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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.

9

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:

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

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

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

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

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

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

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

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

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

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

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

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

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Current Financial Condition

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

Cash Flows

Operating activities

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

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

Investing activities

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

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

Financing activities

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

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

Free Cash Flow

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

Outstanding Debt and Mandatorily Redeemable Preferred Equity

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

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

13

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

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

Contractual Commitments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MARKET RISK MANAGEMENT AND OTHER

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

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

Interest Rate Risk

Variable Rate Debt

     As of March 31, 2003, TWE had an outstanding balance of approximately $600 million of variable-rate debt. Based on the variable rate obligations outstanding at March 31, 2003, each 25 basis point increase or decrease in the level of interest rates would, respectively, increase or decrease the annual interest expense and related cash payments by approximately $2 million. These potential increases or decreases are based on simplifying assumptions, including a constant level of variable rate debt for all maturities and an immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period.

Fixed Rate Debt

     As of March 31, 2003, TWE had an outstanding balance of approximately $5.790 billion of fixed-rate debt and preferred equity. Based on the fixed-rate debt obligations outstanding at March 31, 2003, each 25 basis point increase or decrease in the level of interest rates would, respectively, increase or decrease the fair value of the fixed-rate debt by approximately $166 million. These potential increases or decreases are based on simplifying assumptions, including a constant level and rate of fixed-rate debt and an immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period.

Equity Risk

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

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

Inflation

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

Seasonality

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

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS AND RISK FACTORS

     The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This document contains such “forward-looking

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

statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues, Operating Income before Depreciation and Amortization and cash flow. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify such forward-looking statements. Those forward-looking statements are based on management’s present expectations about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and TWE is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of such changes, new information, future events or otherwise.

     The Company operates in a highly competitive and rapidly changing business that is customer and technology-driven. The Company’s business is affected by government regulation, economic, strategic, political and social conditions, customer responses to new and existing products and services and technological developments. The Company’s actual results could differ materially from management’s expectations because of changes in such factors. Other factors and risks could adversely affect the operations, business or financial results of the Company in the future and could also cause actual results to differ materially from those contained in the forward-looking statements, including those identified in the Company’s other filings with the SEC and the following:

	•		more aggressive than expected competition from new technologies and other distributors of video programming and high-speed data services such as satellite, terrestrial wireless and DSL;
	•		continued price discounting by DSL operators in the Company’s operating areas;
	•		greater than expected increases in programming or other costs, including costs of its new products and services, or difficulty in passing such costs to the Company’s subscribers;
	•		the unexpected loss of popular programming or exclusive arrangements between programming providers and the Company’s competitors with respect to popular programming;
	•		increases in government regulation of video programming rates or other government regulation of the Company’s video, high-speed data and voice operations, such as the imposition of “digital must-carry,” “forced access,” or common carrier requirements;
	•		difficulty in obtaining franchise renewals;
	•		the failure of new equipment, such as digital set-top boxes or digital video recorders, or services, such as digital cable, high-speed data services, voice services or video-on-demand, to appeal to enough subscribers or to be available at prices subscribers are willing to pay, to function as expected and to be delivered in a timely fashion;
	•		changes in technology and failure to anticipate technological developments or to choose technologies appropriately;
	•		fluctuations in spending levels by customers and advertisers;
	•		unanticipated changes in the level of non-discretionary capital expenditures;
	•		inability to realize the value of recorded intangibles resulting in possible future impairments of the Company’s cable franchise intangibles that would affect its operating results;
	•		unanticipated funding obligations relating to some of the Company’s significant cable system joint ventures; and

18

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

•

the Company’s overall financial strategy, including growth in operations, maintaining its financial ratios and strong balance sheet could be adversely affected by decreased liquidity in the capital markets, including any reduction in ability to access either the capital markets for debt securities or bank financing, increased interest rates, failure to meet earnings expectations, significant acquisitions or other transactions, economic slowdowns and changes in the Company’s plans, strategies and intentions.

19

Item 4. Controls and Procedures

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

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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET