UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934

for the quarterly period ended June 30, 2005 or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

of 1934 for the transition period from                                          to                                         .

TIME WARNER INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		13-4099534 (I.R.S. Employer Identification Number)

One Time Warner Center
New York, New York 10019
(212) 484-8000
(Address, including zip code, and telephone number, including
area code, of 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 þ No ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

				Shares Outstanding
Description of Class				as of July 29, 2005
Common Stock — $.01 par value				4,606,921,311
Series LMCN-V Common Stock — $.01 par value				87,245,036

 

 

TIME WARNER INC.

		Page
PART I. FINANCIAL INFORMATION
Management’s discussion and analysis of results of operations and financial condition			1
Item 4. Controls and Procedures			43
Consolidated balance sheet at June 30, 2005 and December 31, 2004			44
Consolidated statement of operations for the three and six months ended June 30, 2005 and 2004			45
Consolidated statement of cash flows for the six months ended June 30, 2005 and 2004			46
Consolidated statement of shareholders’ equity			47
Notes to consolidated financial statements			48
Supplementary information			76
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			84
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			85
Item 4. Submission of Matters to a Vote of Security Holders			86
Item 6. Exhibits			86
EX-10.2 LETTER AGREEMENT, DATED JUNE 2, 2005
EX-10.3 LETTER AGREEMENT, DATED JUNE 17, 2005
EX-10.4 LETTER AGREEMENT, DATED JUNE 24, 2005
EX-10.5 AMENDMENT NO.1 TO THE ASSET PURCHASE AGREEMENT, DATED JUNE 24, 2005
EX-10.10 LETTER AGREEMENT, DATED MAY 10, 2005
EX-10.11 LETTER AGREEMENT, DATED JUNE 1, 2005
EX-10.12 ALTERNATE TOLLING AND OPTIONAL REDEMPTION AGREEMENT, DATED AS OF MAY 31, 2005
EX-31.1 SECTION 302 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
EX-31.2 SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
EX-32 SECTION 906 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER

TIME WARNER INC.

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 notes to help provide an understanding of Time Warner Inc.’s (“Time Warner” or the “Company”) financial condition, changes in financial condition and results of operations. MD&A is organized as follows:

	•		Overview. This section provides a general description of Time Warner’s business segments, as well as recent developments the Company believes are important in understanding the results of operations and financial condition or in understanding anticipated future trends.
	•		Results of operations. This section provides an analysis of the Company’s results of operations for the three and six months ended June 30, 2005 compared to the same periods in 2004. This analysis is presented on both a consolidated and a business segment basis. In addition, a brief description is provided of significant transactions and events that impact the comparability of the results being analyzed.
	•		Financial condition and liquidity. This section provides an analysis of the Company’s financial condition as of June 30, 2005 and cash flows for the six months ended June 30, 2005.
	•		Risk factors and caution concerning forward-looking statements. This section provides a description of risk factors that could adversely affect the operations, business or financial results of the Company or its business segments and the use of forward-looking information appearing in this report, including in MD&A and the consolidated financial statements. Such information is based on management’s current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances.

     The Company utilizes Operating Income (Loss) before Depreciation and Amortization, among other measures, to evaluate the performance of its businesses. Operating Income (Loss) before Depreciation and Amortization is considered an important indicator of the operational strength of the Company’s businesses. Operating Income (Loss) before Depreciation and Amortization eliminates the uneven effect across all business segments of considerable amounts of noncash depreciation of tangible assets and amortization of certain intangible assets that were recognized in business combinations. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in the Company’s businesses. Management evaluates the costs of such tangible and intangible assets, the impact of related impairments, as well as asset sales through other financial measures, such as capital expenditures, investment spending and return on capital.

     Free Cash Flow is Cash Provided by Operations (as defined by U.S. generally accepted accounting principles) plus payments related to securities litigation, less cash provided by discontinued operations, capital expenditures and product development costs, principal payments on capital leases, and partnership distributions, if any. Free Cash Flow is considered to be an important indicator of the Company’s liquidity, including its ability to reduce net debt, make strategic investments, pay dividends to common shareholders and repurchase stock. A limitation of this measure, however, is that it does not reflect securities litigation payments, which reduce liquidity.

     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 and liquidity reported in accordance with U.S. generally accepted accounting principles.

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     Time Warner is a leading media and entertainment company whose major businesses encompass an array of the most respected and successful media brands. Among the Company’s brands are HBO, CNN, AOL, People, Sports Illustrated, Time and Time Warner Cable. The Company has produced and distributed films including The Lord of the Rings trilogy, the Harry Potter series, Million Dollar Baby and Batman Begins and television programs including ER, Two and a Half Men, Without a Trace and The West Wing. During the six months ended June 30, 2005, the Company generated revenues of $21.227 billion (up 1% from $21.045 billion in 2004), Operating Income before Depreciation and Amortization of $2.159 billion (down 57% from $5.042 billion in 2004), Operating Income of $548 million (down 84% from $3.454 billion in 2004), Net Income of $642 million (down 63% from $1.738 billion in 2004), Cash Provided by Operations of $3.463 billion (up 5% from $3.306 billion in 2004) and Free Cash Flow of $1.959 billion (up 12% from $1.743 billion in 2004). The 2005 results reflect the effects of a $3 billion pretax charge related to securities litigation as discussed further in “Other Recent Developments.”

     Time Warner classifies its operations into five reportable segments: AOL, Cable, Filmed Entertainment, Networks and Publishing.

     AOL. America Online, Inc. (“AOL” or “America Online”) is a leader in interactive services, web brands, Internet technologies and e-commerce services, with 27.0 million total AOL brand subscribers in the U.S. and Europe at June 30, 2005. AOL reported total revenues of $4.230 billion (20% of the Company’s overall revenues), $1.076 billion in Operating Income before Depreciation and Amortization and $692 million in Operating Income for the six months ended June 30, 2005. AOL generates its revenues primarily from subscription fees charged to subscribers and from providing advertising services.

     America Online is organized into four business units: Access, Audience, Digital Services and International. This structure reflects AOL’s increased emphasis on generating higher advertising and search revenues, which the Company believes will continue to grow for the foreseeable future.

     Historically, AOL’s primary product offering has been an online subscription service that includes a component of telephone dial-up Internet access. This product, offered under a variety of different terms and price plans, generates the substantial majority of AOL’s revenues. Over the past several years, the AOL Access business has experienced significant declines in U.S. subscribers and related Subscription revenues, and these declines are expected to continue. Driving this decrease is the continued industry-wide maturing of the premium dial-up services business, as consumers migrate to high-speed broadband and lower-cost dial-up services. AOL continues to develop, change, test and implement marketing and new product strategies to attract and retain subscribers. For example, AOL recently launched a marketing campaign to emphasize to consumers the benefits of being an AOL subscriber. AOL is also pursuing agreements, such as the previously announced agreement with Time Warner Cable, to bundle the AOL service along with broadband access.

     AOL’s Audience business strategy focuses on generating Advertising revenue by expanding its audience and increasing usage across all of its web properties, including properties such as AOL.com, MapQuest, Moviefone and AOL Instant Messenger. Currently, a majority of Advertising revenues are generated from traffic on the AOL service, which is generally available only to subscribers. A key component of the Audience business strategy is the upcoming official re-launch in the third quarter of 2005 of the publicly available version of the AOL.com web portal that includes a substantial portion of AOL’s content, features and tools that historically have been available only to AOL subscribers. AOL seeks to generate Advertising revenue from increased traffic that is expected to result from the re-launch of AOL.com through the use of branded advertising and performance-based advertising, including paid-search advertising, as well as from increased utilization and optimization of AOL advertising inventory. The

TIME WARNER INC.

acquisition of Advertising.com Inc. (“Advertising.com”) in the third quarter of 2004 also provides incremental growth in Advertising revenues, primarily through third-party performance-based advertising.

     AOL has taken steps over the past several years to align costs with the declining dial-up subscriber base. These efforts have resulted in reductions in the cost of operating AOL’s network through improved pricing and decreased levels of fixed commitments. These factors are expected to result in continued declines in operating costs throughout the remainder of 2005, although at a rate less than experienced in the first half of 2005.

     AOL’s International business unit, which primarily includes AOL Europe S.A. (“AOL Europe”), has also focused on balancing its subscription and advertising businesses. In late 2004, the International business unit entered into a new, multi-year search arrangement with a third party designed to provide incremental Advertising revenues.

     Cable. Time Warner’s cable business, Time Warner Cable Inc. and its subsidiaries (“TWC Inc.”), is the second-largest cable operator in the U.S. (in terms of basic cable subscribers served). TWC Inc. managed approximately 10.905 million basic cable subscribers (including approximately 1.589 million subscribers of unconsolidated investees) at June 30, 2005, in highly clustered and upgraded systems in 27 states. TWC Inc. delivered revenues of $4.603 billion (21% of the Company’s overall revenues), $1.722 billion of Operating Income before Depreciation and Amortization and $921 million in Operating Income for the six months ended June 30, 2005. As part of the strategy to expand TWC Inc.’s cable footprint, on April 20, 2005, the Company entered into an agreement to acquire, in conjunction with Comcast Corporation (“Comcast”), substantially all of the assets of Adelphia Communications Corporation (“Adelphia”). Please refer to “Other Recent Developments” for further details.

     TWC Inc. offers three basic products — video, high-speed data and its newest service, Digital Phone. Video is TWC Inc.’s largest product in terms of revenues generated; however, the growth of its customer base for video cable service is limited, as the customer base has matured and industry-wide competition from direct-to-home satellite services has increased. Nevertheless, TWC Inc. is continuing to increase its video revenues through its offerings of advanced digital video services such as Digital Video, Video-on-Demand (VOD), Subscription-Video-on-Demand (SVOD) and Digital Video Recorders (DVR) that are available in all of TWC Inc.’s 31 divisions. TWC Inc.’s digital video subscriber base provides a broad base of potential customers for these advanced services. Video programming costs represent a major component of TWC Inc.’s expenses and are expected to continue to increase, reflecting an expansion of service offerings and contractual rate increases across TWC Inc.’s programming lineup.

     High-speed data service has been one of TWC Inc.’s fastest-growing products over the past several years and is a key driver of its results. TWC Inc. expects continued strong growth in residential high-speed data subscribers and revenues for the foreseeable future; however, the rate of growth of both subscribers and revenue could be impacted by intensified competition for subscribers.

     TWC Inc.’s new voice product, Digital Phone, has been launched in all of its divisions and is available to over 70% of TWC Inc.’s homes passed. Digital Phone customers receive unlimited local, in-state and domestic long distance calling, as well as call waiting, caller ID and enhanced “911” services for a monthly fixed fee. In the future, TWC Inc. intends to offer additional plans, including one that will provide unlimited local calling with separate long distance charges. Digital Phone enables TWC Inc. to offer its customers a combined, easy-to-use package of video, high-speed data and voice services, and to compete effectively against similar bundled products that are available from its competitors.

     In addition to the subscription services, TWC Inc. also earns revenue by selling advertising time to national, regional and local businesses.

TIME WARNER INC.

     Filmed Entertainment. Time Warner’s Filmed Entertainment businesses, Warner Bros. Entertainment Group (“Warner Bros.”) and New Line Cinema Corporation (“New Line”), generated revenues of $5.650 billion (25% of the Company’s overall revenues), $629 million in Operating Income before Depreciation and Amortization and $465 million in Operating Income for the six months ended June 30, 2005.

     One of the world’s leading studios, Warner Bros. has diversified sources of revenues with its film and television businesses, combined with an extensive film library and global distribution infrastructure. This diversification has helped Warner Bros. deliver consistent long-term growth and performance. New Line is the oldest independent film company in the world. Its primary source of revenues is the creation and distribution of theatrical motion pictures.

     The sale of DVDs has been one of the largest drivers of the segment’s profit growth over the last few years. Warner Bros.’ library, consisting of more than 6,600 theatrical titles and 54,000 live-action and animated television titles, positions it to benefit from strong DVD sales.

     Warner Bros. continues to develop its industry-leading television business, including the successful releases of television series into the home video market. For the 2004-2005 television season, Warner Bros. had more current productions on the air than any other studio, with prime-time series on all six broadcast networks (including Two and a Half Men, Joey, ER, Without a Trace, The O.C., Cold Case, Smallville and The West Wing). For the 2005-2006 television season, Warner Bros. anticipates having approximately 30 prime-time series on the fall schedule, more than any other studio.

     Piracy, including physical piracy as well as illegal online file-sharing, continues to be a significant issue for the filmed entertainment industry. Piracy has expanded from music to movies and television programming due to advances in technology. The Company has taken a variety of actions to combat piracy over the last several years and will continue to do so, both individually and together with industry associations.

     Networks. Time Warner’s Networks group comprises Turner Broadcasting System, Inc. (“Turner”), Home Box Office (“HBO”) and The WB Television Network (“The WB Network”). The Networks segment delivered revenues of $4.774 billion (21% of the Company’s overall revenues), $1.422 billion in Operating Income before Depreciation and Amortization and $1.298 billion in Operating Income for the six months ended June 30, 2005.

     The Turner networks — including such recognized brands as TBS, TNT, CNN, Cartoon Network and CNN Headline News — are among the leaders in advertising-supported cable TV networks. For over three consecutive years, more prime-time viewers watched advertising-supported cable TV networks than the national broadcast networks. For the six months ended June 30, 2005, TNT ranked first among ad-supported cable networks in total day and prime time delivery of its key demographics, adults 18-49 and adults 25-54. TBS ranked second among ad-supported cable networks in prime time delivery of its key demographic, adults 18-34.

     The Turner networks generate revenues principally from the sale of advertising time and monthly subscriber fees paid by cable system operators, satellite companies and other affiliates. Turner has benefited from strong ratings and a strong advertising market. Key contributors to Turner’s success are its continued investments in high-quality programming focused on original movies, sports, network premieres, licensed and original series, news and animation, as well as brand awareness and operating efficiency.

     HBO operates the HBO and Cinemax multichannel pay television programming services, with the HBO service being the nation’s most widely distributed pay television network. HBO generates revenues principally from monthly subscriber fees from cable system operators, satellite companies and other affiliates. An additional source of revenue is from the ancillary sales of its original programming, including such programs as The Sopranos, Sex and the City, Six Feet Under, Band of Brothers and Deadwood.

TIME WARNER INC.

     The WB Network is a broadcast television network whose target audience consists primarily of young adults in the 12-34 age group demographic. The WB Network generates revenues almost exclusively from the sale of advertising time. The WB Network experienced a decline in its audience of young adults in its target demographic during the 2004-2005 television season. This loss in audience had a significant effect on The WB Network’s ability to grow its advertising revenue during the recently completed broadcast season. Along with a series of cost containment initiatives implemented during the year to offset the decline in advertising revenues, The WB Network is introducing an aggressive new slate of programming in the fall of 2005 that is designed to increase viewership among adults 18-34.

     Publishing. Time Warner’s Publishing segment consists principally of magazine publishing, book publishing and a number of direct-marketing and direct-selling businesses. The segment generated revenues of $2.742 billion (13% of the Company’s overall revenues), $523 million in Operating Income before Depreciation and Amortization and $404 million in Operating Income for the six months ended June 30, 2005.

