TIME WARNER INC.
Table of Contents

 
 
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 September 30, 2007 or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    for the transition period from                      to                     
Commission file number 001-15062
 
TIME WARNER INC.
(Exact name of Registrant as specified in its charter)
     
Delaware   13-4099534
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
One Time Warner Center
New York, NY 10019-8016

(Address of Principal Executive Offices) (Zip Code)
(212) 484-8000
(Registrant’s Telephone Number, Including Area Code)
 
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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Act). Yes o       No þ
       
Description of Class
  Shares Outstanding   
as of November 2, 2007
Common Stock – $.01 par value   3,614,595,917
 
 

 


 

TIME WARNER INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION
     
     Page 
PART I. FINANCIAL INFORMATION
   
    1
  36
  37
  38
  39
  40
  41
  70
 
   
PART II. OTHER INFORMATION
   
  79
  81
  82
  82
 EX-10.1 TIME WARNER INC. 2006 STOCK INCENTIVE PLAN
 EX-10.2 TIME WARNER INC. 2003 STOCK INCENTIVE PLAN
 EX-10.3 TIME WARNER INC. 1999 STOCK PLAN
 EX-10.4 AOL TIME WARNER INC. 1994 STOCK OPTION PLAN
 EX-10.5 TIME WARNER INC. 1988 RESTRICTED STOCK AND RESTRICTED STOCK UNIT PLAN FOR NON-EMPLOYEE DIRECTORS
 EX-10.6 FORM OF RESTRICTED STOCK UNITS AGREEMENT
 EX-10.7 TIME WARNER INC. DEFERRED COMPENSATION PLAN
 EX-10.8 TIME WARNER INC. NON-EMPLOYEE DIRECTORS' DEFERRED COMPENSATION PLAN
 EX-10.9 AMENDED AND RESTATED TIME WARNER INC. ANNUAL BONUS PLAN FOR EXECUTIVE OFFICERS
 EX-31.1 SECTION 302 CERTIFICATION OF PEO
 EX-31.2 SECTION 302 CERTIFICATION OF PFO
 EX-32 SECTION 906 CERTIFICATION OF PEO & PFO

 


Table of Contents

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
     Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of Time Warner Inc.’s (“Time Warner” or the “Company”) financial condition, cash flows 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 nine months ended September 30, 2007. 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 September 30, 2007 and cash flows for the nine months ended September 30, 2007.
 
   
Caution concerning forward-looking statements. This section provides a description of 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. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “2006 Form 10-K”) for a discussion of the risk factors applicable to the Company.
     As discussed more fully in Note 1 to the accompanying consolidated financial statements, the 2006 financial information has been recast so that the basis of presentation is consistent with that of the 2007 financial information. Specifically, amounts were recast to reflect the retrospective presentation of certain businesses that were sold as discontinued operations.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
OVERVIEW
     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 produces and distributes films through Warner Bros. and New Line Cinema, including Harry Potter and the Order of the Phoenix, 300, Ocean’s 13, Rush Hour 3 and Hairspray, as well as television programs, including ER, Two and a Half Men, Cold Case, Without a Trace and The Closer. During the nine months ended September 30, 2007, the Company generated revenues of $33.840 billion (up 8% from $31.349 billion in 2006), Operating Income of $6.606 billion (up 27% from $5.218 billion in 2006), Net Income of $3.356 billion (down 30% from $4.799 billion in 2006) and Cash Provided by Operations of $6.156 billion (down 6% from $6.570 billion in 2006).
Time Warner Businesses
     Time Warner classifies its operations into five reportable segments: AOL, Cable, Filmed Entertainment, Networks and Publishing.
     Time Warner evaluates the performance and operational strength of its business segments based on several factors, of which the primary financial measure is operating income before depreciation of tangible assets and amortization of intangible assets (“Operating Income before Depreciation and Amortization”). Operating Income before Depreciation and Amortization eliminates the uneven effects across all business segments of considerable amounts of noncash depreciation of tangible assets and amortization of certain intangible assets, primarily recognized in business combinations. Operating Income before Depreciation and Amortization should be considered in addition to Operating Income, as well as other measures of financial performance. Accordingly, the discussion of the results of operations for each of Time Warner’s business segments includes both Operating Income before Depreciation and Amortization and Operating Income. For additional information regarding Time Warner’s business segments, refer to Note 10, “Segment Information.”
     AOL. AOL LLC (together with its subsidiaries, “AOL”) is a leader in interactive services. In the U.S. and internationally, AOL operates a leading network of web brands, offers free client software and services to users who have their own Internet connection and provides services to advertisers on the Internet. In addition, AOL operates one of the largest Internet access subscription services in the United States. At September 30, 2007, AOL had 10.1 million AOL brand subscribers in the U.S., which does not include registrations for the free AOL service. For the nine months ended September 30, 2007, AOL reported total revenues of $3.930 billion (12% of the Company’s overall revenues) and had $2.120 billion in Operating Income before Depreciation and Amortization and $1.739 billion in Operating Income, both of which included a net pretax gain of approximately $668 million related to the sale of AOL’s German access business.
     Historically, AOL’s primary product offering has been an online subscription service that includes dial-up Internet access, and this product currently generates the majority of AOL’s revenues. AOL continued to experience significant declines in the first nine months of 2007 in the number of its U.S. subscribers and related revenues, due primarily to AOL’s decisions to focus on its advertising business and offer most of its services (other than Internet access) for free, AOL’s significant reduction of subscriber acquisition and retention efforts, and the industry-wide decline of the premium dial-up ISP business and growth in the broadband Internet access business. The decline in subscribers has had an adverse impact on AOL’s Subscription revenues. However, dial-up network costs have also decreased and are anticipated to continue to decrease as subscribers decline. AOL’s Advertising revenues, in large part, are generated from the traffic to and usage of the AOL service by AOL’s subscribers. Therefore, the decline in subscribers also could have an adverse impact on AOL’s Advertising revenues generated on the AOL Network (as defined below) to the extent that subscribers canceling their subscriptions do not maintain their relationship with and usage of the AOL Network.
     AOL’s strategy is to transition from a business that has relied heavily on Subscription revenues from dial-up subscribers to one that attracts and engages more Internet users and takes advantage of the growth in online advertising by providing advertising services on both the AOL Network and on Internet sites of third-party entities (referred to as “Partner Sites”). AOL’s focus is on growing its global web services business, while managing costs in this business as well as in its access services business.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
     A part of AOL’s strategy is to maintain and expand relationships with current and former AOL subscribers, whether or not they continue to purchase the dial-up Internet access subscription service. Another component of the strategy is to permit access to most of the AOL services, including use of the AOL client software and AOL e-mail accounts, without charge. Therefore, as long as an individual has a means to connect to the Internet, that person can access and use most of the AOL services for free.
     The AOL Network consists of a variety of websites, related applications and services, and the AOL and low-cost ISP services. Specifically, the AOL Network includes AOL.com, international versions of the AOL portal, AIM, MapQuest, Moviefone, ICQ and Netscape, as well as other co-branded websites owned by third-parties for which certain criteria have been met, including that the Internet traffic has been assigned to AOL. Paid-search advertising activities on the AOL Network are conducted primarily through AOL’s strategic relationship with Google Inc. (“Google”). Following the expansion of this strategic relationship in April 2006, 95% of the equity interests in AOL are indirectly held by the Company and 5% are indirectly held by Google.
     During 2007, AOL’s advertising business has been adversely impacted by certain trends, including accelerated fragmentation of online audiences away from the top portals, downward pricing pressures on AOL Network advertising inventory, and the increasing usage by online advertisers of third-party advertising networks. Consistent with these trends and AOL’s strategy, and to supplement AOL’s online advertising businesses that provide advertising and related services on Partner Sites, in the second quarter of 2007, AOL acquired Third Screen Media, Inc. (“TSM”), a mobile advertising network and mobile ad-serving management platform provider, and a controlling interest in ADTECH AG (“ADTECH”), an international online ad-serving company. In addition, as noted under “Recent Developments,” in the third quarter of 2007, the Company purchased TACODA, Inc. (“TACODA”), an online behavioral targeting advertising network. In addition, AOL has announced the formation of a business group within AOL called Platform-A, which will offer advertisers access to sophisticated targeting and measurement tools enabling AOL to optimize advertising inventory across Platform-A’s network of Partner Sites, as well as the AOL Network.
     In February 2006, Advertising.com, a wholly owned subsidiary of AOL that provides advertising services on Partner Sites, entered into a two-year agreement with a major customer whereby Advertising.com became the exclusive provider of online marketing services for this customer. Advertising.com also agreed not to provide similar services to the customer’s competitors during the term of the agreement. Under this agreement, Advertising.com has provided a variety of online marketing services to the customer, including the management of relationships with third-party affiliate Internet publishers, search engine marketing services, and performance and brand advertising in the Advertising.com third-party network. The original term of the agreement was for two years and could be terminated by either party upon ninety days’ written notice. Advertising.com earned gross Advertising revenues from this relationship of $58 million and $162 million for the three and nine months ended September 30, 2007, respectively, and $56 million and $102 million for the three and nine months ended September 30, 2006, respectively.
     In October 2007, Advertising.com and the customer entered into an amendment to the agreement under which the exclusivity provisions of the original agreement, as they apply to both parties, will terminate effective January 1, 2008. In addition, certain provisions in the contract that provide for a minimum management fee to be paid to Advertising.com in the event the customer’s monthly advertising expenditures drop below certain thresholds will terminate effective January 1, 2008. The amendment was entered into following receipt of a notice from the customer in August 2007 stating that the customer wanted to amend the agreement and, if the customer and Advertising.com were not able to negotiate and enter into an acceptable amendment, the notice would serve as the customer’s notice of termination of the agreement, to be effective ninety days later. In August 2007, the customer had announced its entry into an agreement to acquire a business believed to perform online advertising services that are similar to those provided by Advertising.com. The Company does not expect a significant decline in AOL’s Advertising revenues from this relationship in the fourth quarter of 2007 as a result of the amendment. However, as described above, beginning January 1, 2008, the customer is under no obligation to continue to do business with Advertising.com. Accordingly, while the Company is unable to estimate the overall impact of the amendment after January 1, 2008, it anticipates a significant decline in Advertising revenues from this customer.
     In connection with its strategy, AOL undertook certain restructuring and related activities in 2006 and the first nine months of 2007, including involuntary employee terminations, contract terminations, facility closures and asset write-offs. As AOL continues to transition to a global web services business, in the fourth quarter of 2007, AOL has taken and will

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
take further restructuring actions of this nature, which will result in additional restructuring charges during the fourth quarter of 2007 and in the first quarter of 2008.
     Cable. Time Warner’s cable business, Time Warner Cable Inc. and its subsidiaries (“TWC”), is the second-largest cable operator in the U.S. and is an industry leader in developing and launching innovative video, data and voice services. As of September 30, 2007, TWC had approximately 13.3 million basic video subscribers in technologically advanced, well-clustered systems located mainly in five geographic areas — New York state, the Carolinas, Ohio, southern California and Texas. As of September 30, 2007, TWC was the largest cable operator in a number of large cities, including New York City and Los Angeles. For the nine months ended September 30, 2007, TWC delivered revenues of $11.866 billion (35% of the Company’s overall revenues), $4.179 billion in Operating Income before Depreciation and Amortization and $1.971 billion in Operating Income.
     On July 31, 2006, a subsidiary of TWC, Time Warner NY Cable LLC (“TW NY”), and Comcast Corporation (together with its subsidiaries, “Comcast”) completed the acquisition of substantially all of the cable assets of Adelphia Communications Corporation (“Adelphia”) and related transactions. In addition, effective January 1, 2007, TWC began consolidating the results of certain cable systems located in Kansas City, south and west Texas and New Mexico (the “Kansas City Pool”) upon the distribution of the assets of Texas and Kansas City Cable Partners, L.P. (“TKCCP”) to TWC and Comcast. Prior to January 1, 2007, TWC’s interest in TKCCP was reported as an equity method investment. Refer to “Recent Developments” for further details.
     TWC principally offers three services — video, high-speed data and voice, which have been primarily targeted to residential customers. Video is TWC’s largest service in terms of revenues generated and providing video services is a competitive and highly penetrated business. TWC expects to continue to increase video revenues through the offering of advanced digital video services, as well as through price increases and digital video subscriber growth. TWC’s digital video subscribers provide a broad base of potential customers for additional advanced services. Video programming costs represent a major component of TWC’s expenses and are expected to continue to increase, reflecting contractual rate increases, subscriber growth and the expansion of service offerings. TWC expects that its video service margins will decline over the next few years as increases in programming costs outpace growth in video revenues.
     High-speed data has been one of TWC’s fastest-growing services over the past several years and is a key driver of its results. As of September 30, 2007, TWC had approximately 7.4 million residential high-speed data subscribers. TWC 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 revenues is expected to continue to slow over time as high-speed data services become increasingly well-penetrated. TWC also offers commercial high-speed data services and had approximately 272,000 commercial high-speed data subscribers as of September 30, 2007.
     Approximately 2.6 million subscribers received Digital Phone service, TWC’s voice service, as of September 30, 2007. Under TWC’s primary calling plan, for a monthly fixed fee, Digital Phone customers typically receive the following services: an unlimited local, in-state and U.S., Canada and Puerto Rico calling plan, as well as call waiting, caller ID and E911 services. TWC also offers additional calling plans with a variety of calling options that are designed to meet customers’ particular usage patterns. TWC is currently introducing an international calling plan and it intends to offer additional plans in the future. Digital Phone enables TWC to offer its customers a convenient package, or “bundle,” of video, high-speed data and voice services, and to compete effectively against bundled services available from its competitors. TWC expects strong increases in Digital Phone subscribers and revenues for the foreseeable future. TWC has begun to introduce Business Class Phone, a commercial Digital Phone service, to small- and medium-sized businesses and will continue to roll-out this service during the fourth quarter of 2007 in most of the systems TWC owned before and retained after the transactions with Adelphia and Comcast (the “Legacy Systems”). TWC has also been introducing this service in the systems acquired in and retained after the transactions with Adelphia and Comcast (the “Acquired Systems”) during 2007 and will continue the roll-out in the Acquired Systems during 2008.
     Some of TWC’s principal competitors, direct broadcast satellite operators and incumbent local telephone companies in particular, either offer or are making significant capital investments that will allow them to offer services that provide features and functions comparable to the video, data and/or voice services that TWC offers, and they also offer them in bundles similar to TWC’s. The availability of these bundled service offerings has intensified competition and TWC expects that competition will continue to intensify in the future as these offerings become more prevalent.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
     In addition to the subscription services described above, TWC also earns revenues by selling advertising time to national, regional and local businesses.
     As of July 31, 2006, the date the transactions with Adelphia and Comcast closed, the penetration rates for basic video, digital video and high-speed data services were generally lower in the Acquired Systems than in the Legacy Systems. Furthermore, certain advanced services were not available in some of the Acquired Systems, and an IP-based telephony service was not available in any of the Acquired Systems. To increase the penetration of these services in the Acquired Systems, TWC has undertaken a significant integration effort that includes upgrading the capacity and technical performance of these systems to levels that will allow the delivery of these advanced services and features. Such integration-related efforts are expected to be substantially complete by the end of 2007. As of September 30, 2007, Digital Phone was available to nearly 80% of the homes passed in the Acquired Systems. TWC expects the roll-out of Digital Phone service across the remainder of the Acquired Systems to be substantially complete by the end of 2007.
     Improvement in the financial and operating performance of the Acquired Systems depends in part on the completion of these initiatives and the subsequent availability of TWC’s bundled advanced services in the Acquired Systems. In addition, due to both historical and current operational and competitive challenges, TWC expects that the acquired systems located in Los Angeles, CA and Dallas, TX will continue to require more time and resources than the other acquired systems to stabilize and then meaningfully improve their financial and operating performance. As of September 30, 2007, the Los Angeles and Dallas acquired systems together served approximately 1.9 million basic video subscribers (about 50% of the basic video subscribers served by the Acquired Systems). TWC believes that by upgrading the plant and integrating the Acquired Systems into its operations, there is a significant opportunity over time to increase service penetration rates, and improve Subscription revenues and Operating Income before Depreciation and Amortization in the Acquired Systems.
     Filmed Entertainment. Time Warner’s Filmed Entertainment businesses, Warner Bros. Entertainment Group (“Warner Bros.”) and New Line Cinema Corporation (“New Line”), generated revenues of $8.174 billion (23% of the Company’s overall revenues), $865 million in Operating Income before Depreciation and Amortization and $592 million in Operating Income for the nine months ended September 30, 2007.
     One of the world’s leading studios, Warner Bros. has diversified sources of revenues with its film and television businesses, including an extensive film library and global distribution infrastructure. This diversification has helped Warner Bros. deliver consistent long-term performance. New Line is the world’s oldest independent film company. Its primary source of revenues is the creation and distribution of theatrical motion pictures.
     Warner Bros. continues to be an industry-leader in the television business. For the 2007-2008 television season, Warner Bros. expects to produce approximately 24 prime-time series across the five broadcast networks (including Without a Trace, Two and a Half Men, ER, Cold Case, Smallville and Men In Trees), as well as original series for cable networks (including The Closer and Nip/Tuck).
     The sale of DVDs has been one of the largest drivers of the segment’s profit over the last several years, and Warner Bros.’ extensive library of theatrical and television titles positions it to continue to benefit from sales of home video product to consumers. However, the industry and the Company have experienced a leveling of DVD sales due to several factors, including increasing competition for consumer discretionary spending, piracy, the maturation of the standard definition DVD format and the fragmentation of consumer time.
     Piracy, including physical piracy as well as illegal online file-sharing, continues to be a significant issue for the filmed entertainment industry. Due to technological advances, piracy has expanded from music to movies and television programming. The Company has taken a variety of actions to combat piracy over the last several years, including the launch of new services for consumers at competitive price points, aggressive online and customs enforcement, compressed release windows and educational campaigns, and will continue to do so, both individually and together with cross-industry groups, trade associations and strategic partners.
     Networks. Time Warner’s Networks segment comprises Turner Broadcasting System, Inc. (“Turner”) and Home Box Office, Inc. (“HBO”). On September 17, 2006, Warner Bros. and CBS Corp. (“CBS”) ceased the stand-alone operations of The WB Network and UPN, respectively, and formed The CW, an equity method investee of the Company. The Networks

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
segment results included the operations of The WB Network through the date of its shutdown on September 17, 2006. For the nine months ended September 30, 2007, the Networks segment delivered revenues of $7.566 billion (20% of the Company’s overall revenues), $2.479 billion in Operating Income before Depreciation and Amortization and $2.245 billion in Operating Income.
     The Turner networks — including such recognized brands as TNT, TBS, CNN, Cartoon Network and CNN Headline News — are among the leaders in advertising-supported cable TV networks. For five consecutive years, more prime-time households have watched advertising-supported cable TV networks than the national broadcast networks. For the nine months ended September 30, 2007, TNT ranked first among advertising-supported cable networks in total-day delivery of its key demographics, Adults 18-49 and Adults 25-54 and in prime-time delivery ranked second for Adults 18-49 and Adults 25-54. TBS ranked second among advertising-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, direct-to-home satellite operators and other distributors. Key contributors to Turner’s success are its continued investments in high-quality programming focused on sports, network movie premieres, original and syndicated series, news and animation, leading to strong ratings and Advertising and Subscription revenue growth, as well as strong brands and operating efficiency.
     HBO operates the HBO and Cinemax multichannel pay television programming services, with the HBO service ranking as the nation’s most widely distributed pay television network. HBO generates revenues principally from monthly subscriber fees from cable system operators, direct-to-home satellite operators and other distributors. An additional source of revenues are the ancillary sales of its original programming, including The Sopranos, Sex and the City, Rome and Entourage.
     Publishing. Time Warner’s Publishing segment consists principally of magazine publishing and a number of direct-marketing and direct-selling businesses. The segment generated revenues of $3.500 billion (10% of the Company’s overall revenues), $690 million in Operating Income before Depreciation and Amortization and $545 million in Operating Income for the nine months ended September 30, 2007.
     As of September 30, 2007, Time Inc. published over 120 magazines globally, including People, Sports Illustrated, In Style, Southern Living, Real Simple, Entertainment Weekly, Time, Cooking Light and Fortune. It generates revenues primarily from advertising, magazine subscriptions and newsstand sales, and its growth is derived from higher circulation of and advertising in existing magazines, new magazine launches, acquisitions and advertising from digital properties. Time Inc. owns IPC Media, the U.K.’s largest magazine company (“IPC”), and the magazine subscription marketer Synapse Group, Inc. The Company’s Publishing segment has experienced sluggish print advertising sales as advertisers are shifting advertising expenditures to digital media. As a result, Time Inc. continues to invest in developing digital content, including the launch of MyRecipes.com, increased functionality for CNNMoney.com, the expansion of Sports Illustrated’s digital properties and the launch of various digital sites in the U.K. by IPC. For the nine months ended September 30, 2007, digital Advertising revenues reflected approximately 6% of Time Inc.’s Advertising revenues. Time Inc.’s direct-selling division, Southern Living At Home, sells home decor products through independent consultants at parties hosted in people’s homes throughout the U.S.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Recent Developments
Writers Guild of America Collective Bargaining Agreement
     On November 5, 2007, the Writers Guild of America (East and West) (the “Guild”) commenced a strike against film and television studios, subsequent to the expiration of the Guild’s collective bargaining agreement on October 31, 2007. The Company’s Networks and Filmed Entertainment segments and certain of their suppliers retain the services of writers who are members of the Guild. If the strike continues for more than a short period of time, it could cause delays in the production or the release dates of the segments’ television programs or feature films, as well as higher costs resulting either from the strike or less favorable terms of a future agreement. The Company is currently unable to estimate the impact of the strike, if any.
Interest in TW NY Cable Holding Inc.
     In September 2007, the Company proposed to TWC that it enter into discussions regarding a transaction pursuant to which TWC’s subsidiary, TW NY Cable Holding Inc. (“TWNYCH”), would redeem a significant portion of the Company’s 12.43% non-voting, equity interest in it. TWC’s Board of Directors has appointed a special committee of independent directors and authorized it to consider any proposal made by the Company and to negotiate with the Company regarding the terms of such a transaction. No assurance can be given that any proposal will result in an agreement for TWNYCH to redeem a portion of the Company’s interest in it or, if an agreement is reached, that a redemption transaction will be consummated. In April 2005, in connection with the announcement of the Adelphia/Comcast Transactions (as defined below), TWC valued the Company’s 12.43% interest (as if the Adelphia/Comcast Transactions had occurred at that time) at approximately $2.9 billion. This 2005 valuation is not necessarily indicative of the fair value of the interest as of the date of this report. If a redemption transaction takes place, the Company expects that TWC would finance the transaction through available borrowing capacity under TWC’s existing committed revolving credit facility or by accessing the bank credit or debt capital markets. If a redemption transaction is completed, it will not change the 84% ownership interest the Company has in TWC’s common stock (Note 2).
Common Stock Repurchase Program
     In July 2005, Time Warner’s Board of Directors authorized a common stock repurchase program that, as amended over time, allowed the Company to purchase up to an aggregate of $20 billion of common stock during the period from July 29, 2005 through December 31, 2007. As of June 30, 2007, the Company completed this common stock repurchase program, having repurchased approximately 1.1 billion shares of common stock from the program’s inception through such date.
     On July 26, 2007, Time Warner’s Board of Directors authorized a new common stock repurchase program that allows the Company to purchase up to an aggregate of $5 billion of common stock. Purchases under this new stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including price and business and market conditions. From the program’s inception through November 6, 2007, the Company repurchased approximately 119 million shares of common stock for approximately $2.2 billion pursuant to trading programs under Rule 10b5-1 of the Exchange Act (Note 6).
Claxson
     On October 3, 2007, the Company completed the purchase of seven pay television networks and the sales representation rights for eight third-party-owned networks operating principally in Latin America from Claxson Interactive Group, Inc. (“Claxson”) for $234 million in cash (Note 3).
TACODA
     On September 6, 2007, the Company completed the acquisition of TACODA, an online behavioral targeting advertising network, for $274 million in cash, net of cash acquired. The TACODA acquisition did not significantly impact the Company’s consolidated financial results for the three and nine months ended September 30, 2007 (Note 3).

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Divestitures of Certain Non-Core AOL Wireless Businesses
     On August 24, 2007, the Company completed the sale of Tegic Communications, Inc. (“Tegic”), a wholly owned subsidiary of AOL, to Nuance Communications, Inc. (“Nuance”) for $265 million in cash. In the third quarter of 2007, the Company recorded a pretax gain on this sale of approximately $200 million. In addition, in the third quarter of 2007, the Company transferred the assets of Wildseed LLC (“Wildseed”), a wholly owned subsidiary of AOL, to a third-party. The Company recorded a pretax charge of approximately $7 million related to this divestiture in the second quarter of 2007 and an impairment charge of approximately $18 million on the long-lived assets of Wildseed in the first quarter of 2007. All amounts related to both Tegic and Wildseed have been reflected as discontinued operations for all periods presented (Note 3).
Transaction with Liberty
     On May 16, 2007, the Company completed a transaction in which Liberty Media Corporation (“Liberty”) exchanged 68.5 million shares of Time Warner common stock for the stock of a subsidiary of Time Warner that owned assets including the Atlanta Braves baseball franchise (the “Braves”) and Leisure Arts, Inc. (“Leisure Arts”) (at a fair value of $473 million) and $960 million of cash (collectively, the “Liberty Transaction”). Included in the 68.5 million shares of Time Warner common stock are 4 million shares expected to be delivered to the Company upon the resolution of a working capital adjustment that is expected to be completed in the fourth quarter of 2007. The 4 million shares have been reflected as common stock due from Liberty in the accompanying consolidated balance sheet at September 30, 2007. The Company recorded a pretax gain of $71 million on the sale of the Braves, which is net of indemnification obligations valued at $60 million. The Company has agreed to indemnify Liberty for, among other things, increases in the amount due by the Braves under Major League Baseball’s revenue sharing rules from expected amounts for fiscal years 2007 to 2027, to the extent attributable to local broadcast and other contracts in place prior to the Liberty Transaction. The Liberty Transaction was designed to qualify as a tax-free split-off under Section 355 of the Internal Revenue Code of 1986, as amended, and, as a result, the historical deferred tax liabilities of $83 million associated with the Braves were no longer required. In the first quarter of 2007, the Company recorded an impairment charge of $13 million on its investment in Leisure Arts. The results of operations of the Braves and Leisure Arts have been reflected as discontinued operations for all periods presented (Note 3).
Bookspan
     On April 9, 2007, the Company sold its 50% interest in Bookspan, a joint venture accounted for as an equity method investment that primarily owns and operates book clubs via direct mail and e-commerce, to a subsidiary of Bertelsmann AG (“Bertelsmann”) for a purchase price of $145 million, which resulted in a pretax gain of approximately $100 million (Note 3).
Parenting and Time4 Media
     On March 3, 2007, the Company sold its Parenting Group and most of the Time4 Media magazine titles, consisting of 18 of Time Inc.’s smaller niche magazines, to a subsidiary of Bonnier for approximately $220 million, which resulted in a pretax gain of approximately $54 million. The results of operations of the Parenting Group and Time4 Media magazine titles that were sold have been reflected as discontinued operations for all periods presented (Note 3).
Sales of AOL’s European Access Businesses
     On February 28, 2007, the Company completed the sale of AOL’s German access business to Telecom Italia S.p.A. for $850 million in cash, resulting in a net pretax gain of approximately $668 million. In connection with this sale, the Company entered into a separate agreement to provide ongoing web services, including content, e-mail and other online tools and services to Telecom Italia S.p.A. As a result of the historical interdependency of AOL’s European access and audience businesses, the historical cash flows and operations of the access and audience businesses were not clearly distinguishable. Accordingly, AOL’s German access business and its other European access businesses, which were sold in 2006, have not been reflected as discontinued operations in the accompanying consolidated financial statements (Note 3).

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Texas/Kansas City Cable Joint Venture
     TKCCP was a 50-50 joint venture between a consolidated subsidiary of TWC (Time Warner Entertainment-Advance/Newhouse Partnership (“TWE-A/N”)) and Comcast. On January 1, 2007, TKCCP distributed its assets to TWC and Comcast. TWC received the Kansas City Pool, which served approximately 788,000 basic video subscribers as of December 31, 2006, and Comcast received the pool of assets consisting of the Houston cable systems (the “Houston Pool”), which served approximately 795,000 basic video subscribers as of December 31, 2006. TWC began consolidating the results of the Kansas City Pool on January 1, 2007. TKCCP was formally dissolved on May 15, 2007. For accounting purposes, the Company has treated the distribution of TKCCP’s assets as a sale of the Company’s 50% equity interest in the Houston Pool and as an acquisition of Comcast’s 50% equity interest in the Kansas City Pool. As a result of the sale of the Company’s 50% equity interest in the Houston Pool, the Company recorded a pretax gain of approximately $146 million in the first quarter of 2007, which is included as a component of other income (loss), net in the accompanying consolidated statement of operations for the nine months ended September 30, 2007 (Note 2).
Transactions with Adelphia and Comcast
     On July 31, 2006, TW NY and Comcast completed their respective acquisitions of assets comprising in the aggregate substantially all of the cable assets of Adelphia (the “Adelphia Acquisition”). Additionally, on July 31, 2006, immediately before the closing of the Adelphia Acquisition, Comcast’s interests in TWC and Time Warner Entertainment Company, L.P. (“TWE”), a subsidiary of TWC, were redeemed (the “TWC Redemption” and the “TWE Redemption,” respectively, and, collectively, the “Redemptions”). Following the Redemptions and the Adelphia Acquisition, on July 31, 2006, TW NY and Comcast swapped certain cable systems, most of which were acquired from Adelphia, in order to enhance TWC’s and Comcast’s respective geographic clusters of subscribers (the “Exchange” and, together with the Adelphia Acquisition and the Redemptions, the “Adelphia/Comcast Transactions”). The results of the systems acquired in connection with the Adelphia/Comcast Transactions have been included in the accompanying consolidated statement of operations since the closing of the transactions. As a result of the closing of the Adelphia/Comcast Transactions, TWC acquired systems with approximately 4.0 million basic video subscribers and disposed of systems with approximately 0.8 million basic video subscribers previously owned by TWC that were transferred to Comcast in connection with the Redemptions and the Exchange for a net gain of approximately 3.2 million basic video subscribers.
     On February 13, 2007, Adelphia’s Chapter 11 reorganization plan became effective and, under applicable securities law regulations and provisions of the U.S. bankruptcy code, TWC became a public company subject to the requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Under the terms of the reorganization plan, the shares of TWC’s Class A common stock that Adelphia received in the Adelphia Acquisition (representing approximately 16% of TWC’s outstanding common stock) are being distributed to Adelphia’s creditors. On March 1, 2007, TWC’s Class A common stock began trading on the New York Stock Exchange under the symbol “TWC.” As of September 30, 2007, Time Warner owned approximately 84% of TWC’s outstanding common stock (Note 2).
Amounts Related to Securities Litigation
     During the first and second quarters of 2007, the Company reached agreements to settle substantially all of the remaining securities litigation claims, a substantial portion of which had been reserved for at December 31, 2006. For the nine months ended September 30, 2007, the Company recorded charges of approximately $153 million for these settlements. At September 30, 2007, the Company’s remaining reserve related to these matters is approximately $10 million, including approximately $8 million that has been reserved for an expected attorneys’ fee award related to a previously settled matter. The Company believes the potential exposure in the securities litigation matters that remain pending at September 30, 2007 to be de minimis (Note 11).
     The Company recognizes insurance recoveries when it becomes probable that such amounts will be received. The Company recognized insurance recoveries related to Employee Retirement Income Security Act (“ERISA”) matters of approximately $9 million for the nine months ended September 30, 2007 and approximately $4 million and $57 million for the three and nine months ended September 30, 2006, respectively (Note 1).

