Chief Executive Richard Parsons said the SEC has opened a fact-finding inquiry into America Online's accounting practices, but the company said its auditors backed the accounting in question.

The Washington Post last week reported that the America Online unit had boosted revenues through unconventional deals from 2000 to 2002.

Parsons defended the company's accounting during a conference call on Wednesday following the release of results. He said AOL was informed by the SEC of the inquiry after the articles were published.

The SEC declined to comment on the inquiry.

Analysts said the SEC inquiry was likely to dominate Wall Street sentiment on AOL Time Warner even though the company's quarterly results topped analysts' expectations, as strength in its film and cable divisions offset weakness at its online unit.

"Is it going to be a material change to its accounting? I doubt it. But it's going to be a cloud over their shares for a while," said SoundView Technology analyst Jordan Rohan.

AOL Time Warner executives said they would cooperate with the SEC inquiry and said they were comfortable with the accounting practices and policies in place.

"We are comfortable with the accounting practices and policies in place at our company. Our accounting is appropriate for the businesses in which we operate," Chief Financial Officer Wayne Pace told the conference call.

"In the current environment, I wouldn't expect the SEC to look the other way when anyone makes any allegations -- if they have merit or not," Paul Cappuccio, the company's general counsel, told Reuters. "We are not only fine with (the inquiry) but we think it's what they should be doing. We have been pro-active with the SEC."

Shares of AOL Time Warner fell in after-hours trade to $10.55, on the Instinet system, after having closed down 1.3 percent at $11.40 in New York Stock Exchange ( news - web sites) trade.

AOL Time Warner's shares, which have fallen 65 percent since the beginning of the year, have also been hit by accounting-related jitters in the wake of scandals at Adelphia Communications Corp. and WorldCom Group.

RESULTS BEAT ESTIMATES, BUT AOL STILL WEAK

AOL Time Warner posted a second-quarter net profit of $394 million, or 9 cents a share, compared to a net loss of $734 million, or 17 cents a share, a year-earlier.

Year-ago results included a $1.7 billion charge related to goodwill and amortization.

The net profit was the company's first since the completion of Internet pioneer AOL's $106.2 billion takeover of Time Warner in January 2001.

The deal's premise has been questioned after the company's failure to deliver on many of its growth promises and the recent management shake-up that gave control to traditional media veterans from Time Warner.

Revenue rose 10 percent to $10.6 billion in the quarter.

AOL Time Warner said that excluding a range of costs such as noncash amortization expenses, earnings were unchanged at 24 cents a share compared with a year-earlier.

Wall Street analysts, on average, had expected the company, which is home to HBO, People magazine, "The West Wing ( news - web sites)," and artists like Madonna ( news - web sites), to post earnings before a range of items of 22 cents a share and revenue of $10.02 billion, according to Thomson First Call.

Strength at the company's cable systems and its Warner Bros. film unit, driven by the home video release of "Harry Potter ( news - web sites) and the Sorcerer's Stone" and film hits like "Insomnia," helped offset some of the weakness from AOL.

"The Time Warner numbers are great so the question was, Is the second-quarter going to be the bottom or is the third quarter going to be the bottom." said John Tinker, analyst at Blaylock & Partners. "The problems at AOL are not yet yesterday's stories but are becoming so."

Other analysts, however, were still concerned about AOL.

The AOL service added 492,000 net new subscribers in the quarter, compared to analysts' expectations for up to 1 million net new subscribers.

"Subscriber growth issues at AOL have worsened dramatically," Rohan said. "There's a lot of good to talk about, but the pace of the deterioration of the online subscriber growth is concerning."

Executives attributed some of the slowdown to seasonality and little to no growth abroad and noted that average revenue per user rose to $18.18 from $17.26 a year-ago.

AOL's ad revenue fell 42 percent in the quarter as the unit's EBITDA and revenue fell.

AOL's ad and commerce revenue for the third quarter will be comparable to the second quarter.

The company said it sees its 2002 revenue growth at the upper end of its prior range of 5 percent to 8 percent and cash flow growth near the lower end of its 5 percent to 9 percent range.