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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

Commission file number 001-12878

TIME WARNER ENTERTAINMENT COMPANY, L.P.

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

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

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

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

TIME WARNER ENTERTAINMENT COMPANY, L.P.

INDEX TO FORM 10-Q

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

INTRODUCTION

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

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

OVERVIEW

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

Restructuring of TWE

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

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

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

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

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

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

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

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

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

Restructuring of TWE — Advance/Newhouse Partnership

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

EXECUTIVE SUMMARY

Results of Operations

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

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

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

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

Cash Flows

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

FINANCIAL STATEMENT PRESENTATION

Revenue

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

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

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

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

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

Costs and Expenses

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

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

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

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

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

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

RESULTS OF OPERATIONS

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

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

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

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

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

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

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

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

     TWE’s video programming costs increased by 14% in 2003. On a per subscriber basis, programming costs increased by 12%, from $13.14 to $14.66 per month. The majority of this increase was attributable to sports programming cost increases and the impact of having added numerous non-sports services to many of the Company’s programming lineups. Video programming costs are expected to continue to rise for the next several years (although at a lower rate than during 2002) primarily due to the expiration of introductory and promotional periods under programming affiliation agreements, the need to obtain additional quality programming for more extensive service offerings, industry-wide programming cost increases (especially for sports programming) and inflation-indexed or negotiated license fee increases. Video programming costs in the second half of 2003 are expected to increase at rates in line with the average rate of increase experienced in the first half of 2003.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     TWE’s video programming costs increased by 17% in 2003. On a per subscriber basis, programming costs increased by 15%, from $12.77 to $14.68 per month. The majority of this increase was attributable to sports programming cost increases and the impact of having added numerous non-sports services to many of the Company’s programming lineups. Video programming costs are expected to continue to rise for the next several years (although at a lower rate than during 2002) primarily due to the expiration of introductory and promotional periods under programming affiliation agreements, the need to obtain additional quality programming for more extensive service offerings, industry-wide programming cost increases (especially for sports programming) and inflation-indexed or negotiated license fee increases. Video programming costs in the second half of 2003 are expected to increase at rates in line with the average rate of increase incurred in the first half of 2003.

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

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

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

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

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

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

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

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

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