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
RESULTS OF OPERATIONS
Changes in Basis of Presentation
Discontinued Operations
     As discussed more fully in Note 1 to the accompanying consolidated financial statements, the 2006 financial information has been recast so that the basis of presentation is consistent with that of the 2007 financial information. Specifically, the Company has reflected as discontinued operations for all periods presented the financial condition and results of operations of certain businesses sold during the first nine months of 2007, which include the Parenting Group, most of the Time4 Media magazine titles, The Progressive Farmer magazine, Leisure Arts, the Braves, Tegic and Wildseed.
Consolidation of Kansas City Pool
     On January 1, 2007, the Company began consolidating the results of the Kansas City Pool it received upon the distribution of the assets of TKCCP to TWC and Comcast.
Recent Accounting Standards
Accounting for Sabbatical Leave and Other Similar Benefits
     On January 1, 2007, the Company adopted the provisions of Emerging Issues Task Force (“EITF”) Issue No. 06-02, Accounting for Sabbatical Leave and Other Similar Benefits (“EITF 06-02”), related to certain sabbatical leave and other employment arrangements that are similar to a sabbatical leave. EITF 06-02 provides that an employee’s right to a compensated absence under a sabbatical leave or similar benefit arrangement in which the employee is not required to perform any duties during the absence is an accumulating benefit. Therefore, such arrangements should be accounted for as a liability with the cost recognized over the service period during which the employee earns the benefit. Adoption of this guidance resulted in an increase to accumulated deficit of approximately $97 million (approximately $59 million, net of tax) on January 1, 2007. The resulting change in the accrual for the nine months ended September 30, 2007 was not material.
Accounting for Uncertainty in Income Taxes
     On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. This interpretation requires the Company to recognize in the consolidated financial statements those tax positions determined to be more likely than not of being sustained upon examination, based on the technical merits of the positions. Upon adoption, the Company recognized approximately $445 million of tax benefits for positions that were previously unrecognized, of which approximately $433 million was accounted for as a reduction to the accumulated deficit balance and approximately $12 million was accounted for as an increase to the paid-in-capital balance as of January 1, 2007. Additionally, the adoption of FIN 48 resulted in the recognition of additional tax reserves for positions where there is uncertainty about the timing or character of such deductibility. These additional reserves were largely offset by increased deferred tax assets. After considering the impact of adopting FIN 48, the Company had a $1.6 billion reserve for uncertain income tax positions as of January 1, 2007.
     During the three months ended September 30, 2007, the Company recorded additional reserves, including a reserve of approximately $330 million attributable to uncertainties associated with certain tax attributes utilized by the Company that was offset by a decrease to current taxes payable.
     The Company does not presently anticipate that its existing reserves related to uncertain tax positions as of September 30, 2007 will significantly increase or decrease during the twelve month period ended September 30, 2008; however, various events could cause the Company’s current expectations to change in the future. The majority of these uncertain tax positions, if ever recognized in the financial statements, would be recorded in the statement of operations as part of the income tax provision (Note 1).

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Significant Transactions and Other Items Affecting Comparability
     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 (millions):
                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06  
            (recast)             (recast)  
Amounts related to securities litigation and government investigations
  $ (2 )   $ (29 )   $ (169 )   $ (90 )
Asset impairments
    (1 )     (200 )     (36 )     (200 )
Gain on disposal of assets, net
    4             673       22  
 
                       
Impact on Operating Income (Loss)
    1       (229 )     468       (268 )
  
Investment gains, net
    14       727       288       1,042  
 
                       
Impact on Other income (loss), net
    14       727       288       1,042  
  
Minority interest impact
                (57 )      
 
                       
Pretax impact
    15       498       699       774  
Income tax impact
    (9 )     (282 )     (330 )     (381 )
Other tax items affecting comparability
    12       373       92       475  
 
                       
After-tax impact
  $ 18     $ 589     $ 461     $ 868  
 
                       
     In addition to the items affecting comparability above, the Company incurred merger-related, restructuring and shutdown costs of approximately $12 million and $113 million during the three and nine months ended September 30, 2007, respectively, and approximately $73 million and $205 million during the three and nine months ended September 30, 2006, respectively. For further discussions of merger-related, restructuring and shutdown costs, refer to the “Consolidated Results” and “Business Segment Results” discussions.
Amounts Related to Securities Litigation
     The Company recognized legal reserves as well as legal and other professional fees related to the defense of various shareholder lawsuits, totaling $2 million and $178 million for the three and nine months ended September 30, 2007, respectively, and $33 million and $147 million for the three and nine months ended September 30, 2006, respectively. In addition, the Company recognized related insurance recoveries of $9 million for the nine months ended September 30, 2007 and $4 million and $57 million for the three and nine months ended September 30, 2006, respectively.
Asset Impairments
     During the three and nine months ended September 30, 2007, the Company recorded noncash asset impairment charges of $1 million and $2 million, respectively, at the AOL segment related to asset write-offs in connection with facility closures. In addition, during the nine months ended September 30, 2007, the Company recorded a $34 million noncash charge at the Networks segment related to the impairment of the Courtroom Television Network LLC (“Court TV”) tradename as a result of rebranding the Court TV network name to truTV, effective January 1, 2008.
     During the three and nine months ended September 30, 2006, the Company recorded a noncash impairment charge of approximately $200 million to reduce the carrying value of The WB Network’s goodwill. In September 2006, the stand-alone operations of The WB Network ceased and the business was contributed into The CW joint venture, which is discussed below.
     The Company, through its Warner Bros. division, owns a 50% interest in The CW, a national broadcast network, which it accounts for using the equity method of accounting as prescribed by Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock (“APB 18”). As of September 30, 2007, the Company’s investment balance in The CW is approximately $100 million, which is recorded in Investments in the accompanying consolidated balance sheet. To date, The CW has not reported profits and has only recently started its second season of programming. The ratings achieved by the network in this current programming season will be an important factor in

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
determining whether The CW’s 2007 budget and long-term plan will be achieved. Additionally, the current programming season’s ratings will form the basis for The CW’s 2008 budget and long-term operating and cash flow plans through 2011 (which is expected to be completed in the fourth quarter of 2007). Depending on developments in these areas, it is possible that the Company could conclude that its interest in The CW has sustained an impairment on an other than temporary basis. Such impairment, if any, would be recorded in other income (loss), net in the consolidated statement of operations for the year ended December 31, 2007.
Gains on Disposal of Assets, Net
     For the three and nine months ended September 30, 2007, the Company recorded a $2 million reduction and a net pretax gain of $668 million on the sale of AOL’s German access business and, for the nine months ended September 30, 2007, the Company recorded a $1 million reduction to the gain on the sale of AOL’s U.K. access business. In addition, for the three and nine months ended September 30, 2007, the Company recorded a $6 million gain on the sale of four non-strategic magazine titles at the Publishing segment.
     For the nine months ended September 30, 2006, the Company recorded a gain of approximately $20 million at the Corporate segment related to the sale of two aircraft and a $2 million gain at the AOL segment from the resolution of a previously contingent gain related to the 2004 sale of Netscape Security Solutions (“NSS”).
Investment Gains, Net
     For the three and nine months ended September 30, 2007, the Company recognized net gains of $14 million and $288 million, respectively, primarily related to the sale of investments, including, for the nine months ended September 30, 2007, an approximate $100 million gain on the Company’s sale in April 2007 of its 50% interest in Bookspan and a $146 million gain on TWC’s deemed sale of its 50% interest in the Houston Pool in connection with the distribution of TKCCP’s assets at the Cable segment. For the nine months ended September 30, 2007, investment gains, net also included a $4 million gain to reflect market fluctuations in equity derivative instruments.
     For the three and nine months ended September 30, 2006, the Company recognized net gains of $727 million and $1.042 billion, respectively, primarily related to the sale of investments, including $561 million and $800 million of gains, respectively, on sales of the Company’s investment in Time Warner Telecom Inc. and a $157 million gain on the sale of the Company’s investment in the Theme Parks. In addition, for the nine months ended September 30, 2006, the Company recognized a $51 million gain on the sale of the Company’s investment in Canal Satellite Digital. For the three and nine months ended September 30, 2006, investment gains, net also included $1 million of losses and $10 million of gains, respectively, to reflect market fluctuations in equity derivative instruments.
Minority Interest Impact
     For the nine months ended September 30, 2007, income of $57 million was attributed to minority interests, which primarily reflects the respective minority owner’s share of the gains on TWC’s deemed sale of the Houston Pool interest and on the sale of AOL’s German access business.
Income Tax Impact and Other Tax Items Affecting Comparability
     The income tax impact reflects the estimated tax or tax benefit associated with each item affecting comparability. Such estimated taxes or tax benefits vary based on certain factors, including the taxability or deductibility of the items and foreign tax on certain gains. The Company’s tax provision may also include certain other items affecting comparability. For the three and nine months ended September 30, 2007, these items included approximately $12 million and $81 million, respectively, of tax benefits related primarily to the realization of tax attribute carryforwards. In addition, for the nine months ended September 30, 2007, these items included approximately $11 million related to changes in certain state tax laws. For the three and nine months ended September 30, 2006, these items included approximately $373 million and $475 million, respectively, of tax benefits related primarily to the realization of tax attribute carryforwards.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Three and Nine Months Ended September 30, 2007 Compared to Three and Nine Months Ended September 30, 2006
Consolidated Results
     Revenues. The components of revenues are as follows (millions):
                                                 
    Three Months Ended   Nine Months Ended
    9/30/07     9/30/06     % Change   9/30/07     9/30/06     % Change
            (recast)                     (recast)          
Subscription
  $ 6,170     $ 6,136       1 %   $ 18,638     $ 17,298       8 %
Advertising
    2,095       2,003       5 %     6,295       5,925       6 %
Content
    3,141       2,349       34 %     8,163       7,364       11 %
Other
    270       262       3 %     744       762       (2 %)
 
                                       
Total revenues
  $ 11,676     $ 10,750       9 %   $ 33,840     $ 31,349       8 %
 
                                       
     The increase in Subscription revenues for the three and nine months ended September 30, 2007 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 was driven by the impact of the Acquired Systems, the consolidation of the Kansas City Pool, the continued penetration of digital video services, video price increases and growth in high-speed data and Digital Phone subscriber levels. The increase at the Networks segment was due primarily to higher subscription rates at both Turner and HBO and, to a lesser extent, an increase in the number of subscribers at Turner. The decline in Subscription revenues at the AOL segment resulted from decreases in the number of AOL brand domestic subscribers and related revenues, as well as the sales of AOL’s European access businesses in the fourth quarter of 2006 and first quarter of 2007.
     The increase in Advertising revenues for the three and nine months ended September 30, 2007 was primarily due to growth at the AOL and Cable segments, offset partially by a decline at the Networks segment. The increase at the AOL segment was due to growth in Advertising revenues generated on both the AOL Network and on Partner Sites. The increase at the Cable segment was primarily attributable to the impact of the Acquired Systems and, to a lesser extent, growth in the Legacy Systems and the consolidation of the Kansas City Pool. The decline at the Networks segment was primarily driven by the impact of the shutdown of The WB Network on September 17, 2006, partially offset by higher Advertising revenues across Turner’s primary networks.
     The increase in Content revenues for the three and nine months ended September 30, 2007 was primarily related to increases at the Filmed Entertainment and Networks segments. The increase at the Filmed Entertainment segment was primarily driven by an increase in theatrical and television product revenues. The increase at the Networks segment was primarily due to higher ancillary sales of HBO’s original programming.
     Each of the revenue categories is discussed in greater detail by segment in “Business Segment Results.”
     Costs of Revenues. For the three months ended September 30, 2007 and 2006, costs of revenues totaled $6.961 billion and $6.155 billion, respectively, and, as a percentage of revenues, were 60% and 57%, respectively. For the nine months ended September 30, 2007 and 2006, costs of revenues totaled $19.874 billion and $17.646 billion, respectively, and, as a percentage of revenues, were 59% and 56%, respectively. The increase in costs of revenues (inclusive of depreciation expense) as a percentage of revenues for the three and nine months ended September 30, 2007 was primarily attributable to lower margins at the Cable segment, primarily related to the Acquired Systems and the consolidation of the Kansas City Pool. In addition, the increase in costs of revenues as a percentage of revenues for the nine months ended September 30, 2007 was attributable to an increase at the Filmed Entertainment segment, primarily reflecting the change in quantity and mix of products released, partially offset by a decline at the AOL segment. The segment variations are discussed in detail in “Business Segment Results.”
     Selling, General and Administrative Expenses. For the three months ended September 30, 2007, selling, general and administrative expenses decreased 3% to $2.407 billion in 2007 from $2.483 billion in 2006. For the nine months ended September 30, 2007, selling, general and administrative expenses decreased 5% to $7.213 billion in 2007 from $7.593 billion in 2006. The decrease in selling, general and administrative expenses for the three and nine months ended September 30, 2007 related primarily to a significant decline at the AOL segment, substantially due to reduced subscriber

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
acquisition marketing as part of AOL’s revised strategy, partially offset by an increase at the Cable segment primarily related to the impact of the Acquired Systems and the consolidation of the Kansas City Pool. The segment variations are discussed in detail in “Business Segment Results.”
     Included in costs of revenues and selling, general and administrative expenses is depreciation expense, which increased to $943 million and $2.772 billion for the three and nine months ended September 30, 2007, respectively, from $783 million and $2.085 billion for the three and nine months ended September 30, 2006, respectively. These increases primarily related to an increase at the Cable segment, reflecting the impact of the Acquired Systems, the consolidation of the Kansas City Pool and demand-driven increases in recent years of purchases of customer premise equipment.
     Amortization Expense. Amortization expense increased to $167 million and $502 million for the three and nine months ended September 30, 2007, respectively, from $163 million and $419 million for the three and nine months ended September 30, 2006, respectively. The increase in amortization expense for the three and nine months ended September 30, 2007 primarily related to the Cable segment and was driven by the amortization of intangible assets related to customer relationships associated with the Acquired Systems. This was partially offset by a decrease due to the absence during the second and third quarters of 2007 of amortization expense associated with customer relationships recorded in connection with the restructuring of TWE in 2003 that were fully amortized at the end of the first quarter of 2007.
     Amounts Related to Securities Litigation. As previously noted in “Recent Developments,” the Company recognized legal reserves as well as legal and other professional fees related to the defense of various shareholder lawsuits, totaling $2 million and $178 million for the three and nine months ended September 30, 2007, respectively, and $33 million and $147 million for the three and nine months ended September 30, 2006, respectively. In addition, the Company recognized related insurance recoveries of $9 million for the nine months ended September 30, 2007 and $4 million and $57 million for the three and nine months ended September 30, 2006, respectively.
     Merger-related, Restructuring and Shutdown Costs. The Company incurred net restructuring costs for the three and nine months ended September 30, 2007 of approximately $9 million and $103 million, respectively, primarily related to various employee terminations and other exit activities, including $1 million and $10 million, respectively, at the Cable segment for the three and nine months ended September 30, 2007, $4 million and $20 million, respectively, at the Networks segment for the three and nine months ended September 30, 2007, $4 million and $46 million, respectively, at the Publishing segment for the three and nine months ended September 30, 2007 and $27 million at the AOL segment for the nine months ended September 30, 2007. In addition, for the three and nine months ended September 30, 2007, the Cable segment also expensed approximately $3 million and $10 million, respectively, of non-capitalizable merger-related and restructuring costs associated with the Adelphia/Comcast Transactions.
     During the three and nine months ended September 30, 2006, the Company incurred net restructuring costs, primarily related to various employee terminations and other exit activities, totaling approximately $35 million and $104 million, respectively, including $27 million and $43 million, respectively, at the AOL segment for the three and nine months ended September 30, 2006, $4 million and $14 million, respectively, at the Cable segment for the three and nine months ended September 30, 2006, $1 million and $5 million, respectively, at the Filmed Entertainment segment for the three and nine months ended September 30, 2006, $3 million and $37 million, respectively, at the Publishing segment for the three and nine months ended September 30, 2006 and $5 million at the Corporate segment for the nine months ended September 30, 2006. In addition, during the three and nine months ended September 30, 2006, the Cable segment expensed approximately $18 million and $29 million, respectively, of non-capitalizable merger-related costs associated with the Adelphia Acquisition. The results for the three and nine months ended September 30, 2006 also included shutdown costs of $38 million and $119 million, respectively, at The WB Network in connection with the agreement between Warner Bros. and CBS to form the new fully-distributed national broadcast network, The CW. Included in the shutdown costs for the three and nine months ended September 30, 2006 were termination charges related to terminating intercompany programming arrangements with other Time Warner divisions, of which $18 million and $47 million, respectively, has been eliminated in consolidation, resulting in a net pretax charge of $20 million and $72 million, respectively.
     Operating Income. Operating Income increased to $2.130 billion for the three months ended September 30, 2007 from $1.647 billion for the three months ended September 30, 2006. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $1 million of income, net and $229 million of expense, net

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
for 2007 and 2006, respectively, Operating Income increased $253 million, primarily reflecting growth at the Cable, Filmed Entertainment and Networks segments, partially offset by a decline at the AOL segment.
     Operating Income increased to $6.606 billion for the nine months ended September 30, 2007 from $5.218 billion for the nine months ended September 30, 2006. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $468 million of income, net and $268 million of expense, net for 2007 and 2006, respectively, Operating Income increased $652 million, primarily reflecting growth at the AOL, Cable and Networks segments, partially offset by a decline at the Filmed Entertainment segment.
     The segment variations are discussed under “Business Segment Results.”
     Interest Expense, Net. Interest expense, net, increased to $589 million and $1.714 billion for the three and nine months ended September 30, 2007, respectively, from $479 million and $1.114 billion for the three and nine months ended September 30, 2006, respectively. The increase in interest expense, net is primarily due to higher average outstanding balances of borrowings as a result of the Company’s stock repurchase program and the Adelphia/Comcast Transactions, higher interest rates on borrowings and lower interest income related primarily to a smaller amount of short-term investments.
     Other Income (Loss), Net. Other income (loss), net, detail is shown in the table below (millions):
                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06  
            (recast)             (recast)  
Investment gains, net
  $ 14     $ 727     $ 288     $ 1,042  
Income (loss) from equity investees
    (18 )     12       (21 )     54  
Other
    2       (28 )     (36 )     (27 )
 
                       
Other income (loss), net
  $ (2 )   $ 711     $ 231     $ 1,069  
 
                       
     The changes in investment gains, net are discussed under “Significant Transactions and Other Items Affecting Comparability.” Excluding the impact of investment gains, other income (loss), net, remained flat for the three months ended September 30, 2007, primarily due to losses from equity method investees, offset by other income, including foreign exchange gains, and decreased for the nine months ended September 30, 2007, primarily due to losses from equity method investees and higher foreign exchange losses. For the three and nine months ended September 30, 2007, the change in income (loss) from equity investees primarily reflects the absence of equity income during these periods due to the Company no longer treating TKCCP as an equity method investment.
     Minority Interest Expense, Net. Time Warner had $84 million and $305 million of minority interest expense, net for the three and nine months ended September 30, 2007, respectively, compared to $89 million and $265 million for the three and nine months ended September 30, 2006, respectively. The decrease for the three months ended September 30, 2007 primarily related to lower profits recorded at the AOL segment. The increase for the nine months ended September 30, 2007 related primarily to the impact of the 5% minority interest in AOL issued to Google in the second quarter of 2006 and the gain recognized by AOL on the sale of its German access business in the first quarter of 2007. This increase was partially offset by lower minority interest expense related to the Cable segment due in part to the change in the ownership structure at the Cable segment. Comcast held an effective 21% minority interest in TWC until the closing of the Adelphia/Comcast Transactions on July 31, 2006, upon which Comcast’s interest in TWC was redeemed and Adelphia received an approximate 16% minority interest in TWC.
     Income Tax Provision. Income tax expense from continuing operations was $555 million for the three months ended September 30, 2007 compared to $443 million for the three months ended September 30, 2006 and was $1.786 billion for the nine months ended September 30, 2007 compared to $1.546 billion for the nine months ended September 30, 2006. The Company’s effective tax rate for continuing operations was 38% and 37% for the three and nine months ended September 30, 2007, respectively, compared to 25% and 31% for the three and nine months ended September 30, 2006, respectively. The increase for the three and nine months ended September 30, 2007 is primarily attributable to the higher tax attribute carryforwards recognized in the third quarter of 2006. The income tax provisions for the three and nine months ended September 30, 2007 also reflect a charge of approximately $47 million relating to an adjustment to tax benefits recognized

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
in prior periods associated with certain foreign source income, partially offset by a tax benefit of approximately $24 million associated with domestic research and development tax credits.
     Income before Discontinued Operations and Cumulative Effect of Accounting Change. Income before discontinued operations and cumulative effect of accounting change was $900 million for the three months ended September 30, 2007 compared to $1.347 billion for the three months ended September 30, 2006. Basic and diluted net income per share before discontinued operations and cumulative effect of accounting change were both $0.24 in 2007 compared to $0.33 for both in 2006. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $18 million and $589 million of income, net for the three months ended September 30, 2007 and 2006, respectively, income before discontinued operations and cumulative effect of accounting change increased by $124 million, primarily reflecting higher Operating Income, as noted above, partially offset by (i) the dilutive effect of the Adelphia/Comcast Transactions, which resulted in higher depreciation, amortization and interest expense, (ii) increased interest expense, due in part to the Company’s common stock repurchase programs, which has resulted in higher debt levels, and (iii) lower other income (loss), net, as noted above. Basic and diluted net income per share before discontinued operations and cumulative effect of accounting change for the three months ended September 30, 2007 reflect the favorable impact of repurchases of shares under the Company’s stock repurchase programs.
     Income before discontinued operations and cumulative effect of accounting change was $3.032 billion for the nine months ended September 30, 2007 compared to $3.362 billion for the nine months ended September 30, 2006. Basic and diluted net income per share before discontinued operations and cumulative effect of accounting change were $0.81 and $0.80, respectively, in 2007 compared to $0.79 and $0.78, respectively, in 2006. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $461 million and $868 million of income, net for the nine months ended September 30, 2007 and 2006, respectively, income before discontinued operations and cumulative effect of accounting change increased by $77 million, primarily reflecting higher Operating Income, as noted above, partially offset by (i) the dilutive effect of the Adelphia/Comcast Transactions, which resulted in higher depreciation, amortization and interest expense, (ii) increased interest expense, due in part to the impact of the Company’s common stock repurchase programs, which has resulted in higher debt levels, and (iii) lower other income (loss), net, as noted above. Basic and diluted net income per share before discontinued operations and cumulative effect of accounting change for the nine months ended September 30, 2007 reflect the favorable impact of repurchases of shares under the Company’s stock repurchase programs.
     Discontinued Operations. Discontinued operations for the three and nine months ended September 30, 2007 and 2006 reflect certain businesses sold, which included Tegic and Wildseed and, for the nine months ended September 30, 2007, included the Parenting Group, most of the Time4 Media magazine titles, The Progressive Farmer magazine, Leisure Arts and the Braves. Discontinued operations for the three and nine months ended September 30, 2006 also included the operations of the systems transferred to Comcast in connection with the Redemptions and the Exchange and, for the nine months ended September 30, 2006, included the Turner South network (“Turner South”) and Time Warner Book Group (“TWBG”).
     Included in discontinued operations for the three and nine months ended September 30, 2007 were a pretax gain of approximately $200 million and a related tax provision of approximately $15 million on the sale of Tegic. The tax provision on the sale of Tegic included a tax benefit associated with the use of tax attribute carryforwards, partially offset by a tax charge attributable to the reversal of a deferred tax asset. In addition, discontinued operations for the nine months ended September 30, 2007 included a pretax gain of approximately $71 million and a related tax benefit of approximately $82 million on the sale of the Braves, a pretax gain of approximately $54 million and a related tax benefit of approximately $6 million on the sale of the Parenting Group and most of the Time4 Media magazine titles, an impairment of approximately $18 million on AOL’s long-lived assets associated with Wildseed and an impairment of approximately $13 million on the Company’s investment in Leisure Arts. The tax benefit recognized for the Braves transaction resulted primarily from the reversal of certain deferred tax liabilities in connection with the Liberty Transaction. The Liberty Transaction was designed to qualify as a tax-free split-off under Section 355 of the Internal Revenue Code of 1986, as amended, and, as a result, the historical deferred tax liabilities associated with the Braves were no longer required. The tax benefit recognized for the magazine sale transaction resulted primarily from the recognition of deferred tax assets associated with the sale of the magazine titles. In addition, for the three and nine months ended September 30, 2007, respectively, the Company incurred an additional $1 million and $18 million accrual related to changes in estimates of Warner Music Group indemnification liabilities and for the nine months ended September 30, 2007, the Company made

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
payments of $26 million related to Warner Music Group indemnification liabilities established in prior years, which are disclosed on the Company’s accompanying consolidated statement of cash flows as Investment activities of discontinued operations.
     Included in discontinued operations for the three and nine months ended September 30, 2006 were a pretax gain of approximately $145 million on the systems transferred to Comcast in connection with the Redemptions and the Exchange (the “Transferred Systems”) and a tax benefit of approximately $810 million, comprised of a tax benefit of $817 million on the Redemptions, partially offset by a provision of $7 million on the Exchange. The tax benefit of $817 million resulted primarily from the reversal of historical deferred tax liabilities that had existed on systems transferred to Comcast in the TWC Redemption. The TWC Redemption was designed to qualify as a tax-free split-off under Section 355 of the Internal Revenue Code of 1986, as amended, and, as a result, such liabilities were no longer required. However, if the IRS were successful in challenging the tax-free characterization of the TWC Redemption, an additional cash liability on account of taxes of up to an estimated $900 million could become payable by the Company. The results for the nine months ended September 30, 2006 also included a pretax gain of approximately $129 million and a related tax benefit of approximately $21 million on the sale of Turner South and a pretax gain of approximately $194 million and a related tax benefit of approximately $28 million on the sale of TWBG. The tax benefits on the sales of Turner South and TWBG resulted primarily from the release of a valuation allowance associated with tax attribute carryforwards offsetting the gains on these transactions.
     Cumulative Effect of Accounting Change, Net of Tax. For the nine months ended September 30, 2006, the Company recorded a benefit of $25 million, net of tax, as the cumulative effect of a change in accounting principle upon the adoption of FASB Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“FAS 123R”), in 2006, to recognize the effect of estimating the number of awards granted prior to January 1, 2006 that are not ultimately expected to vest.
     Net Income and Net Income Per Common Share. Net income was $1.086 billion for the three months ended September 30, 2007 compared to $2.322 billion for the three months ended September 30, 2006. Basic and diluted net income per common share were $0.30 and $0.29, respectively, in 2007 compared to $0.57 for both in 2006. Net income was $3.356 billion for the nine months ended September 30, 2007 compared to $4.799 billion for the nine months ended September 30, 2006. Basic and diluted net income per common share were $0.89 and $0.88, respectively, in 2007 compared to $1.13 and $1.12, respectively, in 2006. Net income per common share for the nine months ended September 30, 2007 and the three and nine months ended September 30, 2006 reflect the favorable impact of repurchases of shares under the Company’s stock repurchase programs.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
Business Segment Results
     AOL. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the AOL segment for the three and nine months ended September 30, 2007 and 2006 are as follows (millions):
                                                     
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     % Change     9/30/07     9/30/06     % Change  
            (recast)                       (recast)            
Revenues:
                                                   
Subscription
  $ 635     $ 1,455       (56 % )   $ 2,199     $ 4,539       (52 % )
Advertising
    540       479       13 %       1,611       1,320       22 %  
Other
    44       30       47 %       120       89       35 %  
 
                                           
Total revenues
    1,219       1,964       (38 % )     3,930       5,948       (34 % )
Costs of revenues(a)
    (562 )     (916 )     (39 % )     (1,722 )     (2,805 )     (39 % )
Selling, general and administrative(a)
    (229 )     (467 )     (51 % )     (726 )     (1,625 )     (55 % )
Gain (loss) on disposal of consolidated businesses
    (2 )          NM        667       2     NM   
Asset impairments
    (1 )         NM        (2 )         NM   
Restructuring costs
          (27 )   NM        (27 )     (43 )     (37 % )
 
                                           
Operating Income before Depreciation and Amortization
    425       554       (23 % )     2,120       1,477       44 %
Depreciation
    (103 )     (129 )     (20 % )     (312 )     (382 )     (18 % )
Amortization
    (27 )     (35 )     (23 % )     (69 )     (111 )     (38 % )
 
                                           
Operating Income
  $ 295     $ 390       (24 % )   $ 1,739     $ 984       77 %
 
                                           
 
