##### 



SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

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

Commission file number 001-12878

TIME WARNER ENTERTAINMENT COMPANY, L.P.

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

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

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

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

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





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##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.

INDEX TO FORM 10-Q

|                              |                                                                                                |  |      |    | 
|----------------------------- | ---------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                              |                                                                                                |  | Page
|                              |                                                                                                |  |     
|PART I. FINANCIAL INFORMATION |                                                                                                |  |      |   
|                              | Managements discussion and analysis of results of operations
and financial condition          |  |      | 1  | 
|                              | Item 4. Controls and Procedures                                                                |  |      | 20 | 
|                              | Consolidated balance sheet at June 30, 2003 and
December 31, 2002                              |  |      | 21 | 
|                              | Consolidated statement of operations for the three and six months
ended June 30, 2003 and 2002 |  |      | 22 | 
|                              | Consolidated statement of cash flows for the six months ended
June 30, 2003 and 2002           |  |      | 23 | 
|                              | Consolidated statement of partnership capital for the six months ended
June 30, 2003 and 2002  |  |      | 24 | 
|                              | Notes to consolidated financial statements                                                     |  |      | 25 | 
|PART II. OTHER INFORMATION    |                                                                                                |  |      |   
|                              | Item 1. Legal Proceedings                                                                      |  |      | 44 | 
|                              | Item 6. Exhibits and Reports on Form 8-K                                                       |  |      | 45 | 





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##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

INTRODUCTION

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



| |  |  | Overview.This section provides a general description of TWEs
businesses, as well as recent developments that the Company believes
are important in understanding the results of operations.                                                                                                                                                                                                                                                                                                                      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Executive summary.This
section provides a brief summary of the Companys results of
operations for the three and six month ending June 30, 2003 and
the Companys cash flows as of and for the six month period
ending June 30, 2003.                                                                                                                                                                                                                                                                             
|
| |  |  | Financial statement presentation.This section provides a summary
of how the Companys operations are presented in the accompanying
consolidated financial statements.                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | Results of operations.This section provides an analysis of the
Companys results of operations for the three and six months ended June
30, 2003 relative to the comparable periods in 2002.                                                                                                                                                                                                                                                                                                                       
|
| |  |  | Financial condition, liquidity and capital resources.This section
provides an analysis of the Companys financial condition, cash flows
and outstanding debt as of and for the six months ended June 30, 2003.                                                                                                                                                                                                                                                                                                    
|
| |  |  | Market risk management and other.This section discusses how the
Company manages exposure to potential losses arising from adverse
changes in interest rates and changes in the market value of
investments.                                                                                                                                                                                                                                                                                                       
|
| |  |  | Caution concerning forward-looking statements and risk factors.
This section provides a description of risk factors that could
adversely affect the operations, business or financial results of the
Company 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 current expectations
about future events and are inherently susceptible to uncertainty and
changes in circumstances.

OVERVIEW

The Companys operations primarily consist of selling video programming
and high-speed data services to subscribers for a monthly fee and related
advertising services to a variety of local, regional and national clients.
Subscriber services are distributed through a network of coaxial and fiber
optic cables. TWE is a subsidiary of Time Warner Cable Inc. (TWC). TWC is
the second largest operator of cable systems in the United States, serving
approximately 10.9 million basic cable subscribers as of June 30, 2003. This
total includes subscribers served by systems that are owned directly by TWEs
consolidated operations (approximately 7.7 million subscribers), TWEs directly
held and managed unconsolidated cable joint ventures (approximately 1.5 million
subscribers), as well as subscribers served by systems outside of TWE that are
directly or indirectly owned by TWC and managed by TWE (approximately 1.7
million subscribers). The financial statements included in this report reflect
the operations of TWEs consolidated cable systems and its equity investments
in its cable system joint ventures, but exclude the results of TWCs cable
systems in which TWE does not have an ownership interest.

Restructuring of TWE

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

On March 31, 2003, AOL Time Warner and Comcast completed the restructuring
of TWE (the TWE restructuring). As a result of the TWE restructuring, AOL
Time Warner acquired complete ownership of TWEs non-cable businesses, including
Warner Bros., Home Box Office, and TWEs interests in The WB Network, Comedy
Central (which was subsequently sold) and the Courtroom Television Network
(Court TV) (collectively the Non-cable
Businesses). Additionally, all of AOL Time Warners interests in cable,
including those that were wholly-owned and those that were held through

1



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##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

TWE are now controlled by a new subsidiary of AOL Time Warner called Time
Warner Cable Inc. (TWC). As part of the restructuring, AOL Time Warner
received a 79% economic interest in TWCs business, which
reflects an 82.1% indirect interest in the TWI Cable Inc. (TWI
Cable) assets and its 1% direct and 77.4% (82.1% times 94.3%)
indirect interests in TWE Cable. The 79% economic interest in Time
Warner Cable is calculated with each interest weighted based on the
relative number of cable subscribers in each entity as compared to
the total Time Warner Cable subscribers as follows:
[(1.6 million TWI Cable subscribers/9.3 million total
Time Warner Cable subscribers times 82.1%) plus (7.7 million TWE Cable
subscribers/9.3 million total Time Warner Cable subscribers times 82.1% times
94.3%) plus (7.7 million subscribers/9.3 million total Time Warner Cable
subscribers times 1%)]. TWE is now a subsidiary of
TWC.

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

Comcasts 21.0% economic interest in TWCs business is held through a
17.9% direct ownership interest in TWC (representing a 10.7% voting interest)
and a limited partnership interest in TWE representing a 4.7% residual equity
interest. AOL Time Warners 79% economic interest in TWCs business is held
through an 82.1% ownership interest in TWC (representing an 89.3% voting
interest) and a partnership interest in TWE representing a 1% residual equity
interest. AOL Time Warner also holds a $2.4 billion mandatorily redeemable
preferred equity interest in TWE. The additional ownership interests
in TWE acquired
by AOL Time Warner in the TWE restructuring have been accounted for as a step
acquisition and are reflected in the accompanying balance sheet as of June 30,
2003.

A preliminary allocation of the purchase consideration has been performed,
and all the purchase consideration has been allocated to franchise license
intangible assets at TWE. In addition, the 17.9% interest in TWC retained by
Comcast was stepped up to fair value. At TWE, this $2.362 billion adjustment
is reflected as an increase in cable franchise license intangible
assets and a
corresponding increase to contributed capital. The franchise license intangible
assets will not be amortized but will be tested for impairment on an annual
basis. As a result of AOL Time Warners acquisition of
TWEs Non-cable Businesses
(through Warner Communications Inc.), TWE has presented the TWE Non-cable
Businesses as discontinued operations.

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

AOL Time
Warner has previously indicated that TWC may be the subject of an
initial public offering. However, in light of the conclusion of the
Office of the Chief Accountant of the Securities and Exchange
Commission (SEC) that AOL Time Warners accounting
for two related transactions in 2001 between America Online, Inc. and
Bertlesmann A.G. is incorrect, and in light of the fact that the SEC
staff is continuing to investigate a range of other transactions
principally involving AOL Time Warner's America Online unit, it is
likely that the SEC would not declare effective any registration
statement of AOL Time Warner or its affiliates, such as the potential
TWC initial public offering, until these matters are resolved.

Restructuring of TWE  Advance/Newhouse Partnership

During 2002, TWE and the Advance/Newhouse Partnership (Advance/Newhouse)
restructured the TWE-Advance/Newhouse Partnership (TWE-A/N) resulting in
Advance/Newhouse assuming authority for day-to-day operations of certain
TWE-A/N cable systems (the A/N Systems). As a
result, TWE deconsolidated the financial position and operating results of the
A/N Systems and has reflected the 2002 operating results of the A/N Systems
prior to the deconsolidation as discontinued operations. Accordingly, the
statistical information included in this report, such as the numbers of
subscribers, does not include information for the A/N Systems.

EXECUTIVE SUMMARY

Results of Operations

Revenues increased by 9% to $1.616 billion for the three months ended June
30, 2003 compared to the three months ended June 30, 2002, and increased by 9%
to $3.163 billion for the six months ended June 30, 2003 compared to the six
months ended June 30, 2002. The three and six-month periods both benefited
from increases in video and high-speed data revenues and were negatively
impacted by decreases in advertising revenues.

Operating Income before Depreciation and Amortization increased by 18% to
$650 million for the three months ended June 30, 2003 compared to the three
months ended June 30, 2002, and increased by 14% to $1.230 billion for the six
months ended June 30, 2003 compared to the six months ended June 30, 2002. The
three and six-month periods both benefited from total revenue increases and
were negatively impacted by increases in video programming, employee costs and
other cost of revenues, partially offset by a decrease in high-speed
data costs.
Also impacting operating income, although to a lesser extent, were changes in
selling, general and administrative expenses, which decreased by 4% for the
three months ended June 30, 2003 and increased by 3% for the six months ended
June 30, 2003 compared to the prior year periods.

Operating Income increased by 18% to $354 million for the three months
ended June 30, 2003, and by 8% to $650 million for the six months ended June
30, 2003 compared to the three and six months ended June 30, 2002,
respectively. Such increases reflect the improvements in Operating Income
before Depreciation and Amortization discussed above, partially offset by
increases in depreciation related to a shortening of the average life of the
Companys fixed assets as more shorter lived customer premise equipment is
added.

The Companys net income (loss) was $218 million and $483 million for the
three months ended June 30, 2003 and 2002, respectively, and $716 million and
$(20,900) million for the six months ended June 30, 2003 and 2002,
respectively. The Companys net income (loss) includes income from
discontinued operations related to the TWE Non-Cable Businesses and A/N
Systems, which were deconsolidated from the Companys results pursuant to the
restructuring of the TWE and TWE-A/N Partnerships, respectively. In addition,
during the first quarter of 2002, the Company recognized a $21.763 billion
charge related to the cumulative effect of an accounting change. The Companys
income before the discontinued operations and cumulative effect of an
accounting change was $218 million and $216 million for the three months ended
June 30, 2003 and 2002, respectively, and $426 million and $416 million for the
six months ended June 30, 2003 and 2002, respectively. The three and six-month
periods both benefited from increases in operating income and income from
equity investments, and were negatively impacted by increases in interest and
minority interest expenses.

Cash Flows

During the first six months of 2003 the Company generated operating cash
flow from continuing operations of $903 million and free cash flow from
continuing operations of $75 million. This compares to operating cash flow
from continuing operations of $766 million and free cash flow from continuing
operations of $53 million during the first six months of 2002. The increases
were due to increased Operating Income before Depreciation and Amortization.
Free cash flow was negatively impacted by increased partnership distributions
in 2003. The Companys capital expenditures from continuing operations declined
to $661 million during the first six months of 2003 from $691 million during
the first six months of 2002. The decline is primarily due to a decrease in
capital expenditures related to customer premise equipment.

FINANCIAL STATEMENT PRESENTATION

Revenue

The Companys revenues consist of video revenue, high-speed data revenue
and advertising revenue. Video revenue includes monthly fees for basic,
standard and digital services, together with related equipment rental charges,
such as set-top boxes, and charges for premium channels and subscription
video-on-demand services. Video revenue also includes installation, pay per
view and video-on-demand charges and franchise fees relating to video charges
collected on behalf of local franchise authorities. Several ancillary items
are also included within video revenue, such as commissions related to the sale
of merchandise by home shopping services and rental income

2



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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

earned on leasing of antennae tower facilities. In each period presented,
these ancillary items constitute less than 2% of video revenue.

High-speed data revenue includes monthly subscriber fees from both
residential and commercial high-speed data subscribers, along with related
equipment rental charges, home networking fees, installation charges and, to
the extent collected, franchise fees relating to high-speed data services. As
a result of a March 2002 ruling of the Federal Communications Commission
(FCC), TWE stopped collecting all franchise fees on high-speed data services
during 2002 (refer to note 9 of the financial statements  Legal Proceedings).
The Companys high-speed data revenue also includes license fees received from
its unconsolidated cable system joint ventures and the A/N Systems.

Advertising revenue includes the fees charged to local, regional and
national advertising customers for advertising placed on the Companys video
and high-speed data media outlets. At the present time, substantially all of
the Companys advertising revenue is from its video outlets. TWE divides its
advertising revenue into three general categories: general third-party
advertising, program vendor advertising and related party advertising. General
third-party advertising represents local, regional and national advertising
spots sold to unaffiliated third parties who do not provide TWE with
programming. Program vendor advertising represents advertising spots sold to
unaffiliated third-party programming vendors to promote their channels,
including new channel launches. Related party advertising represents
advertising spots sold to other divisions of AOL Time Warner and its
affiliates, including AOL Time Warner affiliated programming vendors. Program
vendor and related party advertising can vary significantly from period to
period depending on the timing of channel launches and the marketing strategies
of the other AOL Time Warner affiliates.

Costs and Expenses

Cost of revenues
primarily includes video programming costs, including
fees paid to the programming vendors net of certain launch fees received, high-speed data
costs and cable service related expenses, including non-administrative employee
costs directly associated with the maintenance or delivery of products and
services to subscribers, franchise fees and other expenses. TWEs programming
agreements generally provide that the Company pays a monthly per subscriber fee
in respect of each programming service that it carries. For further
information regarding the accounting for amounts received from programmers,
refer to Note 2 of the financial statements  Multiple Element Arrangements.

Selling, general and
administrative costs include variable and
non-variable expenses not directly associated with maintenance or delivery of
products and services to subscribers, such as administrative salary costs,
advertising and marketing expenses, billings, repair and maintenance, fees paid
to AOL Time Warner for certain corporate services provided by AOL Time Warner
and other administrative overhead costs, net of management fees received from
unconsolidated cable system joint ventures and TWC cable systems in which TWE
does not have an ownership interest.

Use of Operating Income (Loss) before Depreciation and Amortization and Use of Free Cash Flow

Management considers Operating Income (Loss) before Depreciation and
Amortization to be an important indicator of the operational strength and
performance of the business, including the ability to provide cash flows to
service debt and fund capital expenditures. Operating Income (Loss) before
Depreciation and Amortization eliminates the uneven effect of the Companys
non-cash depreciation of tangible assets. A limitation of this
measure, however, is that it does not reflect the costs of certain capitalized
tangible assets used in generating revenues in the Companys
businesses. Management evaluates the costs of such tangible assets
through other financial measures such as capital expenditures and
investment spending. The Company also utilizes Free Cash Flow to evaluate the
performance of its business. Free Cash Flow, which is defined as cash provided
by operations less capital expenditures, dividend payments and partnership
distributions, and principal payments on capital leases, is considered to be an
important indicator of the Companys ability to service debt and make strategic
investments.

3



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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Both Operating Income (Loss) before Depreciation and Amortization and Free
Cash Flow should be considered in addition to, not as a substitute for, the
Companys operating income (loss), net income (loss) and various cash flow
measures (e.g., cash provided by operations), as well as other measures of
financial performance reported in accordance with accounting principles
generally accepted in the United States.

RESULTS OF OPERATIONS

Quarter ended June 30, 2003 compared to quarter ended June 30, 2002

Revenues.The Companys revenues increased to $1.616 billion in 2003,
compared to $1.478 billion in 2002. This improvement was due to increases in
video and high-speed data revenue, partially offset by a decrease in
advertising revenue. Revenues by category were as follows (in millions):

|                |                |   |                             |       |                     |   |       |       |   |   |     |     |  |  |     |    |  
|--------------- | -------------- | - | --------------------------- | ----- | ------------------- | - | ----- | ----- | - | - | --- | --- |  |  | --- | -- | -
|                |                |   | Three Months Ended June 30, |       | Increase (decrease)
|                |                |   |                             |       |                    
|                |                |   | 2003                        |       | 2002                |   | $     |       | %
|                |                |   |                             |       |                     |   |       |       |  
|Video           |                | $ | 1,207                       |       |                     | $ | 1,116 |       |   | $ | 91  |     |  |  | 8   | % 
|High-speed data |                |   | 309                         |       |                     |   | 218   |       |   |   | 91  |     |  |  | 42  | % 
|Advertising     |                |   | 100                         |       |                     |   | 144   |       |   |   | (44 | )   |  |  | (31 | )%
|                |                |   |                             |       |                     |   |       |       |   |   |     |     |  |  |     |   
|                | Total Revenues |   | $                           | 1,616 |                     |   | $     | 1,478 |   |   | $   | 138 |  |  |     | 9  | %
|                |                |   |                             |       |                     |   |       |       |   |   |     |     |  |  |     |   

Total video
revenues increased by $91 million, or 8%, over 2002 reflecting
higher rates due to enhanced programming line-ups and, to a lesser extent, an increase in digital and basic
subscribers. Consolidated basic video subscribers increased by 82,000 to 7.7
million at June 30, 2003, as compared to 7.6 million at June 30, 2002,
primarily as a result of internal growth of 0.7%. Consolidated digital video
subscribers, who are included in the Companys 7.7 million basic video
subscribers, increased by 605,000, or 28%, to 2.8 million at June 30, 2003, as
compared to 2.2 million at June 30, 2002.

High-speed data
revenues increased by $91 million, or 42%, over 2002,
primarily due to growth in high-speed data subscribers. From June 30, 2002 to
June 30, 2003, total consolidated residential high-speed data subscribers
increased by 636,000 to 2.1 million subscribers. During the same period,
consolidated commercial high-speed data accounts increased by 35,000 accounts
to 82,000 accounts at June 30, 2003. Average monthly revenue per consolidated
residential subscriber decreased by 5%, to $40.46 per residential subscriber in
the second quarter of 2003, compared to $42.64 per residential subscriber in
the second quarter of 2002 primarily due to the inclusion of franchise fees payable to
municipalities in high-speed data revenues in the 2002 period and an increase
in promotional offers in the second quarter of 2003. The Company began to
discontinue collecting franchise fees on high-speed data revenue in the first
quarter of 2002 and discontinued collecting such franchise fees in
the third quarter of 2002. Average monthly revenue per consolidated residential
subscriber would have been $0.83 lower for the second quarter of 2002 if
franchise fees had been excluded. Additionally, as discussed in
note 2 of the financial statements, the Company accounts for
high-speed data revenue from certain third-party internet service
providers on a gross or a net basis depending
on the contractual terms. The average monthly revenue per
consolidated residential subscriber decreased in the current period
partially because a greater portion of the total high-speed data
subscribers were accounted for on a net basis in the
current period as compared to the prior year. Average monthly revenue per consolidated
commercial subscriber increased to $120.24 per commercial subscriber in the
second quarter of 2003, compared to $120.02 per commercial subscriber in the
second quarter of 2002. Average monthly revenue per consolidated commercial
subscriber would have been $2.32 lower for the second quarter of 2002 if
franchise fees had been excluded. The increase in average revenue per
commercial subscriber in 2003, as compared to the 2002 average revenue per
commercial subscriber excluding franchise fees, is primarily due to the
addition of larger (i.e., higher paying) commercial customers in the 2003
period. Residential high-speed data penetration of consolidated systems
increased from 12.3% of eligible homes passed at June 30, 2002 to 16.8% of
eligible homes passed at June 30, 2003. TWE expects continued growth in
high-speed data subscribers and revenue, but at a lower rate as penetration
increases.

