Time Warner Inc. (TWX), the world's largest media company, on Wednesday reported an 8 percent drop in third-quarter net profit as it set up a $500 million legal reserve and said it will restate results for AOL Europe prior to 2002.

The company said the legal reserve relates to investigations of its accounting by the U.S. Department of Justice (search) and the Securities & Exchange Commission (search).

It also said the investigations continue and it may have to further restate results.

Time Warner said it has not established a reserve to deal with shareholder and civil lawsuits as they have been "unable to reasonably estimate a range of possible loss," the company said in a statement.

"Until we know the terms and findings of the SEC, we really don't know the scope of the potential litigation," said Tom Wolzien, an analyst at Sanford C. Bernstein.

The owner of America Online, HBO and the Warner Bros. studio said net income fell to $499 million, or 11 cents a share, from $541 million, or 12 cents a share, a year earlier.

It posted third-quarter earnings per share of 15 cents, which excludes income from discontinued operations of 1 cent a share and one-time charges totaling 5 cents a share, beating average analyst estimates of 14 cents a share.

Revenue rose 5 percent to $9.96 billion, topping estimates of $9.84 billion.

Time Warner said it will restate financial results for 2000 and 2001 and said its results for 2002 may also be affected, which were largely expected by Wall Street, analysts said.

AOL has been the target of two federal investigations into the way it accounted for advertising deals in the past. The SEC has launched a probe specifically into how it accounted for the 2002 purchase of the stake of its joint venture AOL Europe it did not own from German media giant Bertelsmann AG.

The company said it will change the way it accounted for its interest before it purchased Bertelsmann's stake.

Previously it accounted for the deal using the equity method of accounting, with AOL Europe's results having an impact only on the bottom line.

It now says its interest should have been consolidated into AOL's results starting in March 2000 that could deepen AOL's 2001 net losses by $855 million and 2000 net losses by $308 million.

Time Warner said its decision to alter the way it accounted for the results of AOL Europe reflects its discussions with the U.S. Securities and Exchange Commission.

"While we're continuing to work to resolve the government investigations, we're staying focused on moving the company forward," Richard Parsons, CEO of Time Warner said in a statement.

The company also said it is expected to incur approximately $50 million in restructuring charges in the fourth quarter or first quarter next year for AOL.