   |       |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | As a result of Advance/Newhouse assuming
    responsibility for the day-to-day operations of the
    Advance/Newhouse Systems in 2002, the Cable segments
    results reflect the deconsolidation of the operating results of
    the Advance/Newhouse Systems for all periods presented. For
    2002, 2001 and 2000, the net impact of the deconsolidation of
    these systems is a reduction of the Cable segments capital
    expenditures of $206 million, $408 million and
    $414 million, respectively.

F-69



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Because a substantial portion of TWEs
international revenues is derived from the sale of U.S.
copyrighted products abroad, assets located outside the United
States are not material. Information as to operations in
different geographical areas is as follows:

|                    |                |                          |        |        |  |      |        |        |  |   |        |        | 
|------------------- | -------------- | ------------------------ | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                    |                |                         
|                    |                | Years Ended December 31,
|                    |                |                         
|                    |                | 2002                     |        | 2001   |  | 2000
|                    |                |                          |        |        |  |     
|                    |                |                         
|                    |                | (millions)              
|Revenues            |                |                          |        |        |  |      |        |        |  |   |        |       
|United States       |                | $                        | 13,131 |        |  | $    | 11,876 |        |  | $ | 10,790 |       
|United Kingdom      |                |                          | 724    |        |  |      | 583    |        |  |   | 504    |       
|Japan               |                |                          | 446    |        |  |      | 306    |        |  |   | 265    |       
|Germany             |                |                          | 294    |        |  |      | 184    |        |  |   | 225    |       
|France              |                |                          | 287    |        |  |      | 201    |        |  |   | 165    |       
|Canada              |                |                          | 253    |        |  |      | 230    |        |  |   | 203    |       
|Other international |                |                          | 1,290  |        |  |      | 962    |        |  |   | 1,026  |       
|                    |                |                          |        |        |  |      |        |        |  |   |        |       
|                    | Total Revenues |                          | $      | 16,425 |  |      | $      | 14,342 |  |   | $      | 13,178 | 
|                    |                |                          |        |        |  |      |        |        |  |   |        |       

14.     COMMITMENTS
AND CONTINGENCIES

Commitments

TWEs total rent expense amounted to
$193 million in 2002, $225 million in 2001 and
$240 million in 2000. The minimum net rental commitments
under noncancellable long-term operating leases are:
2003-$144 million; 2004-$136 million;
2005-$131 million; 2006-$121 million;
2007-$114 million; and after 2007-$833 million.
Additionally, TWE recognized sublease income of approximately
$19 million in 2002 and as of December 31, 2002, the
Company had future sublease income commitments of approximately
$133 million.

TWEs minimum commitments and guarantees
under certain programming, licensing, franchise and other
agreements aggregated approximately $16.5 billion at
December 31, 2002, which are payable principally over a
five-year period. A summary of the Companys firm
commitments, including net operating leases and outstanding
debt, and contingent commitments is as follows.

|                                      |                                               |            |       |           |  |                |       |       |  |   |       |        |  |   |        |        | 
|------------------------------------- | --------------------------------------------- | ---------- | ----- | --------- |  | -------------- | ----- | ----- |  | - | ----- | ------ |  | - | ------ | ------ | 
|                                      |                                               |            |       |           |  | 2007           |       |      
|Firm Commitments and Outstanding Debt |                                               | 2003       |       | 2004-2006 |  | and thereafter |       | Total
|                                      |                                               |            |       |           |  |                |       |      
|                                      |                                               |           
|                                      |                                               | (millions)
|Programming and production deals      |                                               | $          | 2,178 |           |  | $              | 5,076 |       |  | $ | 5,455 |        |  | $ | 12,709 |       
|Operating leases                      |                                               |            | 144   |           |  |                | 388   |       |  |   | 947   |        |  |   | 1,479  |       
|Other firm commitments                |                                               |            | 163   |           |  |                | 57    |       |  |   | 10    |        |  |   | 230    |       
|                                      |                                               |            |       |           |  |                |       |       |  |   |       |        |  |   |        |       
|                                      | Total firm commitments                        |            | $     | 2,485     |  |                | $     | 5,521 |  |   | $     | 6,412  |  |   | $      | 14,418 | 
|                                      | Total principal outstanding on long-term debt |            |       |          |  |                |       | 2,370 |  |   |       | 4,367  |  |   |        | 6,737  | 
|                                      |                                               |            |       |           |  |                |       |       |  |   |       |        |  |   |        |       
|                                      | Total firm commitments and outstanding debt   |            | $     | 2,485     |  |                | $     | 7,891 |  |   | $     | 10,779 |  |   | $      | 21,155 | 
|                                      |                                               |            |       |           |  |                |       |       |  |   |       |        |  |   |        |       

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



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Networks segment (HBO and The WB Network)
    enters into agreements with movie studios to air movies they
    produce. In addition, the Cable segment enters into commitments
    to purchase programming from cable network providers to provide
    service to its subscribers (e.g. programming deals). The
    commitments represent an estimate of future programming costs
    based on per subscriber rates contained in contracts existing as
    of December 31, 2002 applied to the number of consolidated
    subscribers on that date. Such amounts are subject to
    variability based on changes in the number of future
    subscribers, the extension

F-70



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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|  |                                                                                                                                                                                                                                     
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | of existing contracts, and the entering into of
    new contracts. These arrangements are collectively referred to
    as programming production deals.                                                                             
| 
| | Operating lease obligations primarily relate to
    the minimum lease rental obligations for the Companys real
    estate and operating equipment in various locations around the
    world.                                       
| 
| | Other firm commitments include obligations to
    actors and directors. In addition, other firm commitments
    includes a payment of $128 million made in January 2003 to
    acquire an additional 11% interest in The WB Network.

|                                                   |                              |             |       |                           |  |           |    |                |  |   |     |     |  |   |       |       | 
|-------------------------------------------------- | ---------------------------- | ----------- | ----- | ------------------------- |  | --------- | -- | -------------- |  | - | --- | --- |  | - | ----- | ----- | 
|                                                   |                              |             |       |                          
|                                                   |                              |             |       | Expiration of Commitments
|                                                   |                              |             |       |                          
|                                                   |                              | Total       |       |                           |  | 2007     
|Nature of Contingent Commitments                   |                              | Commitments |       | 2003                      |  | 2004-2006 |    | and thereafter
|                                                   |                              |             |       |                           |  |           |    |               
|                                                   |                              |            
|                                                   |                              | (millions) 
|Guarantees                                         |                              | $           | 2,637 |                           |  | $         | 62 |                |  | $ | 444 |     |  | $ | 2,131 |      
|Letters of credit and other contingent commitments |                              |             | 170   |                           |  |           | 8  |                |  |   | 1   |     |  |   | 161   |      
|                                                   |                              |             |       |                           |  |           |    |                |  |   |     |     |  |   |       |      
|                                                   | Total contingent commitments |             | $     | 2,807                     |  |           | $  | 70             |  |   | $   | 445 |  |   | $     | 2,292 | 
|                                                   |                              |             |       |                           |  |           |    |                |  |   |     |     |  |   |       |      

Following is a description of the Companys
contingent commitments at December 31, 2002:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Guarantees include guarantees the Company has
    provided on certain lease and operating commitments entered into
    by formerly owned entities and joint ventures in which TWE was
    or is a venture partner.                                                                                                                                                                                                                                                                                            
|
| |  | The Cable segment provides letters of credit for
    several of its joint ventures. Should these joint ventures
    default on their debts, TWE would be obligated to cover these
    costs to the extent of the letters of credit. In addition, the
    Company provides for letters of credit and surety bonds related
    to insurance premiums and the Cable segment provides for letters
    of credit and surety bonds that are required by certain local
    governments when cable is being installed.

Contingencies

On June 24, 1997, plaintiffs in Six Flags
Over Georgia LLC et al. v. Time Warner Entertainment Company,
L.P. et al.,filed an amended complaint in the Superior
Court of Gwinnett County, Georgia, claiming that, inter alia,
defendants, which include TWE, violated their fiduciary duties
in operating the Six Flags Over Georgia theme park. On
December 18, 1998, following a trial, a jury returned a
verdict in favor of plaintiffs. The total awarded to plaintiffs
was approximately $454 million in compensatory and punitive
damages. The case was appealed to the Georgia Court of Appeals,
which affirmed the trial courts judgment, and denied
reconsideration. The Supreme Court of Georgia denied certiorari
on January 18, 2001. On February 28, 2001, the
compensatory damages portion of the award plus accrued interest
was paid to plaintiffs. On March 1, 2001, the United States
Supreme Court granted a stay as to payment of the punitive
damages part of the jurys original award, pending the
resolution of a petition for certiorari to be filed by TWE,
which was filed on June 15, 2001. On October 1, 2001,
the United States Supreme Court granted certiorari, vacated the
opinion of the Georgia Court of Appeals and remanded the case
for further consideration as to punitive damages. On
March 29, 2002, the Georgia Court of Appeals affirmed and
reinstated its earlier decision regarding the punitive damage
award. On April 18, 2002, TWE filed a petition for
certiorari to the Georgia Supreme Court seeking review of the
decision of the Georgia Court of Appeals, which was denied on
September 16, 2002. The Georgia Supreme Court subsequently
denied TWEs motion for reconsideration of its
September 16th ruling. Plaintiffs have agreed not to pursue
payment of the punitive damages award and accrued interest until
the resolution of TWEs petition for writ of certiorari to
the United States Supreme Court, which TWE filed on
December 23, 2002. The petition is pending.

F-71



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##### Table of Contents



TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


On April 8, 2002, three former employees of
certain subsidiaries of the Company 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 the Company,
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, the Company is unable to predict the outcome of
this suit.

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 the Company
relating to intellectual property rights and intellectual
property licenses, could have a material adverse effect on the
Companys business, financial condition and operating
results.

15.     RELATED PARTY
TRANSACTIONS

Transactions with AOL Time Warner

In the normal course of conducting their
businesses, TWE has various transactions with AOL Time Warner
and its subsidiaries. Under the provisions of the TWE
partnership agreement, AOL Time Warner provides certain
management services to TWE. For example, employees of TWE
participate in various AOL Time Warner medical, stock option and
other benefit plans, for which TWE is charged its allocable
share of plan expenses, including administrative costs. In
addition, AOL Time Warner provides TWE with certain corporate
services, including accounting, tax, legal and administration,
for which TWE pays a fee, which was established in the agreement.

TWE has management services agreements with AOL
Time Warner, pursuant to which TWE manages, or provides services
to, the cable television systems owned by AOL Time Warner. The
fee is based in part upon the number of AOL Time Warner cable
television subscribers under management of TWE in relation to
total AOL Time Warner and TWE subscribers. Such cable television
systems also pay fees to TWE for the right to carry cable
television programming provided by TWEs cable networks.
Similarly, TWEs cable television systems pay fees to AOL
Time Warner for the right to carry cable television programming
provided by AOL Time Warners cable networks.

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

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

For the year ended December 31, 2002, the
accompanying statement of operations includes revenue, cost of
revenue and selling, general and administrative expenses from
transactions with AOL Time Warner of $335 million,
$197 million and $217 million, respectively. For the
year ended December 31, 2001, revenue, cost of revenue and
selling, general and administrative expenses from transactions
with AOL Time Warner were $423 million, $175 million
and $138 million, respectively. For the year ended
December 31, 2000, revenue, cost of revenue, and selling,
general and administrative expenses from transactions with AOL
Time Warner were $264 million, $85 million and
$95 million, respectively.

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Transactions with Equity Method
Investees

In addition, the Company has transactions with
certain unconsolidated investees accounted for under the equity
method of accounting of both TWE and AOL Time Warner, generally
with respect to sales of products and services in the ordinary
course of business. Such transactions include the licensing of
broadcast rights to film and television product by the Filmed
Entertainment segment and the licensing of rights to carry cable
television programming provided by the Cable Networks segment.
For the year ended December 31, 2002, the accompanying
statement of operations includes revenue and cost of revenue
from the aforementioned transactions of $222 million and
$125 million, respectively. For the year ended
December 31, 2001, revenue and cost of revenue from the
aforementioned transactions were $152 million and
$190 million, respectively. For the year ended
December 31, 2000, the accompanying statement of operations
includes revenue and cost of revenues from the aforementioned
transactions of $161 million and $123 million,
respectively.

Transactions with Comcast

The Company has also entered into various
transactions with Comcast, a minority owner of TWE, and its
subsidiaries, primarily related to the sale of programming to
Comcast cable systems by the Networks segment. These
transactions are executed on terms comparable to those of
unrelated third parties. For the years ended December 31,
2002 and 2001, the accompanying statement of operations includes
revenue from the aforementioned transactions of
$378 million and $365 million, respectively. These
amounts reflect transactions with only those cable systems in
which Comcast had on ownership interest during the periods
covered.

Other Transactions

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

16.     ADDITIONAL
FINANCIAL INFORMATION

Cash Flows

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

|                                         |  |                          |      |      |  |      |      |   |  |   |      |  
|---------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                         |  |                         
|                                         |  | Years Ended December 31,
|                                         |  |                         
|                                         |  | 2002                     |      | 2001 |  | 2000
|                                         |  |                          |      |      |  |     
|                                         |  |                         
|                                         |  | (millions)              
|Cash payments made for interest          |  | $                        | (391 | )    |  | $    | (554 | ) |  | $ | (539 | )
|Interest income received                 |  |                          | 10   |      |  |      | 27   |   |  |   | 24   |  
|                                         |  |                          |      |      |  |      |      |   |  |   |      |  
|Cash interest expense, net               |  | $                        | (381 | )    |  | $    | (527 | ) |  | $ | (515 | )
|                                         |  |                          |      |      |  |      |      |   |  |   |      |  
|Cash payments made for income taxes, net |  | $                        | (165 | )    |  | $    | (174 | ) |  | $ | (114 | )
|Income tax refunds received              |  |                          | 12   |      |  |      | 4    |   |  |   | 7    |  
|                                         |  |                          |      |      |  |      |      |   |  |   |      |  
|Cash taxes, net                          |  | $                        | (153 | )    |  | $    | (170 | ) |  | $ | (107 | )
|                                         |  |                          |      |      |  |      |      |   |  |   |      |  

Noncash investing activities in 2002, 2001 and
2000 included the exchange of certain cable television systems.

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                      
| | ---------------------
| | Interest Expense, Net

Interest expense, net, consists of:

|                 |                             |                          |      |      |   |      |      |      |   |   |      |      |  
|---------------- | --------------------------- | ------------------------ | ---- | ---- | - | ---- | ---- | ---- | - | - | ---- | ---- | -
|                 |                             |                         
|                 |                             | Years Ended December 31,
|                 |                             |                         
|                 |                             | 2002                     |      | 2001 |   | 2000
|                 |                             |                          |      |      |   |     
|                 |                             |                         
|                 |                             | (millions)              
|Interest income  |                             | $                        | 25   |      |   | $    | 24   |      |   | $ | 22   |     
|Interest expense |                             |                          | (426 | )    |   |      | (554 | )    |   |   | (634 | )   
|                 |                             |                          |      |      |   |      |      |      |   |   |      |     
|                 | Total interest expense, net |                          | $    | (401 | ) |      | $    | (530 | ) |   | $    | (612 | )
|                 |                             |                          |      |      |   |      |      |      |   |   |      |     



| |                   
| | ------------------
| | Other Expense, Net

Other expense, net, consists of:

|                                                                                        |                          |                          |      |      |   |      |      |      |   |   |      |      |  
|--------------------------------------------------------------------------------------- | ------------------------ | ------------------------ | ---- | ---- | - | ---- | ---- | ---- | - | - | ---- | ---- | -
|                                                                                        |                          |                         
|                                                                                        |                          | Years Ended December 31,
|                                                                                        |                          |                         
|                                                                                        |                          | 2002                     |      | 2001 |   | 2000
|                                                                                        |                          |                          |      |      |   |     
|                                                                                        |                          |                         
|                                                                                        |                          | (millions)              
|Writedown of Cable television joint ventures                                            |                          | $                        | (363 | )    |   | $    |     |      |   | $ |     |     
|Other investment activity, principally income
    (losses) from equity method investees |                          |                          | 26   |      |   |      | (353 | )    |   |   | (135 | )   
|Losses on accounts receivable securitization
    programs                               |                          |                          | (18  | )    |   |      | (25  | )    |   |   | (59  | )   
|Gains on unconsolidated cable systems                                                   |                          |                          |     |      |   |      | 39   |      |   |   |     |     
|Miscellaneous                                                                           |                          |                          | (2   | )    |   |      | (7   | )    |   |   | (34  | )   
|                                                                                        |                          |                          |      |      |   |      |      |      |   |   |      |     
|                                                                                        | Total other expense, net |                          | $    | (357 | ) |      | $    | (346 | ) |   | $    | (228 | )
|                                                                                        |                          |                          |      |      |   |      |      |      |   |   |      |     

Other Current Liabilities

Other current liabilities consist of:

|                     |                                 |              |       |       |  |   |       |       | 
|-------------------- | ------------------------------- | ------------ | ----- | ----- |  | - | ----- | ----- | 
|                     |                                 |             
|                     |                                 | Years Ended 
|                     |                                 | December 31,
|                     |                                 |             
|                     |                                 | 2002         |       | 2001 
|                     |                                 |              |       |      
|                     |                                 |             
|                     |                                 | (millions)  
|Accrued expenses     |                                 | $            | 2,074 |       |  | $ | 1,940 |      
|Accrued compensation |                                 |              | 292   |       |  |   | 275   |      
|Deferred revenues    |                                 |              | 301   |       |  |   | 350   |      
|Accrued income taxes |                                 |              | 46    |       |  |   | 51    |      
|                     |                                 |              |       |       |  |   |       |      
|                     | Total other current liabilities |              | $     | 2,713 |  |   | $     | 2,616 | 
|                     |                                 |              |       |       |  |   |       |      

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REPORT OF INDEPENDENT AUDITORS

The Partners of

Time Warner Entertainment Company,
L.P.


We have audited the accompanying consolidated
balance sheet of Time Warner Entertainment Company, L.P.
(TWE) as of December 31, 2002 and 2001, and the
related consolidated statements of operations, partnership
capital and cash flows for each of the three years in the period
ended December 31, 2002. Our audits also included the
financial statement schedule listed in the index at
Item 15(a). These financial statements and schedule are the
responsibility of TWEs management. Our responsibility is
to express an opinion on these financial statements and schedule
based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of TWE at December 31, 2002
and 2001, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion,
the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.

As discussed in Note 1 to the consolidated
financial statements, in 2000 TWE changed its film accounting
method and in 2002 TWE changed its method of accounting for
goodwill and intangible assets.



| |                  
| | -----------------
| | ERNST & YOUNG LLP

New York, New York

January 29, 2003


F-75



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##### Table of Contents






TIME WARNER ENTERTAINMENT COMPANY,
L.P.

SELECTED FINANCIAL INFORMATION


The selected financial information for each of
the five years in the period ended December 31, 2002 set
forth below has been derived from and should be read in
conjunction with the consolidated financial statements and other
financial information presented elsewhere herein. Capitalized
terms are as defined and described in such consolidated
financial statements, or elsewhere herein. The selected
historical information prior to 2001 represent the financial
results of TWE prior to the America Online  Time
Warner merger. In addition, certain reclassifications have been
made to conform to the 2001 presentation.

The selected historical financial information for
1998 reflects (i) the TWE-A/N Transfers, effective as of
January 1, 1998, (ii) the Primestar Roll-up
Transaction, effective as of April 1, 1998, (iii) the
formation of Road Runner, effective as of June 30, 1998,
(iv) the Time Warner Telecom Reorganization, effective as
of July 1, 1998 and (v) the formation of the Texas
Cable Joint Venture, effective as of December 31, 1998.

|                                                                                            |  |                          |         |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                            |  |                         
|                                                                                            |  | Years Ended December 31,
|                                                                                            |  |                         
|Selected Operating Statement Information                                                    |  | 2002                     |         | 2001 |  | 2000 |        | 1999 |  | 1998
|                                                                                            |  |                          |         |      |  |      |        |      |  |     
|                                                                                            |  |                         
|                                                                                            |  | (millions)              
|Revenues                                                                                    |  | $                        | 16,425  |      |  | $    | 14,342 |      |  | $    | 13,178 |   |  | $ | 12,434 |   |  | $ | 11,595 |  
|Depreciation and amortization                                                               |  |                          | (1,279  | )    |  |      | (3,538 | )    |  |      | (1,260 | ) |  |   | (1,568 | ) |  |   | (1,618 | )
|Operating income (loss)(a)                                                                  |  |                          | 308     |      |  |      | (31    | )    |  |      | 1,722  |   |  |   | 2,554  |   |  |   | 1,408  |  
|Interest expense, net(b)                                                                    |  |                          | (401    | )    |  |      | (530   | )    |  |      | (612   | ) |  |   | (532   | ) |  |   | (525   | )
|Other income (expense), net(c)                                                              |  |                          | (357    | )    |  |      | (346   | )    |  |      | (228   | ) |  |   | 976    |   |  |   | (292   | )
|Income (loss) before discontinued operations
    and cumulative effect of accounting change |  |                          | (635    | )    |  |      | (998   | )    |  |      | 807    |   |  |   | 2,878  |   |  |   | 414    |  
|Net income (loss)(d)                                                                        |  |                          | (21,219 | )    |  |      | (1,032 | )    |  |      | 229    |   |  |   | 2,759  |   |  |   | 326    |  

|                                             |  |                          |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|-------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                             |  |                         
|                                             |  | Years Ended December 31,
|                                             |  |                         
|Selected Balance Sheet Information           |  | 2002                     |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                             |  |                          |        |      |  |      |        |      |  |     
|                                             |  |                         
|                                             |  | (millions)              
|Cash and equivalents                         |  | $                        | 1,012  |      |  | $    | 250    |      |  | $    | 306    |  |  | $ | 517    |  |  | $ | 87     | 
|Total assets                                 |  |                          | 54,355 |      |  |      | 85,058 |      |  |      | 24,901 |  |  |   | 24,843 |  |  |   | 22,230 | 
|Debt due within one year                     |  |                          | 8      |      |  |      | 2      |      |  |      | 3      |  |  |   | 6      |  |  |   | 6      | 
|Long-term debt                               |  |                          | 6,947  |      |  |      | 8,049  |      |  |      | 7,108  |  |  |   | 6,655  |  |  |   | 6,578  | 
|Preferred stock of subsidiary                |  |                          |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   | 217    | 
|Time Warner General Partners Senior Capital |  |                          |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   | 603    | 
|Partners capital                            |  |                          | 37,117 |      |  |      | 65,405 |      |  |      | 6,926  |  |  |   | 7,149  |  |  |   | 5,107  | 



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | In 2002, includes non-cash charge of
    $2.355 billion relating to the impairment of goodwill at
    the Cable segment (Note 2). In 1999, includes pretax gains
    of approximately $215 million relating to the early
    termination and settlement of a long-term, home video
    distribution agreement and $897 million relating to the
    sale or exchange of certain consolidated cable television
    systems offset by a non-cash charge of $106 million relating to
    Warner Bros. retail stores.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(b) |  | Includes additional interest expense of
    approximately $26 million in 2000 related to the Six Flags
    litigation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(c) |  | Includes pretax charge of $363 million in
    2002 to reduce the carrying value of TWEs investments in
    certain unconsolidated cable television joint ventures
    (Note 5) and pretax gains of $10 million in 2000,
    $40 million in 1999 and $30 million in 1998 relating
    to (i) the partial recognition of a deferred gain in
    connection with the 1998 sale of Six Flags, (ii) net pretax
    gains of approximately $65 million in 2000 and
    $97 million in 1999, principally related to the sale of an
    interest in CanalSatellite, (iii) a pretax charge of
    $24 million recognized in 2000 in connection with the Six
    Flags litigation, (iv) net pretax gains of approximately
    $1.080 billion in 1999 relating to the sale or exchange of
    certain unconsolidated cable television systems and investments
    and (v) a pretax charge of approximately $210 million
    in 1998 to reduce the carrying value of an interest in Primestar.
|   
|(d) |  | Includes a non-cash charge of
    $21.763 billion related to the cumulative effect of an
    accounting change in connection with the adoption of FAS 142. In
    2000, includes a cumulative effect of accounting change of $524
    million in connection with the adoption of a new film accounting
    standard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.

QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)


|        |  |            |        |           |  |            |        |   |  |   |         |  
|------- |  | ---------- | ------ | --------- |  | ---------- | ------ | - |  | - | ------- | -
|        |  |            |        | Operating |  | Net Income
|Quarter |  | Revenues   |        | Income    |  | (Loss)    
|        |  |            |        |           |  |           
|        |  |           
|        |  | (millions)
|2002(a) |  |            |        |           |  |            |        |   |  |   |         |  
|1st     |  | $          | 3,717  |           |  | $          | 532    |   |  | $ | (21,383 | )
|2nd     |  |            | 4,247  |           |  |            | 645    |   |  |   | 483     |  
|3rd     |  |            | 3,935  |           |  |            | 612    |   |  |   | 1,655   |  
|4th     |  |            | 4,526  |           |  |            | (1,481 | ) |  |   | (1,974  | )
|Year    |  |            | 16,425 |           |  |            | 308    |   |  |   | (21,219 | )
|2001(b) |  |            |        |           |  |            |        |   |  |   |         |  
|1st     |  | $          | 3,320  |           |  | $          | (98    | ) |  | $ | (350    | )
|2nd     |  |            | 3,396  |           |  |            | (42    | ) |  |   | (232    | )
|3rd     |  |            | 3,559  |           |  |            | 19     |   |  |   | (241    | )
|4th     |  |            | 4,067  |           |  |            | 90     |   |  |   | (209    | )
|Year    |  |            | 14,342 |           |  |            | (31    | ) |  |   | (1,032  | )



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | TWEs net loss in 2002 has been affected by
    certain significant transactions and nonrecurring items. These
    items consisted of (i) a non- cash charge of
    $21.763 billion in the first quarter to reduce the carrying
    value of goodwill upon adoption of FAS 142 (Note 1),
    (ii) a non-cash pretax charge of $2.355 billion in the
    fourth quarter to reduce the carrying value of goodwill and
    other intangible assets (Note 1), (iii) a non-cash
    charge of $363 million in the fourth quarter to reduce the
    carrying value of TWEs investment in certain
    unconsolidated cable television system joint ventures that
    experienced other-than-temporary declines in market value
    (Note 5) and (iv) discontinued operations net of tax
    of $(1) million in the first quarter, $2 million in the
    second quarter and $112 million in the third quarter,
    thereby aggregating $113 million for the year, to reflect
    the results of the Advance/Newhouse Systems (Note 1).
|   
|(b) |  | TWEs net loss in 2001 has been affected by
    a certain significant transaction and nonrecurring item. This
    item consisted of discontinued operations net of tax of
    $(10) million in the first quarter, $(9) million in
    the second quarter, $(10) million in the third quarter and
    $(10) million in the fourth quarter, thereby aggregating
    $(39) million for the year, to reflect the results of the
    Advance/Newhouse Systems (Note 1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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TIME WARNER ENTERTAINMENT COMPANY,
L.P.




SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS


Years Ended December 31, 2002, 2001 and
2000


|                                            |                                           |            |     |            |  |            |       |            |  |   |      |      |      |   |       |     | 
|------------------------------------------- | ----------------------------------------- | ---------- | --- | ---------- |  | ---------- | ----- | ---------- |  | - | ---- | ---- | ---- | - | ----- | --- | 
|                                            |                                           |            |     | Additions  |  |            |       |           
|                                            |                                           | Balance at |     | Charged to |  |            |       | Balance At
|                                            |                                           | Beginning  |     | Costs and  |  |            |       | End of    
|Description                                 |                                           | of Period  |     | Expenses   |  | Deductions |       | Period    
|                                            |                                           |            |     |            |  |            |       |           
|                                            |                                           |           
|                                            |                                           | (millions)
|2002:                                       |                                           |            |     |            |  |            |       |            |  |   |      |      |      |   |       |    
|Reserves deducted from accounts receivable: |                                           |            |     |            |  |            |       |            |  |   |      |      |      |   |       |    
|                                            | Allowance for doubtful accounts           |            | $   | 500        |  |            | $     | 221        |  |   | $    | (182 | )(a) |   | $     | 539 | 
|                                            | Reserves for sales returns and allowances |            |     | 410        |  |            |       | 1,029      |  |   |      | (800 | )(b) |   |       | 639 | 
|                                            |                                           |            |     |            |  |            |       |            |  |   |      |      |      |   |       |    
|Total                                       |                                           | $          | 910 |            |  | $          | 1,250 |            |  | $ | (982 | )    |      | $ | 1,178 |    
|                                            |                                           |            |     |            |  |            |       |            |  |   |      |      |      |   |       |    
|2001:                                       |                                           |            |     |            |  |            |       |            |  |   |      |      |      |   |       |    
|Reserves deducted from accounts receivable: |                                           |            |     |            |  |            |       |            |  |   |      |      |      |   |       |    
|                                            | Allowance for doubtful accounts           |            | $   | 359        |  |            | $     | 262        |  |   | $    | (121 | )(a) |   | $     | 500 | 
|                                            | Reserves for sales returns and allowances |            |     | 318        |  |            |       | 606        |  |   |      | (514 | )(b) |   |       | 410 | 
|                                            |                                           |            |     |            |  |            |       |            |  |   |      |      |      |   |       |    
|Total                                       |                                           | $          | 677 |            |  | $          | 868   |            |  | $ | (635 | )    |      | $ | 910   |    
|                                            |                                           |            |     |            |  |            |       |            |  |   |      |      |      |   |       |    
|2000:                                       |                                           |            |     |            |  |            |       |            |  |   |      |      |      |   |       |    
|Reserves deducted from accounts receivable: |                                           |            |     |            |  |            |       |            |  |   |      |      |      |   |       |    
|                                            | Allowance for doubtful accounts           |            | $   | 290        |  |            | $     | 158        |  |   | $    | (89  | )(a) |   | $     | 359 | 
|                                            | Reserves for sales returns and allowances |            |     | 378        |  |            |       | 448        |  |   |      | (508 | )(b) |   |       | 318 | 
|                                            |                                           |            |     |            |  |            |       |            |  |   |      |      |      |   |       |    
|Total                                       |                                           | $          | 668 |            |  | $          | 606   |            |  | $ | (597 | )    |      | $ | 677   |    
|                                            |                                           |            |     |            |  |            |       |            |  |   |      |      |      |   |       |    



---



|    |  |                                                                      
|--- |  | ---------------------------------------------------------------------
|(a) |  | Represents uncollectible receivables charged
    against the reserve.
|(b) |  | Represents returns or allowances applied against
    the reserve.    

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##### Table of Contents






TWE GENERAL PARTNERS

MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION


INTRODUCTION

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Overview.This
    section provides a general description of the General
    Partners businesses, as well as recent developments that
    have occurred during 2002 that the General Partners believe are
    important in understanding results of operations, as well as to
    anticipate trends in those operations.                                                                                                                                                                                                                                                                        
|
| |  | Results of
    operations.This section provides an
    analysis of WCIs results of operations for all three years
    presented in the accompanying consolidated statement of
    operations. WCI is the only General Partner with independent
    business operations; therefore, the results of ATC are not
    discussed. In addition, a brief description is provided of
    transactions and events that impact the comparability of the
    results being analyzed.                                                                                                                      
|
| |  | Financial condition and
    liquidity.This section provides an
    analysis of WCIs cash flows, as well as a discussion of
    WCIs outstanding debt and commitments, both firm and
    contingent, that existed as of December 31, 2002. Included
    in the discussion of outstanding debt is a discussion of the
    amount of financial capacity available to fund WCIs future
    commitments, as well as a discussion of other financing
    arrangements.                                                                                                                             
|
| |  | Market risk
    management.This section discusses how
    the General Partners manage exposure to potential loss arising
    from adverse changes in foreign currency exchange rates and
    changes in the market value of investments.                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Critical accounting
    policies.This section discusses those
    accounting policies that are considered important to the General
    Partners financial condition and results, and require
    significant judgment and estimates on the part of management in
    their application. In addition, all of the General
    Partners significant accounting policies, including the
    critical accounting policies, are summarized in Note 1 to the
    accompanying consolidated financial statements.                                                                                     
|
| |  | Risk factors and caution concerning
    forward-looking statements.This
    section provides a description of risk factors that could
    adversely affect the operations, business or financial results
    of the General Partners or its business segments and how certain
    forward-looking statements made by the General Partners 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.

OVERVIEW

Description of Business

On June 30, 1992, thirteen direct or
indirect subsidiaries of Time Warner Companies, Inc. (TW
Companies) contributed the assets and liabilities or the
rights to the cash flows of substantially all of TW
Companies Filmed Entertainment, Cable Networks and Cable
businesses to Time Warner Entertainment Company, L.P.
(TWE), a Delaware limited partnership, for general
partnership interests, and each general partner guaranteed a pro
rata portion of substantially all of TWEs debt and accrued
interest based on the relative fair value of the net assets each
contributed to TWE (the General Partner Guarantees),
(See Note 9). Since then, eleven of the thirteen original
general partners have been merged or dissolved into the other
two. WCI and ATC are the two remaining general partners of TWE.
They have succeeded to the

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##### Table of Contents



TWE GENERAL PARTNERS


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


general partnership interests and have assumed
the General Partner Guarantees of the eleven former general
partners.

