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, 2009 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

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

 

 

TIME WARNER INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION

			Page
PART I. FINANCIAL INFORMATION
Management’s Discussion and Analysis of Results of Operations and Financial Condition			1
Item 4. Controls and Procedures			33
Consolidated Balance Sheet at September 30, 2009 and December 31, 2008			34
Consolidated Statement of Operations for the Three and Nine Months Ended September 30, 2009 and 2008			35
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2009 and 2008			36
Consolidated Statement of Equity for the Nine Months Ended September 30, 2009 and 2008			37
Notes to Consolidated Financial Statements			38
Supplementary Information			70
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			80
Item 1A. Risk Factors			80
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			81
Item 5. Other Information			81
Item 6. Exhibits			82
EX-10.1 FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT, DIRECTORS VERSION
EX-10.2 FORM OF NOTICE OF GRANT OF STOCK OPTIONS TO NON-EMPLOYEE DIRECTOR
EX-31.1 SECTION 302 CERTIFICATION OF THE PEO
EX-31.2 SECTION 302 CERTIFICATION OF THE PFO
EX-32 SECTION 906 CERTIFICATION OF THE PEO AND PFO
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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 a supplement to the accompanying consolidated financial statements and provides additional information on Time Warner Inc.’s (“Time Warner” or the “Company”) businesses, current developments, 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, 2009. 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 affect 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, 2009 and cash flows for the nine months ended September 30, 2009.
	•		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, 2008 (the “2008 Form 10-K”), as well as Item 1A, “Risk Factors,” in Part II of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (the “June 2009 Form 10-Q”), for a discussion of the risk factors applicable to the Company.

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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, TNT, CNN, AOL, People , Sports Illustrated and Time . The Company produces and distributes films through Warner Bros. and New Line Cinema, including Harry Potter and the Half-Blood Prince , The Hangover , The Dark Knight and Gran Torino , as well as television series, including Two and a Half Men , The Mentalist , The Big Bang Theory , Gossip Girl and The Closer . During the nine months ended September 30, 2009, the Company generated revenues of $20.889 billion (down 7% from $22.518 billion in 2008), Operating Income of $3.769 billion (down 7% from $4.066 billion in 2008), Net Income of $1.841 billion (down 30% from $2.630 billion in 2008) and Cash Provided by Operations from Continuing Operations of $3.482 billion (down 18% from $4.246 billion in 2008).

     On March 12, 2009, the Company completed the legal and structural separation of Time Warner Cable Inc. (“TWC”) from the Company. With the completion of the separation, the Company disposed of the Cable segment in its entirety and ceased to consolidate the financial condition and results of operations of TWC in its consolidated financial statements. Accordingly, the Company has presented the financial condition and results of operations of the Cable segment as discontinued operations in the accompanying consolidated financial statements for all periods presented.

     On May 28, 2009, Time Warner announced that its Board of Directors has authorized management to proceed with plans for the complete legal and structural separation of AOL LLC from Time Warner, which is expected to occur in the fourth quarter of 2009. Refer to “Recent Developments” for more information.

Impact of the Current Economic Environment

     The current global economic recession has reduced the Company’s visibility into long-term business trends and has adversely affected its businesses during the first nine months of 2009 and is currently expected to continue to adversely affect them during the remainder of 2009. For example, during the nine months ended September 30, 2009, the Company’s Advertising revenues declined 14% compared to the similar period in the prior year. The Company currently expects Advertising revenues to continue to decline during the remainder of 2009 as compared to the similar period in 2008, although the rate of decline for the remainder of 2009 is expected to moderate in comparison to that experienced during the first nine months of 2009. Additionally, the current economic environment is adversely affecting the Company’s Content revenues due to, among other things, reduced consumer spending on DVDs.

     The significant losses in the market value of the Company’s pension plan assets in 2008 have resulted in an increase in pension expense of approximately $42 million and $113 million, respectively, for the three and nine months ended September 30, 2009 and are expected to result in an approximately $150 million increase in pension expense for the full year of 2009. Additionally, the strengthening of the U.S. dollar relative to significant foreign currencies to which the Company is exposed has negatively affected the Company’s revenues and Operating Income by approximately $130 million and $70 million, respectively, for the three months ended September 30, 2009 and approximately $570 million and $170 million, respectively, for the nine months ended September 30, 2009. If exchange rates remain at levels similar to those at September 30, 2009, the Company does not expect they will have a significant impact on revenues or Operating Income during the remainder of 2009 compared to the similar period in 2008.

     The Company continues to have strong liquidity to meet its needs for the foreseeable future. At September 30, 2009, the Company had $14.029 billion of unused committed capacity, including cash and equivalents and credit facilities containing commitments from a geographically diverse group of major financial institutions. See “Financial Condition and Liquidity” for further details regarding the Company’s total committed borrowing capacity.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

Time Warner Businesses

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

     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 noncash depreciation of tangible assets and amortization of certain intangible assets, primarily intangible assets 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 11, “Segment Information.”

      Networks. Time Warner’s Networks segment is comprised of Turner Broadcasting System, Inc. (“Turner”) and Home Box Office, Inc. (“HBO”). For the nine months ended September 30, 2009, the Networks segment generated revenues of $8.645 billion (41% of the Company’s overall revenues), $3.089 billion in Operating Income before Depreciation and Amortization and $2.773 billion in Operating Income.

     The Turner networks — including such recognized brands as TNT, TBS, CNN, Cartoon Network, truTV and HLN (formerly CNN Headline News) — are among the leaders in advertising-supported cable TV networks. For seven consecutive years, more primetime households have watched advertising-supported cable TV networks than the national broadcast networks. The Turner networks generate revenues principally from the receipt of monthly subscriber fees paid by cable system operators, satellite distribution services, telephone companies and other distributors and from the sale of advertising. Key contributors to Turner’s success are its continued investments in high-quality programming focused on sports, original and syndicated series, news, network movie premieres and animation leading to strong ratings and revenue growth, as well as strong brands and operating efficiencies. For the remainder of 2009, the Company anticipates that the difficult economic environment and the absence of advertising revenues associated with the 2008 election coverage will adversely affect Advertising revenues at Turner compared to the similar period in 2008.

     HBO operates the HBO and Cinemax multichannel premium pay television programming services, with the HBO service ranking as the nation’s most widely distributed premium pay television service. HBO generates revenues principally from monthly subscriber fees from cable system operators, satellite distribution services, telephone companies and other distributors. An additional source of revenues is the sale of its original programming, including Sex and the City , True Blood , Entourage , The Sopranos and Rome .

     The Company’s Networks segment has recently focused on international expansion, including Turner’s fourth quarter 2007 acquisition of seven pay networks operating principally in Latin America and HBO’s acquisitions of additional equity interests in HBO Asia and HBO South Asia during the fourth quarter of 2007 and first quarter of 2008, as well as the acquisition of an additional equity interest in the HBO Latin America Group, consisting of HBO Brasil, HBO Olé and HBO Latin America Production Services (collectively, “HBO LAG”), during the fourth quarter of 2008. In addition, during the three months ended September 30, 2009, Turner acquired Japan Image Communications Co., Ltd. (“JIC”), a Japanese pay television business. HBO LAG and JIC contributed revenues and Operating Income before Depreciation and Amortization of $265 million and $69 million, respectively, for the nine months ended September 30, 2009. In addition, during 2008 and the first nine months of 2009, Turner expanded its presence in Turkey, Germany and Korea. The Company anticipates that international expansion will continue to be an area of focus at the Networks segment for the foreseeable future.

      Filmed Entertainment.    Time Warner’s Filmed Entertainment segment is comprised of Warner Bros. Entertainment Group (“Warner Bros.”), one of the world’s leading studios, and New Line Cinema Corporation (“New Line”). For the nine months ended September 30, 2009, the Filmed Entertainment segment generated revenues of $7.746 billion (35% of the

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

Company’s overall revenues), $923 million in Operating Income before Depreciation and Amortization and $648 million in Operating Income.

     The Filmed Entertainment segment has diversified sources of revenues within its film and television businesses, including an extensive film library and a global distribution infrastructure, which have helped it to deliver consistent long-term operating performance. To increase operational efficiencies and maximize performance within the Filmed Entertainment segment, in 2008 the Company reorganized the New Line business to be operated as a unit of Warner Bros. while maintaining separate development, production and other operations, and the Company incurred restructuring charges primarily related to involuntary employee terminations in connection with the reorganization. Beginning in the first quarter of 2009, Warner Bros. commenced a significant restructuring, primarily consisting of headcount reductions and the outsourcing of certain functions to an external service provider. As a result of these restructurings, the Filmed Entertainment segment incurred restructuring charges of $17 million and $85 million for the three and nine months ended September 30, 2009, respectively, and expects to incur additional restructuring charges of approximately $10 million in the fourth quarter of 2009.

     Warner Bros. continues to be an industry leader in the television business. During the 2009-2010 broadcast season, Warner Bros. expects to produce more than 25 primetime series, with at least one series airing on each of the five broadcast networks (including Two and a Half Men , The Mentalist , The Big Bang Theory , Gossip Girl and Smallville ), as well as original series for several 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. The industry and the Company experienced a decline in DVD sales in 2008 and the first nine months of 2009 as growing consumer interest in high definition Blu-ray DVDs and the effect of increased electronic delivery only partially offset softening consumer demand for standard definition DVDs. Also contributing to the overall decline in DVD sales are several factors, including the general economic downturn in the U.S. and many regions around the world, increasing competition for consumer discretionary time and spending, piracy and the maturation of the standard definition DVD format.

     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, television programming and interactive games. 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.

      Publishing.    Time Warner’s Publishing segment consists principally of magazine publishing and related websites as well as a number of direct-marketing businesses. For the nine months ended September 30, 2009, the Publishing segment generated revenues of $2.635 billion (12% of the Company’s overall revenues), $295 million in Operating Income before Depreciation and Amortization and $167 million in Operating Income. In an ongoing effort to continue to streamline the Publishing segment’s operations, the Company expects to incur up to $100 million of restructuring costs primarily related to severance costs in the fourth quarter of 2009.

     As of September 30, 2009, Time Inc. published 22 magazines in the U.S., including People , Sports Illustrated , Time , InStyle , Real Simple , Southern Living and Fortune , and over 90 magazines outside the U.S., primarily through IPC Media (“IPC”) in the U.K. and Grupo Editorial Expansión (“GEE”) in Mexico. The Publishing segment generates revenues primarily from advertising (including advertising on digital properties), magazine subscriptions and newsstand sales. Time Inc. also owns the magazine subscription marketer, Synapse Group, Inc. (“Synapse”), and the school and youth group fundraising company, QSP, Inc. and its Canadian affiliate, Quality Service Programs Inc. (collectively, “QSP”). Advertising sales at the Publishing segment, particularly print advertising sales, continue to be significantly adversely affected by the current economic environment as evidenced by their continuing decline during the first nine months of 2009. Online advertising sales at the Publishing segment have also been adversely affected by the current economic environment, although, on a percentage basis, to a lesser degree than print advertising sales. Time Inc. continues to develop digital content, including the relaunch of RealSimple.com and the expansion of People.com and Time.com , as well as the expansion of digital properties owned by IPC and GEE. Online Advertising revenues were 11% and 12%, respectively, of Time Inc.’s total Advertising revenues for the three and nine months ended September 30, 2009 compared to 11% and 10%,

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MANAGEMENT’S DISCUSSION AND ANALYSIS
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respectively, for the three and nine months ended September 30, 2008. On July 16, 2009, Time Inc. completed the sale of its direct-selling division, Southern Living At Home, which sells home decor products through independent consultants at parties hosted in people’s homes throughout the U.S.

      AOL.    AOL LLC (together with its subsidiaries, “AOL”) is a leading global web services company with an extensive suite of brands and offerings and a substantial worldwide audience. Its business spans online content, products and services that it offers to consumers, publishers and advertisers. AOL is focused on attracting and engaging consumers and providing valuable online advertising services on both its owned and operated properties and third-party websites. As of September 2009, AOL has the largest advertising network in terms of online consumer reach in the U.S. For the nine months ended September 30, 2009, AOL generated revenues of $2.448 billion (12% of the Company’s overall revenues), $760 million in Operating Income before Depreciation and Amortization and $449 million in Operating Income.

     Historically, AOL’s primary strategic focus was its dial-up Internet access services business, which operated one of the largest Internet subscription access services in the U.S. As broadband penetration in the U.S. increased, AOL experienced a decline, which it continues to experience, in subscribers to its access service. At the same time, online advertising experienced significant growth. In August 2006, AOL fundamentally shifted the primary strategic focus of its business from generating Subscription revenues to attracting and engaging Internet consumers and generating Advertising revenues. In connection with this shift, AOL began offering the vast majority of its content, products and services to consumers for free in an effort to attract and engage a broader group of consumers. While this strategic shift was announced in 2006, AOL is still in the process of completing this transition. Consequently, AOL’s subscription access service remains an important source of its total revenues and cash flows.

     The Company has been evaluating potential transactions involving, and structural alternatives for, AOL for some time, including the possibility of separating AOL’s global web services and subscription access services businesses, which share infrastructure such as data centers and network operations centers. Historically, the global web services business had three units: (i) the first focused on content published on a variety of websites with related applications and services; (ii) the second focused on social networking, community and instant communications products and services; and (iii) the third focused on providing advertising services on both AOL’s owned and operated properties and third-party websites. The subscription access services business included the AOL-branded Internet access service as well as the CompuServe and Netscape Internet access services.

     In April 2009, Tim Armstrong was appointed AOL’s Chairman and Chief Executive Officer, and he commenced a review of AOL’s strategy and operations while the Company continued its evaluation of structural alternatives. The Company’s evaluation resulted in the announcement on May 28, 2009 that it would move forward with plans for the complete legal and structural separation of AOL from Time Warner. Refer to “Recent Developments” for further details regarding the separation of AOL from Time Warner.

     In connection with the strategic review conducted by Mr. Armstrong, which factored in the Company’s decision to separate AOL from Time Warner, AOL has updated its organizational structure and developed the next phase in the strategic shift begun in 2006. AOL’s strategy remains focused primarily on attracting and engaging Internet consumers and generating Advertising revenues, with the subscription access service managed as a valuable distribution channel for AOL’s content, product and service offerings. As a result, AOL intends to continue to operate as a single integrated business rather than as two separate businesses.

     AOL’s strategy is to focus its resources on its core competitive strengths in web content production, local and mapping, communications and advertising networks while expanding the presence of its content, products and service offerings on multiple platforms and digital devices. AOL also aims to reorient its culture and reinvigorate the AOL brand by prioritizing the consumer experience and making greater use of data-driven insights. AOL aims to encourage innovation through the entrepreneurial environment of AOL Ventures.

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

     AOL’s business operations are focused on the following two areas:

	•		AOL Media.    AOL seeks to be a global publisher of relevant and engaging online content by utilizing open and highly scalable publishing platforms and content management systems, as well as a leading online provider of consumer products and services.
			AOL generates Advertising revenues from its owned and operated content, products and services, which are referred to as “AOL Media,” through the sale of display and search advertising. AOL seeks to provide effective and efficient advertising solutions utilizing data-driven insights that help advertisers decide how best to engage consumers.
			AOL also generates revenues through its subscription access service. AOL views its subscription access service as a valuable distribution channel for AOL Media. AOL’s access service subscribers are important users of AOL Media and engaging both present and former access service subscribers is an important component of its strategy. In addition, AOL’s subscription access service will remain an important source of revenue and cash flow for AOL in the near term.
	•		Third Party Network .   AOL also generates Advertising revenues through the sale of advertising on third-party websites and on digital devices, which are referred to as the “Third Party Network,” and AOL markets these advertising offerings to publishers under the brand “Advertising.com.” AOL’s mission is to provide an open and transparent advertising system that is easy-to-use and offers its publishers and advertisers unique and valuable insights. AOL seeks to significantly increase the number of publishers and advertisers utilizing the network.

     AOL markets its advertising offerings to advertisers on both AOL Media and the Third Party Network under the brand “AOL Advertising.”

     During the first nine months of 2009, AOL’s Advertising revenues were negatively affected by weak global economic conditions, which contributed to lower advertising demand, and which the Company anticipates may continue to negatively affect AOL’s Advertising revenues in the fourth quarter of 2009.

     Google Inc. (“Google”) is, except in limited circumstances, the exclusive web search provider for AOL Media. In connection with these search services, Google provides AOL with a share of the revenues generated through paid text-based search advertising on AOL Media. For the nine months ended September 30, 2009, Advertising revenues associated with the Google relationship (substantially all of which were generated on AOL Media) were $422 million. In addition, AOL sells search-based keyword advertising directly to advertisers on AOL Media through the use of a white-labeled, modified version of Google’s advertising platform, for which AOL provides a share of the revenues generated through such sales to Google. Domestically, AOL has agreed, except in certain limited circumstances, to use Google’s search services on an exclusive basis through December 19, 2010. Upon expiration of this agreement, AOL expects to continue to generate Advertising revenues by providing paid-search advertising on AOL Media, either through the continuation of its relationship with Google or an agreement with another search provider.

     AOL views its subscription access service, which is offered to consumers in the U.S. for a monthly fee, as a valuable distribution channel for AOL Media. In general, subscribers to the subscription access service are among the most engaged consumers on AOL Media. However, the domestic AOL-brand access subscriber base has been declining, which has had an adverse impact on AOL’s Subscription revenues. AOL’s domestic AOL-brand access subscribers declined 1.5 million and 1.9 million for the nine months ended September 30, 2009 and 2008, respectively. The continued decline in subscribers is the result of several factors, including the increased availability of high-speed broadband Internet connections, the fact that a significant amount of online content, products and services has been optimized for use with Internet broadband connections and the effects of AOL’s strategic shift announced in 2006, which resulted in significantly reduced marketing efforts for its subscription access service, and the free availability of the majority of its content, products and services. AOL expects the net number of domestic AOL-brand access subscribers to continue to decline. Accordingly, because Advertising revenues associated with AOL Media in large part are generated from the activity (including search queries) of current and former AOL subscribers, as AOL’s subscriber base declines, AOL needs to maintain the engagement of former subscribers similar to historical levels and increase the number and engagement of other consumers on AOL Media. AOL seeks to do

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

this by continuing to develop and offer engaging content, products and services and continuing to transition those access service subscribers who are terminating their paid access subscriptions to free AOL Media offerings.

     During the first nine months of 2009, in an effort to better align its cost structure with its revenues, AOL undertook various restructuring activities. As a result, for the three and nine months ended September 30, 2009, AOL incurred restructuring charges of $10 million and $83 million, respectively, primarily related to involuntary employee terminations and facility closures. AOL currently expects to incur up to $20 million of additional restructuring charges through the consummation of the AOL Separation (as defined below), which is anticipated to occur in the fourth quarter of 2009. Shortly after the AOL Separation, AOL anticipates undertaking significant additional restructuring activities to more effectively align its organizational structure and costs with its strategy.

Recent Developments

HBO Central Europe Acquisition

     On October 14, 2009, HBO entered into an agreement to purchase its partners’ interests in the HBO Central Europe (“HBO CE”) joint venture for approximately $160 million in cash. HBO CE operates the HBO and Cinemax premium pay television programming services serving 11 territories in Central Europe. The closing of the transaction is subject to customary closing conditions, including the receipt of regulatory approvals, and is expected to occur in the first quarter of 2010. HBO currently owns a 33 1/3% interest in HBO CE, and upon closing, this transaction will result in HBO owning 100% of the interests of HBO CE. See Note 2 to the accompanying consolidated financial statements.

AOL Separation from Time Warner

     As noted above, on May 28, 2009, Time Warner announced that its Board of Directors has authorized management to proceed with plans for the complete legal and structural separation of AOL from Time Warner (the “AOL Separation”). The AOL Separation is currently expected to be effected as a spin-off of AOL Holdings LLC, a wholly-owned subsidiary that has been converted to a corporation and renamed AOL Inc. In the AOL Separation, Time Warner

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will distribute all of its AOL Inc. common stock to Time Warner shareholders, and AOL will become an independent, publicly traded company.

     On July 8, 2009, the Company repurchased Google’s 5% interest in AOL for $283 million in cash, which amount included a payment in respect of Google’s pro rata share of cash distributions to Time Warner by AOL attributable to the period of Google’s investment in AOL. After repurchasing this stake, Time Warner currently owns 100% of AOL.

     The AOL Separation is contingent on the satisfaction or waiver of a number of conditions, including the effectiveness of a registration statement on Form 10 that AOL filed with the Securities and Exchange Commission (the “SEC”) on July 27, 2009 in connection with the transaction. Time Warner expects to complete the AOL Separation in the fourth quarter of 2009. See Note 2 to the accompanying consolidated financial statements.

Patch Acquisition

     On June 10, 2009, AOL purchased Patch Media Corporation (“Patch”), a news, information and community platform business dedicated to providing comprehensive local information and services for individual towns and communities, for approximately $7 million in cash. Approximately $700,000 of the consideration is being held in an indemnity escrow account until the first anniversary of the closing.

     At the time of closing, Tim Armstrong, AOL’s Chairman and Chief Executive Officer, held, indirectly through Polar Capital Group, LLC (“Polar Capital”) (a private investment company which he founded), economic interests in Patch that entitled him to receive approximately 75% of the transaction consideration. Mr. Armstrong’s original investment in Patch, made in December 2007 through Polar Capital, was approximately $4.5 million. In connection with the transaction, Mr. Armstrong, through Polar Capital, waived his right to receive any transaction consideration in excess of his original $4.5 million investment, opting to accept only the return of his initial investment. In addition, Mr. Armstrong elected to return the $4.5 million (approximately $450,000 of which is being held in the indemnity escrow account for a year) that he was entitled to receive in connection with the transaction to AOL, to be held by AOL until after the AOL Separation. As soon as legally permissible, following the AOL Separation, AOL will cause to be issued to Polar Capital an amount of AOL Inc. common stock equivalent to $4.5 million (less any amounts held in the indemnity escrow account) based on an average of the high and low market prices on the relevant trading day. The issuance of shares of AOL Inc. common stock to Polar Capital will be exempt from registration under Section 4(2) of the Securities Act of 1933, as a transaction by an issuer not involving a public offering. The payment to Polar Capital of the $4.5 million of consideration is not contingent on the continued employment of Mr. Armstrong with AOL.

     An appraisal of the value of the business was performed by an independent financial advisory firm to determine that the consideration paid by AOL was within a reasonable range of the fair value of Patch. The Patch acquisition did not significantly affect the Company’s consolidated financial results for the three and nine months ended September 30, 2009. See Note 2 to the accompanying consolidated financial statements.

Common Stock Repurchase Program

     On July 26, 2007, Time Warner’s Board of Directors authorized a common stock repurchase program that allows the Company to purchase up to an aggregate of $5 billion of common stock. Purchases under this 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 2, 2009 the Company repurchased approximately 83 million shares of common stock for approximately $3.7 billion, pursuant to trading programs under Rule 10b5-1 of the Exchange Act. This number included approximately 32 million shares of common stock purchased for approximately $878 million in 2009 (Note 6).

TWC Separation from Time Warner and Reverse Stock Split of Time Warner Common Stock

     On March 12, 2009 (the “Distribution Record Date”), the Company disposed of all of its shares of TWC common stock. With the completion of the legal and structural separation of TWC from Time Warner (the “TWC Separation”), the Company disposed of the Cable segment in its entirety. Accordingly, the Company has presented the financial condition

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and results of operations of the Cable segment as discontinued operations in the accompanying consolidated financial statements for all periods presented. See Note 1 to the accompanying consolidated financial statements.

     In connection with the TWC Separation, the Company implemented a 1-for-3 reverse stock split on March 27, 2009.

CME Investment

     On May 18, 2009, the Company completed an investment in Central European Media Enterprises Ltd. (“CME”), in which the Company received a 31% economic interest and a 38% voting interest, for $244 million in cash. CME is a broadcasting company operating leading networks in seven Central and Eastern European countries. In connection with its investment, Time Warner has agreed to allow CME founder and Non-Executive Chairman Ronald S. Lauder to vote Time Warner’s shares of CME for at least four years, subject to certain exceptions. Also, Mr. Lauder has agreed to support Time Warner’s appointment of two designees to CME’s board of directors. The Company’s investment in CME is being accounted for under the cost method of accounting. See Note 2 to the accompanying consolidated financial statements.

RESULTS OF OPERATIONS

Changes in Basis of Presentation

     As discussed more fully in Note 1 to the accompanying consolidated financial statements, the 2008 financial information has been recast so that the basis of presentation is consistent with that of the 2009 financial information. This recast reflects (i) the financial condition and results of operations of TWC as discontinued operations for all periods presented, (ii) the adoption of recent accounting guidance pertaining to noncontrolling interests, (iii) the adoption of recent accounting guidance pertaining to participating securities and (iv) the 1-for-3 reverse stock split of the Company’s common stock that became effective on March 27, 2009.

Recent Accounting Guidance

     See Note 1 to the accompanying consolidated financial statements for a discussion of accounting guidance adopted during the nine months ended September 30, 2009 and recent accounting guidance not yet adopted.

     In addition to the items affecting comparability above, the Company incurred restructuring costs of $39 million and $175 million for the three and nine months ended September 30, 2009, respectively, and $20 million and $168 million for the three and nine months ended September 30, 2008, respectively. For further discussions of restructuring costs, refer to the “Consolidated Results” and “Business Segment Results” discussions.

Amounts Related to Securities Litigation

     The Company recognized legal and other professional fees related to the defense of various shareholder lawsuits totaling $7 million and $21 million for the three and nine months ended September 30, 2009, respectively, and $5 million and $13 million for the three and nine months ended September 30, 2008, respectively.

Asset Impairments

     During the three and nine months ended September 30, 2009, the Company recorded a $52 million noncash impairment of intangible assets related to Turner’s interest in a general entertainment network in India at the Networks segment and a $5 million noncash impairment of certain trade names at the AOL segment. During the three and nine months ended September 30, 2008, the Company recorded a $30 million noncash impairment at the Publishing segment related to a sub-lease with a tenant that filed for bankruptcy in September 2008 and a $9 million noncash impairment of a building at the AOL segment. In addition, during the nine months ended September 30, 2008, the Company recorded an $18 million noncash impairment of GameTap at the Networks segment as a result of Turner’s decision to sell its online video game business.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
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Loss on Sale of Assets

     For the nine months ended September 30, 2009, the Company recognized a $33 million loss on the sale of Warner Bros.’ Italian cinema assets.

     For the three and nine months ended September 30, 2008, the Company recorded a $3 million loss on the completion of the sale of GameTap at the Networks segment.

Investment Losses, Net

     For the three and nine months ended September 30, 2009, the Company recognized $2 million and $23 million, respectively, of miscellaneous investment losses. In addition, for the three and nine months ended September 30, 2009, the Company recognized a $23 million impairment of the Company’s investment in Miditech Pvt. Limited, a programming production company in India, and, for the nine months ended September 30, 2009, a $28 million gain on the sale of the Company’s investment in TiVo Inc. and a $17 million gain on the sale of the Company’s investment in Eidos plc (formerly Sci Entertainment Group plc) (“Eidos”).

     For the three and nine months ended September 30, 2008, the Company recognized $6 million of miscellaneous investment losses and $14 million of miscellaneous investment gains, respectively. In addition, for the nine months ended September 30, 2008, the Company recognized a $26 million impairment of the Company’s investment in Eidos and $10 million of losses resulting from market fluctuations in equity derivative instruments.

Amounts Related to the Separation of TWC

     The Company incurred pretax direct transaction costs (e.g., legal and professional fees) related to the separation of TWC of $6 million for the nine months ended September 30, 2009 and $2 million and $7 million for the three and nine months ended September 30, 2008, respectively, which have been reflected in other income (loss), net in the accompanying consolidated statement of operations. In addition, for the three and nine months ended September 30, 2009, the Company recognized $4 million and $12 million, respectively, of other income related to the increase in the estimated fair value of Time Warner equity awards held by TWC employees.

Costs Related to the Separation of AOL

     The Company incurred costs related to the separation of AOL of $4 million and $24 million, respectively, for the three and nine months ended September 30, 2009, which have been reflected in other income (loss), net in the accompanying consolidated statement of operations. These costs included $4 million and $9 million, respectively, of pretax direct transaction costs (e.g., legal and professional fees) for the three and nine months ended September 30, 2009 and $15 million of financing costs related to the solicitation of consents from debt holders to amend the indentures governing certain of the Company’s debt securities for the nine months ended September 30, 2009. For additional information, refer to “Financial Condition and Liquidity — Outstanding Debt and Other Financing Arrangements — Consent Solicitation.”

Share of Equity Investment Gain on Disposal of Assets

     For the three and nine months ended September 30, 2008, the Company recognized its $30 million share of a pretax gain on the sale of a Central European documentary channel by an equity method investee.

Income Tax Impact and Tax Items Related to TWC

     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 transactions. For the nine months ended September 30, 2009, the Company also recognized approximately $24 million of tax benefits attributable to the impact of certain state tax law changes on TWC net deferred tax liabilities.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

Noncontrolling Interest Impact

     The noncontrolling interest impact for the nine months ended September 30, 2009 of $5 million reflects the minority owner’s share of the tax provision related to changes in certain state tax laws.

Three and Nine Months Ended September 30, 2009 Compared to Three and Nine Months Ended September 30, 2008

Consolidated Results

     The following discussion provides an analysis of the Company’s results of operations and should be read in conjunction with the accompanying consolidated statement of operations.

      Revenues. The components of revenues are as follows (millions):

     The decrease in Subscription revenues for the three and nine months ended September 30, 2009 was primarily related to declines at the AOL and Publishing segments, offset partially by an increase at the Networks segment. The decline at the AOL segment reflects the continued decline in the number of domestic AOL-brand access subscribers. The decrease at the Publishing segment was primarily due to declines in domestic subscription renewals and softening domestic newsstand sales, both of which were due to the effect of the current economic environment, as well as decreases at IPC resulting primarily from the negative impact of foreign exchange rates. The increase in Subscription revenues at the Networks segment was due primarily to higher subscription rates at both Turner and HBO and the effect of the consolidation of HBO LAG, partially offset by the negative impact of foreign exchange rates at Turner.

     The decrease in Advertising revenues for the three and nine months ended September 30, 2009 was primarily due to declines at the Publishing and AOL segments and, to a lesser extent, a decline at the Networks segment. The decrease at the Publishing segment was primarily due to declines in domestic print Advertising revenues and international print Advertising revenues, including the effect of foreign exchange rates at IPC, and lower online revenues. The decrease at the AOL segment was attributable to declines in Advertising revenues on the Third Party Network and display advertising on AOL Media, primarily due to weak global economic conditions, which contributed to lower advertising demand. Also contributing to the decrease at the AOL segment were declines in revenues generated through AOL’s strategic relationship with Google primarily due to decreases in search query volume (partially due to the decline in domestic AOL-brand access subscribers) and lower revenues per search query on certain AOL Media properties. The decrease at the Networks segment was driven mainly by the impact of weakened demand, primarily at Turner’s news networks, and the negative impact of foreign exchange rates, partly offset by increases at Turner’s domestic entertainment networks for the three months ended September 30, 2009.

     The decrease in Content revenues for the three and nine months ended September 30, 2009 was due primarily to declines at the Filmed Entertainment and Networks segments. The decline at the Filmed Entertainment segment was mainly due to a decrease in theatrical product revenues, partially offset for the nine months ended September 30, 2009 by an increase in television product revenues. The negative impact of foreign exchange rates also contributed to the decline in Content revenues at the Filmed Entertainment segment. The decline at the Networks segment was due primarily to lower ancillary sales of HBO’s original programming.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

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

      Costs of Revenues. For the three months ended September 30, 2009 and 2008, costs of revenues totaled $3.924 billion and $4.103 billion, respectively, and, as a percentage of revenues, were 55% and 54%, respectively. For the nine months ended September 30, 2009 and 2008, costs of revenues totaled $11.645 billion and $12.612 billion, respectively, and, as a percentage of revenues, were both 56%. The segment variations are discussed in detail in “Business Segment Results.”

      Selling, General and Administrative Expenses. For the three months ended September 30, 2009 and 2008, selling, general and administrative expenses decreased 7% to $1.612 billion in 2009 from $1.726 billion in 2008, reflecting decreases at each of the Company’s segments. For the nine months ended September 30, 2009 and 2008, selling, general and administrative expenses decreased 7% to $4.862 billion in 2009 from $5.225 billion in 2008, primarily related to decreases at the Filmed Entertainment, AOL, Publishing and Corporate segments. 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 decreased to $237 million and $712 million for the three and nine months ended September 30, 2009, respectively, from $244 million and $738 million for the three and nine months ended September 30, 2008, respectively, primarily reflecting a decline at the AOL segment due in part to a reduction in network assets due to subscriber declines.

      Amortization Expense. Amortization expense decreased to $115 million and $348 million for the three and nine months ended September 30, 2009, respectively, from $140 million and $387 million for the three and nine months ended September 30, 2008, respectively. The decrease in amortization expense for the three and nine months ended September 30, 2009 primarily related to declines at the Filmed Entertainment and AOL segments, partially offset by an increase at the Networks segment. The segment variations are discussed in detail in “Business Segment Results.”

      Restructuring Costs. For the three and nine months ended September 30, 2009, the Company incurred restructuring costs of $39 million and $175 million, respectively, primarily related to various employee terminations and other exit activities, including $17 million and $85 million, respectively, at the Filmed Entertainment segment for the three and nine months ended September 30, 2009, $12 million and $7 million, respectively, at the Publishing segment for the three and nine months ended September 30, 2009 and $10 million and $83 million, respectively, at the AOL segment for the three and nine months ended September 30, 2009.

     The Company incurred restructuring costs for the three and nine months ended September 30, 2008 of $20 million and $168 million, respectively, primarily related to various employee terminations and other exit activities, $17 million and $130 million, respectively, at the Filmed Entertainment segment for the three and nine months ended September 30, 2008, $1 million and $16 million, respectively, at the Publishing segment for the three and nine months ended September 30, 2008, $2 million and $15 million, respectively, at the AOL segment for the three and nine months ended September 30, 2008 and $7 million at the Corporate segment for the nine months ended September 30, 2008.

      Operating Income. Operating Income decreased to $1.388 billion for the three months ended September 30, 2009 from $1.548 billion for the three months ended September 30, 2008. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $64 million and $47 million of expense for the three months ended September 30, 2009 and 2008, respectively, Operating Income decreased $143 million, primarily reflecting declines at the AOL and Publishing segments, partially offset by increases at the Networks and Filmed Entertainment segments.

     Operating Income decreased to $3.769 billion for the nine months ended September 30, 2009 from $4.066 billion for the nine months ended September 30, 2008. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $111 million and $73 million of expense for the nine months ended September 30, 2009 and 2008, respectively, Operating Income decreased $259 million, primarily reflecting declines at the AOL and Publishing segments, partially offset by increases at the Networks and Filmed Entertainment segments.

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

      Interest Expense, Net. Interest expense, net, decreased to $297 million and $904 million for the three and nine months ended September 30, 2009, respectively, from $321 million and $999 million for the three and nine months ended September 30, 2008, respectively. The decrease in interest expense, net for the three and nine months ended September 30, 2009 is due primarily to lower average net debt.

      Other Income (Loss), Net. Other income (loss), net detail is shown in the table below (millions):

     The changes in investment losses, net are discussed under “Significant Transactions and Other Items Affecting Comparability.” Excluding the impact of investment losses, net, the change in other income (loss), net for the three and nine months ended September 30, 2009 was primarily due to the Company’s recognition in the third quarter of 2008 of its $30 million share of a pretax gain on the sale of a Central European documentary channel by an equity method investee, higher losses from equity method investees and costs related to the separation of AOL, partly offset by lower securitization expenses.

      Income Tax Provision. Income tax expense from continuing operations was $377 million for the three months ended September 30, 2009 compared to $487 million for the three months ended September 30, 2008 and was $1.042 billion for the nine months ended September 30, 2009 compared to $1.147 billion for the nine months ended September 30, 2008. The Company’s effective tax rate for continuing operations was 36% and 37% for the three and nine months ended September 30, 2009, respectively, compared to 39% and 38% for the three and nine months ended September 30, 2008, respectively. The decrease for the three and nine months ended September 30, 2009, was principally due to the recognition of certain state and local tax benefits.

      Income from Continuing Operations. Income from continuing operations was $663 million for the three months ended September 30, 2009 compared to $769 million for the three months ended September 30, 2008. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $62 million and $23 million of expense, net for the three months ended September 30, 2009 and 2008, respectively, income from continuing operations decreased by $67 million, primarily reflecting lower Operating Income, partially offset by lower tax expense and interest expense, all as noted above. Basic and diluted income per common share from continuing operations attributable to Time Warner Inc. common shareholders were $0.56 and $0.55, respectively, in 2009 compared to $0.64 and $0.63, respectively, in 2008.

     Income from continuing operations was $1.752 billion for the nine months ended September 30, 2009 compared to $1.899 billion for the nine months ended September 30, 2008. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $71 million and $54 million of expense, net for the nine months ended September 30, 2009 and 2008, respectively, income from continuing operations decreased by $130 million, primarily reflecting lower Operating Income, partially offset by lower interest expense, all as noted above. Basic and diluted income per common share from continuing operations attributable to Time Warner Inc. common shareholders were both $1.45 in 2009 compared to $1.57 and $1.56, respectively, in 2008.

      Discontinued Operations, Net of Tax . The financial results for the nine months ended September 30, 2009 and the three and nine months ended September 30, 2008 included the impact of treating the results of operations and financial condition of TWC as discontinued operations. Discontinued operations, net of tax was a loss of $1 million and income of $130 million for the three and nine months ended September 30, 2009, respectively, and was $355 million and $890 million for the three and nine months ended September 30, 2008, respectively. The current year results included TWC’s results for the period from January 1, 2009 through March 12, 2009, as compared to the full three- and nine-month periods in 2008. In

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MANAGEMENT’S DISCUSSION AND ANALYSIS
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addition, discontinued operations, net of tax for the nine months ended September 30, 2009 included direct transaction costs (e.g., legal and professional fees) related to the separation of TWC of $75 million compared to $53 million and $102 million for the three and nine months ended September 30, 2008, respectively. For additional information, see Note 2 to the accompanying consolidated financial statements.

      Net Income Attributable to Noncontrolling Interests. Net income attributable to noncontrolling interests was $1 million and $41 million, respectively, for the three and nine months ended September 30, 2009 compared to $57 million and $159 million, respectively, for the three and nine months ended September 30, 2008. The decrease in net income attributable to noncontrolling interests for the three and nine months ended September 30, 2009 is primarily attributable to the TWC Separation and the repurchase of Google’s 5% interest in AOL on July 8, 2009.

      Net Income Attributable to Time Warner Inc. shareholders and Net Income Per Common Share Attributable to Time Warner Inc. common shareholders. Net income attributable to Time Warner Inc. shareholders was $661 million for the three months ended September 30, 2009 compared to $1.067 billion for the three months ended September 30, 2008. Basic and diluted net income per common share attributable to Time Warner Inc. common shareholders were $0.56 and $0.55, respectively, in 2009 compared to $0.89 for both in 2008. Net income attributable to Time Warner Inc. common shareholders was $1.841 billion for the nine months ended September 30, 2009 compared to $2.630 billion for the nine months ended September 30, 2008. Basic and diluted net income per common share attributable to Time Warner Inc. common shareholders were $1.54 and $1.53, respectively, in 2009 compared to $2.20 and $2.19, respectively, in 2008.

Business Segment Results

      Networks. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Networks segment for the three and nine months ended September 30, 2009 and 2008 are as follows (millions):

     The increase in Subscription revenues for the three and nine months ended September 30, 2009 was due primarily to higher subscription rates at both Turner and HBO and the effect of the consolidation of HBO LAG, partially offset by the negative impact of foreign exchange rates at Turner.

     The decrease in Advertising revenues for the three and nine months ended September 30, 2009 was driven mainly by

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

the impact of weakened demand, primarily at Turner’s news networks, and the negative impact of foreign exchange rates, partly offset by increases at Turner’s domestic entertainment networks for the three months ended September 30, 2009. The Company anticipates that the difficult economic environment and the absence of Advertising revenues associated with the 2008 election coverage will adversely affect Advertising revenues at Turner in the fourth quarter of 2009 compared to the similar period in 2008.