Total advertising revenues declined by $44 million, or 31%, compared to
2002 primarily due to a decline in related party and program vendor
advertising. General third-party advertising revenue increased by 12% from $85
million in 2002 to $95 million in 2003 due to an increase in advertising rates
and an increase in advertising inventory sold. Program vendor advertising
decreased from $33 million in 2002 to $3 million in 2003 primarily due to fewer
new channel launches. Related party advertising revenue decreased from $26
million in 2002 to $2 million

4



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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

in 2003, primarily due to decreased advertising by America Online, Inc., a
wholly owned subsidiary of AOL Time Warner (America Online). Despite
expected increases in general third-party advertising revenues, the Company
expects total advertising revenues to continue to decline substantially
throughout 2003, as compared to 2002, due to a decrease in related party and
program vendor advertising.

Cost of revenues.Cost of revenues increased to $695 million in 2003,
compared to $645 million in 2002, primarily due to higher video programming
costs and higher personnel costs associated with the deployment of new
services, partially offset by a decline in high-speed data connectivity costs.
The components of cost of revenues were as follows (in millions):

|                  |       |   |                             |     |                     |   |     |     |   |   |     |    |  |  |     |    |   |  |  |  | 
|----------------- | ----- | - | --------------------------- | --- | ------------------- | - | --- | --- | - | - | --- | -- |  |  | --- | -- | - |  |  |  | 
|                  |       |   | Three Months Ended June 30, |     | Increase (decrease) |   |     |     |  
|                  |       |   |                             |     |                     |   |     |     |  
|                  |       |   | 2003                        |     | 2002                |   | $   |     | % |   |     |    | 
|                  |       |   |                             |     |                     |   |     |     |   |   |     |    | 
|Video programming |       | $ | 341                         |     |                     | $ | 299 |     |   | $ | 42  |    |  |  | 14  | % 
|Employee          |       |   | 206                         |     |                     |   | 180 |     |   |   | 26  |    |  |  | 14  | %  |   |  |  | 
|High-speed data   |       |   | 28                          |     |                     |   | 63  |     |   |   | (35 | )  |  |  | (56 | )%
|Other             |       |   | 120                         |     |                     |   | 103 |     |   |   | 17  |    |  |  | 17  | %  |   |  |  | 
|                  |       |   |                             |     |                     |   |     |     |   |   |     |    |  |  |     |    |   |  |  | 
|                  | Total |   | $                           | 695 |                     |   | $   | 645 |   |   | $   | 50 |  |  |     | 8  | %
|                  |       |   |                             |     |                     |   |     |     |   |   |     |    |  |  |     |    |   |  |  | 

TWEs video
programming costs increased by 14% in 2003. On a per
subscriber basis, programming costs increased by 12%, from $13.14 to $14.66 per
month. The majority of this increase was attributable to sports programming
cost increases and the impact of having added numerous non-sports services to
many of the Companys programming lineups. Video programming costs are
expected to continue to rise for the next several years (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
obtain additional quality programming for more extensive service offerings,
industry-wide programming cost increases (especially for sports programming)
and inflation-indexed or negotiated license fee increases. Video programming
costs in the second half of 2003 are expected to increase at rates in line
with the average rate of increase experienced in the first half of 2003.

Employee costs
rose in 2003 in part as a result of higher headcount
associated with customer care and new product initiatives. Merit-based salary
increases, cost-of-living increases and the increased cost of employee
benefits, including costs associated with group insurance and defined benefit
pension plans, also contributed to the increase in employee costs.

High-speed data
costs, which are primarily associated with connectivity,
have decreased due to an industry-wide decline in such connectivity costs.
Additionally, the Company incurred one-time contract termination costs in 2002
associated with its transition from unaffiliated third-party connectivity
providers to America Online.

Other costs increased primarily due to an increase in repairs and
maintenance costs and increased pole rental charges.

Selling, general and administrative expenses.Selling, general and
administrative expenses decreased to $271 million in 2003 from $281 million in
2002. This decrease of $10 million, or 4%, over 2002 was primarily associated
with decreased administrative and other costs, offset in part by increased
employee and advertising costs associated with the roll-out of new products and
services. The components of selling, general and administrative expenses were
as follows (in millions):

|               |       |   |                             |     |                     |   |     |     |   |   |     |     |   |  |     |    |   
|-------------- | ----- | - | --------------------------- | --- | ------------------- | - | --- | --- | - | - | --- | --- | - |  | --- | -- | --
|               |       |   | Three Months Ended June 30, |     | Increase (decrease)
|               |       |   |                             |     |                    
|               |       |   | 2003                        |     | 2002                |   | $   |     | %
|               |       |   |                             |     |                     |   |     |     |  
|Employee       |       | $ | 130                         |     |                     | $ | 119 |     |   | $ | 11  |     |   |  | 9   | % 
|Administrative |       |   | 50                          |     |                     |   | 64  |     |   |   | (14 | )   |   |  | (22 | )%
|Advertising    |       |   | 54                          |     |                     |   | 50  |     |   |   | 4   |     |   |  | 8   | % 
|Other          |       |   | 37                          |     |                     |   | 48  |     |   |   | (11 | )   |   |  | (23 | )%
|               |       |   |                             |     |                     |   |     |     |   |   |     |     |   |  |     |   
|               | Total |   | $                           | 271 |                     |   | $   | 281 |   |   | $   | (10 | ) |  |     | (4 | )%
|               |       |   |                             |     |                     |   |     |     |   |   |     |     |   |  |     |   

5



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##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Employee costs increased due to an increase in headcount associated with
the roll-out of new services and increased subscriber transactions.
Merit-based salary increases, cost-of-living increases and the increased cost
of employee benefits, including costs associated with pension benefits, also
contributed to the increase in employee costs. Administrative costs decreased
primarily due to a decline in legal costs, as well as an increase in management
fees earned from unconsolidated affiliates. Advertising costs increased in
2003 due to the marketing of new products and services, including the Now
Anythings Possible marketing campaign, launched during the fourth quarter of
2002, which focuses on heightened customer care and the Companys broad range
of products and services. Other costs decreased in 2003 primarily due to a
decline in amounts paid to AOL Time Warner for certain corporate services provided
by AOL Time Warner and other administrative overhead costs.

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

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

|                                                       |  |                             |      |      |  |          |      |   |  |  |     |   
|------------------------------------------------------ |  | --------------------------- | ---- | ---- |  | -------- | ---- | - |  |  | --- | --
|                                                       |  | Three Months Ended June 30, |      |      |  |         
|                                                       |  |                             |      |      |  |         
|                                                       |  | 2003                        |      | 2002 |  | % Change
|                                                       |  |                             |      |      |  |         
|                                                       |  | (in millions)               |      |      |  |         
|Operating Income before Depreciation
and Amortization  |  | $                           | 650  |      |  | $        | 552  |   |  |  | 18  | % 
|Depreciation                                           |  |                             | (294 | )    |  |          | (250 | ) |  |  | 18  | % 
|Amortization                                           |  |                             | (2   | )    |  |          | (1   | ) |  |  | 100 | % 
|                                                       |  |                             |      |      |  |          |      |   |  |  |     |   
|Operating income                                       |  |                             | 354  |      |  |          | 301  |   |  |  | 18  | % 
|Interest expense, net                                  |  |                             | (124 | )    |  |          | (83  | ) |  |  | 49  | % 
|Income from equity investments, net                    |  |                             | 7    |      |  |          | 3    |   |  |  | 133 | % 
|Minority interest expense                              |  |                             | (19  | )    |  |          | (2   | ) |  |  |    |   
|                                                       |  |                             |      |      |  |          |      |   |  |  |     |   
|Income before income taxes and
discontinued operations |  |                             | 218  |      |  |          | 219  |   |  |  |    |   
|Income tax provision                                   |  |                             |     |      |  |          | (3   | ) |  |  |    |   
|                                                       |  |                             |      |      |  |          |      |   |  |  |     |   
|Income before discontinued operations                  |  |                             | 218  |      |  |          | 216  |   |  |  |    |   
|Income from discontinued operations, net of tax        |  |                             |     |      |  |          | 267  |   |  |  |    |   
|                                                       |  |                             |      |      |  |          |      |   |  |  |     |   
|Net income                                             |  | $                           | 218  |      |  | $        | 483  |   |  |  | (55 | )%
|                                                       |  |                             |      |      |  |          |      |   |  |  |     |   

Operating Income before Depreciation and Amortization.Operating Income
before Depreciation and Amortization increased 18% to $650 million in 2003 from
$552 million in 2002. Operating Income before Depreciation and Amortization
increased principally as a result of revenue gains and a decrease in selling,
general, and administrative expenses, partially offset by an increase in cost
of revenues.

Depreciation.Depreciation increased to $294 million in 2003, from $250
million in 2002. This increase of $44 million, or 18%, compared to 2002 was
primarily due to a change in the nature of the Companys capital spending. As
a result of the completion of the cable system upgrades in mid-2002 and an
increase in the amount of capital spending on customer premise equipment in
recent years, a larger proportion of the Companys property, plant and
equipment consisted of assets with shorter useful lives in 2003 than in 2002.
Depreciation expense relating to these shorter-lived assets, coupled with
existing depreciation expense relating to the upgraded cable systems, has
resulted in increased overall depreciation expense.

Amortization expense.Amortization expense increased to $2 million from
$1 million in 2002 due to an increase in intangible assets associated with the
renewal of cable franchises.

6



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##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Operating income.Operating income in 2003 increased to $354 million from
$301 million in 2002 due to an increase in Operating Income before Depreciation
and Amortization, offset in part by an increase in depreciation expense.

Interest expense, net.Net interest expense increased in 2003 to $124
million from $83 million in 2002. This increase of $41 million, or 49%,
compared to 2002 was primarily due to interest on the $2.4 billion mandatorily
redeemable preferred equity interest held by AOL Time Warner as a result of the
TWE restructuring, offset in part by declining interest rates on variable rate
debt and lower average debt outstanding.

Income from equity investments, net.Income from equity investments, net
increased to $7 million in 2003 compared to $3 million in 2002 due to an
increase in the earnings of the Companys unconsolidated joint ventures (i.e.,
Texas Cable Partners, L.P. and Kansas City Cable Partners, L.P.).

Minority interest expense.
Minority interest expense, associated with
TWCs direct interests in TWE-A/N and Road Runner, was $19 million in 2003, compared to $2 million in 2002. This increase
primarily reflects an increase in the profitability of Road Runner in which TWC
has a direct 32% common ownership. To a lesser extent, minority interest
expense increased due to TWCs increased preferred ownership in
TWE-A/N as a result of the TWE restructuring. The results of TWE-A/N
and Road Runner are consolidated by TWE for financial reporting
purposes.

Income tax provision.As a U.S. partnership, TWE is not subject to U.S.
federal income taxation. Income taxes of $0 in 2003 and $3 million in 2002
have been provided for the operations of TWEs subsidiary corporations and
unincorporated business taxes.

Income before discontinued operations. Net income from continuing
operations was $218 million in 2003 and $216 million in 2002, reflecting
increases in operating income and income from equity investments, offset by a
decrease due to increases in interest and minority interest expenses.

Net income.Net income was $218 million in 2003 compared to $483 million
in 2002. This decrease of $265 million over 2002 was due to the absence in
2003 of $267 million of income from discontinued operations in 2002.

Six months ended June 30, 2003 compared to six months ended June 30, 2002

Revenues.The Companys revenues increased to $3.163 billion in 2003,
compared to $2.892 billion in 2002. This improvement was due to increases in
video and high-speed data revenue, partially offset by a decrease in
advertising revenue. Revenues by category were as follows (in millions):

|                |                |   |                           |       |                     |   |       |       |   |   |     |     |  |  |     |    |  
|--------------- | -------------- | - | ------------------------- | ----- | ------------------- | - | ----- | ----- | - | - | --- | --- |  |  | --- | -- | -
|                |                |   | Six Months Ended June 30, |       | Increase (decrease)
|                |                |   |                           |       |                    
|                |                |   | 2003                      |       | 2002                |   | $     |       | %
|                |                |   |                           |       |                     |   |       |       |  
|Video           |                | $ | 2,388                     |       |                     | $ | 2,201 |       |   | $ | 187 |     |  |  | 8   | % 
|High-speed data |                |   | 589                       |       |                     |   | 419   |       |   |   | 170 |     |  |  | 41  | % 
|Advertising     |                |   | 186                       |       |                     |   | 272   |       |   |   | (86 | )   |  |  | (32 | )%
|                |                |   |                           |       |                     |   |       |       |   |   |     |     |  |  |     |   
|                | Total Revenues |   | $                         | 3,163 |                     |   | $     | 2,892 |   |   | $   | 271 |  |  |     | 9  | %
|                |                |   |                           |       |                     |   |       |       |   |   |     |     |  |  |     |   

Total video
revenues increased by $187 million, or 8%, over 2002
reflecting higher rates due to enhanced programming line-ups, and, to a lesser extent, an increase in digital and
basic subscribers. Consolidated basic video subscribers increased by 82,000 to
7.7 million at June 30, 2003, as compared to 7.6 million at June 30, 2002,
primarily as a result of internal growth of 0.7%. Consolidated digital video
subscribers, who are included in the Companys 7.7 million basic video
subscribers, increased by 605,000, or 28%, to 2.8 million at June 30, 2003, as
compared to 2.2 million at June 30, 2002.

High-speed data revenues increased by $170 million, or 41%, over 2002,
primarily due to growth in high-speed data subscribers. From June 30, 2002 to
June 30, 2003, total consolidated residential high-speed data subscribers

7



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##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

increased by 636,000 to 2.1 million subscribers. During the same period,
consolidated commercial high-speed data accounts increased by 35,000 accounts
to 82,000 accounts at June 30, 2003. Average monthly revenue per consolidated
residential subscriber decreased by 9%, to $40.09 per residential subscriber in
the first six months of 2003, compared to $44.14 per residential subscriber in
the first six months of 2002 primarily due to the inclusion of franchise fees
payable to municipalities in high-speed data revenues for part of the 2002
period and an increase in promotional offers in the first six months of 2003.
The Company began to discontinue collecting franchise fees on high-speed data
revenue in the first quarter of 2002 and discontinued collecting such franchise
fees in the third quarter of 2002. Average monthly revenue per consolidated
residential subscriber would have been $1.30 lower for the first six months of
2002 if franchise fees had been excluded. Additionally, as discussed
in note 2 of the financial statements, the Company accounts for
high-speed data revenue from certain third-party internet service
providers on a gross or a net basis depending on the contractual
terms. The average monthly revenue per consolidated residential
subscriber decreased in the current period partially because a
greater portion of the total high-speed data subscribers were
accounted for on a net basis in the current period as compared to
the prior year. Average monthly revenue per
consolidated commercial subscriber decreased to $119.56 per commercial
subscriber in the first six months of 2003, compared to $122.60 per commercial
subscriber in the first six months of 2002. Average monthly revenue per
consolidated commercial subscriber would have been $3.62 lower for the second
quarter of 2002 if franchise fees had been excluded. The increase in average
revenue per commercial subscriber in 2003, as compared to the 2002 average
revenue per commercial subscriber excluding franchise fees, is primarily due to
the addition of larger (i.e., higher paying) commercial customers in the 2003
period. Residential high-speed data penetration of consolidated systems
increased from 12.3% of eligible homes passed at June 30, 2002 to 16.8% of
eligible homes passed at June 30, 2003. TWE expects continued growth in
high-speed data subscribers and revenue, but at a lower rate as penetration
increases.

Total advertising revenues declined by $86 million, or 32%, compared to
2002 primarily due to a decline in related party and program vendor
advertising. General third-party advertising revenue increased by 13% from
$156 million in 2002 to $177 million in 2003 due to an increase in advertising
rates and an increase in advertising inventory available for sale. Program
vendor advertising decreased from $67 million in 2002 to $5 million in 2003
primarily due to fewer new channel launches. Related party advertising revenue
decreased from $49 million in 2002 to $4 million in 2003 primarily due to
decreased advertising by America Online. Despite expected increases in general
third-party advertising revenues, the Company expects total advertising
revenues to continue to decline substantially throughout 2003, as compared to
2002, due to a decrease in related party and program vendor advertising.

Cost of revenues.Cost of revenues increased to $1.378 billion in 2003,
compared to $1.268 billion in 2002, primarily due to higher video programming
costs and higher personnel costs associated with the deployment of new
services, partially offset by a decline in high-speed data connectivity costs.
The components of cost of revenues were as follows (in millions):

|                  |       |   |                           |       |                     |   |     |       |   |   |     |     |  |  |     |    |  
|----------------- | ----- | - | ------------------------- | ----- | ------------------- | - | --- | ----- | - | - | --- | --- |  |  | --- | -- | -
|                  |       |   | Six Months Ended June 30, |       | Increase (decrease)
|                  |       |   |                           |       |                    
|                  |       |   | 2003                      |       | 2002                |   | $   |       | %
|                  |       |   |                           |       |                     |   |     |       |  
|Video programming |       | $ | 680                       |       |                     | $ | 579 |       |   | $ | 101 |     |  |  | 17  | % 
|Employee          |       |   | 405                       |       |                     |   | 359 |       |   |   | 46  |     |  |  | 13  | % 
|High-speed data   |       |   | 63                        |       |                     |   | 123 |       |   |   | (60 | )   |  |  | (49 | )%
|Other             |       |   | 230                       |       |                     |   | 207 |       |   |   | 23  |     |  |  | 11  | % 
|                  |       |   |                           |       |                     |   |     |       |   |   |     |     |  |  |     |   
|                  | Total |   | $                         | 1,378 |                     |   | $   | 1,268 |   |   | $   | 110 |  |  |     | 9  | %
|                  |       |   |                           |       |                     |   |     |       |   |   |     |     |  |  |     |   

TWEs video programming costs increased by 17% in 2003. On a per
subscriber basis, programming costs increased by 15%, from $12.77 to $14.68 per
month. The majority of this increase was attributable to sports programming
cost increases and the impact of having added numerous non-sports services to
many of the Companys programming lineups. Video programming costs are
expected to continue to rise for the next several years (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
obtain additional quality programming for more extensive service offerings,
industry-wide programming cost increases (especially for sports programming)
and inflation-indexed or negotiated license fee increases. Video programming
costs in the second half of 2003 are expected to increase at rates in line
with the average rate of increase incurred in the first half of 2003.

8



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##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Employee costs rose in 2003 in part as a result of higher headcount
associated with customer care and new product initiatives. Merit-based salary
increases, cost-of-living increases and the increased cost of employee
benefits, including costs associated with group insurance and defined benefit
pension plans, also contributed to the increase in employee costs.