WCI conducts substantially all of AOL Time Warner
Inc.s (AOL Time Warner or the
Company) music operations, including interests in
recorded music, music publishing and CD and DVD manufacturing.
These music operations include copyrighted music from many of
the worlds leading recording artists that is produced and
distributed by a family of established record labels such as
Warner Bros. Records, Atlantic Records, Elektra Entertainment
and Warner Music International. In addition, WCI has investments
in TWE, TW Companies, IPC Group Limited, Turner Broadcasting
System, Inc. (TBS) and Time Warner Telecom Inc.
(Time Warner Telecom). The financial position and
results of operations of ATC are principally derived from its
investments in TWE, TW Companies, TBS and Time Warner Telecom.

On January 11, 2001, America Online, Inc.
(America Online) and Time Warner Inc. (Time
Warner) merged to form AOL Time Warner, the worlds
leading media and entertainment company (the
Merger). As a result of the Merger, America Online
and Time Warner each became a wholly owned subsidiary of AOL
Time Warner and WCI and ATC each became an indirect, wholly
owned, subsidiary of AOL Time Warner.

Use of EBITDA

WCI, the only General Partner with independent
business operations, evaluates operating performance based on
several factors, including its primary financial measure of
operating income (loss) before non-cash depreciation of tangible
assets, amortization of intangible assets and impairment
write-downs related to goodwill and intangible assets
(EBITDA). WCI considers EBITDA an important
indicator of the operational strength and performance of its
businesses, including the ability to provide cash flows to
service debt and fund capital expenditures. In addition, EBITDA
eliminates the considerable amounts of non-cash depreciation of
tangible assets and amortization of intangible assets recognized
in business combinations accounted for by the purchase method.
As such, the following comparative discussion of the results of
operations of WCI includes, among other factors, an analysis of
changes in EBITDA. However, EBITDA should be considered in
addition to, not as a substitute for, operating income (loss),
net income (loss) and other measures of financial performance
reported in accordance with accounting principles generally
accepted in the U.S. In addition, EBITDA should not be used as a
substitute for the General Partners various cash flow
measures (e.g., operating cash flow), which are discussed in
detail under Financial Condition and Liquidity.

Recent Developments

Investment in Time Warner Entertainment
Company, L.P.

Prior to the change in ownership relating to the
exercise of an option by AT&T Corp. (AT&T),
which is discussed below, the General Partners in the aggregate
held 63.27% of the pro rata priority capital
(Series A Capital) and residual equity capital
(Residual Capital) of TWE and 100% of the junior
priority capital (Series B Capital) of TWE. TW
Companies held, directly or indirectly, 11.22% of the
Series A Capital and Residual Capital limited partnership
interests. The remaining 25.51% limited partnership interests in
the Series A Capital and Residual Capital of TWE were held
by MediaOne TWE Holdings, Inc., a subsidiary of AT&T.

During the second quarter of 2002, AT&T
exercised a one-time option to increase its ownership in the
Series A Capital and Residual Capital of TWE. As a result,
on May 31, 2002, AT&Ts interest in the
Series A Capital and Residual Capital of TWE increased by
approximately 2.13% to approximately 27.64%. This resulted in a
decrease in WCIs and ATCs corresponding interest in
the Series A Capital and Residual Capital of TWE of
approximately 1.07% and 0.74%, respectively, to approximately
36.43% and 25.03%, respectively. Similarly, TW Companies
interest in the Series A Capital and Residual Capital of TWE

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TWE GENERAL PARTNERS


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


decreased by approximately 0.32% to approximately
10.90%. In accordance with Staff Accounting Bulletin
No. 51, Accounting For Sales of Stock of a
Subsidiary, WCI and ATC have reflected the pretax impact
of the dilution of their interests in TWE of approximately
$365 million and $240 million, respectively, as an
adjustment to paid-in-capital (Note 5). During the third
quarter of 2002, TW Companies 10.90% interest in TWE was
transferred to WCI and ATC, increasing WCIs and ATCs
interest in the Series A and Residual Capital of TWE to
41.88% and 30.48%, respectively. AT&Ts interest in TWE
was acquired by Comcast Corp. (Comcast) upon
consummation of the merger of Comcast and AT&Ts
broadband business in November 2002.

In August 2002, AOL Time Warner and AT&T
announced that they had agreed to restructure TWE. The
restructuring is expected to be completed on March 31,
2003. The restructuring will result in the following:
(i) WCI will acquire complete ownership of TWEs
content assets (including Warner Bros., the Warner Bros. Library
and Home Box Office, which will become separate, wholly owned
subsidiaries of WCI); (ii) all of AOL Time Warners
directly-owned cable television system interests will be
contributed to a separate company which will become a
majority-owned subsidiary of AOL Time Warner and will be renamed
Time Warner Cable Inc. (TWC Inc.); (iii) TWE
will become a subsidiary of TWC Inc. and will continue to own
the cable television system interests it previously owned;
(iv) Comcast will receive $2.1 billion in cash, which
the Company anticipates will be funded through a new credit
facility at TWC Inc. that has not yet been established and AOL
Time Warner equity securities valued at $1.5 billion;
(v) a Comcast Trust will also retain a 21% economic
interest in the Companys cable business, 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; and (vi) AOL
Time Warner will retain an overall 79% economic interest in the
cable business, 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 and a
$2.4 billion preferred component. The 1% direct interest
and $2.4 billion preferred interest in TWE, as well as,
part of AOL Time Warners ownership interest in WCI, will
be held through ATC.

Based upon its 89.3% controlling voting interest
in TWC Inc., AOL Time Warner will consolidate the results of TWC
Inc. for accounting purposes. WCI will account for its interest
in TWC Inc. under the equity method of accounting. ATC will
account for its common and preferred interests in TWE at cost.
At the closing of the restructuring, it is anticipated that TWC
Inc. will have approximately $8.1 billion in consolidated
net debt and preferred equity, including the $2.4 billion
preferred interest held by AOL Time Warner. Subject to market
and other conditions, AOL Time Warner expects to complete an
initial public offering of TWC Inc. common stock during 2003. It
is anticipated that the first $2.1 billion of net proceeds
raised in any such offering would be used to repay TWC
Inc.s debt incurred to fund the $2.1 billion cash
payment to Comcast. Thereafter, Comcast will have certain
priority registration rights with respect to its interest in TWC
Inc. (Note 5).

Sale of Columbia House

In June 2002, AOL Time Warner and Sony
Corporation of America each sold 85% of their respective 50%
interest in the Columbia House Company Partnerships
(Columbia House) to Blackstone Capital Partners III
LP (Blackstone), an affiliate of The Blackstone
Group, a private investment bank. The sale resulted in WCI
recognizing a pretax gain of approximately $97 million,
which is included in other income (expense), net, in the
accompanying consolidated statement of operations. In addition,
WCI has deferred an approximate $5 million gain on the
sale. The deferred gain primarily relates to the estimated fair
value of the portion of the proceeds received as a note
receivable, which will be deferred until such time as the
realization of such note becomes more fully assured. As part of
the transaction, AOL Time Warner, including WCI, will continue
to license music and video product to Columbia House for a
five-year period (Note 7).

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##### Table of Contents



TWE GENERAL PARTNERS


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


Acquisition of Word Entertainment

In January 2002, WCI completed its purchase of
Word Entertainment (Word) from Gaylord Entertainment
Company for approximately $84 million in cash. Word is a
leader in the multi-faceted contemporary Christian music
industry with over 30 active artists on several record labels,
approximately 45 songwriters under contract and a catalog
containing more than 75,000 masters. The acquisition was
accounted for using the purchase method of accounting for
business combinations. During the third quarter of 2002, WCI
exchanged 20% of its interest in Word to Curb Records, for
non-cash consideration of equal value.

RESULTS OF OPERATIONS

Transactions Affecting Comparability of
Results of Operations

America Online-Time Warner Merger

As a result of the Merger, the accompanying
historical operating results and financial condition reflect the
allocation of the estimated $147 billion cost to acquire
Time Warner to its underlying net assets, including the net
assets of WCI and ATC. In addition, the historical operating
results and financial condition reflect reclassifications to
conform to AOL Time Warners 2001 financial statement
presentation.

New Accounting Principles

In the first quarter of 2002, the General
Partners adopted new accounting guidance in several areas, which
impacted the comparability of WCIs and ATCs
financial results and are discussed below.

New Accounting Standard for Goodwill and Other
Intangible Assets

During 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 142 Goodwill and Other
Intangible Assets (FAS 142), which
requires that, effective January 1, 2002, goodwill,
including the goodwill included in the carrying value of
investments accounted for using the equity method of accounting,
and certain other intangible assets deemed to have an indefinite
useful life, cease amortizing. The new rules also require that
goodwill and certain intangible assets be assessed for
impairment using fair value measurement techniques. During the
first quarter of 2002, WCI and ATC completed their impairment
review and recorded non-cash pretax charges of
$18.962 billion and $9.603 billion, respectively, for
the impairment of goodwill, substantially all of which was
generated in the Merger. Approximately $14 billion of
WCIs charge and all of ATCs charge was the result of
goodwill impairment charges recorded at TWE and certain other
AOL Time Warner consolidated subsidiaries, which are accounted
for by the General Partners under the equity method of
accounting. These charges reflect overall market declines since
the Merger was announced in January 2000, are non-operational in
nature and are reflected as a cumulative effect of an accounting
change in the accompanying consolidated financial statements
(Note 1).

During the fourth quarter of 2002, WCI and ATC
performed their annual impairment reviews for goodwill and other
intangible assets. As a result, WCI recorded an additional
non-cash charge of $1.499 billion which is recorded as a
component of operating income in the accompanying consolidated
statement of operations. The $1.499 billion charge at WCI
includes a $646 million charge to reduce the carrying value
of goodwill and an $853 million charge to reduce the
carrying value of other intangible assets of WCIs music
operations, which reflects declining valuations in the music
industry, primarily due to the negative effects of piracy.

In addition, the General Partners recognized a
$1.572 billion charge at WCI and $1.146 billion charge
at ATC relating to goodwill impairment charges at TWE, due to
decreasing valuations of TWEs cable systems, as evidenced
by the decline in the stock prices of comparable cable
television companies. These charges are

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TWE GENERAL PARTNERS


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


included in equity in pretax income
(loss) of TWE, in the accompanying consolidated statement
of operations. The impairment charges are non-cash in nature and
do not affect the General Partners liquidity.



| |                                              
| | ---------------------------------------------
| | Reimbursement of Out-of-Pocket
    Expenses

In January 2002, the FASBs Emerging Issues
Task Force (EITF) reached a consensus on EITF
No. 01-14, Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses
Incurred (EITF 01-14). EITF 01-14 requires
that reimbursements received for out-of-pocket expenses be
classified as revenue on the income statement. EITF 01-14 was
effective for the General Partners in the first quarter of 2002
and required retroactive restatement of all periods presented to
reflect the new accounting provisions. This change in revenue
classification impacts WCI. As a result of applying the guidance
of EITF 01-14, WCIs revenues and costs presented herein
were increased by an equal amount of $152 million in 2001
and $155 million in 2000.



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

In April 2001, the EITF reached a final consensus
on EITF Issue No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the
Vendors Products, which was later codified along
with other similar issues, into EITF 01-09, Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of
the Vendors Products (EITF 01-09). EITF
01-09 was effective for the General Partners in the first
quarter of 2002 and requires retroactive restatement of all
periods presented to reflect the new accounting provisions. EITF
01-09 clarifies the income statement classification of costs
incurred by a vendor in connection with the resellers
purchase or promotion of the vendors products, resulting
in certain cooperative advertising and product placement costs
previously classified as selling expenses being reflected as a
reduction of revenues. This change in revenue classification
impacts WCI. As a result of applying the provisions of EITF
01-09, WCIs revenues and costs presented herein were
reduced by an equal amount of $45 million in 2001 and
$35 million in 2000.



| |                                                                     
| | --------------------------------------------------------------------
| | Significant Transactions and Other Items
    Affecting Comparability

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

For the year ended December 31, 2002, these
items included (i) merger and restructuring costs of
approximately $8 million at WCI (Note 4), (ii) a
non-cash charge of $1.499 billion to reduce the carrying
value of goodwill and other intangible assets at WCI, which is
included as a component of operating income (loss) and
excludes a $1.572 billion charge representing WCIs
share of TWEs goodwill and other intangible assets
impairment (Note 3), (iii) non-cash pretax charges of
approximately $446 million at WCI and approximately
$244 million at ATC to reduce the carrying value of certain
investments that experienced other-than-temporary declines in
market value, including non-cash pretax charges of approximately
$356 million at WCI and $244 million at ATC to reduce
the carrying value of their respective investments in Time
Warner Telecom, an equity investee (Note 7), and
(iv) an approximate $97 million gain in the second
quarter on the sale of a portion of WCIs interest in
Columbia House (Note 7).

For the year ended December 31, 2001, these
items included (i) merger and restructuring costs of
approximately $37 million at WCI (Note 4) and
(ii) non-cash pretax charges of approximately
$676 million at WCI and $372 million at ATC to reduce
the carrying value of certain investments that experienced
other-than-temporary declines in market value, including
non-cash pretax charges of approximately $542 million at
WCI and $372 million at ATC to reduce the carrying value of
their respective investments in Time Warner Telecom, an equity
investee (Note 7).

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TWE GENERAL PARTNERS


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


For the year ended December 31, 2000, these
items included (i) merger and restructuring costs of
approximately $18 million (Note 4), (ii) a
non-cash pretax charge of approximately $115 million to
reduce the carrying value of WCIs investment in the
Columbia House (Note 7) and (iii) a non-cash pretax
charge of $337 million for WCI and $227 million for
ATC related to the cumulative effect of an accounting change in
connection with the adoption of a new film accounting standard.

Set forth below is a discussion of the results of
operations and financial condition of WCI, the only General
Partner with independent business operations.

2002 vs. 2001

Revenues.WCIs revenues increased to $4.205 billion in 2002,
compared to $4.036 billion in 2001. Revenues increased
primarily due to the impact of the acquisition of Word
Entertainment in January 2002, lower provisions for returns due
to improved experience, increases in DVD manufacturing volume,
and the positive effect of changes in foreign currency exchange
rates on international revenues, offset in part by the ongoing
weakness in the worldwide music industry and lower DVD
manufacturing prices. Industry-wide worldwide music sales
continue to be negatively impacted by the effects of piracy,
which is expected to continue in the future. In addition,
downward pressure on DVD manufacturing pricing could negatively
affect future manufacturing revenues and profits. As of
December 31, 2002, WCIs music operations had
year-to-date domestic album market share of 17.0%, compared to
16.8% at December 31, 2001.

EBITDA.WCIs EBITDA increased to $471 million in 2002 from
$382 million in 2001. The improvement in EBITDA is due
primarily to higher revenues, the impact of various cost-saving
and restructuring programs and lower marketing and bad debt
expense, partially offset by higher artist and repertoire costs.

Amortization
Expense.WCIs amortization
expense decreased to $175 million in 2002 from
$836 million in 2001. The amortization expense in 2001
primarily reflected amortization of goodwill and other
intangible assets recorded in the Merger. The decrease in
amortization expense in 2002 was due to the adoption of
FAS 142, which resulted in goodwill and certain intangible
assets ceasing to be amortized, offset in part by the
amortization of finite lived intangibles acquired as part of the
purchase of Word Entertainment in January 2002. In the first
quarter of 2003 the Company reassessed the useful life of its
music publishing copyrights and record catalog and concluded
that such lives should be decreased from 20 years to 15.
The impact of this change is expected to increase amortization
expense by approximately $50 million per year.

Operating
Loss.WCIs operating loss
increased to $1.325 billion in 2002 compared to
$551 million in 2001. The increase in operating loss is due
primarily to a $1.499 billion goodwill and other intangible
asset impairment charge, offset in part by an increase in EBITDA
and a decrease in amortization expense due to the adoption of
FAS 142.

Equity in the Pretax Income (Loss) of
TWE.WCIs equity in the
pretax income (loss) of TWE was $(427) million in 2002,
compared to $(969) million in 2001. TWEs pretax loss
decreased in 2002 as compared to 2001 principally due to a
decrease in amortization expense due to the adoption of
FAS 142, and an increase in EBITDA, offset in part by a
non-cash charge of $2.355 billion to reduce the carrying
value of goodwill, as well as an increase in depreciation
expense. WCIs equity in the pretax income (loss) of
TWE also includes a charge of $1.572 billion representing
WCIs share of TWEs goodwill and other intangible
assets impairment charge.

Interest Expense,
Net.WCIs interest expense,
net, was $59 million in 2002 compared to $25 million
in 2001. The increase was principally the result of a loan
received from AOL Time Warner in conjunction with the purchase
of IPC Group Limited.

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TWE GENERAL PARTNERS


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


Other Income (Expense),
Net.WCIs other income
(expense), net was $(308) million in 2002, compared to $(1.088)
billion in 2001. The decrease was principally due to lower
losses from certain investments accounted for under the equity
method of accounting and a decrease in losses related to
investment write-downs.

Income Tax
(Expense) Benefit.The
relationship between income before income taxes and income tax
expense for the General Partners is principally affected by the
amortization of goodwill and certain other financial statement
expenses that are not deductible for income tax purposes. Income
tax expense for each of the General Partners includes all income
taxes related to its allocable share of partnership income of
TWE.

Net Income
(Loss).WCIs net loss
increased to $21.001 billion in 2002 from
$2.259 billion in 2001 due to the cumulative effect of
adopting FAS 142 of $18.962 billion and a
$1.499 billion goodwill and intangibles impairment charge,
offset in part by a decrease in the amortization of intangibles
as a result of the adoption of FAS 142.

2001 vs. 2000

Revenues.WCI
had revenues of $4.036 billion compared to revenues of
$4.268 billion in 2000. Revenues decreased primarily due to
the negative effect of changes in foreign currency exchange
rates on international music operations and lower industry-wide
recorded music sales. Despite the industry-wide sales decline,
WCIs music operations increased its domestic market share
to 16.8%, coming in second place for the year in total industry
sales.

EBITDA.WCIs EBITDA decreased to $382 million from
$512 million. The decrease in EBITDA principally related to
the reduction in revenues, higher marketing costs, including the
cost of promoting new artists, higher provisions for bad debts,
reflecting the difficult industry-wide retail environment and
higher merger-related costs. This was offset in part by higher
income from DVD manufacturing operations and lower artist
royalty costs driven by the lower revenues.

Amortization
Expense.WCIs amortization
expense increased to $836 million in 2001 from
$241 million in 2000 as a result of goodwill and other
intangible assets recorded in 2001 in connection with the Merger.

Operating Income
(Loss).WCI had operating income
(loss) of $(551) million in 2001 compared to
$188 million in 2000. The decline in operating income was
principally related the amortization of goodwill and other
intangible assets recorded in connection with the Merger.

Equity in the Pretax Income (Loss) of
TWE.WCIs equity in the
pretax income (loss) of TWE was $(969) million in 2001, compared
to $539 million in 2000. TWEs pretax income decreased
in 2001 as compared to 2000 principally due to the impact of the
Merger and the application of the purchase method of accounting,
which resulted in increased amortization of goodwill and other
intangible assets recorded in connection with the Merger,
including the amortization of goodwill included in the carrying
value of investments accounted for under the equity method of
accounting, which is recorded in TWEs other expense, net.

Interest Expense,
Net.WCIs interest expense,
net, was $25 million in 2001 compared to $3 million in
2000. The increase was principally the result of the recognition
of the accretion of interest associated with a long-term
liability for artist contracts, which was established as a
result of the Merger and the application of the purchase method
of accounting.

Other Income (Expense),
Net.WCIs other income
(expense), net, was $(1.088) billion in 2001, compared to $(188)
million in 2000. The increase was principally due to an increase
in losses related to investment write-downs and higher losses
from certain investments accounted for under the equity method
of accounting. The losses from equity method investments
primarily relate to the amortization of goodwill and

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TWE GENERAL PARTNERS


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


intangible assets associated with these
investments, which were adjusted upward in connection with the
Merger.

Income Tax
(Expense) Benefit.The
relationship between income before income taxes and income tax
expense for the General Partners is principally affected by the
amortization of goodwill and certain other financial statement
expenses that are not deductible for income tax purposes. Income
tax expense for each of the General Partners includes all income
taxes related to its allocable share of partnership income of
TWE.

Net Income
(Loss).WCI had net income (loss)
of $(2.259) billion in 2001 compared to $44 million in
2000. The decrease primarily relates to a decrease in WCIs
equity in the pretax income of TWE, an increase in losses
related to investment write-downs, higher losses from certain
investments accounted for under the equity method of accounting
and higher amortization expense, offset in part by a
$337 million non-cash pre-tax charge recorded in 2000
related to the cumulative effect of an accounting change in
connection with the adoption of a new film accounting standard
and a decrease in income tax expense.

FINANCIAL CONDITION AND LIQUIDITY

December 31, 2002


Current Financial Condition

WCI had $26.0 billion of equity at
December 31, 2002, compared to $57.4 billion of equity at
December 31, 2001. WCI had no borrowings outstanding to TW
Companies under its revolving credit agreement at the end of
either period. As discussed in more detail below, management
believes that WCIs operating cash flow, cash and
equivalents, and borrowing availability under its revolving
credit agreement with TW Companies are sufficient to fund its
capital and liquidity needs for the foreseeable future without
cash distributions from TWE above those permitted by existing
agreements.

ATC had $15.0 billion of equity at
December 31, 2002, compared to $28.3 billion at
December 31, 2001. Although ATC has no independent
operations, it is expected that additional tax-related and other
distributions from TWE, as well as availability under ATCs
revolving credit agreement with TW Companies, will continue to
be sufficient to satisfy ATCs obligations with respect to
its tax sharing agreement with TW Companies for the foreseeable
future.

Cash Flows



| |                     
| | --------------------
| | Operating Activities

In 2002, WCIs cash provided by operations
amounted to $609 million and reflected $471 million of
EBITDA, $294 million of distributions received from TWE,
$189 million of net income tax refunds ($223 million
of which was received from AOL Time Warner under a tax-sharing
agreement), less a $345 million increase in other working
capital requirements. In 2001, WCIs cash provided by
operations of $477 million reflected $382 million of
EBITDA, $188 million of distributions from TWE,
$225 million of net income tax refunds ($297 million
of which was received from AOL Time Warner under a tax-sharing
agreement), less $318 million related to an increase in
other working capital requirements.



| |                     
| | --------------------
| | Investing Activities

Cash used by investing activities increased to
$312 million in 2002, compared to $228 million in 2001
as a result of a decrease in proceeds received from the sale of
investments.

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OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)




| |                     
| | --------------------
| | Financing Activities

Cash used by financing activities increased to
$337 million in 2002 from $245 million in 2001 as a
result of an increase in amounts due to TW Companies offset
in part by decreased dividend payments.

WCI and ATC have no claims on the assets and cash
flows of TWE except through the payment of certain
reimbursements and cash distributions. In 2002, the General
Partners received an aggregate $497 million of
distributions from TWE, consisting of $473 million of
tax-related distributions and $24 million of stock option
related distributions. In 2001, the General Partners received an
aggregate $317 million of distributions from TWE,
consisting of $53 million of tax-related distributions and
$264 million of stock option related distributions. Of such
aggregate distributions, WCI received $294 million in 2002
and $188 million in 2001, and ATC received
$203 million in 2002 and $129 million in 2001.

Outstanding Debt and Other Financing
Arrangements



| |                                                      
| | -----------------------------------------------------
| | Outstanding Debt and Available Financial
    Capacity

At December 31, 2002, WCI had total
committed capacity, defined as maximum available borrowings
under its debt agreement with TW Companies, of approximately
$1 billion. Of this committed capacity, approximately
$1 billion was available to fund future contractual
obligations, none of which was outstanding as debt. In addition,
WCI has a liability to AOL Time Warner of $887 million as a
result of the IPC acquisition, which occurred during the fourth
quarter of 2001.



| |                             
| | ----------------------------
| | Other Financing Arrangements

From time to time, WCI, through AOL Time Warner,
enters into various other financing arrangements with special
purpose entities (SPEs). These arrangements include
facilities which provide for the accelerated receipt of cash on
certain accounts receivable. WCI employs these financing
arrangements because they provide a cost-efficient form of
financing, including certain tax benefits, as well as an added
level of diversification of funding sources. WCI is able to
realize cost efficiencies under these arrangements since the
assets securing the financing are held by a legally separate,
bankruptcy-remote SPE and provide direct security for the
funding being provided. The assets and financing associated with
these arrangements generally qualify for off-balance sheet
treatment. For more detail, see Note 17 to the accompanying
consolidated financial statements. As of December 31, 2002,
WCIs other financing arrangements consisted of an accounts
receivable securitization facility which had committed capacity
of $450 million, including amounts that can be used by
non-WCI, AOL Time Warner segments. As of December 31, 2002,
WCI had outstanding utilization under the facility of
$450 million and no unused capacity.

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
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 the General
Partners during the third quarter of 2003. Although the Company
has not completed its review, the General Partners anticipate
that the adoption of FIN 46 will not have a significant
impact on their respective financial statements.



| |                                            
| | -------------------------------------------
| | Rating Triggers and Financial
    Covenants

The General Partners source of funding is
generally through participation in AOL Time Warners bank
credit agreements and financing arrangements with SPEs. Each of
the AOL Time Warners bank credit agreements and financing
arrangements with SPEs, contain customary covenants. A breach of
such covenants

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ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


in the bank credit agreements that continues
beyond any grace period can constitute a default, which can
limit the ability to borrow and can give rise to a right of the
lenders to terminate the applicable facility and/or require
immediate payment of any outstanding debt. A breach of such
covenants in the financing arrangements in SPEs that continues
beyond any grace period can constitute a termination event which
can limit the facility as a future source of liquidity; however,
there would be no claims on AOL Time Warner or WCI for the
receivables previously sold. Additionally, in the event that AOL
Time Warners credit ratings decrease, the cost of
maintaining its bank credit agreements and facilities and of
borrowing increases and, conversely, if the ratings improve,
such costs decrease.

As of December 31, 2002 and through the date
of this filing, AOL Time Warner was in compliance with all
covenants. Management does not foresee that AOL Time Warner will
have any difficulty complying with the covenants currently in
place in the foreseeable future.

Contractual and Other Obligations



| |                 
| | ----------------
| | Firm Commitments

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

The following table summarizes separately
WCIs firm commitments at December 31, 2002 and the
timing and effect that such obligations are expected to have on
WCIs liquidity and cash flow in future periods. It should
be noted that there are a number of firm commitments made by WCI
in the normal course of business, the following table represents
the more significant of those firm commitments. WCI expects to
fund these commitments with operating cash flow generated in the
normal course of business.

|                                            |                        |            |     |           |  |            |     |       |  |   |     |     |  |   |     |     | 
|------------------------------------------- | ---------------------- | ---------- | --- | --------- |  | ---------- | --- | ----- |  | - | --- | --- |  | - | --- | --- | 
|                                            |                        |            |     |           |  | 2007 and   |     |      
|Nature of Firm Commitments                  |                        | 2003       |     | 2004-2006 |  | thereafter |     | Total
|                                            |                        |            |     |           |  |            |     |      
|                                            |                        |           
|                                            |                        | (millions)
|Talent contracts                            |                        | $          | 109 |           |  | $          | 329 |       |  | $ | 109 |     |  | $ | 547 |    
|Net operating leases                        |                        |            | 55  |           |  |            | 175 |       |  |   | 120 |     |  |   | 350 |    
|Letter of credit and other firm commitments |                        |            | 10  |           |  |            | 11  |       |  |   |    |     |  |   | 21  |    
|                                            |                        |            |     |           |  |            |     |       |  |   |     |     |  |   |     |    
|                                            | Total firm commitments |            | $   | 174       |  |            | $   | 515   |  |   | $   | 229 |  |   | $   | 918 | 
|                                            |                        |            |     |           |  |            |     |       |  |   |     |     |  |   |     |    

Contingent
Commitments

From time to time, WCI enters into certain
contractual arrangements that require WCI to make payments or
provide funding if certain circumstances occur (contingent
commitments). Contingent commitments were not significant
as of December 31, 2002.

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

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OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


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 are not expected to have a material impact
on the General Partners 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 General Partners have
modified its disclosures herein as required.

Equity Method Investments

Except for the guarantee of TWEs debt, as
discussed in Note 9 to the accompanying consolidated financial
statements, the General Partners do not guarantee the debt of
any of their investments accounted for using the equity method
of accounting. However, for certain of these investments, WCI
expects to continue to provide funding in excess of amounts
currently invested.

MARKET RISK MANAGEMENT

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

Foreign Currency Risk

AOL Time Warner uses foreign exchange contracts
primarily to hedge the risk that unremitted or future royalties
and license fees owed to WCI domestic companies for the sale or
anticipated sale of U.S. copyrighted products abroad may be
adversely affected by changes in foreign currency exchange
rates. As part of its overall strategy to manage the level of
exposure to the risk of foreign currency exchange rate
fluctuations, primarily exposure to changes in the value of the
British pound, Japanese yen, and European currency, AOL Time
Warner hedges a portion of its, TWEs and WCIs
combined foreign currency exposures anticipated over the ensuing
fifteen-month period (the hedging period). At
December 31, 2002, AOL Time Warner had effectively hedged
approximately 75% of WCIs estimated net foreign currency
exposures that principally relate to anticipated cash flows for
royalties and license fees to be remitted to the U.S. over the
ensuing hedging period. The hedging period for royalties and
license fees covers revenues expected to be recognized over the
ensuing twelve-month period, however, there is often a lag
between the time that revenue is recognized and the transfer of
foreign-denominated revenues back into U.S. dollars, therefore,
the hedging period covers a fifteen month period. To hedge this
exposure, AOL Time Warner uses foreign exchange contracts that
generally have maturities of three months to fifteen months
providing continuing coverage throughout the hedging period. AOL
Time Warner reimburses or is reimbursed by WCI for contract
gains and losses related to WCIs foreign currency
exposure. At December 31, 2002, AOL Time Warner had
contracts for the sale of $1.588 billion and the purchase
of $ 1.341 billion of foreign currencies at fixed rates. Of
AOL Time Warners $247 million net sale contract
position, $613 million of foreign exchange sale contracts
and $430 million of foreign exchange purchase contracts
related to WCIs foreign currency exposure, including net
contracts for the sale of $90 million of Japanese yen and
$252 million of European Currency and net contracts for the
purchase of $153 million of the British pound. This
compared to contracts for the sale of $448 million and the
purchase of $400 million of foreign currencies for WCI at
December 31, 2001, including net contracts for the sale of
$146 million of Japanese yen, and net contracts for the
purchase of $28 million of European currency and
$62 million of the British pound.

Based on AOL Time Warners outstanding
foreign exchange contracts related to WCIs exposure at
December 31, 2002, each 5% devaluation of the U.S. dollar
would result in approximately $9 million of net unrealized
losses on contracts. Conversely, a 5% appreciation of the U.S.
dollar would result in approximately $9 million of net
unrealized gains on contracts. Consistent with the nature of the
economic hedge provided by such foreign exchange contracts, such
unrealized gains or losses largely would be offset by
corresponding

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MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


decreases or increases, respectively, in the
dollar value of future foreign currency royalty and license fee
payments that would be received in cash within the hedging
period from the sale of U.S. copyrighted products abroad.

Equity Risk

The General Partners are exposed to market risk
as it relates to changes in market value of their investments.
The General Partners invest in equity instruments of public and
private companies for operational and strategic business
purposes. These securities are subject to significant
fluctuations in fair market value due to volatility of the stock
market and the industries in which the companies operate. These
securities, which are classified in Other
investments on the accompanying consolidated balance
sheet, include investments accounted for using the equity method
of accounting, investments in private securities and equity
derivative instruments. As of December 31, 2002, WCI had
approximately $58 million of investments accounted for at
cost, primarily relating to private equity securities,
approximately $96 million of available-for-sale securities
and approximately $4.199 billion of investments accounted
for using the equity method of accounting. As of
December 31, 2002, substantially all of ATCs
investments consisted of investments accounted for using the
equity method of accounting.

Over the last three years, the General Partners
experienced significant declines in the value of certain
investments. As a result, WCI has recorded non-cash pretax
charges of $446 million in 2002, $676 million in 2001
and $115 million in 2000 and ATC has recorded non-cash pretax
charges of $244 million in 2002, $372 million in 2001
and $0 in 2000. These charges were primarily to reduce the
carrying value of certain publicly traded and privately held
investments and investments accounted for using the equity
method of accounting that had experienced
otherthan-temporary declines in value. While the General
Partners have recognized all declines that are believed to be
other-than-temporary, it is reasonably possible that individual
investments in the General Partners portfolios may
experience an other-than-temporary decline in value in the
future if the underlying investee experiences poor operating
results or the U.S. equity markets experience future broad
declines in value. See Note 7 to the accompanying consolidated
financial statements for additional discussion.

CRITICAL ACCOUNTING POLICIES

The SECs Financial Reporting Release
No. 60, Cautionary Advice Regarding Disclosure About
Critical Accounting Policies (FRR 60),
suggests companies provide additional disclosure and commentary
on those accounting policies considered most critical. FRR 60
considers an accounting policy to be critical if it is important
to the companys financial condition and results, and
requires significant judgment and estimates on the part of
management in its application. The General Partners believe the
following represent the critical accounting policies of the
General Partners as contemplated by FRR 60. As noted in the
following discussion, such critical policies may relate directly
to either WCI only or both of the General Partners. In addition,
since a substantial portion of WCIs and ATCs results
are derived from their investments in TWE, a discussion of some
of the critical accounting policies impacting TWE has been
included. Any impact on TWEs pretax income would impact
WCIs and ATCs equity in pretax income (loss) of
TWE. For a summary of all of the General Partners
significant accounting policies, see Note 1 to the accompanying
consolidated financial statements.

Accounting for Goodwill and Other Intangible
Assets

During 2001, the FASB issued FAS 142, which
requires that, effective January 1, 2002, goodwill,
including the goodwill included in the carrying value of
investments accounted for using the equity method of accounting,
and certain other intangible assets deemed to have an indefinite
useful life, cease amortizing. FAS 142 requires that goodwill
and certain intangible assets be assessed for impairment using
fair value

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ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


measurement techniques. Specifically, goodwill
impairment is determined using a two-step process. The first
step of the goodwill impairment test is used to identify
potential impairment by comparing the fair value of a reporting
unit with its carrying amount, including goodwill. If the fair
value of a reporting unit exceeds its carrying amount, goodwill
of the reporting unit is considered not impaired and the second
step of the impairment test is unnecessary. If the carrying
amount of a reporting unit exceeds its fair value, the second
step of the goodwill impairment test is performed to measure the
amount of impairment loss, if any. The second step of the
goodwill impairment test compares the implied fair value of the
reporting units goodwill with the carrying amount of that
goodwill. If the carrying amount of the reporting units
goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess.
The implied fair value of goodwill is determined in the same
manner as the amount of goodwill recognized in a business
combination. That is, the fair value of the reporting unit is
allocated to all of the assets and liabilities of that unit
(including any unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination and
the fair value of the reporting unit was the purchase price paid
to acquire the reporting unit. The impairment test for other
intangible assets consists of a comparison of the fair value of
the intangible asset with its carrying value. If the carrying
value of the intangible asset exceeds its fair value, an
impairment loss is recognized in an amount equal to that excess.

Determining the fair value of a reporting unit
under the first step of the goodwill impairment test and
determining the fair value of individual assets and liabilities
of a reporting unit (including unrecognized intangible assets)
under the second step of the goodwill impairment test is
judgmental in nature and often involves the use of significant
estimates and assumptions. Similarly, estimates and assumptions
are used in determining the fair value of other intangible
assets. These estimates and assumptions could have a significant
impact on whether or not an impairment charge is recognized and
also the magnitude of any such charge. To assist in the process
of determining goodwill impairment, the General Partners obtain
appraisals from independent valuation firms. In addition, to the
use of independent valuation firms, the General Partners perform
internal valuation analyses, and considers other market
information that is publicly available. Estimates of fair value
are primarily determined using discounted cash flows and market
comparisons and recent transactions. These approaches use
significant estimates and assumptions including projected future
cash flows (including timing), discount rate reflecting the risk
inherent in future cash flows, perpetual growth rate,
determination of appropriate market comparables and the
determination of whether a premium or discount should be applied
to comparables.

During the first quarter of 2002, upon adoption
of FAS 142, WCI and ATC completed their initial impairment
reviews and recorded non-cash pre-tax charges of
$18.962 billion and $9.603 billion, respectively, for
the impairment of goodwill, substantially all of which was
generated in the Merger. During the fourth quarter of 2002, WCI
and ATC performed their annual impairment reviews for goodwill
and other intangible assets and recorded an additional charge of
$646 million to reduce the carrying value of goodwill, as
well as a charge to reduce the carrying value of brands and
trademarks owned by WCI ($853 million). The $18.962 billion
and $9.603 billion charges are reflected as a cumulative
effect of an accounting change and the $646 million and
$853 million charges are reflected as a component of
operating income in the accompanying consolidated statement of
operations. These charges are non-operational and non-cash in
nature and do not affect the General Partners liquidity.

Consistent with FRR 60, WCI has provided
sensitivity analysis in instances when such analysis is
meaningful. As previously discussed, WCIs $646 million
goodwill impairment charge recognized in the fourth quarter of
2002, reflected the fair value of WCI as of December 31,
2002. Assuming an increase in the fair value of WCI of 10% would
have reduced WCIs goodwill impairment charge by
$307 million. Assuming a decline in fair value of 10% would
not impact the amount of goodwill impairment because the
carrying amount of goodwill was reduced to zero as a result of
the actual fourth quarter impairment charge. This analysis does
not consider any potential impairments relating to indefinite
lived intangibles.

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MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


Merger Accounting

The merger of America Online and Time Warner has
been accounted for by AOL Time Warner as an acquisition of Time
Warner under the purchase method of accounting for business
combinations. Under the purchase method of accounting, the cost,
including transaction costs, of approximately $147 billion
to acquire Time Warner was allocated to the underlying net
assets, including the net assets of TWE and the General
Partners, based on their respective estimated fair values. The
excess of the purchase price over the estimated fair values of
the net assets acquired was recorded as goodwill. Consistent
with accounting principles generally accepted in the U.S. at the
time the Merger was consummated, AOL Time Warner valued the
purchase price to acquire Time Warner based upon the fair value
of the AOL Time Warner shares issued in the Merger on the
Mergers announcement date. Due to beneficial market
conditions existing at that time, this resulted in a
significantly higher purchase price and recorded goodwill than
if the purchase price had been valued based upon AOL Time Warner
shares on the Mergers consummation date.

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

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

Investments

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

In evaluating the factors above for
available-for-sale securities, management presumes a decline in
value to be other-than-temporary if the quoted market price of
the security is 20% or more below the investments cost
basis for a period of six months or more (the 20%
criteria) or the quoted market price of the security is
50% or more below the securitys cost basis at any quarter
end (the 50% criteria). However, the

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CONDITION  (Continued)


presumption of an other-than-temporary decline in
these instances may be overcome if there is persuasive evidence
indicating that the decline is temporary in nature (e.g., strong
operating performance of investee, historical volatility of
investee, etc.). Additionally, there may be instances where
impairment losses are recognized even if the 20% and 50%
criteria are not satisfied (e.g., plan to sell the security in
the near term and the fair value is below the General
Partners cost basis).

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

The United States economy has experienced a broad
decline in the public equity markets, particularly in technology
stocks, including investments held in the General Partners
portfolio. Similarly, the General Partners experienced
significant declines in the value of certain privately held
investments, restricted securities and investments accounted for
using the equity method of accounting. As a result, the General
Partners recorded non-cash pretax charges to reduce the carrying
value of certain investments that experienced
other-than-temporary declines, and to reflect market
fluctuations in equity derivative instruments. These charges
were approximately $446 million in 2002, $676 million
in 2001 and $115 million in 2000 for WCI, and are included
in other income (expense), net in the accompanying consolidated
statement of operations. These charges were approximately
$244 million in 2002, $372 million in 2001 and
$0 million in 2000 for ATC, and are included in other
income (expense), net in the accompanying consolidated statement
of operations. The portion of the above charges relating to
publicly traded securities was $433 million in 2002,
$599 million in 2001 and $0 in 2000 for WCI and
$244 million in 2002, $372 million in 2001 and $0 in
2000 for ATC. A detail of the application of the General
Partners investment impairment policy over the last three
years is provided in Note 7.

While the General Partners have recognized all
declines that are believed to be other-than-temporary, it is
reasonably possible that individual investments in the General
Partners portfolios may experience an other-than-temporary
decline in value in the future if the underlying investee
experiences poor operating results or the U.S. equity markets
experience future broad declines in value. As of
December 31, 2002, the General Partners had one investment
for which the fair value of the investment was below carrying
value, but the Company had determined that the decline in value
was temporary. Assuming that the fair values of this investment
remains at its current levels, and assuming no change in any
qualitative factors regarding this investment, the General
Partners would expect to record an additional impairment charge
of approximately $1 million over the first six months of
2003.

Accounting for Artist Advances

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

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##### Table of Contents



TWE GENERAL PARTNERS


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


Revenue and Cost Recognition

There are two areas related to revenue and cost
recognition which incorporate significant judgment and estimates
by management  the accounting for multiple-element
arrangements and the amortization of film costs resulting from
the determination of revenue ultimates under the film accounting
rules.

Multiple-Element Transactions

Multiple-Element transactions within WCI and TWE
fall broadly into two categories:



|   |                                                                                                                                                                                                                                                   
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | Contemporaneous purchases and sales. In these
    transactions, WCI or TWE is selling a product or service to a
    customer and at the same time purchasing goods or services from
    that customer or making an investment in the customer; and
|  
|2. | Sales of multiple products or services. In these
    transactions, WCI or TWE is selling multiple products or
    services to a counterparty.                                                                                                     

Contemporaneous Purchases and Sales

In the normal course of business, WCI or TWE
enters into transactions where it is purchasing a product,
service or making an investment in a vendor and at the same time
it is negotiating a contract for the sale of advertising to the
vendor. For example, when negotiating programming arrangements
with cable networks, TWE will, at times, simultaneously
negotiate for the sale of advertising to the cable network. This
arrangement may be documented in one contract or may be
documented in two separate contracts; whether there are one or
two contracts, these arrangements are negotiated simultaneously.
In accounting for these arrangements, WCI or TWE looks to the
guidance contained in the following authoritative literature:



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | APB Opinion No. 29, Accounting for
    Nonmonetary Transactions (APB 29); and                 
|
| |  | EITF 01-09, Accounting for
    Consideration Given by a Vendor to a Customer
    (EITF 01-09).

WCI or TWE measures these transactions based on
the respective fair values of the goods or services purchased
and the goods or services sold. If WCI or TWE is unable to
determine the fair value of one or more of the element(s) being
purchased, then revenue recognition is limited to the total
consideration received for the products or services sold less
the amounts paid that can be supported. For example, if TWE
sells advertising to a customer for $10 million in cash and
contemporaneously enters into an arrangement to acquire software
for $2 million from the same customer, but fair value for
the software cannot be reliably determined, TWE would limit the
amount of revenue recognized related to the advertising sold to
$8 million. As another example, if TWE sells advertising to
a customer for $10 million in cash and contemporaneously
invests $2 million in the equity of that same customer, but
fair value for the equity investment is only determined to be
$1 million, TWE would limit the amount of revenue
recognized related to the advertising sold to $9 million.
Accordingly, the judgments made in accounting for these
arrangements impact the period revenues, expenses and net income
over the term of the contract.

In applying the above guidance, one of the key
judgments is determining the fair value of the respective
elements. In determining the fair value of the respective
elements, the WCI and TWE refer to quoted market prices,
historical transactions or comparable cash transactions. For
example, in determining the fair value of a non-publicly traded
equity security purchased at the same time WCI or TWE sells a
good or a service to an investee, WCI or TWE would look to what
other investors who do not have other contemporaneous
transaction, have paid in the most recent round of financings
with the investee. If the investment is publicly traded, fair
value would be determined by reference to quoted market prices.
In addition, the stated terms of a transaction are considered to
be at fair value to the extent that price protection in the form
of most favored nation clauses or similar
contractual provisions has been received.

F-94



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##### Table of Contents



TWE GENERAL PARTNERS


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


Finally, in a contemporaneous purchase and sale
transaction, evidence of fair value for one element of a
transaction will provide support for the fair value of the other
element of a transaction. For example, if TWE sells advertising
to a customer and contemporaneously invests in the equity of
that same customer, evidence of the fair value of the investment
would implicitly support the fair value of the advertising sold
since there are only two elements in the arrangement.

Sales of Multiple Products or
Services

WCIs and TWEs policy for revenue
recognition in instances where there are multiple elements being
sold at the same time to the same counterparty is in accordance
with the Frequently Asked Question Guide on SAB 101 and is
similar to the principles underlying the recently finalized EITF
Issue No. 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. Specifically, if WCI or TWE enters
into sales contracts for the sale of multiple products or
services, then they evaluate whether they have objective fair
value evidence for each element of the transaction. If objective
fair value evidence for each element of the transaction exists,
then each element of the transaction is accounted for
independently as it is being delivered based on the relevant
revenue recognition accounting policies. However, if the
objective fair value for one or more elements of the transaction
are unable to be determined, WCI generally recognizes
advertising revenue on a straight line-basis over the term of
the agreement.

Filmed Entertainment Revenues and
Costs

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

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

Gross Versus Net Revenue Recognition

In the normal course of business, WCI acts an
intermediary or agent with respect to certain payments received
from third parties. For example, WCI distributes music product
(e.g., CDs and DVDs) on behalf of third party record labels, TWE
distributes films on behalf of independent film producers and
TWE collects taxes on behalf of franchising authorities.

The accounting issue encountered in these
arrangements is whether WCI and TWE should report revenue based
on the gross amount billed to the ultimate customer
or on the net amount received from the customer
after commissions and other payments to third parties. To the
extent revenues are recorded

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##### Table of Contents



TWE GENERAL PARTNERS


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


gross, any commissions or other payments to third
parties are recorded as expenses so that the net amount (gross
revenues, less expenses) flows through operating income.
Accordingly, the impact on operating income is the same, whether
the revenue is recorded on a gross or net basis. For example, if
WCI distributes a CD to a wholesaler for $15 and passes $10 to
the third party record label, should WCI record gross revenue
from the wholesaler of $15 and $10 of expenses or should they
record the net revenues they keep of $5? In either case, the
impact on operating income is $5.

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

In determining whether WCI serves as principal or
agent in these arrangements WCI follows the guidance in
EITF 99-19, Reporting Revenue Gross as a Principal
versus Net as an Agent (EITF 99-19).
Pursuant to such guidance, WCI serves as the principal in
transactions in which it has substantial risks and rewards of
ownership. The indicators that WCI has substantial risks and
rewards of ownership are as follows:



| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | WCI is the supplier of the products or services
    to the customer;                
| |  | WCI has general inventory risk for a product
    before it is sold;                 
| |  | WCI has latitude in establishing prices;                                            
| |  | WCI has the contractual relationship with the
    ultimate customer;                
| |  | WCI modifies the product purchased to meet the
    ultimate customer specifications;
| |  | WCI has discretion in supplier selection; and                                       
| |  | WCI has credit risk.                                                                

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



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | The supplier (not WCI) is responsible for
    providing the product or service to the customer;
| |  | The supplier (not WCI) has latitude in
    establishing prices;                                
| |  | The amount WCI earns is fixed; and                                                             
| |  | The supplier (not WCI) has credit risk.                                                        

Based on the above criteria and for our more
significant transactions that are evaluated, WCI records the
distribution of product on behalf of third party record labels
on either a gross or net basis depending on the terms of the
contract, TWE records revenue from the distribution of films on
behalf of independent film producers on a gross basis and TWE
records revenue from the collection of franchise fees on a gross
basis.

Sales Returns and Uncollectible
Accounts

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

Similarly, management evaluates accounts
receivables to determine if they will ultimately be collected.
In performing this evaluation, significant judgments and
estimates are involved, including an analysis of

F-96



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##### Table of Contents



TWE GENERAL PARTNERS


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


specific risks on a customer-by-customer basis
for larger accounts and customers, and an analysis of
receivables aging that determines the percent that has
historically been uncollected by aged category. Based on this
information, management reserves an amount that is believed to
be uncollectible.

RISK FACTORS AND CAUTION CONCERNING
FORWARD-LOOKING STATEMENTS

Risk Factors

If the events discussed in these risk factors
occur, the business, financial condition, results of operations
or cash flows of the General Partners or TWE, in which the
General Partners have an investment, could be materially
adversely affected.

Technological developments may adversely
affect the General Partners and TWEs competitive
position and limit its ability to protect its valuable
intellectual property rights.The
businesses of the General Partners and TWE 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 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.                                                                                                                                                                        
| 
| | TWEs cable business may be adversely
    affected by more aggressive than expected competition from
    alternate technologies such as satellite and DSL; by the failure
    to choose technologies appropriately; by the failure of new
    equipment, such as digital set-top boxes or digital video
    recorders, or services, such as digital cable, high-speed data
    services and video-on-demand, to appeal to enough consumers or
    to be available at prices consumers are willing to pay, to
    function as expected and to be delivered in a timely fashion;
| 
| | TWE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;                                                                                                                       

Caution Regarding Forward-Looking
Statements

The SEC encourages companies to disclose
forward-looking information so that investors can better
understand a companys future prospects and make informed
investment decisions. This document contains
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, particularly
statements anticipating future growth in revenues, EBITDA and
cash flow. Words such as anticipates,
estimates, expects,
projects, intends, plans,
believes and words and terms of similar substance
used in connection with any discussion of future operating or
financial performance identify forward-looking statements. These
forward-looking statements are based on managements
present expectations and beliefs about future events. As with
any projection or forecast, they are inherently susceptible to
uncertainty and changes in circumstances, and the General
Partners 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 General Partners, operate in a highly
competitive, consumer-driven and rapidly changing media and
entertainment businesses. These businesses are affected by
government regulation, economic, strategic,

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##### Table of Contents



TWE GENERAL PARTNERS


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


political and social conditions, consumer
response to new and existing products and services,
technological developments and, particularly in view of new
technologies, the continued ability to protect intellectual
property rights. The General Partners actual results could
differ materially from managements expectations because of
changes in such factors. Other factors and risks could adversely
affect the operations, business or financial results of the
General Partners in the future and could also cause actual
results to differ from those contained in the forward-looking
statements, including those identified in the General
Partners other filings with the SEC and the following,
which include factors and risks inherent in the General
Partners investment in TWE:

For WCIs music business:



| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the ability to continue to attract and select
    desirable talent at manageable costs; the popular demand for
    particular artists and albums; the timely completion of albums
    by major artists;              
|
| |  | the ability to continue to enforce its
    intellectual property rights in digital environments; piracy of
    music by means of Internet peer-to-peer file sharing and
    organized and home CD-R activity;        
|
| |  | the ability to develop a successful business
    model applicable to a digital online environment;                                                                                                                   
|
| |  | the ability to maintain retail product pricing in
    a competitive environment;                                                                                                                                     
|
| |  | the potential loss of catalog if it is determined
    that recording artists have a right to recapture sound
    recordings under the United States Copyright Act;                                                   
|
| |  | the potential repeal of Subsection (b) of
    California Labor Code Section 2855, a Section which
    prescribes a maximum length for personal service contracts;                                                    
|
| |  | the risk that there will be other federal and
    state statutes enacted which are similar to California Labor
    Code Section 2855, a Section which prescribes a maximum
    length for personal service contracts;
|
| |  | risks from disruptions in the retail environment
    from bankruptcies, store closings and liquidity problems of
    record retailers;                                                                               
|
| |  | risks associated with foreign currency exchange
    rates;                                                                                                                                                           
|
| |  | the ability to utilize DVD manufacturing capacity
    fully and to maintain current DVD manufacturing pricing; and                                                                                                   
|
| |  | the overall strength of global music sales.                                                                                                                                                                          

For TWEs cable business:



| |   |                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | more aggressive than expected competition from
    new technologies and other types of video programming
    distributors, including satellite and DSL;                                                                                                                                                                                               
|
| |  | increases in government regulation of basic cable
    or equipment rates or other terms of service, such as
    digital must-carry, forced access or
    common carrier requirements; government regulation of other
    services, such as broadband cable modem service;                                                                         
|
| |  | the failure of new equipment, such as digital
    set-top boxes or digital video recorders, or services, such as
    digital cable, high-speed data services or video-on-demand, to
    appeal to enough consumers or to be available at prices
    consumers are willing to pay, to function as expected and to be
    delivered in a timely fashion;
|
| |  | fluctuations in spending levels by advertisers
    and consumers; and                                                                                                                                                                                                                                                                                 
|
| |  | greater than expected increases in programming or
    other costs.                                                                                                                                                                                                                                                                                    

F-98



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##### Table of Contents



TWE GENERAL PARTNERS


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


For TWEs filmed entertainment businesses:



| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the ability to continue to attract and select
    desirable talent and scripts at manageable costs;                                                                                             
|
| |  | general increases in production costs;                                                                                                                                                          
|
| |  | fragmentation of consumer leisure and
    entertainment time and its possible negative effects on the
    broadcast and cable networks, which are significant customers of
    these businesses;
|
| |  | continued popularity of merchandising;                                                                                                                                                          
|
| |  | the uncertain impact of technological
    developments that may facilitate piracy of its copyrighted works;                                                                                     
|
| |  | the ability to develop and apply adequate
    protections for filmed entertainment content in a digital
    delivery environment;                                                               
|
| |  | the ability to develop a successful business
    model for delivery of feature films in a digital online
    environment;                                                                       
|
| |  | risks associated with foreign currency exchange
    rates;                                                                                                                                      
|
| |  | with respect to feature films, the increasing
    marketing costs associated with theatrical film releases in a
    highly competitive marketplace;                                             
|
| |  | with respect to television programming, a
    decrease in demand for television programming provided by
    non-affiliated producers; and                                                       
|
| |  | with respect to home video, the ability to
    maintain relationships with significant customers in the rental
    and sell-through markets.                                                    

For TWEs network businesses:



| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | greater than expected news gathering, 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 the General Partners generally, the overall
financial strategy, including growth in operations, maintaining
financial ratios and a strong balance sheet, could be adversely
affected by decreased liquidity in the capital markets,
including any reduction in the ability to access either the
capital markets for debt securities or bank financings,
significant acquisitions or other transactions, economic
slowdowns, the risk of war and changes in the General
Partners plans, strategies and intentions. In addition,
lower than expected valuations associated with the cash flows
and revenues may result in its inability to realize the value of
recorded intangibles and goodwill.

Item 14. Controls and
Procedures

Within the 90-day period prior to the filing of
this report, each of the General Partners, under the supervision
and with the participation of its management, including the
Chief Executive Officer and Chief

F-99



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##### Table of Contents



TWE GENERAL PARTNERS


MANAGEMENTS DISCUSSION AND
ANALYSIS


OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION  (Continued)


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

F-100



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##### Table of Contents



TWE GENERAL PARTNERS

CONSOLIDATED BALANCE SHEETS


December 31,


(millions)


|                                                                                                      |  |      |         |      |  |      |        |      |  |   |         |   |  |   |        |  
|----------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                                      |  |      |         |     
|                                                                                                      |  | WCI  |         | ATC 
|                                                                                                      |  |      |         |     
|                                                                                                      |  | 2002 |         | 2001 |  | 2002 |        | 2001
|                                                                                                      |  |      |         |      |  |      |        |     
|ASSETS                                                                                                |  |      |         |      |  |      |        |      |  |   |         |   |  |   |        |  
|Current assets                                                                                        |  |      |         |      |  |      |        |      |  |   |         |   |  |   |        |  
|Cash and equivalents                                                                                  |  | $    |        |      |  | $    | 40     |      |  | $ |        |   |  | $ |       |  
|Receivables, less allowances of $294 and
    $355 million                                             |  |      | 842     |      |  |      | 944    |      |  |   |        |   |  |   |       |  
|Inventories                                                                                           |  |      | 131     |      |  |      | 121    |      |  |   |        |   |  |   |       |  
|Prepaid expenses and other current assets                                                             |  |      | 736     |      |  |      | 708    |      |  |   |        |   |  |   |       |  
|                                                                                                      |  |      |         |      |  |      |        |      |  |   |         |   |  |   |        |  
|Total current assets                                                                                  |  |      | 1,709   |      |  |      | 1,813  |      |  |   |         |   |  |   |       |  
|Investments in and amounts due to and from TWE                                                        |  |      | 19,340  |      |  |      | 36,834 |      |  |   | 13,383  |   |  |   | 25,292 |  
|Investments in TW Companies                                                                           |  |      | 103     |      |  |      | 103    |      |  |   | 59      |   |  |   | 60     |  
|Other investments                                                                                     |  |      | 4,353   |      |  |      | 6,084  |      |  |   | 1,199   |   |  |   | 3,047  |  
|Intangible subject to amortization                                                                    |  |      | 2,871   |      |  |      | 2,926  |      |  |   |        |   |  |   |       |  
|Intangible assets not subject to amortization                                                         |  |      | 790     |      |  |      | 1,643  |      |  |   |        |   |  |   |       |  
|Goodwill                                                                                              |  |      | 381     |      |  |      | 11,799 |      |  |   | 262     |   |  |   | 262    |  
|Other assets, primarily property, plant and
    equipment for WCI and net deferred tax assets for ATC |  |      | 677     |      |  |      | 621    |      |  |   | 120     |   |  |   |       |  
|                                                                                                      |  |      |         |      |  |      |        |      |  |   |         |   |  |   |        |  
|Total assets                                                                                          |  | $    | 30,224  |      |  | $    | 61,823 |      |  | $ | 15,023  |   |  | $ | 28,661 |  
|                                                                                                      |  |      |         |      |  |      |        |      |  |   |         |   |  |   |        |  
|                                                                                                     
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                              |  |      |         |      |  |      |        |      |  |   |         |   |  |   |        |  
|Current liabilities                                                                                   |  |      |         |      |  |      |        |      |  |   |         |   |  |   |        |  
|Accounts payable                                                                                      |  | $    | 285     |      |  | $    | 222    |      |  | $ |        |   |  | $ |       |  
|Royalties payable                                                                                     |  |      | 895     |      |  |      | 891    |      |  |   |        |   |  |   |       |  
|Other current liabilities                                                                             |  |      | 522     |      |  |      | 894    |      |  |   |        |   |  |   |       |  
|                                                                                                      |  |      |         |      |  |      |        |      |  |   |         |   |  |   |        |  
|Total current liabilities                                                                             |  |      | 1,702   |      |  |      | 2,007  |      |  |   |        |   |  |   |       |  
|Deferred income taxes                                                                                 |  |      | 1,213   |      |  |      | 1,656  |      |  |   |        |   |  |   | 124    |  
|Other long-term liabilities, including $4, $264,
    $3 and $199 million due to TW Companies          |  |      | 1,318   |      |  |      | 736    |      |  |   | 3       |   |  |   | 199    |  
|                                                                                                     
|Shareholders equity                                                                                  |  |      |         |      |  |      |        |      |  |   |         |   |  |   |        |  
|Common stock                                                                                          |  |      | 1       |      |  |      | 1      |      |  |   | 1       |   |  |   | 1      |  
|Preferred stock of WCI, $.01 par value, 90,000
    outstanding and $90 million liquidation preference |  |      |        |      |  |      |       |      |  |   |        |   |  |   |       |  
|Paid-in capital                                                                                       |  |      | 49,552  |      |  |      | 60,162 |      |  |   | 26,261  |   |  |   | 29,773 |  
|Accumulated other comprehensive income (loss), net                                                    |  |      | (139    | )    |  |      | (175   | )    |  |   | (68     | ) |  |   | (35    | )
|Retained earnings (deficit)                                                                           |  |      | (23,156 | )    |  |      | (1,794 | )    |  |   | (10,900 | ) |  |   | (622   | )
|                                                                                                      |  |      |         |      |  |      |        |      |  |   |         |   |  |   |        |  
|                                                                                                      |  |      | 26,258  |      |  |      | 58,194 |      |  |   | 15,294  |   |  |   | 29,117 |  
|Due from TW Companies, net                                                                            |  |      | 319     |      |  |      | (184   | )    |  |   | 62      |   |  |   | (443   | )
|Reciprocal interest in TW Companies stock                                                             |  |      | (586    | )    |  |      | (586   | )    |  |   | (336    | ) |  |   | (336   | )
|                                                                                                      |  |      |         |      |  |      |        |      |  |   |         |   |  |   |        |  
|Total shareholders equity                                                                            |  |      | 25,991  |      |  |      | 57,424 |      |  |   | 15,020  |   |  |   | 28,338 |  
|                                                                                                      |  |      |         |      |  |      |        |      |  |   |         |   |  |   |        |  
|Total liabilities and shareholders equity                                                            |  | $    | 30,224  |      |  | $    | 61,823 |      |  | $ | 15,023  |   |  | $ | 28,661 |  
|                                                                                                      |  |      |         |      |  |      |        |      |  |   |         |   |  |   |        |  

See accompanying notes.

F-101



---



##### Table of Contents



TWE GENERAL PARTNERS

CONSOLIDATED STATEMENTS OF
OPERATIONS


Years Ended December 31,


(millions)


|                                                                                                                                          |  |      |         |      |  |      |        |      |  |      |        |      |  |   |         |   |  |   |        |   |  |   |      |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------ | - |  | - | ---- | -
|                                                                                                                                          |  |      |         |     
|                                                                                                                                          |  | WCI  |         | ATC 
|                                                                                                                                          |  |      |         |     
|                                                                                                                                          |  | 2002 |         | 2001 |  | 2000 |        | 2002 |  | 2001 |        | 2000
|                                                                                                                                          |  |      |         |      |  |      |        |      |  |      |        |     
|Revenues(a)                                                                                                                               |  | $    | 4,205   |      |  | $    | 4,036  |      |  | $    | 4,268  |      |  | $ |        |   |  | $ |       |   |  | $ |     |  
|Cost of revenues(a)                                                                                                                       |  |      | (2,412  | )    |  |      | (2,121 | )    |  |      | (2,358 | )    |  |   |        |   |  |   |       |   |  |   |     |  
|Selling, general and administrative (a)                                                                                                   |  |      | (1,444  | )    |  |      | (1,630 | )    |  |      | (1,481 | )    |  |   |        |   |  |   |       |   |  |   |     |  
|Amortization of goodwill and other intangibles                                                                                            |  |      | (175    | )    |  |      | (836   | )    |  |      | (241   | )    |  |   |        |   |  |   | (11    | ) |  |   |     |  
|Impairment of goodwill and other intangibles                                                                                              |  |      | (1,499  | )    |  |      |       |      |  |      |       |      |  |   |        |   |  |   |       |   |  |   |     |  
|                                                                                                                                          |  |      |         |      |  |      |        |      |  |      |        |      |  |   |         |   |  |   |        |   |  |   |      |  
|Operating income (loss)                                                                                                                   |  |      | (1,325  | )    |  |      | (551   | )    |  |      | 188    |      |  |   |        |   |  |   | (11    | ) |  |   |     |  
|Equity in pretax income (loss) of TWE                                                                                                     |  |      | (427    | )    |  |      | (969   | )    |  |      | 539    |      |  |   | (352    | ) |  |   | (665   | ) |  |   | 371  |  
|Interest expense, net                                                                                                                     |  |      | (59     | )    |  |      | (25    | )    |  |      | (3     | )    |  |   |        |   |  |   | (1     | ) |  |   | (1   | )
|Other income (expense), net(a)                                                                                                            |  |      | (308    | )    |  |      | (1,088 | )    |  |      | (188   | )    |  |   | (237    | ) |  |   | (568   | ) |  |   | 36   |  
|                                                                                                                                          |  |      |         |      |  |      |        |      |  |      |        |      |  |   |         |   |  |   |        |   |  |   |      |  
|Income (loss) before income taxes and cumulative
    effect of accounting change                                                          |  |      | (2,119  | )    |  |      | (2,633 | )    |  |      | 536    |      |  |   | (589    | ) |  |   | (1,245 | ) |  |   | 406  |  
|Income tax (expense) benefit(a)                                                                                                           |  |      | 80      |      |  |      | 374    |      |  |      | (290   | )    |  |   | (120    | ) |  |   | 212    |   |  |   | (186 | )
|                                                                                                                                          |  |      |         |      |  |      |        |      |  |      |        |      |  |   |         |   |  |   |        |   |  |   |      |  
|Income (loss) before cumulative effect of
    accounting change                                                                           |  |      | (2,039  | )    |  |      | (2,259 | )    |  |      | 246    |      |  |   | (709    | ) |  |   | (1,033 | ) |  |   | 220  |  
|Cumulative effect of accounting change, net of
    $135 million income tax benefit for WCI and $91 million
    income tax benefit for ATC |  |      | (18,962 | )    |  |      |       |      |  |      | (202   | )    |  |   | (9,603  | ) |  |   |       |   |  |   | (136 | )
|                                                                                                                                          |  |      |         |      |  |      |        |      |  |      |        |      |  |   |         |   |  |   |        |   |  |   |      |  
|Net income (loss)                                                                                                                         |  | $    | (21,001 | )    |  | $    | (2,259 | )    |  | $    | 44     |      |  | $ | (10,312 | ) |  | $ | (1,033 | ) |  | $ | 84   |  
|                                                                                                                                          |  |      |         |      |  |      |        |      |  |      |        |      |  |   |         |   |  |   |        |   |  |   |      |  



---



|    |                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Includes the following income
    (expenses) resulting from transactions with AOL Time
    Warner, TW Companies, TWE or equity investees of the
    General Partners:

|                                      |  |   |      |   |  |   |      |   |  |   |      |   |  |   |     |   |  |   |     |  |  |   |      |  
|------------------------------------- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | - |  | - | --- | - |  | - | --- |  |  | - | ---- | -
|Revenues                              |  | $ | 421  |   |  | $ | 307  |   |  | $ | 323  |   |  | $ |    |   |  | $ |    |  |  | $ |     |  
|Cost of revenues                      |  |   | (4   | ) |  |   | (5   | ) |  |   | (11  | ) |  |   |    |   |  |   |    |  |  |   |     |  
|Selling, general and administrative   |  |   | (35  | ) |  |   | (14  | ) |  |   | (15  | ) |  |   |    |   |  |   |    |  |  |   |     |  
|Equity in pretax income (loss) of TWE |  |   | (154 | ) |  |   | (114 | ) |  |   | (107 | ) |  |   |    |   |  |   |    |  |  |   |     |  
|Other income (expense), net           |  |   | 24   |   |  |   | 21   |   |  |   | 12   |   |  |   |    |   |  |   |    |  |  |   |     |  
|Income tax benefit (expense)          |  |   | 223  |   |  |   | 297  |   |  |   | (107 | ) |  |   | (72 | ) |  |   | 111 |  |  |   | (122 | )

See accompanying notes.

F-102



---



##### Table of Contents



TWE GENERAL PARTNERS

CONSOLIDATED STATEMENTS OF CASH
FLOWS


Years Ended December 31,


(millions)


|                                                        |                                                                               |                                        |         |        |      |      |        |       |      |      |      |      |      |   |         |       |     |   |        |     |      |   |      |     |     | 
|------------------------------------------------------- | ----------------------------------------------------------------------------- | -------------------------------------- | ------- | ------ | ---- | ---- | ------ | ----- | ---- | ---- | ---- | ---- | ---- | - | ------- | ----- | --- | - | ------ | --- | ---- | - | ---- | --- | --- | 
|                                                        |                                                                               |                                        |         |       
|                                                        |                                                                               | WCI                                    |         | ATC   
|                                                        |                                                                               |                                        |         |       
|                                                        |                                                                               | 2002                                   |         | 2001   |      | 2000 |        | 2002  |      | 2001 |      | 2000
|                                                        |                                                                               |                                        |         |        |      |      |        |       |      |      |      |     
|OPERATING ACTIVITIES                                    |                                                                               |                                        |         |        |      |      |        |       |      |      |      |      |      |   |         |       |     |   |        |     |      |   |      |    
|Net income (loss)                                       |                                                                               | $                                      | (21,001 | )      |      | $    | (2,259 | )     |      | $    | 44   |      |      | $ | (10,312 | )     |     | $ | (1,033 | )   |      | $ | 84   |    
|Adjustments for non-cash and nonoperating items:        |                                                                               |                                        |         |        |      |      |        |       |      |      |      |      |      |   |         |       |     |   |        |     |      |   |      |    
|                                                        | Cumulative effect of accounting change                                        |                                        |         | 18,962 |      |      |        |      |      |      |      | 202  |      |   |         | 9,603 |     |   |        |    |      |   |      | 136 |    
|                                                        | Impairment of goodwill                                                        |                                        |         | 646    |      |      |        |      |      |      |      |     |      |   |         |      |     |   |        |    |      |   |      |    |    
|                                                        | Depreciation and amortization                                                 |                                        |         | 297    |      |      |        | 933   |      |      |      | 324  |      |   |         |      |     |   |        | 11  |      |   |      |    |    
|                                                        | Loss on writedown of investments                                              |                                        |         | 446    |      |      |        | 676   |      |      |      | 115  |      |   |         | 244   |     |   |        | 372 |      |   |      |    |    
|                                                        | Intangible asset impairment                                                   |                                        |         | 853    |      |      |        |      |      |      |      |     |      |   |         |      |     |   |        |    |      |   |      |    |    
|                                                        | Excess of distributions over equity in pretax
    income of TWE               |                                        |         | 722    |      |      |        | 1,157 |      |      |      | 55   |      |   |         | 555   |     |   |        | 794 |      |   |      | 38  |    
|                                                        | Equity in losses (income) of other investee
    companies after distributions |                                        |         | (48    | )    |      |        | 418   |      |      |      | 66   |      |   |         | (7    | )   |   |        | 196 |      |   |      | (14 | )  
|Changes in operating assets and liabilities:            |                                                                               |                                        |         |        |      |      |        |       |      |      |      |      |      |   |         |       |     |   |        |     |      |   |      |    
|                                                        |                                                                               | Receivables                            |         |        | 55   |      |        |       | 441  |      |      |      | (179 | ) |         |       |    |   |        |     |     |   |      |     |    | 
|                                                        |                                                                               | Inventories                            |         |        | (7   | )    |        |       | 12   |      |      |      | (9   | ) |         |       |    |   |        |     |     |   |      |     |    | 
|                                                        |                                                                               | Accounts payable and other liabilities |         |        | (395 | )    |        |       | (255 | )    |      |      | (293 | ) |         |       | (85 | ) |        |     |     |   |      |     |    | 
|                                                        |                                                                               | Other balance sheet changes            |         |        | 79   |      |        |       | (646 | )    |      |      | 124  |   |         |       | 147 |   |        |     | (107 | ) |      |     | 132 | 
|                                                        |                                                                               |                                        |         |        |      |      |        |       |      |      |      |      |      |   |         |       |     |   |        |     |      |   |      |    
|Cash provided by operating activities                   |                                                                               |                                        | 609     |        |      |      | 477    |       |      |      | 449  |      |      |   | 145     |       |     |   | 233    |     |      |   | 376  |    
|                                                        |                                                                               |                                        |         |        |      |      |        |       |      |      |      |      |      |   |         |       |     |   |        |     |      |   |      |    
|INVESTING ACTIVITIES                                    |                                                                               |                                        |         |        |      |      |        |       |      |      |      |      |      |   |         |       |     |   |        |     |      |   |      |    
|Investments and acquisitions                            |                                                                               |                                        | (167    | )      |      |      | (153   | )     |      |      | (49  | )    |      |   |        |       |     |   |       |     |      |   |     |    
|Capital expenditures                                    |                                                                               |                                        | (180    | )      |      |      | (166   | )     |      |      | (166 | )    |      |   |        |       |     |   |       |     |      |   |     |    
|Investment proceeds                                     |                                                                               |                                        | 35      |        |      |      | 91     |       |      |      |     |      |      |   |        |       |     |   |       |     |      |   |     |    
|                                                        |                                                                               |                                        |         |        |      |      |        |       |      |      |      |      |      |   |         |       |     |   |        |     |      |   |      |    
|Cash used by investing activities                       |                                                                               |                                        | (312    | )      |      |      | (228   | )     |      |      | (215 | )    |      |   |        |       |     |   |       |     |      |   |     |    
|                                                        |                                                                               |                                        |         |        |      |      |        |       |      |      |      |      |      |   |         |       |     |   |        |     |      |   |      |    
|FINANCING ACTIVITIES                                    |                                                                               |                                        |         |        |      |      |        |       |      |      |      |      |      |   |         |       |     |   |        |     |      |   |      |    
|Repayment of loan to AOL Time Warner                    |                                                                               |                                        | (857    | )      |      |      |       |       |      |      |     |      |      |   |        |       |     |   |       |     |      |   |     |    
|Borrowings from AOL Time Warner                         |                                                                               |                                        | 857     |        |      |      |       |       |      |      |     |      |      |   |        |       |     |   |       |     |      |   |     |    
|Other Borrowings                                        |                                                                               |                                        | 5       |        |      |      |       |       |      |      |     |      |      |   |         |       |     |   |        |     |      |   |      |    
|Other debt payments                                     |                                                                               |                                        | (15     | )      |      |      |       |       |      |      |     |      |      |   |         |       |     |   |        |     |      |   |      |    
|Dividends                                               |                                                                               |                                        | (56     | )      |      |      | (164   | )     |      |      | (148 | )    |      |   | (10     | )     |     |   | (107   | )   |      |   | (97  | )  
|Increase in amounts due to (from) TW
    Companies, net |                                                                               |                                        | (271    | )      |      |      | (81    | )     |      |      | (157 | )    |      |   | (135    | )     |     |   | (126   | )   |      |   | (279 | )  
|                                                        |                                                                               |                                        |         |        |      |      |        |       |      |      |      |      |      |   |         |       |     |   |        |     |      |   |      |    
|Cash used by financing activities                       |                                                                               |                                        | (337    | )      |      |      | (245   | )     |      |      | (305 | )    |      |   | (145    | )     |     |   | (233   | )   |      |   | (376 | )  
|                                                        |                                                                               |                                        |         |        |      |      |        |       |      |      |      |      |      |   |         |       |     |   |        |     |      |   |      |    
|INCREASE (DECREASE) IN CASH AND
    EQUIVALENTS         |                                                                               |                                        | (40     | )      |      |      | 4      |       |      |      | (71  | )    |      |   |        |       |     |   |       |     |      |   |     |    
|CASH AND EQUIVALENTS AT BEGINNING OF
    PERIOD         |                                                                               |                                        | 40      |        |      |      | 36     |       |      |      | 107  |      |      |   |        |       |     |   |       |     |      |   |     |    
|                                                        |                                                                               |                                        |         |        |      |      |        |       |      |      |      |      |      |   |         |       |     |   |        |     |      |   |      |    
|CASH AND EQUIVALENTS AT END OF
    PERIOD               |                                                                               | $                                      |        |        |      | $    | 40     |       |      | $    | 36   |      |      | $ |        |       |     | $ |       |     |      | $ |     |    
|                                                        |                                                                               |                                        |         |        |      |      |        |       |      |      |      |      |      |   |         |       |     |   |        |     |      |   |      |    

See accompanying notes.

F-103



---



##### Table of Contents



WCI

CONSOLIDATED STATEMENT OF SHAREHOLDERS
EQUITY


(millions)


|                                                                                                            |                    |        |   |         |  |              |         |               |  |              |         |               |   |   |        |   |  |   |      |   |  |   |         |         |  
|----------------------------------------------------------------------------------------------------------- | ------------------ | ------ | - | ------- |  | ------------ | ------- | ------------- |  | ------------ | ------- | ------------- | - | - | ------ | - |  | - | ---- | - |  | - | ------- | ------- | -
|                                                                                                            |                    |        |   |         |  | Retained     |         |               |  | Reciprocal   |         |              
|                                                                                                            |                    |        |   |         |  | Earnings     |         | Due From      |  | Interest in  |         |              
|                                                                                                            |                    | Common |   | Paid-In |  | (Accumulated |         | TW Companies, |  | TW Companies |         | Shareholders
|                                                                                                            |                    | Stock  |   | Capital |  | Deficit)     |         | net           |  | Stock        |         | Equity       
|                                                                                                            |                    |        |   |         |  |              |         |               |  |              |         |              
|BALANCE AT DECEMBER 31, 1999                                                                                |                    | $      | 1 |         |  | $            | 9,926   |               |  | $            | 833     |               |   | $ | (1,437 | ) |  | $ | (586 | ) |  | $ | 8,737   |        
|Net income                                                                                                  |                    |        |   |         |  |              |         |               |  |              | 44      |               |   |   |        |   |  |   |      |   |  |   | 44      |        
|Foreign currency translation adjustments                                                                    |                    |        |   |         |  |              |         |               |  |              | (70     | )             |   |   |        |   |  |   |      |   |  |   | (70     | )      
|Unrealized losses on securities, net of
    $3 million tax benefit                                          |                    |        |   |         |  |              |         |               |  |              | (5      | )             |   |   |        |   |  |   |      |   |  |   | (5      | )      
|Realized and unrealized gains on derivative
    financial instruments, net of $3 million tax expense        |                    |        |   |         |  |              |         |               |  |              | 4       |               |   |   |        |   |  |   |      |   |  |   | 4       |        
|                                                                                                            |                    |        |   |         |  |              |         |               |  |              |         |               |   |   |        |   |  |   |      |   |  |   |         |        
|                                                                                                            | Comprehensive loss |        |   |         |  |              |         |               |  |              |         | (27           | ) |   |        |   |  |   |      |   |  |   |         | (27     | )
|Decrease in stock option distribution liability
    to TW Companies                                         |                    |        |   |         |  |              |         |               |  |              | 221     |               |   |   |        |   |  |   |      |   |  |   | 221     |        
|Dividends                                                                                                   |                    |        |   |         |  |              |         |               |  |              | (702    | )             |   |   |        |   |  |   |      |   |  |   | (702    | )      
|Transfers to TW Companies, net                                                                              |                    |        |   |         |  |              |         |               |  |              |         |               |   |   | 538    |   |  |   |      |   |  |   | 538     |        
|Other                                                                                                       |                    |        |   |         |  |              | 5       |               |  |              | 4       |               |   |   |        |   |  |   |      |   |  |   | 9       |        
|                                                                                                            |                    |        |   |         |  |              |         |               |  |              |         |               |   |   |        |   |  |   |      |   |  |   |         |        
|BALANCE AT DECEMBER 31, 2000                                                                                |                    |        | 1 |         |  |              | 9,931   |               |  |              | 329     |               |   |   | (899   | ) |  |   | (586 | ) |  |   | 8,776   |        
|                                                                                                            |                    |        |   |         |  |              |         |               |  |              |         |               |   |   |        |   |  |   |      |   |  |   |         |        
|Net loss                                                                                                    |                    |        |   |         |  |              |         |               |  |              | (2,259  | )             |   |   |        |   |  |   |      |   |  |   | (2,259  | )      
|Foreign currency translation adjustments                                                                    |                    |        |   |         |  |              |         |               |  |              | (17     | )             |   |   |        |   |  |   |      |   |  |   | (17     | )      
|Unrealized losses on securities, net of tax
    benefit                                                     |                    |        |   |         |  |              |         |               |  |              | (1      | )             |   |   |        |   |  |   |      |   |  |   | (1      | )      
|Realized and unrealized gains on derivative
    financial instruments, net of tax expense                   |                    |        |   |         |  |              |         |               |  |              | 1       |               |   |   |        |   |  |   |      |   |  |   | 1       |        
|                                                                                                            |                    |        |   |         |  |              |         |               |  |              |         |               |   |   |        |   |  |   |      |   |  |   |         |        
|                                                                                                            | Comprehensive loss |        |   |         |  |              |         |               |  |              |         | (2,276        | ) |   |        |   |  |   |      |   |  |   |         | (2,276  | )
|Increase in stock option distribution liability
    to TW Companies                                         |                    |        |   |         |  |              |         |               |  |              | (17     | )             |   |   |        |   |  |   |      |   |  |   | (17     | )      
|Dividends                                                                                                   |                    |        |   |         |  |              |         |               |  |              | (6      | )             |   |   |        |   |  |   |      |   |  |   | (6      | )      
|Transfers to TW Companies, net                                                                              |                    |        |   |         |  |              |         |               |  |              |         |               |   |   | 715    |   |  |   |      |   |  |   | 715     |        
|Allocation of a portion of the purchase of the
    America Online-Time Warner merger                        |                    |        |   |         |  |              | 50,231  |               |  |              |         |               |   |   |        |   |  |   |      |   |  |   | 50,231  |        
|Other                                                                                                       |                    |        |   |         |  |              |         |               |  |              | 1       |               |   |   |        |   |  |   |      |   |  |   | 1       |        
|                                                                                                            |                    |        |   |         |  |              |         |               |  |              |         |               |   |   |        |   |  |   |      |   |  |   |         |        
|BALANCE AT DECEMBER 31, 2001                                                                                |                    |        | 1 |         |  |              | 60,162  |               |  |              | (1,969  | )             |   |   | (184   | ) |  |   | (586 | ) |  |   | 57,424  |        
|                                                                                                            |                    |        |   |         |  |              |         |               |  |              |         |               |   |   |        |   |  |   |      |   |  |   |         |        
|Reallocation of goodwill among AOL Time Warner
    segments upon adoption of FAS 142                        |                    |        |   |         |  |              | (10,815 | )             |  |              |         |               |   |   |        |   |  |   |      |   |  |   | (10,815 | )      
|Net loss                                                                                                    |                    |        |   |         |  |              |         |               |  |              | (21,001 | )             |   |   |        |   |  |   |      |   |  |   | (21,001 | )      
|Foreign currency translation adjustments                                                                    |                    |        |   |         |  |              |         |               |  |              | 111     |               |   |   |        |   |  |   |      |   |  |   | 111     |        
|Unrealized gains on securities, net of
    $1 million tax provision(a)                                      |                    |        |   |         |  |              |         |               |  |              | 1       |               |   |   |        |   |  |   |      |   |  |   | 1       |        
|Realized and unrealized losses on derivative
    financial instruments, net of $7 million tax benefit       |                    |        |   |         |  |              |         |               |  |              | (10     | )             |   |   |        |   |  |   |      |   |  |   | (10     | )      
|Unfunded accumulated benefit obligation, net of
    $47 million income tax benefit                          |                    |        |   |         |  |              |         |               |  |              | (70     | )             |   |   |        |   |  |   |      |   |  |   | (70     | )      
|Other                                                                                                       |                    |        |   |         |  |              |         |               |  |              | 4       |               |   |   |        |   |  |   |      |   |  |   | 4       |        
|                                                                                                            |                    |        |   |         |  |              |         |               |  |              |         |               |   |   |        |   |  |   |      |   |  |   |         |        
|                                                                                                            | Comprehensive loss |        |   |         |  |              |         |               |  |              |         | (20,965       | ) |   |        |   |  |   |      |   |  |   |         | (20,965 | )
|Decrease in stock option distribution liability
    to TW Companies                                         |                    |        |   |         |  |              |         |               |  |              | 259     |               |   |   |        |   |  |   |      |   |  |   | 259     |        
|Dividends                                                                                                   |                    |        |   |         |  |              |         |               |  |              | (402    | )             |   |   |        |   |  |   |      |   |  |   | (402    | )      
|Transfers to TW Companies, net                                                                              |                    |        |   |         |  |              |         |               |  |              |         |               |   |   | 503    |   |  |   |      |   |  |   | 503     |        
|Dilution of interest in Time Warner Entertainment
    Company, L.P. (net of $146 million income tax impact) |                    |        |   |         |  |              |         |               |  |              | (219    | )             |   |   |        |   |  |   |      |   |  |   | (219    | )      
|Other                                                                                                       |                    |        |   |         |  |              | 205     |               |  |              | 1       |               |   |   |        |   |  |   |      |   |  |   | 206     |        
|                                                                                                            |                    |        |   |         |  |              |         |               |  |              |         |               |   |   |        |   |  |   |      |   |  |   |         |        
|BALANCE AT DECEMBER 31, 2002                                                                                |                    | $      | 1 |         |  | $            | 49,552  |               |  | $            | (23,295 | )             |   | $ | 319    |   |  | $ | (586 | ) |  | $ | 25,991  |        
|                                                                                                            |                    |        |   |         |  |              |         |               |  |              |         |               |   |   |        |   |  |   |      |   |  |   |         |        




See accompanying notes.

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##### Table of Contents



ATC

CONSOLIDATED STATEMENT OF SHAREHOLDERS
EQUITY


(millions)


|                                                                                                           |                      |        |   |         |  |              |        |               |  |              |         |               |   |   |      |   |  |   |      |   |  |   |         |         |  
|---------------------------------------------------------------------------------------------------------- | -------------------- | ------ | - | ------- |  | ------------ | ------ | ------------- |  | ------------ | ------- | ------------- | - | - | ---- | - |  | - | ---- | - |  | - | ------- | ------- | -
|                                                                                                           |                      |        |   |         |  | Retained     |        |               |  | Reciprocal   |         |              
|                                                                                                           |                      |        |   |         |  | Earnings     |        | Due From      |  | Interest in  |         |              
|                                                                                                           |                      | Common |   | Paid-In |  | (Accumulated |        | TW Companies, |  | TW Companies |         | Shareholders
|                                                                                                           |                      | Stock  |   | Capital |  | Deficit)     |        | net           |  | Stock        |         | Equity       
|                                                                                                           |                      |        |   |         |  |              |        |               |  |              |         |              
|BALANCE AT DECEMBER 31, 1999                                                                               |                      | $      | 1 |         |  | $            | 2,338  |               |  | $            | 172     |               |   | $ | (38  | ) |  | $ | (336 | ) |  | $ | 2,137   |        
|Net income                                                                                                 |                      |        |   |         |  |              |        |               |  |              | 84      |               |   |   |      |   |  |   |      |   |  |   | 84      |        
|Foreign currency translation adjustments                                                                   |                      |        |   |         |  |              |        |               |  |              | (18     | )             |   |   |      |   |  |   |      |   |  |   | (18     | )      
|Unrealized losses on securities, net of
    $6 million tax benefit                                         |                      |        |   |         |  |              |        |               |  |              | (10     | )             |   |   |      |   |  |   |      |   |  |   | (10     | )      
|Realized and unrealized gains on derivative
    financial instruments, net of $1 million tax expense       |                      |        |   |         |  |              |        |               |  |              | 2       |               |   |   |      |   |  |   |      |   |  |   | 2       |        
|                                                                                                           |                      |        |   |         |  |              |        |               |  |              |         |               |   |   |      |   |  |   |      |   |  |   |         |        
|                                                                                                           | Comprehensive income |        |   |         |  |              |        |               |  |              |         | 58            |   |   |      |   |  |   |      |   |  |   |         | 58      |  
|Decrease in stock option distribution liability
    to TW Companies                                        |                      |        |   |         |  |              |        |               |  |              | 152     |               |   |   |      |   |  |   |      |   |  |   | 152     |        
|Transfers to TW Companies, net                                                                             |                      |        |   |         |  |              |        |               |  |              |         |               |   |   | (279 | ) |  |   |      |   |  |   | (279    | )      
|Other                                                                                                      |                      |        |   |         |  |              | 3      |               |  |              | 4       |               |   |   |      |   |  |   |      |   |  |   | 7       |        
|                                                                                                           |                      |        |   |         |  |              |        |               |  |              |         |               |   |   |      |   |  |   |      |   |  |   |         |        
|BALANCE AT DECEMBER 31, 2000                                                                               |                      |        | 1 |         |  |              | 2,341  |               |  |              | 386     |               |   |   | (317 | ) |  |   | (336 | ) |  |   | 2,075   |        
|                                                                                                           |                      |        |   |         |  |              |        |               |  |              |         |               |   |   |      |   |  |   |      |   |  |   |         |        
|Net loss                                                                                                   |                      |        |   |         |  |              |        |               |  |              | (1,033  | )             |   |   |      |   |  |   |      |   |  |   | (1,033  | )      
|Foreign currency translation adjustments                                                                   |                      |        |   |         |  |              |        |               |  |              |         |               |   |   |      |   |  |   |      |   |  |   |         |        
|Unrealized losses on securities, net of
    $1 million tax benefit                                         |                      |        |   |         |  |              |        |               |  |              | (1      | )             |   |   |      |   |  |   |      |   |  |   | (1      | )      
|                                                                                                           |                      |        |   |         |  |              |        |               |  |              |         |               |   |   |      |   |  |   |      |   |  |   |         |        
|                                                                                                           | Comprehensive loss   |        |   |         |  |              |        |               |  |              |         | (1,034        | ) |   |      |   |  |   |      |   |  |   |         | (1,034  | )
|Increase in stock option distribution liability
    to TW Companies                                        |                      |        |   |         |  |              |        |               |  |              | (12     | )             |   |   |      |   |  |   |      |   |  |   | (12     | )      
|Transfers to TW Companies, net                                                                             |                      |        |   |         |  |              |        |               |  |              |         |               |   |   | (126 | ) |  |   |      |   |  |   | (126    | )      
|Allocation of a portion of the purchase of the
    America Online-Time Warner merger                       |                      |        |   |         |  |              | 27,432 |               |  |              |         |               |   |   |      |   |  |   |      |   |  |   | 27,432  |        
|Other                                                                                                      |                      |        |   |         |  |              |        |               |  |              | 3       |               |   |   |      |   |  |   |      |   |  |   | 3       |        
|                                                                                                           |                      |        |   |         |  |              |        |               |  |              |         |               |   |   |      |   |  |   |      |   |  |   |         |        
|BALANCE AT DECEMBER 31, 2001                                                                               |                      |        | 1 |         |  |              | 29,773 |               |  |              | (657    | )             |   |   | (443 | ) |  |   | (336 | ) |  |   | 28,338  |        
|Reallocation of goodwill among AOL Time Warner
    segments upon adoption of FAS 142                       |                      |        |   |         |  |              | (3,512 | )             |  |              |         |               |   |   |      |   |  |   |      |   |  |   | (3,512  | )      
|Net income                                                                                                 |                      |        |   |         |  |              |        |               |  |              | (10,312 | )             |   |   |      |   |  |   |      |   |  |   | (10,312 | )      
|Foreign currency translation adjustments                                                                   |                      |        |   |         |  |              |        |               |  |              | 10      |               |   |   |      |   |  |   |      |   |  |   | 10      |        
|Unrealized gains on securities, net of
    $1 million tax provision(a)                                     |                      |        |   |         |  |              |        |               |  |              | 2       |               |   |   |      |   |  |   |      |   |  |   | 2       |        
|Realized and unrealized losses on derivative
    financial instruments, net of $2 million tax benefit      |                      |        |   |         |  |              |        |               |  |              | (3      | )             |   |   |      |   |  |   |      |   |  |   | (3      | )      
|Unfunded accumulated benefit obligation, net of
    $30 million income tax benefit                         |                      |        |   |         |  |              |        |               |  |              | (44     | )             |   |   |      |   |  |   |      |   |  |   | (44     | )      
|Other                                                                                                      |                      |        |   |         |  |              |        |               |  |              | 2       |               |   |   |      |   |  |   |      |   |  |   | 2       |        
|                                                                                                           |                      |        |   |         |  |              |        |               |  |              |         |               |   |   |      |   |  |   |      |   |  |   |         |        
|                                                                                                           | Comprehensive loss   |        |   |         |  |              |        |               |  |              |         | (10,345       | ) |   |      |   |  |   |      |   |  |   |         | (10,345 | )
|Increase in stock option distribution liability
    to TW Companies                                        |                      |        |   |         |  |              |        |               |  |              | 178     |               |   |   |      |   |  |   |      |   |  |   | 178     |        
|Transfers to TW Companies, net                                                                             |                      |        |   |         |  |              |        |               |  |              |         |               |   |   | 505  |   |  |   |      |   |  |   | 505     |        
|Dilution of interest in Time Warner Entertainment
    Company, L.P. (net of $96 million income tax impact) |                      |        |   |         |  |              |        |               |  |              | (144    | )             |   |   |      |   |  |   |      |   |  |   | (144    | )      
|Other                                                                                                      |                      |        |   |         |  |              | 2      |               |  |              | (2      | )             |   |   |      |   |  |   |      |   |  |   |        |        
|                                                                                                           |                      |        |   |         |  |              |        |               |  |              |         |               |   |   |      |   |  |   |      |   |  |   |         |        
|BALANCE AT DECEMBER 31, 2002                                                                               |                      | $      | 1 |         |  | $            | 26,263 |               |  | $            | (10,970 | )             |   | $ | 62   |   |  | $ | (336 | ) |  | $ | 15,020  |        
|                                                                                                           |                      |        |   |         |  |              |        |               |  |              |         |               |   |   |      |   |  |   |      |   |  |   |         |        




See accompanying notes.

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##### Table of Contents



TWE GENERAL PARTNERS

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


1.     SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Basis of
Presentation

Description of Business

On June 30, 1992, thirteen direct or
indirect subsidiaries of Time Warner Companies, Inc. (TW
Companies) contributed the assets and liabilities or the
rights to the cash flows of substantially all of TW
Companies Filmed Entertainment, Networks and Cable
businesses to Time Warner Entertainment Company, L.P., a
Delaware limited partnership (TWE), for general
partnership interests, and each general partner guaranteed a pro
rata portion of substantially all of TWEs debt and accrued
interest based on the relative fair value of the net assets each
contributed to TWE (the General Partner Guarantees,
see Note 9). Since then, eleven of the thirteen original general
partners have been merged or dissolved into the other two.
Warner Communications Inc. (WCI) and American
Television and Communications Corporation (ATC) are
the two remaining general partners of TWE. They have succeeded
to the general partnership interests and have assumed the
General Partner Guarantees of the eleven former general
partners. WCI, ATC and, where appropriate, the former general
partners are referred to herein as the General
Partners.

WCI conducts substantially all of TW
Companies music operations, including interests in
recorded music, music publishing and CD and DVD manufacturing.
These music operations include copyrighted music from many of
the worlds leading recording artists that is produced and
distributed by a family of established record labels such as
Warner Bros. Records, Atlantic Records, Elektra Entertainment
and Warner Music International. In addition, WCI has investments
in TWE, TW Companies, IPC Group Limited, Turner Broadcasting
System, Inc. (TBS) and Time Warner Telecom Inc.
(Time Warner Telecom). ATC does not conduct
operations independent of its ownership interests in TWE and
certain other investments, including investments in TW
Companies, TBS and Time Warner Telecom.

On January 11, 2001, America Online, Inc.
(America Online) and Time Warner Inc. (Time
Warner) merged to form AOL Time Warner Inc. (AOL
Time Warner), the worlds leading media and
entertainment company (the Merger). As a result of
the Merger, America Online and Time Warner each became a wholly
owned subsidiary of AOL Time Warner, and WCI and ATC each became
an indirect, wholly owned subsidiary of AOL Time Warner.

Basis of Presentation

America Online-Time Warner Merger

The Merger has been accounted for by AOL Time
Warner as an acquisition of Time Warner under the purchase
method of accounting for business combinations. Under the
purchase method of accounting, the cost of approximately
$147 billion to acquire Time Warner, including transaction
costs, was allocated to its underlying net assets, including the
net assets of the General Partners, based on their respective
estimated fair values. The excess of the purchase price over the
estimated fair values of the net assets acquired was recorded as
goodwill. This allocation includes intangible assets for WCI,
such as music catalogues and copyrights and brands and
trademarks.

As a result of the Merger, WCIs 2000
historical operating results reflect reclassifications to
conform to AOL Time Warners financial statement
presentation, as follows:



| |   |                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Digital media results have been allocated to the
    business segments now responsible for managing those operations,
    including WCIs music operations;                                                                                         
|
| |  | Income and losses related to investments
    accounted for using the equity method of accounting and gains
    and losses on the sale of investments have been reclassified
    from operating income (loss) to other income (expense),
    net; and

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | Corporate services have been reclassified to
    selling, general and administrative costs as a reduction of
    operating income.

Investment in TWE

Prior to the change in ownership relating to the
exercise of an option by AT&T Corp. (AT&T)
which is discussed below, the General Partners in the aggregate
held 63.27% of the pro rata priority capital
(Series A Capital) and residual equity capital
(Residual Capital) of TWE and 100% of the junior
priority capital (Series B Capital) of TWE. TW
Companies held, directly or indirectly, 11.22% of the
Series A Capital and Residual Capital limited partnership
interests. The remaining 25.51% limited partnership interests in
the Series A Capital and Residual Capital of TWE were held
by MediaOne TWE Holdings, Inc., a subsidiary of AT&T.
AT&Ts interest in TWE was recently acquired by Comcast
Corp. (Comcast) upon consummation of the merger of
Comcast and AT&Ts broadband business in November 2002.

During the second quarter of 2002, AT&T
exercised a one-time option to increase its ownership in the
Series A Capital and Residual Capital of TWE. As a result,
on May 31, 2002, AT&Ts interest in the
Series A Capital and Residual Capital of TWE increased by
approximately 2.13% to approximately 27.64%. This resulted in a
decrease in WCIs and ATCs corresponding interest in
the Series A Capital and Residual Capital of TWE of
approximately 1.07% and 0.74%, respectively, to approximately
36.43% and 25.03%, respectively. Similarly, TW Companies
interest in the Series A Capital and Residual Capital of
TWE decreased by approximately 0.32% to approximately 10.90%. In
accordance with Staff Accounting Bulletin No. 51,
Accounting For Sales of Stock of a Subsidiary, WCI
and ATC have reflected the pretax impact of the dilution of
their interests in TWE of approximately $365 million and
$240 million, respectively, as an adjustment to
paid-in-capital (Note 5). During the third quarter of 2002,
TW Companies 10.90% interest in TWE was transferred to WCI
and ATC, increasing WCIs and ATCs interests in the
Series A and Residual Capital of TWE to 41.88% and 30.48%,
respectively. In August 2002, AOL Time Warner and AT&T
announced that they had agreed to restructure TWE. See
Note 5 for additional discussion.

New Accounting Principles

Revenue Classification Changes

Reimbursement of Out-of-Pocket
Expenses

In January 2002, the Financial Accounting
Standards Boards (FASB) Emerging Issues Task
Force (EITF) reached a consensus on EITF Issue
No. 01-14, Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses
Incurred (EITF 01-14). EITF 01-14
requires that reimbursements received for out-of-pocket expenses
be classified as revenue on the income statement.
EITF 01-14 was effective for the General Partners in the
first quarter of 2002 and requires retroactive restatement of
all periods presented to reflect the new accounting provisions.
This change in revenue classification only impacts WCI. As a
result of applying the guidance of EITF 01-14, WCIs
revenues and costs presented herein were retroactively increased
by an equal amount of approximately $152 million in 2001
and approximately $155 million in 2000.

Emerging Issues Task Force Issue
No. 01-09

In April 2001, the EITF reached a final consensus
on EITF Issue No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the
Vendors Products, which was later codified along
with other similar issues, into EITF Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendors Products
(EITF 01-09). EITF 01-09 was effective for
the General Partners in the first quarter of 2002 and requires
retroactive restatement of all periods presented to reflect the
new accounting provisions. EITF 01-09 clarifies the income
statement classification of costs incurred by a vendor in
connection with the resellers purchase or promotion of the
vendors products, resulting in certain

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


cooperative advertising and product placement
costs previously classified as selling expenses to be reflected
as a reduction of revenues earned from that activity. This
change in revenue classification only impacts WCI. As a result
of applying the provisions of EITF 01-09, WCIs
revenues and costs presented herein were retroactively reduced
by an equal amount of $45 million in 2001 and approximately
$35 million in 2000.

Securities and Exchange Commission Staff
Accounting Bulletin No. 101

In the fourth quarter of 2000, WCI adopted
Securities and Exchange Commission Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial
Statements (SAB 101). SAB 101
clarifies certain existing accounting principles for the timing
of revenue recognition and the classification of revenues in
financial statements. While WCIs existing revenue
recognition policies were consistent with the provisions of
SAB 101, the new rules resulted in changes as to how
revenues from certain transactions are classified. As a result
of applying the provisions of SAB 101, WCIs revenues
and costs were increased by an equal amount of $135 million
for 2000.

New Accounting Standard for Goodwill and Other
Intangible Assets

In July 2001, the FASB issued Statement of
Financial Accounting Standards (Statement)
No. 141, Business Combinations and Statement
No. 142 Goodwill and Other Intangible Assets
(FAS 142). These standards change the
accounting for business combinations by, among other things,
prohibiting the prospective use of pooling-of-interests
accounting. In addition, FAS 142 requires that, effective
January 1, 2002, goodwill, including the goodwill included
in the carrying value of investments accounted for using the
equity method of accounting, and certain other intangible assets
deemed to have an indefinite useful life, cease amortizing. The
new rules also require that goodwill and certain intangible
assets be assessed for impairment using fair value measurement
techniques. During the first quarter of 2002, WCI and ATC
completed its initial impairment review and recorded non-cash
pretax charges of $18.962 billion and $9.603 billion,
respectively, for the impairment of goodwill, substantially all
of which was generated in the Merger. The charge reflects
overall market declines since the Merger was announced in
January 2000, is non-operational in nature and is reflected as a
cumulative effect of an accounting change in the accompanying
consolidated financial statements.

During the fourth quarter of 2002, WCI and ATC
performed their annual impairment reviews for goodwill and other
intangible assets. As a result, WCI recorded an additional
non-cash charge of $1.499 billion which is recorded as a
component of operating income in the accompanying consolidated
statement of operations. The impairment charges are non-cash in
nature and do not affect the General Partners liquidity.
See Note 3 to the accompanying consolidated financial
statements for additional discussion.

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
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 the General
Partners during the third quarter of 2003. Although the
General Partners have not completed their review, the General
Partners anticipate that the adoption of FIN 46 will not have a
significant impact on their consolidated financial statements.

Stock-Based Compensation

In December 2002, the FASB issued Statement
No. 148, Accounting for Stock-Based Compensation,
Transition and Disclosure (FAS 148).
FAS 148 provides alternative methods of transition for a
voluntary

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


change to the fair value based method of
accounting for stock-based employee compensation. 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 are 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 the General Partners consolidated financial
statements. However, the General Partners have modified its
disclosures as required.

Exit and Disposal Activities

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

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 General Partners 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 General
Partners consolidated financial statements.

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. Management does not expect the
provisions of EITF 02-16 to have a material impact on the
General Partners consolidated financial statements.

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. As the General Partners
guarantee of $3.3 billion of TWEs debt (which is
discussed in further detail in Note 9) was issued prior to
December 31, 2002, the initial

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


recognition and initial measurement provisions of
FIN 45 are not expected to have a material impact on the
General Partners 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 General Partners have
modified its disclosures herein as required.

Asset Retirement Obligations

In July 2001, the FASB issued Statement
No. 143, Accounting for Asset Retirement
Obligation (FAS 143). FAS 143
addresses the accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. FAS 143 became
effective for the General Partners in the first quarter of 2002.
The provisions of FAS 143 did not have a material impact on
WCIs or ATCs consolidated financial statements.

Impairment or Disposal of Long-Lived
Assets

In August 2001, the FASB issued Statement
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (FAS 144). FAS 144
clarifies the accounting for the impairment of long-lived assets
and for long-lived assets to be disposed of, including the
disposal of business segments and major lines of business.
FAS 144 became effective for the General Partners in the
first quarter of 2002. The provisions of FAS 144 did not have a
material impact on the General Partners consolidated
financial statements.

Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities

In September 2000, the FASB issued Statement
No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities 
a Replacement of FASB Statement No. 125
(FAS 140). FAS 140 revises the criteria
for accounting for securitizations and other transfers of
financial assets and collateral. In addition, FAS 140
requires certain additional disclosures. Except for the new
disclosure provisions, which were effective for the year ended
December 31, 2000, FAS 140 was effective for the transfer
of financial assets occurring after March 31, 2001. The
provisions of FAS 140 did not have a material impact on General
Partners consolidated financial statements.

Summary of Significant Accounting
Policies

Basis of Consolidation and Accounting for
Investments

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

WCIs fiscal year-end is December 31,
however certain foreign locations are on a month lag. In
addition, during 2002, WCIs domestic music operations
changed its fiscal year end from December 31 to November 30
in order to be consistent with its foreign operations which had
previously been operating under a November fiscal year end. The
impact of this change was not material to WCIs overall
financial results. To the extent a significant and or unusual
transaction or event occurs during the one month lag period, it
would be accounted for within WCIs year-end financial
statements (See Note 4).

Investments in TWE, and certain other companies
in which the General Partners individually have significant
influence, but less than a controlling voting interest, are
accounted for using the equity method of accounting. This is
generally presumed to exist when the General Partners
individually own between 20% and 50% of the investee. Under the
equity method, only the General Partners investment in and
amounts due to and from the equity investee are included in the
consolidated balance sheet; only its share of the
investees earnings is included in the consolidated
operating results; and only the dividends, cash distributions,
loans or

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


other cash received from the investee, additional
cash investments, loan repayments or other cash paid to the
investee, are included in the consolidated cash flows. In
circumstances where the General Partners ownership in an
investee is in the form of a preferred security or otherwise
senior security, WCIs and ATCs share in the
investees income or loss is determined by applying the
equity method of accounting using the
hypothetical-liquidation-at-book-value method. WCI
and ATC use the hypothetical-liquidation-at-book-value method to
determine the earnings or losses attributable to its investment
in TWE. Under the hypothetical-liquidation-at-book-value method,
the investors share of earnings or losses is determined
based on changes in the investors claim in the net book
value of the investee. Additionally, the carrying value of
investments accounted for using the equity method of accounting
are adjusted downward to reflect any other-than-temporary
declines in value.

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

The effect of any changes in each General
Partners ownership interests resulting from the issuance
of equity capital by consolidated subsidiaries or equity
investees to unaffiliated parties is included as a component of
shareholders equity.

WCI, through AOL Time Warner has certain accounts
receivable facilities that provide for the accelerated receipt
of cash on available accounts receivables and licensing
contracts. These securitization transactions are accounted for
as a sale in accordance with FAS 140 because WCI relinquished
control of the receivables. Since WCI has relinquished control
over these receivables and does not control the Qualifying SPE
that holds the receivables, the amounts held in these
securitization facilities are not included in the consolidated
financial statements of WCI.

Investment Impairments

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

In evaluating the factors above for
available-for-sale securities, management presumes a decline in
value to be other-than-temporary if the quoted market price of
the security is 20% or more below the investments cost
basis for a period of six months or more (the 20%
criteria) or the quoted market price of the security is
50% or more below the securitys cost basis at any quarter
end (the 50% criteria). However, the presumption of
an other-than-temporary decline in these instances may be
overcome if there is persuasive evidence indicating that the
decline is temporary in nature (e.g., strong operating
performance of investee, historical volatility of investee,
etc.). Additionally, there may be instances where impairment
losses are

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


recognized even if the 20% and 50% criteria are
not satisfied (e.g., plan to sell the security in the near term
and the fair value is below WCIs or ATCs cost basis).

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

Business Combinations

Business combinations have been accounted for
using the purchase method of accounting. Business combinations
which have been accounted for under the purchase method of
accounting include the results of operations of the acquired
business from the effective date of acquisition. The cost to
acquire companies, including transaction costs, have been
allocated to the underlying net assets of the acquired company
in proportion to their respective fair values. Any excess of the
purchase price over estimated fair values of the net assets
acquired has been recorded as goodwill. In certain purchase
business combinations, the General Partners may review the
operations of the acquired company and implement plans to
restructure its operations. As a result, the General Partners
may accrue a liability related to these restructuring plans
using the criteria prescribed in EITF Issue No. 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination. The impact of accruing these
liabilities in connection with a purchase business combination
is that the related cost is reflected as a liability assumed in
the acquisition and results in additional goodwill as opposed to
being included as a charge in the current period determination
of income (Note 4). The application of the purchase method of
accounting requires significant judgments and assumptions, which
is further discussed in Critical Accounting Policies.

Foreign Currency Translation

The financial position and operating results of
substantially all foreign operations are consolidated using the
local currency as the functional currency. Local currency assets
and liabilities are translated at the rates of exchange on the
balance sheet date, and local currency revenues and expenses are
translated at average rates of exchange during the period.
Resulting translation gains or losses, which have not been
material, are included in the accompanying consolidated
statement of shareholders equity as a component of
accumulated other comprehensive income (loss).

Use of Estimates

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

Significant estimates inherent in the preparation
of the accompanying consolidated financial statements include
managements forecast of anticipated revenues and cash
flows from investments and the sale of future and existing
music-related products in order to evaluate the ultimate
recoverability of accounts receivable, artist advances and
investments recorded as assets in the WCI consolidated balance
sheet. Accounts receivable and sales in the music industry are
subject to customers rights to return unsold items. In
addition, significant estimates have been used in accounting for
business combinations accounted for using the purchase method of
accounting.

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

Revenues and Costs

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

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

Multiple-Element Arrangements

WCI or TWE enters into transactions where it is
purchasing a product, service or making an investment in a
vendor and at the same time it is negotiating a contract for the
sale of advertising to the vendor. For example, when negotiating
programming arrangements with cable networks, TWE will, at
times, simultaneously negotiate for the sale of advertising to
the cable network. This arrangement may be documented in one
contract or may be documented in two separate contracts; whether
there are one or two contracts, these arrangements are
negotiated simultaneously. In accounting for these arrangements,
WCI or TWE looks to the guidance contained in the following
authoritative literature.



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | APB Opinion No. 29, Accounting for
    Nonmonetary Transactions (APB 29); and                 
|
| |  | EITF 01-09, Accounting for
    Consideration Given by a Vendor to a Customer
    (EITF 01-09).

WCI or TWE measures these transactions based on
the respective fair values of the goods or services purchased
and the goods or services sold. If WCI or TWE is unable to
determine the fair value of one or more of the element(s) being
purchased, then revenue recognition is limited to the total
consideration received for the products or services sold less
amounts paid. The accounting for these transactions requires
significant judgments and estimates, which are further discussed
in Critical Accounting Policies.

Advertising

In accordance with AICPA SOP 93-7,
Reporting on Advertising Costs, advertising costs
are expensed upon the first exhibition of the advertisement,
except for certain direct-response advertising, for which the
costs are capitalized and amortized over the expected period of
future benefits. Direct-response advertising principally
consists of product promotional mailings, catalogues and other
promotional costs incurred in WCIs direct-marketing
businesses. Deferred advertising costs are generally amortized
using the straight-line method over a period of twelve months or
less subsequent to the promotional event. Deferred advertising
costs for WCI amounted to $5 million at December 31,
2002 and $3 million at December 31, 2001. Advertising
expense for WCI amounted to $259 million in 2002, $257
million in 2001 and $244 million in 2000.

Cash Equivalents

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

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Derivative and Financial Instruments

Effective January 1, 2001, WCI adopted FASB
Statement No. 133, as amended by FASB Statement
No. 138, Accounting for Derivative Instruments and
Hedging Activities (FAS 133). FAS 133 requires
that all derivative instruments be recognized on the balance
sheet at fair value. In addition, FAS 133 provides that for
derivative instruments that qualify for hedge accounting,
changes in the fair value will either be offset against the
change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in shareholders
equity as a component of accumulated other comprehensive income
(loss) until the hedged item is recognized in earnings,
depending on whether the derivative is being used to hedge
changes in fair value or cash flows. The ineffective portion of
a derivatives change in fair value will be immediately
recognized in earnings. The adoption of FAS 133 did not have a
material effect on WCIs financial statements
(Note 13).

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

Property, Plant and Equipment

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

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

Goodwill and Other Intangible Assets

As a creator and distributor of entertainment
copyrights, WCI has a significant and growing number of
intangible assets, including goodwill, music catalogues,
contracts and copyrights. In accordance with generally accepted
accounting principles, WCI does not recognize the fair value of
internally generated intangible assets. Costs incurred to create
and produce copyrighted product, such as compact discs, DVDs and
cassettes, generally are either expensed as incurred, or
capitalized as tangible assets as in the case of cash advances
and inventoriable product costs. However, accounting recognition
is not given to any increasing asset value that may be
associated with the collection of the underlying copyrighted
material. Additionally, costs incurred to create or extend
brands generally result in losses over an extended development
period and are recognized as a reduction of income as incurred,
while any corresponding brand value created is not recognized as
an intangible asset in the consolidated balance sheet. However,
intangible assets acquired in business combinations accounted
for under the purchase method of accounting are recorded at fair
value on the General Partners consolidated balance sheet.
As of January 1, 2001, in connection with the Merger, the
intangible assets of WCI, including the significant value of
intentionally generated intangible assets, were recorded at fair
value on WCIs consolidated balance sheet. However,
increases in the fair value, if any, or the creation of
intangible assets related to WCI businesses subsequent to the
consummation of the Merger, are not reflected on WCIs
consolidated balance sheet.

As discussed previously, FAS 142, which became
effective on January 1, 2002, required that goodwill and
certain other intangible assets deemed to have an indefinite
useful life cease amortizing. As a result, a

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


substantial portion of the General Partners
goodwill and intangible assets, ceased amortizing. However, WCI
continues to amortize intangible assets that are deemed to have
a finite useful life, including music catalogues and copyrights,
which are amortized over periods up to 20 years.
Amortization of goodwill and intangible assets for WCI was
$175 million in 2002, $836 million in 2001 and
$241 million in 2000. Accumulated amortization of goodwill
and intangible assets for WCI was $396 billion at
December 31, 2002 and $836 million at
December 31, 2001. Amortization of goodwill and intangible
assets for ATC amounted to $11 million in 2001, all of
which related to the amortization of goodwill resulting from the
Merger. There was no amortization of goodwill and intangible
assets for ATC in 2002 and 2000. Accumulated amortization of
goodwill and intangible assets for ATC at was $11 million
at December 31, 2002 and 2001.

The General Partners periodically review the
carrying value of acquired intangible assets, including
goodwill, to determine whether impairment may exist. FAS 142
requires that goodwill and certain intangible assets be assessed
for impairment using fair value measurement techniques.
Specifically, goodwill impairment is determined using a two-step
process. The first step of the goodwill impairment test is used
to identify potential impairment by comparing the fair value of
a reporting unit with its carrying amount, including goodwill.
If the fair value of a reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered not
impaired and the second step of the impairment test is
unnecessary. If the carrying amount of a reporting unit exceeds
its fair value, the second step of the goodwill impairment test
is performed to measure the amount of impairment loss, if any.
The second of the goodwill impairment test compares the implied
fair value of the reporting units goodwill with the
carrying amount of that goodwill. If the carrying amount of the
reporting units goodwill exceeds the implied fair value of
that goodwill, an impairment loss is recognized in an amount
equal to that excess. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill
recognized in a business combination. That is, the fair value of
the reporting unit is allocated to all of the assets and
liabilities of that unit (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business
combination and the fair value of the reporting unit was the
purchase price paid to acquire the reporting unit. The
impairment test for other intangible assets not subject to
amortization consists of a comparison of the fair value of the
intangible asset with its carrying value. If the carrying value
of the intangible asset exceeds its fair value, an impairment
loss is recognized in an amount equal to that excess. For
intangible assets subject to amortization, to the extent the
fair value of the intangible asset, determined based upon the
estimated future cash inflows attributable to the asset, less
estimated future cash outflows, are less than carrying amount,
an impairment loss is recognized. The determination of
impairment of goodwill and other intangible assets requires
significant judgments and estimates, which is further discussed
under Critical Accounting Policies.

Income Taxes

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

Under a tax-sharing agreement between the General
Partners and AOL Time Warner, each General Partner pays to, or
receives from, AOL Time Warner amounts equal to the total
domestic income taxes, or tax benefits, provided by, or
attributable to, the partner. Accordingly, no domestic income
tax balances are reflected in the consolidated balance sheets of
the General Partners, except for amounts related to certain

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


book/tax differences created as a result of
purchase accounting, and for certain items reflected in
shareholders equity.

As a Delaware limited partnership, TWE is
generally not subject to U.S. federal and state income taxation.
However, certain of TWEs operations are conducted by
subsidiary corporations that are subject to domestic or foreign
taxation. Income tax expense for each of the General Partners
includes all income taxes related to its allocable share of
partnership income and its equity in the income tax expense of
corporate subsidiaries of TWE.

Stock-Based Compensation

AOL Time Warner has various stock option plans
under which it may grant options to purchase AOL Time Warner
common stock to employees of AOL Time Warner and WCI, both of
which follow 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. AOL Time Warner and WCI have
elected to continue to apply APB 25 in accounting for stock
option plans (Note 11).

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

As previously discussed, in 2002 the FASB issued
FAS 148. FAS 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting
for stock-based employee compensation. 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 are 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.

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

|                                                                                                                                                   |  |                          |         |      |  |      |        |   |  |   |     |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------ | - |  | - | --- | -
|                                                                                                                                                   |  |                         
|                                                                                                                                                   |  | Years Ended December 31,
|                                                                                                                                                   |  |                         
|                                                                                                                                                   |  | 2002                     |         | 2001 |  | 2000
|                                                                                                                                                   |  |                          |         |      |  |     
|                                                                                                                                                   |  |                         
|                                                                                                                                                   |  | (millions)              
|Net income (loss), as reported                                                                                                                     |  | $                        | (21,001 | )    |  | $    | (2,259 | ) |  | $ | 44  |  
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards
    net of related tax effects |  |                          | (90     | )    |  |      | (33    | ) |  |   | (41 | )
|                                                                                                                                                   |  |                          |         |      |  |      |        |   |  |   |     |  
|Pro forma net income (loss)                                                                                                                        |  | $                        | (21,091 | )    |  | $    | (2,292 | ) |  | $ | 3   |  
|                                                                                                                                                   |  |                          |         |      |  |      |        |   |  |   |     |  

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Comprehensive Income (Loss)

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

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

|                             |  |                |      |               |  |                |    |             |  |       |     |               |  |   |     |   |  |   |   |  |  |   |      |  
|---------------------------- |  | -------------- | ---- | ------------- |  | -------------- | -- | ----------- |  | ----- | --- | ------------- |  | - | --- | - |  | - | - |  |  | - | ---- | -
|                             |  | Foreign        |      | Net           |  | Derivative     |    | Unfunded    |  |       |     | Accumulated  
|                             |  | Currency       |      | Unrealized    |  | Financial      |    | Accumulated |  |       |     | Other        
|                             |  | Translation    |      | Gains         |  | Instrument     |    | Benefit     |  |       |     | Comprehensive
|                             |  | Gains (Losses) |      | on Securities |  | Gains (Losses) |    | Obligation  |  | Other |     | Loss         
|                             |  |                |      |               |  |                |    |             |  |       |     |              
|                             |  |               
|                             |  | (millions)    
|Balance at December 31, 2001 |  | $              | (195 | )             |  | $              | 12 |             |  | $     | 8   |               |  | $ |    |   |  | $ |  |  |  | $ | (175 | )
|2002 activity                |  |                | 111  |               |  |                | 1  |             |  |       | (10 | )             |  |   | (70 | ) |  |   | 4 |  |  |   | 36   |  
|                             |  |                |      |               |  |                |    |             |  |       |     |               |  |   |     |   |  |   |   |  |  |   |      |  
|Balance at December 31, 2002 |  | $              | (84  | )             |  | $              | 13 |             |  | $     | (2  | )             |  | $ | (70 | ) |  | $ | 4 |  |  | $ | (139 | )
|                             |  |                |      |               |  |                |    |             |  |       |     |               |  |   |     |   |  |   |   |  |  |   |      |  

Reclassifications

Certain reclassifications have been made to the
prior years consolidated financial information to conform
to the 2002 presentation.

2.     WORD
ENTERTAINMENT ACQUISITION

In January 2002, WCI completed its purchase of
Word Entertainment (Word) from Gaylord Entertainment
Company for approximately $84 million in cash. Word is a
leader in the multi-faceted contemporary Christian music
industry with over 30 active artists on several record labels,
approximately 45 songwriters under contract and a catalog
containing more than 75,000 masters. The acquisition was
accounted for using the purchase method of accounting for
business combinations. As a result of the subsequent purchase
price allocation, approximately $10 million has been
allocated to copyrights, approximately $20 million has been
allocated to music catalogues, $30 million to goodwill and
the remaining $24 million of the purchase price has been
allocated to the underlying tangible net assets of Word. As
discussed in further detail in Note 3, during the fourth quarter
of 2002, WCI recorded a non-cash, pretax charge of
$646 million related to goodwill impairment.

During the third quarter of 2002, WCI exchanged
20% of its interest in Word to Curb Records for non-cash
consideration of equal value.

3.     GOODWILL AND
INTANGIBLE ASSETS

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

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##### Table of Contents



TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

Upon adoption of FAS 142 in the first quarter of
2002, WCI recorded an approximate $18.962 billion non-cash
charge and ATC recorded an approximate $9.603 billion
non-cash charge to reduce the carrying value of goodwill.
Approximately $5 billion of WCIs charge related to
its wholly owned music business, while the remaining approximate
$14 billion of WCIs charge and all of ATCs
charge were the result of goodwill impairment charges recorded
at TWE and other AOL Time Warner consolidated subsidiaries,
which are accounted for by the General Partners under the equity
method of accounting. Such charges are nonoperational in nature
and are reflected as a cumulative effect of accounting change in
the accompanying consolidated statement of operations. In
calculating the impairment charge, the fair value of WCIs
music business and the reporting units underlying the General
Partners investments in TWE and certain AOL Time Warner
consolidated subsidiaries accounted for under 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 impairment is associated
entirely with goodwill resulting from the Merger. The amount of
the impairment primarily reflects the overall market declines
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 AOL
Time Warners reporting units, including the reporting
units of the acquirer. This differs from the previous accounting
rules where goodwill was assigned only to the businesses of the
company acquired. As a result, a portion of the goodwill
generated in the Merger has been reallocated from WCIs
music business and the reporting units underlying the General
Partners investments in TWE and certain AOL Time Warner
consolidated subsidiaries accounted for under the equity method
of accounting to other segments of AOL Time Warner.

During the fourth quarter of 2002, WCI and ATC
performed their annual impairment reviews for goodwill and other
intangible assets. As a result, WCI recorded an additional
non-cash charge of approximately $1.499 billion which is
recorded as a component of operating income in the accompanying
consolidated statement of operations. The $1.499 billion
charge at WCI includes a $646 million charge to reduce the
carrying value of goodwill and a $853 million charge to
reduce the carrying value of other intangible assets at
WCIs music operations which reflects declining valuations
in the music industry, primarily due to the negative effects of
piracy.

In addition, the General Partners recognized a
$1.572 billion charge at WCI and $1.146 billion charge
at ATC relating to goodwill impairment charges at TWE due to
decreasing valuations of TWEs cable systems as evidenced
by the decline in the stock prices of comparable cable
television companies. These charges are included in equity in
pretax income (loss) of TWE in the accompanying
consolidated statement of operations.

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##### Table of Contents



TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


A summary of changes in WCIs goodwill
during the year ended December 31, 2002 is as follows
(millions):

|      |  |            |       |                |  |                      |     |               |  |              |        |   |  |   |      |   |  |   |     | 
|----- |  | ---------- | ----- | -------------- |  | -------------------- | --- | ------------- |  | ------------ | ------ | - |  | - | ---- | - |  | - | --- | 
|      |  |           
|      |  | Goodwill  
|      |  |           
|      |  | January 1, |       | Acquisitions & |  | Cumulative Effect of |     | 4th Quarter   |  | December 31,
|      |  | 2002(1)    |       | Adjustments(2) |  | Accounting Change(3) |     | Impairment(4) |  | 2002        
|      |  |            |       |                |  |                      |     |               |  |             
|Total |  | $          | 5,857 |                |  | $                    | (34 | )             |  | $            | (4,796 | ) |  | $ | (646 | ) |  | $ | 381 | 
|      |  |            |       |                |  |                      |     |               |  |              |        |   |  |   |      |   |  |   |     | 






|    |                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reflects the reallocation of $5.942 billion
    of goodwill to other segments of AOL Time Warner under
    FAS 142.                                                                            
|   
|(2) | Acquisitions relate to WCIs purchase price
    allocation for the acquisition of Word Entertainment.                                                                                          
|   
|(3) | The impairment charge does not include
    approximately $14.2 billion related to goodwill impairments
    associated with investments accounted for under the equity
    method of accounting.
|   
|(4) | The impairment charge does not include
    approximately $1.572 billion related to WCIs investment in
    TWE.                                                                                

The impairment charges are non-cash in nature and
do not affect the General Partners liquidity.

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

|                                                                |  |                         |       |                         |  |     |      |       |  |                 |       |     |  |   |       |  |  |   |      |   |  |   |       | 
|--------------------------------------------------------------- |  | ----------------------- | ----- | ----------------------- |  | --- | ---- | ----- |  | --------------- | ----- | --- |  | - | ----- |  |  | - | ---- | - |  | - | ----- | 
|                                                                |  |                         |       |                        
|                                                                |  | As of December 31, 2002 |       | As of December 31, 2001
|                                                                |  |                         |       |                        
|                                                                |  |                         |       | Accumulated             |  |     |      |       |  | Accumulated     |       |    
|                                                                |  | Gross                   |       | Amortization(1)         |  | Net |      | Gross |  | Amortization(1) |       | Net
|                                                                |  |                         |       |                         |  |     |      |       |  |                 |       |    
|Intangible assets subject to
    amortization:                  |  |                         |       |                         |  |     |      |       |  |                 |       |     |  |   |       |  |  |   |      |   |  |   |       | 
|Music catalogues, copyrights and other intangible
    assets(2) |  | $                       | 3,194 |                         |  | $   | (323 | )     |  | $               | 2,871 |     |  | $ | 3,079 |  |  | $ | (153 | ) |  | $ | 2,926 | 
|                                                                |  |                         |       |                         |  |     |      |       |  |                 |       |     |  |   |       |  |  |   |      |   |  |   |       | 
|Intangible assets not subject to
    amortization:              |  |                         |       |                         |  |     |      |       |  |                 |       |     |  |   |       |  |  |   |      |   |  |   |       | 
|Brands and trademarks(2)(3)                                     |  | $                       | 847   |                         |  | $   | (57  | )     |  | $               | 790   |     |  | $ | 1,700 |  |  | $ | (57  | ) |  | $ | 1,643 | 
|                                                                |  |                         |       |                         |  |     |      |       |  |                 |       |     |  |   |       |  |  |   |      |   |  |   |       | 






|    |                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Accumulated amortization for intangible assets
    not subject to amortization relates to amortization expense
    recognized prior to the adoption of FAS 142.
|   
|(2) | Amount represents intangible assets related to
    WCIs music operations.                                                                                     
|   
|(3) | The decrease in brands, trademarks and other
    intangible assets primarily relates to the impairment of brands
    and trademarks of WCIs music operations. 

WCI recorded amortization expense of
$175 million in 2002 compared to $836 million in 2001.
Based on the current amount of intangible assets subject to
amortization, the estimated amortization expense for each of the
succeeding 5 years are as follows: 2003: $172 million;
2004: $172 million; 2005: $172 million; 2006:
$158 million; and 2007: $158 million. As acquisitions
and dispositions occur in the future and as purchase price
allocations are finalized, these amounts may vary.

For the year ended December 31, 2002, WCI
acquired the following intangible assets (in millions):

|                                                             |  |   |    |                     |  |  |          | 
|------------------------------------------------------------ |  | - | -- | ------------------- |  |  | -------- | 
|                                                             |  |   |    | Weighted Average   
|                                                             |  |   |    | Amortization Period
|                                                             |  |   |    |                    
|Music catalogues, copyrights and other intangible
    assets |  | $ | 80 |                     |  |  | 15 years | 

F-119



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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


WCIs and ATCs 2001 and 2000 results
do not reflect the provisions of FAS 142. Had WCI and ATC
adopted FAS 142 on January 1, 2000, the net income (loss)
would have been changed to the adjusted amounts indicated below:

|                                              |  |                   |        |                   |  |     |        |     |  |   |      |   |  |   |     |  
|--------------------------------------------- |  | ----------------- | ------ | ----------------- |  | --- | ------ | --- |  | - | ---- | - |  | - | --- | -
|                                              |  |                   |        |                  
|                                              |  | Year Ended        |        | Year Ended       
|                                              |  | December 31, 2001 |        | December 31, 2000
|                                              |  |                   |        |                  
|                                              |  |                  
|                                              |  | (millions)       
|                                              |  | WCI               |        | ATC               |  | WCI |        | ATC
|                                              |  |                   |        |                   |  |     |        |    
|As reported  historical basis                |  | $                 | (2,259 | )                 |  | $   | (1,033 | )   |  | $ | 44   |   |  | $ | 84  |  
|Add: Goodwill amortization                    |  |                   | 617    |                   |  |     |       |     |  |   | 145  |   |  |   |    |  
|Add: Intangible amortization                  |  |                   |       |                   |  |     |       |     |  |   |     |   |  |   |    |  
|Add: TWE goodwill and intangible amortization |  |                   | 1,600  |                   |  |     | 1,099  |     |  |   | 315  |   |  |   | 216 |  
|Add: Equity investee goodwill amortization    |  |                   | 366    |                   |  |     | 258    |     |  |   | 10   |   |  |   |    |  
|Income tax impact                             |  |                   | (808   | )                 |  |     | (543   | )   |  |   | (130 | ) |  |   | (86 | )
|                                              |  |                   |        |                   |  |     |        |     |  |   |      |   |  |   |     |  
|Adjusted                                      |  | $                 | (484   | )                 |  | $   | (219   | )   |  | $ | 384  |   |  | $ | 214 |  
|                                              |  |                   |        |                   |  |     |        |     |  |   |      |   |  |   |     |  



---



|    |  |                                                                                                                                                                                      
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Because goodwill is nondeductible for tax
    purposes, the income tax impact reflects only the ceasing of
    intangible amortization and equity investee goodwill
    amortization.

4.     MERGER AND
RESTRUCTURING COSTS



| |                                                      
| | -----------------------------------------------------
| | Merger Costs Capitalized as a Cost of
    Acquisition

In accordance with generally accepted accounting
principles in the United States, WCI generally treats merger
costs relating to business combinations accounted for using the
purchase method of accounting as additional purchase price paid.

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

Of the total restructuring accruals,
$261 million related to work force reductions and
represented employee termination benefits and relocation costs.
The total number of employees initially identified to be
involuntarily terminated or relocated approximated 2,500. As of
December 31, 2002, all terminations and relocations had
occurred. Because certain employees can defer receipt of
termination benefits, cash payments may continue after the
employee has been terminated. Termination payments of
approximately $88 million and $52 million were made in 2002
and 2001, respectively. In addition, during 2002, there were
non-cash reductions in the restructuring accrual of
$40 million, as actual employee termination payments were
less than amounts originally estimated. As of December 31,
2002, the remaining liability of approximately $81 million
was primarily classified as a current liability in WCIs
accompanying consolidated balance sheet.

The restructuring accrual also includes
approximately $48 million associated with exiting certain
activities. The restructuring accrual associated with exiting
activities specifically includes incremental costs and
contractual obligations for items such as leasehold termination
payments and other facility exit costs incurred as a direct
result of these plans, which will not have future benefits.
Payments related to exiting activities were approximately
$7 million in both 2002 and 2001, respectively. In
addition, during 2002, there were non-cash reductions in the
restructuring accrual associated with other exiting activities
of approximately $10 million, as actual payments were less
than originally estimated. As of December 31, 2002, the
remaining

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##### Table of Contents



TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


liability of $24 million was primarily
classified as a long-term liability in WCIs accompanying
consolidated balance sheet.

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

|                                                    |  |             |     |       |  |       |     |   |  |   |     |  
|--------------------------------------------------- |  | ----------- | --- | ----- |  | ----- | --- | - |  | - | --- | -
|                                                    |  | Employee    |     | Other |  |      
|                                                    |  | Termination |     | Costs |  | Total
|                                                    |  |             |     |       |  |      
|Initial accruals                                    |  | $           | 261 |       |  | $     | 48  |   |  | $ | 309 |  
|Cash paid  2001                                    |  |             | (52 | )     |  |       | (7  | ) |  |   | (59 | )
|                                                    |  |             |     |       |  |       |     |   |  |   |     |  
|Restructuring liability as of December 31,
    2001 |  |             | 209 |       |  |       | 41  |   |  |   | 250 |  
|Cash paid  2002                                    |  |             | (88 | )     |  |       | (7  | ) |  |   | (95 | )
|Non-cash reductions(a)  2002                       |  |             | (40 | )     |  |       | (10 | ) |  |   | (50 | )
|                                                    |  |             |     |       |  |       |     |   |  |   |     |  
|Restructuring liability as of December 31,
    2002 |  | $           | 81  |       |  | $     | 24  |   |  | $ | 105 |  
|                                                    |  |             |     |       |  |       |     |   |  |   |     |  



---



|    |  |                                                                                                                                                                                                                                         
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

Restructuring Costs

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

Included in the restructuring charge was
approximately $4 million related to work force reductions
and represented employee termination benefits. The number of
employees expected to be terminated was approximately 165. As of
December 31, 2002, approximately 20 of the terminations had
occurred. The remaining 145 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 primarily related to incremental costs
and contractual termination obligations for items such as lease
termination payments and other facility exit costs. As of
December 31, 2002, $4 million has been paid against
these accruals. The remaining $4 million is primarily
classified as a current liability in the accompanying
consolidated statement of operations.

|                                            |  |              |    |            |  |       |    |   |  |   |    |  
|------------------------------------------- |  | ------------ | -- | ---------- |  | ----- | -- | - |  | - | -- | -
|                                            |  | Employee     |    |            |  | Other
|                                            |  | Terminations |    | Exit Costs |  | Total
|                                            |  |              |    |            |  |      
|Initial Accruals                            |  | $            | 16 |            |  | $     | 4  |   |  | $ | 20 |  
|Cash paid  2002                            |  |              | (3 | )          |  |       | (1 | ) |  |   | (4 | )
|                                            |  |              |    |            |  |       |    |   |  |   |    |  
|Remaining liability as of December 31, 2002 |  | $            | 13 |            |  | $     | 3  |   |  | $ | 16 |  
|                                            |  |              |    |            |  |       |    |   |  |   |    |  

During 2001, the restructuring plans included
approximately $37 million of merger costs, relating to the
renegotiation of various contractual commitments, that were
expensed as incurred and included in operating income
(loss) in the accompanying consolidated statement of
operations. Of the $37 million, $20 million related to
employee termination benefits for several senior executives and
$17 million related to additional costs related to merger
initiatives. As of December 31, 2002, all of the
$37 million had been paid. During 2000, WCI expensed
approximately $18 million in merger-related costs related to the
failed merger of the

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


global music operations of Time Warner and EMI
Group plc. These costs are included in operating income
(loss) on the accompanying consolidated statement of
operations.

