Time Warner Inc. (the “Company” or “Time Warner”) is a leading media and entertainment company. The Company was formed in connection with the merger of America Online, Inc. (“AOL”) and Time Warner Inc., now known as Historic TW Inc. (“Historic TW”), which was consummated on January 11, 2001 (the “Merger” or the “AOL-Historic TW Merger”). The Company classifies its businesses into the following five reporting segments:

      At January 1, 2006, the Company had a total of approximately 87,850 employees.

      For convenience, the terms the “Company,” “Time Warner” and the “Registrant” are used in this report to refer to both the parent company and collectively to the parent company and the subsidiaries through which its various businesses are conducted, unless the context otherwise requires.

      On February 6, 2006, the Company announced that it will sell Time Warner Book Group Inc., a major trade book publisher with numerous bestselling authors, to Hachette Livre SA (“Hachette”), a wholly owned subsidiary of Lagardère SCA, for $538 million, subject to working capital adjustments. The transaction is expected to close in the first half of 2006. On February 23, 2006, the Company announced an agreement to sell the Turner South regional cable network to Fox Cable Networks, Inc. for approximately $375 million. The transaction is expected to close in the second or third quarter of 2006.

      On January 24, 2006, Warner Bros. Entertainment Inc., a subsidiary of the Company, and CBS Corporation announced their intent to form a new fifth broadcast network, The CW, to be launched in Fall 2006. The network will be a 50-50 joint venture. The WB Network, which is 77.75% owned by the Company, will cease broadcast in conjunction with the launch of the new network.

      On December 20, 2005, AOL, Google Inc. (“Google”) and Time Warner entered into a letter agreement under which Google will acquire a 5% indirect equity interest in AOL in exchange for $1 billion in cash, and AOL and Google will expand their strategic alliance. Under the agreement, Google will continue providing search technology to AOL’s network of Internet properties worldwide, and Google agreed, among other things, to enable AOL to sell text-based advertising for distribution on AOL properties, to grant AOL the right to sell display advertising on Google’s network, and to provide AOL with advertising credits on Google’s network and other promotional opportunities for AOL content.

      In April 2005, Time Warner NY Cable LLC (“TW NY”), a subsidiary of Time Warner Cable Inc. (“TWC Inc.”), reached agreement to acquire, in conjunction with Comcast Corporation (“Comcast”), substantially all of the assets of Adelphia Communications Corporation (“Adelphia”), which is currently in bankruptcy. Through a subsidiary, TWC Inc. will pay $9.2 billion in cash plus TWC Inc. stock, and Comcast will pay $3.5 billion in cash. At the same time that Comcast and TW NY entered into the agreements to acquire the Adelphia assets, TWC Inc. and Comcast and/or their respective affiliates entered into agreements providing for the redemption of Comcast’s interest in TWC Inc. and its subsidiary, Time Warner Entertainment Company, L.P. (“TWE”), and for the swap of certain cable systems. These transactions are subject to customary regulatory and franchise review and approvals, as well as, in the case of the Adelphia acquisition, the Adelphia bankruptcy process. Closing of the transactions is expected during the second quarter of 2006.

      After giving effect to the transactions, TWC Inc. will gain systems passing approximately 7.5 million homes with approximately 3.5 million basic subscribers (in each case, as of December 31, 2004) and TWC Inc. will become a public company. Time Warner will own 84% of TWC Inc.’s common stock (including 83% of the outstanding publicly-traded Class A Common Stock and all outstanding shares of TWC Inc. Class B Common Stock) and a $2.9 billion indirect non-voting economic interest in TW NY. Comcast will have no interest in either TWC Inc. or TWE after giving effect to the transactions. For additional information regarding the Adelphia transactions, see “Description of Certain Provisions of Agreements related to TWC Inc.” herein.

Caution Concerning Forward-Looking Statements and Risk Factors

      This Annual Report on Form  10-K includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained herein due to changes in economic, business, competitive, technological and/or regulatory factors. For more detailed information about these factors, and risk factors with respect to the Company’s operations, see Item 1A, “Risk Factors” below and “Caution Concerning Forward-Looking Statements” in “Management’s Discussion and Analysis of Results of Operations and Financial Condition” in the financial section of this Report. Time Warner is under no obligation to (and expressly disclaims any obligation to) update or alter its forward-looking statements, whether as a result of new information, subsequent events or otherwise.

Available Information and Website

      The Company’s annual reports on Form  10-K, quarterly reports on Form  10-Q, current reports on Form  8-K and any amendments to such reports filed with or furnished to the Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on the Company’s website at www.timewarner.com as soon as reasonably practicable after such reports are electronically filed with the SEC.

AOL

      America Online, Inc. (“AOL”), a subsidiary of the Company based in Dulles, Virginia, is a leader in interactive services. AOL and its subsidiaries operate a leading network of web brands and the largest Internet access subscription service in the United States.

      AOL’s operations, conducted directly and through subsidiaries, are organized into four business units — Access, Audience, Digital Services and International. The Access business is focused on attracting and retaining subscribers (also referred to as members) across AOL’s domestic Internet service provider (“ISP”) businesses, which include the AOL service and also the CompuServe and Netscape Internet services. The Audience business develops AOL’s audience on the Internet by offering a variety of interactive content and services and generates revenue from that audience and AOL’s domestic ISP subscribers through various forms

of online advertising as well as online commerce. Brands include AOL.com, AIM, ICQ, Netscape, Moviefone and MapQuest. The Digital Services business works to develop next-generation digital services, including a variety of wireless, voice and other premium services and applications that appeal to AOL members and Internet users generally. AOL Europe, the principal component of the International business, has subscribers in France, Germany and the U.K., sells advertising and offers local language content and online communities.

Access

AOL Service

      The core AOL service, a subscription-based service with over 19.5 million members in the U.S. and 6.0 million members in Europe at December 31, 2005, provides members with access to the Internet and a global, interactive community offering a wide variety of content, features, services, applications and tools. Examples include search tools, safety and security features and tools, specialized content, online communities, customization and control features and commerce opportunities.

      Subscribers to the AOL service are charged based on the level of service selected. The primary price plans for U.S. members are a $23.90 per month plan (increasing to $25.90 in the first quarter of 2006) that provides unlimited dial-up telephone access to the Internet and use of the AOL service and a $14.95 per month plan that typically offers unlimited use of the AOL service through an Internet connection not provided by AOL, as well as a limited number of hours of dial-up telephone access to the Internet and the AOL service. Except for certain members on commitment plans, AOL members may cancel their membership without early cancellation fees at any time in accordance with the terms of service. AOL utilizes a number of incentives, promotions and retention programs to encourage the registration of new members and the continued membership of existing members, as well as to bring back former members.

      As high-speed Internet access becomes more available, consumers are migrating from accessing the Internet via a narrowband connection to a high-speed connection. In the first quarter of 2006, AOL entered into a number of agreements with high-speed access providers to offer the AOL service along with high-speed Internet access. Members connecting to the AOL service through a high-speed connection such as cable or digital subscriber lines (“DSL”) can take advantage of expanded multimedia content, including streaming music, CD-quality radio and other audio, full-motion video and streaming news clips.

Other Internet Service Providers

      The CompuServe and Netscape Internet services offered by AOL subsidiaries target value-oriented Internet service consumers in the U.S. Subscriber fees are charged to members based on the level of service selected.

Audience

      AOL offers a variety of websites, portals, such as AOL.com, and certain related applications and services, which, along with the AOL and low-cost ISP services, form an online network (the “AOL Network”). The AOL Network includes AOL.com, AIM, MapQuest, Moviefone, ICQ and Netscape. The AOL Network also includes certain websites that are owned or operated by third parties or affiliates of the Company for which the Internet traffic has been assigned by the other party to AOL. AOL’s audience includes AOL members as well as Internet users visiting the AOL Network. The strategy of the Audience business is to increase the activity, and maintain or expand the audience, of unique visitors to the AOL Network, which, in turn, drives AOL’s advertising revenues. During 2005, AOL re-launched the AOL.com website as a portal, making available to the entire Internet community expanded features, content and communications, and search and playback offerings, including music, movies, television, news and other video features.

      AOL earns revenue by offering advertisers a range of online marketing and promotional opportunities on the AOL Network. Online advertising arrangements generally take the form of payments by advertisers on either a fixed-fee basis or on a pay-for-performance basis, where the advertiser pays based on the “click” or

customer transaction resulting from the advertisement. AOL offers advertisers banner advertising, search and other performance-based advertising, as well as a variety of customized programs, including premier placement, rich media advertising, sponsorship of content offerings for designated time periods, local and classified advertising and audience targeting opportunities.

      AOL also generates advertising revenue through Advertising.com. Acquired by AOL in August 2004, Advertising.com develops and sells marketing programs to advertisers, primarily on a pay-for-performance basis, using advertising inventory that Advertising.com purchases from, or obtains by entering into revenue-sharing arrangements with, interactive publishers and websites.

      On December 20, 2005, AOL, Google and Time Warner entered into a letter agreement under which Google will acquire a 5% indirect equity interest in AOL in exchange for $1 billion in cash, and AOL and Google will expand their strategic alliance. Under the agreement, Google will continue providing search technology to AOL’s network of Internet properties worldwide, and Google agreed, among other things, to enable AOL to sell text-based advertising for distribution on AOL properties, to grant AOL the right to sell display advertising on Google’s network, and to provide AOL with advertising credits on Google’s network and other promotional opportunities for AOL content.

Digital Services

      AOL’s Digital Services business seeks to develop next-generation digital services, including a variety of wireless, voice and other premium services and applications that appeal to dial-up, high-speed and mobile AOL members and Internet users generally. By creating services that appeal to both AOL members and Internet users, Digital Services aims to create new customer relationships and to increase subscription, advertising and other revenues.

      AOL’s Digital Services business includes AOL Wireless, which develops and distributes AOL’s wireless services and embedded software solutions. AOL and its subsidiaries also offer a variety of premium subscription services to AOL members and to Internet users generally, including AOL Music Now, an online music subscription service, and AOL Privacy Wall, an advanced firewall, as well as a variety of voice services, including AOL Call Alert.

International

      AOL Europe, the principal component of the International business, has its principal operations in France, Germany, the U.K. and Luxembourg, which is the location from which the AOL service is supplied in Europe. AOL Europe had approximately 6.0 million members in Europe as of December 31, 2005. Under applicable telecommunications industry regulations, AOL Europe is able to offer a competitive bundled broadband access product, which includes the AOL service and high-speed Internet access, as well as a dial-up access product, to consumers in the U.K., France and Germany. In addition, the online service provided to members in each of these countries is produced in the local language and includes online communities. AOL Europe also supplies the CompuServe service in Europe. AOL Europe generates revenue by offering advertisers a range of online marketing and promotional opportunities through its clients and portals. The AOL service is also offered by a subsidiary in Canada.

      America Online Latin America, Inc. (“AOLA”), which is operating under Chapter 11 bankruptcy, is a consolidated venture operating services in Brazil and Mexico and serving members of the AOL-branded service in Puerto Rico. AOLA sold its business in Argentina during 2005 and is in the process of winding up its remaining operations.

Technologies

      AOL employs a multiple vendor strategy in designing, structuring and operating the network services utilized in its interactive online services. AOLnet, a transfer control protocol/ Internet protocol (TCP/ IP) network of third-party network service providers, is used for the AOL service, the Netscape service, certain

versions of the CompuServe service in North America, and other subscriber services, in addition to being used by outside parties. AOL expects it will continue to review its network services arrangements in order to align its network capacity with market conditions, provide members of its online services with higher speed access and manage data network costs. In addition, AOL expects to expand its network services to support local loop unbundling and Voice over Internet Protocol (VoIP) services in Europe.

      AOL enters into multi-year data communications agreements to support AOLnet. In connection with those agreements, AOL may commit to purchase certain minimum levels of data communications services or to pay a fixed cost for network services.

      AOL also utilizes the AOL Transit Data Network (“ATDN”), the domestic and international network that connects AOL, CompuServe 2000 and Time Warner Cable high-speed data customers to the Internet. The ATDN functions as the conduit between all of Time Warner’s content and the Internet, linking together facilities on four continents, with its greatest capacity in the United States and Europe. The ATDN Internet backbone is built from high-end routers and high-bandwidth circuits purchased under long-term agreements from third-party carriers.

      Improving and maintaining AOLnet and the ATDN requires a substantial investment in telecommunications equipment. In addition to making cash purchases of telecommunications equipment, AOL also finances purchases of this equipment through leases.

Marketing

      To support its goals of attracting and retaining members, growing the audience of the AOL Network, and developing and differentiating its family of brands, AOL markets its brands, products and services through a broad array of programs and media, including broadcast television and radio advertising campaigns, direct mail, telemarketing, magazine inserts (including magazines published by the Company’s publishing segment) and print advertisements, retail distribution, bundling agreements, web advertising and alternate media. Other marketing strategies include online and offline cross-promotion and co-branding with a wide variety of partners. Additionally, through multi-year bundling agreements, the interactive online services and products are installed on several different brands of personal computers made by personal computer manufacturers. AOL also utilizes targeted or limited online and offline promotions, incentives, marketing programs and pricing plans designed to appeal to particular groups of potential users of its interactive online services and to distinguish and develop its different brands, products and services.

Competition

      AOL’s Access business competes for subscription revenues with multiple companies providing dial-up Internet service, including EarthLink and discount ISPs such as NetZero. AOL also competes with companies providing Internet access via broadband technologies, such as cable companies and telephone companies, and companies offering emerging broadband access technologies, including wireless, mobile wireless, fiber optic cable and power line. AOL also competes more broadly for subscription revenues and members’ time and activity with information, entertainment and media companies.

      AOL’s Audience business competes for online users’ time and attention and advertising and commerce revenues with a wide range of companies, including ISPs, web-based portals and individual websites providing content, commerce, search, communications, community and similar features, as well as traditional media companies such as Viacom Inc., CBS Corporation, News Corporation, The Walt Disney Company and NBC Universal. Major competitors for Audience include Yahoo! Inc., Microsoft Corporation, Google, IAC/ InterActiveCorp and eBay Inc.

      AOL’s Digital Services business faces competition from a diverse group of providers in developing and offering embedded mobile software and subscription online services. Although this is an emerging area, these services may include educational services, safety and security services, Voice over Internet Protocol, mobile content and data services, mobile messaging, online storage and music and entertainment services.

      AOL Europe operates in a competitive environment involving ISPs as well as telecommunications companies and cable providers. Its main competitors are British Telecom and Wanadoo in the U.K., Wanadoo and Free in France and T-Online, Freenet and Hansenet in Germany. AOL Europe’s non-access competitors are Google, Microsoft Corporation and Yahoo! Inc. in its main markets, Web.de in Germany and Voila in France.

      AOL faces challenges in gaining access to high-speed networks for distribution of the AOL service or other AOL services both from network providers and from competition from other interactive services providers. AOL also competes with other interactive services providers to secure relationships with providers of personal communications devices and related telecommunications services.

CABLE

      The Company’s Cable business, Time Warner Cable Inc. and its subsidiaries (“TWC Inc.” or “Time Warner Cable”), is the second largest operator of cable systems in the U.S. in terms of basic cable subscribers served. As of December 31, 2005, Time Warner Cable managed cable systems serving approximately 10.957 million basic cable subscribers in highly clustered and upgraded systems in 27 states, of which approximately 9.40 million were in cable systems owned by consolidated entities and approximately 1.557 million were in cable systems of unconsolidated investees. All of TWC Inc.’s cable business is conducted under the Time Warner Cable brand name.

      The Company currently holds an effective aggregate 79% interest in TWC Inc., and Comcast holds the remaining interest. See “Description of Certain Provisions of Agreements related to TWC Inc.” herein for additional information with respect to the Company’s and Comcast’s ownership in TWC Inc.

      As part of the strategy to expand Time Warner Cable’s footprint and improve the clustering of its cable systems, on April 20, 2005, TWC Inc., through a subsidiary, entered into agreements to acquire, in conjunction with Comcast, substantially all of the assets of Adelphia. See “Description of Certain Provisions of Agreements related to TWC Inc.” herein for further information. The closing of the acquisition is expected to occur during the second quarter of 2006.

Systems Operations

      Time Warner Cable principally offers three products: video, high-speed data and Digital Phone, an Internet protocol(“IP”)-based voice service. As of December 31, 2005, cable systems owned or managed by Time Warner Cable passed approximately 20 million homes, provided basic video service to approximately 10.957 million subscribers, approximately 5.401 million of whom also subscribe to Time Warner Cable digital video service, and provided high-speed data services to approximately 5.033 million residential subscribers and commercial accounts and Digital Phone service to approximately 1.10 million subscribers. As a result of the Adelphia acquisition and related transactions, TWC Inc. will gain systems passing approximately 7.5 million homes serving approximately 3.5 million basic subscribers (in each case, as of December 31, 2004).

      TWC Inc. operates large, clustered and technologically upgraded cable systems in 27 states. Approximately 89% of Time Warner Cable’s subscribers are located in eight states and, as of December 31, 2005, over 75% of its subscribers were in 19 geographic clusters, each serving more than 300,000 subscribers, and nearly all of its cable systems were capable of carrying two-way broadband services and had been upgraded to 750MHz or higher.

      Time Warner Cable is an industry leader in developing and rolling-out innovative and advanced new products and services, including On-Demand services, high-definition television, set-top boxes with integrated digital video recorders (DVRs), high-speed data services and IP-based telephony (Digital Phone). Time Warner Cable is increasingly focused on introducing innovative products that take advantage of its existing cable platform and marketing convenient, easy-to -understand bundles of these and other products and services to consumers. Time Warner Cable believes that it can attract and retain customers by providing these

multiple-product bundles, such as its video, data and Digital Phone “triple play” package, and supporting them with quality customer care.

      Cable operators are subject to regulation at the federal, state and local level. At the local level, cable operators are generally required to have a franchise with the local government. Franchise requirements and the rights and responsibilities of cable operators and local franchise authorities are themselves subject to provisions of federal and state law. See “Regulation and Legislation” below.

      Time Warner Cable’s video subscribers are typically charged monthly subscription fees based on the level of service selected and, in some cases, equipment usage fees. Movies-on -Demand, Pay-Per -View movies and special events are generally charged on a per use basis.

      Time Warner Cable offers subscribers different packages of video services, including basic, standard and digital packages, for a flat monthly fee. Basic and standard service together provide, on average, approximately 80 channels, including local broadcast signals. Subscribers to digital video service generally receive all the channels included in the basic and standard tiers plus up to 60 additional digital cable networks and up to 45 CD-quality audio music services. Digital subscribers also have access to “mini tiers” of specialized and niche programming (e.g., sports tiers and Spanish language tiers). Time Warner Cable also has begun to provide digital subscribers with access to certain interactive services. As of December 31, 2005, over 49% of Time Warner Cable’s basic video subscribers also purchased digital services. Recently, Time Warner Cable announced the creation of a Family Choice Tier.

      Regardless of service level, subscribers may purchase premium channels (including multiplexed versions) and Subscription -Video-on -Demand (“SVOD”) services for an additional monthly fee. Increasingly, a digital set-top box or comparable device, such as a CableCARD ^® , is required in order to receive these services.

      The rates Time Warner Cable can charge for its basic tier, as well as for equipment rentals and installation services, are generally subject to regulation under federal law. For more information, see “Regulation and Legislation” below.