High-speed data costs, which are primarily associated with connectivity,
have decreased due to an industry-wide decline in such connectivity costs.
Additionally, the Company incurred one-time contract termination costs in 2002
associated with its transition from unaffiliated third-party connectivity
providers to America Online.

Other costs increased primarily due to an increase in repairs and
maintenance costs and increased pole rental charges.

Selling, general and administrative expenses.Selling, general and
administrative expenses increased to $555 million in 2003 from $541 million in
2002. This increase of $14 million, or 3%, over 2002 was primarily associated
with increases in employee and advertising costs primarily due to the roll-out
of new products and services, partially offset by decreases in administrative
and other costs. The components of selling, general and administrative
expenses were as follows (in millions):

|               |       |   |                           |     |                     |   |     |     |   |   |     |    |  |  |     |    |  
|-------------- | ----- | - | ------------------------- | --- | ------------------- | - | --- | --- | - | - | --- | -- |  |  | --- | -- | -
|               |       |   | Six Months Ended June 30, |     | Increase (decrease)
|               |       |   |                           |     |                    
|               |       |   | 2003                      |     | 2002                |   | $   |     | %
|               |       |   |                           |     |                     |   |     |     |  
|Employee       |       | $ | 268                       |     |                     | $ | 242 |     |   | $ | 26  |    |  |  | 11  | % 
|Administrative |       |   | 104                       |     |                     |   | 120 |     |   |   | (16 | )  |  |  | (13 | )%
|Advertising    |       |   | 102                       |     |                     |   | 89  |     |   |   | 13  |    |  |  | 15  | % 
|Other          |       |   | 81                        |     |                     |   | 90  |     |   |   | (9  | )  |  |  | (10 | )%
|               |       |   |                           |     |                     |   |     |     |   |   |     |    |  |  |     |   
|               | Total |   | $                         | 555 |                     |   | $   | 541 |   |   | $   | 14 |  |  |     | 3  | %
|               |       |   |                           |     |                     |   |     |     |   |   |     |    |  |  |     |   

Employee
costs increased due to an increase in headcount associated with
the roll-out of new services and increased subscriber transactions.
Merit-based salary increases, cost-of-living increases and the increased cost
of employee benefits, including costs associated with group insurance and
pension benefits, also contributed to the increase in employee costs.
Administrative costs decreased in 2003 due to decreases in legal costs, as
well as an increase in management fees earned from unconsolidated affiliates.
Advertising costs increased in 2003 due to aggressive marketing of new products
and services, including the Now Anythings Possible marketing campaign,
launched during the fourth quarter of 2002, which focuses on heightened
customer care and the Companys broad range of products and services. Other
costs decreased in 2003 primarily due to a decline in amounts paid to AOL Time
Warner for certain corporate services provided by AOL Time Warner and other
administrative overhead costs.

9



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##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Reconciliation of Operating Income before Depreciation and Amortization to
Operating Income and Net Income (Loss)

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

|                                                                                                  |  |                           |       |      |  |          |         |   |  |  |     |   
|------------------------------------------------------------------------------------------------- |  | ------------------------- | ----- | ---- |  | -------- | ------- | - |  |  | --- | --
|                                                                                                  |  | Six Months Ended June 30, |       |      |  |         
|                                                                                                  |  |                           |       |      |  |         
|                                                                                                  |  | 2003                      |       | 2002 |  | % Change
|                                                                                                  |  |                           |       |      |  |         
|                                                                                                  |  | (in millions)             |       |      |  |         
|Operating Income before Depreciation
and Amortization                                             |  | $                         | 1,230 |      |  | $        | 1,083   |   |  |  | 14  | % 
|Depreciation                                                                                      |  |                           | (576  | )    |  |          | (480    | ) |  |  | 20  | % 
|Amortization                                                                                      |  |                           | (4    | )    |  |          | (2      | ) |  |  | 100 | % 
|                                                                                                  |  |                           |       |      |  |          |         |   |  |  |     |   
|Operating income                                                                                  |  |                           | 650   |      |  |          | 601     |   |  |  | 8   | % 
|Interest expense, net                                                                             |  |                           | (201  | )    |  |          | (175    | ) |  |  | 15  | % 
|Income from equity investments, net                                                               |  |                           | 12    |      |  |          | 4       |   |  |  |    |   
|Minority interest expense                                                                         |  |                           | (31   | )    |  |          | (9      | ) |  |  |    |   
|                                                                                                  |  |                           |       |      |  |          |         |   |  |  |     |   
|Income before income taxes,
discontinued operations and
cumulative effect of an accounting change |  |                           | 430   |      |  |          | 421     |   |  |  | 2   | % 
|Income tax provision                                                                              |  |                           | (4    | )    |  |          | (5      | ) |  |  | (20 | )%
|                                                                                                  |  |                           |       |      |  |          |         |   |  |  |     |   
|Income before discontinued operations and
cumulative effect of an accounting change               |  |                           | 426   |      |  |          | 416     |   |  |  | 2   | % 
|Income from discontinued operations, net of tax                                                   |  |                           | 290   |      |  |          | 447     |   |  |  | (35 | )%
|Cumulative effect of accounting change                                                            |  |                           |      |      |  |          | (21,763 | ) |  |  |    |   
|                                                                                                  |  |                           |       |      |  |          |         |   |  |  |     |   
|Net income (loss)                                                                                 |  | $                         | 716   |      |  | $        | (20,900 | ) |  |  |    |   
|                                                                                                  |  |                           |       |      |  |          |         |   |  |  |     |   

Operating Income before Depreciation and Amortization.Operating Income
before Depreciation and Amortization in 2003 increased 14% to $1.230 billion
from $1.083 billion in 2002. Operating Income before Depreciation and
Amortization increased principally as a result of revenue gains, partially
offset by an increase in costs of revenues and selling, general, and
administrative expenses.

Depreciation.Depreciation increased to $576 million in 2003, from $480
million in 2002. This increase of $96 million, or 20%, compared to 2002 was
primarily due to a change in the nature of the Companys capital spending. As
a result of the completion of the cable system upgrades in mid-2002 and an
increase in the amount of capital spending on customer premise equipment in
recent years, a larger proportion of the Companys property, plant and
equipment consisted of assets with shorter useful lives in 2003 than in 2002.
Depreciation expense relating to these shorter-lived assets, coupled with
existing depreciation expense relating to the upgraded cable systems, has
resulted in increased overall depreciation expense.

Amortization expense.Amortization expense increased to $4 million from
$2 million in 2002 due to an increase in intangible assets associated with the
renewal of cable franchises.

Operating income.Operating income in 2003 increased to $650 million from
$601 million in 2002 due to an increase in Operating Income before Depreciation
and Amortization, offset in part by an increase in depreciation expense.

Interest expense, net.Net interest expense increased in 2003 to $201
million from $175 million in 2002. This increase of $26 million, or 15%,
compared to 2002 was primarily due to interest on the $2.4 billion mandatorily

10



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##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

redeemable preferred equity interest held by AOL Time Warner as a result
of the TWE restructuring, offset in part by declining interest rates on
variable rate debt and lower average debt outstanding.

Income from equity investments, net.Income from equity investments, net,
increased to $12 million in 2003 compared to $4 million in 2002 due to an
increase in the earnings of the Companys unconsolidated joint ventures (i.e.,
Texas Cable Partners, L.P. and Kansas City Cable Partners, L.P.)

Minority interest expense.
Minority interest expense, associated with
TWCs direct interest in TWE-A/N and Road Runner, was $31 million in 2003, compared to $9 million in 2002. This increase
primarily reflects an increase in the profitability of Road Runner in which TWC
has a direct 32% common ownership. To a lesser extent, minority interest
expense increased due to TWCs increased preferred ownership in
TWE-A/N as a result of the TWE restructuring. The results of TWE-A/N
and Road Runner are consolidated by TWE for financial reporting
purposes.

Income tax provision.As a U.S. partnership, TWE is not subject to U.S.
federal income taxation. Income taxes of $4 million in 2003 and $5 million in
2002 have been provided for the operations of TWEs subsidiary corporations and
unincorporated business taxes.

Income before discontinued operations and cumulative effect of accounting
change. The income from continuing operations before the cumulative effect of
an accounting change was $426 million in 2003 compared to $416 million in 2002.
The 2003 results benefited from increases in operating income and income from
equity investments, offset in part by increases in interest and minority
interest expenses.

Net income (loss).Net income was $716 million in 2003 compared to a net
loss of $20.900 billion in 2002. The 2002 net loss was primarily due to the
cumulative effect of an accounting change of $21.763 billion associated with
the adoption of FAS 142 on January 1, 2002. Excluding the cumulative effect of
an accounting change, 2002 net income would have been $863 million compared to
$716 million in 2003. This decrease of $147 million over 2002 is primarily due
to the decrease in income from discontinued operations in the six months ended
June 30, 2003 as compared to the six months ended June 30,
2002.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Current Financial Condition

At June 30, 2003, TWE had $6.402 billion of total debt, including $2.4
billion of mandatorily redeemable preferred securities held by AOL Time Warner,
and $289 million of cash and cash equivalents, representing net debt of $6.113
billion, and partners capital of $23.147 billion. At December 31, 2002, TWE
had $6.952 billion of debt, and $840 million of cash and cash equivalents,
representing net debt of $6.112 billion and partners capital of $37.117
billion. As discussed in further detail below, management believes that the
Companys operating cash flow, cash and equivalents and borrowing capacity are
sufficient to fund capital and liquidity needs for the foreseeable future.

Cash Flows

Operating activities

Operating
cash flow from continuing operations increased 18% to $903
million during the first six months of 2003 compared to $766 million during
the comparable 2002 period, primarily driven by an increase in Operating Income before
Depreciation and Amortization and, to a lesser extent, a decrease in working capital
requirements.

11



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##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Investing activities

The Company has invested significant amounts of capital to upgrade the
technological capability and reliability of its cable systems and to make
selective investments in companies with operations within the cable industry.
Cash used by investing activities of continuing operations decreased 7% to $741
million during the first six months of 2003, compared to $794 million during
the comparable 2002 period, as a result of a 4% decrease in capital
expenditures and decreased spending on investments and acquisitions. The
Company spent $661 million and $691 million on capital expenditures from
continuing operations during the first six months of 2003 and 2002,
respectively. A substantial portion of capital expenditures in 2003 and 2002
were dedicated to purchases of customer premise equipment. The Companys
capital expenditures from continuing operations are comprised of the following
categories:

|                           |                            |   |                           |     |      |   |     |     | 
|-------------------------- | -------------------------- | - | ------------------------- | --- | ---- | - | --- | --- | 
|                           |                            |   | Six Months Ended June 30,
|                           |                            |   |                          
|                           |                            |   | 2003                      |     | 2002
|                           |                            |   |                           |     |     
|                           |                            |   | (in millions)            
|Customer premise equipment |                            | $ | 305                       |     |      | $ | 359 |    
|Scalable infrastructure    |                            |   | 61                        |     |      |   | 77  |    
|Line extensions            |                            |   | 75                        |     |      |   | 73  |    
|Upgrade/rebuilds           |                            |   | 91                        |     |      |   | 64  |    
|Support capital            |                            |   | 129                       |     |      |   | 118 |    
|                           |                            |   |                           |     |      |   |     |    
|                           | Total capital expenditures |   | $                         | 661 |      |   | $   | 691 | 
|                           |                            |   |                           |     |      |   |     |    

The Company anticipates a decrease in overall capital expenditures during
the full year 2003, as compared to the full year 2002. Management also expects expenditures for customer premise
equipment to decline over the next several years as the Companys pace of
adding high-speed data and digital subscribers slows and the unit prices for
set-top boxes, cable modems and digital video recorders (DVRs) decline. See
Note 2 of the financial statements for further discussion of the Companys
depreciation policies.

Financing activities

Cash
used by financing activities of continuing operations was $713 million
 during the first six months of 2003, as compared to $7 million during
the comparable 2002 period. This increase in cash used by financing activities
was primarily due to a decrease in net cash contributions from AOL Time Warner
and an increase in net repayments of debt.

12



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##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Free Cash Flow

The
Company evaluates operating performance based on several measures
including free cash flow. Free cash flow is defined as cash provided
by operating activities less capital expenditures, partnership
distributions and principal payments on capital leases. Management
believes that free cash flow is useful to investors in evaluating
the Companys performance because it is a commonly used
financial analysis tool for measuring and comparing cable
companies liquidity, operating performance and leverage and due
to the capital-intensive nature of the cable business. Free cash flow
should not be considered as an alternative to net income (loss) as an
indicator of performance or as an alternative to net cash provided by
operating activities as a measure of liquidity, and may not be
comparable to similarly titled measures used by other companies. The
Companys free cash flow from continuing operations increased to
$75 million during the first six months of 2003 from
$53 million during the comparable 2002 period primarily due to
increased Operating Income before Depreciation and Amortization and
decreased working capital requirements, partially offset by increased
partnership distributions.

|                                                 |                    |                                                                                             |       |                           |      |      |       |  |        |  
|------------------------------------------------ | ------------------ | ------------------------------------------------------------------------------------------- | ----- | ------------------------- | ---- | ---- | ----- |  | ------ | -
|                                                 |                    |                                                                                             |       | Six Months Ended June 30,
|                                                 |                    |                                                                                             |       |                          
|                                                 |                    |                                                                                             |       | 2003                      |      | 2002
|                                                 |                    |                                                                                             |       |                           |      |     
|Cash provided by operations                      |                    | $                                                                                           | 1,274 |                           |      | $    | 2,236 | 
|                                                 | Reconciling items: |                                                                                             |       |                           |      |      |       |  |       
|                                                 |                    | Income from discontinued operations                                                         |       |                           | (290 | )    |       |  | (447   | )
|                                                 |                    | Operating cash flow adjustments relating
to discontinued operations                         |       |                           | (81  | )    |       |  | (1,023 | )
|                                                 |                    |                                                                                             |       |                           |      |      |       | 
|                                                 |                    | Cash provided by continuing
operating activities                                            |       |                           | 903  |      |       |  | 766    |  
|                                                 | Less:              |                                                                                             |       |                           |      |      |       |  |       
|                                                 |                    | Capital expenditures from
continuing operations                                             |       |                           | (661 | )    |       |  | (691   | )
|                                                 |                    | Partnership distributions and principal
payments on capital leases of
continuing operations |       |                           | (167 | )    |       |  | (22    | )
|                                                 |                    |                                                                                             |       |                           |      |      |       | 
|Free cash flow provided by continuing operations |                    | $                                                                                           | 75    |                           |      | $    | 53    | 
|                                                 |                    |                                                                                             |       |                           |      |      |       | 

Outstanding Debt and Mandatorily Redeemable Preferred Equity

As part of the TWE restructuring, the Companys capital structure was
restructured as follows:



| |  |  | a portion of AOL Time Warners equity interest in TWE was
recapitalized into a $2.4 billion mandatorily redeemable preferred
equity interest in TWE and a 1% residual equity interest in TWE;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | all outstanding amounts borrowed by TWE and its subsidiaries under
a previously existing bank credit facility were extinguished;                                                             
|
| |  |  | the Company settled all previous amounts due to AOL Time Warner;                                                                                                                             
|
| |  |  | the Company borrowed $600 million under its new Senior Revolving
Bank Credit Facility described in more detail in Note 8 to the
unaudited consolidated financial statements; and             
|
| |  |  | ownership in the Company (based on common stock residual interests)
is now held by TWC (94.3%), AOL Time Warner (1.0%) and Comcast (4.7%).                                                   

13



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##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Debt and mandatorily redeemable preferred equity, as of June 30, 2003,
includes the following components:

|                                                                            |  |             |       |               |  |          |       |      |  |                 |            | 
|--------------------------------------------------------------------------- |  | ----------- | ----- | ------------- |  | -------- | ----- | ---- |  | --------------- | ---------- | 
|                                                                            |  | Amounts     |       |               |  |          |       |      |  |                
|                                                                            |  | Outstanding |       |               |  |          |       |      |  |                
|Facility                                                                    |  | (millions)  |       | Interest Rate |  | Maturity
|                                                                            |  |             |       |               |  |         
|TWE
public debt(a)                                                          |  | $           | 3,387 |               |  |          | 7.51  | %(d) |  |                 | 2008- 2033 | 
|Senior Revolving Bank
Credit Facility(b)                                    |  |             | 600   |               |  |          | 1.625 | %(e) |  | January 7, 2004
|Mandatorily redeemable preferred
equity(c)                                  |  |             | 2,400 |               |  |          | 8.059 | %    |  | April 1, 2023  
|Capital leases and other (including $4
million of debt due within one
year) |  |             | 15    |               |  |          |       |      |  |                 |            | 
|                                                                            |  |             |       |               |  |          |       |      |  |                 |            | 
|Total debt and preferred
equity                                             |  | $           | 6,402 |               |  |          |       |      |  |                 |            | 
|                                                                            |  |             |       |               |  |          |       |      |  |                 |            | 



---

|(a) |  | Includes an unamortized fair value adjustment of approximately $187
million as of June 30, 2003, recorded in connection with the
merger of America Online, Inc. and Timer Warner Inc., which is being amortized as a reduction of interest
expense over the term of the debt.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | The Senior Revolving Bank Credit Facility has a total committed
availability of $1.5 billion and matures on January 7, 2004, with an
option to extend its maturity for one year.                                                                                             
|   
|(c) |  | The preferred equity of TWE held by AOL Time Warner pays cash
distributions at an annual rate equal to 8.059% of its face value on a
quarterly basis. The preferred equity matures and is required to be
redeemed in cash by TWE on April 1, 2023.                           
|   
|(d) |  | Calculated as a weighted average interest rate of the various
public debt issuances outstanding (including the amortization of the
related debt premium).                                                                                                                    
|   
|(e) |  | Interest rate is determined by reference to TWEs credit rating and
is currently LIBOR plus 62.5 basis points, including a facility fee of
10 basis points on the aggregate commitment.                                                                                      

Contractual Commitments

In addition to the debt and mandatorily redeemable preferred equity, TWE
has commitments under various firm contractual arrangements to make future
payments for goods and services. These firm commitments secure future rights
to various assets and services to be used in the normal course of operations.
For example, TWE is contractually committed to make 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 these
contracts are not reflected as assets or liabilities on the consolidated
balance sheet.

TWE and Comcast are parties to a funding agreement that requires the
parties to provide additional funding to Texas Cable Partners, L.P. on a
month-to-month basis in an amount projected to enable Texas Cable Partners,
L.P. to comply with all of the covenants in its senior credit agreement and to
pay all of its liabilities and obligations as they mature during that month.
The Companys obligations under the funding agreement totaled $70 million for
the year ended December 31, 2002. This funding agreement expires on January
15, 2004. The Companys expected funding obligation under this agreement is
reflected in the table below under Expected joint venture funding
commitments. Approximately $69 million of the Companys total projected 2003
funding commitment of $81 million was funded in the first six months of 2003.