     Time Inc. publishes approximately 140 magazines globally, including People, Sports Illustrated, In Style, Southern Living, Time, Entertainment Weekly, Fortune, Real Simple, What’s on TV and Cooking Light. It generates revenues primarily from advertising, magazine subscription and newsstand sales, and drives growth through higher circulation and advertising on existing magazines, new magazine launches and acquisitions. Time Inc. owns IPC Media (the U.K.’s largest magazine company) and is the majority shareholder of magazine subscription marketer Synapse Group, Inc. In addition, Time Inc. continues to invest in new magazines, including Pick Me Up, a weekly women’s magazine, and TV Easy, a weekly TV listings magazine, which IPC Media launched in the U.K. in January and May 2005, respectively. In the first quarter of 2005, Time Inc. acquired the remaining 51% stake it did not already own in Essence Communications Partners (“Essence”), the publisher of Essence. Time Inc.’s book publishing operations are conducted primarily by Time Warner Book Group, which had 43 books on the New York Times bestseller list during the first six months of 2005. Time Inc.’s direct-selling division, Southern Living At Home, sells home decor products through approximately 32,000 independent consultants at parties hosted in people’s homes throughout the U.S.

Other Recent Developments

     The Company has reached an agreement in principle for the settlement of the securities class action lawsuits included in the matters consolidated under the caption In re: AOL Time Warner Inc. Securities & “ERISA” Litigation and described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004 Form 10-K”). The tentative settlement is reflected in a Memorandum of Understanding dated as of July 29, 2005 between the lead plaintiff and the Company. Under the proposed settlement, $2.4 billion will be paid by Time Warner into a settlement fund for the members of the class represented in the action. In addition, the $150 million previously paid by Time Warner into a fund in connection with the settlement of the investigation by the U.S. Department of Justice (“DOJ”) will be made available to the class, and Time Warner will use its best efforts to have the $300 million it previously paid in connection with the settlement of its SEC investigation transferred to the settlement fund for the class. The proposed settlement is subject to completion of final documentation and preliminary and final court approval as well as other conditions. At this time, there can be no assurance that these conditions will be met and that the settlement of the securities class action litigation will receive preliminary or final court approval. Ernst & Young also has agreed to a settlement in this litigation matter and will pay $100 million.

     In connection with reaching the agreement in principle on the securities class action litigation, the Company has established a reserve of $2.4 billion. Although the Company has reached an agreement in principle to settle the primary securities class action, other related litigation remains pending, including shareholder derivative actions, lawsuits alleging ERISA violations and securities actions brought by individual shareholders. The Company has established an additional reserve totaling $600 million in connection with the remaining related securities litigation matters pending against the Company. This $600 million amount represents the Company’s current best estimate of its potential financial exposure in these matters. The aggregate $3 billion reserve established, however, does not consider any future insurance recoveries under existing insurance policies because the Company cannot reliably estimate the amount of recovery at this time (Note 10).

TIME WARNER INC.

Common Stock Repurchase Program

     On July 29, 2005, Time Warner’s Board of Directors authorized a common stock repurchase program that allows Time Warner to repurchase, from time to time, up to $5 billion of common stock over a two-year period. Purchases for the stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. Size and timing of these purchases will be based on a number of factors including price and business and market conditions.

     As previously announced, the Company will start paying a regular quarterly cash dividend of $0.05 per share on its common stock, beginning in the third quarter of this year.

     On April 20, 2005, a subsidiary of the Company, Time Warner NY Cable LLC (“TW NY”), and Comcast each reached separate definitive agreements to, collectively, acquire substantially all the assets of Adelphia for a total of $12.7 billion in cash (of which TW NY will pay $9.2 billion and Comcast will pay the remaining $3.5 billion) and 16% of the common stock of TWC Inc.

     At the same time that Comcast and TW NY entered into the Adelphia agreements, Comcast, TWC Inc. and/or their respective affiliates entered into agreements providing for the redemption of Comcast’s interests in TWC Inc. and Time Warner Entertainment Company, L.P. (“TWE”) (the “TWC Inc. Redemption Agreement” and the “TWE Redemption Agreement,” respectively, and, collectively, the “TWC Inc. and TWE Redemption Agreements”). Specifically, Comcast’s 17.9% interest in TWC Inc. will be redeemed in exchange for stock of a subsidiary of TWC Inc. holding cable systems serving approximately 587,000 subscribers (as of December 31, 2004), as well as approximately $1.9 billion in cash. In addition, Comcast’s 4.7% interest in TWE will be redeemed in exchange for interests in a subsidiary of TWE holding cable systems serving approximately 168,000 subscribers (as of December 31, 2004), as well as approximately $133 million in cash. TWC Inc., Comcast and their respective subsidiaries will also swap certain cable systems to enhance their respective geographic clusters of subscribers (“Cable Swaps”).

     After giving effect to the transactions, TWC Inc. will gain systems passing approximately 7.5 million homes (as of December 31, 2004), with approximately 3.5 million basic subscribers. TWC Inc. will then manage a total of approximately 14.4 million basic subscribers. Time Warner will own 84% of TWC Inc.’s common stock, which will become publicly traded at the time of closing, and own a $2.9 billion indirect economic interest in TW NY, a subsidiary of TWC Inc.

     These transactions are subject to customary regulatory review and approvals, including Hart-Scott-Rodino antitrust approval, Federal Communications Commission and local franchise approvals, as well as, in the case of the Adelphia acquisition, the Adelphia bankruptcy process, which involves approvals by the bankruptcy court having jurisdiction over Adelphia’s Chapter 11 case and Adelphia’s creditors. An amended plan of reorganization was filed with the bankruptcy court by Adelphia on June 25, 2005. Closing of the Adelphia acquisition is expected during the first half of 2006.

     The purchase of Adelphia’s assets is not dependent on the occurrence of the Cable Swaps and redemption transactions between Time Warner and Comcast. Furthermore, if Comcast fails to obtain certain necessary governmental authorizations, TW NY has agreed that it will also acquire the cable operations of Adelphia that would have been acquired by Comcast, with the purchase price payable in cash or TWC Inc. stock at the Company’s discretion.

TIME WARNER INC.

Government Investigations

     As previously disclosed by the Company, the Securities and Exchange Commission (“SEC”) and the DOJ had been conducting investigations into the accounting and disclosure practices of the Company. Those investigations focused on advertising transactions, principally involving the Company’s America Online segment, the methods used by the America Online segment to report its subscriber numbers and the accounting related to the Company’s interest in AOL Europe prior to January 2002.

     The Company and its subsidiary, AOL, entered into a settlement with the DOJ in December 2004 that provided for a deferred prosecution arrangement for a two-year period. In addition, on March 21, 2005, the Company announced that the SEC has approved the Company’s proposed settlement, which resolves the SEC’s investigation of the Company.

     Under the terms of the settlement with the SEC, the Company agreed, without admitting or denying the SEC’s allegations, to be enjoined from future violations of certain provisions of the securities laws and to comply with the cease-and-desist order issued by the SEC to AOL in May 2000. The settlement also required the Company to:

	•		Pay a $300 million penalty, which will be used for a Fair Fund, as authorized under the Sarbanes-Oxley Act;
	•		Adjust its historical accounting for Advertising revenues in certain transactions with Bertelsmann, A.G. that were improperly or prematurely recognized, primarily in the second half of 2000, during 2001 and during 2002; as well as adjust its historical accounting for transactions involving three other AOL customers where there were Advertising revenues recognized in the second half of 2000 and during 2001;
	•		Adjust its historical accounting for its investment in and consolidation of AOL Europe; and
	•		Agree to the appointment of an independent examiner, who will either be or hire a certified public accountant. The independent examiner will review whether the Company’s historical accounting for transactions with 17 counterparties identified by the SEC staff, principally involving online advertising revenues and including three cable programming affiliation agreements with related advertising elements, was in conformity with GAAP, and provide a report to the Company’s audit and finance committee of its conclusions within 180 days of being engaged. The transactions that would be reviewed were entered into between June 1, 2000 and December 31, 2001, including subsequent amendments thereto, and involved online advertising and related transactions for which revenue was principally recognized before January 1, 2002.

     The Company paid the $300 million penalty in March 2005; however, it will not be able to deduct the penalty for income tax purposes, be reimbursed or indemnified for such payment through insurance or any other source, or use such payment to setoff or reduce any award of compensatory damages to plaintiffs in related securities litigation pending against the Company. As described above, in connection with the proposed settlement of the primary securities class action, the Company has agreed to use its best efforts to have the $300 million transferred to the settlement fund for the class represented in the action. The historical accounting adjustments were reflected in the restatement of the Company’s financial results for each of the years ended December 31, 2000 through December 31, 2003, which were included in the Company’s 2004 Form 10-K.

     The independent examiner has begun its review, which is expected to be completed by the end of the year. Depending on the independent examiner’s conclusions, a further restatement might be necessary. It is also possible that, so long as there are unresolved issues associated with the Company’s financial statements, the effectiveness of any registration statement of the Company or its affiliates may be delayed.

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Investment in Google Inc.

     In May 2004, America Online exercised a warrant for approximately $22 million and received approximately 7.4 million shares of Series D Preferred Stock of Google Inc. (“Google”). Each of these shares converted automatically into shares of Google’s Class B common stock immediately prior to the closing of Google’s initial public offering on August 24, 2004. In connection with this offering, America Online converted approximately 2.4 million shares of its Google Class B common stock into an equal number of shares of Google’s Class A common stock. Such Class A shares were sold in the offering for $195 million, net of the underwriters’ discounts and commissions, and the Company recorded a gain of approximately $188 million in the third quarter of 2004. Beginning in March, the Company entered into agreements to sell its remaining 5.1 million shares at an average share price of approximately $185. The sales under such agreements settled on May 3, 2005, and the Company received total cash consideration of approximately $940 million, resulting in a gain of approximately $925 million recognized in the second quarter of 2005, which is included as a component of Other income, net.

     At December 31, 2004, the Company had outstanding one share of its Series A mandatorily convertible preferred stock, par value $0.10 per share, face value of $1.5 billion (the “Series A Preferred Stock”), held by a trust for the benefit of Comcast, that was issued on March 31, 2003, as part of the TWE Restructuring. In accordance with the terms of the stock, on March 31, 2005, the Series A Preferred Stock was automatically converted into 83,835,883 shares of common stock of the Company, valued at $1.5 billion, and such amount was reclassified to equity in the accompanying consolidated balance sheet. Prior to the conversion, an estimate of the number of shares of common stock issuable upon the conversion of the Series A Preferred Stock based on the fair market value of the common stock at the end of the applicable period was included only in the calculation of the Company’s diluted earnings per share. Following the issuance of the common stock upon the conversion of the Series A Preferred Stock, the shares issued are included in the calculation of both the basic and diluted earnings per share.

     Urban Cable Works of Philadelphia, L.P. (“Urban Cable”) is an unconsolidated joint venture of TWC Inc., with approximately 48,000 basic subscribers at June 30, 2005, that operates cable television systems in Philadelphia, Pennsylvania. Urban Cable is 40% owned by TWC Inc. and 60% owned by an investment group led by Inner City Broadcasting (“Inner City”). Under a management agreement, TWC Inc. is responsible for the day-to-day management of Urban Cable. During 2004, TWC Inc. and Inner City settled certain disputes regarding the joint venture for $34 million in cash.

     TWC Inc. has also agreed to purchase, subject to receipt of applicable regulatory approvals, all of Inner City’s interests in the Urban Cable venture for approximately $53 million in cash. In addition, upon closing, TWC Inc. will eliminate in consolidation $68 million of debt and interest owed to it by Urban Cable and will assume $47 million of Urban Cable’s third-party debt. On March 3, 2005, the City Council of Philadelphia denied TWC Inc.’s request for approval of this transaction. TWC Inc. believes the denial was invalid, but is unable to predict when the transaction may be completed. In conjunction with the agreement to acquire substantially all of the assets of Adelphia, Urban Cable would be transferred to Comcast as part of the Cable Swaps. For additional details, please refer to the Adelphia/Comcast discussion above. For the six months ended June 30, 2005, Urban Cable’s revenues and Operating Income were $23 million and $2 million, respectively.

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RESULTS OF OPERATIONS

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement of Financial Accounting Standards (“Statement”) No. 123 (Revised), “Share-Based Payment” (“FAS 123R”). FAS 123R requires all companies to measure compensation costs for all share-based payments (including employee stock options) at fair value and recognize such costs in the statement of operations. As a result, the application of the provisions of FAS 123R will have a significant impact on Operating Income before Depreciation and Amortization, Operating Income, net income and earnings per share. In April 2005, the SEC amended the compliance dates for FAS 123R from fiscal periods beginning after June 15, 2005 to fiscal years beginning after June 15, 2005. The Company will continue to account for share-based compensation using the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), until the Company’s adoption of FAS 123R beginning January 1, 2006.

     In accordance with APB 25 and related interpretations, compensation expense for stock options is recognized in income based on the excess, if any, of the quoted market price of the stock at the grant date of the award or other measurement date over the amount an employee must pay to acquire the stock. The compensation costs related to stock options recognized by the Company pursuant to APB 25 were minimal. If a company measures share-based compensation using APB 25, it must also disclose what the impact would have been if it had measured share-based compensation using the fair value of the equity award on the date it is granted as provided in FAS 123, the predecessor of FAS 123R. See Note 1 for the pro forma impact if compensation costs for the Company’s stock option plans had been determined based on the fair value method set forth in FAS 123.

Reclassifications

     Certain reclassifications have been made to the prior year’s financial information to conform to the June 30, 2005 presentation.

TIME WARNER INC.

     As more fully described herein and in the related notes to the accompanying consolidated financial statements, the comparability of Time Warner’s results from continuing operations has been affected by certain significant transactions and other items in each period as follows:

		Three Months Ended								Six Months Ended
		6/30/05				6/30/04				6/30/05				6/30/04
		(millions)								(millions)
Legal reserves related to securities litigation		$	(3,000	)		$	—			$	(3,000	)		$	—
Restructuring costs			(11	)			2				(23	)			2
Asset impairments			—				(10	)			(24	)			(10	)
Gains on disposal of assets, net			8				—				18				1
Impact on Operating Income			(3,003	)			(8	)			(3,029	)			(7	)
Investment gains, net			982				10				1,005				46
Gain (loss) on WMG option			(27	)			—				53				—
Impact on other income, net			955				10				1,058				46
Pretax impact			(2,048	)			2				(1,971	)			39
Income tax impact			572				(1	)			535				(16	)
After-tax impact		$	(1,476	)		$	1			$	(1,436	)		$	23

Legal Reserves Related to Securities Litigation

     As previously discussed, the three and six months ended June 30, 2005 include $3 billion in legal reserves related to the securities litigation (Note 10).

Restructuring Costs

     Restructuring costs consist of charges related to employee terminations and exit activities. During the three and six months ended June 30, 2005, the Company incurred restructuring costs of $13 million and $30 million, respectively, at the Cable segment. In addition, restructuring charges at the AOL segment reflect a $2 million reduction for the three months ended June 30, 2005 and a net reduction of $7 million for the six months ended June 30, 2005 relating to changes in estimates of previously established restructuring accruals. During the three and six months ended June 30, 2004, the Company recorded a $2 million reduction in restructuring costs at the AOL segment, reflecting changes in estimates of previously established restructuring accruals (Note 9).