Selected information relating to the
restructuring plans follows (in millions):

|                                                    |  |             |     |            |  |       |     |   |  |   |     |  
|--------------------------------------------------- |  | ----------- | --- | ---------- |  | ----- | --- | - |  | - | --- | -
|                                                    |  | Employee    |     | Other      |  |      
|                                                    |  | Termination |     | Exit Costs |  | Total
|                                                    |  |             |     |            |  |      
|Initial accruals                                    |  | $           | 20  |            |  | $     | 17  |   |  | $ | 37  |  
|Cash paid  2001                                    |  |             | (4  | )          |  |       |    |   |  |   | (4  | )
|                                                    |  |             |     |            |  |       |     |   |  |   |     |  
|Restructuring liability as of December 31,
    2001 |  |             | 16  |            |  |       | 17  |   |  |   | 33  |  
|Cash paid  2002                                    |  |             | (4  | )          |  |       | (17 | ) |  |   | (21 | )
|Non-cash reductions(a) 2002                        |  |             | (12 | )          |  |       |    |   |  |   | (12 | )
|                                                    |  |             |     |            |  |       |     |   |  |   |     |  
|Remaining liability as of December 31, 2002         |  | $           | 0   |            |  | $     | 0   |   |  | $ | 0   |  
|                                                    |  |             |     |            |  |       |     |   |  |   |     |  



---

|    |  |                                                                                                                                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Non-cash reductions represent adjustments to the
    restructuring accrual as actual costs related to employee
    terminations were less than originally estimated.

5.     INVESTMENT IN
TWE

The General Partners investment in and
amounts due to and from TWE at December 31, 2002 and 2001
consists of the following:

|                                                                                     |       |            |        |        |  |   |        |        | 
|------------------------------------------------------------------------------------ | ----- | ---------- | ------ | ------ |  | - | ------ | ------ | 
|December 31, 2002                                                                    |       | WCI        |        | ATC   
|                                                                                     |       |            |        |       
|                                                                                     |       |           
|                                                                                     |       | (millions)
|Investment in TWE                                                                    |       | $          | 19,241 |        |  | $ | 13,380 |       
|Stock option related distributions due from TWE                                      |       |            | 5      |        |  |   | 3      |       
|Other net liabilities due to TWE, principally
    related to home video distribution |       |            | 94     |        |  |   |       |       
|                                                                                     |       |            |        |        |  |   |        |       
|                                                                                     | Total |            | $      | 19,340 |  |   | $      | 13,383 | 
|                                                                                     |       |            |        |        |  |   |        |       

|                                                                                     |       |            |        |        |  |   |        |        | 
|------------------------------------------------------------------------------------ | ----- | ---------- | ------ | ------ |  | - | ------ | ------ | 
|December 31, 2001                                                                    |       | WCI        |        | ATC   
|                                                                                     |       |            |        |       
|                                                                                     |       |           
|                                                                                     |       | (millions)
|Investment in TWE                                                                    |       | $          | 36,490 |        |  | $ | 25,110 |       
|Stock option related distributions due from TWE                                      |       |            | 264    |        |  |   | 182    |       
|Other net liabilities due to TWE, principally
    related to home video distribution |       |            | 80     |        |  |   |       |       
|                                                                                     |       |            |        |        |  |   |        |       
|                                                                                     | Total |            | $      | 36,834 |  |   | $      | 25,292 | 
|                                                                                     |       |            |        |        |  |   |        |       

The General Partners respective investments
in TWE declined significantly during the year, primarily the
result of the General Partners share of TWEs
$21.763 billion cumulative effect of an accounting change
relating to the adoption of FAS 142 and a $2.355 billion
impairment. In addition, upon the adoption of FAS 142,
$6.857 billion of goodwill at TWE generated in the Merger
was reallocated to other segments of AOL Time Warner thereby
reducing TWEs net assets. For a more comprehensive
description of the impact of these items on TWE, see the
accompanying TWE consolidated financial statements.

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Partnership
Structure

TWE is a Delaware limited partnership that was
capitalized on June 30, 1992 and currently owns and
operates substantially all of the Filmed Entertainment-Warner
Bros., Cable Networks-HBO and Cable businesses previously owned
by the General Partners. Prior to the change in ownership
relating to the exercise of an option by AT&T which is
discussed below, the General Partners in the aggregate held
63.27% of the Series A Capital and Residual Capital of TWE
and 100% of the Series B Capital of TWE. TW Companies,
directly or indirectly, held 11.22% of the Series A Capital
and Residual Capital limited partnership interests. The
remaining 25.51% limited partnership interests in the
Series A Capital and Residual Capital of TWE were held by
MediaOne TWE Holdings, Inc., a subsidiary of AT&T.
AT&Ts interest in TWE acquired by Comcast upon
consummation of the merger of Comcast and AT&Ts
broadband business in November 2002.

During the second quarter of 2002, AT&T
exercised a one-time option to increase its ownership in the
Series A Capital and Residual Capital of TWE. As a result,
on May 31, 2002, AT&Ts interest in the
Series A Capital and Residual Capital of TWE increased by
approximately 2.13% to approximately 27.64%. This resulted in a
decrease in WCIs and ATCs corresponding interest in
the Series A Capital and Residual Capital of TWE of
approximately 1.07% and 0.74%, respectively, to approximately
36.43% and 25.03%, respectively. Similarly, TW Companies
interest in the Series A Capital and Residual Capital
decreased by approximately 0.32% to approximately 10.90%. In
accordance with Staff Accounting Bulletin No. 51,
Accounting For Sales of Stock of a Subsidiary, WCI
and ATC have reflected the pretax impact of the dilution of its
interest in TWE of approximately $365 million and
$240 million, respectively, as an adjustment to
paid-in-capital. During the third quarter of 2002, TW
Companies 10.90% interest in TWE was transferred to WCI
and ATC, increasing WCIs and ATCs interests in the
Series A and Residual Capital of TWE to 41.88% and 30.48%,
respectively.

In August 2002, AOL Time Warner and AT&T
announced that they had agreed to restructure TWE. The
restructuring is expected to be completed on March 31,
2003. The restructuring will result in the following:
(i) WCI will acquire complete ownership of TWEs
content assets (including Warner Bros., Warner Bros. Library and
Home Box Office, which will become separate, wholly owned
subsidiaries of WCI); (ii) all of AOL Time Warners
directly-owned cable television system interests will be
contributed to a separate company which will become a
majority-owned subsidiary of AOL Time Warner and will be renamed
Time Warner Cable Inc. (TWC Inc.); (iii) TWE
will become a subsidiary of TWC Inc. and will continue to own
the cable television system interests it previously owned;
(iv) Comcast will receive $2.1 billion in cash, which
the company anticipates will be funded through a new credit
facility at TWC Inc. that has not yet been established and AOL
Time Warner equity securities valued at $1.5 billion;
(v) a Comcast Trust will also retain a 21% economic
interest in the Companys cable business, 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; and (vi) AOL
Time Warner will retain an overall 79% economic interest in the
cable business, 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 and a
$2.4 billion preferred component. The 1% direct interest
and $2.4 billion preferred interest in TWE, as well as part of
AOL Time Warners ownership interest in WCI, will be held
through ATC.

Based upon its 89.3% controlling voting interest
in TWC Inc., AOL Time Warner will consolidate the results of TWC
Inc. for accounting purposes. WCI will account for its interest
in TWC Inc. under the equity method of accounting. ATC will
account for its common and preferred interests in TWE at cost.
At the closing of the restructuring, it is anticipated that TWC
Inc. will have approximately $8.1 billion in consolidated
net debt and preferred equity, including the $2.4 billion
preferred interest held by AOL Time Warner. Subject to market
and other conditions, AOL Time Warner expects to complete an
initial public offering of TWC Inc. common stock during 2003. It
is anticipated that the first $2.1 billion of net proceeds
raised in any such offering would be used to repay TWC
Inc.s debt incurred to fund the $2.1 billion cash

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


payment to Comcast. Thereafter, Comcast will have
certain priority registration rights with respect to its stake
in TWC Inc.

Partnership Capital and Allocation of
Income

Each partners interest in TWE generally
consists of the undistributed priority capital and residual
equity amounts that were initially assigned to that partner, or
its predecessor, based on the estimated fair value of the net
assets each contributed to TWE (Undistributed Contributed
Capital), plus, with respect to the priority capital
interests only, any undistributed priority capital return. The
priority capital return consists of net partnership income
allocated to date in accordance with the provisions of the TWE
partnership agreement and the right to be allocated additional
partnership income which, together, provides for the various
priority capital rates of return as specified in the following
table. The sum of Undistributed Contributed Capital and the
undistributed priority capital return is referred to herein as
Cumulative Priority Capital. Cumulative Priority
Capital is not necessarily indicative of the fair value of the
underlying priority capital interests, principally due to
above-market rates of return on certain priority capital
interests as compared to securities of comparable credit risk
and maturity, such as the 13.25% rate of return on the
Series B Capital interest owned 100% by the General
Partners. Furthermore, the ultimate realization of Cumulative
Priority Capital could be affected by the fair value of TWE,
which is subject to fluctuation.

A summary of the priority of Undistributed
Contributed Capital, the General Partners ownership of
Undistributed Contributed Capital and Cumulative Priority
Capital at December 31, 2002 and priority capital rates of
return thereon is as set forth below:

|                                              |  |               |     |            |  |           |      |            |  |  |       |     |  |  |        |  
|--------------------------------------------- |  | ------------- | --- | ---------- |  | --------- | ---- | ---------- |  |  | ----- | --- |  |  | ------ | -
|                                              |  |               |     |            |  | Priority  |      |           
|                                              |  | Undistributed |     | Cumulative |  | Capital   |      | % Owned   
|                                              |  | Contributed   |     | Priority   |  | Rates of  |      | by General
|Priority of Undistributed Contributed Capital |  | Capital(a)    |     | Capital    |  | Return(b) |      | Partners  
|                                              |  |               |     |            |  |           |      |           
|                                              |  |              
|                                              |  | (billions)   
|Series A Capital                              |  | $             | 5.6 |            |  | $         | 22.0 |            |  |  | 13.00 | %   |  |  | 72.36  | %
|Series B Capital                              |  |               | 2.9 | (c)        |  |           | 11.4 |            |  |  | 13.25 | %   |  |  | 100.00 | %
|Residual Capital                              |  |               | 3.3 | (c)        |  |           | 3.3  | (d)        |  |  |      | (d) |  |  | 72.36  | %



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Excludes partnership income or loss allocated
    thereto.                                                                                                                                                                                                                                                                                                                                                                                                             
|(b) |  | To the extent income allocations are concurrently
    distributed, the priority capital rates of return on the
    Series A Capital and Series B Capital are 11.00% and
    11.25%, respectively. The Undistributed Contributed Capital
    relating to the Series B Capital has priority over the
    priority returns on the Series A Capital.                                                                                                                       
|(c) |  | The Undistributed Contributed Capital relating to
    the Residual Capital has priority over the priority returns on
    the Series B Capital and the Series A Capital.                                                                                                                                                                                                                                                                                                
|(d) |  | Residual Capital is not entitled to stated
    priority rates of return and, as such, its Cumulative Priority
    Capital is equal to its Undistributed Contributed Capital.
    However, in the case of certain events such as the liquidation
    or dissolution of TWE, Residual Capital is entitled to any
    excess of the then fair value of the net assets of TWE over the
    aggregate amount of Cumulative Priority Capital and special tax
    allocations.

The Undistributed Contributed Capital is
generally based on the fair value of the net assets that each
partner initially contributed to the partnership. For purposes
of allocating partnership income or loss to the partners,
partnership income or loss is based on the fair value of the net
assets contributed to the partnership and results in
significantly less partnership income, or results in partnership
losses, in contrast to the net income reported by TWE for
financial statement purposes, which is also based on the
historical cost of contributed net assets.

Under the TWE partnership agreement, partnership
income, to the extent earned, is first allocated to the
partners capital accounts so that the economic burden of
the income tax consequences of partnership operations is borne
as though the partnership were taxed as a corporation
(special tax allocations). After any special tax
allocations, partnership income is allocated to the
Series A Capital and Series B Capital, in order of
priority, at rates of 13.00% and 13.25% per annum, respectively,
and finally to the Residual Capital. Partnership losses
generally are allocated first to eliminate prior allocations of
partnership income to, and then

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


to reduce the Undistributed Contributed Capital
of, the Residual Capital, Series B Capital and
Series A Capital, in that order, and then to reduce any
special tax allocations. To the extent partnership income is
insufficient to satisfy all special allocations in a particular
accounting period, the right to receive additional partnership
income necessary to provide for the various priority capital
rates of return is carried forward until satisfied out of future
partnership income, including any partnership income that may
result from any liquidation, sale or dissolution of TWE.

TWE reported a net loss of $21.219 billion
and $1.032 billion for the years ended December 31,
2002 and 2001, respectively, and net income of $229 million for
the year ended December 31, 2000. In 2002, this loss
included a $21.763 billion non-cash charge related to the
cumulative effect of an accounting change and a
$2.355 billion impairment charge for goodwill, each of
which was allocated from AOL Time Warner. In addition, in 2002
there was a $1.182 billion gain attributed to the minority
partners of TWE in connection with the restructuring of the
TWE-Advance/Newhouse Partnership (TWE-A/N). In 2000,
this income included a $524 million non-cash charge related
to the cumulative effect of an accounting charge. Because of the
priority rights over allocations of income/loss and
distributions of TWE held by the General Partners,
$779 million of TWEs pretax loss for 2002 was
allocated to the General Partners ($427 million to WCI and
$352 million to ATC). For 2001, $681 million of
TWEs pretax loss was allocated to the General Partners
($404 million to WCI and $277 million to ATC). For 2000,
all of TWEs pretax income before cumulative effect of
accounting change was allocated to the General Partners
($539 million to WCI and $371 million to ATC).

Capital Distributions

The assets and cash flows of TWE are restricted
by the TWE partnership and credit agreements and are unavailable
for use by the partners except through the payment of certain
fees, reimbursements, cash distributions and loans, which are
subject to limitations. Under AOL Time Warners two senior
unsecured long-term revolving bank credit agreements, TWE is
permitted to incur additional indebtedness to make loans,
advances, distributions and other cash payments to AOL Time
Warner, subject to its individual compliance with the leverage
ratio covenant contained therein.

At December 31, 2002 and 2001, the General
Partners had recorded $8 million and $446 million,
respectively, of stock option related distributions due from
TWE, based on closing prices of AOL Time Warner common stock of
$13.10 and $32.10, respectively. The General Partners are paid
when the options are exercised. The General Partners also
receive tax-related distributions from TWE on a current basis.
During 2002, the General Partners received distributions from
TWE in the amount of $497 million, consisting of
$473 million of tax-related distributions and
$24 million of stock option-related distributions. During
2001, the General Partners received distributions from TWE in
the amount of $317 million, consisting of $53 million
of tax-related distributions and $264 million of stock
option-related distributions. During 2000, the General Partners
received distributions from TWE in the amount of
$1.003 billion, consisting of $765 million of
tax-related distributions and $238 million of stock
option-related distributions. Of such aggregate distributions,
WCI received $294 million in 2002, $188 million in
2001 and $594 million in 2000, and ATC received
$203 million in 2002, $129 million in 2001 and
$409 million in 2000. In addition to the tax, stock option
and General Partners senior priority capital
distributions, TWE may make other capital distributions to its
partners that are also subject to certain limitations contained
in the TWE partnership and credit agreements.

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Summarized Financial Information of
TWE

Set forth below is summarized financial
information of TWE.

|                                                                                                                 |  |                          |         |      |  |      |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                 |  |                         
|                                                                                                                 |  | Years Ended December 31,
|                                                                                                                 |  |                         
|                                                                                                                 |  | 2002                     |         | 2001 |  | 2000
|                                                                                                                 |  |                          |         |      |  |     
|                                                                                                                 |  |                         
|                                                                                                                 |  | (millions)              
|Operating Statement Information                                                                                  |  |                          |         |      |  |      |        |   |  |   |        |  
|Revenues                                                                                                         |  | $                        | 16,425  |      |  | $    | 14,342 |   |  | $ | 13,178 |  
|Operating income (loss)                                                                                          |  |                          | 308     |      |  |      | (31    | ) |  |   | 1,722  |  
|Interest expense, net                                                                                            |  |                          | (401    | )    |  |      | (530   | ) |  |   | (612   | )
|Other expense, net                                                                                               |  |                          | (357    | )    |  |      | (346   | ) |  |   | (228   | )
|Minority interest income (expense)                                                                               |  |                          | (28     | )    |  |      | 36     |   |  |   | 82     |  
|Income (loss) before income taxes,
    discontinued operations and cumulative effect of an accounting
    change |  |                          | (478    | )    |  |      | (871   | ) |  |   | 964    |  
|Income (loss) before discontinued operations
    and cumulative effect of an accounting change                   |  |                          | (635    | )    |  |      | (998   | ) |  |   | 807    |  
|Income (loss) before cumulative effect of an
    accounting change                                               |  |                          | 544     |      |  |      | (1,032 | ) |  |   | 753    |  
|Net income (loss)                                                                                                |  |                          | (21,219 | )    |  |      | (1,032 | ) |  |   | 229    |  

|                                                               |  |                          |        |      |  |      |        |   |  |   |        |  
|-------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                               |  |                         
|                                                               |  | Years Ended December 31,
|                                                               |  |                         
|                                                               |  | 2002                     |        | 2001 |  | 2000
|                                                               |  |                          |        |      |  |     
|                                                               |  |                         
|                                                               |  | (millions)              
|Cash Flow Information                                          |  |                          |        |      |  |      |        |   |  |   |        |  
|Cash provided by operations                                    |  | $                        | 4,012  |      |  | $    | 2,585  |   |  | $ | 2,576  |  
|Investments and acquisitions                                   |  |                          | (297   | )    |  |      | (913   | ) |  |   | (421   | )
|Investments in available-for-sale securities                   |  |                          |       |      |  |      | (18    | ) |  |   |       |  
|Capital expenditures from continuing operations                |  |                          | (1,689 | )    |  |      | (1,604 | ) |  |   | (1,512 | )
|Investment proceeds                                            |  |                          | 85     |      |  |      | 35     |   |  |   | 209    |  
|Borrowings                                                     |  |                          | 3,524  |      |  |      | 3,226  |   |  |   | 2,850  |  
|Debt repayments                                                |  |                          | (4,113 | )    |  |      | (2,541 | ) |  |   | (2,399 | )
|Capital and other distributions from continuing
    operations |  |                          | (527   | )    |  |      | (359   | ) |  |   | (1,048 | )
|Increase (decrease) in cash and equivalents                    |  |                          | 762    |      |  |      | (56    | ) |  |   | (211   | )

|                          |  |              |        |      |  |   |        | 
|------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                          |  |             
|                          |  | December 31,
|                          |  |             
|                          |  | 2002         |        | 2001
|                          |  |              |        |     
|                          |  |             
|                          |  | (millions)  
|Balance Sheet Information |  |              |        |      |  |   |        | 
|Cash and equivalents      |  | $            | 1,012  |      |  | $ | 250    | 
|Total current assets      |  |              | 6,103  |      |  |   | 4,908  | 
|Total assets              |  |              | 54,355 |      |  |   | 85,058 | 
|Total current liabilities |  |              | 6,857  |      |  |   | 6,305  | 
|Long-term debt            |  |              | 6,947  |      |  |   | 8,049  | 
|Minority interests        |  |              | 888    |      |  |   | 2,191  | 
|Partners capital         |  |              | 37,117 |      |  |   | 65,405 | 

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##### Table of Contents



TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


6.     TIME WARNER
TELECOM PUBLIC OFFERINGS

Time Warner Telecom, a provider of local and
regional optical broadband networks and services to business
customers, was formed in July 1998 when Time Warner, TWE and
TWE-A/N completed a reorganization of their business telephony
operations. As part of that reorganization, TWEs and
TWE-A/Ns interests in Time Warner Telecom were distributed
to their partners, Time Warner (including the General Partners),
AT&T and the Advance/Newhouse Partnership
(Advance/Newhouse), a partner in TWE-A/N.

In May 1999, Time Warner Telecom completed an
initial public offering of 20% of its common stock (the
Time Warner Telecom IPO). Time Warner Telecom issued
approximately 21 million shares of common stock at a price
of $14 per share and raised net proceeds of approximately
$270 million, of which $180 million was paid to Time Warner
and TWE in satisfaction of certain obligations. In turn, Time
Warner and TWE used those proceeds principally to reduce bank
debt. In connection with the Time Warner Telecom IPO and certain
related transactions, WCIs ownership interest in Time
Warner Telecom was diluted from approximately 28% to
approximately 22% and ATCs ownership interest in Time
Warner Telecom was diluted from approximately 19% to
approximately 15%.

In January 2001, Time Warner Telecom completed a
public offering of an additional 7.475 million shares of
its common stock at a price of $74.44, raising proceeds of
approximately $556 million. As a result, WCIs
ownership in Time Warner Telecom was diluted from approximately
22% to approximately 20% and ATCs ownership in Time Warner
Telecom was diluted from approximately 15% to approximately 14%.

During 2002 and 2001, WCI recorded impairment
charges of approximately $356 million and
$542 million, respectively, while ATC recorded impairment
charges of approximately $244 million and
$372 million, respectively.

As of December 31, 2002, Time Warner Telecom
is owned 44% by AOL Time Warner, including 20% by WCI and 14% by
ATC. The General Partners interests in Time Warner Telecom
are being accounted for under the equity method of accounting.

7.     OTHER
INVESTMENTS

WCIs other investments consist of:

|                                              |  |              |       |      |  |   |       | 
|--------------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                                              |  |             
|                                              |  | December 31,
|                                              |  |             
|                                              |  | 2002         |       | 2001
|                                              |  |              |       |     
|                                              |  |             
|                                              |  | (millions)  
|Equity method investments                     |  | $            | 4,199 |      |  | $ | 5,972 | 
|Cost and fair-value method
    investments(a) |  |              | 154   |      |  |   | 112   | 
|                                              |  |              |       |      |  |   |       | 
|Total                                         |  | $            | 4,353 |      |  | $ | 6,084 | 
|                                              |  |              |       |      |  |   |       | 



---



|    |  |                                                                                                                                                                                       
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | The fair value of the General Partners
    cost-method and fair-value investments were approximately
    $154 million at December 31, 2002 and $112 million at
    December 31, 2001.

Investment Gains

Prior to June 2002, the Columbia House Company
Partnerships (Columbia House) was a 50-50 joint
venture between AOL Time Warner and Sony Corporation of America
(Sony). In June 2002, AOL Time Warner and Sony each
sold 85% of their respective 50% interest in Columbia House to
Blackstone Capital Partners III LP
(Blackstone), an affiliate of The Blackstone Group,
a private investment bank. The sale has resulted in WCI
recognizing a pretax gain of approximately $97 million,
which is included in other income (expense), net, in the
accompanying consolidated statement of operations. In addition,
the WCI has deferred

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


an approximate $5 million gain on the sale. The
deferred gain primarily relates to the estimated fair value of
the portion of the proceeds received as a note receivable, which
will be deferred until such time as the realization of such note
becomes more fully assured. As part of the transaction, AOL Time
Warner, including, WCI, will continue to license music and video
product to Columbia House for a five-year period.

Investment Write-Downs

The United States economy has experienced a broad
decline in the public equity markets, particularly in technology
stocks, including investments held in WCIs and ATCs
portfolios. Similarly, the General Partners have experienced
significant declines in the value of certain privately held
investments and investments accounted for using the equity
method of accounting. As a result, the General Partners recorded
non-cash pretax charges to reduce the carrying value of certain
investments that experienced other-than-temporary declines.
These charges were approximately $446 million for WCI and
$244 million for ATC in 2002, $676 million for WCI and
$372 million for ATC in 2001, and $115 million for WCI
and $0 for ATC in 2000, and are included in other income
(expense), net in the accompanying consolidated statements of
operations. The portion of the above charges relating to
publicly traded securities was $433 million in 2002,
$599 million in 2001 and $0 in 2000 for WCI and
$244 million in 2002, $372 million in 2001 and $0 in
2000 for ATC. The significant components of these charges are
discussed in detail below.



| |                                     
| | ------------------------------------
| | Columbia House Investment Write-Down

In March 2000, the proposed merger between CDNOW,
Inc. and Columbia House was terminated. In connection with the
termination of the merger, the risk associated with the timely
execution of certain strategic alternatives for Columbia
Houses operations and the transformation of Columbia
Houses traditional business model to an online one
increased. As a result, AOL Time Warners management
concluded that the decline in Columbia Houses business was
likely to continue through the near term. As such, WCI recorded
a $115 million non-cash pretax charge in the first quarter
of 2000 to reduce the carrying value of its investment in
Columbia House to an estimate of its fair value. Additionally,
in the fourth quarter of 2001, AOL Time Warners management
concluded that a further decline in Columbia Houses
business was other-than-temporary and as such, WCI recorded a
$65 million non-cash pretax charge.



| |                               
| | ------------------------------
| | Time Warner Telecom Write-Down

As discussed in Note 6, WCI has an
approximate 20% interest and ATC has an approximate 14% interest
in Time Warner Telecom. The value of both WCIs and
ATCs investment was adjusted upward in the Merger by
approximately $992 million and $682 million, respectively,
to their estimated fair values. Since that time, Time Warner
Telecoms share price declined significantly and at
December 31, 2001, the decline had met the 20% criteria.
The General Partners also reviewed qualitative factors in
accordance with its investment policy and determined that the
decline in value was not temporary; therefore impairment charges
of $542 million for WCI and $372 million for ATC were
recognized in the fourth quarter of 2001 based upon the closing
value of Time Warner Telecom common stock as of
December 31, 2001.

During 2002, the fair value of the General
Partners investment in Time Warner Telecom continued to
decline, resulting in additional impairment charges for WCI and
ATC of $255 and $175 million in the first quarter,
respectively, $90 million and $62 million in the
second quarter, respectively, and $11 million and
$7 million in the third quarter, respectively, to reduce
the carrying value of the investment to fair value, which was
determined by the quarter ending values of Time Warner Telecom
common stock. As of December 31, 2002, the carrying value
of the General Partners investment in Time Warner Telecom
had been reduced to $0 as a result of the impairment charges and
the General Partners share of Time Warner Telecoms
losses pursuant to the equity method of accounting. The General
Partners do not have any funding commitments related to Time
Warner Telecom.

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##### Table of Contents



TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Equity Method Investments

In addition to TWE and its equity investees,
investments accounted for using the equity method and the voting
ownership percentage held by WCI at December 31, 2002
include: Time Warner Telecom (approximately 20% and 14% owned by
WCI and ATC, respectively; 44% owned by AOL Time Warner), and
other music joint ventures (between 30% and 50% owned). A
summary of combined financial information as reported by the
equity investees of WCI is set forth below:

|                    |                                                               |                          |       |      |  |      |       |      |   |   |       |      |  
|------------------- | ------------------------------------------------------------- | ------------------------ | ----- | ---- |  | ---- | ----- | ---- | - | - | ----- | ---- | -
|                    |                                                               |                         
|                    |                                                               | Years Ended December 31,
|                    |                                                               |                         
|                    |                                                               | 2002                     |       | 2001 |  | 2000
|                    |                                                               |                          |       |      |  |     
|                    |                                                               |                         
|                    |                                                               | (millions)              
|Operating Results:  |                                                               |                          |       |      |  |      |       |      |   |   |       |     
|Revenues            |                                                               | $                        | 859   |      |  | $    | 1,934 |      |   | $ | 1,851 |     
|Operating loss      |                                                               |                          | (265  | )    |  |      | (115  | )    |   |   | (216  | )   
|Net loss            |                                                               |                          | (385  | )    |  |      | (273  | )    |   |   | (380  | )   
|Balance Sheet:      |                                                               |                          |       |      |  |      |       |      |   |   |       |     
|Current assets      |                                                               |                          | 688   |      |  |      | 871   |      |   |   | 674   |     
|Total assets        |                                                               |                          | 2,278 |      |  |      | 3,029 |      |   |   | 2,006 |     
|Current liabilities |                                                               |                          | 409   |      |  |      | 2,027 |      |   |   | 1,130 |     
|Total liabilities   |                                                               |                          | 1,618 |      |  |      | 3,453 |      |   |   | 2,799 |     
|                    | Total shareholders equity (deficit) or
    partners capital |                          |       | 660  |  |      |       | (424 | ) |   |       | (793 | )

The above table represents the combined financial
information of entities in which WCI has a significant
investment accounted for using the equity method of accounting.
These amounts are not the amounts reflected on WCIs
accompanying consolidated financial statements. Consistent with
the General Partners accounting policy for investments
accounted for using the equity method of accounting, as
described in Note 1, WCI has included $4.199 billion
and ATC has included $1.199 billion in Other
investments on the accompanying consolidated balance
sheets, representing the General Partners investments in
and amounts due to and from the equity investees. Similarly, WCI
has recorded $144 million of expense and ATC has recorded
$7 million of expense, in other income (expense), net, in
the accompanying consolidated statements of operations,
representing the General Partners share in the pretax
income (loss) of these investees.

As discussed in Note 1, under the purchase method
of accounting, the cost to acquire Time Warner was allocated to
its underlying net assets, including the General Partners
investments accounted for using the equity method of accounting,
based on their estimated fair values. As a result, WCIs
investments accounted for using the equity method of accounting
were adjusted upward by approximately $4.9 billion,
including $992 million relating to its investment in Time
Warner Telecom and ATCs investments were adjusted upwards
by approximately $3.2 billion, including $682 million
related to its investment in Time Warner Telecom.

Ownership in Parent Company

WCI and ATC own 28.9 thousand and 14.8 thousand
shares, respectively, of TW Companies common stock. Such
investments are accounted for at historical cost, less the
portion (collectively estimated at 85%) attributable to TW
Companies ownership of the General Partners, which is
deducted from shareholders equity under the caption
Reciprocal interest in TW Companies stock. The TW
Companies common stock owned by the General Partners may only be
sold pursuant to an effective registration statement or in a
transaction exempt from the registration requirements of the
Securities Act of 1933. In addition to TW Companies common
stock, ATC also owns certain TW Companies debt securities. Such
debt securities, which were not significant at either
December 31, 2002 or December 31, 2001, are held by
ATC for the

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


purpose of satisfying its obligations under its
stock options and restricted stock awards subsequent to the
acquisition of the ATC minority interest.

8.     BORROWING
ARRANGEMENTS WITH TW COMPANIES

WCI and ATC each has a revolving credit agreement
with TW Companies, which provides for borrowings from TW
Companies of up to $1 billion. Each credit agreement
expires on December 31, 2008. Interest on any borrowings
under each credit agreement is payable quarterly at the prime
rate. Each of WCIs and ATCs obligation to TW
Companies under the credit agreement is subordinate to the
General Partner Guarantees. At December 31, 2002 and 2001,
there were no borrowings outstanding under these credit
agreements.

9.     GENERAL
PARTNER GUARANTEES

Each General Partner has guaranteed a pro rata
portion of approximately $3.3 billion of TWEs debt
and accrued interest at December 31, 2002, based on the
relative fair value of the net assets each General Partner (or
its predecessor) contributed to TWE. Such indebtedness is
recourse to each General Partner only to the extent of its
guarantee. 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; however, the Indenture permits the General Partners
to engage in mergers and consolidations. There are no
restrictions on the ability of the General Partner guarantors to
transfer assets, other than TWE assets, to parties that are not
guarantors.