The following table summarizes the material firm commitments of the
Companys continuing operations at December 31, 2002 and the timing and effect
that these obligations are expected to have on the Companys liquidity and cash
flow in future periods (as adjusted for any significant commitments entered
into subsequent to December

14



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##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

31, 2002). This table excludes repayments on long-term debt and
commitments related to other entities, including certain unconsolidated equity
method investees and the A/N Systems, for which the Company purchases
programming and certain fixed assets and is reimbursed. The amounts included
in the table below have not been reduced for any actual payments made in the
period from January 1, 2003 to June 30, 2003. TWE expects to fund these firm
commitments with operating cash flow generated in the normal course of
business.

|                                               |       |   |                  |       |      |   |            |       |          |   |       |       |  |   |       |        | 
|---------------------------------------------- | ----- | - | ---------------- | ----- | ---- | - | ---------- | ----- | -------- | - | ----- | ----- |  | - | ----- | ------ | 
|                                               |       |   | Firm Commitments
|                                               |       |   |                 
|                                               |       |   |                  |       |      |   | 2004-      |       | 2007 and |   |       |       | 
|                                               |       |   | 2003             |       | 2006 |   | thereafter |       | Total   
|                                               |       |   |                  |       |      |   |            |       |         
|                                               |       |   | (in millions)   
|Programming payments (a)                       |       | $ | 1,064            |       |      | $ | 3,790      |       |          | $ | 4,674 |       |  | $ | 9,528 |       
|Expected joint venture funding commitments (b) |       |   | 81               |       |      |   |           |       |          |   |      |       |  |   | 81    |       
|Operating leases (c)                           |       |   | 39               |       |      |   | 103        |       |          |   | 142   |       |  |   | 284   |       
|Data processing payments                       |       |   | 27               |       |      |   | 49         |       |          |   | 56    |       |  |   | 132   |       
|High speed data connectivity                   |       |   | 40               |       |      |   | 40         |       |          |   |      |       |  |   | 80    |       
|Converters (d)                                 |       |   | 182              |       |      |   | 51         |       |          |   |      |       |  |   | 233   |       
|Other                                          |       |   | 9                |       |      |   | 3          |       |          |   | 2     |       |  |   | 14    |       
|                                               |       |   |                  |       |      |   |            |       |          |   |       |       |  |   |       |       
|                                               | Total |   | $                | 1,442 |      |   | $          | 4,036 |          |   | $     | 4,874 |  |   | $     | 10,352 | 
|                                               |       |   |                  |       |      |   |            |       |          |   |       |       |  |   |       |       



---

|(a) |  | The Company has purchase commitments with various programming vendors in
order to provide video services to subscribers. The amounts of the
commitments reflected above are based on the number of consolidated
subscribers at December 31, 2002 applied to the per subscriber contractual
rates contained in the contracts that were in effect as of December 31,
2002 and revised to include significant contracts signed in the first six
months of 2003.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | The projected funding commitments relate to Texas Cable Partners, L.P.                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(c) |  | Operating lease obligations primarily relate to the minimum lease rental
obligations for real estate and operating equipment in various locations.                                                                                                                                                                                                                                                                                                          
|   
|(d) |  | Amounts reflect commitments entered into subsequent to December 31, 2002
and do not reflect any payments made in 2003.                                                                                                                                                                                                                                                                                                                                      

The Company also has various contractual arrangements that require it to
make payments or provide funding if specified circumstances occur, which
are referred to as contingent commitments. TWE does not expect that the
contingent commitments summarized in the table below will result in any amounts
being paid in the foreseeable future. The following table summarizes
contingent commitments at December 31, 2002 of the Companys continuing
operations. The timing of amounts presented in the table represents when the
maximum contingent commitment will expire and does not mean that TWE expects to
incur an obligation to make any payments during that time frame.

|                                                   |       |   |                        |     |      |   |            |       |          |   |     |     |  |   |       |       | 
|-------------------------------------------------- | ----- | - | ---------------------- | --- | ---- | - | ---------- | ----- | -------- | - | --- | --- |  | - | ----- | ----- | 
|                                                   |       |   | Contingent Commitments
|                                                   |       |   |                       
|                                                   |       |   |                        |     |      |   | 2004-      |       | 2007 and |   |     |     | 
|                                                   |       |   | 2003                   |     | 2006 |   | thereafter |       | Total   
|                                                   |       |   |                        |     |      |   |            |       |         
|                                                   |       |   | (in millions)         
|Guarantee
of debt (a)                              |       | $ | 100                    |     |      | $ | 2,000      |       |          | $ |    |     |  | $ | 2,100 |      
|Letters of credit and other
contingent commitments |       |   | 25                     |     |      |   |           |       |          |   | 107 |     |  |   | 132   |      
|                                                   |       |   |                        |     |      |   |            |       |          |   |     |     |  |   |       |      
|                                                   | Total |   | $                      | 125 |      |   | $          | 2,000 |          |   | $   | 107 |  |   | $     | 2,232 | 
|                                                   |       |   |                        |     |      |   |            |       |          |   |     |     |  |   |       |      



---

|(a) |  | TWE guarantee of TWC debt given in connection with the TWE restructuring
on March 31, 2003.
|--- |  | -------------------------------------------------------------------------------------------

Prior to the TWE restructuring, TWE had various contingent commitments,
including guarantees, related to the TWE Non-cable Businesses. In connection
with the TWE restructuring, some of these commitments were not

15



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##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

transferred with their applicable Non-cable Business and they remain
contingent commitments of TWE. AOL Time Warner and Warner Communications Inc.
have agreed, on a joint and several basis, to indemnify TWE from and against
any and all of these contingent liabilities, but TWE remains a party to these
commitments. These contingent commitments are not included in the table above.

The Company has an interest in and manages two cable joint ventures,
Kansas City Cable Partners, L.P. (serving approximately 300,000 basic
subscribers as of June 30, 2003) and Texas Cable Partners, L.P. (serving
approximately 1.2 million basic subscribers as of June 30, 2003), both of which
are 50%-owned by TWE and 50%-owned by Comcast. Under the terms of the two
joint venture agreements, either partner may after August 31, 2003 with respect
to Kansas City Cable Partners, L.P. and after December 31, 2003 with respect to
Texas Cable Partners, L.P., initiate buy-sell procedures based on the market
value of the joint venture interests. The Company does not have current plans
to initiate the buy-sell procedure in either joint venture. If a buy-sell
procedure were initiated by Comcast with respect to either joint venture, TWE
would have a choice either to buy Comcasts interests in the joint venture or
to sell its interests in the joint venture to Comcast. However, in such an
event, the Company would be under no obligation to purchase Comcasts
interests. Additionally, in 2005, under the terms of both joint venture
agreements, either partner may trigger the dissolution of the joint ventures
resulting in the distribution of the net assets of the joint ventures to the
partners. Any actions to be taken by the Company under the buy-sell or
dissolution procedures will be evaluated in the context of the Companys
strategy for its Cable operations and AOL Time Warners overall capital
structure and debt reduction plans. These buy-sell arrangements are not
reflected in the above table of contingent commitments.

TWE is required, at least quarterly, to make tax distributions to its
partners in proportion to their residual interests in an aggregate amount
generally equivalent to a percentage of TWEs taxable income.

As discussed in further detail below in the Equity Risk section, TWE is
required to make cash distributions to AOL Time Warner when the Companys
employees exercise previously issued AOL Time Warner stock options.

As part of the
TWE restructuring, there was $2.1 billion of pre-existing
debt of a Comcast subsidiary incurred by TWC in the form of a one-year term
loan with an optional extension for an additional year. The term note
bears interest at a rate of LIBOR plus 87.5 basis points. Repayment of this term
note, including accrued interest, is guaranteed by TWE in the event of TWCs default. This guarantee is
included in the above table of contingent commitments.

For so long as the indebtedness of TWC and/or its subsidiaries and
affiliates (including TWE) is, in AOL Time Warners judgment, attributable to
AOL Time Warner in evaluating its credit profile, TWC, its subsidiaries and
affiliates will not, without the consent of AOL Time Warner, create, incur or
guarantee any indebtedness, including preferred equity, and rental obligations,
if TWCs ratio of indebtedness plus six times its annual rental expense to an
amount contractually defined as EBITDAR then exceeds or would exceed 3:1.

MARKET RISK MANAGEMENT AND OTHER

Market risk is the potential loss arising from adverse changes in market
rates and prices, such as interest rates and changes in the market value of
investments. As a result of the TWE restructuring on March 31, 2003, the
Companys market risk profile materially changed from what was disclosed in
TWEs Annual Report on Form 10-K for the year ended December 31, 2002 (the
2002 10-K). Accordingly, TWE has included in this interim filing certain
market risk disclosures as of March 31, 2003, which include the impact of the
TWE restructuring, as an update to the 2002 10-K. In addition, these
disclosures have been further updated for any material changes occurring during
the second quarter of 2003.

16



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##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Interest Rate Risk

Variable Rate Debt

As of March 31, 2003, TWE had an outstanding balance of approximately $600
million of variable-rate debt. Based on the variable rate obligations
outstanding at March 31, 2003, each 25 basis point increase or decrease in the
level of interest rates would, respectively, increase or decrease the annual
interest expense and related cash payments by approximately $2 million. These
potential increases or decreases are based on 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.

Fixed Rate Debt

As of March 31, 2003, TWE had an outstanding balance of approximately
$5.790 billion of fixed-rate debt and preferred equity. Based on the
fixed-rate debt obligations outstanding at March 31, 2003, each 25 basis point
increase or decrease in the level of interest rates would, respectively,
increase or decrease the fair value of the fixed-rate debt by approximately
$166 million. These potential increases or decreases are based on simplifying
assumptions, including a constant level and rate of fixed-rate debt 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.

Equity Risk

The Company is also exposed to market risk as it relates to changes in the
market value of investments. TWE invests in equity instruments of private
companies for operational and strategic business purposes. Its investments are
subject to significant fluctuations in fair market value due to volatility of
the industries in which the companies operate. As of June 30, 2003, TWE had
$1.599 billion of investments primarily accounted for using the equity method
of accounting.

Some of TWEs employees were previously issued options to purchase shares
of AOL Time Warner common stock. TWE has agreed that, upon the exercise of any
of these options to purchase AOL Time Warner common stock, TWE will reimburse
AOL Time Warner in an amount equal to the excess of the closing price of a
share of AOL Time Warner common stock on the date of the exercise of the option
over the aggregate exercise price paid upon exercise for each share of AOL Time
Warner common stock. At June 30, 2003, TWE had accrued approximately $17
million of stock option distributions payable to AOL Time Warner. That amount,
which is not payable until the underlying options are exercised, will be
adjusted in subsequent accounting periods based on changes in the quoted market
prices for AOL Time Warners common stock.

Inflation

Although the fees paid under some programming agreements with programming
vendors are adjusted based on the consumer price index, the Company does not
believe that its operations are materially affected by inflation.

Seasonality

TWEs business is subject to some seasonal trends in subscribers. The
Companys basic subscriber count tends to decline in the summer and return to
previous levels in the fall. This seasonality is largely due to college
students and other individuals who disconnect their cable service in the summer
months and reconnect in the fall.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS AND RISK FACTORS

The SEC encourages companies to disclose forward-looking information so
that investors can better understand a companys future prospects and make
informed investment decisions. This document contains such forward-looking
17TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONstatements within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements anticipating future
growth in revenues, Operating Income before Depreciation and Amortization and
cash flow. Words such as anticipates, estimates, expects, projects,
intends, plans, believes and words and terms of similar substance used in
connection with any discussion of future operating or financial performance
identify such forward-looking statements. Those forward-looking statements are
based on managements present expectations about future events. As with any
projection or forecast, they are inherently susceptible to uncertainty and
changes in circumstances, and TWE is under no obligation to (and expressly
disclaims any such obligation to) update or alter its forward-looking
statements whether as a result of such changes, new information, future events
or otherwise.The Company operates in a highly competitive and rapidly changing business
that is customer and technology-driven. The Companys business is affected by
government regulation, economic, strategic, political and social conditions,
customer responses to new and existing products and services and technological
developments. The Company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 the Company in the future and could also cause actual results to differ
materially from those contained in the forward-looking statements, including
those identified in the Companys other filings with the SEC and the following:
        
        more aggressive than expected competition from new
technologies and other distributors of video programming and
high-speed data services such as satellite, terrestrial wireless and
DSL;
        
        continued price discounting by
DSL operators in the
Companys operating areas;
        
        greater than expected increases in programming or other
costs, including costs of its new products and services, or
difficulty in passing such costs to the Companys subscribers;
        
        the unexpected loss of popular programming or exclusive
arrangements between programming providers and the Companys
competitors with respect to popular programming;
        
        increases in government regulation of video programming rates
or other government regulation of the Companys video, high-speed
data and voice operations, such as the imposition of digital
must-carry, forced access, or common carrier requirements;
        
        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, voice services or video-on-demand, to
appeal to enough subscribers or to be available at prices
subscribers are willing to pay, to function as expected and to be
delivered in a timely fashion;
        
        changes in technology and failure to anticipate technological
developments or to choose technologies appropriately;
        
        fluctuations in spending levels by customers and advertisers;
        
        unanticipated changes in the level of non-discretionary capital expenditures;
        
        inability to realize the value of recorded intangibles
resulting in possible future impairments of the Companys cable
franchise intangibles that would affect its operating results;
        
        unanticipated funding obligations relating to some of the
Companys significant cable system joint ventures; and18TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
        
        the Companys overall financial strategy, including growth in
operations, maintaining its financial ratios and strong balance
sheet could be adversely affected by decreased liquidity in the
capital markets, including any reduction in ability to access either
the capital markets for debt securities or bank financing, increased
interest rates, failure to meet earnings expectations, significant
acquisitions or other transactions, economic slowdowns and changes
in the Companys plans, strategies and intentions.19Item 4. Controls and ProceduresTWE, 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-15(e) under the Securities Exchange Act of
1934 (the Exchange Act)) as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and the Chief Financial
Officer 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 these entities, its
disclosure controls and procedures with respect to such entities are
necessarily substantially more limited than those it maintains with respect to
its consolidated subsidiaries. There have not been changes in TWEs internal
control over financial reporting during the quarter ended June 30, 2003 that
have materially affected, or are reasonably likely to materially affect, TWEs
internal control over financial reporting.20TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET

|                                                          |                           |   |             |        |              |   |         |        | 
|--------------------------------------------------------- | ------------------------- | - | ----------- | ------ | ------------ | - | ------- | ------ | 
|                                                          |                           |   | June 30,    |        | December 31,
|                                                          |                           |   | 2003        |        | 2002        
|                                                          |                           |   |             |        |             
|                                                          |                           |   | (millions) 
|                                                          |                           |   | (unaudited) |        |              |   |        
|ASSETS                                                    |                           |   |             |        |              |   |         |       
|Current Assets                                            |                           |   |             |        |              |   |         |       
|Cash and cash equivalents                                 |                           | $ | 289         |        |              | $ | 840     |       
|Receivables, less allowances of $48 and $46, respectively |                           |   | 323         |        |              |   | 351     |       
|Receivables from affiliated parties                       |                           |   | 16          |        |              |   | 126     |       
|Current assets of discontinued operations                 |                           |   |            |        |              |   | 4,789   |       
|Prepaid expenses and other current assets                 |                           |   | 47          |        |              |   | 32      |       
|                                                          |                           |   |             |        |              |   |         |       
|                                                          | Total current assets      |   |             | 675    |              |   |         | 6,138  | 
|                                                         
|Investments                                               |                           |   | 1,599       |        |              |   | 1,508   |       
|Property, plant and equipment, net                        |                           |   | 6,673       |        |              |   | 6,618   |       
|Other intangible assets not subject to amortization       |                           |   | 23,695      |        |              |   | 20,429  |       
|Other intangible assets subject to amortization           |                           |   | 59          |        |              |   | 63      |       
|Noncurrent assets of discontinued operations              |                           |   |            |        |              |   | 19,568  |       
|Other assets                                              |                           |   | 95          |        |              |   | 78      |       
|                                                          |                           |   |             |        |              |   |         |       
|                                                          | Total assets              |   | $           | 32,796 |              |   | $       | 54,402 | 
|                                                          |                           |   |             |        |              |   |         |       
|LIABILITIES AND PARTNERS CAPITAL                         |                           |   |             |        |              |   |         |       
|Current liabilities                                       |                           |   |             |        |              |   |         |       
|Accounts payable                                          |                           | $ | 227         |        |              | $ | 505     |       
|Deferred revenue and subscriber related liabilities       |                           |   | 75          |        |              |   | 65      |       
|Payables to affiliated parties                            |                           |   | 233         |        |              |   | 131     |       
|Accrued programming expense                               |                           |   | 277         |        |              |   | 243     |       
|Debt due within one year                                  |                           |   | 4           |        |              |   | 8       |       
|Current liabilities of discontinued operations            |                           |   |            |        |              |   | 5,285   |       
|Other current liabilities                                 |                           |   | 643         |        |              |   | 627     |       
|                                                          |                           |   |             |        |              |   |         |       
|                                                          | Total current liabilities |   |             | 1,459  |              |   |         | 6,864  | 
|                                                         
|Long-term debt                                            |                           |   | 3,998       |        |              |   | 6,944   |       
|Mandatorily redeemable preferred securities               |                           |   | 2,400       |        |              |   |        |       
|Deferred income tax obligations                           |                           |   | 4           |        |              |   | 8       |       
|Noncurrent liabilities of discontinued operations         |                           |   |            |        |              |   | 2,378   |       
|Other liabilities                                         |                           |   | 290         |        |              |   | 248     |       
|                                                          |                           |   |             |        |              |   |         |       
|                                                          | Total liabilities         |   |             | 8,151  |              |   |         | 16,442 | 
|                                                         
|Minority interest                                         |                           |   | 1,498       |        |              |   | 843     |       
|                                                          |                           |   |             |        |              |   |         |       
|Partners capital                                         |                           |   |             |        |              |   |         |       
|Contributed capital                                       |                           |   | 39,098      |        |              |   | 59,936  |       
|Accumulated other comprehensive loss, net                 |                           |   | (101        | )      |              |   | (166    | )     
|Partners deficit                                         |                           |   | (15,850     | )      |              |   | (22,653 | )     
|                                                          |                           |   |             |        |              |   |         |       
|Total partners capital                                   |                           |   | 23,147      |        |              |   | 37,117  |       
|                                                          |                           |   |             |        |              |   |         |       
|Total liabilities and partners capital                   |                           | $ | 32,796      |        |              | $ | 54,402  |       
|                                                          |                           |   |             |        |              |   |         |       

See accompanying notes.

21



---



##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)

|                                                                                                    |                                                 |                                              |       |                             |      |                           |       |       |      |      |       |       |      |   |         |       |      |  
|--------------------------------------------------------------------------------------------------- | ----------------------------------------------- | -------------------------------------------- | ----- | --------------------------- | ---- | ------------------------- | ----- | ----- | ---- | ---- | ----- | ----- | ---- | - | ------- | ----- | ---- | -
|                                                                                                    |                                                 |                                              |       | Three Months Ended June 30, |      | Six Months Ended June 30,
|                                                                                                    |                                                 |                                              |       |                             |      |                          
|                                                                                                    |                                                 |                                              |       | 2003                        |      | 2002                      |       | 2003  |      | 2002
|                                                                                                    |                                                 |                                              |       |                             |      |                           |       |       |      |     
|                                                                                                    |                                                 |                                              |       | (in millions)              
|Revenues:                                                                                           |                                                 |                                              |       |                             |      |                           |       |       |      |      |       |       |      |   |         |      
|                                                                                                    | Video                                           |                                              | $     | 1,207                       |      |                           | $     | 1,116 |      |      | $     | 2,388 |      |   | $       | 2,201 |     
|                                                                                                    | High-speed data                                 |                                              |       | 309                         |      |                           |       | 218   |      |      |       | 589   |      |   |         | 419   |     
|                                                                                                    | Advertising                                     |                                              |       | 100                         |      |                           |       | 144   |      |      |       | 186   |      |   |         | 272   |     
|                                                                                                    |                                                 |                                              |       |                             |      |                           |       |       |      |      |       |       |      |   |         |      
|Total
revenues(a)                                                                                   |                                                 |                                              | 1,616 |                             |      |                           | 1,478 |       |      |      | 3,163 |       |      |   | 2,892   |      
|Costs and expenses:                                                                                 |                                                 |                                              |       |                             |      |                           |       |       |      |      |       |       |      |   |         |      
|                                                                                                    | Cost
of revenues(a)                             |                                              |       | 695                         |      |                           |       | 645   |      |      |       | 1,378 |      |   |         | 1,268 |     
|                                                                                                    | Selling,
general and administrative expenses(a) |                                              |       | 271                         |      |                           |       | 281   |      |      |       | 555   |      |   |         | 541   |     
|                                                                                                    | Depreciation                                    |                                              |       | 294                         |      |                           |       | 250   |      |      |       | 576   |      |   |         | 480   |     
|                                                                                                    | Amortization of intangible assets               |                                              |       | 2                           |      |                           |       | 1     |      |      |       | 4     |      |   |         | 2     |     
|                                                                                                    |                                                 |                                              |       |                             |      |                           |       |       |      |      |       |       |      |   |         |      
|Total costs and expenses                                                                            |                                                 |                                              | 1,262 |                             |      |                           | 1,177 |       |      |      | 2,513 |       |      |   | 2,291   |      
|                                                                                                    |                                                 |                                              |       |                             |      |                           |       |       |      |      |       |       |      |   |         |      
|Operating income                                                                                    |                                                 |                                              | 354   |                             |      |                           | 301   |       |      |      | 650   |       |      |   | 601     |      
|Interest
expense, net(a)                                                                            |                                                 |                                              | (124  | )                           |      |                           | (83   | )     |      |      | (201  | )     |      |   | (175    | )    
|Income from equity investments, net                                                                 |                                                 |                                              | 7     |                             |      |                           | 3     |       |      |      | 12    |       |      |   | 4       |      
|Minority interest expense                                                                           |                                                 |                                              | (19   | )                           |      |                           | (2    | )     |      |      | (31   | )     |      |   | (9      | )    
|                                                                                                    |                                                 |                                              |       |                             |      |                           |       |       |      |      |       |       |      |   |         |      
|Income before taxes, discontinued operations
and cumulative effect of accounting change             |                                                 |                                              | 218   |                             |      |                           | 219   |       |      |      | 430   |       |      |   | 421     |      
|Income tax provision                                                                                |                                                 |                                              |      |                             |      |                           | (3    | )     |      |      | (4    | )     |      |   | (5      | )    
|                                                                                                    |                                                 |                                              |       |                             |      |                           |       |       |      |      |       |       |      |   |         |      
|Income before discontinued operations
and cumulative effect of accounting change                    |                                                 |                                              | 218   |                             |      |                           | 216   |       |      |      | 426   |       |      |   | 416     |      
|Income from discontinued operations before
cumulative effect of accounting change, net of tax       |                                                 |                                              |      |                             |      |                           | 267   |       |      |      | 290   |       |      |   | 447     |      
|Cumulative effect of accounting change                                                              |                                                 |                                              |      |                             |      |                           |      |       |      |      |      |       |      |   | (21,763 | )    
|                                                                                                    |                                                 |                                              |       |                             |      |                           |       |       |      |      |       |       |      |   |         |      
|Net income (loss)                                                                                   |                                                 | $                                            | 218   |                             |      | $                         | 483   |       |      | $    | 716   |       |      | $ | (20,900 | )    
|                                                                                                    |                                                 |                                              |       |                             |      |                           |       |       |      |      |       |       |      |   |         |      
|(a) Includes the following income (expenses)
resulting from transactions
   with related companies: |                                                 |                                              |       |                             |      |                           |       |       |      |      |       |       |      |   |         |      
|                                                                                                    |                                                 | Revenues                                     |       | $                           | 58   |                           |       | $     | 44   |      |       | $     | 105  |   |         | $     | 81   |  
|                                                                                                    |                                                 | Cost of revenues                             |       |                             | (130 | )                         |       |       | (120 | )    |       |       | (254 | ) |         |       | (236 | )
|                                                                                                    |                                                 | Selling, general and administrative expenses |       |                             | 18   |                           |       |       | 7    |      |       |       | 24   |   |         |       | 5    |  
|                                                                                                    |                                                 | Interest expense, net                        |       |                             | (45  | )                         |       |       | 3    |      |       |       | (42  | ) |         |       | 5    |  

See accompanying notes.

22



---



##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
(Unaudited)

|                                                             |                                           |   |            |        |      |   |         |        |  
|------------------------------------------------------------ | ----------------------------------------- | - | ---------- | ------ | ---- | - | ------- | ------ | -
|                                                             |                                           |   | 2003       |        | 2002
|                                                             |                                           |   |            |        |     
|                                                             |                                           |   | (millions)
|OPERATIONS                                                   |                                           |   |            |        |      |   |         |       
|Net
income (loss)(a)                                         |                                           | $ | 716        |        |      | $ | (20,900 | )     
|Adjustments for noncash and nonoperating items:              |                                           |   |            |        |      |   |         |       
|                                                             | Cumulative
effect of accounting change(b) |   |            |       |      |   |         | 21,763 |  
|                                                             | Depreciation and amortization             |   |            | 580    |      |   |         | 482    |  
|                                                             | Equity in income of investees             |   |            | (12    | )    |   |         | (4     | )
|Changes in operating assets and liabilities                  |                                           |   | (91        | )      |      |   | (128    | )     
|Adjustments relating to discontinued operations              |                                           |   | 81         |        |      |   | 1,023   |       
|                                                             |                                           |   |            |        |      |   |         |       
|                                                             | Cash provided by operations               |   |            | 1,274  |      |   |         | 2,236  |  
|INVESTING ACTIVITIES                                         |                                           |   |            |        |      |   |         |       
|Capital expenditures                                         |                                           |   | (661       | )      |      |   | (691    | )     
|Investment and acquisitions                                  |                                           |   | (80        | )      |      |   | (103    | )     
|Cash used by investing activities of discontinued operations |                                           |   | (157       | )      |      |   | (269    | )     
|                                                             |                                           |   |            |        |      |   |         |       
|                                                             | Cash used by investing activities         |   |            | (898   | )    |   |         | (1,063 | )
|FINANCING ACTIVITIES                                         |                                           |   |            |        |      |   |         |       
|Borrowings                                                   |                                           |   | 592        |        |      |   | 2,301   |       
|Debt repayments                                              |                                           |   | (1,457     | )      |      |   | (3,128  | )     
|Cash contributions from AOL Time Warner subsidiary, net      |                                           |   | 152        |        |      |   | 834     |       
|Cash used by financing activities of discontinued operations |                                           |   | (386       | )      |      |   | (1,201  | )     
|                                                             |                                           |   |            |        |      |   |         |       
|                                                             | Cash used by financing activities         |   |            | (1,099 | )    |   |         | (1,194 | )
|                                                             |                                           |   |            |        |      |   |         |       
|Decrease in cash and cash equivalents                        |                                           |   | (723       | )      |      |   | (21     | )     
|                                                            
|Cash
and cash equivalents at beginning of period(c)          |                                           |   | 1,012      |        |      |   | 93      |       
|                                                             |                                           |   |            |        |      |   |         |       
|Cash and cash equivalents at end of period                   |                                           | $ | 289        |        |      | $ | 72      |       
|                                                             |                                           |   |            |        |      |   |         |       



---

|(a) |  | Includes net income (loss) from discontinued operations of $290 million in
2003 and $(4.549) billion in 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Includes cumulative effect of accounting
change for discontinued operations of $4.996 billion in 2002.       
|   
|(c) |  | Includes cash
and cash equivalents from discontinued operations of $172 million at December
31, 2002.        

See accompanying notes.

23



---



##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(Unaudited)

|                                                                                                                                                           |  |                |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                                                                                                                                           |  | Six Months    
|                                                                                                                                                           |  | Ended June 30,
|                                                                                                                                                           |  |               
|                                                                                                                                                           |  | 2003           |         | 2002
|                                                                                                                                                           |  |                |         |     
|                                                                                                                                                           |  | (in millions) 
|BALANCE AT BEGINNING OF PERIOD                                                                                                                             |  | $              | 37,117  |      |  | $ | 65,405  |  
|Reallocation of TWE goodwill to the AOL segment of AOL
Time Warner upon adoption of FAS 142                                                                |  |                |        |      |  |   | (6,857  | )
|                                                                                                                                                           |  |                |         |      |  |   |         |  
|Balance at the beginning of period, adjusted to give effect to the
America Online-Time Warner merger and reallocation
of goodwill upon adoption of FAS 142 |  |                | 37,117  |      |  |   | 58,548  |  
|Allocation of purchase price in connection with
TWE restructuring                                                                                          |  |                | 3,242   |      |  |   |        |  
|Conversion of Partners Capital to mandatorily redeemable preferred equity in
connection with the TWE restructuring                                        |  |                | (2,400  | )    |  |   |        |  
|Net income (loss)                                                                                                                                          |  |                | 716     |      |  |   | (20,900 | )
|Other comprehensive loss                                                                                                                                   |  |                |        |      |  |   | 21      |  
|                                                                                                                                                           |  |                |         |      |  |   |         |  
|Comprehensive loss                                                                                                                                         |  |                | 716     |      |  |   | (20,879 | )
|Other                                                                                                                                                      |  |                | (461    | )    |  |   | 179     |  
|Distribution of Non-Cable-Businesses to a subsidiary of AOL Time Warner                                                                                    |  |                | (15,067 | )    |  |   |        |  
|                                                                                                                                                           |  |                |         |      |  |   |         |  
|BALANCE AT END OF PERIOD                                                                                                                                   |  | $              | 23,147  |      |  | $ | 37,848  |  
|                                                                                                                                                           |  |                |         |      |  |   |         |  

See accompanying notes.

24



---



##### 



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

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 31, 2003, AOL Time Warner and Comcast completed the
restructuring of TWE (the TWE restructuring). As a result of the TWE
restructuring, AOL Time Warner acquired complete ownership of
TWEs non-cable
businesses, including Warner Bros., Home Box Office, and TWEs interests in
The WB Network, Comedy Central (which was subsequently sold) and the
Courtroom Television Network (Court TV) collectively the
Non-cable Businesses. Additionally, all of AOL Time
Warners interests in cable, including those that were wholly-owned and
those that were held through TWE are now controlled by a new subsidiary of
AOL Time Warner called Time Warner Cable Inc. (TWC). As part of the
restructuring, AOL Time Warner received a 79% economic interest in TWCs
business which reflects an 82.1% indirect interest in the TWI Cable
Inc. (TWI Cable) assets and its 1% direct and 77.4%
(82.1% times 94.3%) indirect interests in TWE Cable. The 79% economic
interest in Time Warner Cable is calculated with each interest
weighted based on the relative number of cable subscribers in each
entity as compared to the total Time Warner Cable subscribers as
follows:
[(1.6 million TWI Cable subscribers/9.3 million total Time Warner Cable
subscribers times 82.1%) plus (7.7 million TWE subscribers/9.3 million total Time Warner Cable subscribers times 82.1% times 94.3%) plus
(7.7 million subscribers/ 9.3 million total Time Warner Cable subscribers times 1%)].
TWE is now a subsidiary of TWC.
|
| | In exchange for its previous stake in TWE, Comcast: (i) received AOL
Time Warner preferred stock, which will be converted into $1.5 billion of
AOL Time Warner common stock; (ii) received a 21.0% economic interest in
TWCs business; and (iii) was relieved of $2.1 billion of pre-existing debt
at one of its subsidiaries, which was incurred by TWC as part of the TWE
restructuring.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | Comcasts 21.0% economic interest in TWCs business, is held through a
17.9% direct ownership interest in TWC (representing a 10.7% voting
interest) and a limited partnership interest in TWE representing a 4.7%
residual equity interest. AOL Time Warners 79%
economic interest in TWCs
business is held through an 82.1% ownership interest in TWC (representing an
89.3% voting interest) and a partnership interest in TWE representing a 1%
residual equity interest. AOL Time Warner also holds a $2.4 billion
mandatorily redeemable preferred equity interest in TWE. The additional
ownership interests acquired by AOL Time Warner in the TWE restructuring
have been accounted for as a step acquisition and are reflected in the
accompanying balance sheet as of June 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Of the $4.653 billion purchase consideration paid by AOL Time Warner, approximately
$1.403 billion relates to the additional interest in TWEs
cable business acquired and has been
pushed down to TWE. The fair value of the additional interest was
estimated using a combination of a discounted cash flow methodology
and review of market comparisons and recent transactions. This $1.403 billion in purchase consideration has been preliminarily
allocated to the tangible and intangible assets as follows (millions):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                                           |       |   |     |       | 
|------------------------------------------ | ----- | - | --- | ----- | 
|Fair value of tangible net assets acquired |       | $ | 520 |      
|Cable franchises                           |       |   | 880 |      
|Goodwill                                   |       |   | 3   |      
|                                           |       |   |     |      
|                                           | Total |   | $   | 1,403 | 
|                                           |       |   |     |      



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As previously stated, the purchase allocations noted above are preliminary and
additional work needs to be completed to finalize the allocation. Accordingly, there may be
changes to the allocations noted above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In addition,
the 17.9% interest in TWC retained by Comcast was stepped up to fair value.
Fair value was estimated using a combination of a discounted cash
flow methodology and review of market comparisons and recent
transactions. At TWE, this $2,362 billion adjustment is reflected as
an increase in cable franchise
license intangibles and a corresponding increase to contributed capital. The franchise license
intangible assets will not be amortized but will be tested for impairment on an annual basis. As
a result of AOL Time Warners acquisition of TWEs
Non-cable Business (through Warner Communications
Inc.), TWE has presented the TWE Non-cable Businesses as discontinued operations.

25



---



##### 



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Subsequent to the TWE restructuring, the Companys operations primarily
consist of selling video programming and high-speed data services to
subscribers for a monthly fee and related advertising services to a variety
of local, regional and national clients. Subscriber services are
distributed through a network of coaxial and fiber optic cables. TWE is a
subsidiary of TWC. TWC is the second largest operator of cable systems in
the United States serving approximately 10.9 million basic cable subscribers
as of June 30, 2003. This total includes subscribers served by the systems
owned directly by TWEs continuing consolidated operations (approximately
7.7 million subscribers), TWEs directly held and managed unconsolidated
cable joint ventures (approximately 1.5 million subscribers), as well as
subscribers served by systems outside of TWE that are directly or indirectly
owned by TWC and managed by TWE (approximately 1.7 million subscribers).
The financial statements included in this report reflect the operations of
TWEs consolidated cable systems and its equity investments in its cable
system joint ventures, but exclude the results of TWCs cable systems in
which TWE does not have an ownership interest.

Basis of Presentation

Discontinued Operations



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As part of the restructuring of TWE, AOL Time Warner acquired complete
ownership of the TWE Non-cable Businesses. The TWE Non-cable Businesses
have been reflected as discontinued operations for all periods presented.
Revenues from the discontinued operations of the TWE Non-cable Businesses
were $2.819 billion for the three months ended June 30, 2002, and $2.780
billion and $5.171 billion for the six months ended June 30, 2003 and 2002,
respectively. Net income (loss) from the discontinued operations of the TWE
Non-cable Businesses was $263 million for the three months ended June 30,
2002, and $290 million and $(4.552) billion for the six months ended June
30, 2003 and 2002, respectively.                                                                 
|
| | During 2002, TWE and the Advance/Newhouse Partnership
(Advance/Newhouse) restructured the TWE-Advance/Newhouse Partnership
(TWE-A/N) resulting in Advance/Newhouse assuming authority for the
day-to-day operations of certain TWE-A/N cable systems (A/N Systems),
subject to some exceptions. As a result, TWE deconsolidated the financial
position and operating results of these systems and has reflected the 2002
operating results of the A/N Systems prior to the deconsolidation as
discontinued operations. Revenues and net income from the discontinued
operations of the A/N Systems were $363 million and $4 million,
respectively, for the three months ended June 30, 2002, and $715 million and
$3 million, respectively, for the six months ended June 30, 2002.
|
| | In conjunction with the TWE-A/N restructuring, TWC effectively acquired
Advance/Newhouses ownership interest in Road Runner. As a result of this
acquisition and the concurrent termination of Advance/Newhouses minority
veto rights in Road Runner, TWE consolidated the financial position and
results of operations of Road Runner retroactive to the beginning of 2002.
Previously, the Company accounted for its investment in Road Runner under
the equity method of accounting as Advance/Newhouse held certain veto rights
that allowed it to participate in the day-to-day operations of the Road
Runner business.                                                                                                                                                           
|
| | The minority interest
recognized on TWEs balance sheet represents
TWCs direct preferred and common ownership in TWE-A/N and Road Runner.
Subsequent to the TWE restructuring, TWC owns approximately 3% of
TWE-A/N and
32% of Road Runner. In connection with the TWE restructuring, TWC
contributed $662 million of cash to TWE-A/N, which increased TWCs preferred
interest in TWE-A/N to $976 million.                                                                                                                                                                                                                                                                                                                                                                             

Interim Financial Statements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accompanying
consolidated financial statements are unaudited but,
in the opinion of management, contain all the adjustments (consisting of
those of a normal recurring nature) considered necessary to present fairly
the financial position and the results of operations and cash flows for the
periods presented in conformity with accounting principles generally
accepted in the United States applicable to interim periods. The

26



---



##### 



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



| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | accompanying unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of TWE,
included in its Annual Report on Form 10-K for the year ended December 31,
2002.

