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SECURITIES AND EXCHANGE COMMISSION

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 September 30, 2002 or

[      ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the transition period from                      to           .

Commission file number 1-15062

AOL TIME WARNER INC.

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

(Address, including zip code, and telephone number, including
area code, of 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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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AOL TIME WARNER INC. AND
TIME WARNER ENTERTAINMENT COMPANY, L.P.

INDEX TO FORM 10-Q

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AOL TIME WARNER INC.
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 AOL Time Warner Inc.’s (“AOL Time Warner” 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 AOL Time Warner’s businesses, as well as recent developments that the Company believes are important in understanding the results of operations, as well as to anticipate future trends in those operations.
•		Results of operations. This section provides an analysis of the Company’s results of operations for the three and nine months ended September 30, 2002 relative to the comparable periods in 2001. This analysis is presented on both a consolidated and segment basis. In addition, a brief description is provided of transactions and events that impact the comparability of the results being analyzed.
•		Financial condition and liquidity. This section provides an analysis of the Company’s financial condition as of September 30, 2002 and cash flows for the nine months ended September 30, 2002.
•		Caution concerning forward-looking statements and risk factors. This section discusses 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. In addition, a description is provided of the risk factors that could adversely affect the operations, business or financial results of the Company or its business segments.

OVERVIEW

Description of Business

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

         AOL Time Warner classifies its business interests into six fundamental areas: AOL, consisting principally of interactive services, Web properties, Internet technologies and electronic commerce services; Cable, consisting principally of interests in cable television systems; Filmed Entertainment, consisting principally of interests in filmed entertainment and television production; Networks, consisting principally of interests in cable television and broadcast network programming; Music, consisting principally of interests in recorded music, music publishing and DVD manufacturing; and Publishing, consisting principally of interests in magazine publishing, book publishing and direct marketing.

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AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

Use of EBITDA

         AOL Time Warner evaluates operating performance based on several factors, including its primary financial measure of operating income (loss) before noncash depreciation of tangible assets and amortization of intangible assets (“EBITDA”). AOL Time Warner considers EBITDA an important indicator of the operational strength and performance of its businesses, including the ability to provide cash flows to service debt and fund capital expenditures. In addition, EBITDA eliminates the uneven effect across all business segments of considerable amounts of noncash depreciation of tangible assets and amortization of certain intangible assets deemed to have finite useful lives that were recognized in business combinations accounted for by the purchase method. As such, the following comparative discussion of the results of operations of AOL Time Warner includes, among other measures, an analysis of changes in EBITDA. However, EBITDA should be considered in addition to, not as a substitute for, operating income (loss), net income (loss) and other measures of financial performance reported in accordance with generally accepted accounting principles. In addition, EBITDA should not be used as a substitute for the Company’s various cash flow measures (e.g., operating cash flow and free cash flow), which are discussed in detail beginning on page 27.

Recent Developments

Restatement of Prior Financial Information

         The Company is conducting an internal review of certain advertising and commerce transactions at the AOL segment under the direction of the Company’s Chief Financial Officer. In connection with this internal review, the financial results for each of the quarters ended September 30, 2000 through June 30, 2002 will be restated. The total impact of the adjustments will be to reduce the Company’s consolidated advertising and commerce revenues by $190 million over these eight quarterly periods, with corresponding reductions in EBITDA, operating income and net income for that same time period of $97 million, $83 million and $46 million, respectively. For the AOL segment, the impact of the adjustments will be to reduce advertising and commerce revenues by $168 million over these eight quarterly periods, with corresponding reductions in EBITDA and operating income for that same time period of $97 million and $83 million, respectively. The remaining impact on the Company’s consolidated advertising and commerce revenues of $22 million represents a reduction in revenues from certain transactions related to the AOL segment in which the advertising was delivered by other AOL Time Warner segments. The adjustments represent approximately 1% of the AOL segment’s total revenues for that same two-year period, approximately 3.4% of its advertising and commerce revenues, approximately 1.9% of its EBITDA and approximately 2.1% of its operating income. The largest impact of the adjustments is in the quarter ended September 30, 2000, where advertising and commerce revenues will be reduced by $66 million, both EBITDA and operating income will be reduced by $30 million and net income will be reduced by $18 million. The restatement will result in a decrease in basic earnings per share of $0.01 in both the third and fourth quarters of 2000.

         It is expected that the audited financial statements for the affected periods will be filed with the Securities and Exchange Commission (“SEC”) in the fourth quarter of 2002. Until such time, the Company’s financial statements for the affected periods, including the audited financial statements contained in the 2001 Annual Report on Form 10-K, should no longer be relied upon as a result of the announced restatement.

         The financial results presented in this report reflect the impact of the adjustments that will be made in the restatement of the Company’s financial results. For the three months ended September 30, 2001, the total impact of

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AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

these adjustments is a reduction of both the AOL segment’s and the Company’s consolidated advertising and commerce revenues of $16 million, with corresponding reductions in EBITDA of $6 million, operating income of $2 million and consolidated net income of $1 million. For the nine months ended September 30, 2002 and 2001, the total impact is a reduction of the Company’s consolidated advertising and commerce revenues of $12 million and $72 million, respectively, with corresponding reductions in EBITDA of $14 million and $14 million, respectively, operating income of $10 million and $7 million, respectively and net income of $2 million and $4 million, respectively. For the AOL segment, for the nine months ended September 30, 2002 and 2001, the impact of these adjustments is a reduction of advertising and commerce revenues of $6 million and $57 million, respectively, with corresponding reductions in EBITDA of $14 million and $14 million, respectively, and operating income of $10 million and $7 million, respectively. The remaining impact on the Company’s consolidated advertising and commerce revenues of $6 million and $15 million for the nine months ended September 30, 2002 and 2001, respectively, represents a reduction in revenues from certain transactions related to the AOL segment in which the advertising was delivered by other AOL Time Warner segments.

         The SEC and the Department of Justice (“DOJ”) are investigating the financial reporting and disclosure practices of the Company. The Company will continue its efforts to cooperate with the investigations. The Company is unable to predict the outcome of these investigations. Refer to Note 12 and Part II, Item 1 for additional information regarding the investigations.

Investment in Time Warner Entertainment Company, L.P.

         A majority of AOL Time Warner’s interests in the Filmed Entertainment and Cable segments, and a portion of its interests in the Networks segment, are held through Time Warner Entertainment Company, L.P. (“TWE”). Prior to the change in ownership discussed below, AOL Time Warner owned general and limited partnership interests in TWE consisting of 74.49% of the pro rata priority capital (“Series A Capital”) and residual equity capital (“Residual Capital”), and 100% of the junior priority capital (“Series B Capital”). The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE were held by subsidiaries of AT&T Corp. (“AT&T”).

         During the second quarter of 2002, AT&T exercised a one-time option to increase its ownership in the Series A Capital and Residual Capital of TWE. As a result, on May 31, 2002, AT&T’s interest in the Series A Capital and Residual Capital of TWE increased by approximately 2.13% to approximately 27.64% and AOL Time Warner’s corresponding interest in the Series A Capital and Residual Capital of TWE decreased by approximately 2.13% to approximately 72.36%. In accordance with Staff Accounting Bulletin No. 51, “Accounting for Sales of Stock of a Subsidiary”, AOL Time Warner has reflected the pretax impact of the dilution of its interest in TWE of approximately $690 million as an adjustment to paid-in capital (Note 6).

         In August 2002, AOL Time Warner and AT&T announced that they had agreed to restructure TWE. As part of the restructuring, AOL Time Warner will acquire complete ownership of TWE’s content assets, including Warner Bros. and Home Box Office, as well as TWE’s interests in The WB Network, Comedy Central and Court TV. In addition, almost all of AOL Time Warner’s interests in TWE and all of its interests in cable television systems held through wholly-owned subsidiaries will be contributed to an existing subsidiary of AT&T that will become a subsidiary of AOL Time Warner and be renamed “Time Warner Cable Inc.” In connection with the restructuring, AT&T will receive $2.1 billion in cash and AOL Time Warner common stock valued at $1.5 billion at the time of the closing of the restructuring and will retain both a 17.9% economic stake in Time Warner Cable Inc.

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AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

and a 4.7% economic stake in TWE. AT&T’s combined interests in Time Warner Cable Inc. and TWE will result in AT&T holding an approximately 21% economic interest in the business of Time Warner Cable Inc. AT&T’s 17.9% economic stake in Time Warner Cable Inc. will represent approximately a 10.7% voting interest in Time Warner Cable Inc. The Company anticipates that the restructuring will be completed in early 2003, upon the receipt of local cable franchise approvals, where required, and other required regulatory approvals. Clearance under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 has been received.

         Based upon its controlling voting interest in Time Warner Cable Inc., AOL Time Warner will consolidate the results of Time Warner Cable Inc. for accounting purposes. At the closing of the restructuring, it is anticipated that Time Warner Cable Inc. will have approximately $8.1 billion in consolidated net debt and preferred equity. Subject to market conditions, AOL Time Warner plans to conduct an initial public offering of Time Warner Cable Inc. soon after the closing of the restructuring. It is anticipated that the first $2.1 billion raised in any such offering would be used to pay off Time Warner Cable Inc. debt incurred to fund the $2.1 billion cash payment to AT&T. Thereafter, AT&T will have certain priority registration rights with respect to its stake in Time Warner Cable Inc. (Note 6).

Restructuring of TWE-Advance/Newhouse Partnership and Road Runner

         As of June 30, 2002, the TWE-Advance/Newhouse Partnership (“TWE-A/N”) was owned approximately 64.8% by TWE, the managing partner, 33.3% by the Advance/Newhouse Partnership (“Advance/Newhouse”) and 1.9% indirectly by AOL Time Warner. Prior to August 1, 2002, the financial position and operating results of TWE-A/N were consolidated by AOL Time Warner and TWE, and the partnership interest owned by Advance/Newhouse was reflected in the consolidated financial statements of AOL Time Warner and TWE as minority interest. In addition, Road Runner, a high-speed cable modem Internet service provider, was owned by TWI Cable Inc. (a wholly owned subsidiary of AOL Time Warner), TWE and TWE-A/N, with AOL Time Warner owning approximately 65% on a fully attributed basis (i.e., after considering the portion attributable to the minority partners of TWE and TWE-A/N). AOL Time Warner’s interest in Road Runner was previously accounted for using the equity method of accounting prior to the restructuring because of certain approval rights held by Advance/Newhouse, a partner in TWE-A/N.

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

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AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

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

         In connection with the TWE-A/N restructuring, AOL Time Warner recognized a noncash pretax gain of approximately $1.4 billion. Of this gain, approximately $1.2 billion related to the difference between the carrying value and fair value of AT&T’s interest in the Advance/Newhouse Systems, with the fair value being determined by reference to the fair value of AT&T’s additional interest acquired in the remaining TWE-A/N systems. This gain is included as part of discontinued operations in the accompanying consolidated statement of operations. However, because this gain relates in large part to AT&T’s interest in TWE-A/N, it is substantially offset by minority interest expense, which is similarly included as part of discontinued operations. The remaining pretax gain of $188 million relates to the amount that the fair value of AOL Time Warner’s acquired interest in the TWE-A/N systems remaining under the control of AOL Time Warner exceeded the carrying value of AOL Time Warner’s interest in the Advance/Newhouse Systems, and primarily relates to the portion of TWE-A/N debt assumed by Advance/Newhouse in excess of its pro rata share in effective compensation for certain adverse tax consequences to the Company as a result of the restructuring. The gain is significantly less than the gain recognized by AT&T because the carrying value of AOL Time Warner’s interest in TWE-A/N, including its interest in the Advance/Newhouse Systems, was recently adjusted to fair value as part of the purchase accounting for the Merger. The $188 million pretax gain is also included as part of discontinued operations of AOL Time Warner for the three and nine month periods ended September 30, 2002. Exclusive of the gains associated with these transactions, the impact of the TWE-A/N restructuring on AOL Time Warner’s consolidated net income is substantially mitigated because the earnings of TWE-A/N attributable to Advance/Newhouse’s historical one-third interest was reflected as minority interest expense. As stated previously, this historical minority interest expense is currently classified as part of the discontinued operations for all periods presented. Additionally, there is no impact on AOL Time Warner’s consolidated net income of consolidating Road Runner since the Company had previously accounted for its interest in Road Runner under the equity method of accounting.