     The decrease in Content revenues for the three months ended September 30, 2009 was due primarily to lower ancillary sales of HBO’s original programming, which is expected to continue for the remainder of the year, partly offset by the effect of lower than anticipated home video returns of approximately $25 million for the third quarter of 2009.

     For the three and nine months ended September 30, 2009, costs of revenues increased due to higher programming costs, partially offset by lower newsgathering costs, primarily reflecting the absence of the prior year’s election-related costs. For the three months ended September 30, 2009, programming costs increased 10% to $939 million from $854 million for the three months ended September 30, 2008, and for the nine months ended September 30, 2009, programming costs increased 5% to $3.013 billion from $2.870 billion for the nine months ended September 30, 2008. The increase in programming costs for the three and nine months ended September 30, 2009 was due primarily to the impact of the consolidation of HBO LAG as well as higher expenses related to original programming at Turner, and for the nine months ended September 30, 2009, was partially offset by lower expenses related to sports programming at Turner, primarily NBA programming. Costs of revenues as a percentage of revenues were 45% and 47% for the three and nine months ended September 30, 2009, respectively, compared to 44% and 48% for the three and nine months ended September 30, 2008, respectively.

     The decrease in selling, general and administrative expenses for the three months ended September 30, 2009 was due primarily to lower marketing expenses, partly offset by increased costs related to the consolidation of HBO LAG. Selling, general and administrative expenses for the nine months ended September 30, 2009 were flat primarily due to increased costs associated with the consolidation of HBO LAG, which were offset by lower marketing expenses.

     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the three and nine months ended September 30, 2009 included a $52 million noncash impairment of intangible assets related to Turner’s interest in a general entertainment network in India. The results for the three months ended September 30, 2008 included a $3 million loss on the completion of the sale of GameTap, an online video game business, and the results for the nine months ended September 30, 2008 included an $18 million noncash impairment of GameTap.

     Operating Income before Depreciation and Amortization for the three and nine months ended September 30, 2009 increased primarily due to an increase in revenues. Operating Income for the three and nine months ended September 30, 2009 increased primarily due to the increase in Operating Income before Depreciation and Amortization, partly offset by higher amortization expense primarily related to the consolidation of HBO LAG.

     Content revenues primarily include theatrical product (which is content made available for initial exhibition in theaters) and television product (which is content made available for initial airing on television). The components of Content revenues for the three and nine months ended September 30, 2009 and 2008 are as follows (millions):

     The decline in Content revenues for the three and nine months ended September 30, 2009 included the negative impact of foreign exchange rates on many of the segment’s international operations.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

     Theatrical film revenues for the three months ended September 30, 2009, which included the releases of Harry Potter and the Half-Blood Prince and The Final Destination as well as carryover revenues from The Hangover declined slightly compared to revenues for the three months ended September 30, 2008, which included the releases of The Dark Knight and Journey to the Center of the Earth . The increase in theatrical film revenues for the nine months ended September 30, 2009 was due primarily to the success of key films released in the first half of 2009, which included revenues from the releases of The Hangover and Terminator 4: Salvation as well as carryover from Gran Torino and The Curious Case of Benjamin Button , compared to the similar period in 2008, which included revenues from the releases of Sex and the City , 10,000 B.C. and Get Smart as well as carryover from I Am Legend and The Bucket List . Theatrical product revenues from home video and electronic delivery decreased for the three and nine months ended September 30, 2009 primarily due to the reduced quantity and performance of new releases and lower catalog sales, driven in part by the negative impact of the current economic environment, partially offset by the effect of lower than anticipated catalog returns for the nine months ended September 30, 2009. Significant titles in 2009 included Gran Torino , Watchmen , Body of Lies and Yes Man , compared to significant titles in 2008, which included I Am Legend , 10,000 B.C. , The Bucket List , Sex and the City and Fool’s Gold . Theatrical product revenues from television licensing decreased for the three and nine months ended September 30, 2009 due primarily to the timing and quantity of availabilities. Theatrical product revenues from consumer products and other decreased for the three and nine months ended September 30, 2009 due to difficult comparisons to consumer product revenues in the three and nine months ended September 30, 2008, which included revenues from arrangements related to the release of The Dark Knight in the third quarter of 2008 and the release of Speed Racer in the second quarter of 2008.

     The increase in television product licensing fees for the nine months ended September 30, 2009 was primarily due to the effect of fewer network deliveries in the first quarter of 2008 as a result of the Writers Guild of America (East and West) strike, which was settled in February 2008. The decrease in television product revenues from home video and electronic delivery for the three and nine months ended September 30, 2009 primarily resulted from the reduced quantity and performance of new releases and lower catalog sales, driven in part by the negative impact of the current economic environment.

     The decrease in Other content revenues for the three and nine months ended September 30, 2009 was due primarily to difficult comparisons to the prior year, which included revenues from the second-quarter 2008 interactive video game release of LEGO: Indiana Jones and the third-quarter 2008 interactive video game release of LEGO: Batman , partially offset by benefits from the expansion of third party interactive video games distribution in 2009 as well as the first-quarter 2009 interactive video game release of F.E.A.R. 2: Project Origin .

     The decrease in costs of revenues for the three and nine months ended September 30, 2009 resulted primarily from lower theatrical advertising and print costs due primarily to the timing, quantity and mix of films released and lower manufacturing and related costs associated with a decline in Home video and electronic delivery revenues. Film costs increased to $1.192 billion and $3.473 billion for the three and nine months ended September 30, 2009, respectively, from $1.184 billion and $3.410 billion for the three and nine months ended September 30, 2008, respectively. Included in film costs are net pre-release theatrical film valuation adjustments, which for the three months ended September 30, 2009 included a reversal of $12 million compared to an expense of $10 million for the three months ended September 30, 2008 and for the nine months ended September 30, 2009 increased to $39 million from $28 million for the nine months ended September 30, 2008. In addition, for the three and nine months ended September 30, 2009, the Company recognized a benefit of approximately $25 million related to an adjustment to correct prior period participation accruals, and, during the nine months ended September 30, 2008, the Company recognized approximately $40 million in participation expense related to claims on films released in prior periods. Costs of revenues as a percentage of revenues was 71% for both the three and nine months ended September 30, 2009 compared to 70% and 71% for the three and nine months ended September 30, 2008, respectively.

     The decrease in selling, general and administrative expenses for the three and nine months ended September 30, 2009 was primarily the result of lower employee costs resulting from the operational reorganization of the New Line business in 2008 and Warner Bros.’ restructuring activities in 2009, discussed below, as well as lower distribution expenses primarily associated with the declines in Home video and electronic delivery and Other content revenues.

     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the nine

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

months ended September 30, 2009 included a $33 million loss on the sale of Warner Bros.’ Italian cinema assets. In addition, beginning in the first quarter of 2009, Warner Bros. commenced a significant restructuring, primarily consisting of headcount reductions and the outsourcing of certain functions to an external service provider. The Filmed Entertainment segment incurred restructuring charges of $17 million and $85 million for the three and nine months ended September 30, 2009, respectively, and expects to incur additional restructuring charges of approximately $10 million in the fourth quarter of 2009. The results for the three and nine months ended September 30, 2008 included restructuring charges of $17 million and $130 million, respectively, related to involuntary employee terminations in connection with the operational reorganization of the New Line business.

     Operating Income before Depreciation and Amortization increased for the three and nine months ended September 30, 2009 primarily due to lower costs of revenues and selling, general and administrative expenses, partly offset by a decrease in revenues and the negative impact of foreign exchange rates. Operating Income before Depreciation and Amortization for the nine months ended September 30, 2009 also included the effect of lower than anticipated home video catalog returns of approximately $40 million, and the $33 million loss on the sale of the Italian cinema assets.

     The increase in Operating Income for the three and nine months ended September 30, 2009 was primarily due to the increase in Operating Income before Depreciation and Amortization, as well as a decrease in amortization expense primarily relating to film library assets.

      Publishing. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Publishing segment for the three and nine months ended September 30, 2009 and 2008 are as follows (millions):

     For the three and nine months ended September 30, 2009, Subscription revenues declined primarily due to declines in domestic subscription renewals and softening domestic newsstand sales, both due to the effect of the current economic environment, as well as decreases at IPC resulting primarily from the negative impact of foreign exchange rates. The Company anticipates that the economic environment will continue to adversely affect the Publishing segment’s Subscription revenues in the fourth quarter of 2009.

     For the three and nine months ended September 30, 2009, Advertising revenues decreased primarily due to declines in domestic print Advertising revenues and international print Advertising revenues, including the effect of foreign exchange rates at IPC, and lower online revenues. These declines primarily reflect the current weak economic conditions and

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

increased competition for advertising dollars. The Company currently anticipates that Advertising revenues at the Publishing segment in the fourth quarter of 2009 will decline compared to the similar period in 2008, reflecting primarily the effect of the current economic environment, although the rate of decline in the fourth quarter of 2009 is expected to moderate in comparison to that experienced during the first nine months of 2009.

     For the three and nine months ended September 30, 2009, Other revenues decreased due primarily to decreases at the non-magazine businesses, including Southern Living At Home, which was sold during the three months ended September 30, 2009.

     Costs of revenues decreased 19% and 21% for the three and nine months ended September 30, 2009, respectively, and, as a percentage of revenues, were 40% for both the three and nine months ended September 30, 2009 and both the three and nine months ended September 30, 2008. Costs of revenues for the magazine and online businesses include manufacturing costs (paper, printing and distribution) and editorial-related costs, which together decreased 20% to $322 million for the three months ended September 30, 2009 from $405 million for the three months ended September 30, 2008 and decreased 22% to $956 million for the nine months ended September 30, 2009 from $1.219 billion for the nine months ended September 30, 2009, primarily due to cost savings initiatives, lower printing and paper costs related to a decline in volume and lower costs at IPC due primarily to the effect of foreign exchange rates. In addition, costs of revenues at the non-magazine businesses declined as a result of lower revenues.

     Selling, general and administrative expenses for the three and nine months ended September 30, 2009 decreased due to cost savings initiatives, a decrease at IPC due primarily to the effect of foreign exchange rates and lower marketing expenses, and, for the three months ended September 30, 2009, the effect of the sale of Southern Living At Home, partly offset by costs associated with the acquisition of QSP and higher pension expense, and, for the nine months ended September 30, 2009, an $18 million increase in bad debt reserves related to a newsstand wholesaler.

     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the three and nine months ended September 30, 2008 included a $30 million noncash impairment related to the sub-lease with a tenant that filed for bankruptcy in September 2008. In addition, the results for the three and nine months ended September 30, 2009 included restructuring costs of $12 million and $7 million, respectively, including a $6 million increase related to the sub-lease with the tenant that filed for bankruptcy in September 2008. In an ongoing effort to continue to streamline the Publishing segment’s operations, the Company expects to incur up to $100 million of restructuring costs primarily related to severance costs in the fourth quarter of 2009. The results for the three and nine months ended September 30, 2008 included restructuring costs of $1 million and $16 million, respectively, primarily related to severance costs associated with continuing efforts to streamline operations.

     For the three and nine months ended September 30, 2009, Operating Income before Depreciation and Amortization and Operating Income decreased due primarily to lower revenues, partially offset by decreases in costs of revenues and selling, general and administrative expenses and the absence of the $30 million noncash asset impairment.

     The Company anticipates that, excluding the Publishing segment’s asset impairments and restructuring costs, Operating Income before Depreciation and Amortization and Operating Income at the Publishing segment generated in the fourth quarter of 2009 will be less than that achieved during the comparable period in 2008, primarily resulting from the expected continued declines in Advertising and Subscription revenues.

     As discussed in more detail in Note 1 to the Company’s consolidated financial statements in the 2008 Form 10-K, goodwill and indefinite-lived intangible assets are tested annually for impairment during the fourth quarter or earlier upon the occurrence of certain events. As a result of the test in the fourth quarter of 2008, the Company recognized impairments of goodwill and indefinite-lived intangible assets at the Publishing reporting unit of $6.007 billion and $518 million, respectively and the carrying values of the impaired assets were written down to their estimated fair values as of December 31, 2008. As of September 30, 2009, the carrying values of goodwill and indefinite-lived intangible assets at the Publishing reporting unit were $3.163 billion and $814 million, respectively. If the current economic environment deteriorates in the fourth quarter of 2009 and negatively affects the Company’s long-term view of Advertising revenues beyond the Company’s current expectations, it is possible that the carrying value of the Company’s Publishing reporting unit and certain indefinite-lived intangible assets of the Publishing reporting unit will exceed their respective fair values, which may result in the Company recognizing a noncash impairment of goodwill and/or indefinite-lived intangible assets at the Publishing reporting unit. Determining fair value requires the exercise of significant judgment, including judgments about appropriate discount rates, perpetual growth rates, the amount and timing of expected future cash flows, as well as relevant comparable company earnings multiples (when estimating fair value using a market-based approach).

     To illustrate the magnitude of potential impairment charges relative to changes in estimated fair value, had the fair value of the Publishing reporting unit been hypothetically lower by 10% as of December 31, 2008, the reporting unit book value would have exceeded fair value by approximately $365 million. Had the fair value of the Publishing reporting unit been hypothetically lower by 20% as of December 31, 2008, the reporting unit book value would have exceeded fair value by approximately $856 million. In addition, a hypothetical 10% decrease to the fair value of indefinite-lived intangible assets would result in book value exceeding fair value by approximately $85 million at the Publishing reporting unit, while a hypothetical 20% decrease to the fair value of those indefinite-lived intangible assets would result in book value exceeding fair value by approximately $175 million.

     The decline in Subscription revenues for the three and nine months ended September 30, 2009 reflects the continued decline in the number of domestic AOL-brand access subscribers.

     The number of domestic AOL-brand access subscribers was 5.4 million, 5.8 million and 7.5 million as of September 30, 2009, June 30, 2009 and September 30, 2008, respectively. The average monthly revenue per domestic AOL-brand access subscriber (“ARPU”) was $18.54 and $18.60 for the three months ended September 30, 2009 and 2008, respectively, and $18.43 and $18.29 for the nine months ended September 30, 2009 and 2008, 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. 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 access subscriber numbers presented above.

     The continued decline in domestic AOL-brand access subscribers is the result of several factors, including the increased availability of high-speed Internet broadband connections, the fact that a significant amount of online content, products and services has been optimized for use with broadband Internet connections and the effects of AOL’s strategic shift announced in 2006, which resulted in significantly reduced marketing efforts for its subscription access service and the free availability of the majority of its content, products and services. ARPU for the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008 was negatively affected by the shift in the subscriber mix to lower-priced plans and was positively affected by price increases for lower-priced plans.

     The decline in Advertising revenues for the three and nine months ended September 30, 2009 included the negative impact of foreign exchange rates on international operations relating to both AOL Media and the Third Party Network.

     The decrease in Advertising revenues generated on AOL Media for the three and nine months ended September 30, 2009, as compared to the three and nine months ended September 30, 2008, was due primarily to declines in revenues generated through AOL’s strategic relationship with Google, which was primarily the result of decreases in search query volume (partially due to the decline in domestic AOL-brand access subscribers) and lower revenues per search query on certain AOL Media properties and weak global economic conditions that resulted in lower advertising demand. For the three months ended September 30, 2009, the revenues associated with the arrangement with Google (substantially all of which were paid-search revenues generated on AOL Media) declined $42 million to $135 million from $177 million in 2008, respectively, and for the nine months ended September 30, 2009 declined $91 million to $422 million from $513 million in 2008.

     The decrease in Advertising revenues on the Third Party Network for the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008 was primarily due to weak global economic conditions, which contributed to lower advertising demand. In addition, the decline in Advertising revenues on the Third Party Network included a decrease of $3 million and $23 million for the three and nine months ended September 30, 2009, respectively, due to a change in the relationship with a major customer of AOL. Revenues associated with this relationship were $0 and $2 million for the three and nine months ended September 30, 2009, respectively, compared to $3 million and $25 million for the three and nine months ended September 30, 2008, respectively. Total revenues from this customer for the year ended December 31, 2008 were $26 million.

     Total Advertising revenues for the three months ended September 30, 2009 decreased $4 million from the three months ended June 30, 2009, reflecting decreases in revenues associated with the arrangement with Google, primarily due to decreases in search query volume on certain AOL Media properties.

     AOL has made and is exploring making additional changes to its content, products and services designed to enhance the consumer experience (e.g., fewer advertisements on certain AOL Media properties). These changes have involved and may continue to involve the elimination or modification of advertising practices that historically have been a source of revenues. These enhancements to the consumer experience are intended to ultimately increase AOL’s Advertising revenues by enhancing the attractiveness of AOL’s content, product and service offerings to consumers and therefore their value to advertisers. These changes did not have a significant impact on AOL’s Advertising revenues in the third quarter of 2009, but these enhancements may have a negative impact on its Advertising revenues in the near-term.

     The Company expects Advertising revenues at the AOL segment for the fourth quarter of 2009 to be less than those generated during the comparable period in 2008, primarily reflecting weak economic conditions and the impact of the continued decline in AOL-brand access subscribers.

     For the three and nine months ended September 30, 2009, costs of revenues decreased 16% and 21%, respectively, and, as a percentage of revenues, were 50% for both periods compared to 46% and 48% for the three and nine months ended September 30, 2008, respectively. Costs of revenues decreased for the three and nine months ended September 30, 2009

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

primarily due to declines in TAC and, to a lesser extent, declines in network-related costs associated with a decline in AOL-brand access subscribers and lower personnel-related costs primarily associated with reduced headcount, partly offset by higher compensation expense resulting from AOL’s decision not to pay most annual bonuses in 2008. TAC consists of the costs of acquiring third-party online advertising inventory and costs incurred in connection with distributing AOL’s free products or services or otherwise directing traffic to AOL Media. TAC decreased 18% to $135 million for the three months ended September 30, 2009 from $165 million for the three months ended September 30, 2008 and decreased 26% to $398 million for the nine months ended September 30, 2009 from $535 million for the nine months ended September 30, 2008, due primarily to the decrease in Advertising revenues on the Third Party Network and, to a lesser extent, declines in new product distribution costs.

     Selling, general and administrative expenses decreased 7% to $136 million and 22% to $379 million for the three and nine months ended September 30, 2009, respectively, reflecting reduced payments to marketing partners due to the decline in domestic AOL-brand access subscribers, lower consulting costs and reduced spending due to cost savings initiatives, partly offset by an incremental $15 million accrual in connection with the resolution of a French value-added tax matter associated with AOL’s former European access service businesses and higher compensation expense resulting from the decision not to pay most annual bonuses in 2008. In addition, selling, general and administrative expenses for the three and nine months ended September 30, 2008 included $6 million and $22 million, respectively, of external costs incurred in connection with the Company’s evaluation of various strategic alternatives related to AOL, including the previously contemplated separation of AOL into separate businesses.

     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the three and nine months ended September 30, 2009 included a $5 million noncash impairment of certain trade names, and the results for the three and nine months ended September 30, 2008 included a $9 million noncash impairment of a building. In addition, during the first nine months of 2009, in an effort to better align its cost structure with its revenues, AOL undertook various restructuring activities. As a result, for the three and nine months ended September 30, 2009, AOL incurred restructuring charges of $10 million and $83 million, respectively, primarily related to involuntary employee terminations and facility closures. AOL currently expects to incur up to $20 million of additional restructuring charges through the consummation of the AOL Separation, which is anticipated to occur in the fourth quarter of 2009. Shortly after the AOL Separation, AOL anticipates undertaking significant additional restructuring activities to more effectively align its organizational structure and costs to its strategy.

     For the three and nine months ended September 30, 2009, Operating Income before Depreciation and Amortization decreased due primarily to a decline in revenues and higher restructuring costs, partially offset by lower costs of revenues and selling, general and administrative expenses. For the three and nine months ended September 30, 2009, Operating Income decreased due primarily to the decrease in Operating Income before Depreciation and Amortization, as discussed above, partially offset by a decrease in depreciation expense due in part to a reduction in network assets due to subscriber declines and lower amortization expense primarily due to certain intangible assets becoming fully amortized.

     Excluding the AOL segment’s asset impairments, the Company anticipates that Operating Income before Depreciation and Amortization and Operating Income at the AOL segment during the fourth quarter of 2009 will be less than that generated during the comparable period of 2008, primarily resulting from continuing declines in Subscription and Advertising revenues.

     The results for the nine months ended September 30, 2008 included $7 million of restructuring costs, due primarily to involuntary employee terminations as a result of the Company’s cost savings initiatives at the Corporate segment.

     For the three months ended September 30, 2009, Operating Loss before Depreciation and Amortization increased primarily due to higher pension expenses and an increase in legal and other professional fees related to the defense of former employees in various lawsuits, partially offset by corporate cost savings initiatives. Excluding the restructuring costs noted above, Operating Loss before Depreciation and Amortization and Operating Loss for the nine months ended September 30, 2009 decreased primarily due to corporate cost savings initiatives, partially offset by higher pension expenses and an increase in legal and other professional fees related to the defense of former employees in various lawsuits.

FINANCIAL CONDITION AND LIQUIDITY

     Management believes that cash generated by or available to the Company should be sufficient to fund its capital and liquidity needs for the foreseeable future, including quarterly dividend payments and the remainder of its $5 billion common stock repurchase program. Time Warner’s sources of cash include cash provided by operations, cash and equivalents on hand, available borrowing capacity under its committed credit facilities and commercial paper program and access to capital markets. Time Warner’s unused committed capacity at September 30, 2009 was $14.029 billion, including $7.126 billion of cash and equivalents.

     As part of the TWC Separation, the Company received $9.253 billion on March 12, 2009 as its portion of the payment by TWC of the special cash dividend of $10.27 per share to all holders of TWC Class A Common Stock and TWC Class B Common Stock as of the close of business on March 11, 2009 (aggregating $10.856 billion) (the “Special Dividend”).

     In late January 2009, Google exercised its right to request that AOL register Google’s 5% equity interest for sale in an initial public offering. Time Warner exercised its right to purchase Google’s equity interest for cash based on the appraised fair market value of the equity interest in lieu of conducting an initial public offering. As noted in “Recent Developments,” on July 8, 2009, the Company repurchased Google’s 5% interest in AOL for $283 million in cash, which amount included a payment in respect of Google’s pro rata share of cash distributions to Time Warner by AOL attributable to the period of Google’s investment in AOL.

Current Financial Condition

     At September 30, 2009, Time Warner had $17.500 billion of debt, $7.126 billion of cash and equivalents (net debt of $10.374 billion, defined as total debt less cash and equivalents) and $36.142 billion of shareholders’ equity, compared to $21.955 billion of debt, $1.233 billion of cash and equivalents (net debt of $20.722 billion, defined as total debt less cash and equivalents) and $42.288 billion of shareholders’ equity at December 31, 2008.

     Time Warner had a shelf registration statement (the “Registration Statement”) on file with the SEC since November 8, 2006 that allowed it to offer and sell from time to time debt securities, preferred stock, common stock and/or warrants to purchase debt and equity securities. As a result of the Company’s $13.955 billion of unused committed capacity at March 31, 2009 and the anticipated expiration in early November 2009 of the Registration Statement, the Company determined it no longer needed the Registration Statement. Accordingly, on April 24, 2009, the Company and the subsidiary guarantors under the Registration Statement submitted filings to the SEC that suspended the reporting obligations with respect to the debt securities (and related guarantees) that were offered and sold pursuant to the Registration Statement and deregistered the securities covered under the Registration Statement that were available for offer and sale.

     The Company has historically invested a portion of its cash on hand in money market funds, including The Reserve Fund’s Primary Fund (“The Reserve Fund”). On the morning of September 15, 2008, the Company requested a full redemption of its approximately $330 million investment in The Reserve Fund, but the redemption request was not honored. On September 22, 2008, The Reserve Fund announced that redemptions of shares were suspended pursuant to an SEC order requested by The Reserve Fund so that an orderly liquidation could be effected. Through November 3, 2009, the Company has received $303 million from The Reserve Fund representing its pro rata share of partial distributions made by The Reserve Fund. The Company has not been informed as to when the remaining amount will be returned. In February 2009, The Reserve Fund announced that it would set aside an initial amount of $3.5 billion to defend against certain legal actions. The Company has filed a claim against The Reserve Fund demanding repayment of the remaining amount of its full investment. As a result of the status of The Reserve Fund, the Company has classified its receivable from The Reserve Fund at September 30, 2009 as other current assets on the Company’s consolidated balance sheet.

     As noted in “Recent Developments,” on July 26, 2007, Time Warner’s Board of Directors authorized a common stock repurchase program that allows the Company to purchase up to an aggregate of $5 billion of common stock. Purchases under this 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 2, 2009, the Company repurchased approximately 83 million shares of common stock for approximately $3.7 billion pursuant to trading programs under Rule 10b5-1 of the Exchange Act. This number included approximately 32 million shares of common stock purchased for approximately $878 million in 2009 (Note 6).

     Time Warner’s $2.000 billion aggregate principal (plus accrued interest) amount of floating rate public debt will mature on November 13, 2009. The Company intends to pay such aggregate principal amount and accrued interest in cash on the maturity date. The Company does not have any other public debt maturing until April 2011.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

     In connection with an arrangement entered into with a film co-financing partner in the second quarter of 2009, the Company agreed to advance the co-financing partner, in 2013, a percentage of the net present value of estimated future profit participations owed to the partner on all films co-financed with this partner through 2010.

     In connection with the AOL Separation, Time Warner is assisting AOL in arranging a $250 million 364-day senior secured revolving credit facility (the “AOL Revolving Facility”). Time Warner will guarantee AOL’s obligations under the AOL Revolving Facility. In addition, Time Warner will agree to continue to provide credit support for certain existing AOL lease and certain other obligations of approximately $100 million until the earlier of 24 months following the distribution and 30 days after AOL obtains the right to borrow funds under a long-term post-distribution credit facility. AOL will pay Time Warner a fee for its guarantee of AOL’s obligations under the AOL Revolving Facility and its credit support for AOL’s lease and certain other obligations.

Cash Flows

     Cash and equivalents increased by $5.893 billion, including $52 million of cash used by discontinued operations, and decreased by $20 million, including $11 million of cash used by discontinued operations, for the nine months ended September 30, 2009 and 2008, respectively. Components of these changes are discussed below in more detail.

Operating Activities from Continuing Operations

     Details of cash provided by operations from continuing operations are as follows (millions):

     Cash provided by operations from continuing operations decreased to $3.482 billion in 2009 from $4.246 billion in 2008. The decrease in cash provided by operations from continuing operations was related primarily to an increase in net income taxes paid, a decrease in operating income, an increase in merger-related and restructuring payments, net of accruals and a decrease in cash provided by working capital, partially offset by a decline in net interest payments and domestic pension plan contributions. The 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.

     As of September 30, 2009, certain of the Company’s domestic defined benefit pension plans were funded by assets in a pension trust with a fair market value of $2.030 billion compared to $1.702 billion as of December 31, 2008. Between January 1, 2009 and September 30, 2009, the Company’s plan assets have experienced market gains of approximately 26%.

     Cash provided by investing activities from continuing operations was $8.361 billion for the nine months ended September 30, 2009 compared to cash used by investing activities from continuing operations of $2.018 billion for the nine months ended September 30, 2008. The change in cash provided (used) by investing activities from continuing operations was primarily due to the receipt of the Company’s portion of the Special Dividend, a decline in investments and acquisitions and lower capital expenditures and product development costs.

Financing Activities from Continuing Operations

     Details of cash used by financing activities from continuing operations are as follows (millions):

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

     Cash used by financing activities from continuing operations increased to $5.898 billion for the nine months ended September 30, 2009 from $2.237 billion for the nine months ended September 30, 2008. The change in cash used by financing activities from continuing operations was primarily due to an increase in net debt repayments. The Company used a portion of the $9.253 billion it received from the payment of the Special Dividend to repay in full its $2.0 billion three-year unsecured term loan facility (plus accrued interest) and repay all amounts outstanding under the Revolving Facility (defined below).

Cash Flows from Discontinued Operations

     Details of cash used by discontinued operations are as follows (millions):

     For the nine months ended September 30, 2009, cash used by discontinued operations primarily reflected cash activity of TWC through its separation from the Company on March 12, 2009, and, for the nine months ended September 30, 2008, it primarily reflects cash activity of TWC for the entire nine-month period. The cash used by financing activities from discontinued operations of $5.224 billion for the nine months ended September 30, 2009 reflects the payment of the Special Dividend, partially offset by an increase in borrowings.

Repayment and Termination of $2.0 Billion Term Facility

     On March 17, 2009, the Company used a portion of the proceeds it received from the payment of the Special Dividend to repay in full the $2.0 billion outstanding (plus accrued interest) under its unsecured term loan facility with a maturity date of January 8, 2011 (the “Term Facility”) and terminated the Term Facility. Time Warner did not incur any early termination or prepayment penalties in connection with the termination of the Term Facility.

Termination of Supplemental Credit Agreement

     On March 12, 2009, TWC borrowed the full committed amount of $1.932 billion under its unsecured term loan credit facility entered into on June 30, 2008 (the “TWC Bridge Facility”), all of which was used by TWC to pay a portion of the Special Dividend. On March 26, 2009, TWC completed an offering of $3.0 billion in aggregate principal amount of debt securities and used a portion of the net proceeds from the offering to prepay in full the outstanding loans and all other amounts due under the TWC Bridge Facility, and the TWC Bridge Facility was terminated in accordance with its terms. Concurrently with the termination of the TWC Bridge Facility and pursuant to the terms of the $1.535 billion credit agreement (the “Supplemental Credit Agreement”) between the Company (as lender) and TWC (as borrower) for a two-year senior unsecured supplemental term loan facility (the “Supplemental Credit Facility”), on March 26, 2009, TWC terminated the commitments of Time Warner under the Supplemental Credit Facility, and the Supplemental Credit Agreement was terminated in accordance with its terms.

Amendments to Revolving Facility

     On March 11, 2009, the Company entered into the first and second amendments to the amended and restated credit agreement (the “Revolving Credit Agreement”) for its senior unsecured five-year revolving credit facility (the “Revolving

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

Facility”). The first amendment terminated the $100 million commitment of Lehman Commercial Paper Inc. (“LCPI”), a subsidiary of Lehman Brothers Holdings Inc., which filed a petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in September 2008, reducing the committed amount of the Revolving Facility from $7.0 billion to $6.9 billion. The second amendment, among other things, amended the Revolving Credit Agreement to (i) expand the circumstances under which any other lender under the Revolving Facility would become a Defaulting Lender (as defined in the Revolving Credit Agreement, as amended) and (ii) permit Time Warner to terminate the commitment of any such lender on terms substantially similar to those applicable to LCPI under the first amendment to the Revolving Credit Agreement.

Consent Solicitation

     On April 15, 2009, the Company completed a solicitation of consents (the “Consent Solicitation”) from the holders of the debt securities (the “Securities”) issued by Time Warner Inc. and its subsidiaries under all of the indentures governing the publicly traded debt securities of the Company and its subsidiaries other than the indenture entered into in November 2006 (collectively, the “Indentures”). Completion of the Consent Solicitation resulted in the adoption on April 16, 2009 of certain amendments to each Indenture that provide that certain restrictive covenants will not apply (subject to the concurrent or prior issuance of the guarantee by HBO discussed below) to a conveyance or transfer by AOL LLC of its properties and assets substantially as an entirety, unless such conveyance or transfer constitutes a conveyance or transfer of the properties and assets of the issuer and the guarantors under the relevant Indenture and their respective subsidiaries, taken as a whole, substantially as an entirety. As a result of the Consent Solicitation, prior to or concurrently with a conveyance or transfer of AOL LLC’s properties and assets substantially as an entirety, HBO will issue a guarantee of the obligations of Historic TW Inc. (“Historic TW”) (including in its capacity as successor to Time Warner Companies, Inc.), whether as issuer or guarantor, under the Indentures and the Securities. Such guarantee will be issued by HBO only in connection with such a transaction.

Contractual Commitments

Six Flags

     In connection with the Company’s former investment in the Six Flags theme parks located in Georgia and Texas (“Six Flags Georgia” and “Six Flags Texas,” respectively, and, collectively, the “Parks”), in 1997, certain subsidiaries of the Company (including Historic TW) agreed to guarantee (the “Six Flags Guarantee”) certain obligations of the partnerships that hold the Parks (the “Partnerships”) for the benefit of the limited partners in such Partnerships, including the following (the “Guaranteed Obligations”): (a) making a minimum annual distribution to the limited partners of the Partnerships (the minimum was approximately $61 million in 2008 and is subject to annual cost of living adjustments); (b) making a minimum amount of capital expenditures each year (an amount approximating 6% of the Parks’ annual revenues); (c) offering each year to purchase 5% of the limited partnership units of the Partnerships (plus any such units not purchased pursuant to such offer in any prior year) based on an aggregate price for all limited partnership units at the higher of (i) $250 million in the case of Six Flags Georgia and $374.8 million in the case of Six Flags Texas (the “Base Valuations”) and (ii) a weighted average multiple of EBITDA for the respective Park over the previous four-year period (the “Cumulative LP Unit Purchase Obligation”); (d) making annual ground lease payments; and (e) either (i) purchasing all of the outstanding limited partnership units through the exercise of a call option upon the earlier of the occurrence of certain specified events and the end of the term of each of the Partnerships in 2027 (Six Flags Georgia) and 2028 (Six Flags Texas) (the “End of Term Purchase”) or (ii) causing each of the Partnerships to have no indebtedness and to meet certain other financial tests as of the end of the term of the Partnership. The aggregate amount payable in connection with an End of Term Purchase option on either Park will be the Base Valuation applicable to such Park, adjusted for changes in the consumer price index from December 1996, in the case of Six Flags Georgia, and December 1997, in the case of Six Flags Texas, through December of the year immediately preceding the year in which the End of Term Purchase occurs, in each case, reduced ratably to reflect limited partnership units previously purchased.

     In connection with the Company’s 1998 sale of Six Flags Entertainment Corporation (which held the controlling interests in the Parks) to Six Flags, Inc. (formerly Premier Parks Inc.) (“Six Flags”), Six Flags and Historic TW entered into a Subordinated Indemnity Agreement pursuant to which Six Flags agreed to guarantee the performance of the Guaranteed Obligations when due and to indemnify Historic TW, among others, in the event that the Guaranteed Obligations are not performed and the Six Flags Guarantee is called upon. In the event of a default of Six Flags’ obligations under the

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

Subordinated Indemnity Agreement, the Subordinated Indemnity Agreement and related agreements provide, among other things, that Historic TW has the right to acquire control of the managing partner of the Parks. Six Flags’ obligations to Historic TW are further secured by its interest in all limited partnership units that are held by Six Flags. To date, no payments have been made by the Company pursuant to the Six Flags Guarantee.

     In connection with the TWC Separation, guarantees previously made by Time Warner Entertainment Company, L.P. (“TWE”), a subsidiary of TWC, were terminated and, pursuant to and as required under the original terms of the Six Flags Guarantee, Warner Bros. Entertainment Inc. (“WBEI”) became a guarantor. In addition, TWE’s rights and obligations under the Subordinated Indemnity Agreement have been assigned to WBEI. The Company continues to indemnify TWE in connection with any residual exposure of TWE under the Guaranteed Obligations.

     In April 2009, Six Flags received notices from limited partners of the Partnerships to sell limited partnership units with an aggregate price of approximately $66 million. The general partner of the Georgia limited partnership exercised its right to purchase Six Flags Georgia units having a total purchase price of $7 million. The remaining purchase price for limited partnership units in the Parks that were put was funded through $6 million of cash that had been held in escrow to support the Six Flags Guarantee and a loan from a wholly-owned Time Warner subsidiary (TW-SF LLC) of approximately $53 million (the “TW Loan”). The TW Loan was made to SFOG Acquisition A, Inc., a Delaware corporation, and SFOT Acquisition I, Inc., a Delaware corporation (collectively, the “Acquisition Corporations”). The TW Loan accrues interest at 14% per annum with a final maturity date of March 15, 2011. Up to $10 million of the TW Loan has been guaranteed by Six Flags. Taking into account the limited partnership units purchased in 2009, the estimated maximum Cumulative LP Unit Purchase Obligation for 2010 is approximately $300 million. In addition, the aggregate undiscounted estimated future cash flow requirements covered by the Six Flags Guarantee over the remaining term (through 2028) of the agreements are approximately $1.15 billion (for a net present value of approximately $415 million). In July 2009, the Company received a payment on the TW Loan of $13 million (which included both principal and accrued interest) from the Acquisition Corporations.

     On June 12, 2009, Six Flags and certain of its subsidiaries filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court in Delaware. The reorganization plan that ultimately becomes effective is expected to result in a significant reduction in debt for Six Flags. It is too early to determine the impact, if any, of the reorganization proceedings on the guarantee by Six Flags of the TW Loan. The Partnerships holding the Parks and the Acquisition Corporations were not included in the debtors filing the bankruptcy proceeding.

     In connection with the proposed plan of reorganization of Six Flags, in October 2009, TW-SF LLC agreed to provide the Acquisition Corporations a new 5-year multiple draw credit facility of up to $150 million, which the Acquisition Corporations would be able to use only to fund their obligations to purchase certain limited partnership units of the Partnerships. The new credit facility, which is subject to a number of conditions precedent, including a final order confirming the plan of reorganization, would be in addition to the existing TW Loan. New loans drawn under the facility would mature 5 years from their respective funding date. Interest will accrue at a rate at least equal to a LIBOR floor of 250 basis points plus a spread of 100 basis points over the applicable margin for a new Six Flags’ senior term credit facility, which will close simultaneously with the closing of this facility.

     Because the Six Flags Guarantee existed prior to December 31, 2002 and no modifications to the arrangements have been made since the date the guarantee came into existence, the Company is required to continue to account for the Guaranteed Obligations as a contingent liability. Based on its evaluation of the current facts and circumstances surrounding the Guaranteed Obligations and the Subordinated Indemnity Agreement, the Company is unable to predict the loss, if any, that may be incurred under these Guaranteed Obligations and no liability for the arrangements has been recognized at September 30, 2009. Because of the specific circumstances surrounding the arrangements and the fact that no active or observable market exists for this type of financial guarantee, the Company is unable to determine a current fair value for the Guaranteed Obligations and related Subordinated Indemnity Agreement.

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

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 $4.7 billion and $4.1 billion at September 30, 2009 and December 31, 2008, respectively. Included in these amounts is licensing of film product from the Filmed Entertainment segment to the Networks segment in the amount of $1.1 billion and $967 million at September 30, 2009 and December 31, 2008, respectively.

Customer Credit Risk

     Credit risk in the Company’s businesses originates from sales of various products and services and is dispersed among many different counterparties. At September 30, 2009, no single customer of the Company had a receivable balance that was greater than 5% of the Company’s total net receivables. As a result of the current economic environment, a number of customers that purchase products and services from the Company are experiencing financial challenges (including bankruptcy in some cases). It is possible that some of these customers may not pay amounts owed or expected. It is also possible that these customers or others may not have the financial means to purchase the Company’s products or services in the future. If these events occur, they could have an adverse impact on the Company’s operating results and cash flows.

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 trends in revenues, Operating Income before Depreciation and Amortization, Operating Income 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 2008 Form 10-K and in Item 1A, “Risk Factors,” in the June 2009 Form 10-Q, which should be read in conjunction with this report, 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 and interactive services. 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 2008 Form 10-K and in Item 1A, “Risk Factors,” in the June 2009 Form 10-Q, as well as:

	•		a longer than anticipated continuation of the current economic slowdown or further deterioration in the economy;
	•		decreased liquidity in the capital markets, including any reduction in the ability to access the capital markets for debt securities or bank financings;
	•		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, including the planned separation of AOL from Time Warner; and
	•		the failure to meet earnings expectations.

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

     During the quarter ended September 30, 2009, the Company’s Filmed Entertainment segment outsourced certain information technology processes and controls to two third party service providers and expects to continue to outsource additional information technology processes and controls through the end of 2009. The outsourced processes and controls primarily included the programming and management of applications, databases, servers, and the segment’s information technology network. The Filmed Entertainment segment has implemented controls and monitoring procedures over the third party service providers’ processes and controls. Except for the described outsourcing at the Filmed Entertainment segment, there have not been any changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

See accompanying notes.