The portion of TWE debt and accrued interest at
December 31, 2002 that was guaranteed by each General
Partner, individually and on a consolidated basis for each
General Partner and its subsidiaries, is set forth below:

|                |       |                       |       |        |  |   |       |       | 
|--------------- | ----- | --------------------- | ----- | ------ |  | - | ----- | ----- | 
|                |       |                      
|                |       | Total Guaranteed by  
|                |       | Each General Partner 
|                |       |                      
|General Partner |       | %                     |       | Amount
|                |       |                       |       |       
|                |       |                      
|                |       | (dollars in millions)
|WCI             |       |                       | 59.27 |        |  | $ | 1,950 |      
|ATC             |       |                       | 40.73 |        |  |   | 1,340 |      
|                |       |                       |       |        |  |   |       |      
|                | Total |                       |       | 100.00 |  |   | $     | 3,290 | 
|                |       |                       |       |        |  |   |       |      

10.     INCOME
TAXES

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

|         |  |                          |        |      |  |      |      |     |  |     |        |     |  |   |        |   |  |   |     |  |  |   |     | 
|-------- |  | ------------------------ | ------ | ---- |  | ---- | ---- | --- |  | --- | ------ | --- |  | - | ------ | - |  | - | --- |  |  | - | --- | 
|         |  |                         
|         |  | Years Ended December 31,
|         |  |                         
|         |  |                          |        |      |  |     
|         |  | 2002                     |        | 2001 |  | 2000
|         |  |                          |        |      |  |     
|         |  | WCI                      |        | ATC  |  | WCI  |      | ATC |  | WCI |        | ATC
|         |  |                          |        |      |  |      |      |     |  |     |        |    
|         |  |                         
|         |  | (millions)              
|Domestic |  | $                        | (2,322 | )    |  | $    | (643 | )   |  | $   | (2,830 | )   |  | $ | (1,278 | ) |  | $ | 322 |  |  | $ | 341 | 
|Foreign  |  |                          | 203    |      |  |      | 53   |     |  |     | 197    |     |  |   | 33     |   |  |   | 214 |  |  |   | 65  | 
|         |  |                          |        |      |  |      |      |     |  |     |        |     |  |   |        |   |  |   |     |  |  |   |     | 
|Total    |  | $                        | (2,119 | )    |  | $    | (590 | )   |  | $   | (2,633 | )   |  | $ | (1,245 | ) |  | $ | 536 |  |  | $ | 406 | 
|         |  |                          |        |      |  |      |      |     |  |     |        |     |  |   |        |   |  |   |     |  |  |   |     | 

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Income taxes (benefits) are as set forth
below:

|                |            |                          |     |      |   |      |     |     |   |     |      |      |   |   |      |      |   |   |     |     |   |   |     |    |  
|--------------- | ---------- | ------------------------ | --- | ---- | - | ---- | --- | --- | - | --- | ---- | ---- | - | - | ---- | ---- | - | - | --- | --- | - | - | --- | -- | -
|                |            |                         
|                |            | Years Ended December 31,
|                |            |                         
|                |            |                          |     |      |   |     
|                |            | 2002                     |     | 2001 |   | 2000
|                |            |                          |     |      |   |     
|                |            | WCI                      |     | ATC  |   | WCI  |     | ATC |   | WCI |      | ATC 
|                |            |                          |     |      |   |      |     |     |   |     |      |     
|                |            |                         
|                |            | (millions)              
|Federal         |            |                          |     |      |   |      |     |     |   |     |      |      |   |   |      |      |   |   |     |     |   |   |     |   
|                | Current    |                          | $   | (47  | ) |      | $   | 127 |   |     | $    | (264 | ) |   | $    | (95  | ) |   | $   | 58  |   |   | $   | 93 |  
|                | Deferred   |                          |     | (153 | ) |      |     | (78 | ) |     |      | (164 | ) |   |      | (118 | ) |   |     |     |   |   |     |    |  
|State and Local |            |                          |     |      |   |      |     |     |   |     |      |      |   |   |      |      |   |   |     |     |   |   |     |   
|                | Current    |                          |     | 12   |   |      |     | 40  |   |     |      | (44  | ) |   |      | (16  | ) |   |     | 73  |   |   |     | 41 |  
|                | Deferred   |                          |     | (40  | ) |      |     | (20 | ) |     |      | (43  | ) |   |      | (30  | ) |   |     |     |   |   |     |    |  
|Foreign         |            |                          |     |      |   |      |     |     |   |     |      |      |   |   |      |      |   |   |     |     |   |   |     |   
|                | Current(a) |                          |     | 159  |   |      |     | 55  |   |     |      | 103  |   |   |      | 43   |   |   |     | 165 |   |   |     | 56 |  
|                | Deferred   |                          |     | (11  | ) |      |     | (4  | ) |     |      | 38   |   |   |      | 4    |   |   |     | (6  | ) |   |     | (4 | )
|                |            |                          |     |      |   |      |     |     |   |     |      |      |   |   |      |      |   |   |     |     |   |   |     |   
|Total           |            | $                        | (80 | )    |   | $    | 120 |     |   | $   | (374 | )    |   | $ | (212 | )    |   | $ | 290 |     |   | $ | 186 |   
|                |            |                          |     |      |   |      |     |     |   |     |      |      |   |   |      |      |   |   |     |     |   |   |     |   



---



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

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

|     |  |            |    |     |  |   |    | 
|---- |  | ---------- | -- | --- |  | - | -- | 
|     |  | WCI        |    | ATC
|     |  |            |    |    
|     |  |           
|     |  | (millions)
|2002 |  | $          | 71 |     |  | $ | 32 | 
|2001 |  |            | 63 |     |  |   | 28 | 
|2000 |  |            | 77 |     |  |   | 32 | 

No U.S. income or foreign withholding taxes have
been recorded by WCI on the permanently reinvested earnings of
foreign subsidiaries aggregating approximately $822 million
at December 31, 2002. If such earnings were to be
repatriated, it is expected that any additional U.S. income
tax would be offset by the utilization of the accompanying
foreign tax credits.

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

|                                                                             |  |                          |      |      |  |      |      |   |  |   |     |  
|---------------------------------------------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- | - |  | - | --- | -
|                                                                             |  |                         
|                                                                             |  | Years Ended December 31,
|                                                                             |  |                         
|                                                                             |  | 2002                     |      | 2001 |  | 2000
|                                                                             |  |                          |      |      |  |     
|                                                                             |  |                         
|                                                                             |  | (millions)              
|Taxes on income at U.S. federal statutory rate                               |  | $                        | (723 | )    |  | $    | (922 | ) |  | $ | 188 |  
|Nondeductible expenses                                                       |  |                          | 669  |      |  |      | 529  |   |  |   | 80  |  
|Foreign income taxed at different rates, net of
    U.S. foreign tax credits |  |                          | (18  | )    |  |      | 10   |   |  |   | (17 | )
|State and local taxes, net                                                   |  |                          | (18  | )    |  |      | (29  | ) |  |   | 48  |  
|Other                                                                        |  |                          | 10   |      |  |      | 38   |   |  |   | (9  | )
|                                                                             |  |                          |      |      |  |      |      |   |  |   |     |  
|Total                                                                        |  | $                        | (80  | )    |  | $    | (374 | ) |  | $ | 290 |  
|                                                                             |  |                          |      |      |  |      |      |   |  |   |     |  

The relationship between income taxes and income
before income taxes for the other General Partner is principally
affected by the charge for the impairment of goodwill and
certain other financial statement expenses that are not
deductible for income tax purposes.

As a result of the application of the purchase
method of accounting in 2001, certain intangible assets and
investments accounted for under the equity method of accounting
were significantly adjusted upward to their fair value. Since
the tax basis of these assets remained unchanged as a result of
the Merger, the General

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Partners recognized significant amounts of
deferred tax liabilities, which relate to recorded music
intangibles and equity investments in 2002 and 2001,
respectively.

11.     STOCK OPTION
PLANS

AOL Time Warner has various stock option plans
under which AOL Time Warner may grant options to purchase AOL
Time Warner common stock to employees of AOL Time Warner and
WCI. Such options have been granted to employees of WCI with
exercise prices equal to, or in excess of, fair market value at
the date of grant. Accordingly, in accordance with APB 25 and
related interpretations, compensation cost generally has not
been recognized by AOL Time Warner, nor charged to WCI, related
to such stock option plans. Generally, the options become
exercisable over a three-year vesting period and expire ten
years from the date of grant. Had compensation cost for AOL Time
Warners stock option plans been determined based on the
fair value method set forth under FAS 123, WCIs net income
(loss) would have been changed to the pro forma amounts
indicated below:

|                                                                                                                                                   |  |                          |         |      |  |      |        |   |  |   |     |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------ | - |  | - | --- | -
|                                                                                                                                                   |  |                         
|                                                                                                                                                   |  | Years Ended December 31,
|                                                                                                                                                   |  |                         
|                                                                                                                                                   |  | 2002                     |         | 2001 |  | 2000
|                                                                                                                                                   |  |                          |         |      |  |     
|                                                                                                                                                   |  |                         
|                                                                                                                                                   |  | (millions)              
|Net income (loss), as reported                                                                                                                     |  | $                        | (21,001 | )    |  | $    | (2,259 | ) |  | $ | 44  |  
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards
    net of related tax effects |  |                          | (90     | )    |  |      | (33    | ) |  |   | (41 | )
|                                                                                                                                                   |  |                          |         |      |  |      |        |   |  |   |     |  
|Pro forma net income (loss)                                                                                                                        |  | $                        | (21,091 | )    |  | $    | (2,292 | ) |  | $ | 3   |  
|                                                                                                                                                   |  |                          |         |      |  |      |        |   |  |   |     |  

For purposes of applying FAS 123, the fair value
of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following
weighted-average assumptions (which, for 2000, reflect the
impact of the announced Merger) used for grants to WCI employees
in 2002, 2001 and 2000: dividend yields of 0% for all periods;
expected volatility of 52.9%, 59.3% and 46.3%, respectively;
risk-free interest rates of 4.12%, 4.88% and 6.34%,
respectively; and expected term to exercise of .47 years
after vesting for 2002 and 1.0 years after vesting for 2001 and
2000.

The weighted average fair value of an option
granted to WCI employees was $9.40 ($5.64, net of taxes), $25.89
($15.53, net of taxes) and $27.50 ($16.50, net of taxes) for the
years ended December 31, 2002, 2001 and 2000, respectively.

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


A summary of stock option activity with respect
to employees of WCI is as follows:

|                              |                        |           |        |           |   |   |       |       | 
|----------------------------- | ---------------------- | --------- | ------ | --------- | - | - | ----- | ----- | 
|                              |                        |           |        | Weighted-
|                              |                        |           |        | Average  
|                              |                        | Thousands |        | Exercise 
|                              |                        | of Shares |        | Price    
|                              |                        |           |        |          
|Balance at December 31, 1999. |                        |           | 23,532 |           |   | $ | 17.79 |      
|2000 Activity:                |                        |           |        |           |   |   |       |      
|                              | Granted                |           |        | 2,847     |   |   |       | 56.22 | 
|                              | Exercised              |           |        | (5,017    | ) |   |       | 9.78  | 
|                              | Cancelled/Transfers(a) |           |        | 156       |   |   |       | 21.67 | 
|Balance at December 31, 2000. |                        |           | 21,518 |           |   | $ | 24.77 |      
|2001 Activity:                |                        |           |        |           |   |   |       |      
|                              | Granted(b)             |           |        | 10,258    |   |   |       | 46.86 | 
|                              | Exercised              |           |        | (1,135    | ) |   |       | 13.84 | 
|                              | Cancelled/Transfers(a) |           |        | (3,874    | ) |   |       | 36.80 | 
|Balance at December 31, 2001. |                        |           | 26,767 |           |   | $ | 36.20 |      
|2002 Activity:                |                        |           |        |           |   |   |       |      
|                              | Granted                |           |        | 7,490     |   |   | $     | 24.58 | 
|                              | Exercised              |           |        | (1,341    | ) |   |       | 10.23 | 
|                              | Cancelled/Transfers(a) |           |        | (1,492    | ) |   |       | 40.29 | 
|Balance at December 31, 2002. |                        |           | 31,424 |           |   | $ | 34.35 |      



---



|    |  |                                                                                                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Includes all options cancelled and forfeited
    during the year, as well as options related to employees who
    have been transferred out of and into WCI to and from other AOL
    Time Warner divisions.                      
|   
|(b) |  | In 2001, a special Founders Grant was
    issued to most individuals who were employees of AOL Time Warner
    during the year the Merger was consummated, only a portion of
    which is expected to be recurring in the future.

|            |  |              |        |      |  |      |        |  |  |  |        | 
|----------- |  | ------------ | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|            |  |             
|            |  | December 31,
|            |  |             
|            |  | 2002         |        | 2001 |  | 2000
|            |  |              |        |      |  |     
|            |  |             
|            |  | (thousands) 
|Exercisable |  |              | 17,023 |      |  |      | 15,467 |  |  |  | 19,427 | 

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following table summarizes information about
stock options outstanding with respect to employees of WCI at
December 31, 2002:

|                         |  |                     |        |                     |  |                  |            |                |  |                  |       |  |  |  |        |  |  |   |       | 
|------------------------ |  | ------------------- | ------ | ------------------- |  | ---------------- | ---------- | -------------- |  | ---------------- | ----- |  |  |  | ------ |  |  | - | ----- | 
|                         |  |                     |        |                    
|                         |  | Options Outstanding |        | Options Exercisable
|                         |  |                     |        |                    
|                         |  | Number              |        | Weighted-Average    |  |                  |            | Number         |  | Weighted-       
|                         |  | Outstanding         |        | Remaining           |  | Weighted-Average |            | Exercisable    |  | Average Exercise
|Range of Exercise Prices |  | as of 12/31/02      |        | Contractual Life    |  | Exercise Price   |            | as of 12/31/02 |  | Price           
|                         |  |                     |        |                     |  |                  |            |                |  |                 
|                         |  | (thousands)         |        |                     |  |                  |            | (thousands)    |  |                 
|Under $10                |  |                     | 0      |                     |  |                  | N/A        |                |  |                  | N/A   |  |  |  | 0      |  |  |   | N/A   | 
|$10.00 to $15.00         |  |                     | 5,199  |                     |  |                  | 3.79       |                |  | $                | 12.62 |  |  |  | 4,194  |  |  | $ | 12.53 | 
|$15.01 to $20.00         |  |                     | 1,764  |                     |  |                  | 5.08       |                |  | $                | 16.55 |  |  |  | 1,561  |  |  | $ | 16.35 | 
|$20.01 to $30.00         |  |                     | 7,955  |                     |  |                  | 8.15       |                |  | $                | 25.89 |  |  |  | 1,982  |  |  | $ | 23.65 | 
|$30.01 to $45.00         |  |                     | 4,207  |                     |  |                  | 7.28       |                |  | $                | 37.96 |  |  |  | 2,869  |  |  | $ | 38.38 | 
|$45.01 to $50.00         |  |                     | 9,394  |                     |  |                  | 7.67       |                |  | $                | 48.46 |  |  |  | 4,415  |  |  | $ | 47.89 | 
|$50.01 to $60.00         |  |                     | 2,889  |                     |  |                  | 7.59       |                |  | $                | 56.27 |  |  |  | 1,991  |  |  | $ | 56.62 | 
|$60.01 to $90.00         |  |                     | 16     |                     |  |                  | 7.25       |                |  | $                | 64.00 |  |  |  | 11     |  |  | $ | 64.00 | 
|Total                    |  |                     | 31,424 |                     |  |                  | 6.95 years |                |  | $                | 34.35 |  |  |  | 17,023 |  |  | $ | 32.89 | 

In connection with Time Warners agreement
to merge with America Online entered into in January 2000, all
Time Warner stock options held by WCI employees at that time
became fully vested and exercisable, pursuant to the terms of
Time Warners stock option plans. In addition, on
January 11, 2001, the date the Merger was consummated, each
outstanding equity security of Time Warner was converted into
1.5 units of an equivalent equity security of AOL Time
Warner. See Note 1 for a summary of the terms of the Merger.

12.     BENEFIT
PLANS

WCI and its subsidiaries participate in defined
benefit pension plans covering substantially all domestic
employees. Pension benefits under those plans are based on
formulas that reflect the employees years of service and
compensation levels during their employment period. For the
years ended December 31, 2002, 2001 and 2000, WCI made no
contributions and recognized expense of $16 million,
$7 million and $2 million, respectively, related to
these plans.

Effective January 1, 2000, substantially all
of the WCI-sponsored defined benefit pension plans were merged
into the defined benefit pension plan sponsored by Time Warner
(currently sponsored by AOL Time Warner). The remaining
WCI-sponsored plan relating to its domestic operations is not
material to the consolidated financial statements of WCI.

After the Merger, participation in the defined
benefit pension plan covering domestic employees was limited to
employees who previously participated in these plans. Effective
January 1, 2003, however, the defined benefit plan was
reopened to all eligible employees. In addition to its domestic
employees, employees of WCIs operations in foreign
countries participate to varying degrees in local pension plans,
which in the aggregate are not significant.

Certain domestic employees of WCI also
participate in certain defined contribution plans of AOL Time
Warner, including savings plans and profit sharing plans, as to
which the expense amounted to $6 million in 2002, $5
million in 2001 and $16 million in 2000. Contributions to
the savings plans are based upon a percentage of the
employees elected contributions.

13.     DERIVATIVE
FINANCIAL INSTRUMENTS

WCI uses derivative financial instruments
principally to manage the risk that changes in exchange rates
will affect the amount of unremitted or future royalties and
license fees to be received from the sale of U.S.

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TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


copyrighted products abroad. The following is a
summary of WCIs foreign currency risk management strategy
and the effect of this strategy on WCIs consolidated
financial statements.

Foreign Currency Risk Management

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

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

At December 31, 2002, AOL Time Warner had
contracts for the sale of $1.588 billion and the purchase of
$1.341 billion of foreign currencies at fixed rates. Of AOL
Time Warners $247 million net sale contract position,
$613 million of foreign exchange sale contracts and
$430 million of foreign exchange purchase contracts related
to WCIs foreign currency exposure, including net contracts
for the sale of $90 million of Japanese yen and
$252 million of European currency, and net contracts for
the purchase of $153 million of the British pound. In 2001,
WCI had contracts for the sale of $448 million and purchase
of $400 million of foreign currencies, including net
contracts for the sale of $146 million of Japanese yen, and
net contracts for the purchase of $28 million of European
currency and $62 million of the British pound. WCI had
deferred approximately $2 million of net losses on foreign
exchange contracts at December 31, 2002, which is all
expected to be recognized in income over the next twelve months.
For the years ended December 31, 2002, 2001 and 2000, WCI
recognized $5 million in losses, $19 million in losses
and $7 million in losses, respectively, on foreign exchange
contracts, which were or are expected to be largely offset by
corresponding decreases and increases, respectively, in the
dollar value of foreign currency royalty payments that have been
or are anticipated to be received in cash from the sale of U.S.
copyrighted products abroad. During 2002 and 2001, WCI did not
recognize any gains or losses as the result of the
discontinuance of cash flow hedges because it was probable that
the original forecasted transaction would not occur within the
specified time period.

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##### Table of Contents



TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


14.     GEOGRAPHICAL
INFORMATION

Information as to WCIs operations in
different geographical areas is as follows:

|                    |  |                          |       |      |  |      |       |  |  |   |       | 
|------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                    |  |                         
|                    |  | Years Ended December 31,
|                    |  |                         
|                    |  | 2002                     |       | 2001 |  | 2000
|                    |  |                          |       |      |  |     
|                    |  |                         
|                    |  | (millions)              
|Revenues(a)(b)      |  |                          |       |      |  |      |       |  |  |   |       | 
|United States       |  | $                        | 2,429 |      |  | $    | 2,191 |  |  | $ | 2,341 | 
|United Kingdom      |  |                          | 284   |      |  |      | 306   |  |  |   | 294   | 
|Germany             |  |                          | 340   |      |  |      | 296   |  |  |   | 326   | 
|Japan               |  |                          | 216   |      |  |      | 257   |  |  |   | 295   | 
|France              |  |                          | 156   |      |  |      | 136   |  |  |   | 139   | 
|Other international |  |                          | 780   |      |  |      | 850   |  |  |   | 873   | 
|                    |  |                          |       |      |  |      |       |  |  |   |       | 
|Total               |  | $                        | 4,205 |      |  | $    | 4,036 |  |  | $ | 4,268 | 
|                    |  |                          |       |      |  |      |       |  |  |   |       | 



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Revenues are attributable to countries based on
    location of customer.                                                                                                                                                                                                                                                                                                                                                                              
|   
|(b) |  | Revenues reflect the provisions of EITF 01-09 and
    EITF 01-14 that were adopted by WCI in 2002, which require
    retroactive restatement of 2001 and 2000 results to reflect the
    new accounting provisions. As a result, the net impact of EITF
    01-09 and EITF 01-14 was to increase revenues and costs by equal
    amounts of $107 million for 2001 and (b) reduce
    revenues and costs by an equal amount of $120 million in
    2000.

Because a substantial portion of WCIs
international revenues is derived from the sale of U.S.
copyrighted products abroad, assets located outside the United
States are not material.

15. COMMITMENTS AND
CONTINGENCIES

Commitments

WCIs total rent expense amounted to
$60 million in 2002, $55 million in 2001 and
$59 million in 2000. The minimum net rental commitments of
WCI under noncancellable long-term operating leases are:
2003  $55 million; 2004  $56 million;
2005  $59 million; 2006 
$60 million; 2007  $62 million and after
2007  $58 million.

Each General Partner is jointly and severally
liable for all liabilities, commitments and contingencies of TWE
and the Time Warner Service Partnerships, except for
approximately $3.3 billion of TWEs indebtedness and
accrued interest, which is recourse to each General Partner only
to the extent of its guarantee (Note 9).

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##### Table of Contents



TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following table summarizes separately
WCIs material firm commitments at December 31, 2002
and the timing and effect that such obligations are expected to
have on WCIs liquidity and cash flow in future periods. It
should be noted that there are a number of firm commitments made
by WCI in the normal course of business, the following table
represents the more significant of those firm commitments. WCI
expects to fund these commitments with operating cash flow
generated in the normal course of business.

|                                             |                        |            |     |           |  |            |     |       |  |   |     |     |  |   |     |     | 
|-------------------------------------------- | ---------------------- | ---------- | --- | --------- |  | ---------- | --- | ----- |  | - | --- | --- |  | - | --- | --- | 
|                                             |                        |            |     |           |  | 2007 and   |     |      
|Nature of Firm Commitments                   |                        | 2003       |     | 2004-2006 |  | thereafter |     | Total
|                                             |                        |            |     |           |  |            |     |      
|                                             |                        |           
|                                             |                        | (millions)
|Talent contracts(a)                          |                        | $          | 109 |           |  | $          | 329 |       |  | $ | 109 |     |  | $ | 547 |    
|Net operating leases                         |                        |            | 55  |           |  |            | 175 |       |  |   | 120 |     |  |   | 350 |    
|Letters of credit and other firm commitments |                        |            | 10  |           |  |            | 11  |       |  |   |    |     |  |   | 21  |    
|                                             |                        |            |     |           |  |            |     |       |  |   |     |     |  |   |     |    
|                                             | Total firm commitments |            | $   | 174       |  |            | $   | 515   |  |   | $   | 229 |  |   | $   | 918 | 
|                                             |                        |            |     |           |  |            |     |       |  |   |     |     |  |   |     |    



---



|    |  |                                                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Amount consists primarily of artist advances. Due
    to the unpredictable timing of these payments, estimates were
    made regarding which period the advances would be made in.

Contingencies

WCI is subject to various class action lawsuits
as well as actions that have been brought by various state
attorneys general alleging collusive and other illegal pricing
practices by the major record companies in their capacity as
distributors of compact discs. Although WCI cannot predict the
ultimate outcomes, WCI does not expect that the ultimate
outcomes of these cases will have a material adverse impact on
WCIs financial statements or results of operations.

In addition, on April 8, 2002, three former
employees of certain subsidiaries of the Company 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 named as defendants 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, the Company is unable to predict the outcome of
this suit.

TWE is subject to certain litigation relating to
Six Flags. On June 24, 1997, plaintiffs in Six Flags
Over Georgia LLC et al. v. Time Warner Entertainment Company,
L.P. et al.,filed an amended complaint in the Superior
Court of Gwinnett County, Georgia, claiming that, inter alia,
defendants, which include TWE, violated their fiduciary duties
in operating the Six Flags Over Georgia theme park. On
December 18, 1998, following a trial, a jury returned a
verdict in favor of plaintiffs. The total awarded to plaintiffs
was approximately $454 million in compensatory and punitive
damages. The case was appealed to the Georgia Court of Appeals,
which affirmed the trial courts judgment, and denied
reconsideration. The Supreme Court of Georgia denied certiorari
on January 18, 2001. On February 28, 2001, the
compensatory damages portion of the award plus accrued interest
was paid to plaintiffs. On March 1, 2001, the United States
Supreme Court granted a stay as to payment of the punitive
damages part of the jurys original award, pending the
resolution of a petition for certiorari to be filed by TWE,
which was filed on June 15, 2001. On October 1, 2001,
the United States Supreme Court granted certiorari, vacated the
opinion of the Georgia Court of Appeals and remanded the case
for further consideration as to punitive damages. On
March 29, 2002, the Georgia Court of Appeals affirmed and
reinstated its earlier decision regarding the punitive damage
award. On April 18, 2002, TWE filed a petition for
certiorari to the Georgia Supreme Court seeking review of the
decision of the Georgia Court of Appeals, which was denied on
September 16, 2002. The Georgia Supreme Court subsequently
denied TWEs motion for reconsideration of its
September 16th ruling. Plaintiffs have agreed not to pursue

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##### Table of Contents



TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


payment of the punitive damages award and accrued
interest until the resolution of TWEs petition for writ of
certiorari to the United States Supreme Court, which TWE filed
on December 23, 2002. The petition is pending.

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.

16.     RELATED PARTY
TRANSACTIONS

In the normal course of conducting their
businesses, the General Partners have had various transactions
with AOL Time Warner, TW Companies and TWE units, generally on
terms resulting from a negotiation between the affected units
that in managements view results in reasonable
allocations. Employees of WCI participate in various AOL Time
Warner medical, stock option and other benefit plans for which
WCI is charged its allocable share of plan expenses, including
administrative costs. ATC does not have a significant number of
employees. AOL Time Warners corporate group provides
various other services to WCI. The consolidated financial
statements of the General Partners include transactions with AOL
Time Warner relating to domestic income taxes or tax benefits
(Note 10). The Music division of WCI provides home
videocassette distribution services to certain TWE operations.

TW Companies had a credit agreement with TWE
allowing it to borrow up to $400 million from TWE through
September 15, 2000.

WCI earned interest income at a rate of 6.7% from
TW Companies on a $610 million note receivable, which was
received in December 1997 in exchange for WCIs common
stock of Hasbro. During 2000, WCIs note receivable from TW
Companies, including accrued interest, was settled through a WCI
non-cash dividend in the amount of $695 million. In
addition, WCI has had transactions with the Columbia House
Company partnership and other music joint ventures and with
equity investees of AOL Time Warner, generally with respect to
sales of product in the ordinary course of business.

17. OTHER FINANCING
ARRANGEMENTS

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



| |                                                
| | -----------------------------------------------
| | Accounts Receivable Securitization
    Facility

WCI participates in one of AOL Time Warners
accounts receivable securitization facilities, which provides
for the accelerated receipt of approximately $450 million
of cash, in the aggregate, on available accounts receivables,
all of which was utilized as of December 31, 2002. In
connection with this securitization facility, WCI sells, on a
revolving and nonrecourse basis, certain of its accounts
receivables (Pooled Receivables) to a qualifying
SPE, which in turn sells a percentage ownership interest in the
Pooled Receivables to third-party commercial paper conduits
sponsored by financial institutions. These securitization
transactions are accounted for as a sale in accordance
FAS 140, because WCI relinquished control of the

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##### Table of Contents



TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


receivables. Accordingly, accounts receivable
sold under these facilities are excluded from receivables in the
accompanying consolidated balance sheet.

As proceeds for the accounts receivable sold to
the qualifying SPE, AOL Time Warner and WCI receive cash, for
which there is no obligation to repay, and an interest-bearing
note receivable, which is included in receivables on the
accompanying consolidated balance sheet. In addition, AOL Time
Warner and WCI service the Pooled Receivables on behalf of the
qualifying SPE. Income received by AOL Time Warner and WCI in
exchange for this service is equal to the prevailing market rate
for such services and has not been material in any period. The
notes receivable, which have been adjusted to reflect the
portion that is not expected to be collectible, bear an interest
rate that varies with the prevailing market interest rates. For
this reason and because the accounts receivables underlying the
retained ownership interest that are sold to the qualifying SPE
are generally short term in nature, the fair value of the notes
receivable approximated their carrying value at both
December 31, 2002 and December 31, 2001. However,
notes receivable may become uncollectible to the extent the
qualifying SPE has credit losses and operating expenses. The
notes receivable related to the sale of Pooled Receivables to a
qualifying SPE reflected on WCIs consolidated balance
sheet were $146 million at December 31, 2002 and
$296 million at December 31, 2001.

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

Cash Flows

Additional financial information with respect to
cash payments and receipts is as follows:

|                                              |  |                          |      |      |  |      |     |     |  |     |      |     |  |   |      |   |  |   |     |  |  |   |     | 
|--------------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | --- | --- |  | --- | ---- | --- |  | - | ---- | - |  | - | --- |  |  | - | --- | 
|                                              |  |                         
|                                              |  | Years Ended December 31,
|                                              |  |                         
|                                              |  |                          |      |      |  |     
|                                              |  | 2002                     |      | 2001 |  | 2000
|                                              |  |                          |      |      |  |     
|                                              |  | WCI                      |      | ATC  |  | WCI  |     | ATC |  | WCI |      | ATC
|                                              |  |                          |      |      |  |      |     |     |  |     |      |    
|                                              |  |                         
|                                              |  | (millions)              
|Cash payments made for interest, net          |  | $                        | 34   |      |  | $    |    |     |  | $   | 10   |     |  | $ |     |   |  | $ | 11  |  |  | $ |    | 
|Cash payments (refunds) for income taxes, net |  |                          | (189 | )    |  |      | 72  |     |  |     | (225 | )   |  |   | (111 | ) |  |   | 73  |  |  |   | 122 | 
|Tax related distributions received from TWE   |  |                          | 280  |      |  |      | 193 |     |  |     | 31   |     |  |   | 22   |   |  |   | 453 |  |  |   | 312 | 
|Non-cash capital distributions, net           |  |                          | 245  |      |  |      | 168 |     |  |     |     |     |  |   |     |   |  |   | 221 |  |  |   | 152 | 

Non-cash financing activities in 2002 include the
settlement of a WCI receivable from TW Companies through a WCI
dividend of $360 million. Noncash investing activities in
2002 include the exchange of 20% of WCIs interest in Word
to Curb Records for noncash consideration of equal value.

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##### Table of Contents



TWE GENERAL PARTNERS


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Interest Expense, Net

Interest expense, net, consists of:

|                 |                             |                          |     |      |   |      |   |     |  |     |     |     |   |   |    |    |   |   |     |    |   |   |    |    |  
|---------------- | --------------------------- | ------------------------ | --- | ---- | - | ---- | - | --- |  | --- | --- | --- | - | - | -- | -- | - | - | --- | -- | - | - | -- | -- | -
|                 |                             |                         
|                 |                             | Years Ended December 31,
|                 |                             |                         
|                 |                             |                          |     |      |   |     
|                 |                             | 2002                     |     | 2001 |   | 2000
|                 |                             |                          |     |      |   |     
|                 |                             | WCI                      |     | ATC  |   | WCI  |   | ATC |  | WCI |     | ATC
|                 |                             |                          |     |      |   |      |   |     |  |     |     |    
|                 |                             |                         
|                 |                             | (millions)              
|Interest income  |                             | $                        | 7   |      |   | $    |  |     |  | $   | 9   |     |   | $ |   |    |   | $ | 8   |    |   | $ |   |   
|Interest expense |                             |                          | (66 | )    |   |      |  |     |  |     | (34 | )   |   |   | (1 | )  |   |   | (11 | )  |   |   | (1 | ) 
|                 |                             |                          |     |      |   |      |   |     |  |     |     |     |   |   |    |    |   |   |     |    |   |   |    |   
|                 | Total interest expense, net |                          | $   | (59  | ) |      | $ |    |  |     | $   | (25 | ) |   | $  | (1 | ) |   | $   | (3 | ) |   | $  | (1 | )
|                 |                             |                          |     |      |   |      |   |     |  |     |     |     |   |   |    |    |   |   |     |    |   |   |    |   

Other Income (Expense), Net

Other income (expense), net, consists of:

|                                   |                                   |                          |      |      |   |      |      |      |   |     |      |        |   |   |      |      |   |   |      |      |   |   |    |    | 
|---------------------------------- | --------------------------------- | ------------------------ | ---- | ---- | - | ---- | ---- | ---- | - | --- | ---- | ------ | - | - | ---- | ---- | - | - | ---- | ---- | - | - | -- | -- | 
|                                   |                                   |                         
|                                   |                                   | Years Ended December 31,
|                                   |                                   |                         
|                                   |                                   |                          |      |      |   |     
|                                   |                                   | 2002                     |      | 2001 |   | 2000
|                                   |                                   |                          |      |      |   |     
|                                   |                                   | WCI                      |      | ATC  |   | WCI  |      | ATC  |   | WCI |      | ATC   
|                                   |                                   |                          |      |      |   |      |      |      |   |     |      |       
|                                   |                                   |                         
|                                   |                                   | (millions)              
|Net investment losses(a)           |                                   | $                        | (446 | )    |   | $    | (244 | )    |   | $   | (676 | )      |   | $ | (372 | )    |   | $ | (108 | )    |   | $ |   |   
|Gains (losses) on equity investees |                                   |                          | 144  |      |   |      | 7    |      |   |     | (418 | )      |   |   | (196 | )    |   |   | (32  | )    |   |   | 36 |   
|Securitization income (expense)    |                                   |                          | (3   | )    |   |      |     |      |   |     | (12  | )      |   |   |     |      |   |   | (43  | )    |   |   |   |   
|Other                              |                                   |                          | (3   | )    |   |      |     |      |   |     | 18   |        |   |   |     |      |   |   | (5   | )    |   |   |   |   
|                                   |                                   |                          |      |      |   |      |      |      |   |     |      |        |   |   |      |      |   |   |      |      |   |   |    |   
|                                   | Total other income (expense), net |                          | $    | (308 | ) |      | $    | (237 | ) |     | $    | (1,088 | ) |   | $    | (568 | ) |   | $    | (188 | ) |   | $  | 36 | 
|                                   |                                   |                          |      |      |   |      |      |      |   |     |      |        |   |   |      |      |   |   |      |      |   |   |    |   



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Includes a non-cash pretax charge for WCI and ATC
    to reduce the carrying value of certain investments for
    other-than-temporary declines in value of approximately
    $446 million and $244 million, respectively, for the
    year ended December 31, 2002, approximately
    $676 million and $372 million, respectively, for the
    year ended December 31, 2001 and $108 million and $0
    for the year ended December 31, 2000 (Note 7).

Other Current Liabilities

Other current liabilities of WCI consist of:

|                     |       |              |     |      |  |   |     |     | 
|-------------------- | ----- | ------------ | --- | ---- |  | - | --- | --- | 
|                     |       |             
|                     |       | December 31,
|                     |       |             
|                     |       | 2002         |     | 2001
|                     |       |              |     |     
|                     |       |             
|                     |       | (millions)  
|Accrued expenses     |       | $            | 321 |      |  | $ | 683 |    
|Accrued compensation |       |              | 128 |      |  |   | 169 |    
|Accrued income taxes |       |              | 22  |      |  |   |    |    
|Deferred revenues    |       |              | 51  |      |  |   | 42  |    
|                     |       |              |     |      |  |   |     |    
|                     | Total |              | $   | 522  |  |   | $   | 894 | 
|                     |       |              |     |      |  |   |     |    

F-140



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

The Board of Directors of

Warner Communications Inc.


American Television and Communications
Corporation


We have audited the accompanying consolidated
balance sheets of Warner Communications Inc. (WCI)
and American Television and Communications Corporation
(ATC), as of December 31, 2002 and 2001, and
the related consolidated statements of operations,
shareholders equity and cash flows for each of the three
years in the period ended December 31, 2002. Our audits
also included the accompanying financial statement schedule
listed in the index at Item 15 (a). These financial
statements and schedule are the responsibility of management.
Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of WCI and ATC at
December 31, 2002 and 2001, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Note 1 to the consolidated
financial statements, in 2000 Time Warner Inc. and Time Warner
Entertainment Company, L.P. (TWE) each changed their
film accounting method, and in 2002 WCI, ATC, AOLTW Inc. and TWE
changed their method of accounting for goodwill and intangibles.



| |                  
| | -----------------
| | ERNST & YOUNG LLP

New York, New York

January 29, 2003


F-141



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TWE GENERAL PARTNERS

SELECTED FINANCIAL INFORMATION


WCI Selected Historical Financial
Information

Selected historical financial information is not
presented for ATC because ATC has no independent business
operations, nor does it have significant amounts of debt or
other liabilities. The financial position and results of
operations of ATC are principally derived from its investments
in TWE, TW Companies, Turner Broadcasting System, Inc. and Time
Warner Telecom and its revolving credit agreement with TW
Companies.

The selected historical financial information of
WCI set forth below has been derived from and should be read in
conjunction with the consolidated financial statements and other
financial information of WCI presented elsewhere herein.
Capitalized terms are as defined and described in such
consolidated financial statements, or elsewhere herein.

The selected historical financial information for
1997 reflects the merger of two former General Partners, Warner
Cable Communications Inc., (WCCI) and Time Warner
Operations Inc. (TWOI), into WCI (the WCCI
Merger and the TWOI Merger, respectively). The
WCCI Merger had no effect on the consolidated financial
statements of WCI because WCCI was a consolidated subsidiary of
WCI prior to the merger and, as such, WCCIs net assets,
operating results and cash flows were already included in the
consolidated financial statements of WCI. The TWOI Merger was
accounted for as a merger of entities under common control,
similar to the pooling-of-interest method of accounting for
business combinations.

Selected Operating Statement
Information

|                                                                                       |  |                          |         |      |  |      |        |      |  |      |       |   |  |   |       |  |  |   |       |  
|-------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ----- | - |  | - | ----- |  |  | - | ----- | -
|                                                                                       |  |                         
|                                                                                       |  | Years Ended December 31,
|                                                                                       |  |                         
|                                                                                       |  | 2002                     |         | 2001 |  | 2000 |        | 1999 |  | 1998
|                                                                                       |  |                          |         |      |  |      |        |      |  |     
|                                                                                       |  |                         
|                                                                                       |  | (millions)              
|Revenues(a)                                                                            |  | $                        | 4,205   |      |  | $    | 4,036  |      |  | $    | 4,268 |   |  | $ | 4,052 |  |  | $ | 4,236 |  
|Operating income (loss)(b)                                                             |  |                          | (1,325  | )    |  |      | (551   | )    |  |      | 188   |   |  |   | 169   |  |  |   | 185   |  
|Equity in pretax income (loss) of
    TWE(c) (d)                                       |  |                          | (427    | )    |  |      | (969   | )    |  |      | 539   |   |  |   | 1,724 |  |  |   | 248   |  
|Interest income (expense), net                                                         |  |                          | (59     | )    |  |      | (25    | )    |  |      | (3    | ) |  |   | 73    |  |  |   | 68    |  
|Other income (expense), net(e)                                                         |  |                          | (308    | )    |  |      | (1,088 | )    |  |      | (188  | ) |  |   | 80    |  |  |   | (22   | )
|Income (loss) before cumulative effect of
    accounting change and extraordinary item |  |                          | (2,039  | )    |  |      | (2,259 | )    |  |      | 246   |   |  |   | 1,207 |  |  |   | 218   |  
|Net income (loss)                                                                      |  |                          | (21,001 | )    |  |      | (2,259 | )    |  |      | 44    |   |  |   | 1,207 |  |  |   | 218   |  



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Revenues reflect the provisions of EITF 01-09 and
    01-14, which were adopted in the first quarter of 2002. As a
    result of applying the guidance of EITF 01-14 and 01-09,
    revenues were increased by $107 million in 2001,
    $120 million in 2000, $119 million in 1999 and
    $124 million in 1998. Revenues also reflect the provisions
    of SAB 101, which was adopted in the fourth quarter of
    2000. The impact of SAB 101 was to increase revenues and
    costs by equal amounts of $135 million in 2000,
    $99 million in 1999 and $87 million in 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(b) |  | Includes merger-related costs of approximately
    $8 million in 2002, $37 million in 2001 and
    $18 million in 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(c) |  | Includes an approximate $1.572 billion
    non-cash pretax charge in 2002 representing WCIs share of
    TWEs goodwill and other intangible assets impairment
    charge.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(d) |  | Includes approximately $14 million in 2000,
    $1.402 billion in 1999 and $(53) million in 1998, relating
    to WCIs proportionate share of net gains (losses)
    recognized by TWE in connection with the sale or exchange of
    cable television systems and other investment-related assets in
    1999 and 1998, a pretax charge of $50 million recognized in
    2000 in connection with the Six Flags litigation, pretax gains
    of $10 million recognized in 2000, $40 million
    recognized in 1999 and $30 million recognized in 1998
    related to the partial recognition of a deferred gain in
    connection with the 1998 sale of Six Flags, a pretax gain of
    approximately $215 million in connection with the early
    termination and settlement of a long-term, home video
    distribution agreement in 1999, a pretax gain of approximately
    $97 million in 1999 and $65 million in 2000,
    principally relating to the 1999 sale of an interest in
    CanalSatellite and a pretax noncash charge of approximately
    $106 million relating to Warner Bros. retail stores.
|   
|(e) |  | Includes an approximate $446 million and
    $676 million non-cash pretax charge in 2002 and 2001,
    respectively to reduce the carrying value of certain investments
    that experienced other-than-temporary declines in market value,
    a $115 million non-cash pretax charge in 2000 to reduce the
    carrying value of WCIs investment in Columbia House to an
    estimate of fair value, an approximate $53 million pretax
    gain in 1999 relating to the Time Warner Telecom IPO and a
    $437 million pretax gain in connection with the disposal of
    WCIs interest in Hasbro in 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-142



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##### Table of Contents



TWE GENERAL PARTNERS


SELECTED FINANCIAL INFORMATION 
(Continued)


Selected Balance Sheet Information

|                     |  |              |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|-------------------- |  | ------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                     |  |             
|                     |  | December 31,
|                     |  |             
|                     |  | 2002         |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                     |  |              |        |      |  |      |        |      |  |     
|                     |  |             
|                     |  | (millions)  
|Total assets         |  | $            | 30,224 |      |  | $    | 61,823 |      |  | $    | 11,046 |  |  | $ | 11,481 |  |  | $ | 10,348 | 
|Shareholders equity |  |              | 25,991 |      |  |      | 57,424 |      |  |      | 8,776  |  |  |   | 8,737  |  |  |   | 7,701  | 

F-143



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##### Table of Contents



TWE GENERAL PARTNERS




SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS OF WCI


Years Ended December 31, 2002, 2001 and
2000


|                                            |                                           |            |   |            |     |            |   |            |     |  |   |      |      |   |   |     |     | 
|------------------------------------------- | ----------------------------------------- | ---------- | - | ---------- | --- | ---------- | - | ---------- | --- |  | - | ---- | ---- | - | - | --- | --- | 
|                                            |                                           |            |   | Additions  |     |            |   |           
|                                            |                                           | Balance at |   | Charged to |     |            |   | Balance at
|                                            |                                           | Beginning  |   | Costs and  |     |            |   | End of    
|Description                                 |                                           | of Period  |   | Expenses   |     | Deductions |   | Period    
|                                            |                                           |            |   |            |     |            |   |           
|                                            |                                           |           
|                                            |                                           | (millions)
|2002:                                       |                                           |            |   |            |     |            |   |            |     |  |   |      |      |   |   |    
|Reserves deducted from accounts receivable: |                                           |            |   |            |     |            |   |            |     |  |   |      |      |   |   |    
|                                            | Allowance for doubtful accounts           |            | $ | 106        |     |            | $ | 17         |     |  | $ | (46  | )(a) |   | $ | 77  |    
|                                            | Reserves for sales returns and allowances |            |   | 249        |     |            |   | 520        |     |  |   | (552 | )(b) |   |   | 217 |    
|                                            |                                           |            |   |            |     |            |   |            |     |  |   |      |      |   |   |    
|                                            |                                           | Total      |   | $          | 355 |            |   | $          | 537 |  |   | $    | (598 | ) |   | $   | 294 | 
|                                            |                                           |            |   |            |     |            |   |            |     |  |   |      |      |   |   |    
|2001:                                       |                                           |            |   |            |     |            |   |            |     |  |   |      |      |   |   |    
|Reserves deducted from accounts receivable: |                                           |            |   |            |     |            |   |            |     |  |   |      |      |   |   |    
|                                            | Allowance for doubtful accounts           |            | $ | 50         |     |            | $ | 60         |     |  | $ | (4   | )(a) |   | $ | 106 |    
|                                            | Reserves for sales returns and allowances |            |   | 217        |     |            |   | 596        |     |  |   | (564 | )(b) |   |   | 249 |    
|                                            |                                           |            |   |            |     |            |   |            |     |  |   |      |      |   |   |    
|                                            |                                           | Total      |   | $          | 267 |            |   | $          | 656 |  |   | $    | (568 | ) |   | $   | 355 | 
|                                            |                                           |            |   |            |     |            |   |            |     |  |   |      |      |   |   |    
|2000:                                       |                                           |            |   |            |     |            |   |            |     |  |   |      |      |   |   |    
|Reserves deducted from accounts receivable: |                                           |            |   |            |     |            |   |            |     |  |   |      |      |   |   |    
|                                            | Allowance for doubtful accounts           |            | $ | 68         |     |            | $ |           |     |  | $ | (18  | )(a) |   | $ | 50  |    
|                                            | Reserves for sales returns and allowances |            |   | 222        |     |            |   | 550        |     |  |   | (555 | )(b) |   |   | 217 |    
|                                            |                                           |            |   |            |     |            |   |            |     |  |   |      |      |   |   |    
|                                            |                                           | Total      |   | $          | 290 |            |   | $          | 550 |  |   | $    | (573 | ) |   | $   | 267 | 
|                                            |                                           |            |   |            |     |            |   |            |     |  |   |      |      |   |   |    



---



|    |                                                                      
|--- | ---------------------------------------------------------------------
|(a) | Represents uncollectible receivables charged
    against the reserve.
|   
|(b) | Represents returns or allowances applied against
    the reserve.    

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##### Table of Contents



EXHIBIT INDEX

|        |   |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |   | 
|------- | - | ------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | - | 
|        |   |              |  | Sequential                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Exhibit |   |              |  | Page                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Number  |   | Description  |  | Number                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |   |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 2 | .0           |  | Restructuring Agreement dated as of
    August 20, 2002 by and among Time Warner Entertainment
    Company, L.P. (TWE), AT&T Corp.
    (AT&T), MediaOne of Colorado, Inc.
    (MediaOne), MediaOne TWE Holdings, Inc.
    (Holdings), Comcast Corporation, AT&T Comcast
    Corporation, AOL Time Warner Inc. (AOLTW), TWI Cable
    Inc., Warner Communications Inc. (WCI), and American
    Television and Communications Corporation (ATC) (the
    Restructuring Agreement) (File No. 1-15062)
    (incorporated herein by reference to Exhibit 99.1 to the
    AOLTW Current Report on Form 8-K dated August 21,
    2002).                                              |  |  | * | 
|        | 3 | .1           |  | Agreement of Limited Partnership, dated as of
    October 29, 1991, as amended by the Letter Agreement, dated
    February 11, 1992, and the Letter Agreement dated
    June 23, 1992, among Time Warner Companies, Inc.
    (TWCI) and certain of its subsidiaries, ITOCHU
    Corporation (Itochu) and Toshiba Corporation
    (Toshiba) (the TWE Partnership Agreement, as
    amended) (incorporated herein by reference to
    Exhibit (A) to TWCIs Current Report on Form 8-K
    dated October 29, 1991 (File No. 1-8637) and
    Exhibits 10(b) and 10(c) to TWCIs Current Report on
    Form 8-K dated July 14, 1992 (File No. 1-8637)
    (TWCIs July 1992 Form 8-K)). |  |  | * | 
|        | 3 | .2           |  | Amendment Agreement, dated as of
    September 14, 1993, among Itochu, Toshiba, TWCI, US WEST,
    Inc. and certain of their respective subsidiaries amending the
    TWE Partnership Agreement, as amended (incorporated herein by
    reference to Exhibit 3.2 to the TWE Annual Report on
    Form 10-K for the year ended December 31, 1993 (the
    TWE 1993 Form 10-K)).                                                                                                                                                                                                                                                                                                              |  |  | * | 
|        | 3 | .3(i)and(ii) |  | Certificate of Incorporation and By-Laws of
    American Television and Communications Corporation, as amended
    (incorporated herein by reference to Exhibits 3.3(i) and
    (ii) to the TWE 1993 Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |  | * | 
|        | 3 | .3(iii)      |  | Certificate of Ownership and Merger of American
    Digital Communications, Inc. into ATC as filed with the
    Secretary of State of the State of Delaware on May 31, 1996
    (incorporated herein by reference to Exhibit 3.3(iii) to
    TWEs Annual Report on Form 10-K for the year ended
    December 31, 1996 (the TWE 1996
    Form 10-K)).                                                                                                                                                                                                                                                                                                                                       |  |  | * | 
|        | 3 | .3(iv)       |  | Certificate of Ownership and Merger of Carolina
    Network Corporation into ATC as filed with the Secretary of
    State of the State of Delaware on May 31, 1996
    (incorporated herein by reference to Exhibit 3.3(iv) to the
    TWE 1996 Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  | * | 
|        | 3 | .3(v)        |  | Certificate of Ownership and Merger of ATC
    Holdings II, Inc. into ATC as filed with the Secretary of
    State of the State of Delaware on June 28, 1996
    (incorporated herein by reference to Exhibit 3.3(v) to the
    TWE 1996 Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  | * | 
|        | 3 | .3(vi)       |  | Certificate of Ownership and Merger of
    ARP 113, Inc. into ATC as filed with the Secretary of State
    of the State of Delaware on August 29, 1997 (incorporated
    herein by reference to Exhibit 3.3(vi) to TWEs Annual
    Report on Form 10-K for the year ended December 31,
    1997 (the TWE 1997 Form 10-K)).                                                                                                                                                                                                                                                                                                                                                                 |  |  | * | 
|        | 3 | .3(vii)      |  | Certificate of Ownership and Merger of
    Philadelphia Community Antenna Television Company into ATC as
    filed with the Secretary of State of the State of Delaware on
    August 29, 1997 (incorporated herein by reference to
    Exhibit 3.3(vii) to the TWE 1997 Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                                          |  |  | * | 
|        | 3 | .3(viii)     |  | Certificate of Ownership and Merger of Public
    Cable Company into ATC as filed with the Secretary of State of
    the State of Delaware on August 29, 1997 (incorporated
    herein by reference to Exhibit 3.3(viii) to the TWE 1997
    Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  | * | 
|        | 3 | .3(ix)       |  | Certificate of Ownership and Merger of ATC-PPV,
    Inc. into ATC as filed with the Secretary of State of the State
    of Delaware on October 7, 1998 (incorporated herein by
    reference to Exhibit 3.3(ix) to TWEs Annual Report on
    Form 10-K for the year ended December 31, 1998).                                                                                                                                                                                                                                                                                                                                                                                                |  |  | * | 

i



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##### Table of Contents



|        |    |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |   | 
|------- | -- | ------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | - | 
|        |    |              |  | Sequential                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Exhibit |    |              |  | Page                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Number  |    | Description  |  | Number                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |    |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 3  | .4(i)and(ii) |  | Amended and Restated Certificate of
    Incorporation, as amended, and By-Laws of WCI.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |   | 
|        | 4  | .1           |  | Indenture, dated as of April 30, 1992, as
    amended by the First Supplemental Indenture, dated as of
    June 30, 1992, among TWE, TWCI, certain of TWCIs
    subsidiaries that are parties thereto and The Bank of New York
    (BONY), as Trustee (incorporated herein by reference
    to Exhibits 10(g) and 10(h) to TWCIs July 1992
    Form 8-K).                                                                                                                                                                                                                                                                                                                                                                        |  |  | * | 
|        | 4  | .2           |  | Second Supplemental Indenture, dated as of
    December 9, 1992, among TWE, TWCI, certain of TWCIs
    subsidiaries that are parties thereto and BONY, as Trustee
    (incorporated herein by reference to Exhibit 4.2 to
    Amendment No. 1 to TWEs Registration Statement on
    Form S-4 (Registration No. 33-67688) filed with the
    Commission on October 25, 1993 (the TWE 1993
    Form S-4)).                                                                                                                                                                                                                                                                                                                         |  |  | * | 
|        | 4  | .3           |  | Third Supplemental Indenture, dated as of
    October 12, 1993, among TWE, TWCI, certain of TWCIs
    subsidiaries that are parties thereto and BONY, as Trustee
    (incorporated herein by reference to Exhibit 4.3 to the TWE
    1993 Form S-4).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  | * | 
|        | 4  | .4           |  | Fourth Supplemental Indenture, dated as of
    March 29, 1994, among TWE, TWCI, certain of TWCIs
    subsidiaries that are parties thereto and BONY, as Trustee
    (incorporated herein by reference to Exhibit 4.4 to the TWE
    1993 Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  | * | 
|        | 4  | .5           |  | Fifth Supplemental Indenture, dated as of
    December 28, 1994, among TWE, TWCI, certain of TWCIs
    subsidiaries that are parties thereto and BONY, as Trustee
    (incorporated herein by reference to Exhibit 4.5 to
    TWEs Annual Report on Form 10-K for the year ended
    December 31, 1994).                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  | * | 
|        | 4  | .6           |  | Sixth Supplemental Indenture, dated as of
    September 29, 1997, among TWE, TWCI, certain of TWCIs
    subsidiaries that are parties thereto and BONY, as Trustee
    (incorporated herein by reference to Exhibit 4.7 to Time
    Warner Inc.s (Time Warner) Annual Report on
    Form 10-K for the year ended December 31, 1997 (File
    No. 1-12259) (the Time Warner 1997
    Form 10-K)).                                                                                                                                                                                                                                                                                                                               |  |  | * | 
|        | 4  | .7           |  | Seventh Supplemental Indenture dated as of
    December 29, 1997, among TWE, TWCI, certain of TWCIs
    subsidiaries that are parties thereto and BONY, as Trustee
    (incorporated herein by reference to Exhibit 4.8 to the
    Time Warner 1997 Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |  | * | 
|        | 10 | .1           |  | $6 Billion Five-Year Revolving Credit
    Agreement, dated as of July 8, 2002, among AOLTW, TWE, Time
    Warner Entertainment-Advance/Newhouse Partnership (TWE-A/N
    Partnership), AOL Time Warner Finance Ireland, as
    Borrowers, the Lenders party thereto from time to time, JPMorgan
    Chase Bank (JPMorgan Chase Bank), as Administrative
    Agent, Bank of America, N.A. and Citibank, N.A., as
    Co-Syndication Agents, and ABN AMRO Bank N.V. and BNP Paribas,
    as Co-Documentation Agents, with associated Guarantees
    (incorporated herein by reference to Exhibit 99.1 to the
    AOLTW Current Report on Form 8-K dated July 8, 2002
    (File No. 1-15062) (the AOLTW July 2002
    Form 8-K)). |  |  | * | 
|        | 10 | .2           |  | $4 Billion 364-Day Revolving Credit
    Agreement, dated as of July 8, 2002, among AOLTW, TWE,
    TWE-A/N Partnership, AOL Time Warner Finance Ireland, as
    Borrowers, the Lenders party thereto from time to time, JPMorgan
    Chase Bank, as Administrative Agent, Bank of America, N.A. and
    Citibank, N.A. as Co-Syndication Agents, and ABN AMRO Bank N.V.
    and BNP Paribas, as Co-Documentation Agents, with associated
    Guarantees (incorporated herein by reference to
    Exhibit 99.2 to the AOLTW July 2002 Form 8-K).                                                                                                                                                                                      |  |  | * | 

ii



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |   | 
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | - | 
|        |    |             |  | Sequential                                                                                                                                                                                                                                                                                                                                                                                                      
|Exhibit |    |             |  | Page                                                                                                                                                                                                                                                                                                                                                                                                            
|Number  |    | Description |  | Number                                                                                                                                                                                                                                                                                                                                                                                                          
|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .3          |  | Contribution Agreement, dated as of
    September 9, 1994, among TWE, Advance Publications, Inc.,
    (Advance Publications), Newhouse Broadcasting
    Corporation (Newhouse Broadcasting),
    Advance/Newhouse Partnership (Advance/Newhouse) and
    TWE-A/N Partnership (incorporated herein by reference to
    Exhibit 10(a) to TWEs Current Report on Form 8-K
    dated September 9, 1994).      |  |  | * | 
|        | 10 | .4          |  | Amended and Restated Partnership Agreement of
    TWE-A/N Partnership entered into as of February 1, 2001 by
    and between TWE, Advance/Newhouse and Paragon Communications
    (Paragon) (incorporated herein by reference to
    Exhibit 10.46 to AOL Time Warner Inc.s Transition
    Report on Form 10-K for the year ended December 31,
    2000 (File No. 1-15062) (the AOLTW 2000
    Form 10-K)). |  |  | * | 
|        | 10 | .5          |  | First Amendment to the Amended and Restated
    Partnership Agreement of TWE-A/N Partnership dated as of
    March 1, 2001 among TWE, Advance/Newhouse and Paragon
    (incorporated herein by reference to Exhibit 10.47 to the
    AOLTW 2000 Form 10-K).                                                                                                                                                      |  |  | * | 
|        | 10 | .6          |  | Seconded Amended and Restated Partnership
    Agreement, dated as of August 1, 2002, by and among TWE-A/N
    Partnership, TWE, Paragon and Advance/Newhouse (incorporated
    herein by reference to Exhibit 10.52 to the AOL Time Warner
    Inc. Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2002 (File No. 1-15062) (the AOLTW June
    2002 Form 10-Q)).                             |  |  | * | 
|        | 10 | .7          |  | Third Amended and Restated Partnership Agreement
    of TWE-A/N Partnership dated as of December 31, 2002 among
    TWE, Paragon and Advance/Newhouse (incorporated herein by
    reference to Exhibit 99.1 to the AOLTW Current Report on
    Form 8-K dated December 31, 2002 (File
    No. 1-15062) (the AOLTW December 2002
    Form 8-K)).                                                                |  |  | * | 
|        | 10 | .8          |  | Amended and Restated Transaction Agreement, dated
    as of October 27, 1997 among Advance Publications, Newhouse
    Broadcasting, Advance/Newhouse, TW Holding Co. and TWE-A/N
    Partnership (incorporated herein by reference to
    Exhibit 99(c) to Time Warners Current Report on
    Form 8-K dated October 27, 1997 (File
    No. 1-12259)).                                                          |  |  | * | 
|        | 10 | .9          |  | Transaction Agreement No. 2 dated as of
    June 23, 1998 among Advance Publications, Newhouse
    Broadcasting, Advance/Newhouse, TWE, Paragon and TWE-AN
    Partnership (incorporated herein by reference to
    Exhibit 10.38 to Time Warners Annual Report on 1998
    Form 10-K (File No. 1-12259) (the Time Warner
    1998 Form 10-K)).                                                               |  |  | * | 
|        | 10 | .10         |  | Transaction Agreement No. 3 dated as of
    September 15, 1998 among Advance Publications, Newhouse
    Broadcasting, Advance/Newhouse, TWE, Paragon and TWE-AN
    Partnership (incorporated herein by reference to
    Exhibit 10.39 to the Time Warner 1998 Form 10-K).                                                                                                                                       |  |  | * | 
|        | 10 | .11         |  | Amended and Restated Transaction No. 4
    Agreement dated as of February 1, 2001 among Advance
    Publications, Newhouse Broadcasting, Advance/Newhouse, TWE,
    Paragon and TWE-AN Partnership (incorporated herein by reference
    to Exhibit 10.52 to the AOLTW 2000 Form 10-K).                                                                                                                          |  |  | * | 
|        | 10 | .12         |  | Master Transaction Agreement, dated as of
    August 1, 2002, by and among TWE-A/N Partnership, TWE,
    Paragon and Advance/Newhouse (incorporated herein by reference
    to Exhibit 10.1 to the AOLTW June 2002 Form 10-Q).                                                                                                                                                                                   |  |  | * | 
|        | 10 | .13         |  | Consent and Agreement dated as of
    December 31, 2002 among TWE-A/N, TWE, Paragon,
    Advance/Newhouse, TWEAN Subsidiary LLC (TWEAN
    Subsidiary) and JPMorgan Chase Bank (incorporated herein
    by reference to Exhibit 99.2 to the AOLTW December 2002
    Form 8-K).                                                                                                                                 |  |  | * | 
|        | 10 | .14         |  | Pledge Agreement dated as of December 31,
    2002 among TWE-A/N, Advance/Newhouse, TWEAN Subsidiary and
    JPMorgan Chase Bank (incorporated herein by reference to
    Exhibit 99.3 to the AOLTW December 2002 Form 8-K).                                                                                                                                                                                     |  |  | * | 

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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                            |  |  |   | 
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | - | 
|        |    |             |  | Sequential                                                                                                                                                                                                                                                                                                                                                
|Exhibit |    |             |  | Page                                                                                                                                                                                                                                                                                                                                                      
|Number  |    | Description |  | Number                                                                                                                                                                                                                                                                                                                                                    
|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .15         |  | Agreement Containing Consent Orders, including
    the Decision and Order, between AOLTW and the Federal Trade
    Commission signed December 13, 2000 (incorporated herein by
    reference to Exhibit 99.2 to the AOL Time Warner Current
    Report on Form 8-K dated January 11, 2001 (File
    No. 1-15062) (the AOLTW January 2001
    Form 8-K)). |  |  | * | 
|        | 10 | .16         |  | Public Notice issued by the Federal
    Communications Commission dated January 11, 2001
    (incorporated herein by reference to Exhibit 99.4 to the
    AOLTW January 2001 Form 8-K).                                                                                                                                                                    |  |  | * | 
|        | 10 | .17         |  | Form of Restated Certificate of Incorporation of
    Holdings, related to the Restructuring Agreement (incorporated
    herein by reference to Exhibit 10.3 to the AOLTW Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2002 (File No. 1-15062) (the AOLTW
    September 2002 Form 10-Q)).                                    |  |  | * | 
|        | 10 | .18         |  | Form of Amended and Restated Agreement of Limited
    Partnership of TWE, by and among Time Warner Cable Inc.
    (TWC), MediaOne, ATC, AT&T and AOLTW, related to
    the Restructuring Agreement (incorporated herein by reference to
    Exhibit 10.4 to the AOLTW September 2002 Form 10-Q).                                                         |  |  | * | 
|        | 10 | .19         |  | Form of By-laws of TWC, related to the
    Restructuring Agreement (incorporated herein by reference to
    Exhibit 10.5 to the AOLTW September 2002 Form 10-Q).                                                                                                                                                                                           |  |  | * | 
|        | 10 | .20         |  | Form of Registration Rights Agreement by and
    between AOLTW and TWC, related to the Restructuring Agreement
    (incorporated herein by reference to Exhibit 10.6 to the
    AOLTW September 2002 Form 10-Q).                                                                                                                                           |  |  | * | 
|        | 10 | .21         |  | Form of Registration Rights Agreement by and
    among MediaOne, AOLTW and TWC, related to the Restructuring
    Agreement (incorporated herein by reference to Exhibit 10.7
    to the AOLTW September 2002 Form 10-Q).                                                                                                                                   |  |  | * | 
|        | 10 | .22         |  | Form of Parent Agreement among TWC, AOLTW and
    AT&T, related to the Restructuring Agreement (incorporated
    herein by reference to Exhibit 10.8 to the AOLTW September
    2002 Form 10-Q).                                                                                                                                                           |  |  | * | 
|        | 10 | .23         |  | Form of Partnership Interest Sale Agreement among
    TWC, AOLTW, AT&T and MediaOne, related to the Restructuring
    Agreement (incorporated herein by reference to Exhibit 10.9
    to the AOLTW September 2002 Form 10-Q).                                                                                                                              |  |  | * | 
|        | 10 | .24         |  | Form of Reimbursement Agreement by and among TWC,
    AOLTW, WCI, ATC and TWE, related to the Restructuring Agreement
    (incorporated herein by reference to Exhibit 10.10 to the
    AOLTW September 2002 Form 10-Q).                                                                                                                                   |  |  | * | 
|        | 10 | .25         |  | Form of Brand License Agreement by and between
    WCI and TWC, related to the Restructuring Agreement
    (incorporated herein by reference to Exhibit 10.11 to the
    AOLTW September 2002 Form 10-Q).                                                                                                                                                  |  |  | * | 
|        | 10 | .26         |  | Form of Tax Matters Agreement among AOLTW and
    TWC, related to the Restructuring Agreement (incorporated herein
    by reference to Exhibit 10.12 to the AOLTW September 2002
    Form 10-Q).                                                                                                                                                           |  |  | * | 
|        | 10 | .27         |  | Form of Brand and Trade Name License Agreement by
    and among Time Warner and TWC, related to the Restructuring
    Agreement (incorporated herein by reference to
    Exhibit 10.13 to the AOLTW September 2002 Form 10-Q).                                                                                                                             |  |  | * | 
|        | 10 | .28         |  | Registration Rights Agreement dated as of
    August 20, 2002 by and between MediaOne and AOLTW, related
    to the Restructuring Agreement (incorporated herein by reference
    to Exhibit 10.14 to the AOLTW September 2002
    Form 10-Q).                                                                                                             |  |  | * | 
|        | 10 | .29         |  | Distribution Agreement dated as of
    August 20, 2002 by and among TWE, WCI and AOLTW, related to
    the Restructuring Agreement (incorporated herein by reference to
    Exhibit 10.15 to the AOLTW September 2002 Form 10-Q).                                                                                                                          |  |  | * | 
|        | 10 | .30         |  | Intellectual Property Agreement dated as of
    August 20, 2002 by and between TWE and WCI, related to the
    Restructuring Agreement (incorporated herein by reference to
    Exhibit 10.16 to the AOLTW September 2002 Form 10-Q).                                                                                                                      |  |  | * | 

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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                         |  |  |   | 
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | - | 
|        |    |             |  | Sequential                                                                                                                                                                                                                                                                             
|Exhibit |    |             |  | Page                                                                                                                                                                                                                                                                                   
|Number  |    | Description |  | Number                                                                                                                                                                                                                                                                                 
|        |    |             |  |                                                                                                                                                                                                                                                                                        
|        | 10 | .31         |  | Contribution Agreement dated as of
    August 20, 2002 by and among Holdings, WCI and the AOLTW,
    related to the Restructuring Agreement (incorporated herein by
    reference to Exhibit 10.17 to the AOLTW September 2002
    Form 10-Q).                                          |  |  | * | 
|        | 10 | .32         |  | Intellectual Property Agreement dated as of
    August 20, 2002 by and between Holdings and WCI, related to
    the Restructuring Agreement (incorporated herein by reference to
    Exhibit 10.18 to the AOLTW September 2002 Form 10-Q).                                              |  |  | * | 
|        | 10 | .33         |  | Demand Promissory Note dated August 19, 2002
    issued by Holdings to MediaOne in the original principal amount
    of $2.1 billion, related to the Restructuring Agreement
    (incorporated herein by reference to Exhibit 10.19 to the
    AOLTW September 2002 Form 10-Q).         |  |  | * | 
|        | 21 |             |  | Subsidiaries of TWE and the AOL Time Warner
    General Partners.                                                                                                                                                                                                                       |  |  |   | 
|        | 23 | .1          |  | Consent of Ernst & Young LLP,
    Independent Auditors.                                                                                                                                                                                                                                 |  |  |   | 
|        | 99 | .1          |  | Certification of Principal Executive Officer and
    Principal Financial Officer of the Registrant pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, with respect
    to the TWE Annual Report on Form 10-K for the year ended
    December 31, 2002.                      |  |  |   | 
|        | 99 | .2          |  | Certification of Principal Executive Officer and
    Principal Financial Officer of each of the general partners of
    TWE pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002, with respect to the TWE Annual Report on Form 10-K
    for the year ended December 31, 2002. |  |  |   | 



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|  |                           
|- | --------------------------
|* | Incorporated by reference.

The Registrants hereby agree to furnish to the
Securities and Exchange Commission at its request copies of
long-term debt instruments defining the rights of holders of the
Registrants outstanding long-term debt that are not
required to be filed herewith.

v