(a)  
Costs of revenues and selling, general and administrative expenses exclude depreciation.
     The decline in Subscription revenues for the three and nine months ended September 30, 2007 compared to the three and nine months ended September 30, 2006 was due to decreases in the number of AOL brand domestic subscribers and related revenues, as well as the sales of AOL’s European access businesses (for which Subscription revenues declined by approximately $410 million and $1.110 billion for the three and nine months, respectively) in the fourth quarter of 2006 and first quarter of 2007.
     The number of AOL brand domestic subscribers was 10.1 million, 10.9 million, and 15.2 million as of September 30, 2007, June 30, 2007 and September 30, 2006, respectively. The AOL brand domestic average revenue per subscriber (“ARPU”) was $18.50 and $19.30 for the three months ended September 30, 2007 and 2006, respectively, and $18.69 and $19.05 for the nine months ended September 30, 2007 and 2006, respectively. AOL includes in its subscriber numbers individuals, households and entities that have provided billing information and completed the registration process sufficiently to allow for an initial log-on to the AOL service. Subscribers to the AOL brand service include subscribers participating in introductory free-trial periods and subscribers that are paying no or reduced monthly fees through member service and retention programs. Total AOL brand subscribers include free-trial and retention members of approximately 3% at both September 30, 2007 and June 30, 2007 and 6% at September 30, 2006. Individuals who have registered for the free AOL service, including subscribers who have migrated from paid subscription plans, are not included in the AOL brand subscriber numbers presented above. As previously noted, due to the sales of AOL’s access businesses in the U.K., Germany and France, AOL no longer has AOL brand Internet access subscribers in Europe, although the purchasers of AOL’s European access businesses have certain rights to use specified AOL brands for a period of time.
     The decreases in subscribers are the result of a number of factors, including the effects of AOL’s strategy, which has resulted in the migration of subscribers to the free AOL service offering, declining registrations for the paid service in response to AOL’s significantly reduced marketing and retention campaigns, and competition from broadband access providers. The decreases in ARPU for the three and nine months ended September 30, 2007 compared to the similar periods in the prior year were due primarily to a shift in the subscriber mix to lower-priced subscriber price plans, partially offset by an increase in the percentage of revenue generating customers and, for the nine months ended September 30, 2007, due to a price increase implemented late in the first quarter of 2006.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
     In addition to the AOL brand service, AOL has subscribers to other services, both domestically and internationally, including the Netscape and CompuServe brands. These other brand services are not significant sources of revenues.
     Advertising services include display advertising (which includes certain types of impression-based and performance-driven advertising) and paid-search advertising, both domestically and internationally, which are provided on both the AOL Network and on Partner Sites. Total Advertising revenues improved for the three and nine months ended September 30, 2007 compared to the three and nine months ended September 30, 2006 due to increased Advertising revenues generated on both the AOL Network and on Partner Sites as follows (millions):
                                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     % Change     9/30/07     9/30/06     % Change  
            (recast)                     (recast)          
AOL Network:
                                               
Display
  $ 214     $ 202       6%     $ 667     $ 570       17%  
Paid-search
    163       142       15%       486       422       15%  
 
                                       
Total AOL Network
    377       344       10%       1,153       992       16%  
 
                                               
Partner Sites
    163       135       21%       458       328       40%  
 
                                       
 
                                               
Total Advertising revenues
  $ 540     $ 479       13%     $ 1,611     $ 1,320       22%  
 
                                       
     The increases in AOL Network display Advertising revenues were primarily attributable to increased inventory sold, offset partially by pricing declines and shifts in the mix of inventory sold to lower-priced inventory. In addition, AOL Network display Advertising revenues for the nine months ended September 30, 2007 included a benefit of approximately $19 million related to a change in an accounting estimate resulting from more timely system data. The increases in AOL Network paid-search Advertising revenues, which are generated primarily through AOL’s strategic relationship with Google, were attributable primarily to higher revenues per search query on certain AOL Network properties.
     The increase in Advertising revenues on Partner Sites for the three and nine months ended September 30, 2007 is primarily attributable to the growth in sales of advertising run on Partner Sites generated by Advertising.com. In addition, for the nine months ended September 30, 2007, the increase in Advertising revenues on Partner Sites is also attributable to the expansion of a relationship with a major customer, which began contributing increased revenues beginning in the second quarter of 2006. The revenues associated with this relationship increased $60 million to $162 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. As noted in the AOL “Overview” section, the contract with this customer was amended during the fourth quarter of 2007. The Company does not expect a significant decline in AOL’s Advertising revenues from this relationship in the fourth quarter of 2007 as a result of this amendment. However, beginning January 1, 2008, the customer is under no obligation to continue to do business with Advertising.com. Accordingly, while the Company is unable to estimate the overall impact of the amendment after January 1, 2008, it anticipates a significant decline in Advertising revenues from this customer.
     Total Advertising revenues for the three months ended September 30, 2007 increased $18 million from the three months ended June 30, 2007, due entirely to revenues generated on Partner Sites, as revenues from the AOL Network did not change.
     AOL expects Advertising revenues to continue to increase during the fourth quarter of 2007 as compared to the fourth quarter of 2006 due to expected increases in sales of advertising run on Partner Sites and, to a lesser extent, paid-search advertising on the AOL Network. However, total Advertising revenues for the fourth quarter are expected to increase at a rate less than that experienced during the third quarter of 2007, reflecting lower expected year-over-year growth rates for both display and paid-search Advertising revenue on the AOL Network, primarily as a result of expected continued pricing pressure on display advertising and lower expected search performance. Because of the uncertainty associated with these trends coupled with the end of commitments from a major customer of Advertising.com and the impact of the $19 million benefit recognized in the first quarter of 2007, AOL expects continued downward pressure on year-over-year growth in Advertising revenues in the first quarter of 2008.
     For both the three and nine months ended September 30, 2007, costs of revenues decreased 39%, and, as a percentage of revenues, were 46% and 44% for the three and nine months ended September 30, 2007, respectively, compared to 47% for the three and nine months ended September 30, 2006. For the three and nine months ended September 30, 2007, approximately $290 million and $760 million, respectively, of the decrease in costs of revenues were attributable to the sales of AOL’s European access businesses. The remaining decreases for the three and nine months ended September 30,

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
2007 were attributable to lower network-related expenses and lower customer service expenses associated with the closure of customer support call centers, partially offset by increases in traffic acquisition costs associated with advertising run on Partner Sites. Network-related expenses decreased 80% to $58 million for the three months ended September 30, 2007 from $286 million for the three months ended September 30, 2006 and decreased 76% to $223 million for the nine months ended September 30, 2007 from $919 million for the nine months ended September 30, 2006. For the three and nine months ended September 30, 2007, approximately $180 million and $510 million, respectively, of the decreases were attributable to the sales of AOL’s European access businesses. The remaining declines in network-related expenses for the three and nine months ended September 30, 2007 were principally attributable to lower usage of AOL’s dial-up network associated with the declining AOL brand domestic dial-up subscriber base, improved pricing and network utilization and decreased levels of long-term fixed commitments.
     Selling, general and administrative expenses decreased 51% to $229 million and 55% to $726 million for the three and nine months ended September 30, 2007, respectively, of which approximately $80 million and $270 million, respectively, were attributable to the sales of AOL’s European access businesses. The remaining decreases in selling, general and administrative expenses for the three and nine months ended September 30, 2007 reflect a significant reduction in direct marketing costs of approximately $80 million and $460 million, respectively, primarily due to reduced subscriber acquisition marketing as part of AOL’s revised strategy, and other cost savings initiatives, partially offset by a $13 million charge related to a patent infringement litigation settlement. The nine months ended September 30, 2006 included an approximate $14 million benefit related to the favorable resolution of certain tax matters.
     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the three and nine months ended September 30, 2007 included noncash asset impairment charges of $1 million and $2 million, respectively, related to asset write-offs in connection with facility closures and a $2 million reduction and a net pretax gain of $668 million on the sale of AOL’s German access business, and the results for the nine months ended September 30, 2007 included a $1 million reduction to the gain on the sale of AOL’s U.K. access business. In addition, the results for three and the nine months ended September 30, 2007 included restructuring charges of $4 million and $42 million, respectively, primarily related to involuntary employee terminations, asset write-offs and facility closures, partially offset by the reversal of $4 million and $15 million, respectively, of restructuring charges that were no longer needed due to changes in estimates for the nine months ended September 30, 2007. As AOL continues to transition into a global web services business, in the fourth quarter of 2007, AOL has taken and will take further restructuring actions, which will result in additional restructuring and related charges during the fourth quarter of 2007 and the first quarter of 2008 ranging from $90 million to $130 million. The majority of these charges are expected to be incurred in the fourth quarter of 2007. The results for the three and nine months ended September 30, 2006 included $27 million and $43 million of restructuring charges, respectively, primarily related to headcount reductions and asset write-offs. In addition, the results for the nine months ended September 30, 2006 included a $2 million gain from the resolution of a previously contingent gain related to the 2004 sale of NSS.
     For the three months ended September 30, 2007, Operating Income before Depreciation and Amortization and Operating Income decreased compared to the three months ended September 30, 2006, due primarily to a decline in Subscription revenues, partially offset by lower costs of revenues, lower selling, general and administrative expenses, and higher Advertising revenues. For the nine months ended September 30, 2007, Operating Income before Depreciation and Amortization and Operating Income increased compared to the nine months ended September 30, 2006, due primarily to the $668 million gain on the sale of the German access business, higher Advertising revenues and lower costs of revenues and selling, general and administrative expenses, partially offset by lower Subscription revenues. For the three and nine months ended September 30, 2007, depreciation expense decreased as a result of a decline in network assets due to subscriber declines.
     In connection with AOL’s strategy, including its reduction of subscriber acquisition efforts, AOL expects to experience a continued decline in its subscribers and related Subscription revenues, and, for the fourth quarter of 2007, a decline in subscriber ARPU as compared to the fourth quarter of 2006. In addition, during the fourth quarter of 2007, AOL expects to continue to reduce costs of revenues, including dial-up network and customer service expenses, and selling, general and administrative expenses.
     The Company expects AOL’s Operating Income before Depreciation and Amortization and Operating Income to increase in the fourth quarter of 2007 compared to the fourth quarter of 2006, excluding the gains on the sales of AOL’s

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
European access businesses, primarily as a result of decreases in marketing and other expenses (including restructuring charges) and an increase in Advertising revenues that in the aggregate are expected to more than offset declines in Subscription revenues, including the impact on Subscription revenues of the divestiture of AOL’s European access businesses.
     As previously noted under “Recent Developments,” on February 28, 2007, the Company completed the sale of AOL’s German access business to Telecom Italia S.p.A. for $850 million in cash, resulting in a net pretax gain of approximately $668 million. In connection with this sale, the Company entered into a separate agreement to provide ongoing web services, including content, e-mail and other online tools and services to Telecom Italia S.p.A. As a result of the historical interdependency of AOL’s European access and audience businesses, the historical cash flows and operations of the access and audience businesses were not clearly distinguishable. Accordingly, AOL’s German access business and its other European access businesses, which were sold in 2006, have not been reflected as discontinued operations in the accompanying consolidated financial statements.
     Cable. As previously noted under “Recent Developments,” on July 31, 2006, the Company completed the Adelphia/Comcast Transactions and began consolidating the results of the Acquired Systems. Additionally, on January 1, 2007, the Company began consolidating the results of the Kansas City Pool. Accordingly, the operating results for the three and nine months ended September 30, 2007 include the results for the Legacy Systems, the Acquired Systems and the Kansas City Pool for the full three- and nine-month periods, and the operating results for the three and nine months ended September 30, 2006 include the results of the Legacy Systems for the full three- and nine-month periods and the Acquired Systems for only the two months following the closing of the Adelphia/Comcast Transactions and do not include the results of the Kansas City Pool. The impact of the incremental one month and seven months of revenues and expenses of the Acquired Systems on the results for the three and nine months ended September 30, 2007, respectively, is referred to as the “impact of the Acquired Systems” in this report. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Cable segment for the three and nine months ended September 30, 2007 and 2006 are as follows (millions):
                                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     % Change     9/30/07     9/30/06     % Change  
Revenues:
                                               
Subscription
  $ 3,780     $ 3,031       25%     $ 11,230     $ 7,696       46%  
Advertising
    221       178       24%       636       420       51%  
 
                                       
Total revenues
    4,001       3,209       25%       11,866       8,116       46%  
Costs of revenues(a)
    (1,890 )     (1,495 )     26%       (5,645 )     (3,697 )     53%  
Selling, general and administrative(a)
    (679 )     (573 )     18%       (2,022 )     (1,456 )     39%  
Merger-related and restructuring costs
    (4 )     (22 )     (82% )     (20 )     (43 )     (53% )
 
                                       
Operating Income before Depreciation and Amortization
    1,428       1,119       28%       4,179       2,920       43%  
Depreciation
    (683 )     (513 )     33%       (2,001 )     (1,281 )     56%  
Amortization
    (64 )     (56 )     14%       (207 )     (93 )     123%  
 
                                       
Operating Income
  $ 681     $ 550       24%     $ 1,971     $ 1,546       27%  
 
                                       
 
(a)  
Costs of revenues and selling, general and administrative expenses exclude depreciation.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
     Revenues, including the components of Subscription revenues, for the Legacy Systems, the Acquired Systems, the Kansas City Pool and Total Systems are as follows for the three and nine months ended September 30, 2007 and 2006 (millions):
                                                                 
    Three Months Ended  
    9/30/07     9/30/06        
    Legacy     Acquired     Kansas     Total     Legacy     Acquired     Total     Total Systems  
    Systems     Systems     City Pool     Systems     Systems     Systems(a)     Systems     % Change  
Subscription revenues:
                                                               
Video
  $ 1,705     $ 689     $ 136     $ 2,530     $ 1,623     $ 467     $ 2,090       21%  
High-speed data
    679       212       51       942       616       129       745       26%  
Voice(b)
    260       26       22       308       184       12       196       57%  
 
                                                 
Total Subscription revenues
    2,644       927       209       3,780       2,423       608       3,031       25%  
Advertising revenues
    144       71       6       221       132       46       178       24%  
 
                                                 
Total revenues
  $ 2,788     $ 998     $ 215     $ 4,001     $ 2,555     $ 654     $ 3,209       25%  
 
                                                 
                                                                 
    Nine Months Ended  
    9/30/07     9/30/06        
    Legacy     Acquired     Kansas     Total     Legacy     Acquired     Total     Total Systems  
    Systems     Systems     City Pool     Systems     Systems     Systems(a)     Systems     % Change  
Subscription revenues:
                                                               
Video
  $ 5,108     $ 2,096     $ 409     $ 7,613     $ 4,822     $ 467     $ 5,289       44%  
High-speed data
    1,993       616       151       2,760       1,785       129       1,914       44%  
Voice(b)
    735       60       62       857       481       12       493       74%  
 
                                                 
Total Subscription revenues
    7,836       2,772       622       11,230       7,088       608       7,696       46%  
Advertising revenues
    401       211       24       636       374       46       420       51%  
 
                                                 
Total revenues
  $ 8,237     $ 2,983     $ 646     $ 11,866     $ 7,462     $ 654     $ 8,116       46%  
 
                                                 
 
(a)   Amounts reflect revenues for the Acquired Systems for the two months following the closing of the Adelphia/Comcast Transactions.
 
(b)  
Voice revenues include revenues primarily associated with Digital Phone, TWC’s voice service, as well as revenues associated with subscribers acquired from Comcast who received traditional, circuit-switched telephone service, which were $8 million and $33 million for the three and nine months ended September 30, 2007, respectively, and $12 million for both the three and nine months ended September 30, 2006. TWC continues to provide traditional, circuit-switched services to some of those subscribers, but is in the process of discontinuing the circuit-switched offering in accordance with regulatory requirements. In those areas where the circuit-switched offering is discontinued, Digital Phone is the only voice service TWC provides.
     Subscriber numbers are as follows (thousands):
                                                   
      Consolidated Subscribers(a) as of       Managed Subscribers(a) as of  
      9/30/07       9/30/06     % Change     9/30/07       9/30/06     % Change  
Subscribers:
                                                 
Basic video(b)
    13,308       12,643         5%     13,308       13,425       (1 % )
Digital video(c)
    7,860       6,700         17%     7,860       7,024       12 %  
Residential high-speed data(d)
    7,412       6,041         23%     7,412       6,398       16 %  
Commercial high-speed data(d)
    272       218         25%     272       234       16 %  
Digital Phone(e)
    2,610       1,524         71%     2,610       1,649       58 %  
 
(a)  
Historically, managed subscribers included TWC’s consolidated subscribers and subscribers in the Kansas City Pool of TKCCP, which TWC received on January 1, 2007 in the TKCCP asset distribution. Beginning January 1, 2007, subscribers in the Kansas City Pool are included in both managed and consolidated subscriber results as a result of the consolidation of the Kansas City Pool.
 
(b)  
Basic video subscriber numbers reflect billable subscribers who receive basic video service.
 
(c)  
Digital video subscriber numbers reflect billable subscribers who receive any level of video service via digital technology.
 
(d)  
High-speed data subscriber numbers reflect billable subscribers who receive TWC’s Road Runner high-speed data service or any of the other high-speed data services offered by TWC.
 
(e)  
Digital Phone subscriber numbers reflect billable subscribers who receive IP-based telephony service. Digital Phone subscribers exclude subscribers acquired from Comcast in the Exchange who receive traditional, circuit-switched telephone service (which totaled approximately 43,000 and 122,000 subscribers as of September 30, 2007 and 2006, respectively).
     For the three and nine months ended September 30, 2007, Subscription revenues increased driven by the impact of the Acquired Systems, the consolidation of the Kansas City Pool, the continued penetration of digital video services, video price increases and growth in high-speed data and Digital Phone subscriber levels. Aggregate revenues associated with

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
TWC’s digital video services, including digital tiers, digital pay channels, pay-per-view, video-on-demand, subscription-video-on-demand and digital video recorders, increased 27% to $587 million for the three months ended September 30, 2007 from $464 million for the three months ended September 30, 2006, and increased 53% to $1.759 billion for the nine months ended September 30, 2007 from $1.153 billion for the nine months ended September 30, 2006. Strong growth rates for Subscription revenues associated with high-speed data and voice services are expected to continue during the fourth quarter of 2007.
     For the three and nine months ended September 30, 2007, Advertising revenues increased due to an increase in local and national advertising, primarily due to the impact of the Acquired Systems and, to a lesser extent, growth in the Legacy Systems and the consolidation of the Kansas City Pool.
     For the three and nine months ended September 30, 2007, costs of revenues increased 26% and 53%, respectively, and, as a percentage of revenues, were 47% and 48% for the three and nine months ended September 30, 2007, respectively, compared to 47% and 46% for the three and nine months ended September 30, 2006, respectively. The increases in costs of revenues were primarily related to the impact of the Acquired Systems and the consolidation of the Kansas City Pool, as well as increases in video programming, employee, voice and other costs. The increase in costs of revenues as a percentage of revenues for the nine months ended September 30, 2007 reflects lower margins in the Acquired Systems.
     Video programming costs for the Legacy Systems, the Acquired Systems, the Kansas City Pool and Total Systems were as follows for the three and nine months ended September 30, 2007 and 2006 (millions):
                                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     % Change     9/30/07     9/30/06     % Change  
Video programming costs:
                                               
Legacy Systems
  $ 576     $ 540       7%     $ 1,724     $ 1,581       9%  
Acquired Systems(a)
    254       168       51%       767       168       357%  
Kansas City Pool
    51           NM           152           NM      
 
                                       
Total Systems
  $ 881     $ 708       24%     $ 2,643     $ 1,749       51%  
 
                                       
 
(a)  
2006 amounts reflect video programming costs for the Acquired Systems for the two months following the closing of the Adelphia/Comcast Transactions.
     Video programming costs increased due primarily to the impact of the Acquired Systems and the consolidation of the Kansas City Pool, as well as contractual rate increases and the expansion of service offerings. For the three and nine months ended September 30, 2007, employee costs increased primarily due to the impact of the Acquired Systems, the consolidation of the Kansas City Pool, higher headcount resulting from the continued roll-out of advanced services and salary increases. Additionally, employee costs for the nine months ended September 30, 2006 included a benefit of approximately $16 million (with an additional benefit of approximately $5 million included in selling, general and administrative expenses) due to changes in estimates related to prior period medical benefit accruals. For the three and nine months ended September 30, 2007, voice costs increased $29 million to $115 million and $121 million to $338 million, respectively, primarily due to growth in Digital Phone subscribers and the consolidation of the Kansas City Pool, offset partially by a decline in per subscriber connectivity costs. Other costs increased 31% to $306 million and 56% to $915 million, respectively, for the three and nine months ended September 30, 2007 primarily due to the impact of the Acquired Systems and the consolidation of the Kansas City Pool, as well as certain other increases in costs associated with the continued roll-out of advanced services. In addition, other costs for the nine months ended September 30, 2006 included a benefit of $10 million related to third-party maintenance support payment fees, reflecting the resolution of terms with an equipment vendor.
     The increase in selling, general and administrative expenses for the three and nine months ended September 30, 2007 is primarily the result of higher employee, marketing and other costs due to the impact of the Acquired Systems and the consolidation of the Kansas City Pool, increased headcount and higher costs resulting from the continued roll-out of advanced services and salary increases. The nine months ended September 30, 2006 also included an $11 million charge (with an additional $2 million charge included in costs of revenues) reflecting an adjustment to prior period facility rent expense.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the Cable segment expensed non-capitalizable merger-related and restructuring costs associated with the Adelphia/Comcast Transactions of $3 million and $10 million for the three and nine months ended September 30, 2007, respectively, and $18 million and $29 million for the three and nine months ended September 30, 2006, respectively. In addition, the results included other restructuring costs of $1 million and $10 million for the three and nine months ended September 30, 2007, respectively, and $4 million and $14 million for the three and nine months ended September 30, 2006, respectively.
     Operating Income before Depreciation and Amortization increased for the three and nine months ended September 30, 2007 principally as a result of revenue growth, partially offset by higher costs of revenues and selling, general and administrative expenses, as discussed above.
     Operating Income increased for the three and nine months ended September 30, 2007 primarily due to the increase in Operating Income before Depreciation and Amortization described above, partially offset by increases in both depreciation and amortization expense. Depreciation expense increased primarily due to the impact of the Acquired Systems, the consolidation of the Kansas City Pool and demand-driven increases in recent years of purchases of customer premise equipment. Amortization expense increased primarily as a result of the amortization of intangible assets related to customer relationships associated with the Acquired Systems. This was partially offset by a decrease due to the absence during the second and third quarters of 2007 of amortization expense associated with customer relationships recorded in connection with the restructuring of TWE in 2003 that were fully amortized at the end of the first quarter of 2007.
     The Company anticipates that Operating Income before Depreciation and Amortization and Operating Income will continue to increase during the fourth quarter of 2007 as compared to the fourth quarter of 2006, although the full year rate of growth is expected to be lower than that experienced during the nine months ended September 30, 2007 because the last five months of 2006 included contributions from the Acquired Systems.
     Filmed Entertainment. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Filmed Entertainment segment for the three and nine months ended September 30, 2007 and 2006 are as follows (millions):
                                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     % Change     9/30/07     9/30/06     % Change  
Revenues:
                                               
Subscription
  $ 8     $     NM         $ 22     $     NM      
Advertising
    12       10       20%       30       11     NM      
Content
    3,100       2,311       34%       7,942       7,316       9%  
Other
    58       69       (16% )     180       205       (12% )
 
                                       
Total revenues
    3,178       2,390       33%       8,174       7,532       9%  
Costs of revenues(a)
    (2,407 )     (1,808 )     33%       (6,124 )     (5,493 )     11%  
Selling, general and administrative(a)
    (412 )     (371 )     11%       (1,185 )     (1,138 )     4%  
Restructuring costs
          (1 )   NM                 (5 )   NM      
 
                                       
Operating Income before Depreciation and Amortization
    359       210       71%       865       896       (3% )
Depreciation
    (37 )     (35 )     6%       (112 )     (103 )     9%  
Amortization
    (54 )     (55 )     (2% )     (161 )     (164 )     (2% )
 
                                       
Operating Income
  $ 268     $ 120       123%     $ 592     $ 629       (6% )
 
                                       
 
(a)  
Costs of revenues and selling, general and administrative expenses exclude depreciation.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
     Content revenues include theatrical product (which is content made available for initial exhibition in theaters), television product (which is content made available for initial airing on television), and consumer product and other. The components of Content revenues for the three and nine months ended September 30, 2007 and 2006 are as follows (millions):
                                                 
    Three Months Ended   Nine Months Ended
    9/30/07     9/30/06     % Change   9/30/07     9/30/06     % Change
Theatrical product:
                                               
Theatrical film
  $ 800     $ 356       125 %   $ 1,587     $ 882       80 %
Television licensing
    378       422       (10 %)     1,214       1,211        
Home video
    777       603       29 %     2,087       2,208       (5 %)
 
                                       
Total theatrical product
    1,955       1,381       42 %     4,888       4,301       14 %
 
                                               
Television product:
                                               
Television licensing
    822       594       38 %     2,187       2,083       5 %
Home video
    201       228       (12 %)     528       585       (10 %)
 
                                       
Total television product
    1,023       822       24 %     2,715       2,668       2 %
 
                                               
Consumer product and other
    122       108       13 %     339       347       (2 %)
 
                                       
Total Content revenues
  $ 3,100     $ 2,311       34 %   $ 7,942     $ 7,316       9 %
 
                                       
     The increase in theatrical film revenues for the three and nine months ended September 30, 2007 was due primarily to the success of certain key releases in 2007, which compared favorably to 2006. Revenues for the three and nine months ended September 30, 2007 included the releases of Harry Potter and the Order of the Phoenix, Rush Hour 3, Hairspray and Ocean’s 13 and for the nine months ended September 30, 2007 also included the release of 300. The three and nine months ended September 30, 2006 included worldwide revenues associated with Superman Returns and for the nine months ended September 30, 2006 also included the international carryover of Harry Potter and the Goblet of Fire. Theatrical product revenues from television licensing declined for the three months ended September 30, 2007, as the three months ended September 30, 2006 included availabilities of more significant titles. For the nine months ended September 30, 2007, this decline was offset by a greater number of significant titles in the first quarter of 2007. Home video sales of theatrical product increased for the three months ended September 30, 2007 primarily due to the success of the release of 300. For the nine months ended September 30, 2007, this increase was more than offset by a decline in home video sales of theatrical product primarily due to difficult comparisons as the similar period in the prior year included revenues from the release of Harry Potter and the Goblet of Fire and Wedding Crashers compared to the release of 300 and Happy Feet for the nine months ended September 30, 2007.
     The increase in license fees from television product for the three and nine months ended September 30, 2007 was primarily related to the initial off-network availabilities of Two and a Half Men, Cold Case and The George Lopez Show, partially offset for the nine months ended September 30, 2007 by license fees in the prior year from the initial off-network availability of Without a Trace and second cycle off-network non-continuance license arrangements for Friends. The decline in home video sales of television product for the three and nine months ended September 30, 2007 reflects difficult comparisons to the prior year period, which included higher revenues attributable to Seinfeld, Friends and other long-running series.
     The increase in costs of revenues for the three and nine months ended September 30, 2007 resulted primarily from higher film costs ($1.454 billion and $3.540 billion for the three and nine months ended September 30, 2007, respectively, compared to $1.055 billion and $3.223 billion for the three and nine months ended September 30, 2006, respectively), and higher theatrical advertising and print costs resulting from the timing, quantity and mix of films released. Included in film costs are net pre-release theatrical film valuation adjustments, which increased to $100 million for the three months ended September 30, 2007 from $51 million for the three months ended September 30, 2006, and increased to $204 million for the nine months ended September 30, 2007 compared to $156 million for the nine months ended September 30, 2006. Costs of revenues as a percentage of revenues were 76% for the three months ended September 30, 2007 and 2006, and increased to 75% for the nine months ended September 30, 2007 from 73% for the nine months ended September 30, 2006, reflecting the quantity and mix of products released.
     The increase in selling, general and administrative expenses for the three and nine months ended September 30, 2007 is primarily the result of higher employee costs and higher distribution costs attributable to the increase in revenues, partially offset for the nine months ended September 30, 2007 by higher distribution fees earned.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the three and nine months ended September 30, 2006 included $1 million and $5 million, respectively, of restructuring charges as a result of changes in estimates of previously established restructuring accruals.
     Operating Income before Depreciation and Amortization and Operating Income increased for the three months ended September 30, 2007 primarily related to the increase in revenues, partially offset by the increase in costs of revenues and selling, general and administrative expenses. For the nine months ended September 30, 2007, Operating Income before Depreciation and Amortization and Operating Income decreased primarily due to higher costs of revenues, partially offset by the increase in revenues. Operating Income before Depreciation and Amortization and Operating Income for the three and nine months ended September 30, 2006 reflects a benefit of approximately $10 million related to an adjustment made to reduce certain legal reserves and for the nine months ended September 30, 2006 also included a benefit of $42 million from the sale of certain international film rights.
     The Company anticipates that both Operating Income before Depreciation and Amortization and Operating Income at the Filmed Entertainment segment will increase during the fourth quarter of 2007 compared to the fourth quarter of 2006 due primarily to expectations of improved theatrical distribution and home video performance resulting from the current year’s theatrical release slate.
     Networks. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Networks segment for the three and nine months ended September 30, 2007 and 2006 are as follows (millions):
                                                 
    Three Months Ended   Nine Months Ended
    9/30/07     9/30/06     % Change   9/30/07     9/30/06     % Change
            (recast)                     (recast)          
Revenues:
                                               
Subscription
  $ 1,566     $ 1,460       7 %   $ 4,672     $ 4,412       6 %
Advertising
    709       731       (3 %)     2,181       2,389       (9 %)
Content
    270       204       32 %     682       604       13 %
Other
    10       14       (29 %)     31       39       (21 %)
 
                                       
Total revenues
    2,555       2,409       6 %     7,566       7,444       2 %
Costs of revenues(a)
    (1,253 )     (1,158 )     8 %     (3,693 )     (3,606 )     2 %
Selling, general and administrative(a)
    (468 )     (428 )     9 %     (1,340 )     (1,371 )     (2 %)
Asset impairments
          (200 )   NM       (34 )     (200 )     (83 %)
Restructuring and shutdown costs
    (4 )     (38 )     (89 %)     (20 )     (119 )     (83 %)
 
                                       
Operating Income before Depreciation and Amortization
    830       585       42 %     2,479       2,148       15 %
Depreciation
    (75 )     (68 )     10 %     (222 )     (203 )     9 %
Amortization
    (4 )         NM       (12 )     (5 )     140 %
 
                                       
Operating Income
  $ 751     $ 517       45 %   $ 2,245     $ 1,940       16 %
 
                                       
 
(a)  
Costs of revenues and selling, general and administrative expenses exclude depreciation.
     On September 17, 2006, Warner Bros. and CBS ended the stand-alone operations of The WB Network and UPN, respectively, and formed The CW, an equity method investee of the Company. The Networks segment results included the operations of The WB Network through the date of its shutdown on September 17, 2006. For the three and nine months ended September 30, 2006, the Networks segment operating results included revenues of $94 million and $393 million, respectively, and an Operating Loss of $242 million and $352 million, respectively, from The WB Network.
     The increase in Subscription revenues for the three and nine months ended September 30, 2007 was due primarily to higher subscription rates at both Turner and HBO and, to a lesser extent, an increase in the number of subscribers at Turner.
     The decrease in Advertising revenues for the three and nine months ended September 30, 2007 was driven primarily by the impact of the shutdown of The WB Network on September 17, 2006, partially offset by higher Advertising revenues across Turner’s primary networks.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
     The increase in Content revenues for the three and nine months ended September 30, 2007 was primarily due to higher ancillary sales of HBO’s original programming.
     For the three and nine months ended September 30, 2007, costs of revenues increased due primarily to an increase in programming costs, distribution costs and costs related to digital initiatives. For the three months ended September 30, 2007, programming costs increased 8% to $888 million from $821 million for the three months ended September 30, 2006 and for the nine months ended September 30, 2007 increased slightly to $2.656 billion from $2.645 billion for the nine months ended September 30, 2006. These increases were due primarily to higher acquired theatrical and original programming costs at HBO and an increase in sports programming costs at Turner, particularly related to NASCAR programming for the three months ended September 30, 2007, and to both NASCAR and NBA programming for the nine months ended September 30, 2007. These increases were partially offset by the impact of the shutdown of The WB Network on September 17, 2006. In addition, programming costs for the three and nine months ended September 30, 2006 included a write-off of approximately $17 million associated with certain programming arrangements at Turner. Costs of revenues as a percentage of revenues were 49% for the three and nine months ended September 30, 2007 compared to 48% for the three and nine months ended September 30, 2006.
     For the three months ended September 30, 2007, selling, general and administrative expenses increased due primarily to higher marketing expenses relating to the promotion of new original programming at Turner and HBO and higher selling expenses at Turner. For the nine months ended September 30, 2007, selling, general and administrative expenses decreased due primarily to the shutdown of The WB Network on September 17, 2006.
     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the three and nine months ended September 30, 2007 included approximately $4 million and $20 million, respectively, of restructuring charges and severance related to recent senior management changes at HBO and for the nine months ended September 30, 2007 included a $34 million noncash charge related to the impairment of the Court TV tradename as a result of rebranding the Court TV network name to truTV, effective January 1, 2008. The results for the three and nine months ended September 30, 2006 included shutdown costs at The WB Network of $38 million and $119 million, respectively, including $33 million and $87 million, respectively, related to the termination of certain programming arrangements (primarily licensed movie rights). Included in the costs to terminate programming arrangements is $18 million and $47 million for the three and nine months ended September 30, 2006, respectively, of costs related to terminating intercompany programming arrangements with other Time Warner divisions (e.g., New Line) that have been eliminated in consolidation, resulting in a net charge related to programming arrangements of $15 million and $40 million for the three and nine months ended September 30, 2006, respectively. In addition, shutdown costs at The WB Network for the three and nine months ended September 30, 2006 included a benefit of $2 million and a net charge of $6 million, respectively, related to employee terminations and $7 million and $26 million, respectively, related to contractual settlements. The results for the three and nine months ended September 30, 2006, also included a noncash impairment charge of approximately $200 million to reduce the carrying value of The WB Network’s goodwill.
     Operating Income before Depreciation and Amortization and Operating Income increased for the three and nine months ended September 30, 2007 primarily due to the absence of the noncash asset impairment charge to reduce the carrying value of The WB Network’s goodwill and the shutdown costs of The WB Network incurred in the prior year, as described above.

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Table of Contents

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
     Publishing. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Publishing segment for the three and nine months ended September 30, 2007 and 2006 are as follows (millions):
                                                 
    Three Months Ended   Nine Months Ended
    9/30/07     9/30/06     % Change   9/30/07     9/30/06     % Change
            (recast)                     (recast)          
Revenues:
                                               
Subscription
  $ 385     $ 393       (2 %)   $ 1,124     $ 1,139       (1 %)
Advertising
    636       635             1,904       1,881       1 %
Content
    13       14       (7 %)     39       35       11 %
Other
    165       153       8 %     433       455       (5 %)
 
                                       
Total revenues
    1,199       1,195             3,500       3,510        
Costs of revenues(a)
    (456 )     (474 )     (4 %)     (1,367 )     (1,401 )     (2 %)
Selling, general and administrative(a)
    (441 )     (453 )     (3 %)     (1,403 )     (1,421 )     (1 %)
Gain on sale of assets
    6           NM       6           NM  
Restructuring costs
    (4 )     (3 )     33 %     (46 )     (37 )     24 %
 
                                       
Operating Income before Depreciation and Amortization
    304       265       15 %     690       651       6 %
Depreciation
    (35 )     (26 )     35 %     (92 )     (82 )     12 %
Amortization
    (18 )     (17 )     6 %     (53 )     (46 )     15 %
 
                                       
Operating Income
  $ 251     $ 222       13 %   $ 545     $ 523       4 %
 
                                       
 
(a)  
Costs of revenues and selling, general and administrative expenses exclude depreciation.
     For the three and nine months ended September 30, 2007, Subscription revenues declined primarily as a result of lower Subscription revenues for several domestic titles, the closure of Teen People magazine in September 2006 and the sale of four non-strategic magazine titles in July 2007, partially offset by the favorable effects of foreign currency exchange rates at IPC. In addition, the nine months ended September 30, 2007 also reflected a decline in newsstand sales.
     For the three and nine months ended September 30, 2007, Advertising revenues remained essentially flat due primarily to growth in digital revenues, reflecting contributions from People.com and CNNMoney.com, and the favorable effects of foreign currency exchange rates at IPC, partially offset by a decrease in domestic print Advertising revenues, including the impact of the closures of Teen People and LIFE magazines.
     For the three months ended September 30, 2007, Other revenues increased due primarily to increases at Synapse, a subscription marketing business, and Southern Living at Home. However, Other revenues for the nine months ended September 30, 2007 decreased because the increase for the three months ended September 30, 2007 was more than offset by declines at Southern Living at Home and Synapse through the six months ended June 30, 2007.
     Costs of revenues decreased 4% for the three months ended September 30, 2007 and, as a percentage of revenues, were 38% and 40% for the three months ended September 30, 2007 and 2006, respectively. Costs of revenues decreased 2% for the nine months ended September 30, 2007 and, as a percentage of revenues, were 39% and 40% for the nine months ended September 30, 2007 and 2006, respectively. Costs of revenues for the magazine publishing business include manufacturing costs (paper, printing and distribution) and editorial-related costs, which together decreased 8% to $387 million for the three months ended September 30, 2007 and decreased 6% to $1.185 billion for the nine months ended September 30, 2007, primarily due to editorial-related and manufacturing cost savings, including cost savings related to the closures of Teen People and LIFE magazines. These decreases at the magazine publishing business were offset by increased costs associated with investments in digital properties, including incremental editorial costs and the unfavorable effects of foreign currency exchange rates at IPC.
     Selling, general and administrative expenses decreased for the three and nine months ended September 30, 2007 primarily due to recent cost savings initiatives and the closures of Teen People and LIFE magazines, partially offset by costs associated with the investment in digital properties and the unfavorable effects of foreign currency exchange rates at IPC.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the three and nine months ended September 30, 2007 included $4 million and $46 million, respectively, of restructuring costs, primarily severance associated with continuing efforts to streamline operations and costs related to the shutdown of LIFE magazine in the first quarter of 2007, and a $6 million gain on the sale of four non-strategic magazine titles. The results for the three and nine months ended September 30, 2006 included $3 million and $37 million, respectively, of restructuring costs, primarily associated with continuing efforts to streamline operations.
     Operating Income before Depreciation and Amortization and Operating Income increased for the three and nine months ended September 30, 2007 due primarily to a decrease in costs of revenues and selling, general and administrative expenses. In addition, the increase in Operating Income before Depreciation and Amortization and Operating Income for the nine months ended September 30, 2007 was partially offset by an increase in restructuring charges of $9 million.
     Corporate. Operating Loss before Depreciation and Amortization and Operating Loss of the Corporate segment for the three and nine months ended September 30, 2007 and 2006 are as follows (millions):
                                                 
    Three Months Ended   Nine Months Ended
    9/30/07     9/30/06     % Change   9/30/07     9/30/06     % Change
Amounts related to securities litigation and government investigations
  $ (2 )   $ (29 )     (93 %)   $ (169 )   $ (90 )     88 %
Selling, general and administrative(a)
    (87 )     (97 )     (10 %)     (281 )     (303 )     (7 %)
Gain on sale of assets
                            20     NM  
Restructuring costs
                            (5 )   NM  
 
                                       
Operating Loss before Depreciation and Amortization
    (89 )     (126 )     (29 %)     (450 )     (378 )     19 %
Depreciation
    (10 )     (12 )     (17 %)     (33 )     (34 )     (3 %)
 
                                       
Operating Loss
  $ (99 )   $ (138 )     (28 %)   $ (483 )   $ (412 )     17 %
 
                                       
 
(a)   Selling, general and administrative expenses exclude depreciation.
     As previously noted, the Company recognized legal reserves as well as legal and other professional fees related to the defense of various shareholder lawsuits, totaling $2 million and $178 million for the three and nine months ended September 30, 2007, respectively, and $33 million and $147 million for the three and nine months ended September 30, 2006, respectively. In addition, the Company recognized related insurance recoveries of $9 million for the nine months ended September 30, 2007 and $4 million and $57 million for the three and nine months ended September 30, 2006, respectively. Legal fees are expected to continue to be incurred in future periods, primarily related to ongoing proceedings with respect to certain former employees of the Company.
     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the nine months ended September 30, 2006 included approximately $5 million of restructuring costs and a gain of approximately $20 million on the sale of two aircraft.
     Excluding the items noted above, for the three and nine months ended September 30, 2007, Operating Loss before Depreciation and Amortization and Operating Loss decreased due primarily to lower financial advisory costs. In addition, for the nine months ended September 30, 2007, the decline was also due to lower professional fees.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
FINANCIAL CONDITION AND LIQUIDITY
     Management believes that cash generated by or available to Time Warner should be sufficient to fund its capital and liquidity needs for the foreseeable future, including the quarterly dividend payments and its new $5 billion common stock repurchase program. Time Warner’s sources of cash include cash provided by operations, expected proceeds from sales of assets, cash and equivalents on hand, available borrowing capacity under its committed credit facilities and commercial paper programs of $1.627 billion at Time Warner and $3.046 billion at TWC, in each case as of September 30, 2007, and access to the capital markets.
Current Financial Condition
     At September 30, 2007, Time Warner had $37.129 billion of debt, $1.873 billion of cash and equivalents (net debt of $35.256 billion, defined as total debt less cash and equivalents), $300 million of mandatorily redeemable preferred membership units at a subsidiary and $58.146 billion of shareholders’ equity, compared to $34.997 billion of debt, $1.549 billion of cash and equivalents (net debt of $33.448 billion), $300 million of mandatorily redeemable preferred membership units at a subsidiary and $60.389 billion of shareholders’ equity at December 31, 2006.
     The following table shows the significant items contributing to the increase in net debt from December 31, 2006 to September 30, 2007 (millions):
         
Balance at December 31, 2006
  $ 33,448  
Cash provided by operations
    (6,156 )
Proceeds from exercise of stock options
    (484 )
Capital expenditures and product development costs from continuing operations
    3,100  
Dividends paid to common stockholders
    645  
Repurchases of common stock
    5,714  
Acquisition of TACODA
    274  
Acquisition of Third Screen Media
    104  
Proceeds from sale of AOL’s German access business
    (850 )
Proceeds from sale of the Parenting Group and most of the Time4 Media magazine titles
    (220 )
Proceeds from sale of Tegic
    (265 )
Proceeds from sale of the Company’s 50% interest in Bookspan
    (145 )
All other, net
    91  
 
     
Balance at September 30, 2007(a)
  $ 35,256  
 
     
 
(a)  
Included in the net debt balance is approximately $194 million that represents the net unamortized fair value adjustment recognized as a result of the merger of AOL and Historic TW Inc.
     As noted under “Recent Developments,” in July 2005, Time Warner’s Board of Directors authorized a common stock repurchase program that, as amended over time, allowed the Company to purchase up to an aggregate of $20 billion of common stock during the period from July 29, 2005 through December 31, 2007. As of June 30, 2007, the Company completed this common stock repurchase program, having repurchased approximately 1.1 billion shares of common stock from the program’s inception through such date (Note 6).
     As noted under “Recent Developments,” on July 26, 2007, Time Warner’s Board of Directors authorized a new common stock repurchase program that allows the Company to purchase up to an aggregate of $5 billion of common stock. Purchases under this new stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including price and business and market conditions. From the program’s inception through November 6, 2007, the Company has repurchased approximately 119 million shares of common stock for approximately $2.2 billion pursuant to trading programs under Rule 10b5-1 of the Exchange Act (Note 6).

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
     As noted under “Recent Developments,” on October 3, 2007, the Company completed the purchase of seven pay television networks and the sales representation rights for eight third-party owned networks operating principally in Latin America from Claxson for $234 million in cash (Note 3).
     On December 29, 2006, the Company completed the sale of AOL’s U.K. access business for $712 million, $476 million of which was paid at closing and the remainder of which is payable over the eighteen months following the closing. As of September 30, 2007, the Company expects to receive the remaining approximately $185 million over the nine months ending June 30, 2008. The receivable due from the purchaser of the U.K. access business is non-interest bearing, and was recorded at its discounted present value upon the closing of the sale transaction. In addition, the receivable is denominated in British pounds, and the U.S. dollar amount presented is subject to change based on fluctuations in the exchange rate between the U.S. dollar and the British pound.
     Time Warner’s 6.15% notes due May 1, 2007 (aggregate principal amount of $1.0 billion) and Time Warner’s 8.18% notes due August 15, 2007 (aggregate principal amount of $546 million) matured and were retired on May 1, 2007 and August 15, 2007, respectively.
Cash Flows
     Cash and equivalents increased by $324 million for the nine months ended September 30, 2007 and decreased by $3.042 billion for the nine months ended September 30, 2006. Components of these changes are discussed below in more detail.
Operating Activities
     Details of cash provided by operations are as follows (millions):
                 
    Nine Months Ended  
    9/30/07     9/30/06  
            (recast)  
Operating Income
  $ 6,606     $ 5,218  
Depreciation and amortization
    3,274       2,504  
Amounts related to securities litigation and government investigations:
               
Net expenses
    169       90  
Cash payments, net of recoveries
    (919 )     (267 )
Gain on dispositions of assets
    (673 )     (22 )
Noncash asset impairments
    36       200  
Net interest payments(a)
    (1,516 )     (1,105 )
Net income taxes paid(b)
    (395 )     (340 )
Noncash equity-based compensation
    230       212  
Net cash flows from discontinued operations(c)
    33       156  
Merger-related and restructuring payments, net of accruals(d)
    (103 )     (2 )
All other, net, including working capital changes
    (586 )     (74 )
 
           
Cash provided by operations
  $ 6,156     $ 6,570  
 
           
 
(a)  
Includes interest income received of $77 million and $108 million in 2007 and 2006, respectively.
 
(b)  
Includes income tax refunds received of $84 million and $32 million in 2007 and 2006, respectively.
 
(c)  
Reflects net income from discontinued operations of $324 million and $1.412 billion in 2007 and 2006, respectively, net of noncash gains and expenses and working capital-related adjustments of $(291) million in 2007 and $(1.256) billion in 2006.
 
(d)  
Includes payments for restructuring and merger-related costs and payments for certain other merger-related liabilities, net of accruals.
     Cash provided by operations decreased to $6.156 billion in 2007 compared to $6.570 billion in 2006. The decrease in cash provided by operations related primarily to increases in payments made in connection with the settlements in the securities litigation and the government investigations, interest payments, income taxes paid and cash used for working capital, partially offset by increases in Operating Income and depreciation and amortization. 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 was primarily related to higher payments on accounts payable and lower collections on accounts receivable.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
The Company’s net income tax payments benefited from the utilization of certain tax attribute carryforwards (primarily U.S. federal tax loss carryforwards). Based on current expectations, the Company anticipates that the U.S. federal tax loss carryforwards will be fully utilized in 2007, resulting in a significant increase in income tax payments in 2008.
Investing Activities
     Details of cash used by investing activities are as follows (millions):
                 
    Nine Months Ended  
    9/30/07     9/30/06  
            (recast)  
Investments in available-for-sale securities
  $ (90 )   $  
Investments and acquisitions, net of cash acquired:
               
TACODA
    (274 )      
Third Screen Media
    (104 )      
Cash used for the Adelphia Acquisition and the Exchange
    (25 )     (9,065 )
Redemption of Comcast’s interests in TWC and TWE
          (2,004 )
Court TV
          (697 )
Wireless Joint Venture(a)
    (30 )     (182 )
Synapse(b)
          (140 )
All other
    (259 )     (276 )
Investment activities of discontinued operations
    (26 )      
Capital expenditures and product development costs from continuing operations
    (3,100 )     (2,670 )
Capital expenditures and product development costs from discontinued operations
          (63 )
Proceeds from the sale of available-for-sale securities
    33       42  
Proceeds from the sale of AOL’s German access business
    850        
Proceeds from the sale of Tegic
    265        
Proceeds from the sale of the Parenting Group and most of the Time4 Media magazine titles
    220        
Proceeds from the sale of the Company’s 50% interest in Bookspan
    145        
Proceeds from the issuance of a 5% equity interest by AOL
          1,000  
Proceeds from the sale of a portion of the Company’s interest in Time Warner Telecom
          800  
Proceeds from the sale of Time Warner Book Group
          524  
Proceeds from the sale of Turner South
          371  
Proceeds from the sale of the Theme Parks
          191  
All other investment and asset sale proceeds
    326       188  
 
           
Cash used by investing activities
  $ (2,069 )   $ (11,981 )
 
           
 
(a)  
Cash used for the Wireless Joint Venture for the nine months ended September 30, 2006 represents a deposit that TWC paid in July 2006 related to TWC’s investment in a wireless spectrum joint venture with several other cable companies (the “Wireless Joint Venture”). Included in the cash used for the Wireless Joint Venture for the nine months ended September 30, 2007 is a contribution of $28 million to the Wireless Joint Venture to fund TWC’s share of a payment to Sprint to purchase Sprint’s interest in the Wireless Joint Venture for an amount equal to Sprint’s capital contributions. Under certain circumstances, the remaining members have the ability to exit the Wireless Joint Venture and receive from the Wireless Joint Venture, subject to certain limitations and adjustments, advanced wireless spectrum licenses covering their operating areas.
 
(b)  
Represents purchase of remaining interest in Synapse Group Inc.
     Cash used by investing activities was $2.069 billion in 2007 compared to $11.981 billion in 2006. The change in cash used by investing activities primarily reflected the decrease in investments and acquisitions, net of cash acquired, principally related to the Adelphia Acquisition, the Exchange and the Redemptions, partially offset by a decrease in proceeds from the sales of assets and an increase in capital expenditures and product development costs. The increase in capital expenditures was principally associated with the Acquired Systems, as well as the continued roll-out of TWC’s advanced digital services in the Legacy Systems.
     As a result of the Adelphia/Comcast Transactions, the Company has made significant capital expenditures and anticipates making additional capital expenditures related to the continued integration of the Acquired Systems, including improvements to plant and technical performance and upgrading system capacity to allow TWC to offer its advanced services and features in the Acquired Systems. Through December 31, 2006, the Company incurred approximately $200

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
million of such expenditures, and the Company estimates that it will incur additional expenditures of approximately $200 million during 2007 (including approximately $140 million incurred during the nine months ended September 30, 2007). TWC expects that these upgrades will be substantially complete by the end of 2007. The Company does not believe that these expenditures will have a material negative impact on its liquidity or capital resources.
Financing Activities
     Details of cash provided (used) by financing activities are as follows (millions):
                 
    Nine Months Ended  
    9/30/07     9/30/06  
Borrowings
  $ 12,728     $ 15,580  
Debt repayments
    (10,551 )     (2,551 )
Proceeds from exercise of stock options
    484       378  
Excess tax benefit on stock options
    74       61  
Principal payments on capital leases
    (45 )     (64 )
Repurchases of common stock
    (5,714 )     (10,659 )
Issuance of mandatorily redeemable preferred membership units by a subsidiary
          300  
Dividends paid
    (645 )     (658 )
Other financing activities
    (94 )     (18 )
 
           
Cash (used) provided by financing activities
  $ (3,763 )   $ 2,369  
 
           
     Cash used by financing activities was $3.763 billion in 2007 compared to cash provided by financing activities of $2.369 billion in 2006. The change in cash (used) provided by financing activities is primarily due to a decline in net borrowings (i.e., borrowings less repayments), partially offset by a decline in repurchases of common stock made in connection with the Company’s common stock repurchase programs.
Cable Debt Securities
     On April 9, 2007, TWC issued $5.0 billion in aggregate principal amount of senior unsecured notes and debentures (the “Cable Bond Offering”) consisting of $1.5 billion principal amount of 5.40% Notes due 2012 (the “2012 Initial Notes”), $2.0 billion principal amount of 5.85% Notes due 2017 (the “2017 Initial Notes”) and $1.5 billion principal amount of 6.55% Debentures due 2037 (the “2037 Initial Debentures” and, together with the 2012 Initial Notes and the 2017 Initial Notes, the “Cable Initial Debt Securities”) pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The Cable Initial Debt Securities are guaranteed by TWE and TWNYCH (the “Guarantors”). TWC used a portion of the net proceeds of the Cable Bond Offering to repay all of the outstanding indebtedness under its $4.0 billion three-year term credit facility, which was terminated on April 13, 2007. The balance of the net proceeds was used to repay a portion of the outstanding indebtedness under TWC’s $4.0 billion five-year term credit facility on April 27, 2007, which reduced the amounts outstanding under that facility to $3.045 billion as of such date.
     In connection with the issuance of the Cable Initial Debt Securities, on April 9, 2007, TWC, the Guarantors and the initial purchasers of the Cable Initial Debt Securities entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which TWC agreed, among other things, to use its commercially reasonable efforts to consummate a registered exchange offer for the Cable Initial Debt Securities within 270 days after the issuance date of the Cable Initial Debt Securities or cause a shelf registration statement covering the resale of the Cable Initial Debt Securities to be declared effective within specified periods. On November 5, 2007, pursuant to a registered exchange offer, TWC and the Guarantors exchanged (i) substantially all of the 2012 Initial Notes for a like aggregate principal amount of registered debt securities without transfer restrictions or registration rights (the “2012 Registered Notes,” and, together with the 2012 Initial Notes, the “2012 Notes”), (ii) all of the 2017 Initial Notes for a like aggregate principal amount of registered debt securities without transfer restrictions or registration rights (the “2017 Registered Notes,” and, together with the 2017 Initial Notes, the “2017 Notes”), and (iii) substantially all of the 2037 Initial Debentures for a like aggregate principal amount of registered debt securities without transfer restrictions or registration rights (the “2037 Registered Debentures,” and, together with the 2037 Initial Debentures, the “2037 Debentures”). Collectively, the 2012 Notes, the 2017 Notes and the 2037 Debentures are referred to as the “Cable Debt Securities.”
     The Cable Debt Securities were issued pursuant to an Indenture, dated as of April 9, 2007 (the “Base Cable Indenture”), by and among TWC, the Guarantors and The Bank of New York, as trustee, as supplemented by the First Supplemental Indenture, dated as of April 9, 2007 (the “First Supplemental Cable Indenture” and, together with the Cable Base Indenture, the “Cable Indenture”), by and among TWC, the Guarantors and The Bank of New York, as trustee.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
     The 2012 Notes mature on July 2, 2012, the 2017 Notes mature on May 1, 2017 and the 2037 Debentures mature on May 1, 2037. Interest on the 2012 Notes is payable semi-annually in arrears on January 2 and July 2 of each year, beginning on July 2, 2007. Interest on the 2017 Notes and the 2037 Debentures is payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2007. The Cable Debt Securities are unsecured senior obligations of TWC and rank equally with its other unsecured and unsubordinated obligations. The guarantees of the Cable Debt Securities are unsecured senior obligations of the Guarantors and rank equally in right of payment with all other unsecured and unsubordinated obligations of the Guarantors.
     The Cable Debt Securities may be redeemed in whole or in part at any time at TWC’s option at a redemption price equal to the greater of (i) 100% of the principal amount of the Cable Debt Securities being redeemed and (ii) the sum of the present values of the remaining scheduled payments on the Cable Debt Securities discounted to the redemption date on a semi-annual basis at a government treasury rate plus 20 basis points for the 2012 Notes, 30 basis points for the 2017 Notes and 35 basis points for the 2037 Debentures as further described in the Cable Indenture, plus, in each case, accrued but unpaid interest to the redemption date.
     The Cable Indenture contains customary covenants relating to restrictions on the ability of TWC or any material subsidiary of TWC to create liens and on the ability of TWC and the Guarantors to consolidate, merge or convey or transfer substantially all of their assets. The Cable Indenture also contains customary events of default.
Bank Credit Agreements and Commercial Paper Programs
     On January 25, 2007, Time Warner entered into a $7.0 billion unsecured commercial paper program (the “TW Program”) that replaced its previous $5.0 billion unsecured commercial paper program, which was terminated in February 2007 upon repayment of the last amounts issued thereunder. The obligations of Time Warner under the TW Program are guaranteed by TW AOL Holdings Inc. (“TW AOL”) and Historic TW Inc. (“Historic TW”). In addition, the obligations of Historic TW are guaranteed by Turner and Time Warner Companies, Inc. Proceeds from the TW Program may be used for general corporate purposes, including investments, repayment of debt and acquisitions. Commercial paper issued by Time Warner is supported by unused committed capacity under the Company’s $7.0 billion senior unsecured five-year revolving credit facility. As a result of recent market volatility in the U.S. debt markets, including the dislocation of the overall commercial paper market, the Company has decreased the amount of commercial paper outstanding under the TW Program, and has offset this decrease by increasing borrowings outstanding under its $7.0 billion credit facility. As of September 30, 2007, approximately $1.988 billion of commercial paper was outstanding under the TW Program, and there were borrowings of $3.300 billion outstanding under the Company’s $7.0 billion credit facility.
     On December 4, 2006, TWC entered into a $6.0 billion unsecured commercial paper program (the “TWC Program”) that replaced its previous $2.0 billion commercial paper program, which was terminated on February 14, 2007 upon repayment of the last remaining notes issued under that program. The TWC Program is guaranteed by TWNYCH and TWE. Commercial paper issued by TWC under the TWC Program is supported by unused committed capacity under TWC’s $6.0 billion senior unsecured revolving credit facility and ranks pari passu with other unsecured senior indebtedness of TWC, TWE and TWNYCH. TWC has also decreased the amount of commercial paper outstanding under its program as a result of the recent volatility in the U.S. debt markets, and has offset this decrease by increasing borrowings outstanding under its $6.0 billion credit facility. As of September 30, 2007, approximately $1.018 billion of commercial paper was outstanding under the TWC Program, and there were borrowings of $1.800 billion outstanding under TWC’s $6.0 billion credit facility.
Programming Licensing Backlog
     Programming licensing backlog represents the amount of future revenues not yet recorded from cash contracts for the licensing of theatrical and television product for pay cable, basic cable, network and syndicated television exhibition. Backlog was approximately $3.9 billion and $4.2 billion at September 30, 2007 and December 31, 2006, respectively. Included in these amounts is licensing of film product from one Time Warner division to another Time Warner division in the amount of $699 million and $702 million at September 30, 2007 and December 31, 2006, respectively.

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
     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 from operations. 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 current 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, update or alter its forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise.
     Various factors could adversely affect the operations, business or financial results of Time Warner or its business segments in the future and cause Time Warner’s actual results to differ materially from those contained in the forward-looking statements, including those factors discussed in detail in Item 1A, “Risk Factors,” in the 2006 Form 10-K, and in Time Warner’s other filings made from time to time with the SEC after the date of this report. In addition, Time Warner operates in highly competitive, consumer and technology-driven and rapidly changing media, entertainment, interactive services and cable 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.
     Further, for Time Warner generally, lower than expected valuations associated with the cash flows and revenues at Time Warner’s segments may result in Time Warner’s inability to realize the value of recorded intangibles and goodwill at those segments. In addition, achieving the Company’s financial objectives, including growth in operations, maintaining financial ratios and a strong balance sheet, could be adversely affected by the factors discussed in detail in Item 1A, “Risk Factors,” in the 2006 Form 10-K, as well as:
   
economic slowdowns;
 
   
the impact of terrorist acts and hostilities;
 
   
changes in the Company’s plans, strategies and intentions;
 
   
the impacts of significant acquisitions, dispositions and other similar transactions;
 
   
the failure to meet earnings expectations; and
 
   
decreased liquidity in the capital markets, including any reduction in the ability to access the capital markets for debt securities or bank financings.

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TIME WARNER INC.
Item 4. CONTROLS AND PROCEDURES
Item 4. Controls and Procedures.
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 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 to ensure that information required to be disclosed in reports filed or submitted by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by the Company is accumulated and communicated to the Company’s management to allow timely decisions regarding the required disclosure.
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 September 30, 2007 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

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TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited; millions, except per share amounts)
                 
    September 30,     December 31,  
    2007     2006  
            (recast)  
ASSETS
               
Current assets
               
Cash and equivalents
  $ 1,873     $ 1,549  
Restricted cash
    3       29  
Receivables, less allowances of $1,924 and $2,271
    5,869       6,064  
Inventories
    1,996       1,907  
Prepaid expenses and other current assets
    902       1,136  
Current assets of discontinued operations
          166  
 
           
Total current assets
    10,643       10,851  
Noncurrent inventories and film costs
    5,487       5,394  
Investments, including available-for-sale securities
    2,051       3,426  
Property, plant and equipment, net
    17,547       16,718  
Intangible assets subject to amortization, net
    4,915       5,204  
Intangible assets not subject to amortization
    47,242       46,362  
Goodwill
    41,274       40,749  
Other assets
    2,148       2,389  
Noncurrent assets of discontinued operations
          576  
 
           
Total assets
  $ 131,307     $ 131,669  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities
               
Accounts payable
  $ 1,071     $ 1,357  
Participations payable
    2,118       2,049  
Royalties and programming costs payable
    1,241       1,215  
Deferred revenue
    1,275       1,434  
Debt due within one year
    73       64  
Other current liabilities
    5,102       6,508  
Current liabilities of discontinued operations
    22       153  
 
           
Total current liabilities
    10,902       12,780  
Long-term debt
    37,056       34,933  
Mandatorily redeemable preferred membership units issued by a subsidiary
    300       300  
Deferred income taxes
    12,671       13,114  
Deferred revenue
    497       528  
Other liabilities
    7,468       5,462  
Noncurrent liabilities of discontinued operations
    1       124  
Minority interests
    4,266       4,039  
Commitments and contingencies (Note 11)
               
Shareholders’ equity
               
Series LMCN-V common stock, $0.01 par value, 18.8 million shares issued and outstanding at December 31, 2006
           
Time Warner common stock, $0.01 par value, 4.874 and 4.836 billion shares issued and 3.626 and 3.864 billion shares outstanding
    49       48  
Common stock due from Liberty Media Corporation
    (83 )      
Paid-in-capital
    172,400       172,083  
Treasury stock, at cost (1,248 and 972 million shares)
    (24,892 )     (19,140 )
Accumulated other comprehensive income (loss), net
    56       (136 )
Accumulated deficit
    (89,384 )     (92,466 )
 
           
Total shareholders’ equity
    58,146       60,389  
 
           
Total liabilities and shareholders’ equity
  $ 131,307     $ 131,669  
 
           
See accompanying notes.

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TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited; millions, except per share amounts)
                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06  
            (recast)             (recast)  
Revenues:
                               
Subscription
  $ 6,170     $ 6,136     $ 18,638     $ 17,298  
Advertising
    2,095       2,003       6,295       5,925  
Content
    3,141       2,349       8,163       7,364  
Other
    270       262       744       762  
 
                       
Total revenues(a)
    11,676       10,750       33,840       31,349  
Costs of revenues(a)
    (6,961 )     (6,155 )     (19,874 )     (17,646 )
Selling, general and administrative(a)
    (2,407 )     (2,483 )     (7,213 )     (7,593 )
Amortization of intangible assets
    (167 )     (163 )     (502 )     (419 )
Amounts related to securities litigation and government investigations
    (2 )     (29 )     (169 )     (90 )
Merger-related, restructuring and shutdown costs
    (12 )     (73 )     (113 )     (205 )
Asset impairments
    (1 )     (200 )     (36 )     (200 )
Gains on disposal of assets, net
    4             673       22  
 
                       
Operating income
    2,130       1,647       6,606       5,218  
Interest expense, net(a)
    (589 )     (479 )     (1,714 )     (1,114 )
Other income (loss), net
    (2 )     711       231       1,069  
Minority interest expense, net
    (84 )     (89 )     (305 )     (265 )
 
                       
Income before income taxes, discontinued operations and cumulative effect of accounting change
    1,455       1,790       4,818       4,908  
Income tax provision
    (555 )     (443 )     (1,786 )     (1,546 )
 
                       
Income before discontinued operations and cumulative effect of accounting change
    900       1,347       3,032       3,362  
Discontinued operations, net of tax
    186       975       324       1,412  
 
                       
Income before cumulative effect of accounting change
    1,086       2,322       3,356       4,774  
Cumulative effect of accounting change, net of tax
                      25  
 
                       
Net income
  $ 1,086     $ 2,322     $ 3,356     $ 4,799  
 
                       
 
                               
Basic income per common share before discontinued operations and cumulative effect of accounting change
  $ 0.24     $ 0.33     $ 0.81     $ 0.79  
Discontinued operations
    0.06       0.24       0.08       0.33  
Cumulative effect of accounting change
                      0.01  
 
                       
Basic net income per common share
  $ 0.30     $ 0.57     $ 0.89     $ 1.13  
 
                       
Average basic common shares
    3,673.7       4,048.8       3,756.6       4,258.7  
 
                       
Diluted income per common share before discontinued operations and cumulative effect of accounting change
  $ 0.24     $ 0.33     $ 0.80     $ 0.78  
Discontinued operations
    0.05       0.24       0.08       0.33  
Cumulative effect of accounting change
                      0.01  
 
                       
Diluted net income per common share
  $ 0.29     $ 0.57     $ 0.88     $ 1.12  
 
                       
Average diluted common shares
    3,714.3       4,084.4       3,803.8       4,296.7  
 
                       
Cash dividends declared per share of common stock
  $ 0.0625     $ 0.0550     $ 0.1725     $ 0.1550  
 
                       
 
(a)      Includes the following income (expenses) resulting from transactions with related companies:
                                 
Revenues
  $ 44     $ 91     $ 233     $ 239  
Costs of revenues
    (44 )     (35 )     (155 )     (131 )
Selling, general and administrative
    (1 )     2       (4 )     22  
Interest expense, net
          15             39  
See accompanying notes.

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TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
(Unaudited, millions)
                 
    2007     2006  
            (recast)  
OPERATIONS
               
Net income(a)
  $ 3,356     $ 4,799  
Adjustments for noncash and nonoperating items:
               
Cumulative effect of accounting change, net of tax
          (25 )
Depreciation and amortization
    3,274       2,504  
Amortization of film and television costs
    4,497       4,449  
Asset impairments
    36       200  
Gain on investments and other assets, net
    (971 )     (1,044 )
Equity in (income) losses of investee companies, net of cash distributions
    53       (33 )
Equity-based compensation
    230       212  
Minority interests
    305       265  
Deferred income taxes
    1,406       1,030  
Amounts related to securities litigation and government investigations
    (750 )     (177 )
Changes in operating assets and liabilities, net of acquisitions
    (4,989 )     (4,354 )
Adjustments relating to discontinued operations(a)
    (291 )     (1,256 )
 
           
Cash provided by operations(b)
    6,156       6,570  
 
           
INVESTING ACTIVITIES
               
Investments in available-for-sale securities
    (90 )      
Investments and acquisitions, net of cash acquired
    (662 )     (12,182 )
Investment in a wireless joint venture
    (30 )     (182 )
Investment activities of discontinued operations
    (26 )      
Capital expenditures and product development costs
    (3,100 )     (2,670 )
Capital expenditures from discontinued operations
          (63 )
Investment proceeds from available-for-sale securities
    33       42  
Other investment proceeds
    1,806       3,074  
 
           
Cash used by investing activities
    (2,069 )     (11,981 )
 
           
FINANCING ACTIVITIES
               
Borrowings
    12,728       15,580  
Issuance of mandatorily redeemable preferred membership units by a subsidiary
          300  
Debt repayments
    (10,551 )     (2,551 )
Proceeds from exercise of stock options
    484       378  
Excess tax benefit on stock options
    74       61  
Principal payments on capital leases
    (45 )     (64 )
Repurchases of common stock(c)
    (5,714 )     (10,659 )
Dividends paid
    (645 )     (658 )
Other
    (94 )     (18 )
 
           
Cash provided (used) by financing activities
    (3,763 )     2,369  
 
           
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
    324       (3,042 )
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
    1,549       4,220  
 
           
CASH AND EQUIVALENTS AT END OF PERIOD
  $ 1,873     $ 1,178  
 
           
 
(a)  
The nine months ended September 30, 2007 and 2006 include net income from discontinued operations of $324 million and $1.412 billion, respectively. After considering noncash gains and expenses and working capital-related adjustments relating to discontinued operations, net operational cash flows from discontinued operations were $33 million and $156 million for the nine months ended September 30, 2007 and 2006, respectively.
 
(b)  
The nine months ended September 30, 2007 and 2006 include an approximate $2 million and $181 million source of cash, respectively, related to changing the fiscal year end of certain international operations from November 30 to December 31.
 
(c)  
The nine months ended September 30, 2007 excludes $440 million of common stock repurchased or due from Liberty Media Corporation, indirectly attributable to the exchange of the Atlanta Braves baseball franchise (the “Braves”) and Leisure Arts, Inc. (“Leisure Arts”). Specifically, the $440 million represents the fair value of the Braves and Leisure Arts of $473 million, less a $33 million net working capital adjustment (Note 3).
See accompanying notes.

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TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Nine Months Ended September 30,
(Unaudited; millions, except per share amounts)
                 
    2007     2006  
BALANCE AT BEGINNING OF PERIOD
  $ 60,389     $ 65,105  
Net income
    3,356       4,799  
Other comprehensive income
    192       234  
 
           
Comprehensive income(a)
    3,548       5,033  
Cash dividends ($0.1725 and $0.1550 per common share)
    (645 )     (658 )
Common stock repurchases(b)
    (6,033 )     (10,722 )
Impact of adopting new accounting pronouncements(c).
    386       (40 )
Gain on Time Warner Cable Inc. stock issuance
          1,771  
Gain on issuance of a 5% equity interest by AOL
          801  
Amounts related primarily to stock options and restricted stock
    501       490  
 
           
BALANCE AT END OF PERIOD
  $ 58,146     $ 61,780  
 
           
 
(a)  
The nine months ended September 30, 2007 and 2006 include $187 million and $248 million, respectively, in foreign currency translation adjustments.
 
(b)  
The nine months ended September 30, 2007 includes $440 million of common stock repurchased or due from Liberty Media Corporation, indirectly attributable to the exchange of the Atlanta Braves baseball franchise (the “Braves”) and Leisure Arts, Inc. (“Leisure Arts”). Specifically, the $440 million represents the fair value of the Braves and Leisure Arts of $473 million, less a $33 million working capital adjustment (Note 3).
 
(c)  
The nine months ended September 30, 2007 relates to the impact of adopting the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”), of $445 million, partially offset by the impact of adopting the provisions of Emerging Issues Task Force (“EITF”) Issue No. 06-02, Accounting for Sabbatical Leave and Other Similar Benefits (“EITF 06-02”), of $59 million. See Note 1 of the consolidated financial statements. The nine months ended September 30, 2006 relates to the impact of adopting the provisions of FASB Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“FAS 123R”).
See accompanying notes.

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
     Time Warner Inc. (“Time Warner” or the “Company”) is a leading media and entertainment company, whose businesses include interactive services, cable systems, filmed entertainment, television networks and publishing. Time Warner classifies its business interests into five reportable segments: AOL: consisting principally of interactive services; Cable: consisting principally of interests in cable systems that provide video, high-speed data and voice services; Filmed Entertainment: consisting principally of feature film, television and home video production and distribution; Networks: consisting principally of cable television networks; and Publishing: consisting principally of magazine publishing. Financial information for Time Warner’s various reportable segments is presented in Note 10.
Basis of Presentation
Basis of Consolidation
     The consolidated financial statements include 100% of the assets, liabilities, revenues, expenses and cash flows of Time Warner and all entities in which Time Warner has a controlling voting interest (“subsidiaries”) and variable interest entities (“VIE”) required to be consolidated in accordance with U.S. generally accepted accounting principles (“GAAP”). Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation.
     The financial position and operating results of substantially all foreign operations are consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period. Resulting translation gains or losses are included in the consolidated statement of shareholders’ equity as a component of Accumulated other comprehensive income, net.
Use of Estimates
     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results could differ from those estimates.
     Significant estimates inherent in the preparation of the consolidated financial statements include reserves established for securities litigation matters, accounting for asset impairments, allowances for doubtful accounts, depreciation and amortization, film ultimate revenues, home video and magazine returns, business combinations, pensions and other postretirement benefits, equity-based compensation, income taxes, contingencies and certain programming arrangements.
Interim Financial Statements
     The consolidated financial statements are unaudited; however, in the opinion of management, they contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position, the results of operations and cash flows for the periods presented in conformity with GAAP applicable to interim periods. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Time Warner included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “2006 Form 10-K”).

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income Per Common Share
     Basic income per common share is computed by dividing the net income applicable to common shares after preferred dividend requirements, if any, by the weighted average of common shares outstanding during the period. Weighted-average common shares include shares of Time Warner’s common stock and Series LMCN-V common stock. All outstanding shares of Series LMCN-V common stock were tendered to the Company on May 16, 2007 and were retired in connection with the transaction with Liberty Media Corporation (“Liberty”) described in Notes 3 and 6. Diluted income per common share adjusts basic income per common share for the effects of convertible securities, stock options, restricted stock, restricted stock units, performance stock units and other potentially dilutive financial instruments, only in the periods in which such effect is dilutive.
     Set forth below is a reconciliation of basic and diluted income per common share before discontinued operations and cumulative effect of accounting change (millions, except per share amounts):
                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06  
            (recast)             (recast)  
Income before discontinued operations and cumulative effect of accounting change — basic and diluted
  $ 900     $ 1,347     $ 3,032     $ 3,362  
 
                       
Average number of common shares outstanding — basic
    3,673.7       4,048.8       3,756.6       4,258.7  
Dilutive effect of equity awards
    40.6       35.6       47.2       38.0  
 
                       
Average number of common shares outstanding — diluted
    3,714.3       4,084.4       3,803.8       4,296.7  
 
                       
Income per common share before discontinued operations and cumulative effect of accounting change:
                               
Basic
  $ 0.24     $ 0.33     $ 0.81     $ 0.79  
 
                       
Diluted
  $ 0.24     $ 0.33     $ 0.80     $ 0.78  
 
                       
     Diluted income per common share for the three months ended September 30, 2007 and 2006 and the nine months ended September 30, 2007 and 2006 exclude approximately 294 million and 461 million, respectively, and 291 million and 460 million, respectively, common shares issuable under the Company’s stock compensation plans because they do not have a dilutive effect.
Changes in Basis of Presentation
     The 2006 financial information has been recast so that the basis of presentation is consistent with that of the 2007 financial information. Specifically, amounts were recast to reflect the retrospective presentation of certain businesses that were sold as discontinued operations (see Note 3).
Consolidation of Kansas City Pool
     On January 1, 2007, the Company began consolidating the results of the Kansas City, south and west Texas and New Mexico cable systems (the “Kansas City Pool”) it received upon the distribution of the assets of Texas and Kansas City Cable Partners, L.P. (“TKCCP”) to Time Warner Cable Inc. (together with its subsidiaries, “TWC”) and Comcast Corporation (“Comcast”).
Amounts Related to Securities Litigation
     During the first and second quarters of 2007, the Company reached agreements to settle substantially all of the remaining securities litigation claims, a substantial portion of which had been reserved for at December 31, 2006. For the nine months ended September 30, 2007, the Company recorded charges of approximately $153 million for these settlements. At September 30, 2007, the Company’s remaining reserve related to these matters is approximately $10 million, including approximately $8 million that has been reserved for an expected attorneys’ fee award related to a previously settled matter. The Company believes the potential exposure in the securities litigation matters that remain pending at September 30, 2007 to be de minimis.

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     The Company recognizes insurance recoveries when it becomes probable that such amounts will be received. The Company recognized insurance recoveries related to Employee Retirement Income Security Act (“ERISA”) matters of approximately $9 million for the nine months ended September 30, 2007 and approximately $4 million and $57 million for the three and nine months ended September 30, 2006, respectively.
Equity-Based Compensation
     The Company follows the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“Statement”) No. 123 (revised 2004), Share-Based Payment (“FAS 123R”), which require that a company measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in the statement of operations over the period during which an employee is required to provide service in exchange for the award. FAS 123R also requires that excess tax benefits, as defined, realized from the exercise of stock options be reported as a financing cash inflow rather than as a reduction of taxes paid in cash flow from operations.
     The grant-date fair value of a stock option award is estimated using the Black-Scholes option-pricing model, consistent with the provisions of FAS 123R and the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment. Because option-pricing models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options. The Company determines the volatility assumption for these stock options using implied volatilities from its traded options as well as quotes from third-party investment banks. The expected term, which represents the period of time that options granted are expected to be outstanding, is estimated based on the historical exercise experience of Time Warner employees. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The risk-free rate assumed in valuing the options is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The Company determines the expected dividend yield percentage by dividing the expected annual dividend by the market price of Time Warner common stock at the date of grant.
     In April 2007, TWC started granting stock options and restricted stock units based on TWC’s Class A common stock. The valuation of, as well as the expense recognition for, such awards is generally consistent with the treatment of Time Warner awards as described above. However, because TWC’s Class A common stock has a limited trading history, the volatility assumption is determined by reference to historical and implied volatilities of a comparable peer group of publicly traded companies.
     Prior to the adoption of FAS 123R on January 1, 2006, the Company recognized equity-based compensation expense for awards with graded vesting by treating each vesting tranche as a separate award and recognizing compensation expense ratably for each tranche. For equity awards granted subsequent to the adoption of FAS 123R, the Company treats such awards as a single award and recognizes equity-based compensation expense on a straight-line basis (net of estimated forfeitures) over the employee service period. Equity-based compensation expense is recorded in costs of revenues or selling, general and administrative expense depending on the employee’s job function.
     When recording compensation cost for equity awards, FAS 123R requires companies to estimate the number of equity awards granted that are expected to be forfeited. Prior to the adoption of FAS 123R, the Company recognized forfeitures when they occurred, rather than using an estimate at the grant date and subsequently adjusting the estimated forfeitures to reflect actual forfeitures. The Company recorded a benefit of $25 million, net of tax, as the cumulative effect of a change in accounting principle upon the adoption of FAS 123R in the first quarter of 2006, to recognize the effect of estimating the number of awards granted prior to January 1, 2006 that are not ultimately expected to vest.

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recent Accounting Standards
Accounting for Sabbatical Leave and Other Similar Benefits
     On January 1, 2007, the Company adopted the provisions of Emerging Issues Task Force (“EITF”) Issue No. 06-02, Accounting for Sabbatical Leave and Other Similar Benefits (“EITF 06-02”), related to certain sabbatical leave and other employment arrangements that are similar to a sabbatical leave. EITF 06-02 provides that an employee’s right to a compensated absence under a sabbatical leave or similar benefit arrangement in which the employee is not required to perform any duties during the absence is an accumulating benefit. Therefore, such arrangements should be accounted for as a liability with the cost recognized over the service period during which the employee earns the benefit. Adoption of this guidance resulted in an increase to accumulated deficit of approximately $97 million (approximately $59 million, net of tax) on January 1, 2007. The resulting change in the accrual for the nine months ended September 30, 2007 was not material.
Accounting for Uncertainty in Income Taxes
     On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. This interpretation requires the Company to recognize in the consolidated financial statements those tax positions determined to be more likely than not of being sustained upon examination, based on the technical merits of the positions. Upon adoption, the Company recognized approximately $445 million of tax benefits for positions that were previously unrecognized, of which approximately $433 million was accounted for as a reduction to the accumulated deficit balance and approximately $12 million was accounted for as an increase to the paid-in-capital balance as of January 1, 2007. Additionally, the adoption of FIN 48 resulted in the recognition of additional tax reserves for positions where there is uncertainty about the timing or character of such deductibility. These additional reserves were largely offset by increased deferred tax assets. After considering the impact of adopting FIN 48, the Company had a $1.6 billion reserve for uncertain income tax positions as of January 1, 2007.
     During the three months ended September 30, 2007, the Company recorded additional reserves, including a reserve of approximately $330 million attributable to uncertainties associated with certain tax attributes utilized by the Company that was offset by a decrease to current taxes payable.
     The Company does not presently anticipate that its existing reserves related to uncertain tax positions as of September 30, 2007 will significantly increase or decrease during the twelve month period ended September 30, 2008; however, various events could cause the Company’s current expectations to change in the future. The majority of these uncertain tax positions, if ever recognized in the financial statements, would be recorded in the statement of operations as part of the income tax provision.
     The income tax reserve as of January 1, 2007 included an accrual for interest and penalties of approximately $117 million. The impact of timing differences and tax attributes are considered when calculating interest and penalty accruals associated with the tax reserve. The change in the accrual for interest and penalties for the nine months ended September 30, 2007 was not material. The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax expense.
     The Company and its subsidiaries file income tax returns in the U.S. and various state and local and foreign jurisdictions. The Internal Revenue Service (IRS) has commenced an examination of the Company’s U.S. income tax returns for the 2002 through 2004 period. The tax years that remain subject to examination by significant jurisdiction are as follows:
     
U.S. federal   2002 through the current period
California   2002 through the current period
New York State   1997 through the current period
New York City   1997 through the current period

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. TIME WARNER CABLE INC.
Interest in TW NY Cable Holding Inc.  
     In September 2007, the Company proposed to TWC that it enter into discussions regarding a transaction pursuant to which TWC’s subsidiary, TW NY Cable Holding Inc. (“TWNYCH”), would redeem a significant portion of the Company’s 12.43% non-voting, equity interest in it. TWC’s Board of Directors has appointed a special committee of independent directors and authorized it to consider any proposal made by the Company and to negotiate with the Company regarding the terms of such a transaction. No assurance can be given that any proposal will result in an agreement for TWNYCH to redeem a portion of the Company’s interest in it or, if an agreement is reached, that a redemption transaction will be consummated. In April 2005, in connection with the announcement of the Adelphia/Comcast Transactions (as defined below), TWC valued the Company’s 12.43% interest (as if the Adelphia/Comcast Transactions had occurred at that time) at approximately $2.9 billion. This 2005 valuation is not necessarily indicative of the fair value of the interest as of the date of this report. If a redemption transaction takes place, the Company expects that TWC would finance the transaction through available borrowing capacity under TWC’s existing committed revolving credit facility or by accessing the bank credit or debt capital markets. If a redemption transaction is completed, it will not change the 84% ownership interest the Company has in TWC’s common stock.
Transactions with Adelphia and Comcast
     On July 31, 2006, a subsidiary of TWC, Time Warner NY Cable LLC (“TW NY”), and Comcast completed their respective acquisitions of assets comprising in the aggregate substantially all of the cable assets of Adelphia Communications Corporation (“Adelphia”) (the “Adelphia Acquisition”). Additionally, on July 31, 2006, immediately before the closing of the Adelphia Acquisition, Comcast’s interests in TWC and Time Warner Entertainment Company, L.P. (“TWE”), a subsidiary of TWC, were redeemed (the “TWC Redemption” and the “TWE Redemption,” respectively, and, collectively, the “Redemptions”). Following the Redemptions and the Adelphia Acquisition, on July 31, 2006, TW NY and Comcast swapped certain cable systems, most of which were acquired from Adelphia, in order to enhance TWC’s and Comcast’s respective geographic clusters of subscribers (the “Exchange” and, together with the Adelphia Acquisition and the Redemptions, the “Adelphia/Comcast Transactions”). The results of the systems acquired in connection with the Adelphia/Comcast Transactions have been included in the consolidated statement of operations since the closing of the transactions. As a result of the closing of the Adelphia/Comcast Transactions, TWC acquired systems with approximately 4.0 million basic video subscribers and disposed of systems with approximately 0.8 million basic video subscribers previously owned by TWC that were transferred to Comcast in connection with the Redemptions and the Exchange for a net gain of approximately 3.2 million basic video subscribers.
     On February 13, 2007, Adelphia’s Chapter 11 reorganization plan became effective and, under applicable securities law regulations and provisions of the U.S. bankruptcy code, TWC became a public company subject to the requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Under the terms of the reorganization plan, the shares of TWC’s Class A common stock that Adelphia received in the Adelphia Acquisition (representing approximately 16% of TWC’s outstanding common stock) are being distributed to Adelphia’s creditors. On March 1, 2007, TWC’s Class A common stock began trading on the New York Stock Exchange under the symbol “TWC.” As of September 30, 2007, Time Warner owned approximately 84% of TWC’s outstanding common stock.
Texas/Kansas City Cable Joint Venture
     TKCCP was a 50-50 joint venture between a consolidated subsidiary of TWC (Time Warner Entertainment-Advance/Newhouse Partnership (“TWE-A/N”)) and Comcast. On January 1, 2007, TKCCP distributed its assets to TWC and Comcast. TWC received the Kansas City Pool, which served approximately 788,000 basic video subscribers as of December 31, 2006, and Comcast received the pool of assets consisting of the Houston cable systems (the “Houston Pool”), which served approximately 795,000 basic video subscribers as of December 31, 2006. TWC began consolidating the results of the Kansas City Pool on January 1, 2007. TKCCP was formally dissolved on May 15, 2007. For accounting purposes, the Company has treated the distribution of TKCCP’s assets as a sale of the Company’s 50% equity interest in the Houston Pool and as an acquisition of Comcast’s 50% equity interest in the Kansas City Pool. As a result of the sale of the Company’s 50% equity interest in the Houston Pool, the Company recorded a pretax gain of approximately $146

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
million in the first quarter of 2007, which is included as a component of other income (loss), net in the consolidated statement of operations for the nine months ended September 30, 2007.
     The acquisition of Comcast’s 50% equity interest in the Kansas City Pool on January 1, 2007 was treated as a step-acquisition and accounted for as a purchase business combination. The consideration paid to acquire the 50% equity interest in the Kansas City Pool was the fair value of the 50% equity interest in the Houston Pool transferred to Comcast. The estimated fair value of TWC’s 50% interest in the Houston Pool (approximately $880 million) was determined using a discounted cash flow analysis and was reduced by debt assumed by Comcast. Approximately $612 million of the purchase price has been allocated to intangible assets not subject to amortization and $183 million has been allocated to property, plant and equipment with the remainder of $85 million allocated to other assets and liabilities.
Supplemental Unaudited Pro Forma Information for Significant Acquisitions
     The following schedule presents supplemental unaudited pro forma information for the three and nine months ended September 30, 2006 as if the Adelphia/Comcast Transactions and the consolidation of the Kansas City Pool had occurred on January 1, 2006. The unaudited pro forma information is presented based on information available, is intended for informational purposes only and is not necessarily indicative of and does not purport to represent what Time Warner’s future financial condition or operating results will be after giving effect to the Adelphia/Comcast Transactions and the consolidation of the Kansas City Pool, and does not reflect actions that may be undertaken by management in integrating these businesses (e.g., the cost of incremental capital expenditures). In addition, this supplemental information does not reflect financial and operating benefits TWC expects to realize as a result of the Adelphia/Comcast Transactions and the consolidation of the Kansas City Pool (millions, except per share amounts).
                 
    Pro Forma  
    Three Months Ended     Nine Months Ended  
    9/30/06     9/30/06  
Revenues
  $ 11,225     $ 33,984  
Costs of revenues(a)
    (5,745 )     (17,238 )
Selling, general and administrative expenses(a)
    (2,431 )     (7,689 )
Other, net
    (302 )     (484 )
 
           
Operating Income before Depreciation and Amortization
    2,747       8,573  
Depreciation
    (862 )     (2,540 )
Amortization
    (189 )     (565 )
 
           
Operating Income
    1,696       5,468  
Interest expense, net
    (532 )     (1,490 )
Other income, net
    596       772  
 
           
Income before income taxes, discontinued operations and cumulative effect of accounting change
    1,760       4,750  
Income tax provision
    (433 )     (1,492 )
 
           
Income before discontinued operations and cumulative effect of accounting change
  $ 1,327     $ 3,258  
 
           
 
               
Basic net income per common share before discontinued operations and cumulative effect of accounting change
  $ 0.33     $ 0.77  
Diluted net income per common share before discontinued operations and cumulative effect of accounting change
  $ 0.32     $ 0.76  
 
(a)  
Costs of revenues and selling, general and administrative expenses exclude depreciation.

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. BUSINESS ACQUISITIONS AND DISPOSITIONS
Claxson
     On October 3, 2007, the Company completed the purchase of seven pay television networks and the sales representation rights for eight third-party-owned networks operating principally in Latin America from Claxson Interactive Group, Inc. (“Claxson”) for $234 million in cash.
TACODA
     On September 6, 2007, the Company completed the acquisition of TACODA, Inc. (“TACODA”), an online behavioral targeting advertising network, for $274 million in cash, net of cash acquired. The TACODA acquisition did not significantly impact the Company’s consolidated financial results for the three and nine months ended September 30, 2007.
Divestitures of Certain Non-Core AOL Wireless Businesses
     On August 24, 2007, the Company completed the sale of Tegic Communications, Inc. (“Tegic”), a wholly owned subsidiary of AOL, to Nuance Communications, Inc. (“Nuance”) for $265 million in cash. In the third quarter of 2007, the Company recorded a pretax gain on this sale of approximately $200 million. In addition, in the third quarter of 2007, the Company transferred the assets of Wildseed LLC (“Wildseed”), a wholly owned subsidiary of AOL, to a third-party. The Company recorded a pretax charge of approximately $7 million related to this divestiture in the second quarter of 2007 and an impairment charge of approximately $18 million on the long-lived assets of Wildseed in the first quarter of 2007. All amounts related to both Tegic and Wildseed have been reflected as discontinued operations for all periods presented.
Transaction with Liberty
     On May 16, 2007, the Company completed a transaction in which Liberty exchanged 68.5 million shares of Time Warner common stock for the stock of a subsidiary of Time Warner that owned assets including the Atlanta Braves baseball franchise (the “Braves”) and Leisure Arts, Inc. (“Leisure Arts”) (at a fair value of $473 million) and $960 million of cash (collectively, the “Liberty Transaction”). Included in the 68.5 million shares of Time Warner common stock are 4 million shares expected to be delivered to the Company upon the resolution of a working capital adjustment that is expected to be completed in the fourth quarter of 2007. The 4 million shares have been reflected as common stock due from Liberty in the consolidated balance sheet at September 30, 2007. The Company recorded a pretax gain of $71 million on the sale of the Braves, which is net of indemnification obligations valued at $60 million. The Company has agreed to indemnify Liberty for, among other things, increases in the amount due by the Braves under Major League Baseball’s revenue sharing rules from expected amounts for fiscal years 2007 to 2027, to the extent attributable to local broadcast and other contracts in place prior to the Liberty Transaction. The Liberty Transaction was designed to qualify as a tax-free split-off under Section 355 of the Internal Revenue Code of 1986, as amended, and, as a result, the historical deferred tax liabilities of $83 million associated with the Braves were no longer required. In the first quarter of 2007, the Company recorded an impairment charge of $13 million on its investment in Leisure Arts. The results of operations of the Braves and Leisure Arts have been reflected as discontinued operations for all periods presented.
Bookspan
     On April 9, 2007, the Company sold its 50% interest in Bookspan, a joint venture accounted for as an equity method investment that primarily owns and operates book clubs via direct mail and e-commerce, to a subsidiary of Bertelsmann AG (“Bertelsmann”) for a purchase price of $145 million, which resulted in a pretax gain of approximately $100 million.

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Parenting and Time4 Media
     On March 3, 2007, the Company sold its Parenting Group and most of the Time4 Media magazine titles, consisting of 18 of Time Inc.’s smaller niche magazines, to a subsidiary of Bonnier AB, a Swedish media company (“Bonnier”), for approximately $220 million, which resulted in a pretax gain of approximately $54 million. The results of operations of the Parenting Group and Time4 Media magazine titles that were sold have been reflected as discontinued operations for all periods presented.
Sales of AOL’s European Access Businesses
     On February 28, 2007, the Company completed the sale of AOL’s German access business to Telecom Italia S.p.A. for $850 million in cash, resulting in a net pretax gain of approximately $668 million. In connection with this sale, the Company entered into a separate agreement to provide ongoing web services, including content, e-mail and other online tools and services to Telecom Italia S.p.A. As a result of the historical interdependency of AOL’s European access and audience businesses, the historical cash flows and operations of the access and audience businesses were not clearly distinguishable. Accordingly, AOL’s German access business and its other European access businesses, which were sold in 2006, have not been reflected as discontinued operations in the consolidated financial statements.
Summary of Discontinued Operations
     Discontinued operations for the three and nine months ended September 30, 2007 and 2006 reflect certain businesses sold, which included Tegic and Wildseed and, for the nine months ended September 30, 2007, included the Parenting Group, most of the Time4 Media magazine titles, The Progressive Farmer magazine, Leisure Arts and the Braves. Discontinued operations for the three and nine months ended September 30, 2006 also included the operations of the systems transferred to Comcast in connection with the Redemptions and the Exchange and, for the nine months ended September 30, 2006, included the Turner South network (“Turner South”) and Time Warner Book Group (“TWBG”). The financial data for the discontinued operations for the three and nine months ended September 30, 2007 and 2006 is as follows (millions, except per share amounts):
                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06  
Total revenues
  $ 10     $ 222     $ 133     $ 973  
 
Pretax income
  $ 194     $ 173     $ 225     $ 602  
Income tax benefit (provision)
    (8 )     802       99       810  
 
                       
Net income
  $ 186     $ 975     $ 324     $ 1,412  
 
                       
Basic net income per common share
  $ 0.06     $ 0.24     $ 0.08     $ 0.33  
 
                       
Average basic common shares
    3,673.7       4,048.8       3,756.6       4,258.7  
 
                       
Diluted net income per common share
  $ 0.05     $ 0.24     $ 0.08     $ 0.33  
 
                       
Average diluted common shares
    3,714.3       4,084.4       3,803.8       4,296.7  
 
                       
     Included in discontinued operations for the three and nine months ended September 30, 2007 were a pretax gain of approximately $200 million and a related tax provision of approximately $15 million on the sale of Tegic. The tax provision on the sale of Tegic included a tax benefit associated with the use of tax attribute carryforwards, partially offset by a tax charge attributable to the reversal of a deferred tax asset. In addition, discontinued operations for the nine months ended September 30, 2007 included a pretax gain of approximately $71 million and a related tax benefit of approximately $82 million on the sale of the Braves, a pretax gain of approximately $54 million and a related tax benefit of approximately $6 million on the sale of the Parenting Group and most of the Time4 Media magazine titles, an impairment of approximately $18 million on AOL’s long-lived assets associated with Wildseed and an impairment of approximately $13 million on the Company’s investment in Leisure Arts. The tax benefit recognized for the Braves transaction resulted primarily from the reversal of certain deferred tax liabilities in connection with the Liberty Transaction. The Liberty Transaction was designed to qualify as a tax-free split-off under Section 355 of the Internal Revenue Code of 1986, as amended, and, as a result, the historical deferred tax liabilities associated with the Braves were no longer required. The tax benefit recognized for the magazine sale transaction resulted primarily from the recognition of deferred tax assets associated with the sale of the magazine titles. In addition, for the three and nine months ended September 30, 2007,

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
respectively, the Company incurred an additional $1 million and $18 million accrual related to changes in estimates of Warner Music Group indemnification liabilities, and for the nine months ended September 30, 2007, the Company made payments of $26 million related to Warner Music Group indemnification liabilities established in prior years, which are disclosed on the Company’s consolidated statement of cash flows as Investment activities of discontinued operations.
     Included in discontinued operations for the three and nine months ended September 30, 2006 were a pretax gain of approximately $145 million on the systems transferred to Comcast in connection with the Redemptions and the Exchange and a tax benefit of approximately $810 million, comprised of a tax benefit of $817 million on the Redemptions, partially offset by a provision of $7 million on the Exchange. The tax benefit of $817 million resulted primarily from the reversal of historical deferred tax liabilities (included in noncurrent liabilities of discontinued operations) that had existed on systems transferred to Comcast in the TWC Redemption. The TWC Redemption was designed to qualify as a tax-free split-off under Section 355 of the Internal Revenue Code of 1986, as amended, and, as a result, such liabilities were no longer required. However, if the IRS were successful in challenging the tax-free characterization of the TWC Redemption, an additional cash liability on account of taxes of up to an estimated $900 million could become payable by the Company. The results for the nine months ended September 30, 2006 also included a pretax gain of approximately $129 million and a related tax benefit of approximately $21 million on the sale of Turner South and a pretax gain of approximately $194 million and a related tax benefit of approximately $28 million on the sale of TWBG. The tax benefits on the sales of Turner South and TWBG resulted primarily from the release of a valuation allowance associated with tax attribute carryforwards offsetting the gains on these transactions. 
4. INVENTORIES AND FILM COSTS
     Inventories and film costs consist of (millions):
                 
    September 30,     December 31,  
    2007     2006  
            (recast)  
Programming costs, less amortization
  $ 3,401     $ 3,287  
DVDs, books, paper and other merchandise
    372       347  
Film costs — Theatrical:
               
Released, less amortization
    749       682  
Completed and not released
    301       205  
In production
    1,234       1,392  
Development and pre-production
    69       50  
Film costs — Television:
               
Released, less amortization
    720       704  
Completed and not released
    198       158  
In production
    436       473  
Development and pre-production
    3       3  
 
           
Total inventories and film costs(a)
    7,483       7,301  
Less: current portion of inventory(b)
    (1,996 )     (1,907 )
 
           
Total noncurrent inventories and film costs
  $ 5,487     $ 5,394  
 
           
 
(a)  
Does not include $2.532 billion and $2.691 billion of net film library costs as of September 30, 2007 and December 31, 2006, respectively, which are included in intangible assets subject to amortization on the consolidated balance sheet.
 
(b)  
Current inventory as of September 30, 2007 and December 31, 2006 is comprised primarily of programming inventory at the Networks segment ($1.619 billion and $1.557 billion, respectively), magazines, paper and other merchandise at the Publishing segment ($124 million and $140 million, respectively), and DVDs and videocassettes at the Filmed Entertainment segment ($253 million and $210 million, respectively).

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
     Committed financing capacity and long-term debt consists of (millions):
                                                                 
    Weighted                                          
    Average                           Unamortized              
    Interest                           Discount     2007        
    Rate at           2007     Letters     on     Unused     Outstanding Debt  
    September 30,           Committed     of     Commercial     Committed     September 30,     December 31,  
    2007   Maturities     Capacity     Credit(a)     Paper     Capacity(f)     2007     2006  
Cash and equivalents
                  $ 1,873     $     $     $ 1,873                  
Bank credit agreement debt
and commercial paper
programs(b)
    5.70 %     2011       16,045       220       18       4,673     $ 11,134     $ 12,381  
Floating-rate public debt(b)
    5.73 %     2009       2,000                         2,000       2,000  
Fixed-rate public debt(b)(c)
    6.96 %     2008-2037       23,708                         23,708       20,285  
Other fixed-rate obligations(d)
    8.00 %           287                         287       331  
 
                                                   
Subtotal
                    43,913       220       18       6,546       37,129       34,997  
Debt due within one year(e)
                    (73 )                       (73 )     (64 )
 
                                                   
Total
                  $ 43,840     $ 220     $ 18     $ 6,546     $ 37,056     $ 34,933  
 
                                                   
 
(a)  
Represents the portion of committed capacity reserved for outstanding and undrawn letters of credit.
 
(b)  
The bank credit agreements, commercial paper programs and public debt of the Company rank pari passu with senior debt of the respective obligors thereon. The Company’s maturity profile of its outstanding debt and other financing arrangements is relatively long-term, with a weighted maturity of approximately 10 years.
 
(c)  
As of September 30, 2007, the Company has classified $766 million of debt due within the next twelve months as long-term in the consolidated balance sheet to reflect management’s intent and ability to refinance the obligation on a long-term basis, through the utilization of the unused committed capacity under the Company’s bank credit agreements, if necessary.
 
(d)  
Includes capital lease obligations.
 
(e)  
Debt due within one year primarily relates to capital lease obligations.
 
(f)  
Includes $3.557 billion of unused committed capacity at TWC.
Cable Debt Securities
     On April 9, 2007, TWC issued $5.0 billion in aggregate principal amount of senior unsecured notes and debentures (the “Cable Bond Offering”) consisting of $1.5 billion principal amount of 5.40% Notes due 2012 (the “2012 Initial Notes”), $2.0 billion principal amount of 5.85% Notes due 2017 (the “2017 Initial Notes”) and $1.5 billion principal amount of 6.55% Debentures due 2037 (the “2037 Initial Debentures” and, together with the 2012 Initial Notes and the 2017 Initial Notes, the “Cable Initial Debt Securities”) pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The Cable Initial Debt Securities are guaranteed by TWE and TWNYCH (the “Guarantors”). TWC used a portion of the net proceeds of the Cable Bond Offering to repay all of the outstanding indebtedness under its $4.0 billion three-year term credit facility, which was terminated on April 13, 2007. The balance of the net proceeds was used to repay a portion of the outstanding indebtedness under TWC’s $4.0 billion five-year term credit facility on April 27, 2007, which reduced the amounts outstanding under that facility to $3.045 billion as of such date.
     In connection with the issuance of the Cable Initial Debt Securities, on April 9, 2007, TWC, the Guarantors and the initial purchasers of the Cable Initial Debt Securities entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which TWC agreed, among other things, to use its commercially reasonable efforts to consummate a registered exchange offer for the Cable Initial Debt Securities within 270 days after the issuance date of the Cable Initial Debt Securities or cause a shelf registration statement covering the resale of the Cable Initial Debt Securities to be declared effective within specified periods. On November 5, 2007, pursuant to a registered exchange offer, TWC and the Guarantors exchanged (i) substantially all of the 2012 Initial Notes for a like aggregate principal amount of registered debt securities without transfer restrictions or registration rights (the “2012 Registered Notes,” and, together with the 2012 Initial Notes, the “2012 Notes”), (ii) all of the 2017 Initial Notes for a like aggregate principal amount of registered debt securities without transfer restrictions or registration rights (the “2017 Registered Notes,” and, together with the 2017 Initial Notes, the “2017 Notes”), and (iii) substantially all of the 2037 Initial Debentures for a like aggregate principal amount of registered debt securities without transfer restrictions or registration rights (the “2037 Registered Debentures,” and, together with the 2037 Initial Debentures, the “2037 Debentures”). Collectively, the 2012 Notes, the 2017 Notes and the 2037 Debentures are referred to as the “Cable Debt Securities.”
     The Cable Debt Securities were issued pursuant to an Indenture, dated as of April 9, 2007 (the “Base Cable Indenture”), by and among TWC, the Guarantors and The Bank of New York, as trustee, as supplemented by the First Supplemental Indenture, dated as of April 9, 2007 (the “First Supplemental Cable Indenture” and, together with the Cable Base Indenture, the “Cable Indenture”), by and among TWC, the Guarantors and The Bank of New York, as trustee.

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     The 2012 Notes mature on July 2, 2012, the 2017 Notes mature on May 1, 2017 and the 2037 Debentures mature on May 1, 2037. Interest on the 2012 Notes is payable semi-annually in arrears on January 2 and July 2 of each year, beginning on July 2, 2007. Interest on the 2017 Notes and the 2037 Debentures is payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2007. The Cable Debt Securities are unsecured senior obligations of TWC and rank equally with its other unsecured and unsubordinated obligations. The guarantees of the Cable Debt Securities are unsecured senior obligations of the Guarantors and rank equally in right of payment with all other unsecured and unsubordinated obligations of the Guarantors.
     The Cable Debt Securities may be redeemed in whole or in part at any time at TWC’s option at a redemption price equal to the greater of (i) 100% of the principal amount of the Cable Debt Securities being redeemed and (ii) the sum of the present values of the remaining scheduled payments on the Cable Debt Securities discounted to the redemption date on a semi-annual basis at a government treasury rate plus 20 basis points for the 2012 Notes, 30 basis points for the 2017 Notes and 35 basis points for the 2037 Debentures as further described in the Cable Indenture, plus, in each case, accrued but unpaid interest to the redemption date.
     The Cable Indenture contains customary covenants relating to restrictions on the ability of TWC or any material subsidiary of TWC to create liens and on the ability of TWC and the Guarantors to consolidate, merge or convey or transfer substantially all of their assets. The Cable Indenture also contains customary events of default.
Bank Credit Agreements and Commercial Paper Programs
     On January 25, 2007, Time Warner entered into a $7.0 billion unsecured commercial paper program (the “TW Program”) that replaced its previous $5.0 billion unsecured commercial paper program, which was terminated in February 2007 upon repayment of the last amounts issued thereunder. The obligations of Time Warner under the TW Program are guaranteed by TW AOL Holdings Inc. (“TW AOL”) and Historic TW Inc. (“Historic TW”). In addition, the obligations of Historic TW are guaranteed by Turner and Time Warner Companies, Inc. Proceeds from the TW Program may be used for general corporate purposes, including investments, repayment of debt and acquisitions. Commercial paper issued by Time Warner is supported by unused committed capacity under the Company’s $7.0 billion senior unsecured five-year revolving credit facility. As a result of recent market volatility in the U.S. debt markets, including the dislocation of the overall commercial paper market, the Company has decreased the amount of commercial paper outstanding under the TW Program, and has offset this decrease by increasing borrowings outstanding under its $7.0 billion credit facility. As of September 30, 2007, approximately $1.988 billion of commercial paper was outstanding under the TW Program, and there were borrowings of $3.300 billion outstanding under the Company’s $7.0 billion credit facility.
     On December 4, 2006, TWC entered into a $6.0 billion unsecured commercial paper program (the “TWC Program”) that replaced its previous $2.0 billion commercial paper program, which was terminated on February 14, 2007 upon repayment of the last remaining notes issued under that program. The TWC Program is guaranteed by TWNYCH and TWE. Commercial paper issued by TWC under the TWC Program is supported by unused committed capacity under TWC’s $6.0 billion senior unsecured revolving credit facility and ranks pari passu with other unsecured senior indebtedness of TWC, TWE and TWNYCH. TWC has also decreased the amount of commercial paper outstanding under its program as a result of the recent volatility in the U.S. debt markets, and has offset this decrease by increasing borrowings outstanding under its $6.0 billion credit facility. As of September 30, 2007, approximately $1.018 billion of commercial paper was outstanding under the TWC Program, and there were borrowings of $1.800 billion outstanding under TWC’s $6.0 billion credit facility.

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. SHAREHOLDERS’ EQUITY
Common Stock Repurchase Program
     In July 2005, Time Warner’s Board of Directors authorized a common stock repurchase program that, as amended over time, allowed the Company to purchase up to an aggregate of $20 billion of common stock during the period from July 29, 2005 through December 31, 2007. As of June 30, 2007, the Company completed its $20 billion common stock repurchase program, and, from the program’s inception through June 30, 2007 the Company repurchased approximately 1.1 billion shares of common stock. All outstanding shares of Series LMCN-V common stock were tendered to the Company in connection with the Liberty Transaction and this stock repurchase program and were retired.
     On July 26, 2007, Time Warner’s Board of Directors authorized a new common stock repurchase program that allows the Company to purchase up to an aggregate of $5 billion of common stock. Purchases under this new stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including price and business and market conditions. From the program’s inception through September 30, 2007, the Company repurchased approximately 107 million shares of common stock for approximately $2 billion pursuant to trading programs under Rule 10b5-1 of the Exchange Act.
7. EQUITY-BASED COMPENSATION
Time Warner Inc. Equity Plans
     The Company has three active equity plans under which it is authorized to grant options to purchase up to an aggregate of 450 million shares of Time Warner common stock. Options have been granted to employees and non-employee directors of Time Warner with exercise prices equal to, or in excess of, the fair market value at the date of grant. Generally, the options vest ratably over a four-year vesting period and expire ten years from the date of grant. Certain option awards provide for accelerated vesting upon an election to retire pursuant to the Company’s defined benefit retirement plans or after reaching a specified age and years of service, as well as certain additional circumstances for non-employee directors. For the nine months ended September 30, 2007, the Company granted approximately 28 million options at a weighted-average grant date fair value per option of $5.17 ($3.21, net of tax). For the nine months ended September 30, 2006, the Company granted approximately 54 million options at a weighted-average grant date fair value per option of $4.46 ($2.77, net of tax). The assumptions presented in the table below represent the weighted-average value of the applicable assumption used to value stock options at their grant date.
                 
    Nine Months Ended
    9/30/07   9/30/06
Expected volatility
    22.1 %     22.2 %
Expected term to exercise from grant date
  5.32 years   5.07 years
Risk-free rate
    4.4 %     4.6 %
Expected dividend yield
    1.1 %     1.1 %
     Time Warner may also grant shares of common stock or restricted stock units (“RSUs”), which generally vest between three to five years from the date of grant, to its employees and its non-employee directors pursuant to these equity plans, including an additional plan limited to non-employee directors. Certain RSU awards provide for accelerated vesting upon an election to retire pursuant to the Company’s defined benefit retirement plans or after reaching a specified age and years of service, as well as certain additional circumstances for non-employee directors. For the nine months ended September 30, 2007, the Company granted approximately 8.5 million RSUs at a weighted-average grant date fair value per RSU of $19.99. For the nine months ended September 30, 2006, the Company granted approximately 3.9 million RSUs at a weighted-average grant date fair value per RSU of $17.39.
     Time Warner also has a performance share program for senior level executives. Under this program, recipients of performance share units (“PSUs”) are awarded a target number of PSUs that represent the contingent (unfunded and unsecured) right to receive shares of Company stock at the end of a three-year performance period based on the actual performance level achieved by the Company. Depending on the Company’s total shareholder return relative to the other companies in the S&P 500 Index on the date of the grant, as well as a requirement of continued employment, the recipient

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of a PSU may receive 0% to 200% of the target PSUs granted based on a sliding scale where a relative ranking of less than the 25th percentile will pay 0% and a ranking at the 100th percentile will pay 200% of the target number of shares. PSU holders do not receive payments or accruals of dividends or dividend equivalents for regular cash dividends paid by the Company while the PSU is outstanding. Participants who are terminated by the Company other than for cause or who terminate their own employment for good reason or due to retirement or disability are generally entitled to a pro rata portion of the PSUs that would otherwise vest at the end of the performance period. For accounting purposes, the PSU is considered to have a market condition. The effect of a market condition is reflected in the grant date fair value of the award and, thus, compensation expense is recognized on this type of award provided that the requisite service is rendered (regardless of whether the market condition is achieved). The fair value of a PSU is estimated by using a Monte Carlo analysis to estimate the total return ranking of Time Warner among the S&P 500 Index companies on the date of the grant over the performance period. For the nine months ended September 30, 2007, the Company granted approximately 1.1 million target PSUs at a weighted-average grant date fair value per PSU of $19.47. There were no PSUs granted in 2006.
TWC Equity Plan
     On June 8, 2006, TWC’s board of directors approved the Time Warner Cable Inc. 2006 Stock Incentive Plan (the “TWC 2006 Plan”) under which awards covering the issuance of up to 100,000,000 shares of TWC Class A common stock may be granted to directors, employees and certain non-employee advisors of TWC. TWC made its first grant of equity awards based on TWC Class A common stock in April 2007. Stock options have been granted under the TWC 2006 Plan with exercise prices equal to the fair market value at the date of grant. Generally, the stock options vest ratably over a four-year vesting period and expire ten years from the date of grant. Certain stock option awards provide for accelerated vesting upon an election to retire pursuant to TWC’s defined benefit retirement plans or after reaching a specified age and years of service.
     For the nine months ended September 30, 2007, TWC granted approximately 2.9 million options to employees under the TWC 2006 Plan at a weighted-average grant date fair value per option of $13.33 ($8.26, net of tax). The assumptions presented in the table below represent the weighted-average value of the applicable assumption used to value TWC stock options at their grant date.
         
    Nine Months Ended
    9/30/07
Expected volatility
    24.1%
Expected term to exercise from grant date
  6.59 years
Risk-free rate
    4.7%
Expected dividend yield
    0%
     Under the TWC 2006 Plan, TWC also granted RSUs, which generally vest over a four-year period from the date of grant. Certain RSU awards provide for accelerated vesting upon an election to retire pursuant to TWC’s defined benefit retirement plans or after reaching a specified age and years of service. Shares of TWC Class A common stock will generally be issued in connection with the vesting of an RSU. RSUs awarded to non-employee directors are not subject to vesting restrictions and the shares underlying the RSUs will be issued in connection with a director’s termination of service as a director. For the nine months ended September 30, 2007, TWC granted approximately 2.1 million RSUs at a weighted-average grant date fair value per RSU of $37.07.
     Since April 2007, grants of equity awards to TWC employees have been and will continue to be made by TWC under TWC’s equity plans.

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Equity-Based Compensation Expense
     Compensation expense recognized for equity-based compensation plans, including the TWC 2006 Plan beginning in the second quarter of 2007, for the three and nine months ended September 30, 2007 and 2006 is as follows (millions):
                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06  
Stock options
  $ 33     $ 40     $ 125     $ 161  
Restricted stock, restricted stock units and performance share units
    24       11       105       51  
 
                       
Total impact on Operating Income
  $ 57     $ 51     $ 230     $ 212  
 
                       
Tax benefit recognized
  $ 21     $ 19     $ 84     $ 79  
8. BENEFIT PLANS
     Time Warner and certain of its subsidiaries have both funded and unfunded noncontributory defined benefit pension plans covering a majority of domestic employees and, to a lesser extent, have various defined benefit plans covering international employees. Pension benefits are determined based on formulas that reflect the employees’ years of service and compensation during their employment period and participation in the plans. Time Warner uses a December 31 measurement date for the majority of its plans. A summary of the components of the net periodic benefit cost from continuing operations recognized by substantially all of Time Warner’s domestic and international defined benefit pension plans for the three and nine months ended September 30, 2007 and 2006 is as follows (millions):
Components of Net Periodic Benefit Costs(a)
                                                                 
    Domestic     International     Domestic     International  
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06     9/30/07     9/30/06     9/30/07     9/30/06  
            (recast)                             (recast)                  
Service cost
  $ 39     $ 36     $ 6     $ 6     $ 114     $ 110     $ 17     $ 18  
Interest cost
    50       45       10       9       150       137       32       27  
Expected return on plan
assets
    (64 )     (56 )     (16 )     (12 )     (193 )     (169 )     (47 )     (37 )
Amounts amortized
    8       19       1       2       25       57       3       6  
 
                                               
Net periodic benefit costs
  $ 33     $ 44     $ 1     $ 5     $ 96     $ 135     $ 5     $ 14  
 
                                               
 
                                                               
Contributions
  $ 4     $ 5     $ 5     $     $ 13     $ 15     $ 15     $ 4  
 
                                               
 
(a)  
On August 1, 2007, the former employees of Adelphia and Comcast who became employees of TWC became eligible to participate in the TWC pension plans, which resulted in a new measurement of those plans as of that date. The impact of the new measurement on these plans as of August 1, 2007 will result in an increase in pension expense of $4 million over the last five months of 2007.
Expected Cash Flows
     After considering the funded status of the Company’s defined benefit pension plans, movements in the discount rate, investment performance and related tax consequences, the Company may choose to make contributions to its pension plans in any given year. There currently are no minimum required contributions for domestic funded plans and no discretionary or noncash contributions are currently planned. For domestic unfunded plans, contributions will continue to be made to the extent benefits are paid.

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. MERGER, RESTRUCTURING AND SHUTDOWN COSTS
     In accordance with GAAP, Time Warner generally treats merger costs relating to business acquisitions as additional purchase price paid. However, certain merger costs do not meet the criteria for capitalization and are expensed as incurred as they either relate to the operations of the acquirer or otherwise do not qualify as a liability or cost assumed in an acquisition. In addition, the Company has incurred restructuring and shutdown costs unrelated to business acquisitions which are expensed as incurred.
Merger Costs Capitalized as a Cost of Acquisition
     During 2006, the Company acquired the remaining 50% interest in Courtroom Television Network LLC (“Court TV”) that it did not already own from Liberty. In connection with the 2006 acquisition of the additional Court TV interest, the Company incurred approximately $58 million in capitalizable merger costs (of which $6 million was incurred for the nine months ended September 30, 2007, as other exit costs were higher than originally estimated (the $6 million includes a $1 million reversal for the three months ended September 30, 2007 which resulted in a corresponding decrease in goodwill)). These costs included approximately $36 million related to employee termination costs and approximately $22 million for various exit costs, including lease terminations. Employee termination costs ranged from senior executive to line personnel. Payments of $41 million ($34 million were paid in 2006) have been made against this accrual as of September 30, 2007 ($1 million and $7 million was paid against this liability for the three and nine months ended September 30, 2007, respectively, and, of the $34 million paid in 2006, $15 million and $26 million were paid for the three and nine months ended September 30, 2006, respectively).
     As of September 30, 2007, there was also a remaining liability of approximately $22 million related to the AOL-Historic TW merger.
     As of September 30, 2007, out of the remaining liability of $39 million for all capitalized merger costs, $6 million was classified as a current liability, with the remaining $33 million classified as a long-term liability in the consolidated balance sheet. Amounts relating to these liabilities are expected to be paid through 2014.
Merger, Restructuring and Shutdown Costs Expensed as Incurred
     Merger, restructuring and shutdown costs that were expensed as incurred for the three and nine months ended September 30, 2007 and 2006 are as follows (millions):
                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06  
Adelphia/Comcast Transactions merger-related costs
  $ 3     $ 18     $ 10     $ 29  
2007 restructuring costs
    11             99        
Changes in estimates for 2006 and prior restructuring and shutdown costs
    (2 )     55       4       176  
 
                       
Merger, restructuring and shutdown costs expensed as incurred
  $ 12     $ 73     $ 113     $ 205  
 
                       
     Merger, restructuring and shutdown costs expensed as incurred by segment for the three and nine months ended September 30, 2007 and 2006 are as follows (millions):
                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06  
AOL
  $     $ 27     $ 27     $ 43  
Cable
    4       22       20       43  
Filmed Entertainment
          1             5  
Networks
    4       38       20       119  
Publishing
    4       3       46       37  
Corporate
                      5  
Eliminations
          (18 )           (47 )
 
                       
Merger, restructuring and shutdown costs by segment
  $ 12     $ 73     $ 113     $ 205  
 
                       

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Adelphia/Comcast Transactions Merger-Related Costs
     Through the end of 2006, the Company incurred non-capitalizable merger-related costs at the Cable segment related to the Adelphia/Comcast Transactions of $46 million. These expenses primarily relate to consulting fees concerning integration planning as well as employee terminations. For the three and nine months ended September 30, 2007, the Company incurred an additional $3 million and $10 million, respectively, in non-capitalizable merger-related costs. Of the $46 million incurred through the end of 2006, $18 million and $29 million were incurred during the three and nine months ended September 30, 2006, respectively (see Note 2).
2007 Restructuring Costs
     The Company incurred restructuring costs of approximately $11 million and $99 million for the three and nine months ended September 30, 2007, respectively, primarily related to various employee terminations and other exit activities, including $2 million and $23 million for the three and nine months ended September 30, 2007, respectively, at the AOL segment, $1 million and $10 million for the three and nine months ended September 30, 2007, respectively, at the Cable segment and $4 million and $46 million for the three and nine months ended September 30, 2007, respectively, at the Publishing segment, which includes $9 million of shutdown costs related to the shutdown of LIFE magazine. Employee termination costs occurred across each of the segments and ranged from senior executive to line personnel. Restructuring costs also included $4 million and $20 million, respectively, for the three and nine months ended September 30, 2007 at the Networks segment for restructuring charges and severance related to recent senior management changes at HBO.
Changes in Estimates for 2006 and Prior Restructuring and Shutdown Costs
     During the years ended 2006, 2005 and 2004, the Company incurred restructuring and shutdown costs related to various employee and contractual terminations totaling $521 million. In connection with the 2006 and prior restructuring and shutdown costs, employee termination costs occurred across each of the segments and ranged from senior executives to line personnel. For the three and nine months ended September 30, 2007, the Company incurred a $2 million reduction and a $4 million charge, respectively, at the AOL segment as a result of changes in estimates of previously established restructuring accruals. For the three and nine months ended September 30, 2006, the Company incurred restructuring costs of $55 million and $176 million, respectively. The 2006 initiatives primarily related to various employee terminations totaling approximately $34 million and $98 million, respectively, for the three and nine months ended September 30, 2006, including $27 million and $42 million, respectively, at the AOL segment for the three and nine months ended September 30, 2006, $4 million and $14 million, respectively, at the Cable segment for the three and nine months ended September 30, 2006, $3 million and $37 million, respectively, at the Publishing segment for the three and nine months ended September 30, 2006 and $5 million at the Corporate segment for the nine months ended September 30, 2006. In addition, for the three and nine months ended September 30, 2006, the Company incurred $1 million and $6 million, respectively, of additional restructuring charges ($1 million and $5 million, respectively, at the Filmed Entertainment segment and $1 million for the nine months ended September 30, 2006 at the AOL segment) as a result of changes in estimates of previously established restructuring accruals.
     The results for the three and nine months ended September 30, 2006 include shutdown costs of $38 million and $119 million, respectively, at The WB Network in connection with the agreement between Warner Bros. and CBS to form The CW. Included in the shutdown costs are termination charges related to terminating intercompany programming arrangements with other Time Warner divisions, of which $18 million and $47 million, respectively, has been eliminated in consolidation, resulting in a net pretax charge of $20 million and $72 million, respectively, for the three and nine months ended September 30, 2006.