Sale of Columbia House

         In June 2002, AOL Time Warner and Sony Corporation of America reached a definitive agreement to each sell 85% of its 50% interest in the Columbia House Company Partnerships (“Columbia House”) to Blackstone Capital Partners III LP (“Blackstone”), an affiliate of The Blackstone Group, a private investment bank. The sale has resulted in the Company recognizing a pretax gain of approximately $59 million, which is included in other expense, net, in the accompanying consolidated statement of operations. In addition, the Company has deferred an approximate $28 million gain on the sale. The deferred gain primarily relates to the estimated fair value of the portion of the proceeds received as a note receivable, which will be deferred until such time as the realization of such note becomes more fully assured. As a result of the sale, the Company’s interest in Columbia House has been reduced to 7.5%. As part of the transaction, AOL Time Warner will continue to license music and video product to Columbia House for a five-year period (Note 4).

$10 Billion Revolving Credit Facilities

         In July 2002, AOL Time Warner, together with certain of its consolidated subsidiaries, entered into two

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AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

new senior unsecured long-term revolving bank credit agreements with an aggregate borrowing capacity of $10 billion (the “2002 Credit Agreements”) and terminated three existing bank credit facilities with an aggregate borrowing capacity of $12.6 billion (the “Old Credit Agreements”), which were scheduled to expire during 2002. The 2002 Credit Agreements are comprised of a $6 billion five-year revolving credit facility and a $4 billion 364-day revolving credit facility, borrowings under which may be extended for a period up to two years following the initial term. The borrowers under the 2002 Credit Agreements are AOL Time Warner, TWE, TWE-A/N and AOL Time Warner Finance Ireland. Borrowings bear interest at specific rates, generally based on the credit rating for each of the borrowers, which is currently equal to LIBOR plus .625%, including facility fees of .10% and .125% on the total commitments of the 364-day and five-year facilities, respectively. In addition, the Company is required to pay an additional usage fee of .0625% if the two facilities in the aggregate have more than 33% outstanding and .125% if the facilities have more than 66% outstanding. Currently, the Company is paying the additional  .0625% usage fee. The 2002 Credit Agreements provide same-day funding, multi-currency capability and letter of credit availability. They contain maximum leverage ratio and minimum GAAP net worth covenants of 4.5 times and $50 billion, respectively, for AOL Time Warner and a maximum leverage ratio covenant of 5.0 times for each of TWE and TWE-A/N, but do not contain any credit ratings-based defaults or covenants, nor an ongoing covenant or representation specifically relating to a material adverse change in the Company’s financial condition or results of operations. Borrowings may be used for general business purposes and unused credit is available to support commercial paper borrowings (Note 9).

RESULTS OF OPERATIONS
Transactions Affecting Comparability of Results of Operations

         AOL Time Warner’s results for 2002 have been impacted by the following transactions and events that cause them not to be comparable to the results reported in 2001.

•      New Accounting Standard for Goodwill and Other Intangible Assets . During 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“FAS 142”), which requires that, effective January 1, 2002, goodwill, including the goodwill included in the carrying value of investments accounted for using the equity method of accounting, and certain other intangible assets deemed to have an indefinite useful life, cease amortizing (Note 3).

•      Consolidation of AOL Europe, S.A. (“AOL Europe”) . On January 31, 2002, AOL Time Warner acquired 80% of Bertelsmann AG’s (“Bertelsmann”) 49.5% interest in AOL Europe for $5.3 billion in cash and on July 1, 2002 acquired the remaining 20% of Bertelsmann’s interest for $1.45 billion in cash (Note 5). As a result of the purchase of Bertelsmann’s interest in AOL Europe, AOL Time Warner has a majority interest in and began consolidating AOL Europe, retroactive to the beginning of 2002.

•      Consolidation of IPC Group Limited (“IPC”) . In October 2001, AOL Time Warner’s Publishing segment acquired IPC, the parent company of IPC Media, from Cinven, one of Europe’s leading private equity firms, for approximately $1.6 billion.

•      Consolidation of Road Runner . In August 2002, AOL Time Warner’s Cable segment acquired Advance/Newhouse’s 17% indirect ownership in Road Runner, increasing the Company’s fully attributed ownership to approximately 82%. As a result of the termination of Advance/Newhouse’s minority rights in Road Runner, AOL Time Warner has consolidated the financial position and results of operations of Road Runner with the financial

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AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

position and results of operations of AOL Time Warner’s Cable segment. As permitted under generally accepted accounting principles, the Company has consolidated the results of Road Runner retroactive to the beginning of 2002.

Discontinued Operations

         As previously discussed in “Restructuring of TWE-Advance/Newhouse Partnership and Road Runner,” the Company’s results of operations have been adjusted to reflect the results of the Advance/Newhouse Systems as a discontinued operation for all periods presented. For the six months ended June 30, 2002, the net impact of the deconsolidation of these systems was a reduction of the Cable segment’s previously reported revenues, EBITDA and operating income of $715 million, $333 million and $206 million, respectively. For the three months ended September 30, 2001, the net impact of the deconsolidation of the Advance/Newhouse Systems was a reduction of the Cable segment’s reported revenues, EBITDA and operating income of $316 million, $141 million and $74 million, respectively. For the nine months ended September 30, 2001, the net impact was a reduction of the Cable segment’s reported revenues, EBITDA and operating income of $912 million, $412 million and $225 million, respectively. In addition, as of December 31, 2001, the Advance/Newhouse Systems had current assets and total assets of approximately $64 million and $2.7 billion, respectively, and current liabilities and total liabilities of approximately $210 million and $963 million, respectively, including debt assumed in the restructuring.

New Accounting Standards

         In addition to the transactions previously discussed, in the first quarter of 2002, the Company adopted new accounting guidance in several areas that require retroactive restatement of all periods presented to reflect the new accounting provisions.

Reimbursement of “Out-of-Pocket” Expenses

         In January 2002, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred” (“EITF 01-14”). EITF 01-14 requires that reimbursements received for out-of-pocket expenses be classified as revenue on the income statement and was effective for AOL Time Warner in the first quarter of 2002. The new guidance requires retroactive restatement of all periods presented to reflect the new accounting provisions. This change in revenue classification impacts AOL Time Warner’s Cable and Music segments, resulting in an increase in both revenues and costs of approximately $92 million for the third quarter of 2001 and $287 million for the first nine months of 2001.

Emerging Issues Task Force Issue No. 01-09

         In April 2001, the FASB’s EITF reached a final consensus on EITF Issue No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products,” which was later codified along with other similar issues, into EITF 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products” (“EITF 01-09”). EITF 01-09 was effective for AOL Time Warner in the first quarter of 2002. EITF 01-09 clarifies the income statement classification of costs incurred by a vendor in connection with the reseller’s purchase or promotion of the vendor’s products, resulting in certain cooperative advertising and product placement costs previously classified as selling expenses to be reflected as a reduction of revenues earned from that activity. The new guidance impacts AOL Time Warner’s AOL, Music and Publishing segments. As a

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AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

result of applying the provisions of EITF 01-09, the Company’s revenues and costs each were reduced by an equal amount of approximately $44 million in the third quarter of 2001 and $154 million for the first nine months of 2001.

Other Significant Transactions and Nonrecurring Items

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

2002 Other Significant Transactions and Nonrecurring Items

         AOL Time Warner’s operating results for the nine months ended September 30, 2002 included (i) merger and restructuring costs of $184 million ($107 million in the first quarter and $77 million in the third quarter)(Note 2), (ii) a noncash pretax charge of $1.678 billion ($581 million in the first quarter, $364 million in the second quarter and $733 million in the third quarter) to reduce the carrying value of certain investments that experienced other-than-temporary declines in market value (Note 4), (iii) an approximate $59 million gain in the second quarter on the sale of a portion of the Company’s interest in Columbia House (Note 4) and (iv) an approximate $31 million gain in the second quarter on the redemption of a portion of the Company’s interest in TiVo Inc. (“TiVo”) (Note 4).

2001 Other Significant Transactions and Nonrecurring Items

         For the nine months ended September 30, 2001, AOL Time Warner’s operating results included (i) merger-related costs of approximately $205 million ($71 million in the first quarter and $134 million in the third quarter) (Note 2) and (ii) a noncash pretax charge of approximately $816 million ($620 million in the first quarter and $196 million in the third quarter) to reduce the carrying value of certain investments that experienced other-than-temporary declines in market value and to reflect fluctuations in derivative instruments (Note 4).

         The impact of the significant transactions and nonrecurring items discussed above on the operating results for the three and nine months ended September 30, 2002 and 2001 is as follows:

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AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

FAS 142

         In addition, the Company adopted, effective January 1, 2002, new accounting rules for goodwill and certain intangible assets. Among the requirements of the new rules is that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques. During the first quarter of 2002, the Company completed its impairment review and recorded a $54 billion noncash pretax charge for the impairment of goodwill, substantially all of which was generated in the Merger. The charge reflects overall market declines since the Merger was announced in January 2000, is non-operational in nature and reflected as a cumulative effect of an accounting change in the accompanying consolidated financial statements (Note 3).

         The Company will perform its annual impairment review during the fourth quarter of each year, commencing in the fourth quarter of 2002. While the Company’s overall goodwill impairment analysis will not be completed until the fourth quarter, based on the current market capitalization of AOL Time Warner as implied by the Company’s stock price, lower than expected performance at the AOL segment, and current market conditions in the cable industry, management believes that it is probable that a substantial overall goodwill impairment has occurred as of September 30, 2002. At this time, management is unable to reasonably estimate the magnitude of such an impairment. The factors that will affect the magnitude of impairment include management’s revised operating plan of the AOL segment, the results of the Company’s overall current budgeting and long-term plan process, and a valuation of assets (including unrecognized intangible assets) and liabilities, all of which will be completed in the fourth quarter. Additionally, the magnitude of any impairment will take into consideration AOL Time Warner’s overall market capitalization as well as the extent to which the stock price of comparable companies in the cable industry continue to experience a sustained decline in values. Any impairment charge would be noncash in nature and, therefore, is not expected to affect the Company’s liquidity or result in the non-compliance with any debt covenants, including the covenant to maintain at least $50 billion of GAAP net worth contained in the 2002 Credit Agreements. In addition, the Company would record any such noncash charge as a component of operating income.

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AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001

         Revenues and EBITDA by business segment are as follows (in millions):

Consolidated Results

          Revenues. AOL Time Warner’s revenues increased to $9.983 billion in 2002, compared to $9.068 billion in 2001. This overall increase in revenues was driven by an increase in Subscription revenues of 21% to $4.818 billion and an increase in Content and Other revenues of 8% to $3.467 billion, offset in part by a decrease in Advertising and Commerce revenues of 10% to $1.698 billion.

         As discussed more fully below, the increase in Subscription revenues was principally due to increases in the number of subscribers and in subscription rates at the AOL, Cable and Networks segments, as well as the impact of the acquisitions of AOL Europe and IPC and the consolidation of Road Runner. The increase in Content and Other revenues was principally due to increased revenue at the Filmed Entertainment segment, principally related to improved worldwide home video results, offset in part by lower results at the AOL segment, primarily related to the termination of the iPlanet alliance with Sun Microsystems, Inc. (“Sun Microsystems”) in the third quarter of 2001.