Basis of Consolidation



| |                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The unaudited consolidated financial statements of TWE include 100% of
the assets, liabilities, revenues, expenses, income, loss and cash flows of
all companies in which TWE has a controlling voting interest. Intercompany
transactions between the consolidated companies have been eliminated.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents



| |                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cash and cash equivalents include money market funds, overnight
deposits 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.

Accounting for Investments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Investments in companies in which TWE has significant influence, but
less than a controlling voting interest, are accounted for using the equity
method. Significant influence is generally presumed to exist when TWE owns
between 20% and 50% of the investee. The effect of any changes in TWE
ownership interests resulting from the issuance of capital by consolidated
subsidiaries or unconsolidated cable television system joint ventures to
unaffiliated parties is included as an adjustment to partners capital.

Revenues and Costs



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys 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. Amounts received from
programming vendors representing the reimbursement of marketing costs are
recognized as a reduction of marketing expenses in the period such
reimbursements are received.

Gross Versus Net Revenue Recognition



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the normal course of business, TWE may act as an intermediary or
agent with respect to payments received from third parties. For example,
TWE collects taxes on behalf of franchising authorities. The accounting
issue encountered in these arrangements is whether TWE should report revenue
based on the gross amount billed to the ultimate customer or on the net
amount received from the customer after payments to franchising authorities.
The Company has determined that these amounts should be reported on a
gross basis.                                                                                                                                                                                                                                      
|
| | Additionally, TWE
records high-speed data revenue from certain
third-party internet service providers on a net basis based on the
contractual circumstances involved. Determining whether revenue should be
reported gross or net is based on an assessment of whether TWE is acting as
the principal in a transaction or acting as an agent in the transaction.
To the extent TWE acts as a principal in a transaction, TWE reports as
revenue the payments received on a gross basis. To the extent TWE acts as
an agent in a transaction, TWE reports as revenue the payments received less
commissions and other payments to third parties on a net basis. The
determination of whether TWE serves as principal or agent in a transaction
is judgmental in nature and based

27



---



##### 



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



| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | on an evaluation of the terms of each arrangement. In determining
whether TWE serves as principal or agent in these arrangements TWE follows
the guidance in Emerging Issues Task Force (EITF) Issue No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent.

Multiple-Element Arrangements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the normal course of business, TWE may enter into multiple-element
transactions where it is simultaneously both a customer and a vendor with
the same counter-party (multiple element transactions). For example, when
negotiating the terms of programming purchase contracts with cable networks,
TWE may simultaneously negotiate for the sale of advertising to the same
cable network. These arrangements may be documented in one contract or may
be documented in separate contracts. Whether it is in one contract or
multiple contracts, these arrangements are considered to have been
negotiated simultaneously for accounting purposes. In accounting for these
types of arrangements, the Company considers guidance in the following
authoritative literature:



| |  |  | APB Opinion No. 29, Accounting for Nonmonetary Transactions;                                                            
| | - |  | --------------------------------------------------------------------------------------------------------------------------
|
| |  |  | EITF Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer;                                     
|
| |  |  | EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21); and                               
|
| |  |  | Staff Accounting Bulletin No. 101: Revenue Recognition in
Financial Statements  Frequently asked Questions and
Answers.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Additionally, in November 2002, the EITF reached a consensus on EITF
Issue No. 02-16, Accounting for Consideration Received from a Vendor by a
Customer (EITF 02-16). The guidance in EITF 02-16 is consistent with
TWEs historical accounting. Specifically, EITF 02-16 presumes that cash
consideration received from a vendor, such as a cable network programmer, is
a reduction of the price to use the vendors products or services and
therefore a reduction in cable programming cost. However, this presumption
is overcome when the cash consideration represents a payment for assets or
services, such as advertising, delivered to the vendor, in which case the
cash consideration should be characterized as revenue when recognized in a
customers income statement. EITF 02-16 also provides that cash
consideration paid by a vendor that exceeds the estimated fair value of the
benefits, such as advertising received by the vendor, should be
characterized in the customers income statement as a reduction of cost of
sales or programming expense.



| |                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | With respect to programming and vendor advertising arrangements being
negotiated simultaneously with the same cable network, TWE assesses whether
each element of the arrangements is at fair value. The factors that the
Company considers in determining the individual fair values of the
programming and advertising vary from arrangement to arrangement and
include:



| |  |  | existence of a most-favored-nation clause or comparable
assurances as to fair market value with respect to programming;
| | - |  | -------------------------------------------------------------------------------------------------------------------------
|
| |  |  | comparison to fees under a prior contract;                                                                               
|
| |  |  | comparison to fees paid for similar networks;                                                                            
|
| |  |  | comparison to advertising rates paid by other advertisers on the Companys systems.                                      

Advertising



| |                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Advertising costs are expensed upon the first exhibition of related
advertisements. Advertising expense, net of reimbursements from
programmers, was $54 million and $50 million for the three months ended June
30, 2003 and 2002, respectively, and $102 million and $89 million for the
six months ended June 30, 2003 and 2002, respectively.

28



---



##### 



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

Accounting for Goodwill and Other Intangible Assets



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, Business Combinations and Statement No. 142 Goodwill
and Other Intangible Assets (FAS 142). These standards changed the
accounting for business combinations by, among other things, prohibiting the
prospective use of pooling-of-interests accounting. In addition, FAS 142
required 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 being amortized. The new rules also require
that goodwill and certain intangible assets be assessed for impairment using
fair value measurement techniques. See Note 5 for further discussion of the
adoption of FAS 142.

Property, Plant and Equipment



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Property, plant and equipment are stated at cost. The Company incurs
expenditures associated with the construction and maintenance of its cable
systems. Costs associated with the construction of the cable transmission
and distribution facilities and new cable service installations are
capitalized. TWE capitalizes expenditures for tangible fixed assets greater
than $500 and having a useful life of greater than one year.                                                                                                                                                                                                                                                                                                                                                                        
|
| | Capitalized costs typically include direct material, direct labor,
overhead and interest. Sales and marketing costs, as well as the costs of
repairing or maintaining existing fixed assets, are expensed as incurred.
Types of capitalized expenditures include plant upgrades, drops (i.e.,
customer installations), converters and cable modems. With respect to
customer premise equipment, including converters and cable modems, TWE
capitalizes direct installation charges only upon the initial deployment of
such assets. All costs incurred in subsequent disconnects and reconnects
are expensed as incurred. Depreciation on these assets is provided
generally using the straight-line method over their estimated useful
life (three to five years).
Property, plant and equipment consists of:

|                               |       |   |          |       |              |   |              |       |  |            |  |  | 
|------------------------------ | ----- | - | -------- | ----- | ------------ | - | ------------ | ----- |  | ---------- |  |  | 
|                               |       |   | June 30, |       | December 31, |   | Estimated   
|                               |       |   | 2003     |       | 2002         |   | Useful Lives
|                               |       |   |          |       |              |   |             
|                               |       |   |          |       | (millions)   |   |              |       |  |            | 
|Land
and buildings(a)          |       | $ | 404      |       |              | $ | 381          |       |  | 5-20 years
|Distribution systems           |       |   | 7,522    |       |              |   | 7,172        |       |  | 3-16 years
|Vehicles and other equipment   |       |   | 647      |       |              |   | 549          |       |  | 3-10 years
|Construction in progress       |       |   | 544      |       |              |   | 523          |       |  |            |  | 
|                               |       |   |          |       |              |   |              |       |  |            |  | 
|                               |       |   | 9,117    |       |              |   | 8,625        |       |  |            |  | 
|Less: Accumulated depreciation |       |   | (2,444   | )     |              |   | (2,007       | )     |  |            |  | 
|                               |       |   |          |       |              |   |              |       |  |            |  | 
|                               | Total |   | $        | 6,673 |              |   | $            | 6,618 |  |            |  |  | 
|                               |       |   |          |       |              |   |              |       |  |            |  | 



---

|(a) |  | Land is not depreciated.
|--- |  | ------------------------

Computer Software



| |                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | TWE capitalizes certain costs incurred for the development of internal
use software. These costs, which include the costs associated with coding,
software configuration, upgrades and enhancements are included in property,
plant and equipment in the accompanying consolidated balance sheet. Such
costs are depreciated on a straight-line basis over 3 to 5 years.

29



---



##### 



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

Valuation of Long-Lived Assets



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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 to the extent that the carrying value of such
asset is greater than its fair value.

Cable Franchises



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cable franchises include the value attributed to agreements with local
authorities that allow access to homes and businesses in cable services
areas acquired in connection with a business combination. Following the
adoption of FAS 142 in the first quarter of 2002, cable franchises
capitalized in purchase business combinations are no longer amortized but
are subject to an annual review for impairment. Other costs incurred to
negotiate and renew cable franchise agreements are generally capitalized and
amortized over the term of such franchise agreements.

Stock Options



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | TWE employees participate in various AOL Time Warner stock option
plans. In accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related
interpretations, compensation cost for stock options granted to employees 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 over the amount an employee must
pay to acquire the stock. Generally, the exercise price for stock options
granted to employees equals or exceeds the fair market value of AOL Time
Warner common stock at the date of grant, thereby resulting in no
recognition of compensation expense by the Company. 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.



| |                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Had compensation cost for AOL Time Warners stock option plans been
determined based on the fair value method set forth in FASB Statement No.
123, Accounting for Stock-Based Compensation (FAS 123), the Companys
net income would have been as follows:

|                                                                                                                |  |                             |     |                           |  |      |     |      |  |   |     |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------- |  | --------------------------- | --- | ------------------------- |  | ---- | --- | ---- |  | - | --- | - |  | - | ------- | -
|                                                                                                                |  | Three Months Ended June 30, |     | Six Months Ended June 30,
|                                                                                                                |  |                             |     |                          
|                                                                                                                |  | 2003                        |     | 2002                      |  | 2003 |     | 2002
|                                                                                                                |  |                             |     |                           |  |      |     |     
|                                                                                                                |  | (in millions)              
|Net income (loss) as reported                                                                                   |  | $                           | 218 |                           |  | $    | 483 |      |  | $ | 716 |   |  | $ | (20,900 | )
|Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards |  |                             | (16 | )                         |  |      | (52 | )    |  |   | (78 | ) |  |   | (140    | )
|                                                                                                                |  |                             |     |                           |  |      |     |      |  |   |     |   |  |   |         |  
|Pro forma net income (loss)                                                                                     |  | $                           | 202 |                           |  | $    | 431 |      |  | $ | 638 |   |  | $ | (21,040 | )
|                                                                                                                |  |                             |     |                           |  |      |     |      |  |   |     |   |  |   |         |  

Segments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | FASB Statement No. 131, Disclosure about Segments of an Enterprise
and Related Information, requires public companies to disclose certain
information about their reportable operating segments. Operating segments
are defined as components of an enterprise for which separate financial
information is available and is evaluated on a regular basis by the chief
operating decision maker in deciding how to allocate resources to an
individual segment and in assessing performance of the segment. Since the
Companys continuing operations provide a variety of services over the same
means of delivery, management has determined the Company has only one
reportable segment.

30



---



##### 



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

Use of Estimates



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The preparation of the accompanying unaudited consolidated financial
statements requires management to make estimates and assumptions that
affect the amounts reported in the unaudited consolidated financial
statements and footnotes thereto. Actual results could differ from those
estimates. Estimates are used when accounting for certain items such as
allowances for doubtful accounts, investments, depreciation and
amortization, asset impairment, non-monetary transactions and
contingencies. Allocation methodologies used to prepare the accompanying
unaudited consolidated financial statements are based on estimates and have
been described in the notes, where appropriate.

3. NEW ACCOUNTING STANDARDS

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 beginning 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 Companys consolidated financial statements. However, the
Company has modified its disclosures as required (see Note 2).

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 is
beyond a minimum retention period. FAS 146 is effective for exit or
disposal activities initiated after December 31, 2002. The application of
the provisions of FAS 146 did not have a material impact on the 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), which
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s
current accounting is consistent with the provisions of EITF 00-21 and
therefore management 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.
|
| | In addition, as previously discussed, in November 2002 the EITF reached
a consensus on EITF 02-16, which provides guidance on how a customer is to
account for arrangements where consideration is both paid to and received
from a vendor. The provisions of EITF 02-16 apply to arrangements entered
into or modified after December 31, 2002. The application of EITF 02-16 did
not have a material impact on the Companys consolidated financial
statements.                                                                                                                                                                                                                              

31



---



##### 



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

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. The
application of FIN 46 will not have any significant impact on the Companys consolidated
financial statements.

Certain Financial Instruments with Characteristics of Both Liabilities and
Equity



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity
(FAS 150). FAS 150 impacts the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
equity. The new Statement requires that those instruments be classified as
liabilities in statements of financial position. The Company does not
expect the provisions of FAS 150 to have a material impact on its financial
position or results of operations.

Guarantees



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45
requires that a liability be recorded on 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 disclosure requirements of FIN 45
are effective for financial statements of interim or annual periods ending
after December 15, 2002. The application of the provisions of FIN 45 did
not have a material impact on the Companys consolidated financial
statements.

4. AOL TIME WARNER MERGER AND RESTRUCTURING COSTS

AOL Time Warner Merger Costs Capitalized as a Cost of Acquisition



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 AOL Time Warner merger), TWE reviewed its operations
and implemented several plans to restructure its operations (the
Restructuring Plans). As part of these Restructuring Plans, TWE recorded
a restructuring liability of approximately $84 million during 2001. This
restructuring liability included costs to exit and consolidate certain
activities of TWE, as well as costs to terminate employees across various
TWE business units. Such liabilities were recognized as part of the AOL
Time Warner merger, which was recorded as a purchase business combination
and were included in the allocation of the cost to acquire Time Warner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | Of the total 2001 restructuring costs, $46 million related to work
force reduction and represented employee termination benefits and relocation
costs. Employee termination costs occurred across the TWE business units
and ranged from senior executives to line personnel. The number of
employees initially identified to be involuntarily terminated or relocated
approximated 1,200. Not all employees who were originally identified were
terminated as of December 31, 2002. Therefore, a non-cash reduction to the
employee termination accrual of $13 million and a corresponding reduction in
goodwill was reflected in the fourth quarter of 2002. Since certain
employees can defer receipt of termination benefits for up to five years,
cash payments will continue after such employees have been terminated. The
remaining termination liability was $12 million as of June 30, 2003.
Approximately $2 million of this amount is included in other current
liabilities with the remainder included in other non-current liabilities.
The 2001 restructuring charge also included approximately $38 million of
lease and contract termination costs. The remaining liability for such exit
costs was $2 million as of June 30, 2003 and is included in other current
liabilities.

32



---



##### 



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



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Selected information relating to the restructuring plans is as follows
(in millions):

|                              |                                   |   |              |    |            |   |       |    |  |   |     |    | 
|----------------------------- | --------------------------------- | - | ------------ | -- | ---------- | - | ----- | -- |  | - | --- | -- | 
|                              |                                   |   | Employee     |    | Other      |   |       |    | 
|                              |                                   |   | Terminations |    | Exit Costs |   | Total
|                              |                                   |   |              |    |            |   |      
|Initial accruals              |                                   | $ | 46           |    |            | $ | 38    |    |  | $ | 84  |   
|Cash paid - 2001              |                                   |   | (3           | )  |            |   | (15   | )  |  |   | (18 | ) 
|                              |                                   |   |              |    |            |   |       |    |  |   |     |   
|                              | Liability as of December 31, 2001 |   |              | 43 |            |   |       | 23 |  |   |     | 66 | 
|Cash paid - 2002              |                                   |   | (15          | )  |            |   | (21   | )  |  |   | (36 | ) 
|Non-cash
reductions - 2002(a) |                                   |   | (13          | )  |            |   |      |    |  |   | (13 | ) 
|                              |                                   |   |              |    |            |   |       |    |  |   |     |   
|                              | Liability as of December 31, 2002 |   |              | 15 |            |   |       | 2  |  |   |     | 17 | 
|Cash paid - 2003              |                                   |   | (3           | )  |            |   |      |    |  |   | (3  | ) 
|                              |                                   |   |              |    |            |   |       |    |  |   |     |   
|                              | Liability as of June 30, 2003     |   | $            | 12 |            |   | $     | 2  |  |   | $   | 14 | 
|                              |                                   |   |              |    |            |   |       |    |  |   |     |   



---

|(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 fourth quarter of 2002, the Company incurred and accrued
other restructuring costs of $13 million, which were included in selling,
general and administrative expense, related to the termination of
approximately 210 employees at various levels and across various TWE cable
business units (the 2002 restructuring). As of December 31, 2002, TWE had
terminated all affected employees. Because certain affected employees can
defer receipt of termination benefits for up to five years, cash payments
will continue after such employees have been terminated. The remaining
liability for terminations in connection with the 2002 restructuring is
approximately $3 million as of June 30, 2003, of which approximately $2
million is included in other current liabilities.

33



---



##### 



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

5. GOODWILL AND OTHER INTANGIBLE ASSETS



| |                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As discussed in Note 2, in January 2002, TWE adopted FAS 142, which required
companies to cease 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.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Upon the adoption of FAS 142 in the first quarter of 2002, the
Companys continuing operations completed its initial impairment review and
recorded a non-cash charge of $16.767 billion to reduce the carrying value
of goodwill arising from the AOL Time Warner merger. The charge is
non-operational in nature and is reflected as a cumulative effect of an
accounting change associated with continuing operations in the accompanying
consolidated statement of operations. The impairment charge was estimated
using a combination of a discounted cash flow methodology and review of
market comparisons and recent transactions. In addition, the Company
recognized a non-cash charge of $4.996 billion related to its discontinued
operations upon the adoption of FAS 142. This charge is also recorded as a
cumulative effect of an accounting change in the accompanying consolidated
statement of operations.
|
| | Prior to performing the review for impairment, FAS 142 required that
goodwill deemed to be related to an entity as a whole be assigned to all of
AOL Time Warners reporting units, including the reporting units of America
Online. This differed from the previous accounting rules where goodwill was
assigned only to the businesses of the company acquired. As a result,
approximately $6.857 billion of goodwill generated in the AOL Time Warner
merger was reallocated from TWE to other segments of AOL Time Warner.                                                                                                                                                                                                                                                                                                                                                                                               
|
| | The impairment charges were non-cash in nature and did not affect the
Companys liquidity or, when combined with the impairment of goodwill of
other AOL Time Warner segments, result in non-compliance with any of AOL
Time Warners debt covenants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | In connection with the TWE restructuring, the purchase accounting
adjustments associated with AOL Time Warners 6% increased ownership
interest in the cable systems of TWE and Comcasts exchange of a portion of
its interest in TWE for an interest in TWC have been allocated to TWE. This
allocation resulted in an increase in TWEs cable franchise intangible
assets of $3.242 billion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

34



---



##### 



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



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of June 30, 2003 and December 31, 2002, the Companys other intangible
assets and related
accumulated amortization included the following (in millions):

|                                              |          |   |               |        |                   |   |             |        |       |   |              |        |     |   |        |        |             |   |        |        |   |   |        |        | 
|--------------------------------------------- | -------- | - | ------------- | ------ | ----------------- | - | ----------- | ------ | ----- | - | ------------ | ------ | --- | - | ------ | ------ | ----------- | - | ------ | ------ | - | - | ------ | ------ | 
|                                              |          |   | June 30, 2003 |        | December 31, 2002
|                                              |          |   |               |        |                  
|                                              |          |   |               |        |                   |   | Accumulated |        |       |   |              |        |     |   |        |        | Accumulated |   |        |        |  
|                                              |          |   | Gross         |        | Amortization      |   | Net         |        | Gross |   | Amortization |        | Net
|                                              |          |   |               |        |                   |   |             |        |       |   |              |        |    
|Intangible assets subject to amortization     |          |   |               |        |                   |   |             |        |       |   |              |        |     |   |        |        |             |   |        |        |   |   |        |       
|Renewal
of cable franchises(a)                |          | $ | 75            |        |                   | $ | (59         | )      |       | $ | 16           |        |     | $ | 73     |        |             | $ | (57    | )      |   | $ | 16     |       
|Other
intangible assets(a)                    |          |   | 66            |        |                   |   | (23         | )      |       |   | 43           |        |     |   | 68     |        |             |   | (21    | )      |   |   | 47     |       
|                                              |          |   |               |        |                   |   |             |        |       |   |              |        |     |   |        |        |             |   |        |        |   |   |        |       
|                                              | Subtotal |   | $             | 141    |                   |   | $           | (82    | )     |   | $            | 59     |     |   | $      | 141    |             |   | $      | (78    | ) |   | $      | 63     | 
|                                              |          |   |               |        |                   |   |             |        |       |   |              |        |     |   |        |        |             |   |        |        |   |   |        |       
|Intangible assets not subject to amortization |          |   |               |        |                   |   |             |        |       |   |              |        |     |   |        |        |             |   |        |        |   |   |        |       
|Goodwill                                      |          | $ | 3             |        |                   | $ |            |        |       | $ | 3            |        |     | $ |       |        |             | $ |       |        |   | $ |       |       
|Cable franchises                              |          |   | 24,948        |        |                   |   | (1,256      | )      |       |   | 23,692       |        |     |   | 21,685 |        |             |   | (1,256 | )      |   |   | 20,429 |       
|                                              |          |   |               |        |                   |   |             |        |       |   |              |        |     |   |        |        |             |   |        |        |   |   |        |       
|                                              | Subtotal |   |               | 24,951 |                   |   |             | (1,256 | )     |   |              | 23,695 |     |   |        | 21,685 |             |   |        | (1,256 | ) |   |        | 20,429 | 
|                                              |          |   |               |        |                   |   |             |        |       |   |              |        |     |   |        |        |             |   |        |        |   |   |        |       
|                                              | Total    |   | $             | 25,092 |                   |   | $           | (1,338 | )     |   | $            | 23,754 |     |   | $      | 21,826 |             |   | $      | (1,334 | ) |   | $      | 20,492 | 
|                                              |          |   |               |        |                   |   |             |        |       |   |              |        |     |   |        |        |             |   |        |        |   |   |        |       



| |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company recorded amortization expense of $2 million and $4 million
for the three and six months ended June 30, 2003, respectively. Based on
the current amount of intangible assets subject to amortization, the
estimated amortization expense for each of the succeeding five years is $7
million. As acquisitions and dispositions occur in the future and as
purchase price allocations are finalized, these amounts may vary.
|
| | The Company recorded the following intangible assets during the six
months ended June 30, 2003:                                                                                                                                                                                                                                                                                                                                       

|                         |       |  |               |       |        |            |             
|------------------------ | ----- |  | ------------- | ----- | ------ | ---------- | ------------
|                         |       |  |               |       |        |            | Amortization
|                         |       |  | (in millions) |       | Period
|                         |       |  |               |       |       
|Goodwill                 |       |  | 3             |       |        | Indefinite
|Cable franchises,
net(a) |       |  | 3,263         |       |        | Indefinite
|                         |       |  |               |       |        |            |             
|                         | Total |  | $             | 3,266 |        |            |             
|                         |       |  |               |       |        |            |             



---

|(a) |  | All of the increase in goodwill and $3.242 billion of the
increase in cable franchises, net is associated with the TWE
restructuring.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------

6. PARTNERS CAPITAL



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | TWE is required to make distributions to reimburse the partners of TWE
for income taxes at statutory rates based on their allocable share of
taxable income and to reimburse AOL Time Warner for stock options granted to
employees of TWE based on the amount by which the market price of AOL Time
Warner common stock exceeds the option exercise price on the exercise date.
TWE accrues a stock option distribution and a corresponding liability with
respect to unexercised options when the market price of AOL Time Warner
common stock increases during the accounting period, and reverses previously
accrued stock option distributions and the corresponding liability when the
market price of AOL Time Warner common stock declines. The stock option
liability for the continuing operations of TWE was approximately $17 million
and $3 million as of June 30, 2003 and December 31, 2002, respectively.
Additionally, $356 million was distributed to the partners for income taxes
during the six months ended June 30, 2003, of which $165 million was related
to the Companys continuing operations. Tax distributions of $271 million
were made to the
partners (including $29 million made to Advance/Newhouse) during the
six months ended June 30, 2002, of which $20 million were related to the
Companys continuing operations.

35



---



##### 



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

7. INVESTMENTS AND JOINT VENTURES



| |                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company had investments of $1.599 billion and $1.508 billion as of
June 30, 2003 and December 31, 2002, respectively. These investments are
comprised almost entirely of equity method investees.                                                                           
|
| | At June 30, 2003 and December 31, 2002, investments accounted for using
the equity method primarily included: Texas Cable Partners, L.P. (50% owned,
approximately 1.2 million subscribers) and Kansas City Cable Partners, L.P.
(50% owned, approximately 300,000 subscribers).

8. DEBT AND MANDATORILY REDEEMABLE PREFERRED EQUITY



| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | A summary of TWEs debt and mandatorily redeemable preferred equity as
of June 30, 2003 and December 31, 2002 is summarized below:

|                                            |                                 |   |                        |       |              |   |       |       | 
|------------------------------------------- | ------------------------------- | - | ---------------------- | ----- | ------------ | - | ----- | ----- | 
|                                            |                                 |   | Outstanding Borrowings
|                                            |                                 |   |                       
|                                            |                                 |   | June 30,               |       | December 31,
|                                            |                                 |   | 2003                   |       | 2002        
|                                            |                                 |   |                        |       |             
|                                            |                                 |   | (millions)            
|Debt due within one year                    |                                 | $ | 4                      |       |              | $ | 8     |      
|                                            |                                 |   |                        |       |              |   |       |      
|Long-term debt:                             |                                 |   |                        |       |              |   |       |      
|Amounts due to
AOL Time Warner              |                                 |   |                       |       |              |   | 2,084 |      
|TWE Public Debt (a)                         |                                 |   | 3,387                  |       |              |   | 3,394 |      
|Senior Revolving Bank Credit Facility       |                                 |   | 600                    |       |              |   |       |      
|2002 Credit Agreement                       |                                 |   |                       |       |              |   | 1,167 |      
|Capital leases and other                    |                                 |   | 11                     |       |              |   | 299   |      
|                                            |                                 |   |                        |       |              |   |       |      
|                                            | Total long-term debt            |   |                        | 3,998 |              |   |       | 6,944 | 
|                                            |                                 |   |                        |       |              |   |       |      
|Mandatorily Redeemable Preferred
Equity (b) |                                 |   | 2,400                  |       |              |   |      |      
|                                            |                                 |   |                        |       |              |   |       |      
|                                            | Total debt and preferred equity |   | $                      | 6,402 |              |   | $     | 6,952 | 
|                                            |                                 |   |                        |       |              |   |       |      



---

|(a) |  | Includes an unamortized debt premium of $187 million
and $194 million as of June 30, 2003 and December 31, 2002,
respectively.                                                                                                                                           
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | The mandatorily redeemable preferred equity of TWE held
by AOL Time Warner pays cash distributions at an annual rate
equal to 8.059% of its face value on a quarterly basis. The
preferred equity matures and is required to be redeemed in cash
by TWE on April 1, 2023.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In conjunction with the TWE restructuring, a $4.0 billion 364-day
revolving bank credit facility that was entered into in 2002 (2002 Credit
Agreement) along with AOL Time Warner and certain of its subsidiaries, was
bifurcated into two separate amended and restated credit agreements. The
two facilities evidence the separate direct obligations of AOL Time Warner,
with aggregate commitments of $2.5 billion, and TWE, with aggregate
commitments of $1.5 billion. TWEs $1.5 billion facility, hereafter
referred to as the Senior
Revolving Bank Credit Facility, matures on January 7, 2004, with an
option to extend the maturity for up to

36



---



##### 



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



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | one year. If TWC becomes a public
registrant, TWC will become a joint and several borrower under the Senior
Revolving Bank Credit Facility.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Borrowings under the Senior Revolving Bank Credit Facility bear
interest at rates generally determined by reference to the credit rating of
TWE unless TWC becomes a public registrant and a joint and several borrower,
thereafter such rate will be determined by reference to TWCs credit rating.
The borrowings currently bear interest at the rate of LIBOR plus 0.525%.
In addition, TWE is required to pay a facility fee of 0.10% per annum on the
aggregate commitments under the Senior Revolving Bank Credit Facility and a
usage fee of 0.0625% per annum on the outstanding balance of loans under
this facility at all times that the aggregate of the outstanding balances
are less than or equal to $990 million, and 0.125% at all times that the
aggregate of the outstanding balances exceeds $990 million.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Borrowings under the Senior Revolving Bank Credit Facility may be used
for general corporate purposes, and unused capacity may be used in support
of commercial paper borrowings. The facility provides for same-day funding
and multi-currency capability. This facility contains, among other
covenants, a maximum leverage ratio covenant of consolidated total debt
(excluding amounts owing to preferred equity interests and net of cash
balances in excess of $25 million) to consolidated EBITDA, as defined in the
facility, of 5:1, and a minimum interest coverage ratio of 2.0 times
consolidated cash interest expense. The facility does not contain any
credit ratings-based defaults or covenants, nor any ongoing covenants or
representations specifically relating to a material adverse change in the
Companys financial condition or results of operations.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | TWE is no longer a co-borrower with AOL Time Warner or any of AOL Time
Warners other business segments under any credit facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | In connection with the TWE restructuring, all amounts due to AOL Time
Warner and all outstanding TWE-A/N debt was extinguished, and $600 million
of indebtedness was incurred under the new Senior Revolving Bank Credit
Facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | Additionally, the Company issued $2.4 billion in mandatorily redeemable
preferred equity to a subsidiary of AOL Time Warner in conjunction with the
TWE restructuring. The issuance was a non-cash transaction. The preferred
equity bears an annual interest rate of 8.059% payable in cash quarterly.
The preferred equity matures and is required to be redeemed by TWE in cash
on April 1, 2023.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | During 1992 and 1993, TWE issued debt publicly in a number of
offerings. The maturities of these outstanding issuances ranged from 10 to
40 years and the interest rates range from 7.25% to 10.15%. Each of Warner
Communications Inc. (a subsidiary of AOL Time Warner) and American
Television and Communications Corporation (a subsidiary of AOL Time Warner)
(the Guarantors) has guaranteed a pro rata portion of TWEs public and
bank debt and accrued interest, based on the relative fair value of the net
assets that each Guarantor (or its predecessor) contributed to TWE prior to
the TWE restructuring. Such indebtedness is recourse to each Guarantor only
to the extent of its guarantee. The indenture pursuant to which TWEs
public notes and debentures have been issued (the Indenture) requires the
majority consent of the holders of the notes and debentures to terminate the
Guarantor guarantees. There are generally no restrictions on the ability of
the Guarantors to transfer material assets other than its interests in TWE
or TWC to parties that are not Guarantors.
|
| | For so long as the indebtedness of TWC and/or its subsidiaries and
affiliates (including TWE) is, in AOL Time Warners judgment, attributable
to AOL Time Warner in evaluating its credit profile, TWC, its subsidiaries
and affiliates will not, without the consent of AOL Time Warner, create,
incur or guarantee any indebtedness, including preferred equity, and rental
obligations, if TWCs ratio of indebtedness plus six times its annual rental
expense to an amount defined as EBITDAR then exceeds or would exceed 3:1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

37



---



##### 



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

9. COMMITMENTS AND CONTINGENCIES

Firm Commitments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition to the debt and preferred equity, TWE has commitments under
various firm contractual arrangements to make future payments for goods and
services. These firm commitments secure future rights to various assets and
services to be used in the normal course of operations. For example, TWE is
contractually committed to make some 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 these
contracts are not reflected as assets or liabilities on the consolidated
balance sheet.                                                                                                                                                                                                                                                              
|
| | TWE and Comcast are parties to a funding agreement that requires the
parties to provide additional funding to Texas Cable Partners, L.P. on a
month-to-month basis in an amount projected to enable Texas Cable Partners,
L.P. to comply with all of the covenants in its senior credit agreement and
to pay all of its liabilities and obligations as they mature during that
month. The Companys obligations under the funding agreement totaled $70
million for the year ended December 31, 2002. This funding agreement
expires on January 15, 2004 for 2003 funding shortfalls. The Companys
expected funding obligation under this agreement is reflected in the table
below under Expected joint venture funding commitments. Approximately $69
million of the Companys total projected 2003 funding commitment of $81
million was funded during the first six months of 2003.
|
| | The following table summarizes the material firm commitments of the
Companys continuing operations at December 31, 2002 and the timing and
effect that these obligations are expected to have on the Companys
liquidity and cash flow in future periods (as adjusted for any significant
commitments entered into subsequent to December 31, 2002). This table
excludes repayments on long-term debt and commitments related to other
entities, including certain unconsolidated equity method investees and the
A/N Systems, for which the Company purchases programming and certain fixed
assets and is reimbursed. The amounts included in the table below have not
been reduced for any actual payments made in the period from January 1, 2003
to June 30, 2003. TWE expects to fund these firm commitments with operating
cash flow generated in the normal course of business.   

|                                              |       |   |                  |       |      |   |            |       |          |   |       |       |  |   |       |        | 
|--------------------------------------------- | ----- | - | ---------------- | ----- | ---- | - | ---------- | ----- | -------- | - | ----- | ----- |  | - | ----- | ------ | 
|                                              |       |   | Firm Commitments
|                                              |       |   |                 
|                                              |       |   |                  |       |      |   | 2004-      |       | 2007 and |   |       |       | 
|                                              |       |   | 2003             |       | 2006 |   | thereafter |       | Total   
|                                              |       |   |                  |       |      |   |            |       |         
|                                              |       |   | (in millions)   
|Programming
payments(a)                       |       | $ | 1,064            |       |      | $ | 3,790      |       |          | $ | 4,674 |       |  | $ | 9,528 |       
|Expected
joint venture funding commitments(b) |       |   | 81               |       |      |   |           |       |          |   |      |       |  |   | 81    |       
|Operating
leases(c)                           |       |   | 39               |       |      |   | 103        |       |          |   | 142   |       |  |   | 284   |       
|Data processing payments                      |       |   | 27               |       |      |   | 49         |       |          |   | 56    |       |  |   | 132   |       
|High speed data connectivity                  |       |   | 40               |       |      |   | 40         |       |          |   |      |       |  |   | 80    |       
|Converters(d)                                 |       |   | 182              |       |      |   | 51         |       |          |   |      |       |  |   | 233   |       
|Other                                         |       |   | 9                |       |      |   | 3          |       |          |   | 2     |       |  |   | 14    |       
|                                              |       |   |                  |       |      |   |            |       |          |   |       |       |  |   |       |       
|                                              | Total |   | $                | 1,442 |      |   | $          | 4,036 |          |   | $     | 4,874 |  |   | $     | 10,352 | 
|                                              |       |   |                  |       |      |   |            |       |          |   |       |       |  |   |       |       



---

|(a) |  | The Company has purchase commitments with various programming vendors
in order to provide video services to subscribers. The amounts of the
commitments reflected above are based on the number of consolidated
subscribers at December 31, 2002 applied to the per subscriber
contractual rates contained in the contracts that were in effect as of
December 31, 2002 and revised to include significant contracts signed
during the first six months of 2003.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | The projected funding commitments relate to Texas Cable Partners,
L.P.                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(c) |  | Operating lease obligations primarily relate to the minimum lease
rental obligations for real estate and operating equipment in various
locations.                                                                                                                                                                                                                                                                                                              
|   
|(d) |  | Amounts reflect commitments entered into subsequent to December 31,
2002 and do not reflect any payments made in 2003.                                                                                                                                                                                                                                                                                                                                          

38



---



##### 



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

Contingent Commitments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company also has various contractual arrangements that require it
to make payments or provide funding if specified circumstances occur, which
are referred to as contingent commitments. TWE does not expect that the
contingent commitments summarized in the table below will result in any
amounts being paid in the foreseeable future. The following table
summarizes contingent commitments of the Companys continuing operations at
December 31, 2002. The timing of amounts presented in the table represents
when the maximum contingent commitment will expire and does not mean that
TWE expects to incur an obligation to make any payments during that time
frame.

|                                                   |       |   |                        |     |      |   |            |       |          |   |     |     |  |   |       |       | 
|-------------------------------------------------- | ----- | - | ---------------------- | --- | ---- | - | ---------- | ----- | -------- | - | --- | --- |  | - | ----- | ----- | 
|                                                   |       |   | Contingent Commitments
|                                                   |       |   |                       
|                                                   |       |   |                        |     |      |   | 2004-      |       | 2007 and |   |     |     | 
|                                                   |       |   | 2003                   |     | 2006 |   | thereafter |       | Total   
|                                                   |       |   |                        |     |      |   |            |       |         
|                                                   |       |   | (in millions)         
|Guarantee of debt (a)                              |       | $ | 100                    |     |      | $ | 2,000      |       |          | $ |    |     |  | $ | 2,100 |      
|Letters of credit and other
contingent commitments |       |   | 25                     |     |      |   |           |       |          |   | 107 |     |  |   | 132   |      
|                                                   |       |   |                        |     |      |   |            |       |          |   |     |     |  |   |       |      
|                                                   | Total |   | $                      | 125 |      |   | $          | 2,000 |          |   | $   | 107 |  |   | $     | 2,232 | 
|                                                   |       |   |                        |     |      |   |            |       |          |   |     |     |  |   |       |      



---

|(a) |  | TWE guarantee of TWC debt given in connection with the TWE
restructuring on March 31, 2003.
|--- |  | -------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As part of the
TWE restructuring, there was $2.1 billion of
pre-existing debt of a Comcast subsidiary incurred by TWC in the form of a
one-year term loan with an optional extension for an additional year.
The term note bears interest at a rate of LIBOR plus 87.5 basis
points. Repayment of this term note, including accrued interest, is guaranteed by TWE in the event of TWCs
default. This guarantee is included in the above table of contingent
commitments.
|
| | TWE does not provide any guarantees related to third-party debt of its
unconsolidated cable television system joint ventures. As of December 31,
2002, Texas Cable Partners L.P. and Kansas City Cable Partners L.P. had
third-party debt outstanding of approximately $1.227 billion and $399
million, respectively.                                                                                                                                                     

Other



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has an interest in and manages two cable joint ventures,
Kansas City Cable Partners, L.P. (serving approximately 300,000 basic
subscribers as of June 30, 2003) and Texas Cable Partners, L.P. (serving
approximately 1.2 million basic subscribers as of June 30, 2003), both of which
are 50%-owned by TWE and 50%-owned by Comcast. Under the terms of the two
joint venture agreements, either partner may after August 31, 2003 with
respect to Kansas City Cable Partners, L.P. and after December 31, 2003 with
respect to Texas Cable Partners, L.P., initiate buy-sell procedures based on
the market value of the joint venture interests. The Company does not have
current plans to initiate the buy-sell procedure in either joint venture.
If a buy-sell procedure were initiated by Comcast with respect to either
joint venture, TWE would have a choice either to buy Comcasts interests in
the joint venture or to sell its interests in the joint venture to Comcast.
However, in such an event, the Company would be under no obligation to
purchase Comcasts interests. Additionally, in 2005, under the terms of
both joint venture agreements, either partner may trigger the dissolution of
the joint ventures resulting in the distribution of the net assets of the
joint ventures to the partners. Any actions to be taken by the Company
under the buy-sell or dissolution procedures will be evaluated in the
context of the Companys strategy for its Cable operations and AOL Time
Warners overall capital structure and debt reduction plans. These buy-sell
arrangements are not reflected in the above table of contingent commitments.
|
| | At any time following the second anniversary of the closing of the TWE
restructuring (i.e., March 31, 2005), Comcast has the right to require TWC
to purchase all or a portion of Comcasts limited partnership interest in
TWE at an appraised fair market value, subject to a right of first refusal
in favor of AOL Time                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

39



---



##### 



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Warner. Additionally, Comcast also has the right, at any time
following the second anniversary of the closing of the TWE restructuring, 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. If TWC and AOL Time Warner do not
collectively elect to purchase all of Comcasts offered partnership
interest, Comcast may proceed with the sale of the offered partnership
interest to that third party on terms no more favorable than those offered
to TWC and AOL Time Warner, if that third party agrees to be bound by the
same terms and conditions applicable to Comcast as a limited partner in TWE.
The purchase price payable by TWC or AOL Time Warner as consideration for
the Comcasts partnership interest may be cash; common stock, if the common
stock of the purchaser is then publicly traded, or a combination of both.



| |                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | TWE is required, at least quarterly, to make tax distributions to its
partners in proportion to their residual interests in an aggregate amount
generally equivalent to a percentage of TWEs taxable income. TWE is also
required to make cash distributions to AOL Time Warner when the Companys
employees exercise previously issued AOL Time Warner stock options.

LEGAL PROCEEDINGS



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 16, 1998, plaintiffs in Andrew Parker and Eric DeBrauwere, et
al. v. Time Warner Entertainment Company, L.P. and Time Warner Cablefiled a
purported nationwide class action in U.S. District Court for the Eastern
District of New York claiming that TWE sold its subscribers personally
identifiable information and failed to inform subscribers of their privacy
rights in violation of the Cable Communications Policy Act of 1984 and
common law. The plaintiffs are seeking damages and declaratory and
injunctive relief. On August 6, 1998, TWE filed a motion to dismiss, which
was denied on September 7, 1999. On December 8, 1999, TWE filed a motion to
deny class certification, which was granted on January 9, 2001 with respect
to monetary damages, but denied with respect to injunctive relief. On June
2, 2003, the U.S. Court of Appeals for the Second Circuit vacated the
District Courts decision denying class certification as a matter of law and
remanded the case for further proceedings on class certification and other
matters. Although the Company is vigorously defending this matter,
management is unable to predict the outcome of the case or reasonably
estimate a range of possible loss.                                                                                                                                                                                                                     
|
| | In accordance with a March 2002 ruling by the Federal Communications
Commission (FCC) that the definition of cable service does not include
cable-modem service, the Company stopped collecting and paying all franchise
fees related to revenue derived from cable-modem service. Several local
franchising authorities have threatened lawsuits and have asked the FCC to
determine whether the Companys decision to stop payments is within its
rights. In addition, the city of Rochester, New York, along with a number of
other franchising authorities in the Rochester area, filed suit against the
Company on September 27, 2002 in the Supreme Court for the State of New York
in Monroe County, alleging that the Companys failure to pay franchise fees
with respect to revenue derived from cable-modem service constituted a
breach of relevant franchise agreements, and seeking more than $1 million in
damages. The Company intends to defend against this lawsuit vigorously. On
May 30, 2003, the Company filed suit against the city of Rochester and
certain franchising authorities, including the plaintiffs in the state court
action, in the U.S. District Court for the Western District of New York
seeking a ruling that the collection and remittance of these fees are not
allowable. Due to their preliminary status, management is unable to predict
the outcome of the cases or reasonably estimate a range of possible loss.
|
| | On May 16, 2003, Kimberly Saunders and Linda Saunders, et al. v AOL
Time Warner Inc., a putative class action lawsuit, was filed in the New York
State Supreme Court for the County of New York against AOL Time Warner and
its subsidiaries and affiliates, including Time Warner Cable Inc., alleging
unfair trade practices and negligent representation, among other claims, in
relation to the Companys rental of converter boxes to basic                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

40



---



##### 



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | only subscribers who have cable ready televisions. The plaintiffs
are seeking compensatory and punitive damages and injunctive relief. On
July 9, 2003, AOL Time Warner filed a motion to dismiss as to all
defendants. The Company intends to defend against this lawsuit vigorously.
Due to its preliminary status, management is unable to predict the outcome
of the case or reasonably estimate a range of possible loss.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On February 4, 2003, Data Innovation LLC v. Time Warner Entertainment
Company, L.P. et al.(originally filed as Hark Chan and Data
Innovation LLC v.
Time Warner Entertainment Company, L.P. et al.),a patent infringement
complaint, was filed in the U.S. District Court for the Western District of
Texas. The plaintiff has named as defendants, among others, TWE, TWE-A/N,
Texas Cable Partners, L.P. and Road Runner. The plaintiff alleges that the
defendants high-speed data and video-on-demand services infringe various
patents held by the plaintiff. The complaint does not allege any willful
infringement. The plaintiff seeks injunctive relief and monetary damages.
The Company intends to defend against this lawsuit vigorously. Due to its
preliminary status, management is unable to predict the outcome of the case
or reasonably estimate a range of possible loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | As of
August 11, 2003, three putative class action lawsuits have
been filed alleging violations of ERISA in the U.S. District Court for the
Southern District of New York on behalf of current and former participants
in the AOL Time Warner Savings Plan, the AOL Time Warner Thrift Plan and/or
the Time Warner Cable Savings Plan (the Plans), which may include
employees of TWE. Collectively, these lawsuits name as defendants AOL Time
Warner, certain current and former directors and officers of AOL Time Warner
and members of the Administrative Committees of the Plans. One of these
cases also names TWE as a defendant. The lawsuits allege that AOL Time
Warner and other defendants breached certain fiduciary duties to Plan
participants by, inter alia,continuing to offer AOL Time Warner stock as an
investment under the Plans, and by failing to disclose, among other things,
that AOL Time Warner was experiencing declining advertising revenues and
that AOL Time Warner was inappropriately inflating advertising revenues
through various transactions. The complaints seek unspecified damages and
unspecified equitable relief. The ERISA actions have been consolidated with
other AOL Time Warner-related shareholder lawsuits and derivative actions
under the caption In re AOL Time Warner Inc. Securities and ERISA
Litigationin the Southern District of New York. On July 3, 2003,
plaintiffs filed a consolidated amended complaint naming additional
defendants, including America Online, Inc., certain current and former
officers, directors and employees of AOL Time Warner, certain current and
former members of the Administrative and Investment Committees of the Plans
and Fidelity Management Trust Company. AOL Time Warner intends to defend
against these lawsuits vigorously. The Company is unable to predict the
outcome of these cases or reasonably estimate a range of possible loss.
|
| | On April 8, 2002, three former employees of certain subsidiaries of AOL
Time Warner filed Henry Spann et al. v. AOL Time Warner Inc. et al.,a
purported class action, in the U.S. District Court for the Central District
of California. Plaintiffs have named as defendants, among others, AOL Time
Warner, TWE, WEA Corp., WEA Manufacturing Inc., Warner Bros. Records,
Atlantic Recording Corporation, various pension plans sponsored by the
companies and the administrative committees of those plans. Plaintiffs
allege that defendants miscalculated the proper amount of pension benefits
owed to them and other class members as required under the plans in
violation of ERISA. The lawsuit has been transferred to the U.S. District
Court for the Southern District of New York. Due to the preliminary status
of this matter, TWE is unable to predict the outcome of this suit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | As part of the TWE restructuring, AOL Time Warner has indemnified the
cable businesses of TWE from and against any and all liabilities relating
to, arising out of or resulting from specified litigation matters brought
against the TWE Non-cable Businesses. Although AOL Time Warner has agreed to
indemnify the cable businesses of TWE against such liabilities, TWE remains
a named party in certain litigation matters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | 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) could have a material adverse effect on the Companys business,
financial condition and operating results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

41



---



##### 



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

10. ADDITIONAL FINANCIAL INFORMATION

Other Cash Flow Information



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

|                                    |  |                             |     |                           |  |      |     |      |  |   |      |   |  |   |      |  
|----------------------------------- |  | --------------------------- | --- | ------------------------- |  | ---- | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                                    |  | Three Months Ended June 30, |     | Six Months Ended June 30,
|                                    |  |                             |     |                          
|                                    |  | 2003                        |     | 2002                      |  | 2003 |     | 2002
|                                    |  |                             |     |                           |  |      |     |     
|                                    |  | (in millions)              
|Cash payments made for interest     |  | $                           | (79 | )                         |  | $    | (81 | )    |  | $ | (197 | ) |  | $ | (205 | )
|Interest income received            |  |                             | 1   |                           |  |      |    |      |  |   | 3    |   |  |   |     |  
|                                    |  |                             |     |                           |  |      |     |      |  |   |      |   |  |   |      |  
|Cash interest expense, net          |  |                             | (78 | )                         |  |      | (81 | )    |  |   | (194 | ) |  |   | (205 | )
|                                    |  |                             |     |                           |  |      |     |      |  |   |      |   |  |   |      |  
|Cash payments made for income taxes |  | $                           | (9  | )                         |  | $    | (4  | )    |  | $ | (10  | ) |  | $ | (6   | )
|                                    |  |                             |     |                           |  |      |     |      |  |   |      |   |  |   |      |  

Interest Expense, Net



| |                                    
| | -----------------------------------
| | Interest expense, net, consists of:

|                      |  |                             |      |                           |  |               |     |      |  |   |      |   |  |   |      |  
|--------------------- |  | --------------------------- | ---- | ------------------------- |  | ------------- | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                      |  | Three Months Ended June 30, |      | Six Months Ended June 30,
|                      |  |                             |      |                          
|                      |  | 2003                        |      | 2002                      |  | 2003          |     | 2002
|                      |  |                             |      |                           |  |               |     |     
|                      |  |                             |      |                           |  | (in millions) |     |      |  |  
|Interest income       |  | $                           | 5    |                           |  | $             | 4   |      |  | $ | 10   |   |  | $ | 7    |  
|Interest expense      |  |                             | (129 | )                         |  |               | (87 | )    |  |   | (211 | ) |  |   | (182 | )
|                      |  |                             |      |                           |  |               |     |      |  |   |      |   |  |   |      |  
|Interest expense, net |  | $                           | (124 | )                         |  | $             | (83 | )    |  | $ | (201 | ) |  | $ | (175 | )
|                      |  |                             |      |                           |  |               |     |      |  |   |      |   |  |   |      |  

Video Programming and High-Speed Data Expenses



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Video programming and high-speed data expenses included within cost of
revenues consist of:

|                         |  |                             |     |                           |  |      |     |      |  |   |     |  |  |   |     | 
|------------------------ |  | --------------------------- | --- | ------------------------- |  | ---- | --- | ---- |  | - | --- |  |  | - | --- | 
|                         |  | Three Months Ended June 30, |     | Six Months Ended June 30,
|                         |  |                             |     |                          
|                         |  | 2003                        |     | 2002                      |  | 2003 |     | 2002
|                         |  |                             |     |                           |  |      |     |     
|                         |  | (in millions)              
|Video                    |  | $                           | 341 |                           |  | $    | 299 |      |  | $ | 680 |  |  | $ | 579 | 
|High speed data services |  |                             | 28  |                           |  |      | 63  |      |  |   | 63  |  |  |   | 123 | 
|                         |  |                             |     |                           |  |      |     |      |  |   |     |  |  |   |     | 
|                         |  | $                           | 369 |                           |  | $    | 362 |      |  | $ | 743 |  |  | $ | 702 | 
|                         |  |                             |     |                           |  |      |     |      |  |   |     |  |  |   |     | 

42



---



##### 



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

Other Current Liabilities



| |                                      
| | -------------------------------------
| | Other current liabilities consist of:

|                              |       |   |            |     |              |   |     |     | 
|----------------------------- | ----- | - | ---------- | --- | ------------ | - | --- | --- | 
|                              |       |   | June 30,   |     | December 31,
|                              |       |   | 2003       |     | 2002        
|                              |       |   |            |     |             
|                              |       |   | (millions)
|Accrued compensation          |       | $ | 73         |     |              | $ | 80  |    
|Accrued franchise fees        |       |   | 73         |     |              |   | 86  |    
|Accrued interest              |       |   | 92         |     |              |   | 92  |    
|Accrued insurance             |       |   | 90         |     |              |   | 77  |    
|Accrued sales and other taxes |       |   | 73         |     |              |   | 65  |    
|Accrued marketing support     |       |   | 68         |     |              |   | 52  |    
|Other accrued expenses        |       |   | 174        |     |              |   | 175 |    
|                              |       |   |            |     |              |   |     |    
|                              | Total |   | $          | 643 |              |   | $   | 627 | 
|                              |       |   |            |     |              |   |     |    

43



---



##### 



Part II. Other Information

Item 1. Legal Proceedings

Reference is made to the lawsuit brought by the city of Rochester, New
York and others described on page 32 of the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2003 (the First Quarter 2003 10-Q). On
May 30, 2003, the Company filed suit against the city of Rochester and certain
franchising authorities, including the plaintiffs in the state court action, in
the U.S. District Court for the Western District of New York seeking a ruling
that the collection and remittance of cable modem-related franchise fees are
not allowable.

On June 16, 1998, plaintiffs in Andrew Parker and Eric DeBrauwere, et al.
v. Time Warner Entertainment Company, L.P. and Time Warner Cablefiled a
purported nationwide class action in U.S. District Court for the Eastern
District of New York claiming that TWE sold its subscribers personally
identifiable information and failed to inform subscribers of their privacy
rights in violation of the Cable Communications Policy Act of 1984 and common
law. The plaintiffs are seeking damages and declaratory and injunctive relief.
On August 6, 1998, TWE filed a motion to dismiss, which was denied on
September 7, 1999. On December 8, 1999, TWE filed a motion to deny class
certification, which was granted on January 9, 2001 with respect to monetary
damages, but denied with respect to injunctive relief. On June 2, 2003, the
U.S. Court of Appeals for the Second Circuit vacated the District Courts
decision denying class certification as a matter of law and remanded the case
for further proceedings on class certification and other matters. Although the
Company is vigorously defending this matter, management is unable to predict
the outcome of the case or reasonably estimate a range of possible loss.

On May 16, 2003, Kimberly Saunders and Linda Saunders, et al. v. AOL Time
Warner Inc.,a putative class action lawsuit, was filed in the New York State
Supreme Court for the County of New York against AOL Time Warner and its
subsidiaries and affiliates, including Time Warner Cable Inc., alleging unfair
trade practices and negligent representation, among other claims, in relation
to the Companys rental of converter boxes to basic only subscribers who have
cable ready televisions. The plaintiffs are seeking compensatory and
punitive damages and injunctive relief. On July 9, 2003, AOL Time Warner filed
a motion to dismiss as to all defendants. The Company intends to defend
against this lawsuit vigorously. Due to its preliminary status, management is
unable to predict the outcome of the case or reasonably estimate a range of
possible loss.

Reference is made to Hark Chan and Data Innovation LLC v. Time Warner
Entertainment Company, L.P., et al.,described on page 32 of the First Quarter
2003 10-Q. On July 24, 2003, the District Court granted defendants motion to
dismiss Hark Chan as a plaintiff.

Reference is made to the ERISA lawsuits described on page 32 of the First
Quarter 2003 10-Q. On July 3, 2003, plaintiffs filed a consolidated amended
complaint naming additional defendants, including America Online, Inc., certain
current and former officers, directors and employees of AOL Time Warner,
certain current and former members of the Administrative and Investment
Committees of the Plans and Fidelity Management Trust Company.

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) could have a material
adverse effect on the Companys business, financial condition and operating
results.

44



---



##### 



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

(a) 
Exhibits.



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

(b) 
Reports on Form 8-K.



| |                                             
| | --------------------------------------------
| | TWE filed the following reports on Form 8-K.

|    |  |        |             |      |  |                                                                                                                                                                                                                             |  |               
|--- |  | ------ | ----------- | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|    |  | Item # | Description | Date
|    |  |        |             |      |  |                                                                                                                                                                                                                            
|(i) |  |        | 2,7         |      |  | Reporting (i) the closing of the TWE
restructuring and related transactions
(Item 2) and (ii) unaudited pro forma
financial information reflecting the
disposition by TWE of its non-cable
assets and liabilities (Item 7). |  | March 28, 2003

45



---



##### 



TIME WARNER ENTERTAINMENT COMPANY, L.P.

SIGNATURES

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

| |  |    |  |                                                                                                        
| |  | -- |  | -------------------------------------------------------------------------------------------------------
| |  |    |  | TIME WARNER ENTERTAINMENT COMPANY, L.P.                                                                
|
| |  | By |  | /s/  Wayne
H. PaceName:     Wayne H. Pace
Title:   Executive Vice President and
Chief Financial Officer
|

Dated: August 14, 2003

46



---



##### 



EXHIBIT INDEX
(i) Pursuant to Item 601 of Regulation S-K

|            |  |                                                                                                                                                                                                                                                              
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                              
|31.1        |  | Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, with respect to the registrants Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003.                                                  
|            |  |                                                                                                                                                                                                                                                              
|31.2        |  | Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, with respect to the registrants Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003.                                                  
|            |  |                                                                                                                                                                                                                                                              
|32.         |  | 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 registrants Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.

47