Asset Impairments

     For the six months ended June 30, 2005, the Company recorded a $24 million noncash impairment charge related to goodwill associated with America Online Latin America, Inc. (“AOLA”) following AOLA’s March 2005 announcement that it intends to liquidate its operations. On June 24, 2005, AOLA filed a petition for Chapter 11 bankruptcy protection. For the three and six months ended June 30, 2004, the Company recognized a $10 million impairment charge related to a building held for sale at the AOL segment.

Gains on Disposal of Assets, Net

     For the three and six months ended June 30, 2005, the Company recorded an approximate $5 million gain at the AOL segment related to the sale of a building. The three and six months ended June 30, 2005 also include gains of $3 million and $5 million, respectively, from the resolution of previously contingent gains related to the 2004 sale of Netscape Security Solutions. In addition, the six months ended June 30, 2005 includes an $8 million gain at the

TIME WARNER INC.

Publishing segment related to the collection of a loan made in conjunction with the Company’s 2003 sale of Time Life Inc. (“Time Life”), which was previously fully reserved due to concerns about recoverability.

     For the six months ended June 30, 2004, the Company recognized an $8 million gain at the Publishing segment related to the sale of a building, partially offset by an approximate $7 million loss at the Networks segment related to the sale of the winter sports teams.

Investment Gains, Net

     For the three and six months ended June 30, 2005, the Company recognized net gains of $982 million and $1.005 billion, respectively, primarily related to the sale of investments, including a $925 million gain on the sale of the Company’s remaining investment in Google and a $36 million gain, which was previously deferred, related to the Company’s 2002 sale of a portion of its interest in Columbia House Holdings Inc. (“Columbia House”). The Company sold its 7.5% remaining interest in Columbia House for approximately $9 million in July of 2005, and this will result in an approximate $1 million gain in the third quarter of 2005. For the three and six months ended June 30, 2005, investment gains also include $1 million and $2 million, respectively, of gains to reflect market fluctuations in equity derivative instruments.

     For the three and six months ended June 30, 2004, the Company recognized net gains of $10 million and $46 million, respectively, primarily related to the sale of investments. Investment gains were partially offset by $5 million and $7 million, respectively, of losses to reflect market fluctuations in equity derivative instruments.

Gain (Loss) on WMG Option

     In the first quarter of 2005, the Company entered into an agreement with Warner Music Group (“WMG”) pursuant to which WMG agreed to a cash purchase of the Company’s option to acquire shares of WMG that it received in connection with the sale of WMG in 2004. Under the agreement, the cash purchase of the option would be made at the time of the WMG public offering at a price based on the initial public offering price per share, net of any underwriters’ discounts. As a result of the estimated public offering price range, the Company adjusted the value of the option in the first quarter of 2005 from $85 million to $165 million and, accordingly, recorded a gain of $80 million. In the second quarter of 2005, WMG’s registration statement was declared effective and it completed its initial public offering at a reduced price from its initial estimated range, and the Company received approximately $138 million from the sale of its option. As a result of these events, for the three and six months ended June 30, 2005, the Company recorded a $27 million loss and a $53 million net gain, respectively, related to this option (Note 2).

TIME WARNER INC.

Three and Six Months Ended June 30, 2005 Compared to Three and Six Months Ended June 30, 2004

     Revenues. As shown below, consolidated revenues decreased 1% to $10.744 billion for the three months ended June 30, 2005 from $10.860 billion for the three months ended June 30, 2004. For the six months ended June 30, 2005, consolidated revenues increased 1% to $21.227 billion compared to $21.045 billion for the six months ended June 30, 2004. The components of revenues are as follows:

		Three Months Ended												Six Months Ended
		6/30/05				6/30/04				% Change				6/30/05				6/30/04				% Change
							(millions)												(millions)
Subscription		$	5,618			$	5,486				2	%		$	11,110			$	10,800				3	%
Advertising			2,020				1,846				9	%			3,667				3,293				11	%
Content			2,816				3,237				(13	%)			5,899				6,354				(7	%)
Other			290				291				—				551				598				(8	%)
Total revenues		$	10,744			$	10,860				(1	%)		$	21,227			$	21,045				1	%

     The increase in Subscription revenues for the three and six months ended June 30, 2005 was primarily related to increases at the Cable and Networks segments, offset partially by a decline at the AOL segment. The increase at the Cable segment for the three and six months was principally due to the continued penetration of advanced services (primarily high-speed data, Digital Phone and advanced digital video services) and video rate increases. The increase at the Networks segment for the three and six months was due primarily to higher subscription rates at Turner and HBO and, to a lesser extent, an increase in the number of subscribers at Turner and HBO. The AOL segment declined for the three and six months primarily as a result of lower domestic subscribers, partially offset by growth at AOL Europe due to the favorable effects of foreign currency exchange rates.

     The increase in Advertising revenues for the three and six months ended June 30, 2005 was primarily due to growth at the AOL, Networks and Publishing segments. The increase at the AOL segment for the three and six months was due primarily to revenues associated with the acquisition of Advertising.com and growth in paid-search advertising. The increase at the Networks segment for the three and six months was primarily driven by higher CPMs (advertising cost per one thousand viewers) and sellouts at Turner’s entertainment networks, partly offset by a decline at The WB Network as a result of lower ratings. The increase at the Publishing segment for the three and six months was due to contributions from new magazine launches, the acquisition of the remaining interest in the publisher of Essence, and growth at In Style, Real Simple, and Southern Living, offset partly by lower Advertising revenues from Time, Sports Illustrated and Fortune. In addition, the six months ended June 30, 2005 benefited from an increase in Advertising revenues from People in the first quarter of 2005.

     The decrease in Content revenues for the three and six months ended June 30, 2005 was principally due to declines at the Filmed Entertainment and Networks segments. The decline at the Filmed Entertainment segment for the three months was primarily driven by a decline in theatrical product revenues, partially offset by an increase in television product revenues. For the six months, the decrease was driven by a decline in both theatrical and television product revenues. The decline at the Networks segment for the three and six months was due primarily to lower licensing revenue at HBO associated with fewer episodes of Everybody Loves Raymond, partially offset by higher ancillary sales of HBO’s original programming. In addition, for the six months, Content revenues declined at the Networks segment due to the absence of the winter sports teams at Turner, which were sold at the end of the first quarter of 2004.

     Other revenues were flat for the three months ended June 30, 2005. For the six months ended June 30, 2005, the decline in Other revenues was attributable to a decline at the Networks segment, primarily due to the sale of the winter sports teams.

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)

     Each of the revenue categories is discussed in greater detail by segment in the “Business Segment Results.”

     Costs of Revenues. For the three months ended June 30, 2005 and 2004, costs of revenues totaled $6.249 billion and $6.342 billion, respectively, and as a percentage of revenues were 58% for both periods. For the six months ended June 30, 2005 and 2004, costs of revenues totaled $12.249 billion and $12.313 billion, respectively, and as a percentage of revenues were 58% and 59%, respectively. Costs of revenues as a percentage of revenues were flat for the three months, primarily as a result of declines in margin at the Publishing and Film segments, offset by an increase in margin at AOL. The improvement in costs of revenues as a percentage of revenues for the six months related primarily to improved margins at the AOL and Networks segments. The segment variations are discussed in detail in “Business Segment Results.”

     Selling, General and Administrative Expenses. For the three months ended June 30, 2005 and 2004, selling, general and administrative expenses increased 2% to $2.571 billion in 2005 from $2.515 billion in 2004. For the six months ended June 30, 2005 and 2004, selling, general and administrative expenses increased 3% to $5.099 billion in 2005 from $4.960 billion in 2004. The increase for the three and six months resulted primarily from increases at all segments except the AOL segment and Corporate. The segment variations are discussed in detail in “Business Segment Results.”

     Legal Reserves Related to Securities Litigation. As previously discussed in “Other Recent Developments,” the three and six months ended June 30, 2005 include $3 billion in legal reserves related to the securities litigation.

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

     The following table reconciles Operating Income (Loss) before Depreciation and Amortization to Operating Income (Loss). In addition, the table provides the components from Operating Income (Loss) to Net Income (Loss) for purposes of the discussions that follow:

		Three Months Ended												Six Months Ended
		6/30/05				6/30/04				% Change				6/30/05				6/30/04				% Change
		(millions)												(millions)
Operating Income (Loss) before Depreciation and Amortization		$	(422	)		$	2,637			NM				$	2,159			$	5,042				(57	%)
Depreciation			(657	)			(642	)			2	%			(1,309	)			(1,277	)			3	%
Amortization			(152	)			(157	)			(3	%)			(302	)			(311	)			(3	%)
Operating Income (Loss)			(1,231	)			1,838			NM					548				3,454				(84	%)
Interest expense, net			(324	)			(383	)			(15	%)			(670	)			(787	)			(15	%)
Other income, net			989				33			NM					1,100				64			NM
Minority interest expense, net			(72	)			(62	)			16	%			(131	)			(118	)			11	%
Income (Loss) before income taxes, discontinued operations and cumulative effect of accounting change			(638	)			1,426			NM					847				2,613				(68	%)
Income tax benefit (provision)			317				(544	)		NM					(205	)			(1,019	)			(80	%)
Income (Loss) before discontinued operations and cumulative effect of accounting change			(321	)			882			NM					642				1,594				(60	%)
Discontinued operations, net of tax			—				(105	)		NM					—				110			NM
Cumulative effect of accounting change, net of tax			—				—				—				—				34			NM
Net income (loss)		$	(321	)		$	777			NM				$	642			$	1,738				(63	%)

TIME WARNER INC.

     Operating Income (Loss) before Depreciation and Amortization. Time Warner’s Operating Income (Loss) before Depreciation and Amortization was a loss of $422 million for the three months ended June 30, 2005 compared to income of $2.637 billion for the three months ended June 30, 2004. Excluding the items previously discussed under “Significant Transactions and Other Items Affecting Comparability” totaling $3.003 billion and $8 million of net expense for 2005 and 2004, respectively, Operating Income (Loss) before Depreciation and Amortization decreased $64 million principally as a result of a decline at the Filmed Entertainment segment, partially offset by growth at the Cable and AOL segments.

     For the six months ended June 30, 2005, Operating Income before Depreciation and Amortization was $2.159 billion compared to $5.042 billion in 2004. Excluding the items previously discussed under “Significant Transactions and Other Items Affecting Comparability” of $3.029 billion and $7 million of net expense, Operating Income before Depreciation and Amortization improved by $139 million principally as a result of growth at the Cable and AOL segments, partially offset by a decline at the Filmed Entertainment segment.

     The segment variations are discussed in detail under “Business Segment Results.”

     Depreciation Expense. Depreciation expense increased to $657 million and $1.309 billion for the three and six months ended June 30, 2005 from $642 million and $1.277 billion for the three and six months ended June 30, 2004, respectively. The increase in depreciation expense for the three and six months primarily related to the Cable segment, partially offset by a decrease at AOL. The increase in depreciation expense at Cable for the three and six months reflects increased spending on customer premise equipment that is depreciated over a shorter useful life compared to the mix of assets previously purchased. The decrease in depreciation expense at AOL for the three and six months relates primarily to a decline in network assets as a result of membership declines.

     Amortization Expense. Amortization expense decreased to $152 million and $302 million for the three and six months ended June 30, 2005, respectively, from $157 million and $311 million for the three and six months ended June 30, 2004, respectively. The decrease relates primarily to a decline in amortization at the Publishing segment as a result of certain intangibles with short useful lives, such as customer lists, becoming fully amortized beginning in the latter part of 2004.

     Operating Income (Loss). Time Warner’s Operating Income (Loss) was a loss of $1.231 billion for the three months ended June 30, 2005 compared to income of $1.838 billion for the three months ended June 30, 2004. Excluding the items previously discussed under “Significant Transactions and Other Items Affecting Comparability” totaling $3.003 billion and $8 million of net expense for 2005 and 2004, respectively, Operating Income declined $74 million.

     Time Warner’s Operating Income was $548 million for the six months ended June 30, 2005 compared to $3.454 billion for the three months ended June 30, 2004. Excluding the items previously discussed under “Significant Transactions and Other Items Affecting Comparability” totaling $3.029 billion and $7 million of net expense for 2005 and 2004, respectively, Operating Income increased by $116 million.

     These amounts reflect the changes in business segment Operating Income before Depreciation and Amortization, and the increase in depreciation expense, as discussed above.

     Interest Expense, Net. Interest expense, net, decreased to $324 million and $670 million for the three and six months ended June 30, 2005, respectively, from $383 million and $787 million for the three and six months ended June 30, 2004, respectively, due primarily to lower average net debt levels and higher interest rates on cash investments.

TIME WARNER INC.

     Other Income, Net. Other income, net, detail is shown in the table below:

		Three Months Ended								Six Months Ended
		6/30/05				6/30/04				6/30/05				6/30/04
		(millions)								(millions)
Investment gains, net		$	982			$	10			$	1,005			$	46
Gain (loss) on WMG option			(27	)			—				53				—
Income from equity method investees			36				26				47				32
Other			(2	)			(3	)			(5	)			(14	)
Other income, net		$	989			$	33			$	1,100			$	64

     The changes in investment gains, net, and the gain (loss) on the WMG option are discussed above in detail under “Significant Transactions and Other Items Affecting Comparability.” Excluding the impact of these items, Other income, net, improved in 2005 as compared to the prior period, primarily from an increase in income from equity method investees.

     Minority Interest Expense, Net. Time Warner had $72 million and $131 million of minority interest expense for the three and six months ended June 30, 2005, respectively, compared to $62 million and $118 million for the three and six months ended June 30, 2004, respectively. The increase relates primarily to larger profits recorded by TWC Inc., in which Comcast has a minority interest.

     Income Tax Benefit (Provision). Income tax from continuing operations was a $317 million benefit for the three months ended June 30, 2005, compared to a provision of $544 million for the three months ended June 30, 2004 and was a provision of $205 million for the six months ended June 30, 2005, compared to a provision of $1.019 billion for the six months ended June 30, 2004. The Company’s effective tax rate for continuing operations was a benefit of 50% and a provision of 24% for the three and six months ended June 30, 2005, respectively, as compared to provisions of 38% and 39% for the three and six months ended June 30, 2004, respectively. The change in the effective tax rate was primarily a result of the favorable impact of state tax law changes in Ohio and New York enacted in the second quarter of 2005, partially offset by non-deductible expense related to a portion of the settlement accrual for the securities litigation.

     The state law changes relate to the method of taxation in Ohio and the method of apportionment in New York. In Ohio, the income tax is being phased-out and replaced with a gross receipts tax, while in New York the methodology for income apportionment is changing over time to a single receipts factor from a three factor formula. These tax law changes resulted in a reduction in certain deferred tax liabilities related to these states. Accordingly, the Company has recognized these reductions as noncash tax benefits totaling approximately $170 million for Ohio and $135 million for New York State in the second quarter of 2005.

     Income (Loss) before Discontinued Operations and Cumulative Effect of Accounting Change. Income (Loss) before discontinued operations and cumulative effect of accounting change was a loss of $321 million for the three months ended June 30, 2005 compared to income of $882 million for the three months ended June 30, 2004. Basic and diluted net income (loss) per share before discontinued operations and cumulative effect of accounting change were both losses of $0.07 in 2005, compared to income of $0.19 for both basic and diluted net income per share before discontinued operations and cumulative effect of accounting change in 2004. Excluding the items previously discussed under “Significant Transactions and Other Items Affecting Comparability” totaling $1.476 billion of net expense and $1 million of income in 2005 and 2004, respectively, Income (loss) before discontinued operations and cumulative effect of accounting change improved by $274 million primarily due to the change in income tax benefit (provision) as discussed above.

     Income before discontinued operations and cumulative effect of accounting change was $642 million for the six months ended June 30, 2005 compared to $1.594 billion for the six months ended June 30, 2004. Basic and diluted net income per share before discontinued operations and cumulative effect of accounting change were both $0.14 in

TIME WARNER INC.

2005 compared to $0.35 and $0.34 in 2004, respectively. Excluding the items previously discussed under “Significant Transactions and Other Items Affecting Comparability” totaling $1.436 billion of net expense and $23 million of income, Income before discontinued operations and cumulative effect of accounting change improved by $507 million, primarily due to the change in income tax benefit (provision) and Operating Income as discussed above.

     Discontinued Operations, Net of Tax. Included in the 2004 results for the three and six months ended June 30, 2004 are $93 million and $16 million, respectively, of pre-tax losses and a $12 million tax provision and $126 million tax benefit, respectively, from the operations of the Music business (Note 2).

     Cumulative Effect of Accounting Change, Net of Tax. The Company recorded a $34 million benefit, net of tax, as a cumulative effect of accounting change upon the consolidation of AOLA in the first quarter of 2004 in accordance with FASB Interpretation No. 46 (Revised), “Consolidation of Variable Interest Entities.”

     Net Income (Loss) and Net Income (Loss) Per Common Share. Net income (loss) was a loss of $321 million for the three months ended June 30, 2005 compared to income of $777 million for the three months ended June 30, 2004. Basic and diluted net income (loss) per common share were both a loss of $0.07 in 2005, compared to income of $0.17 for both basic and diluted net income per common share in 2004. Net income was $642 million for the six months ended June 30, 2005 compared to $1.738 billion for the six months ended June 30, 2004. Basic and diluted net income per common share were both $0.14 in 2005 compared to $0.38 and $0.37 in 2004, respectively. Net income (loss) includes the items previously addressed under “Significant Transactions and Other Items Affecting Comparability,” discontinued operations, net of tax, and the cumulative effect of accounting change, net of tax.

TIME WARNER INC.

Business Segment Results

     AOL. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the AOL segment for the three and six months ended June 30, 2005 and 2004 are as follows:

		Three Months Ended												Six Months Ended
		6/30/05				6/30/04				% Change				6/30/05				6/30/04				% Change
		(millions)												(millions)
Revenues:
Subscription		$	1,734			$	1,902				(9	%)		$	3,508			$	3,821				(8	%)
Advertising			320				221				45	%			631				435				45	%
Other			43				54				(20	%)			91				112				(19	%)
Total revenues			2,097				2,177				(4	%)			4,230				4,368				(3	%)
Costs of revenues (a)			(961	)			(1,056	)			(9	%)			(1,939	)			(2,119	)			(8	%)
Selling, general and administrative (a)			(588	)			(626	)			(6	%)			(1,208	)			(1,265	)			(5	%)
Restructuring costs			2				2				—				7				2				250	%
Asset impairment			—				(10	)		NM					(24	)			(10	)			140	%
Gain on sale of assets			8				—			NM					10				—			NM
Operating Income before Depreciation and Amortization			558				487				15	%			1,076				976				10	%
Depreciation			(143	)			(170	)			(16	%)			(290	)			(340	)			(15	%)
Amortization			(47	)			(41	)			15	%			(94	)			(83	)			13	%
Operating Income		$	368			$	276				33	%		$	692			$	553				25	%

     The reduction in Subscription revenues for the three and six months ended June 30, 2005 primarily reflects a decrease in domestic Subscription revenues (from $1.463 billion to $1.278 billion for the three months and from $2.934 billion to $2.591 billion for the six months), offset in part by an increase in Subscription revenues at AOL Europe (from $407 million to $430 million for the three months and from $836 million to $879 million for the six months). AOL’s domestic Subscription revenues declined due primarily to a decrease in the number of domestic AOL brand subscribers and related revenues. AOL Europe’s Subscription revenues increased as the result of the favorable impact of foreign currency exchange rates ($25 million and $50 million for the three and six months, respectively), partially offset by a decline in subscribers and related revenues.

     The number of AOL brand domestic and European subscribers is as follows at June 30, 2005, March 31, 2005 and June 30, 2004 (millions):

		June 30,				March 31,				June 30,
		2005				2005				2004
Subscriber category:
AOL brand domestic (a)
$15 and over			15.6				16.8				18.8
Under $15			5.2				4.9				4.6
Total AOL brand domestic			20.8				21.7				23.4
AOL Europe			6.2				6.3				6.3

TIME WARNER INC.

     The average monthly Subscription revenue per subscriber (“ARPU”) for each significant category of subscribers, calculated as total subscription revenue for the category divided by the average subscribers in the category for the applicable period, is as follows:

		Three Months Ended								Six Months Ended
		6/30/05				6/30/04				6/30/05				6/30/04
Subscriber category:
AOL brand domestic
$15 and over		$	20.84			$	21.10			$	20.68			$	20.88
Under $15			13.31				13.07				13.21				12.92
Total AOL brand domestic			19.05				19.58				18.98				19.41
AOL Europe			22.31				20.84				22.71				21.28

     Domestic subscribers to the AOL brand service include subscribers during introductory free-trial periods and subscribers at no or reduced monthly fees through member service and retention programs. Total AOL brand domestic subscribers include free-trial and retention members of approximately 11% at June 30, 2005, 13% at December 31, 2004 and 15% at June 30, 2004. Domestic AOL brand subscribers also include subscribers to a bundled broadband service, which combines the AOL service with high-speed Internet access provided by third-party broadband Internet access providers such as cable companies and telephone companies.

     The largest component of the AOL brand domestic $15 and over price plans is the $23.90 price plan, which provides unlimited access to the AOL service using America Online’s dial-up network and unlimited usage of the AOL service through any other Internet connection. The largest component of the AOL brand domestic under $15 price plans is the $14.95 per month price plan, which includes ten hours of dial-up access and unlimited usage of the AOL service through an Internet connection not provided by America Online, such as a high-speed broadband Internet connection via cable or digital subscriber lines. America Online continues to develop, test, change and implement price plans, service offerings and payment methods to attract and retain members to its AOL service and, therefore, the composition of AOL’s subscriber base is expected to change over time.

     The decline in AOL brand subscribers on plans priced $15 and over per month for the three and six months resulted from a number of factors, principally the continued maturing of dial-up services and subscribers adopting other dial-up and high-speed services. Further, during the periods, subscribers migrated from the premium-priced unlimited dial-up plans, including the $23.90 plan, to lower-priced limited dial-up plans, such as the $14.95 plan. The decline in AOL brand subscribers overall, and specifically in the $15 and over per month price plans, is expected to continue into the foreseeable future.

     Growth in AOL brand subscribers on plans below $15 per month for the three and six months was driven principally by the migration of subscribers from plans $15 and over per month and, to a lesser extent, by new subscribers. AOL expects that the proportion of its subscribers on lower-priced plans will continue to increase. The AOL/TWC Inc. agreement relating to the bundling of the AOL service together with broadband access is still being implemented and the impact on the AOL segment and Time Warner’s consolidated financial results is not expected to be significant during 2005.

     Within the $15 and over per month category, the decrease in ARPU for the three and six months ended June 30, 2005, as compared to the similar periods in the prior year, was due primarily to a lower priced mix in subscriber price plans, partially offset by an increase in the percentage of revenue generating subscribers. Premium services revenues included in ARPU for the three and six months ended June 30, 2005 were $22 million and $42 million, respectively, compared to $26 million and $48 million for the three and six months ended June 30, 2004, respectively. ARPU for subscribers in the below $15 per month category increased primarily due to an improved mix in subscriber price plans and an increase in the percentage of revenue generating subscribers. In the below $15 per month category, premium services revenues included in ARPU for the three and six months ended June 30, 2005 were $8 million and $14 million, respectively, compared to $6 million and $11 million, for the three and six months ended June 30, 2004, respectively.

TIME WARNER INC.

     AOL Europe offers a variety of price plans, including bundled broadband, unlimited access to the AOL service using America Online’s dial-up network and limited access plans, which are generally billed based on actual usage. AOL Europe continues to actively market bundled broadband plans, as AOL Europe’s subscribers have been migrating from dial-up plans to bundled broadband plans, and this trend is expected to continue.

     The ARPU for European subscribers for the three and six months ended June 30, 2005, as compared to the similar periods in the prior year, increased due to a change in the mix of price plans, with broadband subscribers growing as a percentage of total subscribers and an increase in premium services revenues. In addition, the three and six months benefited from the positive effect of changes in foreign currency exchange rates related to the strengthening of the Euro and British Pound relative to the U.S. Dollar. The total number of AOL brand subscribers at AOL Europe reflects a year-over-year decline in subscribers in France and Germany partially offset by an increase in the U.K.

     In addition to the AOL brand service, America Online has subscribers to lower-cost services, both domestically and internationally, including the Netscape and CompuServe brands. These other brand services are not a significant source of revenue.

     Advertising revenues increased for the three and six months primarily due to $60 million and $120 million, respectively, of revenues from sales of advertising run on third-party websites generated by Advertising.com, which was acquired in August 2004, and a $30 million and $57 million increase, respectively, in paid-search advertising. AOL expects Advertising revenues to continue to increase during the second half of 2005 due to contributions from Advertising.com’s performance-based advertising, and expected growth in paid-search and traditional online advertising. However, the rate of growth is expected to be less than experienced in the first half of 2005 because the growth rate in the first half of 2005 benefited from the absence of Advertising.com in the first half of 2004.

     Other revenues primarily include software licensing revenue and revenue from providing the Cable segment access to the AOL Transit Data Network (“ATDN”) for high-speed access to the Internet. Other revenues decreased for the three and six months due primarily to lower ATDN revenue from TWC Inc., reflecting lower pricing under the terms of a new agreement and lower network usage.

     For the three and six months ended June 30, 2005, costs of revenues decreased 9% and 8%, respectively, and, as a percentage of revenues, decreased to 46% for both the three and six months ended June 30, 2005 from 49% for both the three and six months ended June 30, 2004. For the three and six months ended June 30, 2005, the declines related primarily to lower network-related expenses. Network-related expenses decreased 32% to $338 million and 32% to $697 million for the three and six months, respectively, principally attributable to improved pricing and decreased levels of fixed commitments. These factors are expected to result in continued declines in network expenses throughout 2005, although at a rate less than that experienced in the first half of 2005. The decline in network costs was partially offset by costs associated with Advertising.com, which was acquired in August 2004, and higher broadband and member service costs at AOL Europe.

     AOL’s three and six months ended June 30, 2004 results included $20 million and $33 million, respectively, of expense related to the November 2003 expiration of the federal moratorium on Internet sales taxes. The six months ended June 30, 2004 results also included $15 million of benefits related to the favorable rulings on certain state sales tax matters. In the fourth quarter of 2004, the federal moratorium on Internet sales taxes was retroactively reinstated to November 2003 and extended through 2007. As a result of the retroactive application of the legislation, the previously accrued amounts were reversed in the fourth quarter of 2004.

     The decrease in selling, general and administrative expenses for the three and six months ended June 30, 2005 primarily related to a decrease in marketing costs, partially offset by additional costs resulting from the acquisition of Advertising.com and higher general and administrative costs. The three and six months ended June 30, 2005 amounts also include a $15 million benefit related to the favorable resolution of a European value-added tax matter.

TIME WARNER INC.

The decrease in marketing costs primarily resulted from lower spending on member acquisition activities, partially offset by an increase in brand advertising. The three and six months ended June 30, 2004 also included an approximate $25 million adjustment to reduce excess marketing accruals made in prior years, primarily related to AOL Europe. Marketing costs are expected to continue to decrease during the remainder of 2005 compared to the prior year.

     As previously discussed under “Significant Transactions and Other Items Affecting Comparability,” the results for the three and six months ended June 30, 2005 include an approximate $5 million gain on the sale of a building and gains of $3 million and $5 million, respectively, from the resolution of previously contingent gains related to the 2004 sale of Netscape Security Solutions. The three months ended June 30, 2005 also reflect a $2 million reduction in restructuring costs and a net reduction of $7 million for the six months ended June 30, 2005 relating to changes in estimates of previously established restructuring accruals. The six months ended June 30, 2005 also include a $24 million noncash goodwill impairment charge related to AOLA. The three and six months ended June 30, 2004 included the reversal of $2 million of previously established restructuring accruals, that were no longer required and a $10 million impairment charge related to a building that was held for sale.

     The increases in Operating Income before Depreciation and Amortization and Operating Income for the three and six months are due primarily to lower costs of revenues and selling, general and administrative expenses, higher Advertising revenues and the net benefit of restructuring reversals and the gains on sale of consolidated businesses, partially offset by lower Subscription revenues. For the six months ended June 30, 2005, the increase was also partially offset by the $24 million noncash goodwill impairment charge described above. Operating Income also improved due to lower depreciation expense reflecting a decline in network assets as the result of membership declines.

     Cable. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Cable segment for the three and six months ended June 30, 2005 and 2004 are as follows:

		Three Months Ended												Six Months Ended
		6/30/05				6/30/04				% Change				6/30/05				6/30/04				% Change
		(millions)												(millions)
Revenues:
Subscription		$	2,221			$	1,990				12	%		$	4,348			$	3,924				11	%
Advertising			136				126				8	%			255				235				9	%
Total revenues			2,357				2,116				11	%			4,603				4,159				11	%
Costs of revenues (a)			(1,067	)			(935	)			14	%			(2,069	)			(1,840	)			12	%
Selling, general and administrative (a)			(377	)			(364	)			4	%			(782	)			(752	)			4	%
Restructuring charges			(13	)			—			NM					(30	)			—			NM
Operating Income before Depreciation and Amortization			900				817				10	%			1,722				1,567				10	%
Depreciation			(386	)			(355	)			9	%			(762	)			(701	)			9	%
Amortization			(19	)			(19	)			—				(39	)			(37	)			5	%
Operating Income		$	495			$	443				12	%		$	921			$	829				11	%

     For the three and six months ended June 30, 2005, Subscription revenues increased due to the continued penetration of advanced services (primarily high-speed data, Digital Phone and advanced digital video services) and video rate increases. High-speed data subscription revenues increased to $525 million for the three months ended June 30, 2005 from $433 million for the three months ended June 30, 2004 and to $1.018 billion for the six months ended June 30, 2005 from $847 million for the six months ended June 30, 2004. Digital Phone revenues increased to $57 million for the three months ended June 30, 2005 from $3 million for the three months ended June 30, 2004 and to $89 million for the six months ended June 30, 2005 from $5 million for the six months ended June 30, 2004. The

TIME WARNER INC.

Company anticipates that revenues for the remainder of 2005 will be impacted positively by revenues associated with its high-speed data and Digital Phone services.

     TWC Inc. subscriber counts include all billable subscribers for each level of service received. Basic cable subscribers include all subscribers who receive basic video cable service. Digital video subscribers reflect all subscribers who receive any level of video service received via digital technology. High-speed data subscribers include all subscribers who receive TWC Inc.’s Road Runner Internet service, as well as other Internet services offered by TWC Inc. Digital Phone subscribers includes all subscribers who receive telephony service. At June 30, 2005, as compared to June 30, 2004, basic cable subscribers were down slightly (i.e. 4,000 subscribers) and totaled 10.905 million (including 1.589 million subscribers of unconsolidated investees, which are managed by TWC Inc.), digital video subscribers increased by 10% to 5.053 million (including 768,000 subscribers of unconsolidated investees, which are managed by TWC Inc.), residential high-speed data subscribers increased by 22% to 4.323 million (including 623,000 subscribers of unconsolidated investees, which are managed by TWC Inc.) and commercial high-speed data subscribers increased by 30% to 193,000 (including 25,000 subscribers of unconsolidated investees, which are managed by TWC Inc.). Additionally, Digital Phone subscribers totaled 614,000 (including 96,000 subscribers of unconsolidated investees, which are managed by TWC Inc.).

     The increase in Advertising revenues for the three and six months ended June 30, 2005 is due to growth of national and local advertising, including an increase in both the rates and volume of advertising spots sold.

     For the three and six months ended June 30, 2005, costs of revenues increased 14% and 12%, respectively, and, as a percentage of revenues, were 45% for both the three and six months ended June 30, 2005 compared to 44% for both the three and six months ended June 30, 2004. The increase in costs of revenues is primarily related to increases in video programming costs, higher employee costs and an increase in telephony service costs. For the three and six months ended June 30, 2005, video programming costs increased 14% to $532 million and 13% to $1.042 billion, respectively, due primarily to contractual rate increases across TWC Inc.’s programming line-up, including a $14 million charge related to the resolution of contractual terms with a program vendor. Programming costs in the first six months of 2004 also benefited from the receipt of non-recurring programming credits. Video programming costs are expected to increase during the remainder of 2005, and the full year rate of increase is expected to be at a rate similar to that experienced during the first half of 2005, reflecting the expansion of service offerings and contractual rate increases across TWC Inc.’s programming line-up. Employee costs increased primarily due to merit increases and higher headcount resulting from the roll-out of advanced services. Telephony service costs increased due to the growth of Digital Phone subscribers. Despite the growth in high-speed data subscribers, as discussed above, high-speed data connectivity costs declined 23% for both the three and six months of 2005, as connectivity costs have continued to decrease on a per subscriber basis due to industry-wide cost declines.

     The increase in selling, general and administrative expenses is primarily the result of higher employee and administrative costs due to merit increases and higher headcount resulting from the roll-out of advanced services. This was partially offset by $7 million and $34 million of costs for the three and six months ended June 30, 2004, respectively, incurred in connection with the previously discussed Urban Cable dispute. The six months ended June 30, 2005 also include $9 million in reserves related to legal matters.

     As previously discussed under “Significant Transactions and Other Items Affecting Comparability,” the results for the three and six months ended June 30, 2005 include approximately $13 million and $30 million, respectively, of restructuring costs, primarily associated with the early retirement of certain senior executives. These changes are part of TWC Inc.’s broader plans to simplify its organization and enhance its customer focus. TWC Inc. is in the process of executing this reorganization and expects to incur additional costs associated with this reorganization as it is implemented throughout 2005.

TIME WARNER INC.

     Operating Income before Depreciation and Amortization for the three and six months increased principally as a result of revenue gains (particularly high margin high-speed data revenues), offset in part by higher costs of revenues, selling, general and administrative expenses and the restructuring charges discussed above.

     Operating Income increased due primarily to the increase in Operating Income before Depreciation and Amortization described above, offset in part by an increase in depreciation expense. Depreciation expense increased $31 million and $61 million for the three and six months, respectively, due primarily to the increased spending on customer premise equipment in recent years, which generally has a significantly shorter useful life compared to the mix of assets previously purchased.

     Filmed Entertainment. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Filmed Entertainment segment for the three and six months ended June 30, 2005 and 2004 are as follows:

		Three Months Ended												Six Months Ended
		6/30/05				6/30/04				% Change				6/30/05				6/30/04				% Change
		(millions)												(millions)
Revenues:
Advertising		$	2			$	2				—			$	5			$	5				—
Content			2,585				3,043				(15	%)			5,536				5,962				(7	%)
Other			49				46				7	%			109				111				(2	%)
Total revenues			2,636				3,091				(15	%)			5,650				6,078				(7	%)
Costs of revenues (a)			(2,033	)			(2,313	)			(12	%)			(4,259	)			(4,521	)			(6	%)
Selling, general and administrative (a)			(384	)			(361	)			6	%			(762	)			(728	)			5	%
Operating Income before Depreciation and Amortization			219				417				(47	%)			629				829				(24	%)
Depreciation			(30	)			(25	)			20	%			(60	)			(49	)			22	%
Amortization			(52	)			(53	)			(2	%)			(104	)			(106	)			(2	%)
Operating Income		$	137			$	339				(60	%)		$	465			$	674				(31	%)

     For the three months ended June 30, 2005, Content revenues decreased primarily as a result of a decline in theatrical product (from $2.136 billion to $1.560 billion), partially offset by an increase in television product (from $781 million to $896 million). For the six months ended June 30, 2005, Content revenues decreased as a result of declines in both theatrical product (from $3.695 billion to $3.415 billion) and television product (from $2.010 billion to $1.887 billion). Content revenues also include consumer products and other revenues, which increased $3 million to $129 million for the three months ended June 30, 2005, and decreased $23 million to $234 million for the six months ended June 30, 2005.

     For the three months ended June 30, 2005, revenue from theatrical product decreased due to declines in worldwide home video sales and worldwide theatrical film revenues of $357 million and $276 million, respectively, partially offset by a $57 million increase in television license fees. For the six months ended June 30, 2005, revenue from theatrical product decreased due to declines in worldwide theatrical film revenues and worldwide home video sales of $416 million and $44 million, respectively, partially offset by a $180 million increase in television license fees.

     The decline in home video sales from theatrical product for the three and six months ended June 30, 2005, was attributable to difficult comparisons to the prior year, which included the key home video releases of The Lord of the Rings: The Return of the King, The Matrix Revolutions and The Last Samurai. For the six months, this was partially offset by the first quarter 2005 home video release of Harry Potter and the Prisoner of Azkaban in most international territories and the domestic home video release of Troy. The decrease in worldwide theatrical film revenues for the three and six months ended June 30, 2005 was attributable to difficult comparisons to the prior year,

TIME WARNER INC.

which included international overages associated with The Lord of the Rings: The Return of the King and the success of Troy, Harry Potter and the Prisoner of Azkaban, and The Last Samurai in the first six months of 2004. For the three and six months ended June 30, 2005, the increase in theatrical product revenue from television distribution related to the timing and quantity of various international availabilities, including a greater number of significant titles in 2005.

     The increase in television product revenues for the three months ended June 30, 2005 is attributable to a $128 million increase in home video sales, partially offset by a $13 million decline in license fees. The decrease in television product revenues for the six months ended June 30, 2005 is attributable to a $295 million decline in license fees, partially offset by a $172 million increase in home video sales.

     The decrease in worldwide license fees from television product for the three and six months ended June 30, 2005 was primarily attributable to difficult comparisons to 2004, which included higher revenues associated with the final broadcast seasons of Friends and The Drew Carey Show. The first six months of 2004 also included the third-cycle syndication continuance license arrangements for Seinfeld. The growth in home video sales of television product for the three and six months was primarily attributable to an increased number of titles released in this format, with the most significant contributions from Seinfeld.

     The decrease in costs of revenues resulted primarily from lower film costs ($1.187 billion and $2.595 billion for the three and six months ended June 30, 2005, respectively, compared to $1.524 billion and $3.052 billion for the three and six months ended June 30, 2004, respectively) primarily resulting from the quantity and mix of product released. Included in film costs are theatrical valuation adjustments, which declined from $88 million in 2004 to $57 million in 2005 for the three months and from $144 million in 2004 to $95 million in 2005 for the six months. Advertising and print costs also decreased for the three and six months due to the quantity and mix of films released. These decreases were offset partially by higher home video costs related to increased volume and an increase in the ratio of television product, which has higher manufacturing costs and freight costs. Costs of revenues as a percentage of revenues increased to 77% for the three months ended June 30, 2005 from 75% for the three months ended June 30, 2004, and to 75% for the six months ended June 30, 2005 compared to 74% for the six months ended June 30, 2004 due to the quantity and mix of product released.

     Selling, general and administrative expenses increased for the three and six months ended June 30, 2005, primarily due to higher employee costs related to additional headcount and salary increases. The increase for the six months was partially offset by a decline related to the distribution fees associated with the off-network television syndication of Seinfeld in the prior year.

     Operating Income before Depreciation and Amortization and Operating Income for the three and six months ended June 30, 2005 decreased due to lower revenues and increased selling, general and administrative expenses, which were partially offset by the decrease in costs of revenues, as discussed above.

     The Company anticipates that both Operating Income before Depreciation and Amortization and Operating Income will continue to decline in the third quarter of 2005 as a result of difficult comparisons to 2004 but will return to growth in the fourth quarter of 2005 compared to the same periods of 2004.

TIME WARNER INC.

     Networks. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Networks segment for the three and six months ended June 30, 2005 and 2004 are as follows:

		Three Months Ended												Six Months Ended
		6/30/05				6/30/04				% Change				6/30/05				6/30/04				% Change
		(millions)												(millions)
Revenues:
Subscription		$	1,374			$	1,303				5	%		$	2,716			$	2,537				7	%
Advertising			861				817				5	%			1,543				1,451				6	%
Content			215				224				(4	%)			468				508				(8	%)
Other			39				34				15	%			47				77				(39	%)
Total revenues			2,489				2,378				5	%			4,774				4,573				4	%
Costs of revenues (a)			(1,366	)			(1,282	)			7	%			(2,452	)			(2,417	)			1	%
Selling, general and administrative (a)			(488	)			(435	)			12	%			(900	)			(753	)			20	%
Loss on sale of assets			—				—				—				—				(7	)		NM
Operating Income before Depreciation and Amortization			635				661				(4	%)			1,422				1,396				2	%
Depreciation			(57	)			(51	)			12	%			(112	)			(100	)			12	%
Amortization			(8	)			(8	)			—				(12	)			(11	)			9	%
Operating Income		$	570			$	602				(5	%)		$	1,298			$	1,285				1	%

     The increase in Subscription revenues for the three and six months ended June 30, 2005 was due primarily to higher subscription rates at Turner and HBO and, to a lesser extent, an increase in the number of subscribers at Turner and HBO. The three and six months 2005 results also include a $22 million benefit from the resolution of certain contractual agreements at Turner and the three and six months 2004 results included a benefit of approximately $50 million from the resolution of certain contractual agreements at Turner and HBO.

     The increase in Advertising revenues for the three and six months ended June 30, 2005 was driven primarily by higher CPMs and sellouts at Turner’s entertainment networks, partially offset by a decline at The WB Network as a result of lower ratings.

     The decrease in Content revenues for the three and six months ended June 30, 2005 was primarily due to lower licensing revenues at HBO associated with fewer episodes of Everybody Loves Raymond, partially offset by higher ancillary sales of HBO’s original programming. In addition, for the six months ended June 30, 2005, Content revenues declined due to the absence of the winter sports teams at Turner, which were sold on March 31, 2004 and contributed $22 million of Content revenues in 2004, and a 2004 benefit associated with favorable home video returns experience.

     For the three months ended June 30, 2005, Other revenues increased primarily related to higher ticket and event revenue at the Atlanta Braves. For the six months ended June 30, 2005, the decline in Other revenues was primarily attributable to the sale of the winter sports teams in the first quarter of 2004, which contributed $39 million of Other revenues in the first quarter of 2004, partially offset by the increase in revenues primarily related to the Atlanta Braves, as previously discussed.

     Costs of revenues increased 7% for the three months ended June 30, 2005 and, as a percentage of revenues, was 55% and 54% for the three months ended June 30, 2005 and June 30, 2004, respectively. Costs of revenues increased 1% for the six months ended June 30, 2005 and, as a percentage of revenues, was 51% and 53% for the six months ended June 30, 2005 and June 30, 2004, respectively. For the three and six months ended June 30, 2005, the increase in costs of revenues was primarily attributable to an increase in programming costs, partially offset by lower costs related to the absence of the winter sports teams due to their sale in March 2004. Programming costs increased to $1.012 billion for the three months ended June 30, 2005 as compared to $967 million for the three

TIME WARNER INC.

months ended June 30, 2004 and to $1.773 billion for the six months ended June 30, 2005 from $1.708 billion for the six months ended June 30, 2004. The increase in programming expenses for the three and six months is primarily due to an increase in original series, sports rights and news costs at Turner, partially offset by lower theatrical film and original programming costs at HBO.

     Selling, general and administrative expenses increased for the three and six months ended June 30, 2005 primarily due to higher marketing and promotional expenses to support new programming primarily at Turner and higher general and administrative costs at Turner, partially offset by a decline in marketing and promotional expenses at The WB Network. In addition, the increase in selling, general and administrative expenses for the three and six months reflects the reversal of bankruptcy related bad debt reserves of $14 million and $75 million for the three and six months ended June 30, 2004, respectively, at Turner and HBO on receivables from Adelphia.

     As discussed in “Significant Transactions and Other Items Affecting Comparability,” the six months 2004 results include an approximate $7 million loss on the sale of the winter sports teams.

     Operating Income before Depreciation and Amortization and Operating Income declined for the three months ended June 30, 2005 primarily due to higher costs of revenues and selling, general and administrative expenses, partially offset by an increase in revenues, as discussed above. Operating Income before Depreciation and Amortization and Operating Income increased for the six months ended June 30, 2005 primarily due to an increase in revenues, partially offset by higher selling, general and administrative expenses and costs of revenues, as described above.

     The Company anticipates that the rate of growth in both Operating Income before Depreciation and Amortization and Operating Income during the remainder of 2005 will be higher than that experienced in the first half of 2005. The growth for the first half of 2005 was negatively impacted, in part, by an approximate $28 million lower net benefit from the favorable resolution of certain contractual agreements as well as the 2004 reversal of $75 million of Adelphia bad debt reserves.

     Publishing. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Publishing segment for the three and six months ended June 30, 2005 and 2004 are as follows:

		Three Months Ended												Six Months Ended
		6/30/05				6/30/04				% Change				6/30/05				6/30/04				% Change
		(millions)												(millions)
Revenues:
Subscription		$	421			$	423				—			$	802			$	777				3	%
Advertising			742				716				4	%			1,313				1,237				6	%
Content			169				126				34	%			297				235				26	%
Other			170				178				(4	%)			330				341				(3	%)
Total revenues			1,502				1,443				4	%			2,742				2,590				6	%
Costs of revenues (a)			(608	)			(556	)			9	%			(1,151	)			(1,056	)			9	%
Selling, general and administrative (a)			(546	)			(530	)			3	%			(1,076	)			(1,015	)			6	%
Gain on sale of assets			—				—				—				8				8				—
Operating Income before Depreciation and Amortization			348				357				(3	%)			523				527				(1	%)
Depreciation			(31	)			(33	)			(6	%)			(66	)			(63	)			5	%
Amortization			(26	)			(36	)			(28	%)			(53	)			(74	)			(28	%)
Operating Income		$	291			$	288				1	%		$	404			$	390				4	%

(a)  Costs of revenues and selling, general and administrative expenses exclude depreciation.

TIME WARNER INC.

     Subscription revenues were essentially flat for the three months ended June 30, 2005. For the six months ended June 30, 2005, Subscription revenues increased primarily due to higher newsstand sales of People and the U.K. magazine launches, Pick Me Up and Nuts.

     For the three and six months ended June 30, 2005, Advertising revenues increased due to contributions from new magazine launches, the acquisition of the remaining interest in the publisher of Essence, and growth at In Style, Real Simple, and Southern Living, offset partly by lower Advertising revenues from Time, Sports Illustrated and Fortune. In addition, the six months ended June 30, 2005 benefited from an increase in Advertising revenues from People in the first quarter of 2005. The Company anticipates that the rate of growth in Advertising revenues will decline in the second half of 2005 as compared to the rate of growth experienced in the first half of 2005 due to soft market conditions.

     Content revenues increased for the three and six months ended June 30, 2005 due to a number of best-selling titles at Time Warner Book Group.

     Costs of revenues increased 9% for the three months ended June 30, 2005 and, as a percentage of revenues were 40% and 39% for the three months ended June 30, 2005 and 2004, respectively. Costs of revenues increased 8% for the six months ended June 30, 2005 and, as a percentage of revenues were 42% and 41% for the six months ended June 30, 2005 and 2004, respectively. Costs of revenues for the magazine publishing business include manufacturing (paper, printing and distribution) and editorial-related costs, which together increased 9% to $483 million and 9% to $911 million for the three and six months ended June 30, 2005, respectively. The increase for the three and six months was primarily due to magazine launch-related costs, the acquisition of the remaining interest in the publisher of Essence, increases in paper prices as well as costs related to several titles at Time Warner Book Group.

     Selling, general and administrative expenses increased 3% and 6% for the three and six months ended June 30, 2005, respectively, primarily due to magazine launch-related costs, the acquisition of the remaining interest in the publisher of Essence, and higher selling expenses related to the success of several titles at Time Warner Book Group.

     As previously discussed in “Significant Transactions and Other Items Affecting Comparability,” the results for the six months ended June 30, 2005 reflect an $8 million gain related to the collection of a loan made in conjunction with the Company’s 2003 sale of Time Life, which was previously fully reserved due to concerns about recoverability. The results for the six months ended June 30, 2004 reflect an $8 million gain on the sale of a building.

     For the three and six months ended June 30, 2005, Operating Income before Depreciation and Amortization decreased, reflecting higher costs of revenues and selling, general and administrative expenses, including $9 million and $17 million, respectively, of higher start-up losses on magazine launches, partially offset by an increase in revenues.

     Operating Income for the three and six months ended June 30, 2005 improved slightly, benefiting from a decline in amortization expense as a result of certain short-lived intangibles, such as customer lists, becoming fully amortized, partially offset by the decline in Operating Income before Depreciation and Amortization discussed above.

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     Corporate. Operating Loss before Depreciation and Amortization and Operating Loss of the Corporate segment for the three and six months ended June 30, 2005 and 2004 are as follows:

		Three Months Ended												Six Months Ended
		6/30/05				6/30/04				% Change				6/30/05				6/30/04				% Change
		(millions)												(millions)
Legal reserves related to securities litigation.		$	(3,000	)		$	—			NM				$	(3,000	)		$	—			NM
Selling, general and administrative (a)			(104	)			(112	)			(7	%)			(206	)			(276	)			(25	%)
Operating Loss before Depreciation and Amortization			(3,104	)			(112	)		NM					(3,206	)			(276	)		NM
Depreciation			(10	)			(8	)			25	%			(19	)			(24	)			(21	%)
Operating Loss		$	(3,114	)		$	(120	)		NM				$	(3,225	)		$	(300	)		NM

     ^(a)  Selling, general and administrative expenses exclude depreciation.

     As previously discussed, the three and six months ended June 30, 2005 results include $3 billion in legal reserves related to the securities litigation.

     Besides normal corporate expenses, included in selling, general and administrative expenses are legal and other professional fees related to the SEC and DOJ investigations into the Company’s accounting and disclosure practices and the defense of various securities litigation matters ($3 million and $9 million for the three and six months ended June 30, 2005, respectively, compared to $6 million and $14 million for the three and six months ended June 30, 2004, respectively). Costs are expected to continue to be incurred in future periods.

     Also included in selling, general and administrative expenses for the three and six months ended June 30, 2004 are charges of $14 million and $67 million, respectively, associated with the relocation of the Company’s corporate headquarters. Of the $67 million charge, approximately $26 million relates to a noncash write-off of a fair value lease adjustment, which was established in purchase accounting at the time of the merger of America Online and Time Warner Inc., now known as Historic TW Inc. (“Historic TW”). In the first quarter of 2005, the Company reversed approximately $3 million of this charge, which was no longer required due to changes in estimates.

     Excluding the items discussed above, Operating Loss before Depreciation and Amortization and Operating Loss increased slightly for the three and six months ended June 30, 2005, due primarily to higher employee and general and administrative costs, partially offset in the six months by lower severance costs.

Current Financial Condition

     At June 30, 2005, Time Warner had $20.549 billion of debt, $7.592 billion of cash and equivalents (net debt of $12.957 billion, defined as total debt less cash and equivalents) and $62.620 billion of shareholders’ equity, including the conversion of $1.5 billion of mandatorily convertible preferred stock to common stock in the first quarter of 2005, compared to $22.375 billion of debt, $6.139 billion of cash and equivalents (net debt of $16.236 billion) and $60.771 billion of shareholders’ equity at December 31, 2004.

     The following table shows the significant items contributing to the decrease in net debt from December 31, 2004 to June 30, 2005 (millions):

Net debt at December 31, 2004		$	16,236
Free Cash Flow(a)(b)			(1,959	)
Proceeds from sale of the Company’s remaining interest in Google			(940	)
Proceeds from the Company’s option in WMG			(138	)
All other, net			(242	)
Net debt at June 30, 2005(c)		$	12,957

     As previously announced, the Company will start paying a regular quarterly cash dividend of $0.05 per share on its common stock, beginning in the third quarter of this year.

     As noted in “Other Recent Developments,” the Company has accrued $3 billion in legal reserves related to the securities litigation.

     As noted in “Other Recent Developments,” on July 29, 2005, the Company’s Board of Directors authorized a common stock repurchase program that allows Time Warner to repurchase, from time to time, up to $5 billion of common stock over a two-year period. Purchases for the stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. Size and timing of these purchases will be based on a number of factors including price and business and market conditions.

     In April 2005, the Company entered into an agreement to jointly acquire substantially all of the assets of Adelphia with Comcast for a combination of cash and stock of TWC Inc. TWC Inc. also has agreed to redeem Comcast’s interests in TWC Inc. and TWE following the Adelphia acquisition. Upon closing, these transactions will impact the Company’s financial condition and liquidity. For additional details, please see “Other Recent Developments.”

     As discussed in more detail below, management believes that Time Warner’s cash provided by operations, cash and equivalents, borrowing capacity under its committed credit facilities and availability under its commercial paper programs are sufficient to fund its capital and liquidity needs for the foreseeable future, including the quarterly dividend payments, the common stock repurchase program, the proposed acquisition of Adelphia, the redemption of Comcast’s interests in TWC Inc. and TWE and payments to be made in resolving pending securities litigation.

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Cash Flows

     Cash and equivalents increased by $1.453 billion and $3.186 billion for the six months ended June 30, 2005 and 2004, respectively. Components of these changes are discussed in more detail in the pages that follow.

Operating Activities

     Sources of cash provided by operations are as follows:

		Six Months Ended
		6/30/05				6/30/04
		(millions)
Operating Income before Depreciation and Amortization		$	2,159			$	5,042
Legal reserves related to securities litigation			3,000				—
Noncash asset impairments			24				10
Net interest payments(a)			(709	)			(805	)
Net income taxes paid(b)			(261	)			(267	)
Adjustments relating to discontinued operations (c)			(11	)			120
Merger and restructuring payments (d)			(79	)			(74	)
Cash paid related to the government investigations			(300	)			—
All other, net, including working capital changes			(360	)			(720	)
Cash provided by operations		$	3,463			$	3,306

     Cash provided by operations increased to $3.463 billion in 2005 compared to $3.306 billion in 2004. The increase in cash provided by operations is related primarily to an increase in Operating Income before Depreciation and Amortization (excluding the legal reserves related to securities litigation, which have not been paid), higher contributions from working capital changes and lower interest payments. These increases were partially offset by cash paid related to the settlement of the SEC investigation in 2005 and a reduction in cash relating to discontinued operations. The changes in components of working capital are subject to wide fluctuations based on the timing of cash transactions related to production schedules, the acquisition of programming, collection of accounts receivable and similar items. The change in working capital between periods primarily reflects higher cash collections on receivables, partially offset by the timing of accounts payable and accrual payments.

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Investing Activities

     Sources of cash provided (used) by investing activities are as follows:

		Six Months Ended
		6/30/05				6/30/04
		(millions)
Investment and acquisitions, net of cash acquired:
Essence		$	(128	)		$	—
Consolidation of AOLA (a)			—				33
Synapse			—				(120	)
All other, principally funding of joint ventures			(130	)			(126	)
Capital expenditures and product development costs			(1,448	)			(1,341	)
Proceeds from the sale of other available-for-sale securities			36				40
Proceeds from the sale of the Company’s remaining interest in Google			940				—
Net proceeds from the sale of WMG (b)			—				2,501
Proceeds from the sale of the WMG Option			138				—
All other investment and asset sale proceeds			230				131
Cash provided (used) by investing activities		$	(362	)		$	1,118

     Cash used by investing activities was $362 million in 2005 compared to cash provided by investing activities of $1.118 billion in 2004. The change in cash provided (used) by investing activities is primarily due to the absence of proceeds from the 2004 sale of WMG and an increase in capital expenditures and product development costs, offset by the proceeds from the sale of the Company’s remaining interest in Google, the proceeds received upon the sale of its WMG option and higher other investment proceeds.

Financing Activities

     Sources of cash used by financing activities are as follows:

		Six Months Ended
		6/30/05				6/30/04
		(millions)
Borrowings		$	1,203			$	1,489
Debt repayments			(3,037	)			(2,865	)
Proceeds from exercise of stock options			158				224
Principal payments on capital leases			(67	)			(102	)
Other financing activities			95				16
Cash used by financing activities		$	(1,648	)		$	(1,238	)

     Cash used by financing activities was $1.648 billion in 2005 compared to $1.238 billion in 2004. The increase in cash used by financing activities was due principally to higher incremental debt repayments in 2005, and lower proceeds from the exercise of stock options, partially offset by lower principal payments on capital leases.

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Free Cash Flow

     Free Cash Flow is cash provided by operations (as defined by U.S. generally accepted accounting principles) plus payments related to securities litigation less cash provided by discontinued operations, capital expenditures and product development costs, principal payments on capital leases, and partnership distributions, if any. Free Cash Flow is considered to be an important indicator of the Company’s liquidity, including its ability to reduce net debt, make strategic investments, pay dividends to common shareholders and repurchase stock. A limitation of this measure, however, is that it does not reflect securities litigation payments, which reduce liquidity. Free Cash Flow should be considered in addition to, and not as a substitute for, the Company’s various cash flow measures (e.g., cash provided by operations) reported in accordance with U.S. generally accepted accounting principles.

     The following table provides a reconciliation from the Company’s cash provided by operations to Free Cash Flow.

		Six Months Ended
		6/30/05				6/30/04
		(millions)
Cash provided by operations		$	3,463			$	3,306
Capital expenditures and product development costs			(1,448	)			(1,341	)
Principal payments on capital leases			(67	)			(102	)
Free Cash Flow including discontinued operations			1,948				1,863
Less: Free Cash Flow from discontinued operations.			11				(120	)
Free Cash Flow		$	1,959			$	1,743

Capital Expenditures and Product Development Costs

     Time Warner’s total capital expenditures and product development costs were $1.448 billion for the six months ended June 30, 2005 compared to $1.341 billion for the six months ended June 30, 2004. Capital expenditures and product development costs principally relate to the Company’s Cable segment, which had capital expenditures of $899 million for the six months ended June 30, 2005 as compared to $718 million for the six months ended June 30, 2004.

     The Cable segment’s capital expenditures comprise the following categories:

		Six Months Ended
		6/30/05				6/30/04
		(millions)
Cable Segment Capital Expenditures
Customer premise equipment		$	431			$	348
Scaleable infrastructure			118				66
Line extensions			130				105
Upgrade/rebuild			69				54
Support capital			151				145
Total capital expenditures		$	899			$	718

     TWC Inc. incurs expenditures associated with the construction and maintenance of its cable systems. Costs associated with the construction of the cable transmission and distribution facilities and new cable service installations are capitalized. TWC Inc. generally capitalizes expenditures for tangible fixed assets having a useful life of greater than one year. Capitalized costs include direct material, direct labor, overhead and, in some cases, interest. Sales and marketing costs, as well as the costs of repairing or maintaining existing fixed assets, are expensed as incurred. Types of capitalized expenditures include: customer premise equipment, scaleable infrastructure, line extensions, plant upgrades and rebuilds and support capital. With respect to customer premise equipment, which includes converters and cable modems, TWC Inc. capitalizes direct installation charges only upon the initial deployment of these assets. All costs incurred in subsequent disconnects and reconnects are expensed as

Risk Factors

     If the events discussed in these risk factors occur, the Company’s business, financial condition, results of operations or cash flows could be materially adversely affected. In such case, the market price of the Company’s common stock could decline.

     The Company’s America Online business continues to face substantial competition in maintaining and growing its subscriber base, in developing compelling products and services, and in increasing revenues from sources other than fees for the AOL service, and if America Online is unable to meet its competitive challenges, the Company’s financial results could be adversely affected. Historically, America Online’s primary product offering has been an online subscription service that includes a component of telephone “dial-up” Internet access. This product, offered under a variety of different terms and price plans, generates the substantial majority of America Online’s revenues. During the last several years, the online services industry has been changing from one in which the only way for a household to access the Internet was through telephone “dial-up” Internet access provided by Internet service providers to one in which households can access the Internet through a variety of connection methods, such as cable modems, DSL or wireless connections offered by a number of different providers, including Internet service providers, cable companies and telephone and other telecommunications companies. As a result, significant price and service competition for Internet access exists. Furthermore, unlike some of its competitors, AOL does not own or control access to the “last mile” of connectivity to the consumer that would enable it to easily offer high-speed access to subscribers. Therefore, in order for America Online to provide high-speed access, it generally must secure access from the providers that control the last mile of infrastructure. In some cases, those companies provide products competitive to AOL. To date, America Online has had limited success in reaching agreements with companies for high-speed access and implementing such agreements, and there can be no assurance that it will be successful in doing so in the future. As a result primarily of these factors, America Online has experienced declines in subscribers throughout 2003, 2004 and to date in 2005, and declines are expected to continue into the foreseeable future. Declines in subscribers have resulted in decreased Subscription revenues and have had an adverse impact on Advertising revenues and profitability.

     Since late 2002, America Online’s strategy has focused on improving and expanding its Internet products and services, including enhancement of or upgrade to the content and features provided through the flagship AOL service, and introducing premium services, as well as reducing costs. In late 2004, America Online reorganized its operating structure and expanded its strategy from attracting and retaining subscribers, especially those who access the Internet via a high-speed connection, to focus also on increasing the value of and maintaining or increasing the size of its U.S. and worldwide audience to the America Online network of sites, content and services. America Online’s strategy continues to include the development and offering of additional products and services to existing subscribers, as well as to Internet users in general. This strategy includes the potentially conflicting goals of maintaining and improving a subscription business while increasing the audience for its Internet properties by making generally available to Internet users without charge much of the content, features and tools that were previously only available to subscribers. The success of America Online’s strategy will depend on a number of

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factors, including competition, the rate of decline in the number of subscribers to the AOL service, the ability to generate more activity on, and to attract more people to, its network of sites, content and services, the growth of the online advertising business, the ability to secure and maintain agreements with third parties for advertising and for distribution of America Online products and services, accurate forecasting of consumer preferences, and the ability to anticipate and keep up with technological developments. If America Online is unsuccessful, Time Warner’s financial condition, results of operations and cash flows could be adversely affected.

     With respect to telephone “dial-up” Internet access, America Online faces significant competition from other Internet service providers, particularly those with low-priced offerings. To meet this competition, America Online plans to continue to provide certain content, features and tools that will only be available to its subscribers. America Online also operates lower-priced Internet services to compete with the low-price ISPs. It is too early to determine whether these services will compete successfully.

     America Online expects to continue to experience declines in the number of subscribers. Each year, a significant portion of AOL members cancel their membership or are terminated by America Online either for non-payment of account charges or violation of one of the terms of service that apply to members (for example, sending spam e-mails or violating community guidelines in chat rooms). In addition, maintaining and growing the subscriber base is difficult because the larger the subscriber base, the greater the number of new subscribers required to offset those subscribers who cancel or are terminated. In 2003 and continuing to the present, America Online did not register new members in numbers sufficient to replace the subscribers who canceled or were terminated. One important reason for the declining number of subscribers has been that registrations have been declining in response to marketing campaigns and various other subscriber acquisition methods; continuing decreases in new registrations could adversely affect the rate of decline in the total number of subscribers. Broadband DSL access providers have recently announced conditional offers that include price reductions that could further adversely affect the rate of decline of America Online subscribers. As part of its strategy announced in late 2004 and in connection with the upcoming official re-launch of the AOL.com Website as a portal, America Online during 2005 has been moving certain proprietary content, features and tools to the Internet, allowing all Internet users, not just members of the AOL service, to access such content, features and tools without charge. This strategy could result in further declines in the number of subscribers and may result in subscribers canceling their subscriptions at a faster rate than in the past. In addition, America Online is seeking to enter into agreements with high-speed access distributors, such as cable companies and telecommunications companies, to bundle the AOL service along with broadband access. It is uncertain whether these agreements will result in America Online attracting or retaining subscribers. Furthermore, even if this strategy is successful in attracting or retaining subscribers, such agreements may be less profitable. America Online continues to develop, test, change, market and implement price plans, service offerings and payment methods to identify effective ways to attract and retain members.

     America Online will need to develop other sources of revenues to offset the lower revenues from service fees resulting from the decline in subscribers and migration of existing subscribers to lower-priced plans. For the foreseeable future, Advertising revenues will be an increasingly important source of revenues for America Online. To date, increases in Advertising revenues have not been high enough to offset the losses in revenues resulting from the decline in subscribers and migration of existing subscribers to lower-priced plans. Advertising revenues have been adversely impacted by the loss in AOL subscribers because subscribers generate more usage than non-subscriber Internet visitors to the America Online network of sites, services and content. America Online’s Advertising revenues have improved in large part due to America Online’s acquisition of Advertising.com, which provides strategic direct-response and brand marketing services to online advertisers, and the paid-search relationship America Online has with Google, including a more recent arrangement with AOL Europe. Increased competition for advertising inventory on third-party Internet sites could adversely impact Advertising.com’s continued growth.

     America Online’s ability to increase Advertising revenues depends in part on its ability to maintain and increase the size and value of its audience using the America Online network of sites, content and services. This audience currently includes AOL members, as well as Internet users accessing America Online’s network of sites,

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content and services from the Internet either in the U.S. or from another country. America Online hopes to increase the size and value of its audience through the upcoming official re-launch of the AOL.com Website as a portal, which is currently scheduled to occur during the third quarter of 2005. Although America Online has had some success in attracting an audience outside of its member base at Internet sites like MapQuest and Moviefone, America Online faces significant competition from third-party Internet sites, such as Yahoo!, in attracting Internet users to its portal. It is unknown whether this strategy of increasing content available on the Web through a portal will be successful in generating increased activity by its audience or in maintaining or increasing its audience size, and thus lead to an increase in Advertising revenues.

     America Online has made progress in developing alternative sources of revenue and reducing costs, and it needs to continue to do so. For example, while AOL Europe’s profitability increased in 2004, the AOL European services are not the leading Internet service providers in France, Germany or the U.K. Competition includes telecommunications companies that may have greater resources and infrastructure. AOL’s continued growth will depend in part on AOL Europe’s increasing its Advertising revenues and profitability over the next year.

     A significant portion of the increase in AOL’s operating income is attributable to decreases in costs. While network service costs were cut substantially in 2004 and to date in 2005, further decreases in 2005 are expected, but in a smaller amount than in 2004. Further decreases in network service costs in 2005 are expected to result primarily from previously negotiated price decreases and from continuing decreases in demand based on the decline in the number of subscribers to the AOL service who access the service via dial-up telephone. AOL expects that reductions in network-related expenses after 2005 will not continue at the same rate as in 2005. America Online is also continuing to explore opportunities for further cost reductions. America Online must continue to identify and implement further cost reductions and develop alternative sources of revenues from advertising, digital services and other sources to continue to generate growth in operating income. Accordingly, America Online’s strategy includes continuing to sell both new and existing premium digital services, such as AOL Call Alert and MusicNet, to subscribers and non-subscribers. Developing and introducing digital services requires America Online to operate outside of its core area of expertise and may subject America Online to new regulatory requirements. America Online has announced the launch of the AOL Internet Phone Service, an enhanced Voice Over Internet Protocol service for new and current AOL subscribers. This new service involves an ongoing commitment of resources, and there can be no assurance that it will be successful. Furthermore, revenues from digital premium services may be adversely affected by a reduction in prices for these services or from incorporating them into the standard AOL service offering rather than offering them separately as premium services, resulting from pressure from competitors who may offer similar services over time at lower prices or at no additional charge as part of their standard offerings. For example, a McAfee Virus Scan Online product, which AOL previously sold separately to subscribers, is now provided to AOL subscribers at no additional charge.

     If the proposed Adelphia acquisition and/or related transactions with Comcast close, TWC Inc. will face certain challenges regarding the integration of the newly acquired systems into its existing managed systems. The successful integration of the acquired systems will depend primarily on TWC Inc.’s ability to manage the combined operations and integrate the acquired systems (including management information, marketing, purchasing, accounting and finance, sales, billing, customer support and product distribution infrastructure, personnel, payroll and benefits, regulatory compliance and technology systems) into its operations. The integration of these systems, including the anticipated upgrade of certain of the Adelphia acquired systems, will require significant capital expenditures and may require TWC Inc. to use financial resources it would otherwise devote to the development of new products and services and the expansion of its existing cable systems. Furthermore, these integration efforts will require substantial attention from TWC Inc.’s management and may impose significant strains on technical resources. If TWC Inc. fails to successfully integrate the acquired systems, it could have a negative impact on the performance of the Company.

     In addition, when appropriate, TWC Inc. intends to selectively pursue strategic acquisitions of additional cable systems as part of its growth strategy. Time Warner cannot predict whether TWC Inc. will be successful in buying additional cable systems. However, if TWC Inc. completes a significant acquisition of additional cable

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systems prior to the integration of the systems proposed to be acquired from Adelphia and Comcast, it could further complicate the integration risks associated with the integration of the systems proposed to be acquired from Adelphia and Comcast. Further, TWC Inc. might not be able to successfully integrate a significant acquisition of additional cable systems. If TWC Inc. fails to integrate successfully systems acquired from Adelphia, Comcast or from others, if TWC Inc. fails to manage its growth or if it encounters unexpected difficulties during expansion, it could have a negative impact on the performance of TWC Inc.’s systems (including the systems to be acquired in the Adelphia and Comcast transactions), as well as on the operations, business or financial results of Time Warner.

     TWC Inc. also faces certain integration challenges in connection with the internal controls and procedures that have been implemented with respect to the systems to be acquired from Adelphia in the proposed transactions. Certain provisions of the Sarbanes-Oxley Act of 2002 require public companies to, among other things, implement and maintain policies and procedures pertaining to the maintenance of records that reflect the company’s transactions and disposition of assets in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles such that, among other things, (1) transactions are accurately and fairly recorded to permit the preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures are made only when properly authorized and (2) unauthorized transactions involving the acquisition, use or disposition of assets that could have a material adverse effect on the company’s financial statements are prevented or detected in a timely manner. Adelphia has stated that it has material weakness in its internal controls and, while Adelphia has agreed to use reasonable efforts to implement effective internal controls prior to the consummation of the proposed transactions, such policies and procedures may not be in place when TWC Inc. acquires such systems in the proposed transactions. If TWC Inc. is required to devote significant time and resources to implementing and ensuring that such controls are in place, it will further complicate the integration of the Adelphia systems with its existing managed systems.

     If the proposed Adelphia acquisition and/or related transactions with Comcast close, TWC Inc. may not realize the anticipated benefits of such transactions. The proposed Adelphia acquisition and related transactions with Comcast will combine cable systems of three companies that have previously operated separately. Time Warner expects that TWC Inc. will realize cost savings and other financial and operating benefits as a result of the proposed transactions. However, Time Warner cannot predict with certainty when these cost savings and benefits will occur or the extent to which they actually will be achieved, if at all. As described above, many systems must be integrated and such integration and the anticipated upgrade of a significant portion of the systems acquired from Adelphia will require substantial attention from TWC Inc.’s management and impose strains on TWC Inc.’s technical resources. If the proposed transactions close, the diversion of management attention, the strains on technical resources and the difficulties associated with integrating the acquired systems and TWC Inc.’s existing cable systems could have a material adverse effect on Time Warner’s consolidated operating results and on the value of Time Warner’s common stock.

     The Company’s Cable segment has begun providing voice services over its cable systems and faces risks inherent to entering into a new line of business, from competition and from regulatory actions or requirements. TWC Inc.’s Digital Phone service was launched in all of its operating divisions at December 31, 2004. Coordinating the continued roll-out of a product with which it has only limited operating experience may present significant challenges. First, although TWC Inc. has launched Digital Phone service in all its divisions, it remains a relatively new technology. Furthermore, the Digital Phone service depends on interconnection and related services provided by certain third parties. TWC Inc. may encounter unforeseen difficulties as it introduces the product in new operating areas or increases the scale of its offering in areas in which it has launched. Second, TWC Inc. may face heightened customer expectations and regulatory requirements related to the reliability of voice services as compared with video and high-speed data services. TWC Inc. will need to undertake significant training of customer service representatives and technicians. If the service is not sufficiently reliable or TWC Inc. otherwise fails to meet customer expectations or regulatory requirements, the Digital Phone business could be impacted adversely. Third, the competitive landscape for voice services is expected to be intense, with TWC Inc. facing competition from other providers of VoIP services, as well as incumbent local telephone companies, cellular telephone service providers

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and others, including established long distance companies. The incumbent local telephone companies have substantial capital and other resources, as well as longstanding customer relationships. Some of these companies have entered into co-marketing arrangements with direct-to-home satellite service providers to offer video services, and some have begun fiber upgrades to their networks to enable the direct delivery of video services, together with their telephone and DSL offerings. Such bundled offerings by telephone companies may compete with TWC Inc.’s offerings and could adversely impact TWC Inc. Finally, the Company expects advances in communications technology, as well as changes in the marketplace and the regulatory and legislative environment. Consequently, the Company is unable to predict the effect that ongoing or future developments in these areas might have on the Cable segment’s voice business and operations. MCI, one of TWC Inc.’s two interconnect and provisioning partners in the Digital Phone business, has announced that it has agreed to be acquired by Verizon, a regional phone company that competes with TWC Inc. in some areas. It is currently not known whether, or to what extent, the proposed acquisition will have any negative impact on the Digital Phone business.

     In addition, there are risks associated with TWC Inc.’s launch of voice services in the cable systems acquired in the proposed Adelphia and Comcast transactions. Some of the acquired systems may not currently have cable facilities with sufficient capacity to provide voice services using VoIP technology. In such case, TWC Inc. will be required to upgrade the facilities prior to launching any Digital Phone services. Additionally, the Digital Phone service depends upon interconnection and related services that can only be obtained by third parties, and TWC Inc. will be required to secure such services for the areas covered by the acquired systems before deploying Digital Phone service in those areas.

     The voice services business may also present additional regulatory risks. It is unclear whether and to what extent traditional state and federal telephone regulations will apply to telephony services provided using VoIP technology. In addition, regulators could allow utility pole owners to charge cable operators offering voice services higher rates for pole rental than is allowed for cable and high-speed services. The FCC recently initiated a rulemaking proceeding on the regulatory approach to voice services utilizing VoIP technology, and Congress is considering enacting new laws to govern it. The FCC held in November 2004 that one particular VoIP service is not subject to traditional state public utility regulation and indicated that other providers offering similar VoIP services would not be subject to state public utility regulation if they met certain criteria. This decision has been appealed in federal court. In May 2005, the FCC adopted rules requiring VoIP providers that connect to the public switched telephone network to supply enhanced “911” (E911) capabilities as a standard feature to their subscribers. There are also court cases addressing the proper regulatory treatment for the service and rulemakings and various other proceedings underway at the state level. Therefore, the Company cannot be certain what impact regulation will have on the Digital Phone business.

     Pending securities litigation or failure to fulfill the obligations under the deferred prosecution agreement with the U.S. Department of Justice or the Consent Order with the Securities and Exchange Commission could adversely affect Time Warner’s operations. In connection with the resolution of the investigation by the DOJ of the Company, America Online entered into a deferred prosecution agreement with the DOJ. In accordance with the agreement, the DOJ filed a criminal complaint against America Online in December 2004 for the conduct of certain employees in connection with securities fraud by PurchasePro.com, but the DOJ will defer prosecution of AOL and will dismiss the complaint in December 2006 provided the Company fulfills its obligations under the deferred prosecution agreement, as described in the 2004 Form 10-K. If the Company does not satisfy its obligations, the DOJ can proceed with the prosecution of America Online for actions in connection with PurchasePro.com, as set forth in the complaint, and may consider additional actions against the Company, which could have significant adverse effects on its operations and financial result. The Company intends to satisfy its obligations under the deferred prosecution agreement. In addition, in connection with the settlement with the SEC, the Company consented to entry of a Consent Order requiring it to comply with federal securities laws and regulations and the terms of an earlier order. If the Company is found to be in violation of the Consent Order, it may be subject to increased penalties and consequences as a result of the prior actions. As of August 1, 2005, 42 putative class action and shareholder derivative lawsuits alleging violations of federal and state securities laws as well as purported breaches of fiduciary duties had been filed against Time Warner, certain of its current and former executives, past

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and present members of its Board of Directors and, in certain instances, America Online. There is also a consolidated action making allegations of ERISA violations. The complaints purport to be made on behalf of certain of the Company’s shareholders and allege, among other things, that Time Warner violated various provisions of the securities laws. There are also actions filed by individual shareholders pending in federal and state courts. Although the Company has reached an agreement in principle to settle the primary consolidated securities class action lawsuits, the settlement is subject to certain conditions and some members of the class may elect to “opt out” of the settlement to pursue their claims separately. In addition, the shareholder derivative, ERISA and individual securities actions remain pending and the Company is unable to predict the outcome of these remaining securities matters. The Company has established a reserve of $3 billion, with $2.4 billion related to the proposed settlement of the primary consolidated securities class actions and $600 million in connection with the remaining shareholder derivative, ERISA and securities matters. The Company is incurring expenses as a result of the pending litigation, and costs associated with judgments in or additional settlements of these matters could adversely affect its financial condition and results of operations. See Note 10, “Commitments and Contingencies–Securities Matters.”

     Technological developments may adversely affect the Company’s competitive position and limit its ability to protect its valuable intellectual property rights. Time Warner’s businesses operate in the highly competitive, consumer-driven and rapidly changing media and entertainment industries. These businesses, as well as the industries generally, are to a large extent dependent on the ability to acquire, develop, adopt, and exploit new technologies to distinguish their products and services from those of their competitors. In addition, the Company may face legal and practical limitations on its ability to enforce the Company’s intellectual property rights as a result of technological developments that facilitate the theft and unlawful distribution of the Company’s copyrighted works in digital form, including via the Internet. For example:

	•		The Company’s cable business may be adversely affected by more aggressive than expected competition from alternate technologies, such as satellite, DSL, traditional phone, and wireless and power-line services; by the failure to choose technologies appropriately; by the failure of new equipment, such as digital set-top boxes or digital video recorders; or by the failure of new services, such as digital cable, high-speed data services, Digital Phone and Video-On-Demand, to appeal to enough consumers, or to be available at prices consumers are willing to pay, to function as expected or to be delivered in a timely fashion;
	•		The Company’s America Online business may be adversely affected by competitors’ abilities to develop new technologies more quickly, including more compelling features/functions and premium digital services for Internet users, and by the uncertainty of the costs for obtaining rights from third parties, including appropriate patent licenses for technologies and methods used to deliver new services; and
	•		The Company’s filmed entertainment and television network businesses may be adversely affected by the impact of digital video recorders or other technologies that change the nature of television advertising or by the fragmentation of consumer leisure and entertainment time caused by a greater number of choices resulting from technological developments.

Caution Regarding Forward-Looking Statements

     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 “forward-looking 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 forward-looking statements. These forward-looking statements are based on management’s present expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the Company is under no obligation to, and expressly disclaims any obligation to,

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update or alter its forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise.

     Additionally, Time Warner operates in highly competitive, consumer and technology-driven and rapidly changing media, entertainment and Internet businesses. These businesses are affected by government regulation, economic, strategic, political and social conditions, consumer response to new and existing products and services, technological developments and, particularly in view of new technologies, the continued ability to protect intellectual property rights. Time Warner’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 Time Warner or its business segments in the future and could also cause actual results to differ materially from those contained in the forward-looking statements, including those identified in Time Warner’s other filings with the SEC, and the following factors and risks:

     For Time Warner’s AOL business:

	•		the ability to successfully implement its business strategy;
	•		the ability to develop and introduce new products and services to remain competitive;
	•		the ability to differentiate its products and services from its competitors;
	•		the ability to develop, adopt or have access to new technologies;
	•		the ability to have access to distribution channels controlled by third parties;
	•		the ability to manage its subscriber base profitably;
	•		risks related to a non-compliance with the Deferred Prosecution Agreement and applicable FTC Consent Decrees and Assurances of Voluntary Compliance;
	•		the ability to provide adequate server, network and system capacity;
	•		the risk of business interruption caused by computer viruses, worms or other malicious activity, weather events, natural disasters, terrorist attacks, third-party supplier failures, or unforeseen events;
	•		the risk of unanticipated increased costs for network services;
	•		the ability to maintain, and the cost of maintaining, the privacy and security of company and customer information;
	•		increased competition from providers of Internet services, including providers of broadband access;
	•		the ability to generate increased usage of sites and services that are part of the America Online network, and the ability to maintain or expand the audience for its sites, content and services;
	•		the ability to attract additional traditional advertisers to the online advertising medium;
	•		the ability to maintain, expand or renew existing advertising or marketing commitments;
	•		the risk that the online advertising industry will not continue to grow, and that even if the industry continues to grow, the risk that America Online will not successfully compete in securing advertising relationships;

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	•		the ability to maintain or enter into new content, electronic commerce or marketing arrangements and the risk that the cost of such arrangements may increase;
	•		risks associated with state, local or federal taxation of online services and Internet access providers;
	•		risks associated with foreign currency exchange rates; and
	•		the risks from changes in U.S. and international regulatory environments affecting interactive services.

     For Time Warner’s cable business:

	•		more aggressive than expected competition, including price competition, from other distributors of video programming, including direct to home satellite distributors, regional incumbent telephone companies and from competitors using new technologies;
	•		more aggressive than expected competition, including price competition, from other distributors of high-speed data services, including DSL, satellite and terrestrial wireless distributors, power companies and from competitors using new technologies;
	•		more aggressive than expected competition, including price competition, from other distributors of voice services, including regional telephone companies, long distance providers, national VoIP providers, wireless distributors and from competitors using new technologies;
	•		additional competition fostered by the grant of additional cable franchises by governmental authorities that enable competing operators to build cable systems in areas in which TWC Inc. holds franchises;
	•		greater than expected increases in programming or other costs, including costs of new products and services, or difficulty in passing such costs to subscribers;
	•		increases in government regulation of video services, including regulation that limits cable operators’ ability to raise rates, that requires that particular programming be carried or offered in a particular manner (for instance, “a la carte”), or that dictates set-top box or other equipment features, functionalities or specifications;
	•		government regulation of other services, such as high-speed data and voice services, including regulation that results in the imposition of pole fees for such services that are higher than those permissible for video services;
	•		government regulation that dictates the manner in which it operates its cable systems or determines what to offer, such as the imposition of “forced access” rules or common carrier type requirements;
	•		increased difficulty in obtaining franchise renewals;
	•		the failure of new equipment, such as digital set-top boxes or digital video recorders, or by the failure of new services, such as digital cable service, high-speed data services, voice service or video-on-demand, to appeal to enough consumers or to be available at prices consumers are willing to pay, to function as expected or to be delivered in a timely fashion;
	•		fluctuations in spending levels by advertisers and consumers;
	•		changes in technology and failure to anticipate technological developments or to choose and implement technologies appropriately;

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	•		unanticipated funding obligations relating to its cable joint ventures;
	•		a future decision by the FCC or Congress to require cable operators to contribute to the federal “Universal Service Fund” based on the provision of cable modem service, which could raise the price of cable modem service and impair TWC Inc.’s competitive position;
	•		the award of franchises or similar grants of rights to competitors of cable providers on terms substantially more favorable than those afforded existing cable operators;
	•		the risk of business interruption caused by computer viruses, worms or other malicious activity, weather events, natural disasters, terrorist attacks, third-party supplier failures, or unforeseen events, as well as the cost of repairing damage caused by such events; and
	•		the ability to maintain, and the cost of maintaining, the privacy and security of company and customer information.

     For Time Warner’s filmed entertainment businesses:

	•		the ability to continue to attract and select desirable talent and scripts at manageable costs;
	•		general increases in production costs;
	•		fragmentation of consumer leisure and entertainment time and its possible negative effects on the broadcast and cable networks, which are significant customers of the filmed entertainment businesses;
	•		continued popularity of merchandising;
	•		the uncertain impact of technological developments that facilitate theft and unlawful distribution of the Company’s copyrighted works and by legal and practical limitations on the ability to enforce the Company’s intellectual property rights;
	•		the ability to develop and apply adequate protections for filmed entertainment content in a digital delivery environment;
	•		the ability to develop successful business models for the secure delivery of filmed entertainment products in a digital environment;
	•		risks associated with foreign currency exchange rates;
	•		with respect to feature films, the risk that marketing costs associated with theatrical film releases in a highly competitive marketplace will increase;
	•		with respect to television programming, increased competition in viewership for broadcast programming due to the increasing number of cable and pay television services;
	•		with respect to home video, the threat that an impending format war over the next generation of high definition DVD product might prevent a smooth transition from the current DVD product to the next generation, thereby fragmenting and diminishing the potential market while harming current DVD sales as the industry and consumers wait to see which format or formats will prevail;

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	•		the risk that domestic DVD sales growth will slow resulting from a reduced expansion in the number of new DVD households, as DVD player penetration approaches maturation; and
	•		the ability to maintain an ad supported commercial television model in the face of challenges posed by increased consumer usage of digital video recorders or other technologies that change the nature of the advertising and other markets for television products.

     For Time Warner’s network businesses:

	•		increased competition from large media companies whose increasing scale could result in competitive advantages, including in advertising sales, promotions, programming and other areas;
	•		greater than expected newsgathering, programming or production costs;
	•		increased resistance by cable and satellite distributors to wholesale price increases;
	•		the negative impact on premium programmers of greater than anticipated basic cable rate increases to consumers;
	•		increased regulation of distribution agreements;
	•		the sensitivity of network advertising to economic cycles and to new media technologies;
	•		the negative impact of further consolidation of multiple-system cable operators;
	•		theft and unlawful distribution of content by means of interception of cable and satellite transmissions or Internet peer-to-peer file sharing;
	•		the impact of digital video recorders or other technologies that change the nature of television advertising;
	•		the development of new technologies that alter the role of programming networks and services; and
	•		greater than expected fragmentation of consumer viewership, as well as the possible loss of viewers, as a result of the increased number of programming services and the increased popularity of alternatives to television.

     For Time Warner’s publishing businesses:

	•		declines in spending levels by advertisers and consumers;
	•		the ability in a challenging environment to continue to develop new profitable sources of circulation;
	•		substantial postal rate increases expected during the first half of 2006;
	•		further increases in paper prices;
	•		increased costs and business disruption resulting from instability in the newsstand distribution channel;
	•		increased competition from new magazine entrants may have an impact on its most profitable magazines, including People;
	•		risks associated with changes in foreign currency exchange rates;

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	•		changes in government regulation of direct marketing;
	•		receipt of information identifying debit card purchasers which may require changes in payment acceptance procedures for such purchasers, which could decrease subscription renewals; and
	•		the introduction and increased popularity over the long term of alternative technologies for the distribution of news and information.

     For Time Warner generally, achieving the Company’s financial objectives, including growth in operations, maintaining financial ratios and a strong balance sheet, could be adversely affected by decreased liquidity in the capital markets, including any reduction in the ability to access either the capital markets for debt securities or bank financings, failure to meet earnings expectations, significant acquisitions such as the pending Adelphia acquisition or other transactions such as the proposed redemption of Comcast’s interests in TWC Inc. and TWE, economic slowdowns, the impact of terrorist acts and hostilities in Iraq and elsewhere in the world, increased expenses as a result of the securities litigation pending against Time Warner, as well as the risk of costs associated with judgments in or additional settlements of such matters, and changes in the Company’s plans, strategies and intentions. In addition, lower than expected valuations associated with the cash flows and revenues at its segments may result in its inability to realize the value of recorded intangibles and goodwill at those segments.

Evaluation of Disclosure Controls and Procedures

     The Company, 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 the Company’s “disclosure controls and procedures” (as such term is 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 the Company’s disclosure controls and procedures are effective in timely making known to them material information relating to the Company and the Company’s consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted under the Exchange Act. The Company has investments in certain unconsolidated entities. As the Company 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. The Company began consolidating the financial results of AOLA, effective March 31, 2004 pursuant to the requirements of FASB Interpretation No. 46 (Revised), “Consolidation of Variable Interest Entities.” Because the Company does not control AOLA, the Company’s disclosure controls and procedures with respect to information regarding AOLA also are more limited than those for consolidated subsidiaries the Company controls.

Changes in Internal Control Over Financial Reporting

     There have not been any changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

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		June 30,				December 31,
		2005				2004
		(millions, except
		per share amounts)
ASSETS
Current assets
Cash and equivalents		$	7,592			$	6,139
Restricted cash			150				150
Receivables, less allowances of $1.966 and $2.109 billion			5,001				5,512
Inventories			1,638				1,737
Prepaid expenses and other current assets			1,006				920
Total current assets			15,387				14,458
Noncurrent inventories and film costs			4,454				4,415
Investments, including available-for-sale securities			3,438				4,703
Property, plant and equipment, net			13,200				13,094
Intangible assets subject to amortization, net			3,689				3,892
Intangible assets not subject to amortization			39,698				39,656
Goodwill			39,745				39,667
Other assets			2,976				3,273
Total assets		$	122,587			$	123,158
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	1,030			$	1,339
Participations payable			2,284				2,580
Royalties and programming costs payable			1,168				1,018
Deferred revenue			1,599				1,653
Debt due within one year			1,188				1,672
Other current liabilities			7,673				6,468
Current liabilities of discontinued operations			40				50
Total current liabilities			14,982				14,780
Long-term debt			19,361				20,703
Deferred income taxes			14,339				14,943
Deferred revenue			730				749
Mandatorily convertible preferred stock			—				1,500
Other liabilities			4,898				4,160
Noncurrent liabilities of discontinued operations			7				38
Minority interests			5,650				5,514
Commitments and contingencies (Note 10)
Shareholders’ equity
Series LMCN-V common stock, $0.01 par value, 87.2 and 105.7 million shares outstanding			1				1
Time Warner common stock, $0.01 par value, 4.604 and 4.483 billion shares outstanding			46				45
Paid-in-capital			157,934				156,252
Accumulated other comprehensive income (loss), net			(370	)			106
Accumulated deficit			(94,991	)			(95,633	)
Total shareholders’ equity			62,620				60,771
Total liabilities and shareholders’ equity		$	122,587			$	123,158