         The decline in Advertising and Commerce revenues compared to 2001 was due to lower advertising revenues (from $1.572 billion to $1.388 billion) principally related to the AOL segment, due to the continued weakness in online advertising sales and the decline in the current benefit from prior period contract sales, which are expected to continue into 2003. However, excluding the AOL segment, advertising revenues increased 9% primarily

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AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

related to growth at both the Networks and Publishing segments, including the impact of the acquisition of IPC. Commerce revenues ($310 million in 2002 and $308 million in 2001) were essentially flat.

          Intersegment Revenues. AOL Time Warner’s intersegment revenues increased to $796 million in 2002 compared to $462 million in 2001. The increase in intersegment revenues was principally due to an increase in film product sold by the Filmed Entertainment segment to the Company’s Networks segment. In addition, intersegment advertising and commerce revenues increased to $138 million in 2002 from $97 million in 2001. Since intersegment revenues are eliminated in consolidation, they do not impact the Company’s consolidated results.

          Corporate. AOL Time Warner’s corporate EBITDA loss increased to $87 million in 2002 from $74 million in 2001. The increase in the EBITDA loss was principally due to legal and other professional fees related to the SEC and DOJ investigations into the accounting practices of the Company, which are expected to continue into 2003.

          Depreciation and Amortization. Depreciation and amortization decreased to $777 million in 2002 from $2.229 billion in 2001. This decrease was due to a decrease in amortization expense to $181 million in 2002 from $1.784 billion in 2001 due to the adoption of FAS 142, which resulted in goodwill and certain intangible assets ceasing to be amortized. The decrease was offset in part by an increase in depreciation expense to $596 million in 2002 from $445 million in 2001. The increase in depreciation expense reflects higher levels of capital spending at the Cable segment related to the roll-out of digital services over the past three years and increased capital spending on equipment that varies with the number of new subscribers and is depreciated over a shorter useful life. In addition, depreciation at the AOL segment increased primarily due to an increase in network assets acquired as well as a decrease in the useful life of certain network assets.

          Operating Income (Loss). AOL Time Warner’s operating income increased to $1.315 billion in 2002 from an operating loss of $47 million in 2001. The improvement primarily related to a decrease in amortization expense due to the adoption of FAS 142, offset in part by a decrease in EBITDA, which is discussed in detail under “Business Segment Results,” and an increase in depreciation expense.

          Interest Expense, Net. Interest expense, net, increased to $489 million in 2002, from $341 million in 2001 due principally to incremental borrowings to purchase AOL Europe and IPC, the change in the mix of debt to higher fixed rate borrowings and reduced interest income due to the automatic conversion of the Company’s investment in Hughes Electronics Corp. (“Hughes”) from interest-bearing preferred stock to common stock in June 2002.

          Other Expense, Net. Other expense, net, increased to $851 million in 2002 from $437 million in 2001. Other expense, net, in each period included pretax noncash charges to reduce the carrying value of certain investments that experienced an other-than-temporary decline in value (Note 4). In 2002, this charge was approximately $733 million, primarily related to the Company’s investments in Hughes and America Online Latin America, Inc. (“AOL Latin America”). In 2001, the Company recorded a charge of approximately $196 million. Excluding these charges, other expense, net, decreased by $123 million in 2002 compared to 2001, primarily due to a reduction of losses from equity method investees related to reduced amortization associated with the adoption of FAS 142.

         Depending upon general market conditions and the performance of individual investments in the Company’s portfolio, the Company may be required in the future to record additional noncash charges to reduce the carrying value of individual investments to their fair value for other-than-temporary declines. In addition to investments in the Company’s portfolio as of September 30, 2002, the Company is committed to provide up to an

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OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

additional $89 million in funding to AOL Latin America prior to December 31, 2002 in exchange for senior convertible notes. Based upon the financial condition of AOL Latin America and general market conditions, the Company may be required to record an additional noncash charge related to this investment. Any such noncash charge would be unrelated to the Company’s core operations and would be recorded in other expense, net (Note 4). Excluding equity method investees, as of September 30, 2002, the fair value and carrying value of the Company’s portfolio were approximately $1.742 billion and $1.699 billion, respectively.

          Minority Interest Income (Expense). Minority interest income (expense) was $55 million of expense in 2002, compared to $12 million of minority interest income in 2001. The 2002 expense primarily reflects the impact of adopting FAS 142, which resulted in a reduction in amortization expense at the Company’s partially owned consolidated investees, thereby resulting in higher income attributable to minority partners.

          Income Tax Provision. AOL Time Warner had an income tax benefit of $25 million in 2002, compared to income tax expense of $174 million in 2001. The effective tax rate in each period differs from the 35% U.S. federal statutory rate as a result of several factors, including the Company’s pretax income relative to the amount of non-temporary differences (i.e., certain financial statement expenses that are not deductible for income tax purposes), foreign income taxed at different rates and state and local income taxes. The most significant non-temporary difference in 2002 relates to foreign losses with no tax benefit and in 2001 relates to nondeductible amortization of goodwill.

         As of September 30, 2002, the Company had net operating loss carryforwards of approximately $12.0 billion, primarily resulting from stock option exercises. These carryforwards are available to offset future U.S. Federal taxable income and are, therefore, expected to reduce Federal income taxes paid by the Company. If the net operating losses are not utilized, they expire in varying amounts, starting in 2011 through 2021.

          Net Income (Loss) and Net Income (Loss) Per Common Share. AOL Time Warner had net income of $57 million in 2002 compared to a net loss of $997 million in 2001. Basic and diluted net income per common share was $0.01 in 2002 compared to basic and diluted net loss per common share of $0.22 in 2001.

         As previously described and summarized in the table on page 9, the comparability of the Company’s operating results for 2002 and 2001 have been affected by the recognition of certain significant and nonrecurring items. These items totaled pretax losses of $810 million in 2002 and $330 million in 2001. In addition, beginning in the third quarter of 2002, the Company has reported the results of the Advance/Newhouse Systems as a discontinued operation for all periods presented. The impact of the discontinued operations was income of $112 million in 2002, primarily relating to a gain on the disposition of the Advance/Newhouse Systems compared to a loss of $10 million in 2001. Excluding the impact of the significant and nonrecurring items and the discontinued operations, the Company’s normalized net income from continuing operations was $431 million in 2002 compared to a loss of $789 million in 2001. Similarly, the normalized basic and diluted net income from continuing operations per common share was $0.10 in 2002 compared to a loss of $0.18 per share in 2001. The improvement primarily reflects reduced amortization associated with the adoption of FAS 142, offset in part by an overall decrease in AOL Time Warner’s EBITDA and increased depreciation expense, interest expense, net, and other expense, net.

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Management Evaluation

         As noted above, the acquisition of AOL Europe and IPC, the consolidation of Road Runner, as well as the implementation of FAS 142, significantly impacted the comparability of AOL Time Warner’s 2002 results. In addition, other significant transactions and nonrecurring items occurred in each year, which also impacted the comparability of the Company’s results. As such, in reviewing the performance of its businesses, management also evaluates the Company’s results assuming that the acquisitions of AOL Europe and IPC, the consolidation of Road Runner and the adoption of FAS 142 occurred as of the beginning of 2001. In addition, management evaluates results excluding the previously discussed other significant transactions and nonrecurring items. Giving effect to these items, the Company’s total revenues would have increased 6% (from $9.417 billion to $9.983 billion), EBITDA would have decreased 1% (from $2.187 billion to $2.169 billion), operating income would have declined 11% (from $1.570 billion to $1.392 billion) and income from continuing operations would have declined 27% (from $592 million to $431 million).

Business Segment Results

          AOL. Revenues increased 2% to $2.215 billion in 2002, compared to $2.173 billion in 2001. EBITDA decreased 41% to $432 million in 2002, compared to $736 million in 2001.

         Revenues benefited from a 33% increase in Subscription revenues (from $1.374 billion to $1.827 billion), which was offset in part by a 47% decrease in Advertising and Commerce revenues (from $601 million to $321 million) and a 66% decrease in Content and Other revenues (from $198 million to $67 million).

         The growth in subscription revenues was primarily related to the acquisition of AOL Europe in 2002, as well as domestic revenue growth. Domestically, subscription revenues increased 11% and were principally driven by membership growth. The number of AOL brand subscribers in the U.S. was 26.7 million at September 30, 2002 compared to 24.2 million at September 30, 2001. The average monthly subscription revenue per domestic subscriber for the quarter increased 2% to $18.34 as compared to $18.06 in the prior year quarter. This increase is due to the standard unlimited rate increase of $1.95 per month to $23.90 (effective beginning in July 2001) and a shift in the mix of members to new higher premium rate plans. These increases were offset in part by new member acquisition programs and member service and retention programs that offer incentives in the form of discounts and free months to AOL’s members.

         The majority of AOL’s domestic subscribers are on standard unlimited pricing plans. Additionally, AOL has entered into certain bundling programs with original equipment manufacturers (“OEMs”) that generally do not result in subscription revenues during introductory periods, as well as the sale of bulk subscriptions at a discounted rate to AOL’s selected strategic partners for distribution to their employees. As of September 30, 2002, of the 26.7 million domestic AOL members, approximately 82% were on standard unlimited pricing plans (including 11% under various free trial, member service and retention programs), 13% were on lower priced plans, including Bring Your Own Access (“BYOA”), bulk employee programs with strategic partners, and limited usage plans (weighted average monthly rate of approximately $11.45), and the remaining 5% were on OEM bundled plans.

         The number of AOL brand subscribers in Europe was 6.1 million at September 30, 2002 and the average monthly subscription revenue per European subscriber for the third quarter of 2002 was $15.48. This compares to AOL brand subscribers in Europe of 5.0 million at September 30, 2001 and average monthly subscription revenue per European subscriber for the third quarter of 2001 of $12.97. The average monthly subscription revenue per European subscriber in 2002 was impacted by price increases implemented earlier this year in various European countries offering the AOL service and the positive effect of changes in foreign currency exchange rates.

         The decline in Advertising and Commerce revenues resulted from a decline in advertising revenues (from $547 million to $267 million), as commerce revenues were flat. The decline in advertising revenues is principally

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due to a reduction in benefits from prior period domestic contract sales and continued weakness in online advertising sales, which is expected to extend into 2003. The advertising revenue decline was slightly offset by contributions from AOL Europe. Domestic contractual commitments received in prior periods contributed advertising revenue of $164 million in the 2002 period compared to $431 million in the comparable prior year period. Included in the amount of revenue from domestic contractual commitments received in prior periods was revenue recognized from the termination of contractual commitments, which declined to less than $1 million in the 2002 period compared to $72 million in the comparable prior year period. Also contributing to the decline in advertising is a slight decline in intercompany sales of advertising to other business segments of AOL Time Warner in 2002 compared to 2001 (from $40 million to $37 million). Of the $267 million of advertising revenue in the current quarter, approximately $89 million related to the five most significant domestic advertisers. Similarly, of the $547 million of advertising revenue in the prior year quarter, approximately $185 million related to the five most significant domestic advertisers.

         During the quarter, domestic advertising commitments for future periods declined to $648 million as of September 30, 2002 from approximately $860 million as of June 30, 2002. This compares to advertising commitments of $1.378 billion as of September 30, 2001 and $1.760 billion as of June 30, 2001. During the three months ended September 30, 2002, in addition to the $164 million recognized in revenue, remaining commitments were reduced by approximately $80 million, without any revenue being recognized, to reflect a decline in future consideration to be received related to the termination or restructuring of various contracts. Similarly, during the three months ended September 30, 2001, in addition to the $431 million recognized in revenue, remaining commitments were reduced by approximately $20 million, without any revenue being recognized, to reflect a decline in future consideration to be received related to the termination or restructuring of various contracts. Included in the $648 million of advertising commitments for future periods as of September 30, 2002 are approximately $217 million of commitments for the five largest commitments. Similarly, included in the $1.378 billion of advertising commitments for future periods as of September 30, 2001 are $442 million of commitments for the five largest commitments.