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Selected Information
     Selected information relating to the Adelphia/Comcast Transactions Merger-Related Costs, 2007 Restructuring Costs, 2006 and Prior Restructuring and Shutdown Costs is as follows (millions):
                         
    Employee     Other        
    Terminations     Exit Costs     Total  
Remaining liability as of December 31, 2006
  $ 162     $ 52     $ 214  
Net accruals
    91       22       113  
Cash paid(a)
    (166 )     (41 )     (207 )
 
                 
Remaining liability as of September 30, 2007
  $ 87     $ 33     $ 120  
 
                 
 
(a)  
Of the $207 million paid in 2007, $30 million was paid during the three months ended September 30, 2007. Of this $30 million, $3 million relates to Adelphia/Comcast Transactions Merger-Related Costs, $13 million relates to 2007 Restructuring Costs and $14 million relates to 2006 and Prior Restructuring Costs and Shutdown Costs.
     As of September 30, 2007, out of the remaining liability of $120 million, $68 million was classified as a current liability, with the remaining $52 million classified as a long-term liability in the consolidated balance sheet. Amounts are expected to be paid through 2013.
10. SEGMENT INFORMATION
     Time Warner classifies its operations into five reportable segments: AOL, consisting principally of interactive services; Cable, consisting principally of interests in cable systems that provide video, high-speed data and voice services; Filmed Entertainment, consisting principally of feature film, television and home video production and distribution; Networks, consisting principally of cable television networks; and Publishing, consisting principally of magazine publishing.
     Information as to the operations of Time Warner in each of its business segments is set forth below based on the nature of the products and services offered. Time Warner evaluates performance based on several factors, of which the primary financial measure is operating income before depreciation of tangible assets and amortization of intangible assets (“Operating Income before Depreciation and Amortization”). Additionally, the Company has provided a summary of Operating Income by segment.
                                         
    Three Months Ended September 30, 2007  
    Subscription     Advertising     Content     Other     Total  
    (millions)  
Revenues
                                       
AOL
  $ 635     $ 540     $     $ 44     $ 1,219  
Cable
    3,780       221                   4,001  
Filmed Entertainment
    8       12       3,100       58       3,178  
Networks
    1,566       709       270       10       2,555  
Publishing
    385       636       13       165       1,199  
Intersegment elimination
    (204 )     (23 )     (242 )     (7 )     (476 )
 
                             
Total revenues
  $ 6,170     $ 2,095     $ 3,141     $ 270     $ 11,676  
 
                             
                                         
    Three Months Ended September 30, 2006  
    Subscription     Advertising     Content     Other     Total  
    (recast, millions)  
Revenues
                                       
AOL
  $ 1,455     $ 479     $     $ 30     $ 1,964  
Cable
    3,031       178                   3,209  
Filmed Entertainment
          10       2,311       69       2,390  
Networks
    1,460       731       204       14       2,409  
Publishing
    393       635       14       153       1,195  
Intersegment elimination
    (203 )     (30 )     (180 )     (4 )     (417 )
 
                             
Total revenues
  $ 6,136     $ 2,003     $ 2,349     $ 262     $ 10,750  
 
                             

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                                         
    Nine Months Ended September 30, 2007  
    Subscription     Advertising     Content     Other     Total  
    (millions)  
Revenues
                                       
AOL
  $ 2,199     $ 1,611     $     $ 120     $ 3,930  
Cable
    11,230       636                   11,866  
Filmed Entertainment
    22       30       7,942       180       8,174  
Networks
    4,672       2,181       682       31       7,566  
Publishing
    1,124       1,904       39       433       3,500  
Intersegment elimination
    (609 )     (67 )     (500 )     (20 )     (1,196 )
 
                             
Total revenues
  $ 18,638     $ 6,295     $ 8,163     $ 744     $ 33,840  
 
                             
                                         
    Nine Months Ended September 30, 2006  
    Subscription     Advertising     Content     Other     Total  
    (recast, millions)  
Revenues
                                       
AOL
  $ 4,539     $ 1,320     $     $ 89     $ 5,948  
Cable
    7,696       420                   8,116  
Filmed Entertainment
          11       7,316       205       7,532  
Networks
    4,412       2,389       604       39       7,444  
Publishing
    1,139       1,881       35       455       3,510  
Intersegment elimination
    (488 )     (96 )     (591 )     (26 )     (1,201 )
 
                             
Total revenues
  $ 17,298     $ 5,925     $ 7,364     $ 762     $ 31,349  
 
                             
Intersegment Revenues
     In the normal course of business, the Time Warner segments enter into transactions with one another. The most common types of intersegment transactions include:
   
The Filmed Entertainment segment generating Content revenues by licensing television and theatrical programming to the Networks segment;
 
   
The Networks segment generating Subscription revenues by selling cable network programming to the Cable segment; and
 
   
The AOL, Cable, Networks and Publishing segments generating Advertising revenues by promoting the products and services of other Time Warner segments.

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     These intersegment transactions are recorded by each segment at estimated fair value as if the transactions were with third parties and, therefore, impact segment performance. While intersegment transactions are treated like third-party transactions to determine segment performance, the revenues (and corresponding expenses or assets recognized by the segment that is counterparty to the transaction) are eliminated in consolidation and, therefore, do not themselves impact consolidated results. Additionally, transactions between divisions within the same reporting segment (e.g., a transaction between HBO and Turner within the Networks segment) are eliminated in arriving at segment performance and, therefore, do not themselves impact segment results. Revenues recognized by Time Warner’s segments on intersegment transactions are as follows:
                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06  
            (recast)             (recast)  
    (millions)     (millions)  
Intersegment Revenues(a)
                               
AOL
  $ 5     $ 12     $ 16     $ 39  
Cable
    2       7       10       21  
Filmed Entertainment(b)
    230       174       469       567  
Networks(c)
    233       215       681       536  
Publishing
    6       9       20       38  
 
                       
Total intersegment revenues
  $ 476     $ 417     $ 1,196     $ 1,201  
 
                       
 
(a)  
Intersegment revenues include intercompany Advertising revenues of $23 million and $30 million for the three months ended September 30, 2007 and 2006, respectively, and $67 million and $96 million for the nine months ended September 30, 2007 and 2006, respectively.
 
(b)  
Intersegment revenues at the Filmed Entertainment segment include sales to The WB Network through its shutdown on September 17, 2006.
 
(c)  
Intersegment revenues at the Networks segment include the impact of the systems acquired in the Adelphia/Comcast Transactions and the consolidation of the Kansas City Pool.
                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06  
            (recast)             (recast)  
    (millions)     (millions)  
Operating Income (Loss) before Depreciation and Amortization
                               
AOL(a)
  $ 425     $ 554     $ 2,120     $ 1,477  
Cable
    1,428       1,119       4,179       2,920  
Filmed Entertainment
    359       210       865       896  
Networks(b)
    830       585       2,479       2,148  
Publishing(c)
    304       265       690       651  
Corporate(d)
    (89 )     (126 )     (450 )     (378 )
Intersegment elimination
    (17 )     (14 )     (3 )     8  
 
                       
Total Operating Income (Loss) before Depreciation and Amortization
  $ 3,240     $ 2,593     $ 9,880     $ 7,722  
 
                       
 
(a)  
For the three and nine months ended September 30, 2007, includes a $2 million reduction and a net pretax gain of approximately $668 million on the sale of AOL’s German access business and, for the nine months ended September 30, 2007, includes a net $1 million reduction to the gain on the sale of AOL’s U.K. access business. For the three and nine months ended September 30, 2007, also includes noncash asset impairment charges of $1 million and $2 million, respectively. For the nine months ended September 30, 2006, includes a $2 million gain related to the 2004 sale of Netscape Security Solutions (“NSS”).
 
(b)  
For the nine months ended September 30, 2007, includes a $34 million noncash charge related to the impairment of the Court TV tradename as a result of rebranding the Court TV network name to truTV, effective January 1, 2008. For the three and nine months ended September 30, 2006, includes a $200 million noncash goodwill impairment charge related to The WB Network.
 
(c)  
For the three and nine months ended September 30, 2007, includes a $6 million gain on the sale of four non-strategic magazine titles.
 
(d)  
For the three and nine months ended September 30, 2007, includes $2 million and $16 million, respectively, in net expenses related to securities litigation and government investigations. For the nine months ended September 30, 2007, includes $153 million in legal reserves related to securities litigation. For the nine months ended September 30, 2006, includes $50 million in legal reserves related to securities litigation. For the three and nine months ended September 30, 2006, includes $29 million and $40 million, respectively, in net expenses related to securities litigation and government investigations. For the nine months ended September 30, 2006, also includes a $20 million gain on the sale of two aircraft.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06  
            (recast)             (recast)  
    (millions)     (millions)  
Depreciation of Property, Plant and Equipment
                               
AOL
  $ (103 )   $ (129 )   $ (312 )   $ (382 )
Cable
    (683 )     (513 )     (2,001 )     (1,281 )
Filmed Entertainment
    (37 )     (35 )     (112 )     (103 )
Networks
    (75 )     (68 )     (222 )     (203 )
Publishing
    (35 )     (26 )     (92 )     (82 )
Corporate
    (10 )     (12 )     (33 )     (34 )
 
                       
Total depreciation of property, plant and equipment
  $ (943 )   $ (783 )   $ (2,772 )   $ (2,085 )
 
                       
                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06  
            (recast)             (recast)  
    (millions)     (millions)  
Amortization of Intangible Assets
                               
AOL
  $ (27 )   $ (35 )   $ (69 )   $ (111 )
Cable
    (64 )     (56 )     (207 )     (93 )
Filmed Entertainment
    (54 )     (55 )     (161 )     (164 )
Networks
    (4 )           (12 )     (5 )
Publishing
    (18 )     (17 )     (53 )     (46 )
 
                       
Total amortization of intangible assets
  $ (167 )   $ (163 )   $ (502 )   $ (419 )
 
                       
                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06  
            (recast)             (recast)  
    (millions)     (millions)  
Operating Income (Loss)
                               
AOL(a)
  $ 295     $ 390     $ 1,739     $ 984  
Cable
    681       550       1,971       1,546  
Filmed Entertainment
    268       120       592       629  
Networks(b)
    751       517       2,245       1,940  
Publishing(c)
    251       222       545       523  
Corporate(d)
    (99 )     (138 )     (483 )     (412 )
Intersegment elimination
    (17 )     (14 )     (3 )     8  
 
                       
Total operating income (loss)
  $ 2,130     $ 1,647     $ 6,606     $ 5,218  
 
                       
 
(a)  
For the three and nine months ended September 30, 2007, includes a $2 million reduction and a net pretax gain of approximately $668 million on the sale of AOL’s German access business and, for the nine months ended September 30, 2007, includes a net $1 million reduction to the gain on the sale of AOL’s U.K. access business. For the three and nine months ended September 30, 2007, also includes noncash asset impairment charges of $1 million and $2 million, respectively. For the nine months ended September 30, 2006, includes a $2 million gain related to the 2004 sale of NSS.
 
(b)  
For the nine months ended September 30, 2007, includes a $34 million noncash charge related to the impairment of the Court TV tradename as a result of rebranding the Court TV network name to truTV, effective January 1, 2008. For the three and nine months ended September 30, 2006, includes a $200 million noncash goodwill impairment charge related to The WB Network.
 
(c)  
For the three and nine months ended September 30, 2007, includes a $6 million gain on the sale of four non-strategic magazine titles.
 
(d)  
For the three and nine months ended September 30, 2007, includes $2 million and $16 million, respectively, in net expenses related to securities litigation and government investigations. For the nine months ended September 30, 2007, includes $153 million in legal reserves related to securities litigation. For the nine months ended September 30, 2006, includes $50 million in legal reserves related to securities litigation. For the three and nine months ended September 30, 2006, includes $29 million and $40 million, respectively, in net expenses related to securities litigation and government investigations. For the nine months ended September 30, 2006, also includes a $20 million gain on the sale of two aircraft.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     A summary of total assets by operating segment is set forth below:
                 
    September 30,     December 31,  
    2007     2006  
    (millions)  
Assets
               
AOL
  $ 5,434     $ 5,762  
Cable
    56,592       55,736  
Filmed Entertainment
    17,735       18,354  
Networks
    34,825       34,952  
Publishing
    14,577       14,900  
Corporate
    2,144       1,965  
 
           
Total assets
  $ 131,307     $ 131,669  
 
           
11. COMMITMENTS AND CONTINGENCIES
Contingencies
Securities Matters
Consolidated Securities Class Action
     During the Summer and Fall of 2002, 30 shareholder class action lawsuits were filed in various U.S. District Courts naming as defendants the Company, certain current and former executives of the Company and, in several instances, AOL. The complaints purported to be made on behalf of certain shareholders of the Company and alleged that the Company made material misrepresentations and/or omissions of material fact in violation of Section 10(b) of the Exchange Act, Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. Plaintiffs claimed that the Company failed to disclose AOL’s declining advertising revenues and that the Company and AOL inappropriately inflated advertising revenues in a series of transactions. Certain of the lawsuits also alleged that certain of the individual defendants and other insiders at the Company improperly sold their personal holdings of Time Warner stock, that the Company failed to disclose that the January 2001 merger of America Online, Inc. (now AOL LLC) and Time Warner Inc., now known as Historic TW (the “Merger” or the “AOL-Historic TW Merger”), was not generating the synergies anticipated at the time of the announcement of the merger and, further, that the Company inappropriately delayed writing down more than $50 billion of goodwill. The lawsuits sought an unspecified amount in compensatory damages. All of these lawsuits were centralized in the U.S. District Court for the Southern District of New York for coordinated or consolidated pre-trial proceedings (along with the federal derivative lawsuits and certain lawsuits brought under ERISA described below) under the caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation.
     The Minnesota State Board of Investment (“MSBI”) was designated lead plaintiff for the consolidated securities actions and filed a consolidated amended complaint on April 15, 2003, adding additional defendants including additional officers and directors of the Company, Morgan Stanley & Co., Salomon Smith Barney Inc., Citigroup Inc., Banc of America Securities LLC and JP Morgan Chase & Co. Plaintiffs also added additional allegations, including that the Company made material misrepresentations in its registration statements and joint proxy statement-prospectus related to the AOL-Historic TW Merger and in its registration statements pursuant to which debt securities were issued in April 2001 and April 2002, allegedly in violation of Section 11 and Section 12 of the Securities Act of 1933. On May 5, 2004, the district court granted in part the defendants’ motion to dismiss the consolidated amended complaint. The court dismissed all claims with respect to the registration statements pursuant to which debt securities were issued in April 2001 and April 2002 and certain other claims against other defendants, but otherwise allowed the remaining claims against the Company and certain other defendants to proceed. On August 11, 2004, the court granted MSBI’s motion to file a second amended complaint. On July 30, 2004, defendants filed a motion for summary judgment on the basis that plaintiffs could not establish loss causation for any of their claims, and thus plaintiffs did not have any recoverable damages. On April 8, 2005, MSBI moved for leave to file a third amended complaint to add certain new factual allegations and four additional individual defendants.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     In July 2005, the Company reached an agreement in principle with MSBI for the settlement of the consolidated securities actions. The settlement is reflected in a written agreement between the lead plaintiff and the Company. On September 30, 2005, the court issued an order granting preliminary approval of the settlement and certified the settlement class. The court issued an order dated April 6, 2006 granting final approval of the settlement, and the time to appeal that decision has expired. In connection with reaching the agreement in principle on the securities class action, the Company established a reserve of $3 billion during the second quarter of 2005 reflecting the MSBI settlement and other pending related shareholder and ERISA litigation. Pursuant to the MSBI settlement, in October 2005, Time Warner paid $2.4 billion into a settlement fund (the “MSBI Settlement Fund”) for the members of the class represented in the action, and Ernst & Young LLP paid $100 million. In connection with the settlement, the $150 million previously paid by Time Warner into a fund in connection with the settlement of the investigation by the DOJ was transferred to the MSBI Settlement Fund. In addition, the $300 million the Company previously paid in connection with the settlement of its SEC investigation will be distributed to investors through the MSBI settlement process pursuant to an order issued by the U.S. District Court for the District of Columbia on July 11, 2006. On October 27, 2006, the court awarded to plaintiffs’ counsel fees in the amount of $147.5 million and reimbursement for expenses in the amount of $3.4 million, plus interest accrued on such amounts since October 7, 2005, the date the Company paid $2.4 billion into the MSBI Settlement Fund; these amounts are to be paid from the MSBI Settlement Fund. On May 2, 2007, the court entered an order directing an initial distribution of these funds. Administration of the MSBI settlement is ongoing. Settlements also have been reached in substantially all of the additional related cases, including the ERISA and derivative actions, as described below.
Other Related Securities Litigation Matters
     During the Fall of 2002 and Winter of 2003, three putative class action lawsuits were filed alleging violations of ERISA in the U.S. District Court for the Southern District of New York on behalf of current and former participants in the Time Warner Savings Plan, the Time Warner Thrift Plan and/or the TWC Savings Plan (the “Plans”). Collectively, these lawsuits named as defendants the Company, certain current and former directors and officers of the Company and members of the Administrative Committees of the Plans. The lawsuits alleged that the Company and other defendants breached certain fiduciary duties to plan participants by, inter alia, continuing to offer Time Warner stock as an investment under the Plans, and by failing to disclose, among other things, that the Company was experiencing declining advertising revenues and that the Company was inappropriately inflating advertising revenues through various transactions. The complaints sought unspecified damages and unspecified equitable relief. The ERISA actions were consolidated as part of the In re AOL Time Warner Inc. Securities and “ERISA” Litigation described above. On July 3, 2003, plaintiffs filed a consolidated amended complaint naming additional defendants, including TWE, certain current and former officers, directors and employees of the Company and Fidelity Management Trust Company. On March 9, 2005, the court granted in part and denied in part the Company’s motion to dismiss the consolidated ERISA complaint. The court dismissed two individual defendants and TWE for all purposes, dismissed other individuals with respect to claims plaintiffs had asserted involving the TWC Savings Plan, and dismissed all individuals who were named in a claim asserting that their stock sales had constituted a breach of fiduciary duty to the Plans. The parties reached an agreement to resolve this matter in 2006. The aggregate amount for which the Company settled this lawsuit as well as the related lawsuits is described below. The court granted preliminary approval of the settlement in an opinion dated May 1, 2006 and final approval in an opinion dated September 27, 2006. On October 25, 2006, one of the objectors to this settlement filed a notice of appeal of this decision; pursuant to a settlement agreement between the parties in a related securities matter, that objector subsequently withdrew his notice of appeal, and the time to appeal has expired. On October 26, 2007, the court issued an order approving certain attorneys’ fees and expenses requested by plaintiffs’ counsel, as well as approving certain incentive awards to the lead plaintiffs. The time to appeal this decision has not yet expired.
     During the Summer and Fall of 2002, 11 shareholder derivative lawsuits were filed naming as defendants certain current and former directors and officers of the Company, as well as the Company as a nominal defendant. Three were filed in New York State Supreme Court for the County of New York, four were filed in the U.S. District Court for the Southern District of New York and four were filed in the Court of Chancery of the State of Delaware for New Castle County. The complaints alleged that defendants breached their fiduciary duties by causing the Company to issue corporate statements that did not accurately represent that AOL had declining advertising revenues and by failing to conduct adequate due diligence in connection with the AOL-Historic TW Merger, that the AOL-Historic TW Merger was not generating the synergies anticipated at the time of the announcement of the merger, and that the Company inappropriately delayed writing down more than $50 billion of goodwill, thereby exposing the Company to potential liability for alleged violations of federal securities laws. The lawsuits further alleged that certain of the defendants improperly sold their personal holdings of Time Warner securities. The lawsuits requested that (i) all proceeds from defendants’ sales of Time Warner common stock, (ii)

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all expenses incurred by the Company as a result of the defense of the shareholder class actions discussed above, and (iii) any improper salaries or payments be returned to the Company. The four lawsuits filed in the Court of Chancery for the State of Delaware for New Castle County were consolidated under the caption, In re AOL Time Warner Inc. Derivative Litigation. A consolidated complaint was filed on March 7, 2003 in that action, and on June 9, 2003, the Company filed a notice of motion to dismiss the consolidated complaint. On May 2, 2003, the three lawsuits filed in New York State Supreme Court for the County of New York were dismissed on forum non conveniens grounds, and plaintiffs’ time to appeal has expired. The four lawsuits pending in the U.S. District Court for the Southern District of New York were centralized for coordinated or consolidated pre-trial proceedings with the securities and ERISA lawsuits described above under the caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation. On October 6, 2004, plaintiffs filed an amended consolidated complaint in three of these four cases. On April 20, 2006, plaintiffs in the four lawsuits filed in the Court of Chancery of the State of Delaware for New Castle County filed a new complaint in the U.S. District Court for the Southern District of New York. The parties to all of these actions subsequently reached an agreement to resolve all remaining matters in 2006, and the federal district court in New York granted preliminary approval of the settlement in an opinion dated May 10, 2006. A final approval hearing was held on June 28, 2006, and the court granted final approval of the settlement in an opinion dated September 6, 2006. The time to appeal that decision has expired. The court has yet to rule on plaintiffs’ petition for attorneys’ fees and expenses.
     During the Summer and Fall of 2002, several lawsuits brought by individual shareholders were filed in various federal jurisdictions, and in late 2005 and early 2006, numerous additional shareholders determined to “opt-out” of the settlement reached in the consolidated federal securities class action described above, and thereafter many filed federal lawsuits. All of these matters have now been settled. The aggregate amount for which the Company has settled these lawsuits as well as related lawsuits is described below.
     On November 11, 2002, Staro Asset Management, LLC filed a putative class action complaint in the U.S. District Court for the Southern District of New York on behalf of certain purchasers of Reliant 2.0% Zero-Premium Exchangeable Subordinated Notes for alleged violations of the federal securities laws. Plaintiff is a purchaser of subordinated notes, the price of which was purportedly tied to the market value of Time Warner stock. Plaintiff alleges that the Company made misstatements and/or omissions of material fact that artificially inflated the value of Time Warner stock and directly affected the price of the notes. Plaintiff seeks compensatory damages and/or rescission. This lawsuit has been consolidated for coordinated pretrial proceedings under the caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation described above. On September 27, 2007, the Company filed a motion to dismiss this action based on plaintiff’s failure to take any action to prosecute the case for nearly four years. The Company intends to defend against this lawsuit vigorously.
     On November 15, 2002, the California State Teachers’ Retirement System filed an amended consolidated complaint in the U.S. District Court for the Central District of California on behalf of a putative class of purchasers of stock in Homestore.com, Inc. (“Homestore”). Plaintiff alleged that Homestore engaged in a scheme to defraud its shareholders in violation of Section 10(b) of the Exchange Act. The Company and two former employees of its AOL division were named as defendants in the amended consolidated complaint because of their alleged participation in the scheme through certain advertising transactions entered into with Homestore. Motions to dismiss filed by the Company and the two former employees were granted on March 7, 2003, and a final judgment of dismissal was entered on March 8, 2004. On April 7, 2004, plaintiff filed a notice of appeal in the Ninth Circuit Court of Appeals. The Ninth Circuit heard oral argument on this appeal on February 6, 2006 and issued an opinion on June 30, 2006 affirming the lower court’s decision and remanding the case to the district court for further proceedings. On September 28, 2006, plaintiff filed a motion for leave to amend the complaint, and on December 18, 2006, the court held a hearing and denied plaintiff’s motion. In addition, on October 20, 2006, the Company joined its co-defendants in filing a petition for certiorari with the Supreme Court of the United States, seeking reconsideration of the Ninth Circuit’s decision. In December 2006, the Company reached an agreement with plaintiff to settle its claims against the Company and its former employees. The aggregate amount for which the Company has agreed to settle this as well as related lawsuits is described below. The court issued preliminary approval of this settlement on August 6, 2007. The settlement agreement remains subject to final approval by the district court. There can be no assurance that the settlement will receive final court approval.
     On April 30, 2004, a second amended complaint was filed in the U.S. District Court for the District of Nevada on behalf of a putative class of purchasers of stock in PurchasePro.com, Inc. (“PurchasePro”). Plaintiffs alleged that PurchasePro engaged in a scheme to defraud its shareholders in violation of Section 10(b) of the Exchange Act. The Company and four former officers and employees were added as defendants in the second amended complaint and were alleged to have

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participated in the scheme through certain advertising transactions entered into with PurchasePro. Three similar putative class actions had previously been filed against the Company, AOL and certain former officers and employees, and were consolidated with the Nevada action. On February 17, 2005, the judge in the consolidated action granted the Company’s motion to dismiss the second amended complaint with prejudice. The parties have agreed to settle this matter. The court granted preliminary approval of the proposed settlement in an order dated July 18, 2006 and granted final approval of the settlement in an order dated October 10, 2006. The administration of the settlement is ongoing. The aggregate amount for which the Company has settled this as well as related lawsuits is described below.
     During the fourth quarter of 2006, the Company established an additional reserve of $600 million related to its remaining securities litigation matters described above, bringing the reserve for unresolved claims to approximately $620 million at December 31, 2006. The prior reserve aggregating $3.0 billion established in the second quarter of 2005 had been substantially utilized as a result of the settlements resolving many of the other shareholder lawsuits that had been pending against the Company, including settlements entered into during the fourth quarter of 2006. During the first and second quarters of 2007, the Company reached agreements to settle substantially all of the remaining securities litigation claims, a substantial portion of which had been reserved for at December 31, 2006. For the nine months ended September 30, 2007, the Company recorded charges of approximately $153 million for these settlements. At September 30, 2007, the Company’s remaining reserve related to these matters is approximately $10 million, including approximately $8 million that has been reserved for an expected attorneys’ fee award related to a previously settled matter. The Company believes the potential exposure in the securities litigation matters that remain pending at September 30, 2007 to be de minimis.
Other Matters
     Warner Bros. (South) Inc. (“WBS”), a wholly owned subsidiary of the Company, is litigating numerous tax cases in Brazil. WBS currently is the theatrical distribution licensee for Warner Bros. Entertainment Nederlands (“Warner Bros. Nederlands”) in Brazil and acts as a service provider to the Warner Bros. Nederlands home video licensee. All of the ongoing tax litigation involves WBS’ distribution activities prior to January 2004, when WBS conducted both theatrical and home video distribution. Much of the tax litigation stems from WBS’ position that in distributing videos to rental retailers, it was conducting a distribution service, subject to a municipal service tax, and not the “industrialization” or sale of videos, subject to Brazilian federal and state VAT-like taxes. Both the federal tax authorities and the State of Sao Paulo, where WBS is based, have challenged this position. In June 2007, WBS received an adverse ruling in a case pending before the Superior Court concerning sales tax allegedly owed on assignments of films to video rental stores. WBS requested reconsideration of this decision. In September 2007, WBS elected to participate in a government-sponsored amnesty program, which resolved ten of the state tax matters, including the foregoing Superior Court case, for a payment of approximately $20 million (based on the real/U.S. dollar exchange rate on the date the payment was made).  The payment made was consistent with the reserve previously established for these matters. In some additional tax cases, WBS, often together with other film distributors, is challenging the imposition of taxes on royalties remitted outside of Brazil and the constitutionality of certain taxes. The Company intends to defend against the various remaining tax cases vigorously, but is unable to predict the outcome of these suits.
     On October 8, 2004, certain heirs of Jerome Siegel, one of the creators of the “Superman” character, filed suit against the Company, DC Comics and Warner Bros. Entertainment Inc. in the U.S. District Court for the Central District of California. Plaintiffs’ complaint seeks an accounting and demands up to one-half of the profits made on Superman since the alleged April 16, 1999 termination by plaintiffs of Siegel’s grants of one-half of the rights to the Superman character to DC Comics’ predecessor-in-interest. Plaintiffs have also asserted various Lanham Act and unfair competition claims, alleging “wasting” of the Superman property by DC Comics and failure to accord credit to Siegel. The Company answered the complaint and filed counterclaims on November 11, 2004, to which plaintiffs replied on January 7, 2005. On April 30, 2007, the Company filed motions for partial summary judgment on various issues, including the unavailability of accounting for pre-termination and foreign works. The case is scheduled for trial starting in January 2008. The Company intends to defend against this lawsuit vigorously, but is unable to predict its outcome.
     On October 22, 2004, the same Siegel heirs filed a second lawsuit against the Company, DC Comics, Warner Bros. Entertainment Inc., Warner Communications Inc. and Warner Bros. Television Production Inc. in the U.S. District Court for the Central District of California. Plaintiffs claim that Jerome Siegel was the sole creator of the character Superboy and, as such, DC Comics has had no right to create new Superboy works since the alleged October 17, 2004 termination by plaintiffs of Siegel’s grants of rights to the Superboy character to DC Comics’ predecessor-in-interest. This lawsuit seeks a declaration regarding the validity of the alleged termination and an injunction against future use of the Superboy character.

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Plaintiffs have also asserted Lanham Act and unfair competition claims alleging false statements by DC Comics regarding the creation of the Superboy character. The Company answered the complaint and filed counterclaims on December 21, 2004, to which plaintiffs replied on January 7, 2005. The case was consolidated for discovery purposes with the “Superman” action described immediately above. The parties filed cross-motions for summary judgment or partial summary judgment on February 15, 2006. In its ruling dated March 23, 2006, the court denied the Company’s motion for summary judgment, granted plaintiffs’ motion for partial summary judgment on termination and held that further proceedings are necessary to determine whether the Company’s Smallville television series may infringe on plaintiffs’ rights to the Superboy character. On January 12, 2007, the Company filed a motion for reconsideration of the court’s decision granting plaintiffs’ motion for partial summary judgment on termination. On April 30, 2007, the Company filed a motion for summary judgment on non-infringement of Smallville. On July 27, 2007, the court granted the Company’s motion for reconsideration, reversing the bulk of the March 23, 2006 ruling, and requested additional briefing on certain issues. The Company’s motion for summary judgment is pending. The Company intends to defend against this lawsuit vigorously, but is unable to predict its outcome.
     On May 24, 1999, two former AOL Community Leader volunteers filed Hallissey et al. v. America Online, Inc. in the U.S. District Court for the Southern District of New York. This lawsuit was brought as a collective action under the Fair Labor Standards Act (“FLSA”) and as a class action under New York state law against AOL and AOL Community, Inc. The plaintiffs allege that, in serving as Community Leader volunteers, they were acting as employees rather than volunteers for purposes of the FLSA and New York state law and are entitled to minimum wages. On December 8, 2000, defendants filed a motion to dismiss on the ground that the plaintiffs were volunteers and not employees covered by the FLSA. On March 10, 2006, the court denied defendants’ motion to dismiss. On May 11, 2006, plaintiffs filed a motion under the Fair Labor Standards Act asking the court to notify former community leaders nationwide about the lawsuit and allow those community leaders the opportunity to join the lawsuit. A related case was filed by several of the Hallissey plaintiffs in the U.S. District Court for the Southern District of New York alleging violations of the retaliation provisions of the FLSA. This case was stayed pending the outcome of the Hallissey motion to dismiss and has not yet been activated. Three related class actions have been filed in state courts in New Jersey, California and Ohio, alleging violations of the FLSA and/or the respective state laws. The New Jersey and Ohio cases were removed to federal court and subsequently transferred to the U.S. District Court for the Southern District of New York for consolidated pretrial proceedings with Hallissey. The California action was remanded to California state court, and on January 6, 2004 the court denied plaintiffs’ motion for class certification. Plaintiffs appealed the trial court’s denial of their motion for class certification to the California Court of Appeals. On May 26, 2005, a three-justice panel of the California Court of Appeals unanimously affirmed the trial court’s order denying class certification. The plaintiffs’ petition for review in the California Supreme Court was denied. The Company has settled the remaining individual claims in the California action. The Company intends to defend against the remaining lawsuits vigorously, but is unable to predict the outcome of these suits.
     On January 17, 2002, Community Leader volunteers filed a class action lawsuit in the U.S. District Court for the Southern District of New York against the Company, AOL and AOL Community, Inc. under ERISA. Plaintiffs allege that they are entitled to pension and/or welfare benefits and/or other employee benefits subject to ERISA. In March 2003, plaintiffs filed and served a second amended complaint, adding as defendants the Company’s Administrative Committee and the AOL Administrative Committee. On May 19, 2003, the Company, AOL and AOL Community, Inc. filed a motion to dismiss and the Administrative Committees filed a motion for judgment on the pleadings. Both of these motions are pending. The Company intends to defend against these lawsuits vigorously, but is unable to predict the outcome of these suits.
     On August 1, 2005, Thomas Dreiling filed a derivative suit in the U.S. District Court for the Western District of Washington against AOL and Infospace Inc. as nominal defendant. The complaint, brought in the name of Infospace by one of its shareholders, asserts violations of Section 16(b) of the Exchange Act. Plaintiff alleges that certain AOL executives and the founder of Infospace, Naveen Jain, entered into an agreement to manipulate Infospace’s stock price through the exercise of warrants that AOL had received in connection with a commercial agreement with Infospace. Because of this alleged agreement, plaintiff asserts that AOL and Mr. Jain constituted a “group” that held more than 10% of Infospace’s stock and, as a result, AOL violated the short-swing trading prohibition of Section 16(b) in connection with sales of shares received from the exercise of those warrants. The complaint seeks disgorgement of profits, interest and attorneys fees. On September 26, 2005, AOL filed a motion to dismiss the complaint for failure to state a claim, which was denied by the court on December 5, 2005. On October 11, 2007, the parties filed cross-motions for summary judgment. The case is

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
scheduled for trial starting in January of 2008. The Company intends to defend against this lawsuit vigorously, but is unable to predict the outcome of this suit or reasonably estimate the range of possible loss.
     On September 1, 2006, Ronald A. Katz Technology Licensing, L.P. (“Katz”) filed a complaint in the U.S. District Court for the District of Delaware alleging that TWC and AOL, among other defendants, infringe a number of patents purportedly relating to customer call center operations, voicemail and/or video-on-demand services. The plaintiff is seeking unspecified monetary damages as well as injunctive relief. On March 20, 2007, this case, together with other lawsuits filed by Katz, was made subject to a Multidistrict Litigation Order transferring the case for pretrial proceedings to the U.S. District Court for the Central District of California. The Company intends to defend against the claim vigorously, but is unable to predict the outcome of the suit or reasonably estimate a range of possible loss.
     On June 16, 1998, plaintiffs in Andrew Parker and Eric DeBrauwere, et al. v. Time Warner Entertainment Company, L.P. and Time Warner Cable filed a purported nation-wide class action in U.S. District Court for the Eastern District of New York claiming that TWE sold its subscribers’ personally identifiable information and failed to inform subscribers of their privacy rights in violation of the Cable Communications Policy Act of 1984 and common law. The plaintiffs seek damages and declaratory and injunctive relief. On August 6, 1998, TWE filed a motion to dismiss, which was denied on September 7, 1999. On December 8, 1999, TWE filed a motion to deny class certification, which was granted on January 9, 2001 with respect to monetary damages, but denied with respect to injunctive relief. On June 2, 2003, the U.S. Court of Appeals for the Second Circuit vacated the District Court’s decision denying class certification as a matter of law and remanded the case for further proceedings on class certification and other matters. On May 4, 2004, plaintiffs filed a motion for class certification, which the Company opposed. On October 25, 2005, the court granted preliminary approval of a class settlement arrangement on terms that were not material to the Company. A final settlement approval hearing was held on May 19, 2006 and, on January 26, 2007, the court denied approval of the settlement. The Company intends to defend against this lawsuit vigorously, but is unable to predict the outcome of this suit.
     On October 20, 2005, a group of syndicate participants, including BNZ Investments Limited, filed three related actions in the High Court of New Zealand, Auckland Registry, against New Line Cinema Corporation, a wholly owned subsidiary of the Company, and its subsidiary, New Line Productions Inc. (collectively, “New Line”). The complaints allege breach of contract, breach of duties of good faith and fair dealing, and other common law and statutory claims under California and New Zealand law. Plaintiffs contend, among other things, they have not received proceeds from certain financing transactions they entered into with New Line relating to three motion pictures: The Lord of the Rings: The Fellowship of the Ring; The Lord of the Rings: The Two Towers; and The Lord of the Rings: The Return of the King (collectively, “the Trilogy”). The parties to these actions have agreed that all claims will be heard before a single arbitrator, who has been selected, before the International Court for Arbitration, and the proceedings before the High Court of New Zealand have been dismissed without prejudice. The arbitration is scheduled to begin in September 2008. The Company intends to defend against these proceedings vigorously, but is unable to predict the outcome of the proceedings.
     Other matters relating to the Trilogy are also pending. On February 28, 2005, Wingnut Films, Ltd. filed a case against New Line Cinema Corporation, and Katja Motion Pictures Corp. and New Line Productions, Inc., both of which are wholly owned subsidiaries of New Line Cinema Corporation, as well as other unnamed defendants, in the U.S. District Court for the Central District of California. The complaint alleges that New Line Cinema Corporation failed to make full payment to plaintiff with respect to its participation in Adjusted Gross Receipts (as defined in the parties’ contract). A trial in this matter has been scheduled for January 2008. Claims have also been made by other profit participants relating to the Trilogy, including the Estate of J.R.R. Tolkien. The Company intends to defend against these matters vigorously, but is unable to predict the outcome of the proceedings.
     On December 22, 2006, AOL Europe Services SARL (“AOL Luxembourg”), a wholly owned subsidiary of AOL organized under the laws of Luxembourg, received an assessment from the French tax authorities, which assessment, together with accrued interest, equaled 35 million as of September 30, 2007 (approximately $51 million based on the exchange rate as of such date) for value added tax (“VAT”) due in France related to subscription revenues from French subscribers earned from July 1, 2003 through December 31, 2003. The French tax authorities assert that these revenues are subject to French VAT, instead of Luxembourg VAT, as originally reported and paid by AOL Luxembourg. The Company intends to defend against this assessment vigorously and is currently appealing this assessment at the audit level, but is unable to predict the outcome of the proceedings. AOL Luxembourg also could receive similar assessments from the French tax authorities in the future for subscription revenues earned in 2004 through 2006. If AOL Luxembourg were to receive such additional assessments and were to be unsuccessful on appeal of such assessments and the current assessment, the Company believes AOL

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Luxembourg’s total net exposure related to subscription revenues from French subscribers earned from July 1, 2003 through October 31, 2006, including interest accrued through September 30, 2007, could equal up to 78 million (approximately $112 million based on the exchange rate as of such date).
     On August 30, 2007, eight years after the case was initially filed, the Supreme Court of the Republic of Indonesia overturned the rulings of two lower courts and issued a judgment against Time Inc. Asia and six journalists in the matter of H.M. Suharto v. Time Inc. Asia et al. The underlying libel lawsuit was filed in July 1999 by the former dictator of Indonesia following the publication of TIME magazine’s May 24, 1999 cover story “Suharto Inc.” Following a trial in the Spring of 2000, a three-judge panel of an Indonesian court found in favor of Time Inc. and the journalists, and that decision was affirmed by an intermediate appellate court in March 2001. The court’s August 30, 2007 decision reversed those prior determinations and ordered defendants to, among other things, apologize for certain aspects of the May 1999 article and pay Mr. Suharto damages in the amount of one trillion rupiah (approximately $110 million based on the exchange rate as of September 30, 2007). The Company continues to defend this matter vigorously and intends to challenge the judgment by filing a petition for review with the Supreme Court of the Republic of Indonesia. The Company does not believe it is likely that efforts to enforce such judgment within Indonesia, or in those jurisdictions outside of Indonesia in which the Company has substantial assets, would result in any material loss to the Company. Consequently, no loss has been accrued for this matter as of September 30, 2007. Moreover, the Company believes that insurance coverage is available for the judgment, were it to be sustained and, eventually, enforced.
     On September 20, 2007, Brantley, et al. v. NBC Universal, Inc., et al. was filed in the U.S. District Court for the Central District of California against the Company and TWC. The complaint, which also names as defendants several other programming content providers (collectively, the “programmer defendants”) as well as other cable and satellite providers (collectively, the “distributor defendants”), alleges violations of Sections 1 and 2 of the Sherman Antitrust Act. Among other things, the complaint alleges coordination between and among the programmer defendants to sell and/or license programming on a “bundled” basis to the distributor defendants, who in turn purportedly offer that programming to subscribers in packaged tiers, rather than on a per channel (or “à la carte”) basis. Plaintiffs, who seek to represent a purported nationwide class of cable and satellite subscribers, demand, among other things, unspecified treble monetary damages and an injunction to compel the offering of channels to subscribers on an “à la carte” basis. The Company intends to defend against this lawsuit vigorously, but is unable to predict the outcome of this suit or reasonably estimate a range of possible loss.
     From time to time, the Company receives notices from third parties claiming that it infringes their intellectual property rights. Claims of intellectual property infringement could require Time Warner to enter into royalty or licensing agreements on unfavorable terms, incur substantial monetary liability or be enjoined preliminarily or permanently from further use of the intellectual property in question. In addition, certain agreements entered into by the Company may require the Company to indemnify the other party for certain third-party intellectual property infringement claims, which could increase the Company’s damages and its costs of defending against such claims. Even if the claims are without merit, defending against the claims can be time-consuming and costly.
     The costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments and investigations, claims and changes in those matters (including those matters described above), and developments or assertions by or against the Company relating to intellectual property rights and intellectual property licenses, could have a material adverse effect on the Company’s business, financial condition and operating results.

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. ADDITIONAL FINANCIAL INFORMATION
Cash Flows
     Additional financial information with respect to cash (payments) and receipts is as follows (millions):
                 
    Nine Months Ended  
    9/30/07     9/30/06  
            (recast)  
Cash payments made for interest
  $ (1,593 )   $ (1,213 )
Interest income received
    77       108  
 
           
    Cash interest payments, net
  $ (1,516 )   $ (1,105 )
 
           
Cash payments made for income taxes
  $ (479 )   $ (372 )
Income tax refunds received
    84       32  
 
           
    Cash tax payments, net
  $ (395 )   $ (340 )
 
           
     The nine months ended September 30, 2007 excludes $440 million of common stock repurchased or due from Liberty, indirectly attributable to the exchange of the Braves and Leisure Arts. Specifically, the $440 million represents the fair value of the Braves and Leisure Arts of $473 million, less a $33 million working capital adjustment.
 
     In addition, the consolidated statement of cash flows does not reflect approximately $120 million of common stock repurchases that were included in Other current liabilities at December 31, 2006 but for which payment was not made until the first quarter of 2007.
Interest Expense, Net
     Interest expense, net, consists of (millions):
                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06  
            (recast)             (recast)  
Interest income
  $ 55     $ 62     $ 154     $ 238  
Interest expense
    (644 )     (541 )     (1,868 )     (1,352 )
 
                       
Total interest expense, net
  $ (589 )   $ (479 )   $ (1,714 )   $ (1,114 )
 
                       
Other Income, Net
     Other income, net, consists of (millions):
                                 
    Three Months Ended     Nine Months Ended  
    9/30/07     9/30/06     9/30/07     9/30/06  
            (recast)             (recast)  
Investment gains, net
  $ 14     $ 727     $ 288     $ 1,042  
Income (loss) on equity method investees
    (18 )     12       (21 )     54  
Losses on accounts receivable securitization programs
    (13 )     (13 )     (40 )     (39 )
Other
    15       (15 )     4       12  
 
                       
Total other income, net
  $ (2 )   $ 711     $ 231     $ 1,069  
 
                       

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other Current Liabilities
     Other current liabilities consists of (millions):
                 
    September 30,     December 31,  
    2007     2006  
            (recast)  
Accrued expenses
  $ 3,769     $ 4,952  
Accrued compensation
    1,234       1,351  
Accrued income taxes
    99       205  
 
           
Total other current liabilities, net
  $ 5,102     $ 6,508  
 
           

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SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(Unaudited)
Overview
     TW AOL Holdings Inc, Historic TW Inc., Time Warner Companies, Inc. and Turner Broadcasting System, Inc. (collectively, the “Guarantor Subsidiaries”) are wholly owned subsidiaries of Time Warner Inc. (the “Parent Company”). The Guarantor Subsidiaries have fully and unconditionally, jointly and severally, directly or indirectly, guaranteed, on an unsecured basis, the debt issued by the Parent Company in its November 2006 public offering.
     The Securities and Exchange Commission’s rules require that condensed consolidating financial information be provided for wholly owned subsidiaries that have guaranteed debt of a registrant issued in a public offering, where each such guarantee is full and unconditional. Set forth below are condensed consolidating financial statements presenting the financial position, results of operations, and cash flows of (i) the Parent Company, (ii) the Guarantor Subsidiaries on a combined basis (as such guarantees are joint and several), (iii) the direct and indirect non-guarantor subsidiaries of the Parent Company (the “Non-Guarantor Subsidiaries”) on a combined basis and (iv) the eliminations necessary to arrive at the information for Time Warner Inc. on a consolidated basis.
     There are no legal or regulatory restrictions on the Parent Company’s ability to obtain funds from any of its wholly owned subsidiaries through dividends, loans or advances.
     These condensed consolidating financial statements should be read in conjunction with the consolidated financial statements of Time Warner Inc.
Basis of Presentation
     In presenting the condensed consolidating financial statements, the equity method of accounting has been applied to (i) the Parent Company’s interests in the Guarantor Subsidiaries and (ii) the Guarantor Subsidiaries’ interests in the Non-Guarantor Subsidiaries, where applicable, even though all such subsidiaries meet the requirements to be consolidated under U.S. generally accepted accounting principles. All inter-company balances and transactions between the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries have been eliminated, as shown in the column “Eliminations.”
     The Parent Company’s accounting bases in all subsidiaries, including goodwill and identified intangible assets, have been “pushed down” to the applicable subsidiaries.
     All direct and indirect domestic subsidiaries are included in Time Warner Inc.’s consolidated U.S. tax return. In the condensed consolidating financial statements, tax expense has been allocated based on each such subsidiary’s relative contribution to the consolidated total. With respect to the use of certain consolidated tax attributes (principally operating and capital loss carryforwards), such benefits have been allocated to the respective subsidiary that generated the taxable income permitting such use (i.e., pro-rata based on where the income was generated). For example, to the extent a Non-Guarantor Subsidiary generated a gain on the sale of a business for which the Parent Company utilized tax attributes to offset such gain, the tax attribute benefit would be allocated to the Non-Guarantor Subsidiary. Deferred taxes of the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries have been allocated based upon the temporary differences between the carrying amounts of the respective assets and liabilities of the applicable entities.
     Beginning in 2007, the method of allocating certain corporate overhead expenses was revised for purposes of preparing these condensed consolidating financial statements. Specifically, these expenses are no longer being allocated to the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries, but they instead are reflected as expenses of the Parent Company. The impact of this change for the three and nine months ended September 30, 2007 was to cause (i) the Parent Company’s operating loss to increase by approximately $70 million and approximately $220 million, respectively, (ii) the Guarantor Subsidiaries’ operating income to increase by approximately $15 million and approximately $50 million, respectively, and (iii) the Non-Guarantor Subsidiaries’ operating income to increase by approximately $55 million and approximately $170 million, respectively.

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SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Balance Sheet
September 30, 2007
                                         
                                    Time  
    Parent     Guarantor     Non-Guarantor             Warner  
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                    (millions)  
ASSETS
                                       
Current assets
                                       
Cash and equivalents
  $ 760     $ 51     $ 1,062     $     $ 1,873  
Restricted cash
                3             3  
Receivables, net
    31       3       5,835             5,869  
Inventories
          1       1,995             1,996  
Prepaid expenses and other current assets
    244       51       607             902  
 
                             
Total current assets
    1,035       106       9,502             10,643  
Noncurrent inventories and film costs
                5,487             5,487  
Investments in amounts due to and from consolidated subsidiaries
    87,196       82,839             (170,035 )      
Investments, including available-for-sale securities
    53       585       1,874       (461 )     2,051  
Property, plant and equipment, net
    431       241       16,875             17,547  
Intangible assets subject to amortization, net
          1       4,914             4,915  
Intangible assets not subject to amortization
          641       46,601             47,242  
Goodwill
          2,618       38,656             41,274  
Other assets
    116       225       1,807             2,148  
 
                             
Total assets
  $ 88,831     $ 87,256     $ 125,716     $ (170,496 )   $ 131,307  
 
                             
 
                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                       
Current liabilities
                                       
Accounts payable
  $ 5     $ 11     $ 1,055     $     $ 1,071  
Participations payable
                2,118             2,118  
Royalties and programming costs payable
          2       1,239             1,241  
Deferred revenue
                1,275             1,275  
Debt due within one year
          4       69             73  
Other current liabilities
    551       237       4,380       (66 )     5,102  
Current liabilities of discontinued operations
          1       21             22  
 
                             
Total current liabilities
    556       255       10,157       (66 )     10,902  
Long-term debt
    17,250       5,437       14,369             37,056  
Mandatorily redeemable preferred membership units issued by a subsidiary
                300             300  
Debt due (from) to affiliates
    (1,844 )     735       1,109              
Deferred income taxes
    12,671       14,956       15,031       (29,987 )     12,671  
Deferred revenue
                497             497  
Other liabilities
    2,052       2,955       6,489       (4,028 )     7,468  
Noncurrent liabilities of discontinued operations
                1             1  
Minority interests
                3,913       353       4,266  
Shareholders’ equity
                                       
Due (to) from Time Warner and subsidiaries
          (12,383 )     (30,310 )     42,693        
Other shareholders’ equity
    58,146       75,301       104,160       (179,461 )     58,146  
 
                             
Total shareholders’ equity
    58,146       62,918       73,850       (136,768 )     58,146  
 
                             
Total liabilities and shareholders’ equity
  $ 88,831     $ 87,256     $ 125,716     $ (170,496 )   $ 131,307  
 
                             

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SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Balance Sheet
December 31, 2006
                                         
                                    Time  
    Parent     Guarantor     Non-Guarantor             Warner  
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                    (recast, millions)  
ASSETS
                                       
Current assets
                                       
Cash and equivalents
  $ 207     $ 77     $ 1,265     $     $ 1,549  
Restricted cash
                29             29  
Receivables, net
    30       2       6,032             6,064  
Inventories
                1,907             1,907  
Prepaid expenses and other current assets
    273       39       824             1,136  
Current assets of discontinued operations
                166             166  
 
                             
Total current assets
    510       118       10,223             10,851  
Noncurrent inventories and film costs
                5,394             5,394  
Investments in amounts due to and from consolidated subsidiaries
    86,833       81,798             (168,631 )      
Investments, including available-for-sale securities
    33       607       3,203       (417 )     3,426  
Property, plant and equipment, net
    476       242       16,000             16,718  
Intangible assets subject to amortization, net
                5,204             5,204  
Intangible assets not subject to amortization
          626       45,736             46,362  
Goodwill
          2,546       38,203             40,749  
Other assets
    123       249       2,017             2,389  
Noncurrent assets of discontinued operations
                576             576  
 
                             
Total assets
  $ 87,975     $ 86,186     $ 126,556     $ (169,048 )   $ 131,669  
 
                             
 
                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                       
Current liabilities
                                       
Accounts payable
  $ 4     $ 13     $ 1,340     $     $ 1,357  
Participations payable
                2,049             2,049  
Royalties and programming costs payable
          5       1,210             1,215  
Deferred revenue
                1,434             1,434  
Debt due within one year
          4       60             64  
Other current liabilities
    1,458       261       4,807       (18 )     6,508  
Current liabilities of discontinued operations
          1       152             153  
 
                             
Total current liabilities
    1,462       284       11,052       (18 )     12,780  
Long-term debt
    14,272       5,993       14,668             34,933  
Mandatorily redeemable preferred membership units issued by a subsidiary
                300             300  
Debt due (from) to affiliates
    (1,798 )     735       1,063              
Deferred income taxes
    13,114       16,027       16,099       (32,126 )     13,114  
Deferred revenue
                528             528  
Other liabilities
    454       1,179       4,873       (1,044 )     5,462  
Noncurrent liabilities of discontinued operations
    82             42             124  
Minority interests
                3,800       239       4,039  
Shareholders’ equity
                                       
Due (to) from Time Warner and subsidiaries
          (9,310 )     (24,692 )     34,002        
Other shareholders’ equity
    60,389       71,278       98,823       (170,101 )     60,389  
 
                             
Total shareholders’ equity
    60,389       61,968       74,131       (136,099 )     60,389  
 
                             
Total liabilities and shareholders’ equity
  $ 87,975     $ 86,186     $ 126,556     $ (169,048 )   $ 131,669  
 
                             

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TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Operations
For The Three Months Ended September 30, 2007
                                         
                                    Time  
    Parent     Guarantor     Non-Guarantor             Warner  
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                    (millions)  
Revenues
  $     $ 297     $ 11,415     $ (36 )   $ 11,676  
 
                             
Costs of revenues
          (153 )     (6,844 )     36       (6,961 )
Selling, general and administrative
    (90 )     (67 )     (2,250 )           (2,407 )
Amortization of intangible assets
                (167 )           (167 )
Amounts related to securities litigation and government investigations
    (2 )                       (2 )
Merger-related, restructuring and shut-down costs
                (12 )           (12 )
Asset impairments
                (1 )           (1 )
Loss on disposal of assets, net
                4             4  
 
                             
Operating income (loss)
    (92 )     77       2,145             2,130  
Equity in pretax income of consolidated subsidiaries
    1,817       2,101             (3,918 )      
Interest income (expense), net
    (278 )     (374 )     63             (589 )
Other income (loss), net
    8       8       (8 )     (10 )     (2 )
Minority interest expense, net
                (67 )     (17 )     (84 )
 
                             
Income before income taxes and discontinued operations
    1,455       1,812       2,133       (3,945 )     1,455  
Income tax provision
    (555 )     (688 )     (823 )     1,511       (555 )
 
                             
Income before discontinued operations
    900       1,124       1,310       (2,434 )     900  
Discontinued operations, net of tax
    186       176       194       (370 )     186  
 
                             
Net income
  $ 1,086     $ 1,300     $ 1,504     $ (2,804 )   $ 1,086  
 
                             

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TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Operations
For The Three Months Ended September 30, 2006
                                         
                                    Time  
    Parent     Guarantor     Non-Guarantor             Warner  
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                    (recast, millions)  
Revenues
  $     $ 283     $ 10,542     $ (75 )   $ 10,750  
 
                             
Costs of revenues
          (130 )     (6,098 )     73       (6,155 )
Selling, general and administrative
    (20 )     (75 )     (2,390 )     2       (2,483 )
Amortization of intangible assets
                (163 )           (163 )
Amounts related to securities litigation and government investigations
    (29 )                       (29 )
Merger-related, restructuring and shut-down costs
                (73 )           (73 )
Asset Impairments
                (200 )           (200 )
 
                             
Operating income (loss)
    (49 )     78       1,618             1,647  
Equity in pretax income of consolidated subsidiaries
    2,019       2,213             (4,232 )      
Interest income (expense), net
    (193 )     (331 )     45             (479 )
Other income, net
    13       66       664       (32 )     711  
Minority interest expense, net
                (66 )     (23 )     (89 )
 
                             
Income before income taxes, discontinued operations and cumulative effect of accounting change
    1,790       2,026       2,261       (4,287 )     1,790  
Income tax provision
    (443 )     (500 )     (618 )     1,118       (443 )
 
                             
Income before discontinued operations
    1,347       1,526       1,643       (3,169 )     1,347  
Discontinued operations, net of tax
    975       975       975       (1,950 )     975  
 
                             
Net income
  $ 2,322     $ 2,501     $ 2,618     $ (5,119 )   $ 2,322  
 
                             

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TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Operations
For The Nine Months Ended September 30, 2007
                                         
                                    Time  
    Parent     Guarantor     Non-Guarantor             Warner  
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                    (millions)  
Revenues
  $     $ 889     $ 33,038     $ (87 )   $ 33,840  
 
                             
Costs of revenues
          (411 )     (19,548 )     85       (19,874 )
Selling, general and administrative
    (292 )     (185 )     (6,738 )     2       (7,213 )
Amortization of intangible assets
                (502 )           (502 )
Amounts related to securities litigation and government investigations
    (169 )                       (169 )
Merger-related, restructuring and shut-down costs
                (113 )           (113 )
Asset impairments
                (36 )           (36 )
Gains on disposal of assets, net
                673             673  
 
                             
Operating income (loss)
    (461 )     293       6,774             6,606  
Equity in pretax income of consolidated subsidiaries
    6,035       6,781             (12,816 )      
Interest income (expense), net
    (778 )     (1,089 )     153             (1,714 )
Other income, net
    22       2       251       (44 )     231  
Minority interest expense, net
                (213 )     (92 )     (305 )
 
                             
Income before income taxes, discontinued operations and cumulative effect of accounting change
    4,818       5,987       6,965       (12,952 )     4,818  
Income tax provision
    (1,786 )     (2,232 )     (2,624 )     4,856       (1,786 )
 
                             
Income before discontinued operations
    3,032       3,755       4,341       (8,096 )     3,032  
Discontinued operations, net of tax
    324       321       276       (597 )     324  
 
                             
Net income
  $ 3,356     $ 4,076     $ 4,617     $ (8,693 )   $ 3,356  
 
                             

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TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Operations
For The Nine Months Ended September 30, 2006
                                         
                                    Time  
    Parent     Guarantor     Non-Guarantor             Warner  
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                    (recast, millions)  
Revenues
  $     $ 859     $ 30,608     $ (118 )   $ 31,349  
 
                             
Costs of revenues
          (380 )     (17,379 )     113       (17,646 )
Selling, general and administrative
    (70 )     (220 )     (7,308 )     5       (7,593 )
Amortization of intangible assets
                (419 )           (419 )
Amounts related to securities litigation and government investigations
    (90 )                       (90 )
Merger-related, restructuring and shut-down costs
    (5 )           (200 )           (205 )
Asset impairments
                (200 )           (200 )
Gains on disposal of assets, net
    20             2             22  
 
                             
Operating income (loss)
    (145 )     259       5,104             5,218  
Equity in pretax income of consolidated subsidiaries
    5,500       6,089             (11,589 )      
Interest income (expense), net
    (469 )     (917 )     272             (1,114 )
Other income, net
    22       69       1,049       (71 )     1,069  
Minority interest expense, net
                (227 )     (38 )     (265 )
 
                             
Income before income taxes, discontinued operations and cumulative effect of accounting change
    4,908       5,500       6,198       (11,698 )     4,908  
Income tax provision
    (1,546 )     (1,738 )     (2,043 )     3,781       (1,546 )
 
                             
Income before discontinued operations and cumulative effect of accounting change
    3,362       3,762       4,155       (7,917 )     3,362  
Discontinued operations, net of tax
    1,412       1,412       1,412       (2,824 )     1,412  
 
                             
Income before cumulative effect of accounting change
    4,774       5,174       5,567       (10,741 )     4,774  
Cumulative effect of accounting change, net of tax
    25       2       2       (4 )     25  
 
                             
Net income
  $ 4,799     $ 5,176     $ 5,569     $ (10,745 )   $ 4,799  
 
                             

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TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Cash Flows
For The Nine Months Ended September 30, 2007
                                         
                                    Time  
    Parent     Guarantor     Non-Guarantor             Warner  
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                    (millions)  
OPERATIONS
                                       
Net income
  $ 3,356     $ 4,076     $ 4,617     $ (8,693 )   $ 3,356  
Adjustments for noncash and nonoperating items:
                                       
Depreciation and amortization
    33       51       3,190             3,274  
Amortization of film costs
          321       4,176             4,497  
Asset impairments
                36             36  
Gain on investments and other assets, net
    (9 )     (13 )     (949 )           (971 )
Deficiency of distributions over equity in pretax income of consolidated subsidiaries
    (6,035 )     (6,781 )           12,816        
Equity in losses of investee companies, net of cash distributions
          1       52             53  
Equity-based compensation
    42       16       172             230  
Minority interests
                213       92       305  
Deferred income taxes
    1,406       193       195       (388 )     1,406  
Amounts related to securities litigation and government investigations
    (750 )                       (750 )
Changes in operating assets and liabilities, net of acquisitions
    1,149       2,581       (4,286 )     (4,433 )     (4,989 )
Adjustments relating to discontinued operations
    (323 )     (322 )     (243 )     597       (291 )
 
                             
Cash provided (used) by operations
    (1,131 )     123       7,173       (9 )     6,156  
INVESTING ACTIVITIES
                                       
Investments in available-for-sale securities
    (3 )           (87 )           (90 )
Investments and acquisitions, net of cash acquired
    (4 )     (17 )     (641 )           (662 )
Investments in wireless spectrum joint venture
                (30 )           (30 )
Investments and acquisitions from discontinued operations
                (26 )           (26 )
Capital expenditures and product development costs
    12       (85 )     (3,027 )           (3,100 )
Investment proceeds from available-for-sale securities
    10       23                   33  
Advances to parent and consolidated subsidiaries
    4,494       3,525             (8,019 )      
Other investment proceeds
    1       28       1,777             1,806  
 
                             
Cash provided (used) by investing activities
    4,510       3,474       (2,034 )     (8,019 )     (2,069 )
FINANCING ACTIVITIES
                                       
Borrowings
    6,042             6,686             12,728  
Debt repayments
    (3,056 )     (546 )     (6,949 )           (10,551 )
Proceeds from exercise of stock options
    484                         484  
Excess tax benefit on stock options
    68             6             74  
Principal payments on capital leases
          (3 )     (42 )           (45 )
Repurchases of common stock
    (5,714 )                       (5,714 )
Dividends paid
    (645 )                       (645 )
Other
    (5 )           (89 )           (94 )
Change in due to/from parent and investment in segment
          (3,074 )     (4,954 )     8,028        
 
                             
Cash used by financing activities
    (2,826 )     (3,623 )     (5,342 )     8,028       (3,763 )
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
    553       (26 )     (203 )           324  
 
                             
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD
    207       77       1,265             1,549  
 
                             
CASH AND EQUIVALENTS AT END OF PERIOD
  $ 760     $ 51     $ 1,062     $     $ 1,873  
 
                             

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TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Cash Flows
For The Nine Months Ended September 30, 2006
                                         
                                    Time  
    Parent     Guarantor     Non-Guarantor             Warner  
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                    (recast, millions)  
OPERATIONS
                                       
Net income
  $ 4,799     $ 5,176     $ 5,569     $ (10,745 )   $ 4,799  
Adjustments for noncash and nonoperating items: