NEW YORK (CNN/Money) - AOL Time Warner Inc. Wednesday used asset sales and a litigation settlement to more than double second quarter net income, surpassing Wall Street forecasts, but the world's largest media company also said federal regulators found its method of accounting for two deals was not correct.

Investors, apparently focusing on the accounting woes, sent AOL (AOL: down $1.10 to $15.75, Research, Estimates) shares skidding about 7 percent on the New York Stock Exchange.

New York-based AOL Time Warner, which owns Time magazine, Warner Bros., the troubled AOL Internet service, CNN, CNN/Money and other properties, said net income jumped to $1.1 billion, or 23 cents a share, from $396 million, or 9 cents a share, a year earlier. Revenue rose to $10.8 billion from $10.2 billion.

Excluding special items such as asset sale gains and litigation settlements, earnings came in at about $540 million, or 12 cents a share, versus average analysts' forecasts of 10 cents a share. Sales forecasts were about $10.6 billion.

"While I'm pleased with the first six months of 2003, I think it's fair to say we still have a lot of hard work in front of us," CEO Richard Parsons told analysts Wednesday.

AOL Time Warner said it cut its net debt to $24.2 billion at the end of the quarter from $26.3 billion three months earlier, largely through the sale of assets and the settlement of litigation with Microsoft Corp. Parsons has said cutting the company's debt is his top priority and he's committed to seeing net debt under about $20 billion by next year.

The company has seen some lower than desired prices for certain properties. It wrote down the value of its professional basketball and hockey teams by $178 million in the quarter, which it is negotiating to sell, and it also took a $99 million charge to write down the value of its book division, which it pulled off the market due to the lack of strong bids for the unit.

But Parsons said the debt reduction goals are on target to be met and that he now believes the company can meet its debt targets without selling a stake in its cable unit to the public.

"The balance sheet management issues have evaporated," he said referring to the various motivations for such a sale. "We're going to get to net debt objectives (without it)."

Meanwhile, the Securities and Exchange Commission's chief accounting office has concluded that two transactions between America Online and Bertelsmann were not accounted for correctly. AOL Time Warner had previously disclosed a preliminary finding from the SEC along those lines.

The company said its staff continues to believe it was correct in its accounting, but said its own ongoing investigation or further discussions with the SEC may cause that view to change. It also said the SEC's probe of transactions related to America Online is ongoing.

The company refined its guidance slightly from its last outlook given three months ago. It kept its revenue target the same but said it now expects earnings before depreciation and amortization to show mid-single digit growth, rather than the low to mid-single-digit growth it saw in April.

The revenue picture at the company's America Online unit slipped a bit though, as the company now sees revenue falling in the mid single digits rather than remaining flat with 2002 revenue of $9.1 billion. However, it edged up the lower end of the guidance for the unit's income, although it now expects a decline for the year.

In the second quarter, the company posted improved revenue from all of its divisions except America Online, where revenue fell 6 percent.

The world's largest Internet service provider reported its third straight quarter of declining U.S. subscribers as well as its largest drop ever, down a net 846,000 during the period to 25.3 million. But about 380,000 of the net decline resulted from identifying and dropping customers who were not paying for the service.

"Over half of those were contributing nothing to bottom line," said Don Logan, chairman of the company's media and communications group, referring to the overall drop in AOL subscribers. "They were costing us money. It's nice to lose those."

Even with the loss of paying subscribers, the online unit posted a 6 percent rise in subscription revenue compared with a year earlier. The rise was due to gains in AOL Europe and "a modest increase" in the number of customers paying for the more expensive high-speed Internet service that has become its marketing focus. The company said it now has 2.2 million high-speed Internet customers, a gain of about 300,000 in quarter.

Operating income from America Online also posted the biggest dollar decline of any division in the company when special charges are excluded. It fell 23 percent to $210 million. Income also was off in the music division, which the company is seeking to sell.