         The Company expects to complete performance on a majority of the remaining domestic advertising commitments by the end of 2003. Further declines in future consideration to be received, and revenue that would otherwise be recognized, could occur from additional terminations or restructurings of such commitments. As services under certain large longer term contracts signed in previous periods are completed, the Company expects to enter into fewer long term contracts as the Company develops its online advertising strategy, reducing its reliance on long-term arrangements, including arrangements which involve significant non-advertising components, as the market continues to migrate to more traditional short-term advertiser arrangements. The Company expects that the level of advertising commitments for future periods will decline as traditional advertiser arrangements typically involve shorter terms. The Company is uncertain whether the amount of revenue from the more traditional short-term advertising arrangements will reach the levels of current and prior advertising revenue even if the online advertising market improves. The Company also is uncertain of its ability to replace or renew advertising sales for some of its largest advertisers.

         The decrease in Content and Other revenues is primarily due to the termination of AOL’s iPlanet alliance with Sun Microsystems in the third quarter of 2001, which contributed approximately $131 million of revenue and approximately $129 million of EBITDA during the third quarter of 2001. This was offset in part by $30 million of intercompany network revenues which are derived primarily through network services provided to Road Runner, which began in November 2001.

         The decline in EBITDA is primarily due to the advertising revenue shortfall, the absence of revenues from the iPlanet alliance and an increase in domestic marketing expenses. EBITDA was also impacted by an increase in

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intercompany advertising purchased by AOL on properties of other AOL Time Warner business segments (from $64 million to $68 million), including advertising purchased on Time Warner Cable properties in support of the rollout of AOL Broadband services. In the third quarter of 2002, EBITDA losses at AOL Europe were $1 million. It is expected that fourth quarter losses at AOL Europe will increase compared to the current quarter, due to seasonal increases in marketing efforts as well as member usage and, the rate of year over year improvement will slow in 2003.

         The current year results are significantly impacted by the acquisition of AOL Europe as discussed above. Accordingly, management also evaluates the current period results assuming the operations of AOL Europe were consolidated beginning January 1, 2001. Assuming such consolidation as of January 1, 2001, AOL’s revenues would have decreased by 7% to $2.215 billion in 2002, compared to $2.378 billion in 2001. Subscription revenues would have increased by 15% to $1.827 billion in 2002, compared to $1.586 billion in 2001, Advertising and Commerce revenues would have decreased 48% to $321 million in 2002, compared to $612 million in 2001, Content and Other revenues would have decreased 63% to $67 million in 2002, as compared to $180 million in 2001, and EBITDA would have decreased 30% to $432 million in 2002, compared to $617 million in 2001.

          Cable. Revenues increased 15% to $1.753 billion in 2002 compared to $1.525 in 2001. EBITDA increased 5% to $680 million in 2002 from $650 million in 2001.

         Revenues increased due to a 16% increase in Subscription revenues (from $1.381 billion to $1.601 billion) and a 6% increase in Advertising and Commerce revenues (from $144 million to $152 million). The increase in Subscription revenues was due to higher basic cable rates, increases in high-speed data services subscribers, digital cable subscribers and basic cable subscribers, as well as the impact of the consolidation of Road Runner in 2002. In 2002, as compared to the prior year comparable period, high-speed data subscribers increased by 69% to 2.313 million, digital cable subscribers increased by 47% to 3.456 million and basic cable subscribers increased by 1.5% to 10.862 million. In addition, total customer relationships, representing the number of customers that receive at least one level of service, increased by 4% to approximately 11.2 million as of September 30, 2002 compared to approximately 10.8 million as of September 30, 2001 and revenue generating units, representing the total of all analog video, digital video, high-speed data and telephony customers, increased by 16% to approximately 16.6 million in 2002 compared to approximately 14.4 million in 2001. The Company’s subscriber amounts include subscribers at both consolidated entities and investees accounted for under the equity method of accounting. High speed data subscribers include residential subscribers, as well as commercial and bulk (e.g., apartment buildings and universities) subscribers. Due to their nature, commercial and bulk subscribers are charged at a higher amount than residential subscribers. The number of commercial and bulk high speed data subscribers is calculated by dividing commercial and high speed data revenue by the lower average rate charged to residential customers.

         The increase in Advertising and Commerce revenues was primarily related to higher intercompany sales of advertising to other business segments of AOL Time Warner (from $11 million to $31 million) offset in part by lower levels of advertising purchased by programming vendors to promote their channels, including new channel launches (from $36 million to $19 million). The Company expects fourth quarter 2002 advertising sales to programming vendors to be below fourth quarter 2001 levels and overall 2003 amounts to be lower than 2002.

         EBITDA increased principally as a result of the revenue gains, offset in part by increases in programming and other operating costs and the consolidation of Road Runner in 2002. Video programming costs increased 19%, relating to general programming rate increases across both basic and digital services, the addition of new

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programming services and higher basic and digital subscriber levels. Programming costs are expected to continue to increase as general programming rates increase and digital services continue to be rolled out. Other operating costs increased as a result of the roll out of new services and higher development spending in the Interactive Personal Video division (from $0 to $9 million).

         As noted above, the consolidation of Road Runner effective January 1, 2002 significantly impacted the comparability of the Cable segment’s 2002 results by increasing revenues and decreasing EBITDA. As such, management of the Company also evaluates the results of the Cable segment assuming that the results of Road Runner were included in both periods. Assuming that the results of Road Runner were included in both periods, total revenues would have increased 14% (from $1.543 billion to $1.753 billion), Subscription revenues would have increased 15% (from $1.398 billion to $1.601 billion) and EBITDA would have increased 11% (from $612 million to $680 million).

          Filmed Entertainment. Revenues increased 25% to $2.643 billion in 2002, compared to $2.112 billion in 2001. EBITDA increased 8% to $331 million in 2002, compared to $307 million in 2001.

         Revenues increased and EBITDA decreased at Warner Bros. while revenues and EBITDA increased at the filmed entertainment businesses of Turner Broadcasting System, Inc. (the “Turner filmed entertainment businesses”), which include New Line Cinema, Castle Rock and the former film and television libraries of Metro-Goldwyn-Mayer, Inc. and RKO pictures.

         For Warner Bros., the revenue increase was primarily related to international home video performance, including Harry Potter and the Sorcerer’s Stone and Ocean’s Eleven, syndication revenues from the initial availability of Will & Grace and revenues from the sale of cable broadcasting rights to The Drew Carey Show to the cable networks of Turner Broadcasting System, Inc. (the “Turner cable networks”). This was offset in part by the reduction in 2002 of revenues related to the sale of broadcasting rights for Friends and reduced commerce revenues related to the closure of its Studio Stores. For the Turner filmed entertainment businesses, revenues increased primarily due to the home video performance of The Lord of the Rings: The Fellowship of the Ring , revenues from the sale of Seinfeld broadcasting rights to the Turner cable networks and the domestic theatrical performance of Austin Powers in Goldmember .

         For Warner Bros., EBITDA declined against difficult comparisons, which includes the sale of broadcasting rights for Friends in 2001. In addition, the current period revenue growth was partially offset by costs associated with current period theatrical releases. For the Turner filmed entertainment businesses, EBITDA increased primarily due to the revenue increase.

          Networks. Revenues increased 10% to $1.832 billion in 2002, compared to $1.663 billion in 2001. EBITDA increased 16% to $520 million in 2002 from $450 million in 2001.

         Revenues grew primarily due to an 8% increase in Subscription revenues with growth at both the Turner cable networks and HBO, a 7% increase in Advertising and Commerce revenues (from $535 million to $574 million) with growth at both the Turner cable networks and The WB Network and a 39% increase in Content and Other revenues with strong growth at HBO. EBITDA increased at the Turner cable networks and HBO, offset in part by lower results at The WB Network.

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         For the Turner cable networks, Subscription revenues benefited from higher domestic rates and an increase in the number of domestic subscribers, led by TNT, TBS, Turner Classic Movies, CNN and Cartoon Network. Advertising and Commerce revenues increased 5% (from $430 million to $453 million) due to a slight recovery in the cable television advertising market offset in part by a slight decline in intercompany sales of advertising to other business segments of AOL Time Warner (from $30 million to $28 million). For HBO, Subscription revenues benefited from an increase in the number of subscribers and higher rates. Content and Other revenues benefited from higher home video sales of HBO’s original programming and higher licensing and syndication revenue from the broadcast comedy series, Everybody Loves Raymond . For The WB Network, the increase in Advertising and Commerce revenues (from $105 million to $121 million) was primarily driven by higher rates.

         For the Turner cable networks, the EBITDA increase was principally due to the increased revenues, partially offset by higher programming costs. For HBO, the increase in EBITDA was principally due to the increase in revenues. For The WB Network, the lower EBITDA was principally due to higher programming and marketing costs, offset in part by the increase in revenues.

          Music . Revenues increased 2% to $983 million in 2002, compared to $962 million in 2001. EBITDA increased 10% to $96 million in 2002 from $87 million in 2001.

         Revenues increased primarily due to the impact of the acquisition of Word Entertainment in January 2002, lower provisions for returns due to improved historical experience, the positive effect of changes in foreign currency exchange rates on international revenues and increases in DVD manufacturing volume, partially offset by declines in recorded music shipments related to the ongoing weakness in the worldwide music industry and lower DVD manufacturing prices. Industry-wide worldwide sales continue to be negatively impacted by the effects of piracy. In addition, downward pressure on DVD manufacturing pricing could negatively affect future manufacturing profits.

         The increase in EBITDA is due primarily to the revenue increase, the impact of various cost-saving and restructuring programs and lower marketing and bad debt expense, offset in part by higher artist and repertoire costs. As of September 30, 2002, the Music segment had year-to-date domestic album market share of 17.2% compared to 16.8% at December 31, 2001.

          Publishing. Revenues increased 24% to $1.353 billion in 2002 compared to $1.095 billion in 2001. EBITDA increased 41% to $276 million in 2002 from $196 million in 2001.

         Revenues increased due to a 34% increase in Subscription revenues (from $308 million to $414 million), 21% increase in Advertising and Commerce revenues (from $628 million to $762 million) and an 11% increase in Content and Other revenues (from $159 million to $177 million). The increases in both Subscription revenues and Advertising and Commerce revenues were due predominantly to the acquisitions of IPC in October 2001 and Synapse Group Inc. (“Synapse”) in December 2001. The growth in Advertising and Commerce revenues was offset in part by lower commerce revenues from Time Life’s direct marketing business. Advertising revenues increased 17%, predominantly due to the impact of IPC and increased intercompany sales of advertising to other business segments of AOL Time Warner (from $8 million to $34 million). In addition, advertising revenues benefited slightly from additional issues published in the current period, as well as the stabilization of the advertising market during the quarter, which benefited from soft comparisons to the prior year quarter in the aftermath of September 11th. The growth in intercompany advertising primarily relates to the sale of online advertising on the various Publishing segment websites under an intercompany arrangement, whereby the AOL segment acts as principal in the sale of such advertising to third parties and remits to the Publishing segment a share of the advertising revenues generated.

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The stabilization of the advertising market primarily benefited the non-business oriented publications, while softness continued in the advertising market for business oriented publications. The increase in Content and Other revenues is due primarily to increased sales at Time Inc. Home Entertainment, a marketer of editorial brand product extensions for some of the magazine franchises, as well as the impact of the acquisition of IPC.

         The growth in EBITDA is due primarily to the acquisitions of IPC and Synapse, as well as overall cost savings.

         As noted above, the acquisition of IPC in October 2001 significantly impacted the comparability of the Publishing segment’s 2002 results by significantly increasing both revenues and EBITDA. As such, management of the Company also evaluates the results of the Publishing segment assuming that the results of IPC were included in both periods. Assuming that the results of IPC were included in both periods, total revenues would have increased 11% (from $1.221 billion to $1.353 billion), Subscription revenues would have increased 8% (from $382 million to $414 million), Advertising and Commerce revenues would have increased 13% (from $673 million to $762 million) and EBITDA would have increased 23% (from $224 million to $276 million).

Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001

         Revenues and EBITDA by business segment are as follows (in millions):

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Consolidated Results

          Revenues. AOL Time Warner’s revenues increased to $29.641 billion in 2002, compared to $26.851 billion in 2001. The overall increase in revenues was driven by an increase in Subscription revenues of 23% to $14.032 billion and an increase in Content and Other revenues of 8% to $10.091 billion, offset by a decrease in Advertising and Commerce revenues of 9% to $5.518 billion.

         As discussed more fully below, the increase in Subscription revenues was principally due to increases in the number of subscribers and in subscription rates at the AOL, Cable and Networks segments, as well as the impact of the acquisitions of AOL Europe and IPC and the consolidation of Road Runner. The increase in Content and Other revenues was principally due to increased revenue at the Filmed Entertainment segment related to improved international theatrical and worldwide home video results, offset in part by lower results at the AOL segment, primarily related to the termination of the iPlanet alliance with Sun Microsystems in the third quarter of 2001.

         The decline in Advertising and Commerce revenues was principally due to lower advertising revenues (from $5.055 billion to $4.475 billion), principally related to the AOL segment, due to continued weakness in online advertising sales and the decline in the current benefit from prior period contract sales, which are expected to continue into 2003. However, excluding the AOL segment, advertising revenues increased 7% primarily related to growth at the Networks and Publishing segments, including the impact of the acquisition of IPC. Commerce revenues ($1.043 billion in 2002 and $1.033 billion in 2001) were essentially flat.

          Intersegment Revenues. AOL Time Warner’s intersegment revenues increased to $1.801 billion in 2002 compared to $1.313 billion in 2001. The increase in intersegment revenues was principally due to increases in network services provided by the AOL segment to the Cable segment, DVD manufacturing provided by the Music segment to the Filmed Entertainment segment and film product sold by the Filmed Entertainment segment to the Company’s Networks segment. In addition, intersegment Advertising and Commerce revenues increased to $402 million in 2002 from $263 million in 2001. Since intersegment revenues are eliminated in consolidation, they do not impact the Company’s consolidated results.

          Corporate. AOL Time Warner’s corporate EBITDA loss increased to $246 million in 2002 from $219 million in 2001. The increase in EBITDA loss was principally due to legal and other professional fees related to the SEC and DOJ investigations into the financial reporting and disclosure practices of the Company, which are expected to continue into 2003, as well as certain project termination costs.

          Depreciation and Amortization. Depreciation and amortization decreased to $2.206 billion in 2002 from $6.589 billion in 2001. The decrease was due to a decrease in amortization expense to $520 million in 2002 from $5.318 billion in 2001 due to the adoption of FAS 142, which resulted in goodwill and certain intangible assets ceasing to be amortized, offset in part by the impact of additional amortization expense from the acquisitions of AOL Europe and IPC. This decrease was offset in part by an increase in depreciation expense to $1.686 billion in 2002 from $1.271 billion in 2001. The increase in depreciation expense reflects higher levels of capital spending at the Cable segment related to the roll-out of digital services over the past three years and increased capital spending on equipment that varies with the number of new subscribers and is depreciated over a shorter useful life. In addition, depreciation at the AOL segment increased primarily due to an increase in network assets acquired as well as a decrease in the useful life of certain network assets.

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          Operating Income (Loss). AOL Time Warner’s operating income increased to $3.892 billion in 2002 from an operating loss of $74 million in 2001. The improvement primarily related to a decrease in amortization expense due to the adoption of FAS 142, offset in part by a decrease in EBITDA, which is discussed in detail under “Business Segment Results,” and an increase in depreciation expense.

          Interest Expense, Net. Interest expense, net, increased to $1.306 billion in 2002, from $996 million in 2001, due principally to additional interest expense on incremental borrowings to purchase AOL Europe and IPC, offset in part by lower market interest rates in 2002.

          Other Expense, Net. Other expense, net, increased to $1.837 billion in 2002 from $1.572 billion in 2001. Other expense, net, in each period included pretax noncash charges to reduce the carrying value of certain investments that experienced an other-than-temporary decline in value. In 2002, this charge was approximately $1.678 billion, primarily related to AOL Time Warner’s investments in Hughes, Time Warner Telecom Inc., Gateway, Inc. and AOL Latin America, which was offset in part by an approximate $59 million gain on the sale of a portion of the Company’s interest in Columbia House and an approximate $31 million gain on the redemption of a portion of the Company’s interest in TiVo. In 2001, AOL Time Warner recorded a charge of approximately $870 million, which was offset in part by approximately $54 million of pretax gains related to equity derivative instruments and the sale of certain investments. Excluding these charges and the Columbia House and TiVo gains, other expense, net, decreased by $507 million in 2002 compared to 2001 primarily due to a reduction of losses from equity method investees, primarily relating to reduced amortization associated with the adoption of FAS 142, offset in part by the absence of prior year net pretax investment-related gains, including gains related to the exchange of various unconsolidated cable television systems at TWE (attributable to the minority owners of TWE).

         Depending upon general market conditions and the performance of individual investments in the Company’s portfolio, the Company may be required in the future to record additional noncash charges to reduce the carrying value of individual investments to their fair value for other-than-temporary declines. In addition to investments in the Company’s portfolio as of September 30, 2002, the Company is committed to provide up to an additional $89 million in funding to AOL Latin America prior to December 31, 2002 in exchange for senior convertible notes. Based upon the financial condition of AOL Latin America and general market conditions, the Company may be required to record an additional noncash charge related to this investment. Any such charge would be unrelated to the Company’s core operations and would be recorded in other expense, net (Note 4). Excluding equity method investees, as of September 30, 2002, the fair value and carrying value of the Company’s portfolio were approximately $1.742 billion and $1.699 billion, respectively.

          Minority Interest Income (Expense). Minority interest income (expense) was $139 million of expense in 2002, compared to $18 million of minority interest income in 2001. The 2002 expense primarily reflects the adoption of FAS 142, which resulted in a reduction of amortization expense at the Company’s partially owned consolidated investees, thereby resulting in higher income attributable to minority partners and accretion on the preferred securities of AOL Europe. The increase in minority interest expense was partially offset by the absence in 2002 of an allocation of pretax gains related to the exchange of various unconsolidated cable television systems in 2001 at TWE attributable to the minority owners of TWE.

          Income Tax Provision. AOL Time Warner had income tax expense of $279 million in 2002, compared to $450 million in 2001. The effective tax rate in each period differs from the 35% U.S. federal statutory rate as a result of several factors, including the Company’s pretax income relative to the amount of non-temporary differences (i.e., certain financial statement expenses that are not deductible for income tax purposes), foreign income taxed at

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OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

different rates and state and local income taxes. The most significant non-temporary difference in 2002 relates to foreign losses with no tax benefit and in 2001 relates to nondeductible amortization of goodwill.

         As of September 30, 2002, the Company had net operating loss carryforwards of approximately $12.0 billion, primarily resulting from stock option exercises. These carryforwards are available to offset future U.S. Federal taxable income and are, therefore, expected to reduce Federal income taxes paid by the Company. If the net operating losses are not utilized, they expire in varying amounts, starting in 2011 through 2021.

          Net Income (Loss) and Net Income (Loss) Per Common Share. AOL Time Warner had a net loss of $53.791 billion in 2002 compared to a net loss of $3.103 billion in 2001. Basic and diluted net loss per common share was $12.09 in 2002 compared to basic and diluted net loss per common share of $0.70 in 2001.

         As previously described and summarized in the table on page 9, the comparability of the Company’s operating results for 2002 and 2001 have been affected by the recognition of certain significant and nonrecurring items. These items totaled pretax losses of $1.772 billion in 2002 and $1.021 billion in 2001. In addition, beginning in the third quarter of 2002, the Company has reported the results of the Advance/Newhouse Systems as a discontinued operation for all periods presented. The impact of the discontinued operations was income of $113 million in 2002, primarily relating to a gain on the disposition of the Advance/Newhouse Systems and a loss of $29 million in 2001. Net income in 2002 was also impacted by a charge of approximately $54.235 billion relating to the cumulative effect of an accounting change, discussed further in Notes 1 and 3. Excluding the impact of the significant and nonrecurring items, the discontinued operations, and the cumulative effect of an accounting change, the Company’s normalized net income from continuing operations was $1.394 billion in 2002 compared to a net loss of $2.461 billion in 2001. Similarly, the normalized basic and diluted net income from continuing operations per common share was $0.31 in 2002 compared to a loss of $0.56 in 2001. The improvement in normalized earnings principally resulted from reduced amortization associated with the adoption of FAS 142, offset in part by an overall decline in AOL Time Warner’s EBITDA, increased depreciation expense, net, and other expense, net.

Management Evaluation

         As noted above, the acquisition of AOL Europe and IPC, the consolidation of Road Runner, as well as the implementation of FAS 142, significantly impacted the comparability of AOL Time Warner’s 2002 results. In addition, other significant transactions and nonrecurring items occurred in each year, which also impacted the comparability of the Company’s results. As such, management also evaluates the Company’s results assuming that the acquisitions of AOL Europe and IPC, the consolidation of Road Runner and the adoption of FAS 142 occurred as of the beginning of 2001. In addition, in reviewing the performance of its businesses, management evaluates results excluding the previously discussed other significant transactions and nonrecurring items. Giving effect to these items, the Company’s total revenues would have increased 6% (from $27.896 billion to $29.641 billion), EBITDA would have increased 1% (from $6.214 billion to $6.282 billion), operating income would have declined 7% (from $4.385 billion to $4.076 billion) and income from continuing operations and before the cumulative effect of an accounting change would have declined 10% (from $1.547 billion to $1.394 billion).

Business Segment Results

          AOL. Revenues increased 6% to $6.772 billion in 2002, compared to $6.373 billion in 2001. EBITDA decreased 40% to $1.324 billion in 2002, compared to $2.213 billion in 2001.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

         Revenues benefited from a 36% increase in Subscription revenues (from $3.910 billion to $5.330 billion), which was offset in part by a 38% decrease in Advertising and Commerce revenues (from $1.965 billion to $1.228 billion) and a 57% decrease in Content and Other revenues (from $498 million to $214 million).

         The growth in subscription revenues was primarily related to the acquisition of AOL Europe in 2002, as well as domestic revenue growth. Domestically, subscription revenues increased 15% and was principally driven by membership growth and price increases. The number of AOL brand subscribers in the U.S. was 26.7 million at September 30, 2002 compared to 24.2 million at September 30, 2001. The average monthly subscription revenue per domestic subscriber for the first nine months of 2002 increased 4% to $18.19 as compared to $17.54 in the prior year comparable period. This increase is due to the standard unlimited rate increase of $1.95 per month to $23.90 (effective beginning in July 2001) and a shift in the mix of members to new higher premium rate plans. These increases were offset in part by new member acquisition programs and member service and retention programs that offer incentives in the form of discounts and free months to AOL’s members.

         The majority of AOL's domestic subscribers are on unlimited pricing plans. Additionally, AOL has entered into certain bundling programs with OEMs that generally do not result in subscription revenues during introductory periods, as well as the sale of bulk subscriptions at a discounted rate to AOL’s selected strategic partners for distribution to their employees. As of September 30, 2002, of the 26.7 million domestic AOL members, approximately 82% were on standard unlimited pricing plans (including 11% under various free trial, member service and retention programs), 13% were on lower priced plans, including BYOA, bulk employee programs with strategic partners, and limited usage plans (weighted average monthly rate of approximately $10.85), and the remaining 5% were on OEM bundled plans.

         The number of AOL brand subscribers in Europe was 6.1 million at September 30, 2002 and the average monthly subscription revenue per European subscriber for the first nine months of 2002 was $14.37. This compares to AOL brand subscribers in Europe of 5.0 million at September 30, 2001 and average monthly subscription revenue per European subscriber for the first nine months of 2002 of $12.67. The average monthly subscription revenue per European subscriber in 2002 was impacted by price increases implemented earlier this year in various European countries offering the AOL service and the positive effect of changes in foreign currency exchange rates.

         The decline in Advertising and Commerce revenues resulted from a decline in advertising revenues (from $1.761 billion to $998 million) and a 13% decrease in commerce revenues. The decline in advertising revenues is principally due to a reduction in benefits from prior period contract sales and continued weakness in online advertising sales, which are expected to extend into 2003. The advertising revenue decline was slightly offset by contributions from AOL Europe. Domestic contractual commitments received in prior periods contributed advertising revenue of $669 million in the 2002 period compared to $1.258 billion in the comparable prior year period. Included in the amount of revenue from domestic contractual commitments received in prior periods was revenue recognized from the termination of contractual commitments, which declined to $10 million in the 2002 period compared to $128 million in the comparable prior year period. The decline in advertising revenues was offset in part by an increase in the intercompany sales of advertising to other business segments of AOL Time Warner in 2002 as compared to 2001 (from $90 million to $141 million). Of the $998 million of advertising revenue in the current nine-month period, approximately $331 million related to the five most significant domestic advertisers. Similarly, of the $1.761 billion of advertising revenue in the prior year nine-month period, approximately $380 million related to the five most significant domestic advertisers.

         During the first nine months of 2002, domestic advertising commitments for future periods declined to $648 million as of September 30, 2002 from $1.450 billion as of December 31, 2001. This compares to advertising commitments

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of $1.378 billion as of September 30, 2001 and $2.598 billion as of December 31, 2000. During the first nine months of 2002, in addition to the $669 million recognized in revenue, remaining commitments were reduced by approximately $343 million, without any revenue being recognized, to reflect a decline in future consideration to be received related to the termination or restructuring of various contracts. Similarly, during the nine months ended September 30, 2001, in addition to the $1.258 billion recognized in revenue, remaining commitments were reduced by approximately $376 million, without any revenue being recognized, to reflect a decline in future consideration to be received related to the termination or restructuring of various contracts. Included in the $648 million of advertising commitments for future periods as of September 30, 2002 are approximately $217 million of commitments for the five largest commitments. Similarly, included in the $1.378 billion of advertising commitments for future periods as of September 30, 2001 are $442 million of commitments for the five largest commitments.

         The Company expects to complete performance on a majority of the remaining domestic advertising commitments by the end of 2003. Further declines in future consideration to be received, and revenue that would otherwise be recognized, could occur from additional terminations or restructurings of such commitments. As services under certain large longer term contracts signed in previous periods are completed, the Company expects to enter into fewer long term contracts as the Company develops its online advertising strategy, reducing its reliance on long-term arrangements, including arrangements which involve significant non-advertising components, as the market continues to migrate to more traditional short-term advertiser arrangements. The Company expects that the level of advertising commitments for future periods will decline as traditional advertiser arrangements typically involve shorter terms. The Company is uncertain whether the amount of revenue from the more traditional short-term advertising arrangements will reach the levels of current and prior advertising revenue even if the online advertising market improves. The Company also is uncertain of its ability to replace or renew advertising sales for some of its largest advertisers.

         The decrease in Content and Other revenues is primarily due to the termination of AOL’s iPlanet alliance with Sun Microsystems in the third quarter of 2001, which contributed approximately $305 million of revenue and approximately $249 million of EBITDA during the first nine months of 2001. This was offset in part by $82 million of intercompany network revenues which are derived primarily through network services provided to Road Runner, which began in November 2001.

         The decline in EBITDA is primarily due to the advertising revenue shortfall, the absence of revenues from the iPlanet alliance, an increase in domestic marketing expenses, as well as EBITDA losses at AOL Europe of $126 million. EBITDA was also impacted by an increase in intercompany advertising purchased by AOL on properties of other AOL Time Warner business segments (from $141 million to $216 million), including advertising purchased on Time Warner Cable properties in support of the rollout of AOL Broadband services.

         The current year results are significantly impacted by the acquisition of AOL Europe as discussed above. Accordingly, management also evaluates the current period results assuming the operations of AOL Europe were consolidated beginning January 1, 2001. Assuming such consolidation as of January 1, 2001, AOL’s revenues would have decreased by 3% to $6.772 billion in 2002, compared to $6.966 billion in 2001. Subscription revenues would have increased 18% to $5.330 billion in 2002, as compared to $4.516 billion in 2001, Advertising and Commerce revenues would have decreased 39% to $1.228 billion in 2002, as compared to $2.007 billion in 2001, content and other revenues would have decreased 52% to $214 million, as compared to $443 million in 2001, and EBITDA would have decreased 25% to $1.324 billion in 2002, compared to $1.768 billion in 2001.

          Cable . Revenues increased 18% to $5.198 billion in 2002 compared to $4.404 billion in 2001. EBITDA increased 4% to $2.007 billion in 2002 from $1.924 billion in 2001.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

         Revenues increased due to a 17% increase in Subscription revenues (from $4.050 billion to $4.722 billion) and a 34% increase in Advertising and Commerce revenues (from $354 million to $476 million). The increase in Subscription revenues was due to higher basic cable rates and increases in high-speed data services subscribers, digital cable subscribers and basic cable subscribers, as well as the impact of the consolidation of Road Runner in 2002. In 2002, as compared to the prior year comparable period, high-speed data subscribers increased by 69% to 2.313 million, digital cable subscribers increased by 47% to 3.456 million and basic cable subscribers increased by 1.5% to 10.862 million. In addition, total customer relationships, representing the number of customers that receive at least one level of service, increased by 4% to approximately 11.2 million as of September 30, 2002 compared to approximately 10.8 million as of September 30, 2001 and revenue generating units, representing the total of all analog video, digital video, high-speed data and telephony customers, increased by 16% to approximately 16.6 million in 2002 compared to approximately 14.4 million in 2001. The Company’s subscriber amounts include subscribers at both consolidated entities and investees accounted for under the equity method of accounting. High speed data subscribers include residential subscribers, as well as commercial and bulk (e.g., apartment buildings and universities) subscribers. Due to their nature, commercial and bulk subscribers are charged at a higher amount than residential subscribers. The number of commercial and bulk high speed data subscribers is calculated by dividing commercial and high speed data revenue by the lower average rate charged to residential customers.

         The increase in Advertising and Commerce revenues was primarily related to an increase in advertising purchased by programming vendors to promote their channels, including new channel launches (from $53 million to $101 million) and an increase in the intercompany sale of advertising to other business segments of AOL Time Warner (from $32 million to $89 million). The Company expects fourth quarter 2002 advertising sales to programming vendors to be below fourth quarter 2001 levels and overall 2003 amounts to be lower than 2002.

         EBITDA increased principally as a result of the revenue gains, offset in part by increases in programming and other operating costs and the consolidation of Road Runner in 2002. The increase in video programming costs of 22% relates to general programming rate increases across both basic and digital services, the addition of new programming services and higher basic and digital subscriber levels. Programming costs are expected to continue to increase as general programming rates increase and digital services continue to be rolled out. Other operating costs increased as a result of the roll out of new services, higher property taxes associated with the upgrade of cable plants and higher development spending in the Interactive Personal Video division (from $0 to $22 million).

         As noted above, the consolidation of Road Runner effective January 1, 2002 significantly impacted the comparability of the Cable segment’s 2002 results by increasing revenues and decreasing EBITDA. As such, management of the Company also evaluates the results of the Cable segment assuming that the results of Road Runner were included in both periods. Assuming that the results of Road Runner were included in both periods, total revenues would have increased 16% (from $4.472 billion to $5.198 billion), Subscription revenues would have increased 15% (from $4.115 billion to $4.722 billion) and EBITDA would have increased 12% (from $1.796 billion to $2.007 billion).

          Filmed Entertainment. Revenues increased 15% to $7.165 billion in 2002, compared to $6.217 billion in 2001. EBITDA increased 25% to $840 million in 2002, compared to $670 million in 2001.

         Revenues and EBITDA increased at both Warner Bros. and the Turner filmed entertainment businesses, which include New Line Cinema, Castle Rock and the former film and television libraries of Metro-Goldwyn-Mayer, Inc. and RKO pictures.

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OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

         For Warner Bros., the revenue increase was primarily related to the worldwide theatrical and home video performance of Harry Potter and the Sorcerer’s Stone and Ocean’s Eleven , partially offset by reduced commerce revenues related to the closure of its Studio Stores. For the Turner filmed entertainment businesses, revenues increased primarily due to New Line Cinema’s continued theatrical and home video success of The Lord of the Rings: The Fellowship of the Ring .

         For Warner Bros., EBITDA increased principally due to the profitability of Harry Potter and the Sorcerer’s Stone . For the Turner filmed entertainment businesses, EBITDA increased primarily due to the revenue increase.

          Networks. Revenues increased 7% to $5.575 billion in 2002, compared to $5.190 billion in 2001. EBITDA increased 2% to $1.371 billion in 2002 from $1.343 billion in 2001.

         Revenues grew primarily due to an 8% increase in Subscription revenues with growth at both the Turner cable networks and HBO, a 3% increase in Advertising and Commerce revenues (from $1.803 billion to $1.850 billion) with growth at both the Turner cable networks and the WB Network and a 25% increase in Content and Other revenues with growth at HBO, offset in part a decrease at the Turner cable networks. EBITDA increased due to improved results at HBO offset in part by lower results at the Turner cable networks and The WB Network.

         For the Turner cable networks, Subscription revenues benefited from higher domestic rates and an increase in the number of domestic subscribers, led by TNT, Turner Classic Movies, TBS, CNN, and Cartoon Network. Advertising and Commerce revenues increased slightly ($1.477 billion in 2002 compared to $1.459 billion in 2001) reflecting a slight recovery in the cable television advertising market during the second and third quarters of 2002, which was offset in part by a slight decline in intercompany sales of advertising to other business segments of AOL Time Warner (from $87 million to $84 million). For HBO, Subscription revenues benefited from an increase in the number of subscribers and higher rates. Content and Other revenues benefited from higher home video sales of HBO’s original programming and higher licensing and syndication revenue from the broadcast comedy series Everybody Loves Raymond . For The WB Network, the increase in Advertising and Commerce revenues was driven by higher rates.

         For the Turner cable networks, the decrease in EBITDA was principally due to higher programming, marketing and newsgathering costs, partially offset by the increased Subscription revenues. In addition, EBITDA was negatively affected by an allowance for doubtful accounts established on receivables from Adelphia Communications, a major cable television operator (“Adelphia”). For The WB Network, the EBITDA decline was principally due to higher program license fees offset in part by higher Advertising and Commerce revenues. For HBO, the increase in EBITDA was principally due to the increase in revenues and reduced costs relating to the finalization of certain licensing agreements, offset in part by an allowance for doubtful accounts established on receivables from Adelphia and higher write-offs of development costs.

          Music . Revenues increased 4% to $2.902 billion in 2002, compared to $2.801 billion in 2001. EBITDA increased 10% to $294 million in 2002 from $268 million in 2001.

         Revenues increased primarily due to the impact of the acquisition of Word Entertainment in January 2002, lower provisions for returns due to improved historical experience and increases in DVD manufacturing volume, offset in part by declines in recorded music shipments related to the ongoing weakness in the worldwide music industry, the negative effect of changes in foreign currency exchange rates on international revenues and lower DVD

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OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

manufacturing prices. Industry-wide worldwide music sales continue to be negatively impacted by the effects of piracy. In addition, downward pressure on DVD manufacturing pricing, could negatively affect future manufacturing profits.

         The increase in EBITDA is due primarily to the higher revenues, the impact of various cost-saving and restructuring programs and lower marketing and bad debt expense, partially offset by higher artist and repertoire costs. As of September 30, 2002, the Music segment had year-to-date domestic album market share of 17.2%, compared to 16.8% at December 31, 2001.

          Publishing. Revenues increased 20% to $3.830 billion in 2002 compared to $3.179 billion in 2001. EBITDA increased 31% to $758 million in 2002 from $580 million in 2001.

         Revenues increased due to a 35% increase in Subscription revenues (from $781 million to $1.057 billion), 15% increase in Advertising and Commerce revenues (from $1.990 billion to $2.285 billion) and a 20% increase in Content and Other revenues (from $408 million to $488 million). The increases in both Subscription revenues and Advertising and Commerce revenues were due to the acquisitions of IPC in October 2001 and Synapse in December 2001. The growth in Advertising and Commerce revenues was offset in part by lower commerce revenues from Time Life’s direct marketing business. Advertising revenues increased 9% due to the acquisition of IPC. Advertising increases at the non-business oriented publications were offset by continued softness in the advertising market for business oriented publications. The increase in Content and Other revenues is due primarily to increased sales at the AOL Time Warner Book Group due to the carryover successes of 2001 bestsellers and the success of several 2002 releases, including “The Lovely Bones”, as well as the impact of the acquisition of IPC.

         The growth in EBITDA is due predominantly to the acquisitions of IPC and Synapse and, to a lesser extent, overall cost savings and reduced costs relating to the final settlement of certain liabilities associated with the closure of American Family Enterprises during 2001, offset in part by additional reserves established on receivables from newsstand distributors.

         As noted above, the acquisition of IPC in October 2001 significantly impacted the comparability of the Publishing segment’s 2002 results by significantly increasing both revenues and EBITDA. As such, management of the Company also evaluates the results of the Publishing segment assuming that the results of IPC were included in both periods. Assuming that the results of IPC were included in both periods, total revenues would have increased 7% (from $3.563 billion to $3.830 billion), Subscription revenues would have increased 5% (from $1.006 billion to $1.057 billion), Advertising and Commerce revenues would have increased 7% (from $2.130 billion to $2.285 billion) and EBITDA would have increased 17% (from $647 million to $758 million).

FINANCIAL CONDITION AND LIQUIDITY
September 30, 2002

Current Financial Condition

         At September 30, 2002, AOL Time Warner had $28.3 billion of debt, $2.3 billion of cash and equivalents (net debt of $26.0 billion, defined as total debt less cash and cash equivalents) and $98.0 billion of shareholders’ equity, compared to $22.8 billion of debt, $719 million of cash and equivalents (net debt of $22.1 billion) and $152.0 billion of shareholders’ equity at December 31, 2001. In addition, as of September 30, 2002, AOL Europe also had approximately $792 million, including accrued dividends, of redeemable preferred securities outstanding,

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which is classified as minority interest in the accompanying consolidated balance sheet. These securities are required to be redeemed by the Company in April 2003 in cash, AOL Time Warner common stock, or a combination thereof, at the discretion of the Company. Further, pursuant to a previously negotiated agreement and as previously disclosed, TWE is committed to acquiring in January 2003 an incremental 11% interest in The WB Network for $128 million in cash. The Company had approximately $8.4 billion of committed, available funding as of September 30, 2002. The Company has no scheduled debt maturities for the remainder of 2002. However, the holders of the 6.85% debentures due 2026 of Time Warner Companies, Inc., a wholly owned subsidiary of the Company, may at their option cause the Company to redeem on January 15, 2003, the $400 million principal amount outstanding of such debentures at 100% of their principal amount plus accrued and unpaid interest to the date of redemption.

         The Company’s outstanding utilization under its accounts receivable and backlog securitization facilities was approximately $1.7 billion as of September 30, 2002 and $1.6 billion as of December 31, 2001. The Company has either renewed or extended the maturity dates of certain securitization facilities with $800 million of committed capacity that were scheduled to mature during the third quarter of 2002. Total committed capacity under the Company’s accounts receivable and backlog securitization facilities as of September 30, 2002 was approximately $2.0 billion, of which, approximately $350 million is scheduled to mature in the fourth quarter of 2002.

         As discussed in more detail below, management believes that AOL Time Warner’s operating cash flow, cash and equivalents, borrowing capacity under the 2002 Credit Agreements and commercial paper programs are sufficient to fund its capital and liquidity needs for the foreseeable future.

Cash Flows

Operating Activities

         Cash provided by operations increased to $5.925 billion for the first nine months of 2002 as compared to $4.230 billion in 2001. This year over year growth in cash flow from operations compared to 2001 was driven primarily by over $1.7 billion of improvements in working capital, lower income taxes and interest payments and a decrease in payments to settle restructuring and merger-related liabilities, offset in part by a decrease in EBITDA and the consolidation of losses at AOL Europe and Road Runner. The improvements in working capital are related to reduced working capital needs in the current period compared to increased working capital needs in the prior period. Working capital needs are subject to wide fluctuations based on the timing of cash transactions related to production schedules, the acquisition of programming, collection of sales proceeds and similar items. The current period benefits are largely expected to reverse in future periods.

         During the first nine months of 2002, cash provided by operations of $5.925 billion reflected $6.098 billion of EBITDA, less $1.018 billion of net interest payments, $180 million of net income taxes paid and $565 million of payments to settle merger and restructuring liabilities. Cash flow from operations also reflects a reduction in other working capital requirements of $1.590 billion.

         During the first nine months of 2001, cash provided by operations of $4.230 billion reflected $6.515 billion of EBITDA, less $886 million of net interest payments, $263 million of net income taxes paid and $1.030 billion of payments to settle restructuring and merger-related liabilities. Cash flow from operations also reflects an increase in working capital requirements of $106 million.

Investing Activities

         Cash used by investing activities was $9.618 billion in the first nine months of 2002, compared to $1.993 billion in 2001. The year over year increase in cash used by investing activities compared to 2001 is primarily due to

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the increased cash used for acquisitions and investments, principally the acquisition of Bertelsmann’s interest in AOL Europe. Also contributing to the increase is the absence in 2002 of proceeds from the sale of short-term investments that occurred in the first nine months of 2001 (primarily money market investments held by America Online at the time of the Merger).

         During the first nine months of 2002, cash used by investing activities of $9.618 billion reflected approximately $7.582 billion of cash used for acquisitions and investments, including $6.75 billion related to the acquisition of Bertelsmann’s interest in AOL Europe. In addition, cash used by investing activities in 2002 included $2.284 billion of total capital expenditures and product development costs, offset in part by $248 million of proceeds received from the sale of investments.

         During the first nine months of 2001, cash used by investing activities of $1.993 billion reflected $1.774 billion of cash used for acquisitions and investments and $2.660 billion of total capital expenditures and product development costs, offset in part by $690 million of cash acquired in the Merger and $1.751 billion of proceeds received from the sale of investments. The proceeds received from the sale of investments in 2001 was due primarily to the sale of short-term investments previously held by America Online.

Financing Activities

         Cash provided by financing activities was $5.323 billion for the first nine months of 2002 as compared to cash used by financing activities of $3.342 billion in 2001. The year over year increase in cash provided by financing activities is principally due to incremental borrowings in the current period used to finance the acquisition of Bertelsmann’s interest in AOL Europe compared to net repayments on borrowings and the repurchase of AOL Time Warner common stock in the prior period.

         During the first nine months of 2002, cash provided from financing activities of $5.323 billion resulted from approximately $5.493 billion of net incremental borrowings, primarily used to acquire Bertelsmann’s interest in AOL Europe, and $255 million of proceeds received principally from the exercise of employee stock options, offset in part by the redemption of redeemable preferred securities at AOL Europe for $255 million, the repurchase of AOL Time Warner common stock for total cash of $102 million, $11 million of dividends and partnership distributions and $35 million of principal payments on capital leases.

         During the first nine months of 2001, cash used by financing activities of $3.342 billion resulted from $1.248 billion of net payments on borrowings, the repurchase of AOL Time Warner common stock for an aggregate cost of $2.298 billion, the redemption of redeemable preferred securities of subsidiaries for $575 million and $55 million of dividends and partnership distributions, offset in part by $813 million of proceeds received principally from the exercise of employee stock options.

Free Cash Flow

         AOL Time Warner evaluates operating performance based on several measures including free cash flow, which is defined as cash provided by operations less capital expenditures and product development costs, dividend payments and partnership distributions, and principal payments on capital leases. The comparability of AOL Time Warner’s free cash flow has been affected by certain significant unusual and nonrecurring items in each period. Specifically, AOL Time Warner’s free cash flow has been impacted by the cash impact of the significant and nonrecurring items previously discussed. In addition, free cash flow has been impacted by payments made in

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

settling other merger and restructuring liabilities. For the first nine months of 2002, these items aggregated approximately $565 million of cash payments. For 2001, these items aggregated approximately $981 million. Excluding the effect of these nonrecurring items and discontinued operations, free cash flow increased to $3.999 billion in 2002 from $2.481 billion in 2001, primarily due to improved cash flows from the Company’s filmed entertainment businesses, reduced interest and taxes paid, lower capital expenditures and product development costs and improvements in working capital. In addition, excluding the effect of nonrecurring items and cash flow from discontinued operations, the free cash flow during the first nine months of 2002 represented 64% conversion of EBITDA to free cash flow, compared to a 37% conversion ratio in 2001. Part of the growth in free cash flow was related to the timing of various cash payments and receipts which are expected to have an offsetting impact on free cash flow generation in future quarters. As a result, the Company expects a reduction in the rate that it converts EBITDA to free cash flow in future periods. On an as reported basis, free cash flow in 2002 was $3.434 billion, compared to $1.500 billion in 2001.

TWE Cash Flow Restrictions

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

Common Stock Repurchase Program

         In January 2001, AOL Time Warner’s Board of Directors authorized a common stock repurchase program that allows AOL Time Warner to repurchase, from time to time, up to $5 billion of common stock over a two-year period. During the first nine months of 2002, the Company repurchased approximately 4 million shares at an aggregate cost of $102 million. These repurchases increased the cumulative shares purchased under this common stock repurchase program to approximately 79.4 million shares at an aggregate cost of $3.148 billion. In an effort to maintain financial flexibility, the pace of share repurchases under this program has slowed in 2002. As such, the Company does not expect that its repurchases of common stock for the remainder of the year will be significant.

$10 Billion Shelf Registration Statement

         In January 2001, AOL Time Warner filed a shelf registration statement with the SEC, which allowed AOL Time Warner to offer and sell from time to time, debt securities, preferred stock, series common stock, common stock and/or warrants to purchase debt and equity securities in amounts up to $10 billion in initial aggregate public offering prices. On April 19, 2001, AOL Time Warner issued an aggregate of $4 billion principal amount of debt securities under this shelf registration statement at various fixed interest rates and maturities of 5, 10 and 30 years. On April 8, 2002, AOL Time Warner issued the remaining $6 billion principal amount of debt securities under this shelf registration statement at various fixed interest rates and maturities of 3, 5, 10 and 30 years. The net proceeds to the Company were approximately $3.964 billion under the first issuance and approximately $5.930 billion under the second issuance, both of which were used for general corporate purposes, including, but not limited to, the repayment of outstanding commercial paper and bank debt (Note 9).

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AOL TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

$10 Billion Revolving Credit Facilities

         In July 2002, AOL Time Warner, together with certain of its consolidated subsidiaries, entered into two new senior unsecured long-term revolving bank credit agreements with an aggregate borrowing capacity of $10 billion (the “2002 Credit Agreements”) and terminated three existing bank credit facilities with an aggregate borrowing capacity of $12.6 billion (the “Old Credit Agreements”), which were scheduled to expire during 2002. The 2002 Credit Agreements are comprised of a $6 billion five-year revolving credit facility and a $4 billion 364-day revolving credit facility, borrowings under which may be extended for a period up to two years following the initial term. The borrowers under the 2002 Credit Agreements are AOL Time Warner, TWE, TWE-A/N and AOL Time Warner Finance Ireland. Borrowings bear interest at specific rates, generally based on the credit rating for each of the borrowers, which is currently equal to LIBOR plus .625%, including facility fees of .10% and .125% on the total commitments of the 364-day and five-year facilities, respectively. The obligations of each of AOL Time Warner and AOL Time Warner Finance Ireland are guaranteed by America Online, Time Warner, TBS and TW Companies, directly or indirectly. The obligation of AOL Time Warner Finance Ireland is guaranteed by AOL Time Warner. In addition, the Company is required to pay an additional usage fee of .0625% if the two facilities in the aggregate have more than 33% outstanding and .125% if the facilities have more than 66% outstanding. Currently, the Company is paying the additional .0625% usage fee. The 2002 Credit Agreements provide same-day funding, multi-currency capability and letter of credit availability. They contain maximum leverage ratio and minimum GAAP net worth covenants of 4.5 times and $50 billion, respectively, for AOL Time Warner and a maximum leverage ratio covenant of 5.0 times for each of TWE and TWE-A/N, but do not contain any credit ratings-based defaults or covenants, nor an ongoing covenant or representation specifically relating to a material adverse change in the Company’s financial condition or results of operations. Borrowings may be used for general business purposes and unused credit is available to support commercial paper borrowings (Note 9).

Capital Expenditures and Product Development Costs

         AOL Time Warner’s total capital expenditures and product development costs were $2.284 billion and $2.660 billion for the nine months ended September 30, 2002 and 2001, respectively. Capital expenditures and product development costs from continuing operations were $2.078 billion in 2002 compared to $2.362 billion in 2001. Capital expenditures and product development costs from continuing operations principally relate to the Company’s Cable segment, which had capital expenditures of $1.225 billion in 2002 compared to $1.328 billion in 2001. The Cable segment, over the past several years, has been engaged in a plan to upgrade the technological capability and reliability of its cable television systems and develop new services. Also contributing to capital expenditures and product development costs are product development costs incurred by the AOL segment which amounted to $169 million and $255 million for the nine months ended September 30, 2002 and 2001, respectively. The Cable segment’s capital expenditures from continuing operations are comprised of the following categories:

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

         AOL Time Warner’s Cable segment generally capitalizes expenditures for tangible fixed assets 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 at the Cable segment include plant upgrades, drops (i.e., customer installations), converters and cable modems. With respect to customer premise equipment, including converters and cable modems, the Cable segment 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. For converters and modems, such life is generally 3-5 years and for plant upgrades, such useful life is up to 16 years. As of September 30, 2002, the total net book value of capitalized labor and overhead costs associated with the installation of converters and modems was approximately $150 million. As of that same date, the net book value of all capitalized costs associated with converters and modems, including equipment costs, was approximately $1.4 billion.

         Included in the AOL segment’s product development costs are costs incurred for the production of technologically feasible computer software that generates additional functionality to its existing software products. Capitalized costs typically include direct labor and related overhead for software produced by AOL as well as the cost of software purchased from third parties. Costs incurred on a product prior to the determination that the product is technologically feasible, as well as maintenance costs of established products, are expensed as incurred. All costs in the software development process which are experimental in nature are classified as research and development and are expensed as incurred until technological feasibility has been established. Once technological feasibility has been established, such costs are capitalized until the software has completed testing and is mass-marketed. Amortization is provided on a product-by-product basis using the greater of the straight-line method or the current year revenue as a percentage of total revenue estimates for the related software product, not to exceed five years, commencing the month after the date of the product release. The total net book value related to capitalized software costs was approximately $330 million as of September 30, 2002.

Filmed Entertainment Backlog

         Backlog represents the amount of future revenue not yet recorded from cash contracts for the licensing of theatrical and television product for pay cable, basic cable, network and syndicated television exhibition. Backlog for all of AOL Time Warner’s Filmed Entertainment companies was approximately $3.3 billion at September 30, 2002, compared to approximately $3.8 billion at December 31, 2001 (including amounts relating to the licensing of film product to AOL Time Warner’s Networks segment of approximately $744 million at September 30, 2002 and approximately $1.231 billion at December 31, 2001).

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

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 statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues, EBITDA and cash flow. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify such forward-looking statements. Those forward-looking statements are based on management’s present expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the Company is under no obligation to (and expressly 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.

         AOL Time Warner operates in highly competitive, consumer-driven and rapidly changing Internet, media and entertainment businesses. These businesses are affected by government regulation, economic, strategic, political and social conditions, consumer response to new and existing products and services, technological developments and, particularly in view of new technologies, the continued ability to protect intellectual property rights. AOL Time Warner’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 AOL Time Warner or its business segments in the future and could also cause actual results to differ from those contained in the forward-looking statements, including those identified in AOL Time Warner’s other filings with the SEC and the following:

•		For AOL Time Warner’s America Online businesses, the ability to implement potential changes in strategy resulting from the new management’s review of the business; the ability to develop new products and services to remain competitive; the ability to develop, adopt or have access to new technologies; the ability to successfully implement its broadband strategy; the ability to have access to distribution channels controlled by third parties; the ability to retain and grow the subscriber base; the ability to provide adequate server, network and system capacity; increased costs and business disruption resulting from the financial difficulties being experienced by a number of AOL’s network service providers, including WorldCom; the risk of unanticipated increased costs for network services; increased competition from providers of Internet services; the ability to attract more traditional advertisers to the online advertising medium; the ability to renew existing advertising or marketing commitments, including the ability to renew or replace individual large multi-period online advertising commitments with similar commitments or with shorter term advertising sales, which are generally affected more by the current unfavorable state of overall online advertising market conditions; the ability to maintain or renew large advertising arrangements (during the nine months ended September 30, 2002, the ten most significant third party advertising customers of America Online represented 43% of America Online’s aggregate domestic advertising revenues as compared to 31% for the nine months ended September 30, 2001); the ability to maintain or enter into new electronic commerce, advertising, marketing or content arrangements; the risk that the online advertising market will not improve at all or at a rate comparable to improvements in the general advertising market; the ability to maintain and grow market share in the enterprise software industry; the risks from changes in U.S. and international regulatory environments affecting interactive services; and the ability to continue to expand successfully internationally.
•		For AOL Time Warner’s cable business, more aggressive than expected competition from new technologies and other types of video programming distributors, including DBS and DSL; increases in government regulation of

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OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

		basic cable or equipment rates or other terms of service (such as “digital must-carry,” open access or common carrier requirements); government regulation of other services, such as broadband cable modem service; increased difficulty in obtaining franchise renewals; the failure of new equipment (such as digital set-top boxes) or services (such as digital cable, high-speed online services, telephony over cable or video-on-demand) to appeal to enough consumers or to be available at prices consumers are willing to pay, to function as expected and to be delivered in a timely fashion; theft of service from interception of cable transmissions; fluctuations in spending levels by advertisers and consumers; the ability to enter into new program vendor advertising arrangements; and greater than expected increases in programming or other costs.
•		For AOL Time Warner’s filmed entertainment businesses generally, their ability to continue to attract and select desirable talent and scripts at manageable costs; general increases in production costs; fragmentation of consumer leisure and entertainment time (and its possible negative effects on the broadcast and cable networks, which are significant customers of these businesses); continued popularity of merchandising; the potential repeal of the Sonny Bono Copyright Term Extension Act; the uncertain impact of technological developments which may facilitate piracy of the Company’s copyrighted works; and risks associated with foreign currency exchange rates. With respect to feature films, the increasing marketing costs associated with theatrical film releases in a highly competitive marketplace; with respect to television programming, a decrease in demand for television programming provided by non-affiliated producers; and with respect to home video, the ability to maintain relationships with significant customers in the rental and sell-through markets.
•		For AOL Time Warner’s network businesses, greater than expected programming or production costs; increased news gathering costs in the event of a war; public or cable operator resistance to price increases (and the negative impact on premium programmers of increases in basic cable rates); increased regulation of distribution agreements; the sensitivity of network advertising to economic cyclicality and to new media technologies; the impact of consolidation among cable and satellite distributors; piracy of music by means of interception of cable and satellite transmissions or Internet peer-to-peer file sharing; the impact of personal video recorder “ad-stripping” functions on advertising sales; the development of new technologies that alter the role of programming networks and services; and greater than expected fragmentation of consumer viewership due to an increased number of programming services or the increased popularity of alternatives to television.
•		For AOL Time Warner’s music business, its ability to continue to attract and select desirable talent at manageable costs; the popular demand for particular artists and albums; the timely completion of albums by major artists; its ability to continue to enforce its intellectual property rights in digital environments; piracy of music by means of Internet peer-to-peer file sharing; its ability to develop a successful business model applicable to a digital online environment; the potential repeal of Subsection (6) of California Labor Code Section 2855 regarding the maximum length of personal service contracts; the potential repeal of the Sonny Bono Copyright Term Extension Act; risks associated with foreign currency exchange rates; its ability to utilize DVD manufacturing capacity fully and to maintain current DVD manufacturing pricing; and the overall strength of global music sales.
•		For AOL Time Warner’s print media and publishing businesses, fluctuations in spending levels by advertisers and consumers; unanticipated increases in paper, postal and distribution costs (including costs resulting from financial pressure on the U.S. Postal Service); increased costs and business disruption resulting from instability in the newsstand distribution channel; the introduction and increased popularity of alternative technologies for the provision of news and information; and the ability to continue to develop new sources of circulation.

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OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

•

For AOL Time Warner generally, the risks related to the continued successful operation of the businesses of AOL Time Warner on an integrated basis and the possibility that the Company will not be able to continue to realize the benefits of the combination of these businesses; lower than expected valuations associated with the cash flows and revenues at the AOL Time Warner segments may result in the inability of the Company to realize the value of recorded intangibles and goodwill at those segments.

         In addition, the Company’s overall financial strategy, including growth in operations, maintaining its financial ratios and a strong balance sheet, could be adversely affected by increased interest rates, decreased liquidity in the capital markets (including any reduction in its ability to access either the capital markets for debt securities or bank financings), failure to meet earnings expectations, significant acquisitions or other transactions, economic slowdowns, increased expenses as a result of the SEC and DOJ investigations and the shareholder litigation pending against the Company, as well as the risk of costs associated with judgments in or settlements of such matters, and changes in the Company’s plans, strategies and intentions.

Item 4.     Controls and Procedures

         Within the 90-day period prior to the filing of this report, the Company, 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 the Company’s “disclosure controls and procedures” (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely making known to them material information relating to the Company and the Company’s consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted under the Exchange Act. The Company has investments in certain unconsolidated entities. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those it maintains with respect to its consolidated subsidiaries. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.

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See accompanying notes.

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