      Time Warner Cable offers On-Demand content to customers with digital set-top boxes across all of its service areas. On-Demand services enable subscribers to instantaneously view programming stored on servers at the system’s headend and to utilize functions such as pause, rewind and fast forward while watching this programming. Free local and national On-Demand content provides subscribers with access to selected programming from a variety of sources, with no incremental charges. Subscribers are charged for Movies-on -Demand on a per use basis. SVOD provides digital customers with the ability to view an array of content associated with a particular content provider on a monthly subscription basis. Traditional pay-per-view, with fixed start times and no pause or rewind functionality, has been largely eclipsed by the availability of Video-on -Demand (“VOD”), except for certain event-based programming.

      During 2005, Time Warner Cable introduced a new product known as “Start Over” in Columbia, South Carolina. Start Over uses Time Warner Cable’s existing VOD technology to enable viewers to re-start certain TV shows, which are identified by the presence of an on-screen icon, that are already in progress. Because the product does not permit subscribers to fast-forward through commercials, traditional advertising economics are preserved. Start Over is expected to be launched in additional areas during 2006.

      For a separate fee, Time Warner Cable offers set-top boxes with integrated DVRs in all of its service areas and, as of December 31, 2005, over 27% of its digital subscribers have received them. DVR users can record programming on a hard drive built into the set-top box through the interactive program guide and can

view the recorded programming using functions such as pause, rewind and fast-forward. DVR users can also record one show while watching another or record two shows simultaneously.

      Video programming rights represent a major cost component for Time Warner Cable. TWC Inc. generally obtains the right to carry video programming services through the negotiation of affiliation agreements with programmers. Most programming services impose a monthly license fee per subscriber upon the cable operator and these fees typically increase over time. TWC Inc.’s programming costs continue to rise, especially for sports programming (See “Management’s Discussion and Analysis of Results of Operations and Financial Condition, Business Segment Results — Cable” in the financial pages herein). TWC Inc. obtains rights to On-Demand programming from film studios and other distributors. TWC Inc. typically pays the provider a portion of any separate fees paid by the customer for the selected On-Demand programming.

      TWC Inc. obtains the right to carry local broadcast television stations either through the stations’ exercise of their so-called “must carry” rights, or through negotiated retransmission consent agreements. See “Regulation and Legislation — Communications Act and FCC Regulation — Carriage of Broadcast Television Stations and Other Programming Regulation” below. Time Warner Cable’s existing programming and retransmission consent agreements expire at various times.

      Time Warner Cable also carries the high-definition television signals and other digital signals broadcast by numerous local television stations, including all stations owned and operated by the major broadcast networks and nearly all public television stations, as well as various basic cable and premium networks and certain high-definition sports programming.

      Residential and commercial high-speed data services are available across TWC Inc.’s entire footprint. As of December 31, 2005, Time Warner Cable had approximately 5.033 million high-speed data subscribers, consisting of approximately 4.822 million residential subscribers and approximately 211,000 commercial accounts. Subscribers pay a monthly flat fee for high-speed data service based upon the level of service received. Due to their nature, commercial and bulk subscribers are charged at different rates than residential subscribers. High-speed data customers connect their personal computers (PCs) to Time Warner Cable’s two-way hybrid fiber optic/coaxial plant using a cable modem.

      As of December 31, 2005, Time Warner Cable provided its voice service, Digital Phone, to approximately 1.10 million subscribers. Digital Phone is offered across Time Warner Cable’s footprint and is available to nearly 85% of Time Warner Cable’s homes passed. Digital Phone customers typically receive unlimited local, in-state and U.S., Canada and Puerto Rico long distance calling and a number of calling features for a monthly fixed fee. Subscribers switching to Digital Phone can keep their existing landline phone numbers and retain their directory listings. In the future, Time Warner Cable intends to offer additional plans with a variety of local and long distance options and other calling features.

      TWC Inc.’s Digital Phone service utilizes IP technology to carry telephone calls over TWC Inc.’s own managed network and, for calls to destinations outside of that network, utilizes the traditional public telephone network. In that regard, TWC Inc. has multi-year agreements with MCI, Inc. (“MCI”) and Sprint Nextel Corporation (“Sprint”) pursuant to which these companies assist Time Warner Cable in providing Digital Phone service. In January 2006, MCI merged with Verizon Communications Inc., a regional phone company that competes with Time Warner Cable in some areas. It is not known what impact, if any, the merger will have on Time Warner Cable’s Digital Phone offering.

      In November 2005, TWC Inc., several other cable companies and Sprint announced that they would form a joint venture to develop integrated video entertainment, wireline and wireless data and communications products and services. The participating companies have agreed to work together to develop new products for consumers that combine cable’s core products and interactive features and the potential of wireless technology to deliver advanced integrated entertainment, communications and wireless services to consumers in their homes and when they are away. For example, the venture expects to introduce a service providing a single voice mailbox for both the home and wireless phone.

      TWC Inc. also generates revenue by selling advertising time to a variety of national, regional and local businesses. Cable operators generally receive an allocation of scheduled advertising time on cable programming services into which the operator can insert commercials. The clustering of TWC Inc.’s systems expands the share of viewers that Time Warner Cable reaches within a local DMA (Designated Market Area), which helps local advertising sales personnel to compete more effectively with broadcast and other media. In addition, in many locations, contiguous cable system operators have formed advertising interconnects to deliver locally inserted commercials across wider geographic areas, replicating the reach of broadcast stations as closely as possible.

      Time Warner Cable also operates 24-hour local news channels in New York City (NY1 News and NY1 Noticias), Albany, NY (Capital News 9), Rochester, NY (R/News), Syracuse, NY (News 10 Now), Charlotte and Raleigh, NC (Carolina News 14) and Austin, TX (News 8 Austin).

Cable Joint Ventures

      Following restructurings in 2004 and 2005, Texas and Kansas City Cable Partners, L.P. (“TKCCP”), a 50-50 joint venture between Time Warner Entertainment-Advance/ Newhouse Partnership (“TWE-A/ N”) and Comcast, served approximately 1.557 million basic video subscribers as of December 31, 2005. Time Warner accounts for its investment in the venture using the equity method. See “Description of Certain Provisions of the TWE-A/ N Partnership Agreement” herein for information about the Company’s and TWC Inc.’s ownership in TWE-A/ N. Beginning on June 1, 2006, either TWC Inc. or Comcast can trigger the dissolution of TKCCP. If a dissolution is triggered, the non-triggering party has the right to choose and take full ownership of one of two pools of TKCCP’s systems — one pool consisting of the Houston systems and the other consisting of the Kansas City, Southwest Texas and New Mexico systems (collectively, the “Southwest systems”) — with an arrangement to distribute the partnership’s debt between the two pools. The party triggering the dissolution would own the remaining pool of systems and its associated debt.

      On April 20, 2005, in conjunction with the signing of agreements related to the Adelphia acquisition, TWC Inc. and Comcast entered into an agreement pursuant to which, if the Adelphia acquisition and the related cable system swaps occur, and if Comcast receives the Southwest systems upon distribution of the TKCCP assets, as described above, Comcast would have the right to put the Southwest Texas and New Mexico systems, which served approximately 484,000 basic subscribers as of December 31, 2005, to TWC Inc. in exchange for certain TWC Inc. cable systems serving approximately 400,000 basic subscribers as of December 31, 2005. Comcast’s right to trigger such a swap would commence on the first anniversary of the date on which Comcast received the Southwest systems in a dissolution and expires after 180 days. Under the agreement, if the value of the systems being transferred between the parties is different, a cash adjustment will be made to equalize value. If Comcast triggers the swap, the closing of the swap will be subject to customary terms and conditions.

Competition

      Time Warner Cable faces intense competition from a variety of alternative information and entertainment delivery sources, principally from direct-to -home satellite video providers and certain regional telephone companies offering phone and DSL services. In addition, technological advances will likely increase the number of alternatives available to Time Warner Cable’s customers from other providers and intensify the competitive environment.

      Video Competition. Time Warner Cable’s video services face competition from direct broadcast satellite (“DBS”) services, such as the Dish Network and DirecTV, which is controlled by News Corporation, a major Time Warner Cable programming supplier. DirecTV and Dish Network offer satellite-delivered pre-packaged broadcast and programming services that can be received by relatively small and inexpensive receiving dishes. The video services provided by these satellite providers are comparable, in many respects, to Time Warner Cable’s analog and digital video services, and DBS subscribers can obtain satellite receivers with integrated DVRs from those providers as well. Both major DBS providers have entered into co-marketing arrangements with regional telephone companies in an effort to provide customers with video, telephone and DSL service from what appears to the customer as a single source. In addition, a number of these telephone companies have begun fiber upgrades to their networks which, among other things, enable the delivery of video services directly to consumer residences. Time Warner Cable’s VOD services compete with online movie services, which are delivered over broadband connection. Time Warner Cable’s traditional video services also compete with video services delivered over broadband Internet connections.

      “Online” Competition. Time Warner Cable’s high-speed data service faces competition from a variety of companies that offer other forms of online services, including DSL service provided by regional telephone companies and low cost dial-up services over ordinary telephone lines. DSL providers have offered aggressive promotional packages in some of Time Warner Cable’s operating areas and, as described above, some DSL providers have entered into co-marketing arrangements with DBS operators in an effort to provide customers with DSL, telephone and video service from what appears to the customer to be a single source. In some cases, DSL providers also have partnered with Internet service providers, such as AOL, which may enhance DSL’s competitive position. In addition, as noted above, a number of regional telephone companies have begun fiber upgrades to their networks that also enable the delivery of improved high-speed data services. Other developing technologies, such as Internet service via power lines, satellite and various wireless services (e.g., Wi-Fi), including those of local municipalities, also compete or are likely to compete with cable and cable modem services.

      Digital Phone Competition. Time Warner Cable’s Digital Phone service competes directly with the local and long distance offerings of the regional telephone companies that provide service in Time Warner Cable’s service areas, as well as with wireless phone providers and national providers of voice over Internet products such as Vonage. This has intensified the competitive environment in which Time Warner Cable operates. As noted above, the regional telephone companies with which Time Warner Cable competes for phone customers also offer online services and certain of these companies also have begun to offer video services to consumers as they complete network upgrades.

      Overbuilds. Under the Cable Television Consumer Protection and Competition Act of 1992, franchising authorities are prohibited from unreasonably refusing to award additional franchises. As a result, from time to time, Time Warner Cable faces competition from overlapping cable systems operating in its franchise areas, including municipally-owned systems. Furthermore, legislation supported by regional telephone companies has been proposed at the federal level and in a number of states that would allow these companies to enter the video distribution business without obtaining local franchise approval and often on substantially more favorable terms than those afforded Time Warner Cable and other existing cable operators. Legislation of this kind was recently enacted in Texas. See “Regulation and Legislation” below.

      Satellite master antenna television (“SMATV”). Additional competition comes from private cable television systems servicing condominiums, apartment complexes and certain other multiple dwelling units, often on an exclusive basis, with local broadcast signals and many of the same satellite-delivered program

services offered by franchised cable systems. Some SMATV operators now offer voice and high-speed data services as well.

      Wireless Cable/ Multichannel microwave distribution services (“MMDS”). Time Warner Cable faces competition from wireless cable operators, including digital wireless operators, who use terrestrial microwave technology to distribute video programming. Some MMDS operators now offer voice and high-speed data services.

      Additional Competition. In addition to multichannel video providers, cable systems compete with all other sources of news, information and entertainment, including over-the -air television broadcast reception, live events, movie theaters, home video products and the Internet. In general, Time Warner Cable also faces competition from other media for advertising dollars. To the extent that Time Warner Cable’s products and services converge with theirs, Time Warner Cable competes with the manufacturers of consumer electronics products. For instance, Time Warner Cable’s DVRs compete with similar devices manufactured by consumer electronics companies.

FILMED ENTERTAINMENT

      The Company’s Filmed Entertainment businesses produce and distribute theatrical motion pictures, television shows, animation and other programming, distribute home video product and license rights to the Company’s feature films, television programming and characters. All of the foregoing businesses are principally conducted by various subsidiaries and affiliates of Warner Bros. Entertainment Inc., known collectively as the Warner Bros. Entertainment Group (“Warner Bros.”) and New Line Cinema Corporation (“New Line”).

Feature Films

      Warner Bros. produces feature films both wholly on its own and under co-financing arrangements with others, and also distributes completed films produced and financed by others. The terms of Warner Bros.’ agreements with independent producers and other entities are separately negotiated and vary depending upon the production, the amount and type of financing by Warner Bros., the media and territories covered, the distribution term and other factors. Warner Bros.’ feature films are produced under both the Warner Bros. Pictures and Castle Rock banners, and also by Warner Independent Pictures (“WIP”).

      Warner Bros.’ strategy focuses on offering a diverse slate of films with a mix of genres, talent and budgets that includes several “event” movies per year. In response to the high cost of producing theatrical films, Warner Bros. has entered into certain film co-financing arrangements with other companies, decreasing its financial risk while in most cases retaining substantially all worldwide distribution rights. During 2005, Warner Bros. released a total of 24 original motion pictures for theatrical exhibition, including Harry Potter and the Goblet of Fire, Charlie and the Chocolate Factory, Batman Begins and The Dukes of Hazard. Of Warner Bros.’ total 2005 releases, four were wholly financed by Warner Bros. and 20 were financed with or by others.

      Warner Bros. has co-financing arrangements with Village Roadshow Pictures, Legendary Pictures, LLC and Virtual Studios, LLC. Additionally, Warner Bros. has an exclusive distribution arrangement with Alcon Entertainment (“Alcon”) for distribution of all of Alcon’s motion pictures in domestic and certain international territories.

      WIP produces or acquires smaller budget and alternative films for domestic and/or worldwide release. In 2005, WIP released Good Night, and Good Luck and the hit documentary March of the Penguins, among others.

      Warner Bros. distributes feature films to more than 125 international territories. In 2005, Warner Bros. released internationally 17 English-language motion pictures and 20 local language films that it either produced or acquired.

      Theatrical films are also produced and distributed by New Line, a leading independent producer and distributor of theatrical motion pictures. Included in its 12 films released during 2005 were Wedding Crashers and Monster-in -Law. During 2005, New Line and HBO formed Picturehouse, a jointly-owned theatrical distribution company to produce and distribute independent films. In its first year, Picturehouse released a total of 5 films (one of which was solely an HBO production), and began production on Fur, an upcoming release starring Nicole Kidman. Like Warner Bros., New Line releases a diversified slate of films with an emphasis on building and leveraging franchises. As part of its strategy for reducing financial risk and dealing with the rising cost of film production, New Line typically pre-sells the international rights to its releases on a territory by territory basis, while still retaining a share of each film’s potential profitability in those foreign territories.

Home Video

      Warner Home Video Inc. (“WHV”) distributes for home video use DVDs containing filmed entertainment product produced or otherwise acquired by the Company’s various content-producing subsidiaries and divisions, including Warner Bros. Pictures, Warner Bros. Television, Castle Rock, New Line, Home Box Office and Turner Broadcasting System. In addition to the creation of DVDs from new content generated by the Company, WHV produces and distributes DVDs from the Company’s extensive filmed entertainment library of thousands of feature films, television titles and animated titles. WHV also distributes other companies’ product, including DVDs for BBC and National Geographic, and national sports leagues in the U.S., and has similar distribution relationships with producers outside the U.S.

      WHV sells and/or licenses its product in the U.S. and in major international territories to retailers and/or wholesalers through its own sales force, with warehousing and fulfillment handled by third parties. In some countries, WHV’s product is distributed through licensees. DVD product is replicated by third parties, with replication for the U.S., Canada, Europe and Mexico provided for under a long-term contract. Among WHV’s 2005 DVD releases, 15 film titles generated U.S. sales of more than one million units each, including The Polar Express, Batman Begins, Charlie and the Chocolate Factory, Million Dollar Baby, Monster-In-Law and The Notebook.

      Since inception of the DVD format, WHV has released over 4,000 DVD titles (including feature films, television and animated titles) in the U.S. and international markets, led by sales of Warner Bros.’ first three Harry Potter films, which have had total net worldwide sales of over 77 million DVD units sold through to the consumer. DVD is the fastest selling consumer electronics product of all time, with an installed base at December 31, 2005 of over 82 million households in the U.S. and over 223 million households internationally (including approximately 46 million households in China).

Television

      Warner Bros. is one of the world’s leading suppliers of television programming, distributing programming in 175 foreign territories and in more than 40 languages. Warner Bros. both develops and produces new television series, made-for-television movies, mini-series, reality-based entertainment shows and animation programs and also licenses programming from the Warner Bros. library for exhibition on media all over the world.

      Warner Bros.’ television programming is primarily produced by Warner Bros. Television Production Inc. (“WBTV”), which produces primetime dramatic and comedy programming for the major networks and for cable, and Telepictures Productions Inc. (“Telepictures”), which specializes in reality-based and talk/variety series for the syndication and primetime markets. For the 2005-06 season, WBTV is producing popular programming such as Gilmore Girls, Smallville and Supernatural for The WB Television Network (“The WB Network”) and ER, Two and a Half Men, Without a Trace, Cold Case, The O.C., Close to Home, Freddie and Nip/ Tuck for third party networks and cable distributors. Telepictures produces the primetime reality

series  The Bachelor as well as first-run syndication staples, such as Extra, and the talk shows The Ellen DeGeneres Show and Tyra.

      Warner Bros. Animation Inc. is responsible for the creation, development and production of contemporary television, made for DVD, and feature film animation, as well as for the creative use and production of classic animated characters from Warner Bros. and DC Comics, including the Looney Tunes and Hanna-Barbera libraries.

Backlog

      Backlog represents the future revenue not yet recorded from cash contracts for the licensing of theatrical and television programming for pay cable, network (excluding certain license fees), basic cable and syndicated television exhibition. Backlog for all of Time Warner’s content companies amounted to $4.5 billion at December 31, 2005, compared to $3.7 billion at December 31, 2004 (including amounts relating to the intercompany licensing of film product to the Company’s cable television networks (including HBO and the Turner Networks) of $774 million and $514 million as of December 31, 2005 and December 31, 2004, respectively). The backlog excludes advertising barter contracts.

Other Entertainment Assets

      Warner Bros. Interactive Entertainment Inc. licenses and produces interactive games for a variety of platforms based on Warner Bros.’ and DC Comics’ properties, as well as original game properties.

      Warner Bros. Consumer Products Inc. licenses rights in both domestic and international markets to the names, likenesses, images, logos and other representations of characters and copyrighted material from the films and television series produced or distributed by Warner Bros., including the superhero characters of DC Comics, Hanna-Barbera characters, classic films and Harry Potter.

      Through joint ventures, Warner Bros. International Cinemas Inc. owns interests in 81 multi-screen cinema complexes with over 625 screens in Japan, China, Italy and the U.S.

      DC Comics, wholly owned by the Company, publishes more than 50 regularly issued comics magazines featuring such popular characters as Superman, Batman, Wonder Woman and The Sandman. DC Comics also derives revenues from motion pictures, television, product licensing and books. The Company also owns E.C. Publications, Inc., the publisher of MAD magazine.

Competition

      The production and distribution of theatrical motion pictures, television and animation product and DVDs are highly competitive businesses, as each vies with the other, as well as with other forms of entertainment and leisure time activities, including video games, the Internet and other computer-related activities for consumers’ attention. Furthermore, there is increased competition in the television industry evidenced by the increasing number and variety of broadcast networks and basic cable and pay television services now available. Despite this increasing variety of networks and services, access to primetime and syndicated television slots has actually tightened as networks and owned and operated stations increasingly source programming from content producers aligned with or owned by their parent companies. There is active competition among all production companies in these industries for the services of producers, directors, writers, actors and others and for the acquisition of literary properties. With respect to the distribution of television product, there is significant competition from independent distributors as well as major studios. Revenues for filmed entertainment product depend in part upon general economic conditions, but the competitive position of a producer or distributor is still greatly affected by the quality of, and public response to, the entertainment product it makes available to the marketplace.

      Warner Bros. also competes in its character merchandising and other licensing activities with other licensors of character, brand and celebrity names.

NETWORKS

      The Company’s Networks business consists principally of domestic and international basic cable networks, pay television programming services and a broadcast television network. The basic cable networks (collectively, the “Turner Networks”) owned by Turner Broadcasting System, Inc. (“Turner”) constitute the principal component of the Company’s basic cable networks. Pay television programming consists of the multichannel HBO and Cinemax pay television programming services (collectively, the “Home Box Office Services”) operated by Home Box Office, Inc. On January 24, 2006, Warner Bros. Entertainment Inc. (“WBE”) announced that The WB Network, a broadcast television network in which a subsidiary of WBE holds a 77.75% interest, will cease operations commencing with the Fall 2006 season, and WBE will join with CBS Corporation (“CBS”) to launch a new jointly owned television network.

      The programming of the Turner Networks and the Home Box Office Services (collectively, the “Cable Networks”) is distributed via cable, satellite and other distribution technologies.

      The Turner Networks generate their revenue principally from the sale of advertising (other than Turner Classic Movies, which sells advertising only in certain European markets) and from receipt of monthly subscriber fees paid by cable system operators, satellite distribution services, hotels and other customers (known as affiliates) that have contracted to receive and distribute such networks. Turner Classic Movies generates most of its revenue from the monthly fees paid by affiliates, which are generally charged on a per subscriber basis. The Home Box Office Services generate revenue principally from fees paid by affiliates for the delivery of the Home Box Office Services to subscribers who are generally free to cancel their subscriptions at any time. Home Box Office’s agreements with its affiliates are typically long-term arrangements that provide for annual service fee increases and retail promotion activities and have fee arrangements that are generally related to the number of subscribers served by the affiliate. The Home Box Office Services and their affiliates engage in ongoing marketing and promotional activities to retain existing subscribers and acquire new subscribers. Home Box Office also derives revenues from its original films and series through the sale of DVDs, as well as, in recent years, from its licensing of successful original programming in syndication and to basic cable channels.

      Although the Cable Networks believe prospects of continued carriage and marketing of their respective networks by the larger affiliates are good, the loss of one or more of them as distributors of any individual network or service could have a material adverse effect on their respective businesses. In addition, further consolidation of multiple-system cable operators could adversely impact the Cable Networks’ prospects for securing future carriage agreements on commercially reasonable terms, or at all.

      Advertising revenues on the basic cable networks and The WB Network consist of consumer advertising, which is sold primarily on a national basis in the U.S. (and on a regional basis outside the U.S.). The WB Network sells time exclusively on a national basis, with local affiliates of The WB Network selling local advertising. Advertising contracts generally have terms of one year or less. Advertising revenue is generated from a wide variety of categories, including food and beverage, financial and business services, entertainment, drugs/health and medical and automotive. Advertising revenue is a function of the size and demographics of the audience delivered, the “CPM,” which is the cost per thousand viewers delivered, and the number of units of time sold. Units sold and CPMs are influenced by the quantitative and qualitative characteristics of the audience of each network as well as overall advertiser demand in the marketplace.

Turner Networks

      Turner’s entertainment networks include two general entertainment networks, TBS, with approximately 89.5 million U.S. households as of December 31, 2005, as reported by Nielsen Media Research (“households”); and TNT, with approximately 89.8 million households in the U.S. as of December 31, 2005; as well as Cartoon Network (including Adult Swim, its overnight block of contemporary animation aimed at adults) with approximately 88.6 million households in the U.S. as of December 31, 2005; Turner Classic Movies, a

commercial-free network presenting classic films from the Company’s MGM, RKO and pre-1950 Warner Bros. film libraries, among others, which had approximately 71.5 million households in the U.S. as of December 31, 2005, and Boomerang, an animation network featuring classic cartoons. Programming for these entertainment networks is derived, in part, from the Company’s film, made-for-television and animation libraries as to which Turner or other divisions of the Company own the copyrights, plus licensed programming, including sports, and original films and series. Turner has announced that it has entered into an agreement to sell Turner South, a Southeast regional entertainment network, which is expected to close in the second or third quarter of 2006.

      Turner has licensed programming rights from the National Basketball Association (the “NBA”) to televise a certain number of regular season and playoff games on TNT through the 2007-08 season. TBS and Turner South televise Atlanta Braves baseball games, for which rights fee payments are made to Major League Baseball’s central fund for distribution to all Major League Baseball clubs. Through a joint venture with NBC, Turner also has rights to televise certain NASCAR Nextel Cup and Busch Series races through the end of 2006. Commencing in 2007, Turner has secured rights to televise certain NASCAR Nextel Cup races through 2014.

      Turner’s CNN and Headline News networks, 24-hour per day cable television news services, reach more than 89.9 million households and 88.9 million households in the U.S., respectively, as of December 31, 2005. Together with CNN International (“CNNI”), CNN reached more than 200 countries and territories as of December 31, 2005. CNN operates 36 news bureaus, of which 10 are located in the U.S. and 26 are located around the world.

      CNNI is distributed to multiple distribution platforms for delivery to cable and DSL systems, satellite platforms, mobile operators, broadcasters, hotels and other viewers around the world on a network of 10 regional satellites. CNN Headline News is distributed in the Asia Pacific region and Latin America; CNN en Español is a separate Spanish language all-news network in Latin America; and CNNj is an all-news network in Japan. CNN-IBN, a co-branded, 24-hour, English-language general news and current affairs channel in India, was launched in December 2005.

      Turner also distributes Pogo (an entertainment network for children) in India and certain other South Asian territories. In addition, Turner distributes approximately 45 region-specific versions and local-language feeds of TNT, Cartoon Network, Turner Classic Movies and Boomerang in over 125 countries around the world. In the U.K. and Ireland, Turner distributes Toonami, an all-action animation network.

      In a number of regions, Turner has launched international versions of its channels through joint ventures with local partners. These include CNN+, a Spanish language  24-hour news network distributed in Spain and Andorra; CNN Turk, a Turkish language  24-hour news network available in Turkey and the Netherlands; and Cartoon Network Japan. Turner also has interests in services in China (CETV) and Italy.

      In addition to its cable networks, Turner manages various Internet sites that generate revenue from commercial advertising and consumer subscription fees. The CNN News Group has multiple sites, such as CNN.com and allpolitics.com, which are operated by CNN Interactive. Several localized editions of CNN.com operate in Turner’s international markets. In 2005, CNN launched Pipeline, a broadband news service available via subscription in 25 countries. The CNN News Group also produces CNNMoney.com in collaboration with Time Inc.’s Money Magazine. Turner also operates the NASCAR Website, NASCAR.com, pursuant to an agreement with NASCAR through 2006, and the PGA’s Website, PGA.com, pursuant to an agreement with PGA through 2011. Turner operates CartoonNetwork.com, a popular advertiser-supported site in the U.S., as well as 15 international sites affiliated with the regional children’s services feeds. In 2005, Turner introduced GameTap, a direct-to -consumer broadband subscription-based gaming service offering access to over 300 classic and contemporary video games.

Home Box Office

      HBO, operated by the wholly owned subsidiary Home Box Office, Inc., is the nation’s most widely distributed pay television service. Including HBO’s sister service, Cinemax, the Home Box Office Services had approximately 39.9 million subscriptions as of December 31, 2005. Both HBO and Cinemax are made available on a number of multiplex channels and in high definition. Home Box Office also offers subscription video-on -demand products, which enable digital cable subscribers who subscribe to the Home Box Office Services to view programs at a time of their choice with DVD-like functionality.

      A major portion of the programming on HBO and Cinemax consists of recently released, uncut and uncensored theatrical motion pictures. Home Box Office’s practice has been to negotiate licensing agreements of varying duration with major motion picture studios and independent producers and distributors in order to ensure continued access to such films. These agreements typically grant pay television exhibition rights to recently released and certain older films owned by the particular studio, producer or distributor in exchange for negotiated fees, which may be a function of, among other things, the box office performances of the films.

      HBO is also defined by its award-winning original dramatic and comedy series, movies and mini-series such as The Sopranos, Entourage, Rome, Deadwood and Empire Falls, and boxing matches and sports news programs, as well as comedy specials, family programming and documentaries. In 2005 HBO won 27 Primetime Emmys ^®  — the most of any network.

      Home Box Office produced Everybody Loves Raymond, which completed its ninth and final season on CBS in 2005 and now airs in syndication. Home Box Office also licenses its successful original programming, such as Sex and the City, in syndication and to basic cable channels. HBO Sports operates HBO Pay-Per-View, which distributes pay-per-view prizefights. HBO Video markets DVDs of a variety of HBO’s original programming, including movies, miniseries and dramatic and comedy series. Through various joint ventures, HBO-branded services are also distributed in more than 50 countries in Latin America, Asia and Central Europe.

New Television Network

      On January 24, 2006, WBE, a subsidiary of the Company, and CBS announced their intent to form a new fifth broadcast network, The CW, to be launched in Fall 2006. The new broadcast network will be a 50-50 joint venture between WBE and CBS. The WB Network, which is 77.75% owned by a subsidiary of WBE and has operated for the past 11 years, will cease broadcast in conjunction with the launch of the new network and The WB’s partnership with Tribune Broadcasting (“Tribune”) will be dissolved.

      The CW is expected to incorporate The WB’s current scheduling model which, among other things, includes a six night-13 hour primetime lineup and the schedule of children’s programming now known as Kids’ WB! , a five-hour animated programming block on Saturday mornings.

      Tribune has owned a 22.25% interest in The WB Network. Sixteen of the stations owned by Tribune that are current affiliates of The WB Network and eleven of the CBS-owned UPN stations will carry the new CW network.

Other Network Interests

      The Company and Liberty Media (“Liberty”) each have a 50% interest in Court TV, which was available in approximately 84.5 million households as of December 31, 2005. Court TV is an advertiser-supported basic cable television service providing an informative and entertaining view of the American legal system. Focusing on “investigative television,” Court TV broadcasts live trial coverage by day and original programs such as Forensic Files and Psychic Detectives and popular off-network series such as NYPD Blue in the evening. Under the Court TV Operating Agreement, beginning January 2006, Liberty may give written notice to the Company requiring the Company to purchase all of Liberty’s interest in Court TV (the “Liberty Put”) and, as of the same date, the Company may, by notice to Liberty, require Liberty to sell all of its interest in Court TV to the Company (the “Time Warner Call”). The price to be paid upon exercise of either

the Liberty Put or the Time Warner Call will be an amount equal to one half of the fair market value of Court TV, determined by appraisal. As of February 17, 2006, Liberty had not exercised the Liberty Put and Time Warner had not exercised the Time Warner Call.

      Through a wholly owned subsidiary, Turner owns the Atlanta Braves of Major League Baseball. During 2005, Turner announced its intention to sell the team.

Competition

      Each of the Networks competes with other television programming services for marketing and distribution by cable and other distribution systems. All of the Networks compete for viewers’ attention and audience share with all other forms of programming provided to viewers, including broadcast networks, local over-the -air television stations, other pay and basic cable television services, home video, pay-per-view and video-on-demand services, online activities and other forms of news, information and entertainment. In addition, the Networks face competition for programming with those same commercial television networks, independent stations, and pay and basic cable television services, some of which have exclusive contracts with motion picture studios and independent motion picture distributors. The Turner Networks, The WB Network and Turner’s Internet sites compete for advertising with numerous direct competitors and other media.

      The Cable Networks’ production divisions compete with other producers and distributors of programs for air time on broadcast networks, independent commercial television stations, and pay and basic cable television networks.

PUBLISHING

      The Company’s magazine publishing businesses are conducted primarily by Time Inc., a wholly owned subsidiary of the Company, either directly or through its subsidiaries. In addition, Time Inc. operates certain direct-marketing and direct-selling business. On February 6, 2006, the Company announced that it will sell its trade book publishing operations conducted by Time Warner Book Group Inc., a Time Inc. subsidiary. The sale is expected to close in the first half of 2006.

Magazines

      As of February 1, 2006, Time Inc. published over 150 magazines worldwide, approximately 45 in the U.S. and over 105 in other countries. These magazines generally appeal to the broad consumer market and include People, Sports Illustrated, Southern Living, In Style, Real Simple, Entertainment Weekly, Time, Fortune, Cooking Light and What’s On TV.

      Time Inc. expands its magazine businesses generally through the development of product extensions, new magazines and international editions, and acquisitions. Product extensions are generally managed by the individual magazines and involve, among other things, new magazines launches, specialized editions aimed at particular audiences, and distribution of editorial content through different media, such as the Internet, books and television. Many of Time Inc.’s magazine brands have developed websites to distribute editorial content published in the magazines and content new to Internet audiences.

      Time Inc. continues to invest in new magazines, including Pick Me Up, a weekly women’s magazine offering real life stories in an accessible and entertaining way, and TV Easy, a weekly compact paid-for TV listings magazine, both launched by IPC Media in the U.K. in 2005. These launches were in addition to the magazines launched in 2004, including All You, a monthly U.S. women’s magazine distributed exclusively, at this time, in Wal-Mart stores, Cottage Living, a monthly U.S. women’s lifestyle magazine, and Nuts, a weekly U.K. mass-market, lifestyle men’s magazine. Time Inc. also re-launched Life in 2004 as a weekend magazine distributed in U.S. newspapers nationwide.

      In the first quarter of 2005, Time Inc. acquired the remaining 51% equity stake it did not already own in Essence Communications Partners, the publisher of Essence, the premier magazine for African-American

women. In the third quarter of 2005, Time Inc. acquired Grupo Editorial Expansión (GEE), a publisher of consumer and business magazines in Mexico. GEE has a portfolio of 15 titles including Expansión, GEE’s flagship magazine and Mexico’s leading business magazine.

      Generally, each magazine published by Time Inc. in the U.S. has an editorial staff under the supervision of a managing editor and a business staff under the management of a president or publisher. Magazine production and distribution activities are generally centralized. Fulfillment activities for Time Inc.’s U.S. magazines are generally administered from a centralized facility in Tampa, Florida.

      Time Inc.’s major magazines are described below:

      People is a weekly magazine that reports on celebrities and other newsworthy individuals. People generated approximately 13% of Time Inc.’s revenues in 2005. People has expanded its franchise to include People en Español, a Spanish-language magazine aimed primarily at U.S. Hispanic readers, and Teen People, aimed at teenage readers. Who Weekly is an Australian version of People managed by IPC Media, Time Inc.’s consumer magazine publisher in the U.K.

      Sports Illustrated is a weekly magazine that covers sports. Sports Illustrated for Kids is a sports magazine intended primarily for pre-teenagers.

      In Style is a monthly magazine that focuses on celebrity, lifestyle, beauty and fashion. In recent years, In Style has expanded internationally by launching in Australia and the U.K. under the management of IPC Media; it is also published under license in six countries.

      Real Simple is a monthly magazine that focuses on life, home, body and soul and provides practical solutions for simplifying various aspects of busy lives. It is also published under license in three countries. In addition, Real Simple launched a weekly television series on PBS in January 2006.

      Entertainment Weekly is a weekly magazine that includes reviews and reports on movies, DVDs, video, television, music and books.

      Time is a weekly newsmagazine that summarizes the news and interprets the week’s events, both national and international. Time also has four weekly English-language editions that circulate outside the United States. Time for Kids is a current events newsmagazine for children, ages 5 to 13.

      Fortune is a bi-weekly magazine that reports on worldwide economic and business developments and compiles the annual Fortune 500 list of the largest U.S. corporations. It is also published under license in China. Other business and financial magazines include Money, a monthly magazine that reports primarily on personal finance, FSB: Fortune Small Business, which covers small business, and Business 2.0 , a magazine that reports on innovation in the worlds of business and technology.

      IPC Media, the U.K.’s leading consumer magazine publisher, publishes over 80 magazines as well as numerous special issues and guides in the U.K. and Australia. These publications are largely focused in the television listings, women’s lifestyle, celebrity, home and garden, leisure, music and men’s lifestyle sectors. IPC’s magazines include What’s On TV and TV Times in the television listings sector, Chat and Woman in the women’s lifestyle sector, Now in the celebrity sector, Woman & Home and Ideal Home in the home and garden sector, Country Life and Horse & Hound in the leisure sector, NME in the music sector, and Loaded and Nuts in the men’s lifestyle sector. In addition, IPC publishes three magazines through two unconsolidated joint ventures with Groupe Marie Claire.

      Southern Progress Corporation publishes eight magazines, including the regional lifestyle magazines Southern Living and Sunset and the specialty magazines Cooking Light and Health.

      Time4 Media publishes 17 sport and outdoor activity enthusiast magazines such as Golf, Field & Stream, Ski, Yachting, Salt Water Sportsman, Transworld Skateboarding and Transworld Snowboarding, as well as Popular Science. In addition, Time4 Media oversees the publication and production of This Old House magazine and the two television series  This Old House and Ask This Old House.

      The Parenting Group publishes Parenting and Babytalk magazines.

      Essence Communications Inc. publishes Essence magazine and produces the annual Essence Music Festival.

      GEE publishes 13 consumer and business magazines in Mexico including Expansión, Quien, a celebrity and personality magazine, Obras, an architecture, construction and engineering magazine, Life and Style, a men’s lifestyle magazine, and Balance, a fitness, health and nutrition magazine for women. In addition, GEE publishes two magazines through an unconsolidated joint venture with Hachette Filipacchi Presse S.A.

      Time Inc. also has management responsibility under a management contract for the American Express Publishing Corporation’s publishing operations, including its lifestyle magazines Travel & Leisure, Food & Wine and Departures.

      Advertising carried in Time Inc.’s U.S. magazines is predominantly consumer advertising, including toiletries and cosmetics, food, domestic and foreign automobiles, pharmaceuticals, media and movies, retail and department stores, direct response, financial services and sporting goods. In 2005, Time Inc. magazines accounted for 23.4% (compared to 24.4% in 2004) of the total U.S. advertising revenue in consumer magazines excluding Life and other newspaper supplements, as measured by the Publishers Information Bureau (PIB). People, Time and Sports Illustrated were ranked 1, 3 and 4, respectively, by PIB revenue, and Time Inc. had five of the 15 leading magazines in terms of advertising dollars.

      Through the sale of magazines to consumers, circulation generates significant revenues for Time Inc. In addition, circulation is an important component in determining Time Inc.’s advertising revenues because advertising page rates are based on circulation and readership. Most of Time Inc.’s U.S. magazines are sold primarily by subscription and delivered to subscribers through the mail. Most of Time Inc.’s international magazines are sold primarily at newsstand. Subscriptions are sold primarily through direct mail and online solicitation, subscription sales agents, marketing agreements with other companies and insert cards in Time Inc. magazines and other publications.

      Time Inc. owns approximately 92% of Synapse Group, Inc. (“Synapse”), a leading seller of magazine subscriptions to Time Inc. magazines and magazines of other publishers in the U.S. Synapse sells magazine subscriptions principally through marketing relationships with credit card issuers, consumer catalog companies, commercial airlines with frequent flier programs, retailers and Internet businesses. Under the relevant agreements, in April 2006 the Synapse minority shareholders have the right to require Time Inc. to purchase their entire remaining interest in Synapse (the “Synapse Put”), and in May 2006 Time Inc. has the right to require the Synapse shareholders to sell their entire interest in Synapse to Time Inc. (the “Time Inc. Call”). The price to be paid upon exercise of either the Synapse Put or the Time Inc. Call would be based upon Synapse’s earnings for 2005.

      Newsstand sales of magazines, which are reported as a component of Subscription revenues, are sold through traditional newsstands as well as other retail outlets such as Wal-Mart, supermarkets and convenience and drug stores, and may or may not result in repeat purchases. Time/Warner Retail Sales & Marketing Inc. distributes and markets copies of Time Inc. magazines and books and certain other publishers’ magazines and books through third-party wholesalers primarily in the U.S. and Canada. Wholesalers, in turn, sell Time Inc. magazines to the retail segments noted above. Marketforce (UK) Ltd distributes and markets copies of all IPC magazines, some international Time Inc. editions and certain other publishers’ magazines outside of the U.S. and Canada, which copies are sold through third-party wholesalers to retail outlets such as supermarkets and newsagents.

      Paper constitutes a significant component of physical costs in the production of magazines. During 2005, Time Inc. purchased over half a million tons of paper principally from four independent manufacturers.

      Printing and binding for Time Inc. magazines are performed primarily by major domestic and international independent printing concerns in multiple locations in the U.S. and in nine other countries. Magazine printing contracts are either fixed-term or open-ended at fixed prices with, in some cases, adjustments based on certain criteria.

Direct Marketing and Selling

      Through subsidiaries, Time Inc. conducts direct-marketing and direct-selling businesses. In addition to selling magazine subscriptions, Synapse is a direct marketer of consumer products, including software, DVDs and other merchandise.

      Southern Living At Home, the direct selling division of Southern Progress Corporation, specializes in home décor products that are sold in the U.S. through more than 35,000 independent consultants at parties hosted in people’s homes.

      Book-of -the-Month Club, Inc. (“BOMC”) has a 50-50 joint venture with Bertelsmann’s Doubleday Direct, Inc. to operate the U.S. book clubs of BOMC and Doubleday jointly. The joint venture, named Bookspan, acquires the rights to manufacture and sell books to consumers through clubs. Bookspan operates its own fulfillment and warehousing operations in Pennsylvania. Under the relevant agreements, in January of each year either Bertelsmann or the Company may elect to terminate the venture by giving notice during specified termination periods. If such an election is made by either party, a confidential bid process will take place pursuant to which the highest bidder will purchase the other party’s entire venture interest. The Company is unable to predict whether this bid process will occur or the amount that may be paid out or received under it.

Books

      On February 6, 2006, the Company announced that it will sell its trade book publishing business conducted by the Time Warner Book Group Inc. (“TWBG”) to Hachette for $538 million, subject to working capital adjustments. The transaction is expected to close in the first half of 2006.

      Time Inc.’s trade book publishing operations have been conducted primarily by TWBG’s three major publishing houses, Warner Books, Little, Brown and Company and Time Warner Book Group UK. During 2005, TWBG placed a record 69 books on The New York Times bestseller list, including Blink by Malcolm Gladwell, The Historian by first time author Elizabeth Kostova and Your Best Life Now by Joel Osteen. In addition, new releases from many of its major recurring bestselling authors made the list, including David Baldacci, Michael Connelly, Nelson DeMille, James Patterson and Nicholas Sparks. TWBG also handles book distribution for Little, Brown and Warner Books, as well as Disney, Microsoft and other publishers, through its distribution center in Indiana.

      The how-to, lifestyle and special commemorative book publishing businesses of Oxmoor House, Leisure Arts and Sunset Books, which are operated by Southern Progress Corporation, are not being sold as part of the sale of TWBG.

Postal Rates

      Postal costs represent a significant operating expense for the Company’s magazine publishing and direct-marketing activities. In 2005, the Company spent over $350 million for services provided by the U.S. Postal Service. The U.S. Postal Service has implemented a postal rate increase of 5.4% effective January 8, 2006. These costs are not directly passed on to magazine subscribers. Time Inc. strives to minimize postal expense

through the use of certain cost-saving activities with respect to address quality, mail preparation and delivery of products to postal facilities.

Competition

      Time Inc. faces significant competition from several direct competitors and other media, including the Internet. Time Inc.’s magazine operations compete for circulation and audience with numerous other magazine publishers and other media. Time Inc.’s magazine operations also compete with other magazine publishers and other media for advertising directed at the general public and at more focused demographic groups. The magazine publishing business presents few barriers to entry and many new magazines are launched annually across multiple sectors. In recent years competitors launched and/or repositioned many magazines, primarily in the celebrity and women’s service sectors, that compete directly with People, In Style, Real Simple and other Time Inc. magazines, particularly at newsstand checkouts in mass-market retailers. Time Inc. anticipates that it will face continuing competition from these new competitors and additional competitors may enter the magazine business and further intensify competition.

      Time Inc.’s direct-marketing operations compete with other direct marketers through all media, including the Internet, for the consumer’s attention.

OTHER ASSETS

      The Company also has an aggregate equity interest in Time Warner Telecom Inc. (“Time Warner Telecom”) of approximately 44% and an aggregate voting interest (consisting of high-voting common stock) of approximately 71%. Time Warner Telecom is a provider of managed network solutions to business customers and organizations in 44 metropolitan markets across the United States. Time Warner Telecom integrates data, dedicated Internet access, and local and long distance voice services for long distance carriers, wireless communications companies, incumbent local exchange carriers and various organizations in the public and private sector. The Company’s nominees to the Board of Directors of Time Warner Telecom are limited to less than a majority by the terms of a stockholder agreement, and Time Warner Telecom is a separately-managed public company whose stock is traded through Nasdaq. Its financial results are not consolidated with those of the Company. The Company has determined that it does not consider its interest in Time Warner Telecom to be strategic and has so advised Time Warner Telecom.

INTELLECTUAL PROPERTY

      Time Warner Inc. is one of the world’s leading creators, owners and distributors of intellectual property. The Company’s vast intellectual property assets include copyrights in motion pictures, television programs, books, magazines and software; trademarks in names, logos and characters; patents or patent applications for inventions related to its products and services; and licenses of intellectual property rights of various kinds. These intellectual property assets, both in the U.S. and in other countries around the world, are among the Company’s most valuable assets. The Company derives value from these assets through a range of business models, including the theatrical release of films, the licensing of its films and television programming to multiple domestic and international television and cable networks and pay television services, and the sale of products such as DVDs and magazines. It also derives revenues related to its intellectual property through advertising in its magazines, networks, cable systems and online services and from various types of licensing activities, including licensing of its trademarks and characters. To protect these assets, the Company relies upon a combination of copyright, trademark, unfair competition, patent and trade secret laws and contract provisions. The duration of the protection afforded to the Company’s intellectual property depends on the type of property in question and the laws and regulations of the relevant jurisdiction; in the case of licenses, it also depends on contractual and/or statutory provisions.

      The Company vigorously pursues all appropriate avenues of protection for its intellectual property. However, there can be no assurance of the degree to which these measures will be successful in any given case. Policing unauthorized use of the Company’s intellectual property is often difficult and the steps taken may not

in every case prevent misappropriation. Piracy, particularly in the digital environment, continues to present a threat to revenues from products and services based on intellectual property. The Company seeks to limit that threat through a combination of approaches, including offering legitimate market alternatives, applying digital rights management technologies, pursuing legal sanctions for infringement, promoting appropriate legislative initiatives, and enhancing public awareness of the meaning and value of intellectual property. The Company works with various cross-industry groups and trade associations, as well as with strategic partners to develop and implement technological solutions to control digital piracy.

      Third parties may bring intellectual property infringement claims or challenge the validity or scope of the Company’s intellectual property from time to time, and such challenges could result in the limitation or loss of intellectual property rights. In addition, domestic and international laws, statutes and regulations are constantly changing, and the Company’s assets may be either adversely or beneficially affected by such changes. Moreover, effective intellectual property protection may be either unavailable or limited in certain foreign territories. The Company therefore engages in efforts to strengthen and update intellectual property protection around the world, including efforts to ensure effective and appropriately tailored remedies for infringement.

REGULATION AND LEGISLATION

      The Company’s cable system, cable and broadcast television network, original programming and Internet businesses are subject, in part, to regulation by the Federal Communications Commission (“FCC”), and the cable system business is also subject to regulation by most local and some state governments where the Company has cable systems. The Company’s magazine and other direct marketing activities are also subject to regulation. In addition, in connection with regulatory clearance of the AOL-Historic TW Merger, the Company’s cable system and Internet businesses are subject to the terms of the Consent Decree (the “Consent Decree”) issued by the Federal Trade Commission (“FTC”), the Memorandum Opinion and Order (“Order”) issued by the FCC, as well as other conditions that have been fully satisfied and are no longer relevant. The Company is also subject to an FTC consent decree (the “Turner Consent Decree”) as a result of the FTC’s approval of the acquisition of Turner Broadcasting System, Inc. in 1996.

      The following is a summary of the terms of these orders as well as current significant federal, state and local laws and regulations affecting the growth and operation of these businesses. In addition, various legislative and regulatory proposals under consideration from time to time by Congress and various federal agencies have in the past materially affected, and may in the future materially affect, the Company.

FTC Consent Decree

      In December 2000, the FTC issued a Consent Decree in connection with the AOL-Historic TW Merger. The consent decree provided that, with the exception of Road Runner, Time Warner Cable was not permitted to launch an affiliated ISP, like the AOL for Broadband service, in the majority of its operating area until it launched the EarthLink service, an unaffiliated ISP, on those systems. The Consent Decree also provided that for those systems, Time Warner Cable was required to enter into agreements with two additional unaffiliated ISPs within 90 days after launching an affiliated ISP. In addition, the Consent Decree required that, in its remaining systems, Time Warner Cable had to enter into agreements with three unaffiliated providers within 90 days after launching an affiliated ISP.

      Time Warner Cable has now entered into, and received FTC approval for, agreements with the required number of unaffiliated ISPs in all covered systems. If any of the required agreements expires or is terminated during the term of the Consent Decree, Time Warner Cable will be required to replace it with another approved agreement.

      The Consent Decree also requires that Time Warner Cable’s FTC-approved agreements contain a provision that requires Time Warner Cable to give notice to the unaffiliated ISPs if Time Warner enters into an agreement for AOL to provide ISP Service, as defined under the Decree, with any one of six specified cable operators. In that event, the Company is required to give each unaffiliated ISP the option to adopt all

terms and conditions of the relevant AOL ISP Service agreement. In addition, the Consent Decree requires that Time Warner continue to offer and promote DSL service in areas served by Time Warner Cable to the same extent and on terms comparable to the terms offered in areas not served by Time Warner Cable. AOL is also prohibited from entering into agreements with cable MSOs that restrict the ability of that MSO to enter into agreements with other ISPs or interactive television providers. The Company’s obligations under the Consent Decree expire on April 17, 2006.

FCC Memorandum Opinion and Order

      In January 2001, the FCC issued an Order imposing certain requirements regarding Time Warner Cable’s provision of ISPs with which Time Warner Cable has entered into distribution agreements. Specifically, the Order requires Time Warner Cable to provide consumers with a list of available ISPs upon request, to allow such ISPs to determine the content on their first screen, and to allow such ISPs to have direct billing arrangements with the subscribers they obtain. The Order prohibits Time Warner Cable from requiring customers to go through an affiliated ISP to reach an unaffiliated ISP, from requiring such ISPs to include particular content, and from discriminating on the basis of affiliation with regard to technical system performance.

      In addition, the FCC’s Order prohibits the Company from entering into any agreement with Comcast that gives any ISP affiliated with the Company exclusive carriage rights on any former AT&T cable system for broadband ISP services or that affects Comcast’s ability to offer rates or other carriage terms to ISPs that are not affiliated with the Company.

Turner FTC Consent Decree

      The Company is also subject to the terms of a consent decree (the “Turner Consent Decree”) entered in connection with the FTC’s approval of the acquisition of Turner by Historic TW in 1996. Certain requirements imposed by the Turner Consent Decree, such as carriage commitments for Time Warner Cable for the rollout of at least one independent national news video programming service, have been fully satisfied by the Company. Various other conditions remain in effect, including certain restrictions that prohibit the Company from offering programming upon terms that (1) condition the availability of, or the carriage terms for, the HBO service upon whether a multichannel video programming distributor carries a video programming service affiliated with Turner; and (2) condition the availability of, or the carriage terms for, CNN, TBS and TNT upon whether a multichannel video programming distributor carries any video programming service affiliated with TWE. The Turner Consent Decree also imposes certain restrictions on the terms by which a Turner video programming service may be offered to an unaffiliated programming distributor that competes in areas served by Time Warner Cable.

      Other conditions of the Turner Consent Decree prohibit Time Warner Cable from requiring, as a condition of carriage, that any national video programming vendor provide a financial interest in its programming service or that such programming vendor provide exclusive rights against any other multichannel programming distributor. In addition, Time Warner Cable may not discriminate on the basis of affiliation in the selection, terms or conditions of carriage for national video programming vendors.

      The Turner Consent Decree also requires that any Time Warner stock held by Liberty Media Corporation (“Liberty”), its former corporate parent, Tele-Communications, Inc. (“TCI”), which was merged with AT&T in 1999 and was subsequently acquired by Comcast in 2002, as well as by the late Bob Magness and John C. Malone as individuals, be non-voting except that such securities are entitled to a vote of one-one hundredth (1/100) of a vote per share owned when voting with the outstanding common stock on the election of directors and a vote equal to the vote of the common stock with respect to corporate matters that would adversely change the rights or terms of these non-voting securities. Upon the sale of these non-voting securities to any independent third party, the securities may be converted into voting stock of Time Warner. The Turner Consent Decree also prohibits Liberty, TCI (now Comcast), the late Bob Magness and John C. Malone as individuals, from holding ownership interests, collectively, of more than 9.2% of the fully diluted equity of Time Warner. In 2002, Liberty sought to eliminate these restrictions from the Turner Consent Decree; the petition was denied by the FTC without prejudice.

      The Turner Consent Decree was modified by the FTC on December 21, 2004, upon application by Liberty, to permit Liberty to lend to a third party the Company common stock into which the non-voting stock held by it is convertible, provided that Liberty has no right to vote or to direct the voting of the loaned common stock and will not directly or indirectly influence or attempt to influence the voting of such stock. The Turner Consent Decree will expire in February 2007. On February 16, 2006, Liberty filed a petition with the FTC seeking to terminate the Turner Consent Decree as it applies to Liberty in advance of the 2007 expiration, including all voting restrictions on its Time Warner stock holdings, based on changed circumstances.

Cable System Regulation

      The Communications Act of 1934, as amended (the “Communications Act”), and the regulations and policies of the FCC affect significant aspects of Time Warner Cable’s operations, including video subscriber rates; carriage of broadcast television stations, as well as the way Time Warner Cable sells its video program packages to subscribers; the use of cable systems by franchising authorities and other third parties; cable system ownership; offering of voice and high-speed data services; and use of utility poles and conduits.

      Subscriber Rates. The Communications Act and the FCC’s rules regulate rates for basic cable service and equipment in communities that are not subject to “effective competition,” as defined by federal law. Where there is no effective competition, federal law authorizes franchising authorities to regulate the monthly rates charged by the operator for the minimum level of video programming service, referred to as basic service, which generally includes local broadcast channels and public access or educational and government channels required by the franchise. This kind of regulation also applies to the installation, sale and lease of equipment used by subscribers to receive basic service, such as set-top boxes and remote control units. In many localities, Time Warner Cable is no longer subject to this rate regulation, either because the local franchising authority has not become certified by the FCC to regulate these rates or because the FCC has found that there is effective competition.

      Carriage of Broadcast Television Stations and Other Programming Regulation. The Communications Act and the FCC’s regulations contain broadcast signal carriage requirements that allow local commercial television broadcast stations to elect once every three years to require a cable system to carry their stations, subject to some exceptions, or to negotiate with cable systems the terms by which the cable systems may carry their stations, commonly called “retransmission consent.” The most recent election by broadcasters became effective on January 1, 2006.

      The Communications Act and the FCC’s regulations require a cable operator to devote up to one-third of its activated channel capacity for the mandatory carriage of local commercial television stations. The Communications Act and the FCC’s regulations give local non-commercial television stations mandatory carriage rights, but non-commercial stations do not have the option to negotiate retransmission consent for the carriage of their signals by cable systems. Additionally, cable systems must obtain retransmission consent for all “distant” commercial television stations (i.e., those television stations outside the DMA to which a community is assigned) except for commercial satellite-delivered independent “superstations” and some low-power television stations.

      FCC regulations require Time Warner Cable to carry the signals of both commercial and non-commercial local digital-only broadcast stations and the digital signals of local broadcast stations that return their analog spectrum to the government and convert to a digital broadcast format. The FCC’s rules give digital-only broadcast stations discretion to elect whether the operator will carry the station’s primary signal in a digital or converted analog format, and the rules also permit broadcasters with both analog and digital signals to tie the carriage of their digital signals to the carriage of their analog signals as a retransmission consent condition.

      The Communications Act also permits franchising authorities to negotiate with cable operators for channels for public, educational and governmental access programming. Moreover, it requires a cable system

with 36 or more activated channels to designate a significant portion of its channel capacity for commercial leased access by third parties to provide programming that may compete with services offered by the cable operator. The FCC regulates various aspects of such third-party commercial use of channel capacity on Time Warner Cable’s cable systems, including the rates and some terms and conditions of the commercial use.

      High-Speed Internet Access. From time to time, industry groups, telephone companies and ISPs have sought local, state and federal regulations that would require cable operators to sell capacity on their systems to ISPs under a common carrier regulatory scheme. Cable operators have successfully challenged regulations requiring this “forced access,” although courts that have considered these cases have employed varying legal rationales in rejecting these regulations.

      In 2002, the FCC released an order in which it determined that cable-modem service constitutes an “information service” rather than a “cable service” or a “telecommunications service,” as those terms are used in the Communications Act. That determination has now been largely sustained by the U.S. Supreme Court. According to the FCC, an “information service” classification may permit but does not require it to impose “multiple ISP” requirements. In 2002, the FCC initiated a rulemaking proceeding to consider whether it may and should do so and whether local franchising authorities should be permitted to do so. This rulemaking proceeding remains pending.

      In 2005, the FCC adopted a Policy Statement intended to offer guidance on its approach to the Internet and broadband access. Among other things, the Policy Statement stated that consumers are entitled to competition among network, service and content providers, and to access the lawful content and services of their choice, subject to the needs of law enforcement. The FCC may in the future adopt specific regulations to implement the Policy Statement.

      Ownership Limitations. There are various rules prohibiting joint ownership of cable systems and other kinds of communications facilities. Local telephone companies generally may not acquire more than a small equity interest in an existing cable system in the telephone company’s service area, and cable operators generally may not acquire more than a small equity interest in a local telephone company providing service within the cable operator’s franchise area. In addition, cable operators may not have more than a small interest in “multichannel multipoint distribution services” facilities or “satellite master antenna television” systems in their service areas. Finally, the FCC has been exploring whether it should prohibit cable operators from holding ownership interests in satellite operators.

      The Communications Act also required the FCC to adopt “reasonable limits” on the number of subscribers a cable operator may reach through systems in which it holds an ownership interest. In September 1993, the FCC adopted a rule that was later amended to prohibit any cable operator from serving more than 30% of all cable, satellite and other multi-channel subscribers nationwide. The Communications Act also required the FCC to adopt “reasonable limits” on the number of channels that cable operators may fill with programming services in which they hold an ownership interest. In September 1993, the FCC imposed a limit of 40% of a cable operator’s first 75 activated channels. In March 2001, a federal appeals court struck down both limits and remanded the issue to the FCC for further review. The FCC initiated a rulemaking in 2001 to consider adopting a new horizontal ownership limit and recently announced a follow-on proceeding to consider the issue anew. The FCC is currently exploring whether it should re-impose any limits. The Company believes that it is unlikely that the FCC will adopt limits more stringent than those struck down.

      Local telephone companies may provide service as traditional cable operators with local franchises or they may opt to provide their programming over unfranchised “open video systems.” Open video systems are subject to specified requirements, including, but not limited to, a requirement that they set aside a portion of their channel capacity for use by unaffiliated program distributors on a non-discriminatory basis. A federal appellate court overturned various parts of the FCC’s open video rules, including the FCC’s preemption of local franchising requirements for open video operators. The FCC has modified its open video rules to comply with the federal court’s decision.

      Pole Attachment Regulation. The Communications Act requires that utilities provide cable systems and telecommunications carriers with nondiscriminatory access to any pole, conduit or right-of -way controlled by

investor-owned utilities. The Communications Act also requires the FCC to regulate the rates, terms and conditions imposed by these utilities for cable systems’ use of utility pole and conduit space unless state authorities demonstrate to the FCC that they adequately regulate pole attachment rates, as is the case in some states in which Time Warner Cable operates. In the absence of state regulation, the FCC administers pole attachment rates on a formula basis. The FCC’s original rate formula governs the maximum rate utilities may charge for attachments to their poles and conduit by cable operators providing cable services. The FCC also adopted a second rate formula that became effective in February 2001 and governs the maximum rate investor-owned utilities may charge for attachments to their poles and conduit by companies providing telecommunications services. Any increase in attachment rates resulting from the FCC’s new rate formula is being phased in (in equal annual installments) over a five-year period that began in February 2001. The U.S. Supreme Court has upheld the FCC’s jurisdiction to regulate the rates, terms and conditions of cable operators’ pole attachments that are being used to provide both cable service and high-speed data service.

      Other Regulatory Requirements of the Communications Act and the FCC. The Communications Act also includes provisions regulating customer service, subscriber privacy, marketing practices, equal employment opportunity, technical standards and equipment compatibility, antenna structure notification, marking, lighting, emergency alert system requirements and the collection from cable operators of annual regulatory fees, which are calculated based on the number of subscribers served and the types of FCC licenses held.

      Certain regulatory requirements are also applicable to set-top boxes. Currently, many cable subscribers rent from their cable operator a set-top box that performs both signal-reception functions and conditional-access security functions. The lease rates cable operators charge for this equipment are subject to rate regulation to the same extent as basic cable service. In 1996, Congress enacted a statute seeking to allow subscribers to use set-top boxes obtained from third-party retailers. The most important of the FCC’s implementing regulations requires cable operators to offer separate equipment providing only the security function (so that subscribers can purchase set-top boxes or other navigational devices from other sources) and to cease placing into service new set-top boxes that have integrated security. The regulations requiring cable operators to cease distributing set-top boxes with integrated security are currently scheduled to go into effect on July 1, 2007. In addition, the FCC recently ordered the cable industry to investigate and report on the possibility of implementing a downloadable security system that would be accessible to all set-top devices. If the implementation of such a system proves technologically feasible, this may eliminate the need for consumers to lease separate conditional-access security devices.

      In December 2002, cable operators and consumer-electronics companies entered into a standard-setting agreement relating to interoperability between cable systems and reception equipment. Among other things, the agreement envisions consumer electronics devices with a slot for a conditional-access security card — a CableCARD( ^tm ) — provided by the cable operator. To implement the agreement, the FCC promulgated regulations that: require cable systems with activated spectrum of 750 MHz or greater to support unidirectional digital devices; establish a voluntary labeling system for unidirectional devices; prohibit so-called “selectable output controls”; and adopt content-encoding rules. The FCC has issued a further notice of proposed rulemaking to consider additional changes. Cable operators, consumer-electronics companies and other market participants are holding discussions that may lead to a similar set of interoperability agreements covering digital devices capable of carrying cable operators’ two-way and interactive products and services.

      Separately, the FCC has adopted cable inside wiring rules to provide specific procedures for the disposition of residential home wiring and internal building wiring where a subscriber terminates service or where an incumbent cable operator is forced by a building owner to terminate service in a multiple dwelling unit building. The FCC has also adopted rules providing that, in the event that an incumbent cable operator sells the inside wiring, it must make the wiring available to the multiple dwelling unit owner or the alternative cable service provider during the 24-hour period prior to the actual service termination by the incumbent, in order to avoid service interruption.

      Compulsory Copyright Licenses for Carriage of Broadcast Stations and Music Performance Licenses. Time Warner Cable’s cable systems provide subscribers with, among other things, local and distant television broadcast stations. Time Warner Cable generally does not obtain a license to use the copyrighted perform-

ances contained in these stations’ programming directly from program owners. Instead, it obtains this license pursuant to a compulsory license provided by federal law, which requires it to make payments to a copyright pool. The elimination or substantial modification of the cable compulsory license could adversely affect Time Warner Cable’s ability to obtain suitable programming and could substantially increase the cost of programming that remains available for distribution to its subscribers.

      When Time Warner Cable obtains programming from third parties, it generally obtains licenses that include any necessary authorizations to transmit the music included in it. When Time Warner Cable creates its own programming and provides various other programming or related content, including local origination programming and advertising that it inserts into cable-programming networks, it is required to obtain any necessary music performance licenses directly from the rights holders. These rights are generally controlled by three music performance rights organizations, each with rights to the music of various composers. Time Warner Cable generally has obtained the necessary licenses, either through negotiated licenses or through procedures established by consent decrees entered into by some of the music performance rights organizations.

      Cable operators operate their systems under non-exclusive franchises. Franchises are awarded, and cable operators are regulated, by municipal or other franchising authorities. In some states, cable regulation is imposed at the state level as well. The Company believes it generally has good relations with state and local cable regulators.

      Franchise agreements typically require payment of franchise fees and contain regulatory provisions addressing, among other things, upgrades, service quality, cable service to schools and other public institutions, insurance and indemnity bonds. The terms and conditions of cable franchises vary from jurisdiction to jurisdiction. The Communications Act provides protections against many unreasonable terms. In particular, the Communications Act imposes a ceiling on franchise fees of five percent of revenues derived from cable service. Time Warner Cable generally passes the franchise fee on to its subscribers, listing it as a separate item on the bill.

      Franchise agreements usually have a term of ten to 15 years from the date of grant, although some renewals may be for shorter terms. Franchises usually are terminable only if the cable operator fails to comply with material provisions. Time Warner Cable has not had a franchise terminated due to breach. After a franchise agreement expires, a franchising authority may seek to impose new and more onerous requirements, including requirements to upgrade facilities, to increase channel capacity and to provide various new services. Federal law, however, provides significant substantive and procedural protections for cable operators seeking renewal of their franchises. In addition, although Time Warner Cable occasionally reaches the expiration date of a franchise agreement without having a written renewal or extension, it generally has the right to continue to operate, either by agreement with the franchising authority or by law, while continuing to negotiate a renewal. In the past, substantially all of the material franchises relating to its systems have been renewed by the relevant local franchising authority, though sometimes only after significant time and effort. Despite its efforts and the protections of federal law, it is possible that some Time Warner Cable franchises may not be renewed, and Time Warner Cable may be required to make significant additional investments in its cable systems in response to requirements imposed in the course of the franchise renewal process.

      Franchises usually require the consent of franchising authorities prior to the sale, assignment, transfer or change of control of a cable system. Federal law imposes various limitations on the conditions local authorities may impose and requires localities to act on such requests within 120 days, provided that information requested by the local franchising authorities is timely provided. Time Warner Cable, Adelphia and Comcast are seeking the consents of local franchising authorities in connection with the Adelphia acquisition and related cable swaps, as applicable, described in greater detail below, through the submission of FCC Form 394s, where applicable. Notwithstanding the submission of any such FCC Form 394s, Time Warner Cable, Adelphia and Comcast reserve their rights to seek the application of Section 365 of the Bankruptcy Code, including a provision which may serve to override consent provisions which may be contained in certain

franchise agreements, to the transfer of Adelphia’s franchise agreements or otherwise assert that local franchising authorities’ consent is not required under the terms of a particular franchise agreement.

      As of December 31, 2005, it was unclear whether and to what extent regulators will subject services like TWC Inc.’s Digital Phone (“Non-traditional Voice Services”) to the regulations that apply to traditional circuit switch telephone service provided by incumbent telephone companies. In February 2004, the FCC opened a rulemaking proceeding to consider these and other issues. This proceeding remains pending. In November 2004, the FCC issued an order preempting certain kinds of state regulation of Non-traditional Voice Services, including state requirements to obtain a certificate and to file a tariff. The order did not decide, however, what federal rules should apply to Non-traditional Voice Services. In particular, there is uncertainty as to whether and to what extent the “access charge” and “universal service” rules that apply to traditional circuit switch telephone service will also apply to Non-traditional Voice Services. It is also possible that regulators will allow utility pole owners to charge cable operators offering Non-traditional Voice Services higher rates for pole rental than for traditional cable service and cable-modem service. In May 2005, the FCC adopted rules requiring Non-traditional Voice Service providers to supply enhanced 911 (E911) capabilities as a standard feature to their subscribers. Additionally, Non-traditional Voice Service providers must obtain affirmative acknowledgement from all subscribers that they have been advised of the circumstances under which E911 service may not be available. In August 2005, the FCC adopted an order requiring certain types of Non-traditional Voice Services, as well as facilities-based broadband Internet access service providers, to assist law enforcement investigations through compliance with the Communications Assistance For Law Enforcement Act.

Network Regulation

      Under the Communications Act and its implementing regulations, vertically integrated cable programmers like the Turner Networks and the Home Box Office Services, are generally prohibited from offering different prices, terms, or conditions to competing unaffiliated multichannel video programming distributors unless the differential is justified by certain permissible factors set forth in the regulations. The rules also place certain restrictions on the ability of vertically integrated programmers to enter into exclusive distribution arrangements with cable operators. Certain other federal laws also contain provisions relating to violent and sexually explicit programming, including provisions relating to the voluntary promulgation of ratings by the industry and requiring manufacturers to build television sets with the capability of blocking certain coded programming (the so-called “V-chip”).

Marketing Regulation

      Time Inc.’s magazine and book marketing activities, as well as marketing and billing activities by AOL and other divisions of the Company, are subject to regulation by the FTC and each of the state Attorneys General under general consumer protection statutes prohibiting unfair or deceptive acts or practices. Certain areas of marketing activity are also subject to specific federal statutes and rules, such as the Telephone Consumer Protection Act, the Children’s Online Privacy Protection Act, the Gramm-Leach-Bliley Act (relating to financial privacy), the FTC Mail or Telephone Order Merchandise Rule and the FTC Telemarketing Sales Rule. There are also certain other statutes and rules that regulate conduct in areas such as privacy, data security and telemarketing. In addition, Time Inc. regularly receives and resolves routine inquiries from state Attorneys General and is subject to agreements with state Attorneys General addressing some of Time Inc.’s marketing activities. Certain of Time Inc.’s specific marketing methods, such as automatic subscription renewal and free trial, are being examined by the Attorneys General of several states. Also, Time Inc. has pending with the FTC a response to a Civil Investigative Demand relating to Time Inc.’s retail subscription sales partnership with Best Buy. AOL is also subject to a 2004 FTC Consent Decree, a 1998 FTC Consent Decree and Assurances of Voluntary Compliance with state governments regarding AOL’s

marketing and billing activities, including its cancel/save processes, billing practices, rebates and other marketing promotions.

      AOL is subject to certain consent orders and assurances of voluntary compliance or discontinuance reached with federal and state regulators. These orders and assurances relate to AOL’s marketing and billing activities, including its cancel/save processes, billing practices, rebates, other marketing promotions and processing of consumer complaints. In 1998, AOL entered into an FTC Consent Decree regarding service access, billing authorization, and disclosures. In 2004, AOL entered into a Consent Decree with the FTC related to the company’s cancellation and rebate practices. AOL has also entered into a series of settlements with State Attorneys General. In 1998, AOL entered an Assurance of Voluntary Compliance (“AVC”) with the Attorneys General of 44 states related to cancellation policies and procedures, free trial offers and premium services. In 2005, AOL entered into agreements settling investigations by the Attorneys General of Ohio and New York. Both agreements require that AOL resolve certain consumer complaints, and the New York agreement also requires that AOL change its retention consultant compensation practices and implement a system of third party verification for certain save processes. AOL from time to time also is subject to investigations by various state regulators regarding consumer protection issues related to marketing and billing matters. In December 2005, AOL was informed of a multi-state investigation related to marketing and billing matters.

DESCRIPTION OF CERTAIN PROVISIONS OF AGREEMENTS

RELATED TO TWC INC.

Background

      Time Warner Cable Inc., referred to herein as TWC Inc., was created in connection with the March 31, 2003 restructuring (the “TWE Restructuring”) of Time Warner Entertainment Company, L.P. (“TWE”), a limited partnership which formerly held a substantial portion of the Company’s filmed entertainment and cable television assets.

      Among other things, as a result of the TWE Restructuring, all of Time Warner’s interests in cable, including those that were wholly owned and those that were held through TWE, became controlled by TWC Inc. As part of the TWE Restructuring, Time Warner received a 79% economic interest in TWC Inc.’s cable systems and TWE, which continues to own the interests in the cable systems that it held prior to the TWE Restructuring, became a subsidiary of TWC Inc. In exchange for the 27.64% stake in TWE previously held by Comcast, TWC Inc. issued to Comcast, among other things, a 21% effective interest in TWC Inc.’s business, consisting of a 17.9% stock interest in TWC Inc. and a 4.7% limited partnership interest in TWE. Under the arrangements entered into by Comcast as part of the process of obtaining FCC approval of Comcast’s acquisition of AT&T Broadband, Comcast (and/or the Comcast trust referred to below) is obligated to take steps to dispose of its entire interest in TWC Inc. and TWE held by Comcast (or such Comcast trust) in an orderly process by November 2007, and in any event by May 2008.

      In connection with the TWE Restructuring, Comcast also received Series A Mandatorily Convertible Preferred Stock of Time Warner which, in accordance with its terms, automatically converted on March 31, 2005 into 83,835,883 shares of Time Warner common stock valued at $1.5 billion at the time of conversion.

Adelphia/Comcast

      In April 2005, a subsidiary of TWC Inc., TW NY, and Comcast entered into separate definitive agreements (collectively, the “Adelphia Agreements”) to collectively acquire substantially all the assets of Adelphia, which is currently in bankruptcy, for a total of $12.7 billion in cash (of which TW NY will pay $9.2 billion and Comcast will pay the remaining $3.5 billion) and 16% of the common stock of TWC Inc. (the “Adelphia Acquisition”). The purchase price is subject to customary adjustments to reflect changes in Adelphia’s net liabilities and subscribers as well as any shortfall in Adelphia’s capital expenditure spending

relative to its budget during the interim period between the execution of the Adelphia Agreements and the closing of the Adelphia Acquisition.

      At the same time that Comcast and TW NY entered into the Adelphia Agreements, Comcast, TWC Inc. and/or their respective affiliates entered into agreements providing for the redemption of Comcast’s interests in TWC Inc. and TWE (the “TWC Redemption Agreement” and the “TWE Redemption Agreement,” respectively, and, collectively, the “Redemption Agreements”). Specifically, Comcast’s 17.9% interest in TWC Inc. will be redeemed in exchange for 100% of the capital stock of a subsidiary of TWC Inc. holding cable systems serving approximately 587,000 subscribers (as of December 31, 2004), as well as approximately $1.9 billion in cash. In addition, Comcast’s 4.7% residual equity interest in TWE will be redeemed in exchange for 100% of the equity interests in a subsidiary of TWE holding cable systems serving approximately 168,000 subscribers (as of December 31, 2004), as well as approximately $133 million in cash. TWC Inc., Comcast and their respective subsidiaries will also swap certain cable systems to enhance their respective geographic clusters of subscribers (“Cable Swaps”).

      After giving effect to the transactions, TWC Inc. will gain systems passing approximately 7.5 million homes, with approximately 3.5 million basic subscribers (in each case, as of December 31, 2004). TWC Inc. will then manage a total of approximately 14.4 million basic subscribers. Time Warner will own 84% of TWC Inc.’s common stock (including 83% of the outstanding TWC Inc. Class A Common Stock (the “TWC Class A Common Stock”), which will become publicly traded at the time of closing, and all outstanding shares of TWC Inc. Class B Common Stock (the “TWC Class B Common Stock”)) and will also own a $2.9 billion indirect non-voting economic interest in TW NY.

      These transactions (referred to collectively as the “Adelphia Transactions”) are subject to customary regulatory review and approvals, including FCC and local franchise approvals, as well as, in the case of the Adelphia Acquisition, the Adelphia bankruptcy process, which involves approvals by the bankruptcy court having jurisdiction over Adelphia’s Chapter 11 case and by Adelphia’s creditors. Hart-Scott-Rodino Act antitrust review has been completed. Closing of the Adelphia Transactions is expected during the second quarter of 2006.

      The Adelphia Acquisition is not dependent on the closing of the Cable Swaps or the transactions contemplated by the Redemption Agreements. Furthermore, if Comcast fails to obtain certain necessary governmental authorizations, TW NY has agreed to acquire the cable operations of Adelphia that would have been acquired by Comcast, with the purchase price payable in cash or TWC Inc. stock at TW NY’s discretion.

      In addition to entering into the agreements to purchase substantially all of Adelphia’s assets, the Redemption Agreements and the Cable Swap agreements described above, in April 2005 TWC Inc. and Comcast amended certain pre-existing agreements. The objective of these amendments is to terminate these agreements contingent upon the completion of the transactions provided for in the Redemption Agreements. The following brief description of these agreements does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of such agreements.

      Registration Rights Agreement. In conjunction with the TWE Restructuring, TWC Inc. granted Comcast and certain affiliates registration rights related to the shares of TWC Class A Common Stock acquired by Comcast in the TWE Restructuring. In connection with the entry into the TWC Redemption Agreement, Comcast generally has agreed not to exercise or pursue registration rights with respect to the TWC Class A Common Stock owned by it until the earlier of the date upon which the TWC Redemption Agreement is terminated in accordance with its terms and the date upon which TWC Inc.’s offering of equity securities to the public for cash for its own account in one or more transactions registered under the Securities Act of 1933 (the “Securities Act”) exceeds $2.1 billion. TWC Inc. does, however, have an obligation to file a shelf registration statement on June 1, 2006 covering all of the shares of the TWC Class A Common Stock if the TWC Redemption has not occurred as of such date.

      Tolling and Optional Redemption Agreements. A subsidiary of TWC Inc., Comcast and certain of its affiliates entered into an amendment (the “Second Tolling Amendment”) to the Tolling and Optional Redemption Agreement, dated as of September 24, 2004, as amended, pursuant to which the parties agreed that if both of the Redemption Agreements terminate, TWC Inc. will redeem 23.8% of Comcast’s 17.9% ownership of TWC Class A Common Stock in exchange for 100% of the common stock of a TWC Inc. subsidiary that will own certain cable systems serving approximately 148,000 basic subscribers (as of December 31, 2004) plus approximately $422 million in cash. In addition, a subsidiary of TWC Inc., Comcast and certain of its affiliates have entered into an Alternate Tolling and Optional Redemption Agreement under which the parties have agreed that if the TWC Redemption Agreement terminates, but the TWE Redemption Agreement is not terminated, an alternate version of the partial redemption contemplated by the Second Tolling Amendment may occur.

Management and Operation of TWC Inc.

      The following description summarizes certain provisions of agreements related to, and constituent documents of, TWC Inc. that affect and govern the ongoing operations of TWC Inc. Such description does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of such agreements and constituent documents.

      Stockholders of TWC Inc. Time Warner and its subsidiaries own shares of TWC Class A Common Stock, which generally has one vote per share, and shares of TWC Class B Common Stock, which generally has ten votes per share, which together represent 89.3% of the voting power of TWC Inc. and 82.1% of the equity of TWC Inc. A Comcast statutory trust (the “Comcast Trust”) owns shares of TWC Class A Common Stock representing the remaining 10.7% of the voting power and 17.9% of the equity of TWC Inc. The TWC Class B Common Stock is not convertible into TWC Class A Common Stock upon transfer or otherwise. The TWC Class A Common Stock and the TWC Class B Common Stock vote together as a single class on all matters, except with respect to the election of directors and certain matters described below.

      Board of Directors of TWC Inc. The TWC Class A Common Stock votes, as a separate class, with respect to the election of the Class A directors of TWC Inc. (the “Class A Directors”), and the TWC Class B Common Stock votes, as a separate class, with respect to the election of the Class B directors of TWC Inc. (the “Class B Directors”). Pursuant to the restated certificate of incorporation of TWC Inc. (the “Certificate of Incorporation”), the Class A Directors must represent not less than one-sixth and not more than one-fifth of the directors of TWC Inc., and the Class B Directors must represent not less than four-fifths of the directors of TWC Inc. As a result of its shareholdings, Time Warner has the ability to cause the election of all Class A Directors and Class B Directors, subject to certain restrictions on the identity of these directors discussed below.

      The Certificate of Incorporation requires that there be at least two independent directors on the board of directors of TWC Inc. In addition, a parent agreement (the “Parent Agreement”) among Time Warner, TWC Inc. and Comcast provides that until such time that an initial public offering of TWC Inc. common stock is effected, or upon the effectiveness of the Shareholder Agreement (defined below), at least 50% of the independent directors must be reasonably satisfactory to the Comcast Trust. To the extent possible, all such independent directors will be Class A Directors. Upon the closing of the transactions under the TWC Redemption Agreement (the “TWC Redemption”), Comcast will have no interest in TWC Inc. and the Parent Agreement will be replaced by a shareholder agreement that was entered into by TWC Inc. and Time Warner in April 2005 (the “Shareholder Agreement”).

      Under the terms of the amended and restated certificate of incorporation that TWC Inc. is required to adopt as part of the closing of the Adelphia Acquisition (the “Restated Certificate of Incorporation”), for three years following the earlier of an initial public offering of TWC Inc. common stock and the date upon which shares of TWC Inc. common stock are issued in connection with the Adelphia Acquisition, at least 50% of the board of directors of TWC Inc. must be independent directors.

      Protections of Minority Class A Common Stockholders. The approval of the holders of a majority of the voting power of the outstanding shares of TWC Class A Common Stock held by persons other than Time Warner is necessary in connection with:

      Non-voting Stock. As required by section 1123(a)(6) of the United States Bankruptcy Code, upon the closing of the Adelphia Acquisition, the Restated Certificate of Incorporation will prohibit the issuance of non-voting equity securities. Such provision may thereafter be amended or eliminated if approved by the holders of a majority of the TWC Class A Common Stock and the TWC Class B Common Stock, voting together as a single class.

Matters Affecting the Relationship between Time Warner and TWC Inc.

      Indebtedness Approval Right. Under the Parent Agreement (or, following the closing of the TWC Redemption Agreement, the Shareholder Agreement), until such time as the indebtedness of TWC Inc. is no longer attributable to Time Warner, in Time Warner’s reasonable judgment, TWC Inc., its subsidiaries and entities that it manages may not, without the consent of Time Warner, create, incur or guarantee any indebtedness, including preferred equity, or rental obligations if its ratio of indebtedness plus six times its annual rental expense to EBITDA (as EBITDA is defined in the applicable agreement and which is comparable to operating income (loss) before depreciation and amortization) plus rental expense, or “EBITDAR,” then exceeds or would exceed 3:1.

      Other Time Warner Rights. Under the Parent Agreement (or, upon the closing of the TWC Redemption, the Shareholder Agreement), TWC Inc. must obtain Time Warner’s consent before it enters into any agreement that binds or purports to bind Time Warner or its affiliates or that would subject TWC Inc. to significant penalties or restrictions as a result of any action or omission of Time Warner; or adopts a stockholder rights plan, becomes subject to Section 203 of the Delaware General Corporation Law, adopts a “fair price” provision or takes any similar action.

      Time Warner Standstill. Under the Parent Agreement (or, upon the closing of the TWC Redemption, the Shareholder Agreement), Time Warner has agreed that for a period of three years following the completion of an initial public offering of TWC Inc. (or, in the case of the Shareholder Agreement, the closing of the Adelphia Acquisition), Time Warner will not make or announce a tender offer or exchange offer for the TWC Class A Common Stock without the approval of a majority of the independent directors of TWC Inc.; and for a period of 10 years following an initial public offering of TWC Inc. (or, in the case of the Shareholder Agreement, the closing of the Adelphia Acquisition), Time Warner will not enter into any business combination with TWC Inc., including a short-form merger, without the approval of a majority of the independent directors of TWC Inc. Under the Adelphia Agreements, TWC Inc. has agreed that for a period

of two years following the closing of the Adelphia Acquisition, it will not enter into any short form merger and that for a period of 18 months following the closing of the Adelphia Acquisition it will not issue equity securities to any person (other than, subject to satisfying certain requirements, TWC Inc. and its affiliates) that have a higher vote per share than the TWC Class A Common Stock.

      Transactions between Time Warner and TWC Inc. The by-laws of TWC Inc. provide that Time Warner may only enter into transactions with TWC Inc. and its subsidiaries, including TWE, that are on terms that, at the time of entering into such transaction, are substantially as favorable to TWC Inc. or its subsidiaries as they would be able to receive in a comparable arm’s-length transaction with a third party. Any such transaction involving reasonably anticipated payments or other consideration of $50 million or greater also requires the prior approval of a majority of the independent directors of TWC Inc. Under the Adelphia Agreements, TWC Inc. is prohibited from entering into any transaction having the intended effect of benefiting Time Warner and any of its affiliates (other than TWC Inc. and its subsidiaries) in a manner that would deprive TWC Inc. of the benefit it would have otherwise obtained if the transaction were to have been effected on arm’s length terms. Following the closing of the Adelphia Acquisition, TWC Inc. will continue to be subject to the same prohibition under the amended and restated by-laws that TWC Inc. is required to adopt at the time of the closing of the Adelphia Acquisition.

Comcast Registration Rights Agreement

      The Comcast Trust, which currently holds shares of TWC Class A Common Stock representing a 17.9% interest in TWC Inc., entered into a registration rights agreement with TWC Inc. (the “Comcast Registration Rights Agreement”) relating to its shares of TWC Class A Common Stock, as well as any common stock of TWC Inc. that it or another Comcast trust may receive in connection with a sale of a partnership interest in TWE under the Partnership Interest Sale Agreement (as defined below) (see “Description of Certain Provisions of the TWE Partnership Agreement — Exit Rights and Restrictions on Transfer” below). The TWC Redemption Agreement modifies the Comcast Registration Rights Agreement and provides that, upon the closing of the TWC Redemption, the Comcast Trust’s ownership interest in TWC Inc. will be entirely redeemed and the Comcast Registration Rights Agreement will terminate. However, if the TWC Redemption is not completed, the Comcast Registration Rights Agreement, as modified, will continue to be in full force and effect. The following is a summary of certain provisions of the Comcast Registration Rights Agreement that will apply if Comcast’s interest in TWC Inc. is not redeemed; such summary does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of such agreements.

      Demand and Piggyback Registration Rights. Under the Comcast Registration Rights Agreement, subject to several exceptions, including TWC Inc.’s right to defer a demand registration under some circumstances, the Comcast Trust has the right to require that TWC Inc. take all commercially reasonable steps to register for public resale under the Securities Act all shares of TWC Class A Common Stock owned by it that it requests be registered. Under the Comcast Registration Rights Agreement:

      In addition, the Comcast Trust has “piggyback” registration rights subject to customary restrictions on any registration for TWC Inc.’s account or the account of another stockholder, and TWC Inc. and Time Warner are permitted to piggyback on the Comcast Trust’s demand registrations.

      Under the TWC Redemption Agreement, the Comcast Trust agreed not to exercise or pursue registration rights with respect to the TWC Class A Common Stock owned by it until the earlier of the date upon which

the TWC Redemption Agreement is terminated in accordance with its terms and the date upon which TWC Inc.’s offering of equity securities to the public for cash for its own account in one or more transactions registered under the Securities Act (other than as consideration in an acquisition transaction or as compensation to employees) exceeds $2.1 billion (the “Comcast TWC Lock-Up Period”). In addition, under the TWC Redemption Agreement, the Comcast Trust agreed not to transfer its shares of TWC Class A Common Stock, subject to certain exceptions, including transfers to certain affiliates of Comcast, during the Comcast TWC Lock-Up Period. Under the Comcast Registration Rights Agreement, as modified by the TWC Redemption Agreement, TWC Inc. has agreed to use all commercially reasonable efforts to:

      Under the Comcast Registration Rights Agreement, as modified by the TWC Redemption Agreement, TWC Inc. is not obligated to effect more than one demand registration on behalf of the Comcast Trust in any 90-day period with the initial registration on the shelf registration statement together with the first takedown and each subsequent takedown thereafter deemed to be a demand registration.

      Priority in Underwritten Public Offerings. Under the Comcast Registration Rights Agreement, the Comcast Trust, TWC Inc. and Time Warner agreed to the following method of determining the priority of inclusion of shares of TWC Class A Common Stock of those three parties in an underwritten public offering in the event that the managing underwriters of such public offering were to determine that the number of securities proposed to be offered by the three parties would jeopardize the success of the offering:

      The TWC Redemption Agreement modifies the Comcast Registration Rights Agreement so that the Comcast Trust will have full priority in respect of its shares of TWC Class A Common Stock for a period beginning on November 1, 2006 and ending on the earlier of November 18, 2007 or such date on which the Comcast Trust and its affiliates no longer beneficially own any TWC Class A Common Stock. Following such date, the priorities in the Comcast Registration Rights Agreement as in effect prior to such modification will again be applicable.

      Time Warner Registration Rights Agreement between TWC Inc. and Time Warner. At the closing of the TWE Restructuring, Time Warner and TWC Inc. entered into a registration rights agreement (the “Time Warner Registration Rights Agreement”) relating to Time Warner’s shares of TWC Inc. common stock. Subject to several exceptions, including TWC Inc.’s right to defer a demand registration under some circumstances, Time Warner may, under that agreement, require that TWC Inc. take commercially reasonable steps to register for public resale under the Securities Act all shares of common stock that Time Warner requests to be registered. Time Warner may demand an unlimited number of registrations. In

addition, Time Warner has been granted “piggyback” registration rights subject to customary restrictions and TWC Inc. is permitted to piggyback on Time Warner’s registrations. Any registration statement filed under the Time Warner Registration Rights Agreement is subject to the cut-back priority discussed above under “Comcast Registration Rights Agreement.” Time Warner has agreed that it will not, until the earlier of (1) March 31, 2008, and (2) the date that the Comcast Trust holds less than $250 million of TWC Inc. common stock, dispose of its shares of TWC Inc. common stock other than in registered offerings.

      In connection with the registrations described above under both the Comcast and Time Warner Registration Rights Agreements, TWC Inc. will indemnify the selling stockholders and bear all fees, costs and expenses, except underwriting discounts and selling commissions.

DESCRIPTION OF CERTAIN PROVISIONS OF THE

TWE PARTNERSHIP AGREEMENT

      TWE is a Delaware limited partnership, of which subsidiaries of TWC Inc. are the general partners currently holding partnership interests representing a 94.3% residual equity interest in TWE. A Comcast statutory trust (“Comcast Trust I”), currently holds partnership interests representing a 4.7% residual equity interest in TWE. American Television and Communications Corporation (“ATC”), another wholly owned subsidiary of Time Warner, currently holds a partnership interest consisting of a $2.4 billion preferred interest and a 1% residual equity interest in TWE. Upon the closing of the TWE Redemption, Comcast Trust I’s ownership interest in TWE will be redeemed and, prior to the closing of the Adelphia Acquisition, the partnership interests held by ATC will be contributed to a subsidiary of TWC Inc. in exchange for non-voting common stock of such subsidiary. If the transactions contemplated by the Adelphia Agreements close but the TWE Redemption does not close, Comcast will retain its ownership interest in TWE.

      The following description summarizes certain provisions of the TWE partnership agreement relating to the ongoing operations of TWE. Such description does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the TWE partnership agreement.

Management and Operations of TWE

      TWC Inc., through its subsidiaries, has the exclusive authority to manage the business and affairs of TWE, subject to certain protections over extraordinary actions afforded Comcast Trust I under the TWE partnership agreement. These protections consist of consent rights over the dissolution or liquidation of TWE and the transfer of control of TWE to a third party, in each case, prior to the later of March 31, 2006 or 30 days following the expiration of the Comcast TWE Lock-Up Period (as defined below), and the right to approve of certain amendments to the TWE partnership agreement.

Transactions with Affiliates

      The TWE partnership agreement requires that transactions between TWC Inc. and its subsidiaries, on the one hand, and TWE and its subsidiaries, on the other hand, be conducted on an arm’s-length basis, with management, corporate or similar services being provided by TWC Inc. on a “no mark-up” basis with fair allocations of administrative costs and general overhead.

Exit Rights and Restrictions on Transfer

      Time Warner, TWC Inc., Comcast and Comcast Trust I are parties to a partnership interest sale agreement (the “Partnership Interest Sale Agreement”) that provides, among other things, that under certain circumstances Comcast Trust I could cause Time Warner or TWC Inc. to acquire Comcast Trust I’s 4.7% residual equity interest in TWE for consideration consisting of either cash or stock of Time Warner or TWC Inc. The fair market value of the interest will be determined through an appraisal mechanism set forth in the Partnership Interest Sale Agreement.

      Under the TWE Redemption Agreement, Comcast Trust I has agreed not to exercise its rights to cause either Time Warner or TWC Inc. to purchase its interest in TWE under the Partnership Interest Sale

Agreement until the earliest of (1) such time as the TWE Redemption Agreement is terminated, (2) under certain circumstances, notice by Comcast of its intent to terminate the TWE Redemption Agreement and (3) December 31, 2006 (the period ending at such earliest time, the “Comcast TWE Lock-Up Period”). In addition, Time Warner and TWC Inc. have agreed that if Comcast exercises its rights to cause Time Warner or TWC Inc. to purchase its interest in TWE before November 18, 2007, the consideration will not include stock of TWC Inc. and Time Warner’s ability to purchase such interest using Time Warner common stock will be subject to certain restrictions concerning the registration of such shares under the Securities Act. However, in lieu of using cash or stock of Time Warner, in certain circumstances TWC Inc. would be permitted to satisfy its obligations by causing the TWE Redemption to occur. Comcast Trust I has also agreed not to transfer its interest in TWE, subject to certain exceptions for transfers to certain affiliates of Comcast, during the Comcast TWE Lock-Up Period.

      Following expiration of the Comcast TWE Lock-Up Period, Comcast Trust I will have the right to sell all or a portion of its interest in TWE to a third party in a bona fide transaction, subject to a right of first refusal, first, in favor of Time Warner and, second, in favor of TWC Inc. If TWC Inc. and Time Warner do not collectively elect to purchase all of the Comcast Trust I’s offered partnership interest, Comcast Trust I may proceed with the sale of the offered partnership interest to that third party on terms no more favorable than those offered to TWC Inc. and Time Warner if that third party agrees to be bound by the same terms and conditions applicable to Comcast Trust I as a limited partner in TWE and under the Partnership Interest Sale Agreement. The TWE partnership agreement provides that TWC Inc. and Time Warner may generally transfer their partnership interests in TWE at any time, except that TWC Inc. may not transfer control of TWE prior to the later of March 31, 2006 or 30 days following the expiration of the Comcast TWE Lock-Up Period. No transfer of partnership interests may be made by any partner through the securities markets, and no transfer may be made by any partner if the transfer causes TWE to have more than 100 partners or would result in, or have a material risk of, TWE being treated as a corporation for federal income tax purposes.

Redemption of Preferred Component

      The preferred component of Time Warner’s partnership interest must be redeemed by TWE on April 1, 2023.

DESCRIPTION OF CERTAIN PROVISIONS OF THE

TWE-A/ N PARTNERSHIP AGREEMENT

      The following description summarizes certain provisions of the partnership agreement relating to TWE-A/ N. Such description does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the TWE-A/ N partnership agreement.

Partners of TWE-A/ N

      The general partnership interests in TWE-A/ N are held by TW NY and an indirect subsidiary of TWE (such TWE subsidiary and TW NY are together, the “TW Partners”) and Advance/ Newhouse Partnership, a partnership owned by wholly owned subsidiaries of Advance Publications Inc. and Newhouse Broadcasting Corporation (“A/ N”). The TW Partners also hold preferred partnership interests.

2002 Restructuring of TWE-A/ N

      The TWE-A/ N cable television joint venture was formed by TWE and A/ N in December 1995. A restructuring of the partnership was completed during 2002. As a result of this restructuring, cable systems and their related assets and liabilities serving 2.1 million subscribers as of December 31, 2002 located primarily in Florida (the “A/ N Systems”), were transferred to a subsidiary of TWE-A/ N (the “A/ N Subsidiary”). As part of the restructuring, effective August 1, 2002, A/ N’s interest in TWE-A/ N was converted into an interest that tracks the economic performance of the A/ N Systems, while the TW Partners retain the economic interests and associated liabilities in the remaining TWE-A/ N cable systems. Also, in connection with the restructuring, Time Warner effectively acquired A/ N’s interest in Road Runner. TWE-

A/ N’s financial results, other than the results of the A/ N Systems, are consolidated with TWC Inc. Road Runner continues to provide high-speed data services to the A/ N subsidiary.

Management and Operations of TWE-A/ N

      Management Powers and Services Agreement. Subject to the requirement to act by unanimous consent with respect to some actions as described below, an indirect subsidiary of TWE, TWE-A/ N Holdco, L.P. (“TWE-A/ N Holdco”), is the managing partner, with exclusive management rights of TWE-A/ N, other than with respect to the A/ N Systems. The managing partner is responsible for the management of TWE-A/ N, other than the A/ N Systems, on a day-to -day basis. Also, subject to the requirement to act by unanimous consent with respect to some actions as described below, A/ N has authority for the supervision of the day-to -day operations of the A/ N Subsidiary and the A/ N Systems. In connection with the 2002 restructuring, TWE entered into a services agreement with A/ N and the A/ N Subsidiary under which TWE agreed to exercise various management functions, including oversight of programming and various engineering-related matters. TWE and A/ N also agreed to periodically discuss cooperation with respect to new product development.

      Actions Requiring Unanimous Consent. Some actions cannot be taken by TWE-A/ N, TWE, TWE-A/N Holdco or A/ N without the unanimous consent of the TW Partners and A/ N or the unanimous consent of an executive committee consisting of members designated by the TW Partners and A/ N. These actions include, among other things:

Restrictions on Transfer

      TW Partners. Each TW Partner is generally permitted to directly or indirectly dispose of its entire partnership interest at any time to a wholly owned affiliate of TWE (in the case of transfers by TWE) or to TWE, the Company or a wholly owned affiliate of TWE or the Company (in the case of transfers by TWC Inc.). In addition, the TW Partners are also permitted to transfer their partnership interests through a pledge to secure a loan, or a liquidation of TWE in which the Company, or its affiliates, receives a majority of the interests of TWE-A/ N held by the TW Partners. TWE is allowed to issue additional partnership interests in TWE so long as the Company continues to own, directly or indirectly, either 35% or 43.75% of the residual equity capital of TWE, depending on when the issuance occurs.

      A/ N Partner. A/ N is generally permitted to directly or indirectly transfer its entire partnership interest at any time to certain members of the Newhouse family or specified affiliates of A/ N. A/ N is also permitted to dispose of its partnership interest through a pledge to secure a loan and in connection with specified restructurings of A/ N.

Restructuring Rights of the Partners

      TWE and A/ N each have the right to cause TWE-A/ N to be restructured at any time. Upon a restructuring, TWE-A/ N is required to distribute the A/ N Subsidiary with all of the A/ N Systems to A/ N in complete redemption of A/ N’s interests in TWE-A/ N, and A/ N is required to assume all liabilities of the A/N Subsidiary and the A/ N Systems. Following such a restructuring, TWE’s obligations to provide management services to A/ N and the A/ N Subsidiary would terminate. As of the date of this annual report, neither TWE nor A/ N has delivered notice of the intent to cause a restructuring of TWE-A/ N.

Rights of First Offer

      TWE’s Regular Right of First Offer. Subject to exceptions, A/ N and its affiliates are obligated to grant TWE a right of first offer prior to any sale of assets of the A/ N Systems to a third party.

      TWE’s Special Right of First Offer. Within a specified time period following the first, seventh, thirteenth and nineteenth anniversaries of the deaths of two specified members of the Newhouse family (those deaths have not yet occurred), A/ N has the right to deliver notice to TWE stating that it wishes to transfer some or all of the assets of the A/ N Systems, thereby granting TWE the right of first offer to purchase the specified assets. Following delivery of this notice, an appraiser will determine the value of the assets proposed to be transferred. Once the value of the assets has been determined, A/ N has the right to terminate its offer to sell the specified assets. If A/ N does not terminate its offer, TWE will have the right to purchase the specified assets at a price equal to the value of the specified assets determined by the appraiser. If TWE does not exercise its right to purchase the specified assets, A/ N has the right to sell the specified assets to an unrelated third party within 180 days on substantially the same terms as were available to TWE.

DESCRIPTION OF AGREEMENT WITH LIBERTY MEDIA CORPORATION

      The following description summarizes certain provisions of Time Warner’s agreement with Liberty Media and certain of its subsidiaries (collectively, “LMC”) that was entered into in connection with the merger of Turner Broadcasting System, Inc. in 1996 (the “Turner Transaction”) and the Turner Consent Decree. Such description does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the Second Amended and Restated LMC Agreement dated as of September 22, 1995 among Historic TW, Time Warner Companies, Inc. and LMC (the “LMC Agreement”).

Ownership of Time Warner Common Stock

      Pursuant to the LMC Agreement, immediately following consummation of the Turner Transaction, LMC exchanged the 50.6 million shares of Historic TW common stock, par value $.01 per share received by LMC in the Turner Transaction on a one-for-one basis for 50.6 million shares of Series LMCN-V Common Stock of Historic TW. In June 1997, LMC and its affiliates received 6.4 million additional shares of Series LMCN-V Common Stock pursuant to the provisions of an option agreement between Historic TW and LMC and its affiliates. In May 1999, the terms of the Series LMCN-V Common Stock were amended, which effectively resulted in a two-for-one stock split. At the time of the AOL-Historic TW Merger, each share of Series  LMCN-V Common Stock was exchanged for one and one half shares of a substantially identical Series LMCN-V Common Stock of Time Warner. Each share of Series LMCN-V Common Stock receives the same dividends and otherwise has the same rights as a share of Time Warner Common Stock except that (a) holders of Series  LMCN-V Common Stock are entitled to 1/100th of a vote per share on the election of directors and do not have any other voting rights, except as required by law or with respect to limited matters, including amendments to the terms of the Series LMCN-V Common Stock adverse to such holders, and (b) unlike shares of Time Warner Common Stock, shares of Series LMCN-V Common Stock are not subject to redemption by Time Warner if necessary to prevent the loss by Time Warner of any governmental license or franchise. The Series LMCN-V Common Stock is not transferable, except in limited circumstances, and is not listed on any securities exchange.

      LMC exchanged its shares of Historic TW common stock for Series LMCN-V Common Stock in order to comply with the Turner Consent Decree, which effectively prohibits LMC and its affiliates (including TCI) from owning voting securities of Time Warner other than securities that have limited voting rights. In 2002, LMC sought to eliminate these restrictions from the Turner Consent Decree; the petition was denied by the FTC without prejudice. See “Regulation and Legislation — Turner FTC Consent Decree,” above. The Turner Consent Decree will expire in February 2007.

      Each share of Series LMCN-V Common Stock is convertible into one share of Time Warner Common Stock at any time when such conversion would no longer violate the Turner Consent Decree or have a Prohibited Effect (as defined below), including following a transfer to a third party. Following application by

LMC, the Turner Consent Decree was modified by the FTC on December 21, 2004 to permit LMC, in connection with a hedging transaction, to lend the Time Warner Common Stock into which its Series  LMCN-V Common Stock is convertible. As a result, approximately 83,940,790 of the 171,185,826 shares of Series LMCN-V Common Stock owned by LMC have been converted into Time Warner Common Stock as of February 24, 2006 but are still deemed beneficially owned by LMC. Under the terms of the modification, LMC has no right to vote or to direct the voting of the loaned Common Stock and may not directly or indirectly influence or attempt to influence its voting. On February 16, 2006, LMC filed a petition with the FTC seeking to terminate the Turner Consent Decree as it applies to LMC in advance of the 2007 expiration, including all voting restrictions on its Time Warner stock holdings, based on changed circumstances.

Other Agreements

      Under the LMC Agreement, if Time Warner takes certain actions that have the effect of (a) making the continued ownership by LMC of Time Warner’s equity securities illegal under any federal or state law, (b) imposing damages or penalties on LMC under any federal or state law as a result of such continued ownership, (c) requiring LMC to divest any such Time Warner equity securities, or (d) requiring LMC to discontinue or divest any business or assets or lose or significantly modify any license under any communications law (each a “Prohibited Effect”), then Time Warner will be required to compensate LMC for income taxes incurred by it in disposing of all Time Warner equity securities received by LMC in connection with the Turner Transaction and related agreements (whether or not the disposition of all such equity securities is necessary to avoid such Prohibited Effect).

      The agreements described in the preceding paragraph may have the effect of requiring Time Warner to pay amounts to LMC in order to engage in (or requiring Time Warner to refrain from engaging in) activities that LMC would be prohibited under the federal communications laws from engaging in. Based on the current businesses of Time Warner and LMC and based upon Time Warner’s understanding of applicable law, Time Warner does not expect these requirements to have a material effect on its business.

FOREIGN CURRENCY EXCHANGE RATES AND INTERNATIONAL REVENUES

      Time Warner’s foreign operations are subject to various risks, including the risk of fluctuation in currency exchange rates and to exchange controls. Time Warner cannot predict the extent to which such controls and fluctuations in currency exchange rates may affect its operations in the future or its ability to remit dollars from abroad. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Market Risk Analysis,” Note 15, “Derivative Instruments — Foreign Currency Risk Management” to the consolidated financial statements set forth in the financial pages herein, and “Risk Factors” below, for additional information. For a discussion of revenues of international operations, see Note 16, “Segment Information” to the consolidated financial statements set forth in the financial pages herein.

RISKS RELATING TO TIME WARNER GENERALLY

      Pending securities litigation or the failure to fulfill the obligations under the deferred prosecution agreement with the U.S. Department of Justice or the Consent Order with the Securities and Exchange Commission could adversely affect Time Warner’s operations. In connection with the resolution of the investigation by the DOJ of the Company, AOL entered into a deferred prosecution agreement with the DOJ. In accordance with the agreement, the DOJ filed a criminal complaint against AOL in December 2004 for the conduct of certain employees in connection with securities fraud by PurchasePro.com, but the DOJ will defer prosecution of AOL and will dismiss the complaint in December 2006 provided the Company fulfills its obligations under the deferred prosecution agreement. For a discussion of these obligations, see Item 3, “Legal Proceedings — Government Investigations.” If the Company does not satisfy its obligations, the DOJ can proceed with the prosecution of AOL for actions in connection with PurchasePro.com, as set forth in the complaint, and may consider additional actions against the Company, which could have significant adverse

effects on its operations and financial results. The Company intends to satisfy its obligations under the deferred prosecution agreement. In addition, in connection with the settlement with the SEC, the Company consented to the entry of a Consent Order requiring it to comply with federal securities laws and regulations and the terms of an earlier order. If the Company is found to be in violation of the Consent Order, it may be subject to increased penalties and consequences as a result of the prior actions. In connection with the SEC settlement, an independent examiner was appointed to review whether the Company’s historical accounting for certain transactions with 17 counterparties was in conformity with GAAP. The independent examiner has begun its review, which has been extended and is expected to be completed in the second quarter of 2006. Depending on the independent examiner’s conclusions, a further restatement of the Company’s financial statements may be necessary. It is also possible that, so long as there are unresolved issues associated with the Company’s financial statements, the effectiveness of any registration statement of the Company or its affiliates may be delayed. As of February 23, 2006, 41 putative class action and shareholder derivative lawsuits alleging violations of federal and state securities laws as well as purported breaches of fiduciary duties had been filed against Time Warner, certain of its current and former executives, past and present members of its Board of Directors and, in certain instances, AOL. There is also a consolidated action making allegations of ERISA violations. The complaints purport to be made on behalf of certain of the Company’s shareholders and allege, among other things, that Time Warner violated various provisions of the securities laws. There are also actions filed by individual shareholders pending in federal and state courts. Although the Company has reached an agreement to settle the primary consolidated securities class action lawsuits, the settlement is subject to final court approval, and some members of the class have elected to “opt out” of the settlement to pursue their claims separately. Similarly, although the parties have reached an understanding to resolve the consolidated action alleging ERISA violations, the settlement is subject to definitive documentation and necessary court approvals. In addition, the shareholder derivative and individual securities actions remain pending and the Company is unable to predict the outcome of these remaining related matters. The Company has established a reserve of $3 billion, with $2.4 billion related to the proposed settlement of the primary consolidated securities class actions and $600 million in connection with the remaining shareholder derivative, ERISA and securities matters (including suits brought by individual shareholders who decided to “opt-out” of the settlement in the primary securities class action). The Company has paid, or agreed to pay, approximately $335 million, before providing for any remaining potential insurance recoveries, to settle certain of these claims and is incurring expenses as a result of the pending litigation. Costs associated with judgments in or additional settlements of these matters could adversely affect its financial condition and results of operations. See Item 3, “Legal Proceedings — Securities Matters.”

      Several of the Company’s businesses are characterized by rapid technological change, and if Time Warner does not respond appropriately to technological changes, its competitive position may be harmed. Time Warner’s businesses operate in the highly competitive, consumer-driven and rapidly changing media, entertainment, interactive services and cable industries. Several of these businesses are to a large extent dependent on the ability to acquire, develop, adopt, and exploit new and existing technologies to distinguish their products and services from those of their competitors.

      The acquisition, development, adoption, exploitation and distribution of new and existing technology may take long periods of time and may require significant capital investments. The Company may be required to anticipate far in advance which technologies and equipment it should adopt for new products and services or for future enhancements of or upgrades to its existing products and services. If it chooses technologies or equipment that are less effective, cost-efficient or attractive to its customers than those chosen by its competitors, the Company’s competitive position could deteriorate, and its operations, business or financial results could be adversely affected. Time Warner also may not be able to anticipate the demand for products and services requiring new technology and equipment. Therefore, it is possible that the Company could select a technology that does not achieve widespread commercial success or that its products or services will not appeal to enough customers, will not be available at competitive prices, will not function as expected or will not be delivered in a timely fashion.

      As a result of advances in technology or decreases in the cost of existing technologies, the Company’s competitors may in the future be able to provide products and services that are similar to products and services

now offered by the Company that those competitors currently cannot fully match. Furthermore, advances in technology, decreases in the cost of existing technologies or changes in competitors’ product and service offerings also may require the Company in the future to make additional research and development expenditures or to offer at no additional charge or at a lower price certain products and services the Company currently offers to customers separately or at a premium.

      The Company’s competitive position also may be adversely affected by various timing factors, such as the ability of its competitors to develop new technologies more quickly. In addition, the uncertainty of the costs for obtaining intellectual property rights from third parties could impact the ability of the Company to respond to technological advances in a timely manner.

      The combination of increased competition, more technologically advanced platforms, products and services, the increasing number of choices available to consumers and the overall rate of change in the media, entertainment, interactive services and cable industries requires companies such as Time Warner to become more responsive to consumer needs and to adapt more quickly to market conditions than had been necessary in the past. The Company could have difficulty managing these changes while at the same time maintaining its rates of growth and profitability.

      Piracy of the Company’s feature films, television programming and other content may decrease the revenues received from the exploitation of the Company’s entertainment content and adversely affect its business and profitability. Piracy of motion pictures, television programming, video content and DVDs is prevalent in many parts of the world. Technological advances allowing the unauthorized dissemination of motion pictures, television programming and other content in unprotected digital formats increase the threat of piracy by making it easier to create, transmit and distribute high quality unauthorized copies of such content. The proliferation of unauthorized copies and piracy of the Company’s products can have an adverse effect on its businesses and profitability because these products reduce the revenue that Time Warner potentially could receive from the legitimate sale and distribution of its content. In addition, if piracy continues to increase, it could have an adverse effect on the Company’s business and profitability. Although piracy adversely affects the Company’s U.S. revenues, the impact on revenues from outside the United States is more significant, particularly in countries where laws protective of intellectual property rights are not strictly enforced. Time Warner has taken, and will continue to take, a variety of actions to combat piracy, both individually and together with cross-industry groups, trade associations and strategic partners. Policing the unauthorized use of the Company’s intellectual property is often difficult, however, and the steps taken by the Company may not prevent the infringement by and/or piracy of unauthorized third parties in every case. There can be no assurance that the Company’s efforts to enforce its rights and protect its intellectual property will be successful in reducing content piracy.

      The Company is, and may be in the future, subject to intellectual property infringement claims, which could have an adverse impact on the Company’s business or operating results due to a disruption in its business operations, the incurrence of significant costs and other factors. From time to time, the Company receives notices from others claiming that it infringes their intellectual property rights, and the number of these claims could increase in the future. Claims of intellectual property infringement could require Time Warner to enter into royalty or licensing agreements on unfavorable terms, incur substantial monetary liability or be enjoined preliminarily or permanently from further use of the intellectual property in question, which could require Time Warner to change its business practices and limit its ability to compete effectively. Even if Time Warner believes that the claims are without merit, the claims can be time-consuming and costly to defend and divert management’s attention and resources away from its businesses. In addition, agreements entered into by the Company may require it to indemnify the other party for certain third-party intellectual property infringement claims, which could require the Company to expend sums to defend against or settle such claims or, potentially, to pay damages. If Time Warner is required to take any of these actions, it could have an adverse impact on the Company’s business or operating results.

      Time Warner’s businesses may suffer if it cannot continue to license or enforce the intellectual property rights on which its businesses depend. The Company relies on patent, copyright, trademark and trade secret laws in the United States and similar laws in other countries, and licenses and other agreements with its

employees, customers, suppliers and other parties, to establish and maintain its intellectual property rights in technology and products and services used in its various operations. However, any of the Company’s intellectual property rights could be challenged or invalidated, or such intellectual property rights may not be sufficient to permit it to take advantage of current industry trends or otherwise to provide competitive advantages, which could result in costly redesign efforts, discontinuance of certain product and service offerings or other competitive harm. Further, the laws of certain countries do not protect Time Warner’s proprietary rights, or such laws may not be strictly enforced. Therefore, in certain jurisdictions the Company may be unable to protect its intellectual property adequately against unauthorized copying or use, which could adversely affect its competitive position. Also, because of the rapid pace of technological change in the industries in which the Company operates, much of the business of its various segments relies on technologies developed or licensed by third parties, and Time Warner may not be able to obtain or to continue to obtain licenses from these third parties on reasonable terms, if at all. It is also possible that, in connection with a merger or acquisition transaction, the Company may license its trademarks or service marks and associated goodwill to third parties or the business of various segments could be subject to certain restrictions in connection with such trademarks or service marks and associated goodwill that were not in place prior to such a transaction.

      Time Warner’s international operations are subject to increased risks that could adversely affect its business and operating results. Time Warner’s businesses operate and serve customers worldwide. There are certain risks inherent in doing business internationally, including:

One or more of these factors could harm the Company’s future international operations and consequently, could harm its business and operating results.

      Weakening economic conditions or other factors could reduce the Company’s advertising or other revenues or hinder its ability to increase such revenues. Expenditures by advertisers tend to be cyclical, reflecting general economic conditions, as well as budgeting and buying patterns. Because several of the Company’s segments derive a substantial portion of their revenues from the sale of advertising, a decline or delay in advertising expenditures could reduce the Company’s revenues or hinder its ability to increase these revenues. Disasters, acts of terrorism, political uncertainty or hostilities also could lead to a reduction in advertising expenditures as a result of uninterrupted news coverage and economic uncertainty. Advertising expenditures by companies in certain sectors of the economy, including the automotive, financial and pharmaceutical industries, represent a significant portion of the Company’s advertising revenues. Any political, economic, social or technological change resulting in a significant reduction in the advertising spending of these sectors could adversely affect the Company’s advertising revenues or its ability to increase such revenues. In addition, because many of the products and services offered by the Company are largely discretionary items, weakening

economic conditions or outlook could reduce the consumption of such products and services and reduce the Company’s revenues.

      The Company faces risks relating to competition for the leisure and entertainment time of audiences, which has intensified in part due to advances in technology. In addition to the various competitive factors discussed in the following paragraphs, all of the Company’s businesses are subject to risks relating to increasing competition for the leisure and entertainment time of consumers. The Company’s businesses compete with each other and all other sources of news, information and entertainment, including broadcast television, movies, live events, radio broadcasts, home video products, print media and the Internet. Technological advancements, such as video on demand, new video formats and streaming capabilities and downloading via the Internet, have increased the number of media and entertainment choices available to consumers and intensified the challenges posed by audience fragmentation. The increasing number of choices available to audiences could negatively impact not only consumer demand for the Company’s products and services, but also advertisers’ willingness to purchase advertising from the Company’s businesses. If the Company does not respond appropriately to further increases in the leisure and entertainment choices available to consumers, it could have an adverse effect on the Company’s competitive position and revenues.

      Several of the Company’s businesses rely heavily on network and information systems or other technology, and a disruption or failure of such networks, systems or technology as a result of computer viruses, misappropriation of data or other malfeasance, as well as outages, disasters, accidental releases of information or similar events, may disrupt the Company’s businesses. Because network and information systems and other technologies are critical to many of Time Warner’s operating activities, network or information system shutdowns caused by events such as computer hacking, dissemination of computer viruses, worms and other destructive or disruptive software, denial of service attacks and other malicious activity, as well as power outages, disasters, accidental releases of information, terrorist attacks and similar events, pose increasing risks. Such an event could have an adverse impact on the Company and its customers, including degradation of service, service disruption, excessive call volume to call centers and damage to equipment and data. Such an event also could result in large expenditures necessary to repair or replace such networks or information systems or to protect them from similar events in the future. Significant incidents could result in a disruption of the Company’s operations, customer dissatisfaction, or a loss of customers or revenues.

      Furthermore, the operating activities of Time Warner’s various businesses could be subject to risks caused by misappropriation, misuse, leakage, falsification and accidental release or loss of information maintained in the Company’s information technology systems and networks, including customer, personnel and vendor data. The Company could be exposed to significant costs if such risks were to materialize, and such events could damage the reputation and credibility of Time Warner and its businesses. The Company also could be required to expend significant capital and other resources to remedy any such security breach. As a result of the increasing awareness concerning the importance of safeguarding personal information, the potential misuse of such information and legislation that has been adopted or is being considered regarding the protection and security of personal information, information-related risks are increasing, particularly for businesses that handle a large amount of personal customer data.

RISKS RELATING TO TIME WARNER’S AOL BUSINESS

      The Company’s AOL business faces significant competition. Historically, AOL’s primary product offering has been an online subscription service that includes a component of telephone “dial-up” Internet access. This product, offered under a variety of different terms and price plans, generates the substantial majority of AOL’s revenue. During the last several years, the online services industry has been changing from one in which the only way for a household to access the Internet was through telephone “dial-up” Internet access provided by Internet service providers to one in which households can access the Internet through a variety of connection methods, such as cable modems, DSL or wireless connections offered by a number of different providers, including Internet service providers, cable companies and telephone and other telecommunications companies. Additional methods of high-speed (also referred to as broadband) Internet access, such as wireless, mobile wireless, fiber optic cable and power lines, are continuing to be developed and offered. As a

result, significant price and service competition for Internet access exists and is expected to continue in the future.

      Unlike some of its competitors in the U.S., AOL does not own or control access to the “last mile” of connectivity to the consumer that would enable it to easily offer high-speed access to subscribers. Therefore, in order for AOL to provide high-speed access in the U.S., it generally must negotiate and secure access from the providers that control the last mile of infrastructure. In some cases, those companies provide products competitive to AOL. To date, while AOL has reached and implemented agreements with various high-speed access providers, significant price and service competition exists in the offer of high-speed Internet access services. AOL (together with the high-speed access providers) has had limited success in providing a competitive offering in the U.S., and there can be no assurance that AOL will be able to compete successfully in the future.

      The success of AOL’s Audience business depends on its ability to generate advertising revenue from increased activity by the audience of members of the AOL service and from increased numbers and activity of Internet users visiting AOL’s network of portals, including AOL.com, other websites (including certain affiliated or third-party websites), and certain related applications and services (the AOL service and such portals, websites, applications and services are together referred to as the “AOL Network”). In attracting and engaging this audience, AOL faces significant competition from the major interactive networks provided by Google, Yahoo! and Microsoft, other popular sites, including those provided by IAC/ InterActiveCorp and eBay, and sites focused in specific vertical markets or commerce areas, such as shopping, auctions and travel, many of which possess large user bases and may command greater brand association among consumers. In addition, AOL also competes for the time and activity of Internet users with the traditional media companies. AOL is competing for audience with these companies, as well as other companies, and, if these competitors are more successful than AOL in attracting and engaging their audiences, AOL’s advertising revenue could be adversely affected.

      Declines in subscribers to the AOL service are expected to continue, and are expected to continue to adversely affect AOL’s subscription and advertising revenue. AOL has experienced declines in the number of subscribers to the AOL service throughout 2003, 2004 and 2005, and expects to continue to experience declines in the number of these subscribers for the foreseeable future. Each year, a significant number of subscribers of the AOL service cancel their membership or are terminated by AOL either for non-payment of account charges or violation of one of the terms of service that apply to members (for example, sending spam e-mails or violating community guidelines in chat rooms).

      AOL is not registering new members in numbers sufficient to replace the subscribers who have canceled or have been terminated. Registrations have been declining for several reasons, including declining registrations in response to AOL’s marketing campaigns, competition from broadband access providers and reduced subscriber acquisition efforts. Continuing decreases in new registrations could adversely affect the rate of decline in the total number of subscribers. Furthermore, in connection with the announcements of the broadband agreements discussed below, AOL recently has announced price increases for certain AOL service plans. These increases are intended to encourage subscribers to migrate to broadband access, but could result in a further or faster decline in the number of subscribers or registrations to the AOL service, and these declines could adversely affect subscription and advertising revenue.

      AOL recently has entered into agreements with high-speed Internet access providers to offer the AOL service along with high-speed Internet access. It is too early to determine if such agreements will be successful attracting and retaining subscribers. These arrangements generate less revenue than arrangements with subscribers who purchase their narrowband Internet access directly from AOL. In addition, it is too early to determine whether subscribers who access the AOL service through a broadband connection will generate more or less activity on the AOL Network than subscribers who access the AOL service through a narrowband connection. As part of its strategy to attract and retain subscribers, AOL continues to enhance and upgrade the content and features provided through the AOL service, and AOL plans to continue to provide certain content, features and tools that will only be available to its subscribers. AOL also continues to

develop, test, change, market and implement price plans, service offerings and payment methods, as well as other strategies, to identify effective ways to attract and retain members.

      Declines in AOL’s subscribers, as well as the migration of existing subscribers to lower-priced AOL subscription plans, have resulted in decreased subscription revenue. The loss of subscribers also has had an adverse impact on advertising revenue at the AOL segment because subscribers generate significantly more usage than non-subscriber Internet visitors to the AOL Network. Accordingly, decreased usage due to decreases in subscribers reduces the amount of advertising inventory that AOL has available to sell to advertisers. If AOL is unable to attract and retain members, it will continue to have an adverse effect on AOL’s subscription and advertising revenue.

      If AOL is unsuccessful in increasing its advertising revenue, AOL’s results of operations and cash flows could be adversely affected. AOL will need to develop other sources of revenue, including advertising revenue, to offset lower revenue resulting from the decline in subscribers and the migration of existing subscribers to lower-priced plans. Advertising revenue will be an increasingly important source of revenue for AOL for the foreseeable future, but increases in advertising revenue to date have not been high enough to offset the losses in subscription revenue and are not expected to be sufficient to offset such losses for the foreseeable future. AOL’s ability to increase its advertising revenue will depend on a number of factors, including competition, the rate of decline in the number of subscribers to the AOL service, the ability to generate more activity on, and to attract more people to, the AOL Network, the growth of the online advertising business, the ability to secure and maintain agreements with third parties for advertising and for distribution of AOL products and services, accurate forecasting of consumer preferences, and the ability to anticipate and keep up with technological developments.

      AOL expects that maintaining and increasing the size and value of its U.S. and worldwide audience of subscribers and other Internet users accessing the AOL Network will have a significant impact on its ability to increase advertising revenue. AOL re-launched the AOL.com website as a free portal during the third quarter of 2005 as part of its efforts to increase the size and value of its audience. In connection with this re-launch, AOL moved much of its proprietary content and many of its features and tools to the Internet, allowing all Internet users, not just members of the AOL service, to access such content, features and tools without charge. It is too early to determine whether this strategy of increasing content, features and tools available on the web through a free portal will be successful in generating increased activity by AOL’s audience or in maintaining or increasing its audience size. Therefore, there can be no assurance that this strategy will lead to an increase in advertising revenue. In addition, this strategy could result in further declines in the number of subscribers and the cancellation of subscriptions at a faster rate than in the past. This could hinder AOL’s efforts to maintain and improve its subscription business and negatively impact both its subscription and advertising revenue.

      Factors relating to competition also may hamper AOL’s efforts to increase its advertising revenue. Although AOL has had some success in attracting an audience outside of its member base at Internet sites like MapQuest and Moviefone, AOL faces significant competition from third-party Internet sites, such as Yahoo!, in attracting Internet users to its portal. Also, although AOL’s advertising revenue improved in 2005, the increases were primarily due to AOL’s acquisition of Advertising.com, which provides performance-based and brand marketing services to online advertisers, and the paid-search relationship AOL has with Google, including an arrangement with AOL Europe. Increased competition for advertising inventory on third-party Internet sites could adversely impact Advertising.com’s continued growth. In addition, growth in paid-search revenue depends in part on Google’s ability to generate increased advertising revenue from search queries made by AOL’s audience. AOL’s ability to increase advertising revenue also depends in part on the continued increase in Internet advertising spending by advertisers and AOL’s ability to successfully compete for Internet advertising expenditures.

      The Company’s AOL business may not be able to increase its revenue from the sale of premium digital services. AOL’s strategy to increase revenue from sources other than the AOL service includes continuing to sell both new and existing premium digital services to members of the AOL service and Internet users. The development cycles for premium digital services may be long and could require significant capital investments

in addition to ongoing commitments of resources. AOL has discontinued certain non-profitable premium digital services in the past, and there can be no assurance that new premium digital services will be successful. Furthermore, revenue from premium digital services may be adversely affected by the reduction in prices for these services or by their incorporation into the AOL service offering rather than separate premium service offerings, which could result from pressure from competitors who may offer similar services over time at lower prices or at no additional charge as part of their standard offerings. For example, a McAfee Virus Scan Online product, which AOL previously sold separately to subscribers, is currently provided to subscribers to the AOL service at no additional charge. In addition, the development and introduction of premium digital services require AOL to operate outside of its core area of expertise and may subject it to new regulatory requirements. AOL’s ability to increase its revenue from the sale of premium digital services will depend on a number of factors, including the ability, at a reasonable cost, to acquire customers and to make Internet users aware that they can purchase AOL’s premium digital services without having a subscription to the AOL service. If AOL is unable to generate revenue from premium digital services that is greater than the cost of providing such services, its operating results will be adversely affected.

      If the Company’s AOL business is unable to acquire or offer compelling search functionality, content, features, services, applications and tools at reasonable costs, the size or value of its audience may not increase as anticipated, which could adversely affect its subscription and advertising revenue. AOL believes that it must offer compelling and differentiated search functionality, content, features, services, applications and tools to attract and retain subscribers and to attract Internet users to, and generate increased activity on, the AOL Network. AOL also anticipates that subscribers and Internet users may demand an escalating quality of offerings. If AOL is unable to provide offerings that are compelling to subscribers and Internet users, the size and value of AOL’s audience may be adversely affected. With respect to search functionality, AOL has an existing relationship with Google, whereby Google provides its industry-leading algorithmic search. AOL has committed that AOL’s use of algorithmic search will be on an exclusive basis. Although AOL retains the ability to differentiate its search product from Google and other providers, competing search technologies may grow in popularity, and this exclusivity in certain circumstances may limit AOL’s flexibility to change providers of its algorithmic search in the future. With respect to content, although AOL has access to certain content provided by the Company’s other businesses, it also may be required to make substantial payments to third parties from whom it licenses such content, and costs for such content may continue to increase as a result of competition or for other reasons. Further, many of AOL’s content arrangements with third parties are non-exclusive, so competitors may be able to offer similar or identical content. If AOL is unable to acquire or develop compelling content at reasonable prices or if other companies broadcast content that is similar to or the same as that provided by AOL, the size and value of AOL’s audience may be adversely affected. If the size and value of AOL’s audience does not grow significantly, AOL’s subscription and advertising revenue could be adversely affected.

      More individuals are using non-PC devices to access the Internet, and AOL must be able to secure placement of its services, applications and features on such devices, must ensure that they are compatible with the devices and must ensure that the AOL Network is accessible by users of non-PC devices. The number of individuals who access the Internet through devices other than a personal computer, such as personal digital assistants, mobile telephones and television set-top devices, has increased significantly. AOL must be able to secure arrangements with the device manufacturers as well as the access providers or wireless carriers, as the case may be, in order to ensure placement of its services, applications and features on the non-PC devices. In addition, AOL must ensure that its services, applications and features are technologically compatible in order for them to be placed on such non-PC devices. Also, the websites, applications and services included in the AOL Network must be designed so that they are technologically compatible with the non-PC devices in order that users of these devices can access the AOL Network and engage in activity. If AOL is unable to place its services, applications and features on non-PC devices, or if AOL is unable to attract and retain a substantial number of alternative device users to use the AOL Network, it could have an adverse impact on AOL’s advertising, subscription or other revenue.

      The AOL segment may not be able to continue to reduce costs. AOL intends to continue to identify and implement cost reductions. While network service costs were cut substantially in 2004 and 2005, AOL expects

that domestic network expenses will continue to decline in 2006 but at a rate lower than in 2005. However, this decline is expected to be more than offset by increased network expenses at AOL Europe due to the continued migration of AOL Europe dial-up subscribers to bundled broadband plans for which network expenses per subscriber are significantly higher. In addition to network costs, AOL continues to evaluate opportunities to reduce other costs, including but not limited to, customer service costs, personnel costs and other technology-related costs. If AOL cannot continue to identify and implement cost reductions, its operating results could be adversely affected.

      Changes in international, federal, state and local tax laws and regulations, or interpretations of international, federal, state and local tax laws and regulations, could adversely affect AOL’s operating results. International, federal, state and local tax laws and regulations affecting AOL’s business, or interpretations or application of these tax laws and regulations, could change. In addition, new international, federal, state and local tax laws and regulations affecting AOL’s business could be enacted. In December 2004, the U.S. federal government enacted the Internet Tax Nondiscrimination Act (or the ITNA), extending the moratorium on states and other local authorities imposing access or discriminatory taxes on the Internet through November 2007. If the ITNA is not extended or permanently enacted, state and local jurisdictions may seek to impose taxes on Internet access or electronic commerce within their jurisdictions. These taxes could adversely affect AOL’s operating results.

      The Streamlined Sales Tax Project is an effort by state governments, with input from local governments and the private sector, to establish a simplified and uniform sales tax system by creating uniform definitions for taxable goods and requiring participating states and local governments to have one statewide tax rate for each type of product. In conjunction with the Streamlined Sales Tax Project, the U.S. Congress continues to consider overriding a Supreme Court decision that limits the ability of state governments to require sellers outside of their own state to collect and remit sales taxes on goods purchased by in-state residents. If the U.S. Congress were to enact such legislation, it could have a negative impact on AOL’s users and its business.

      In addition, under a directive adopted by the European Union in July 2003, certain services are subject to a Value Added Tax, or VAT, which is levied based on the country from which the service is provided rather than the place of consumption. If the EU votes in the future to change its approach from the current “place of supply” to a “place of consumption” approach, AOL’s operating results could be adversely affected.

RISKS RELATING TO TIME WARNER’S CABLE BUSINESS

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

      In addition, when appropriate, TWC Inc. intends to selectively pursue strategic acquisitions of additional cable systems as part of its growth strategy. Time Warner cannot predict whether TWC Inc. will be successful in buying additional cable systems. If TWC Inc. were to acquire a significant number of additional cable systems prior to completing the integration of the systems proposed to be acquired from Adelphia and Comcast, the integration of the systems proposed to be acquired from Adelphia and Comcast, as well as such additional systems, could be further complicated. If TWC Inc. fails to integrate successfully systems acquired from Adelphia, Comcast or others, fails to manage its growth as a result of these acquisitions or encounters unexpected difficulties during that growth, it could have a negative impact on the performance of TWC Inc.’s

systems (including the systems to be acquired in the Adelphia and Comcast transactions), as well as on the operations, business or financial results of Time Warner.

      TWC Inc. also faces certain integration challenges in connection with the internal control over financial reporting and disclosure controls and procedures that have been implemented with respect to the systems to be acquired from Adelphia. The Sarbanes-Oxley Act of 2002 requires public companies, among other things, to implement and maintain policies and procedures pertaining to the maintenance of records that reflect the company’s transactions and disposition of assets in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles such that, among other things, (1) transactions are accurately and fairly recorded to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles and receipts and expenditures are made only when properly authorized and (2) unauthorized transactions involving the acquisition, use or disposition of assets that could have a material adverse effect on the company’s financial statements are prevented or detected in a timely manner. Adelphia has disclosed in its Annual Report on Form  10-K for the year ended December 31, 2004 (filed with the SEC on October 6, 2005) that it has identified material weaknesses in its internal control over financial reporting as of December 31, 2004 and that, as of such date, Adelphia did not maintain effective internal control over financial reporting. While Adelphia has agreed to use reasonable efforts to implement effective internal control over financial reporting prior to the consummation of the proposed transactions, such policies and procedures may not be in place when TWC Inc. acquires such systems in the proposed transactions. As a result, TWC Inc. may be required to devote significant time and resources to implementing such controls, which will further complicate the integration of the Adelphia systems with its existing managed systems, and TWC Inc. cannot ensure that it will be able to put such controls in place in a timely fashion.

      If the proposed Adelphia acquisition and/or related transactions with Comcast close, TWC Inc. may not realize the anticipated benefits of such transactions. The proposed Adelphia acquisition and related transactions with Comcast will combine cable systems of three companies that have previously operated separately. Time Warner expects that TWC Inc. will realize cost savings and other financial and operating benefits as a result of the proposed transactions. However, due to the complexity of and risks relating to the integration of these systems, among other factors, Time Warner cannot predict with certainty when these cost savings and benefits will occur or the extent to which they actually will be achieved, if at all.

      In introducing voice services over its cable systems, TWC Inc. faces risks inherent to entering into a new line of business. TWC Inc. completed a launch of its Digital Phone service during 2004. During 2005, it added 880,000 Digital Phone subscribers, ending the year with 1.1 million subscribers. Managing the growth of a product with which it has only limited operating experience may present significant challenges, and TWC Inc. may encounter unforeseen difficulties as it introduces the product in new operating areas or increases the scale of its offering in areas in which it has launched. First, TWC Inc. faces heightened customer expectations for the reliability of voice services as compared with its video and high-speed data services. TWC Inc. has undertaken significant training of customer service representatives and technicians, and it will need to continue to have a highly trained workforce. To ensure reliable service, TWC Inc. may need to increase its expenditures, including on technology, equipment and personnel. If the service is not sufficiently reliable or TWC Inc. otherwise fails to meet customer expectations, the Digital Phone business could be adversely affected. Second, the competitive landscape for voice services is intense, with TWC Inc. facing competition from providers of Internet phone services, as well as incumbent local telephone companies, cellular telephone service providers and others. See “TWC Inc. faces a wide range of competition, which could affect the future results of operations of TWC Inc.” Third, the Digital Phone service depends on interconnection and related services provided by certain third parties. As a result, TWC Inc.’s ability to implement changes as the service grows may be limited. In addition, in January 2006, MCI, Inc., one of TWC Inc.’s two interconnect and provisioning partners in the Digital Phone business, merged with Verizon Communications Inc., a regional phone company that competes with TWC Inc.’s offerings in some areas. It is currently not known whether, or to what extent, the merger will have any negative impact on the Digital Phone products and operations. Finally, the Company expects advances in communications technology, as well as changes in the marketplace and the regulatory and legislative environment. Consequently, the Company is unable to predict the effect that

ongoing or future developments in these areas might have on the Cable segment’s voice business and operations.

      In addition, TWC Inc.’s launch of voice services in the cable systems expected to be acquired in the Adelphia and Comcast transactions may pose certain risks. TWC Inc. may not be able to provide its Digital Phone service in some of the acquired systems without first upgrading the facilities. In such cases, TWC Inc. will be required to upgrade, or otherwise prepare, the facilities prior to launching any Digital Phone services. Additionally, TWC Inc. may need to obtain certain services from third parties prior to deploying Digital Phone services in the acquired cable systems. If TWC Inc. encounters difficulties in launching voice services in these acquired systems, its operations, business or financial results may be adversely affected.

      Increases in programming costs could adversely affect TWC Inc.’s operations, business or financial results. Programming has been, and is expected to continue to be, one of TWC Inc.’s largest operating expense items. In recent years, TWC Inc. has experienced sharp increases in the cost of programming, particularly sports programming. The increases are expected to continue due to a variety of factors, including inflationary and negotiated annual increases, additional programming being provided to subscribers, and increased costs to purchase new programming.

      Programming cost increases that TWC Inc. is unable to pass on fully to its subscribers have had, and will continue to have, an adverse impact on cash flow and operating margins. Current and future programming providers that provide content that is desirable to TWC Inc. subscribers may enter into exclusive affiliation agreements with TWC Inc.’s cable and non-cable competitors and may be unwilling to enter into affiliation agreements with TWC Inc. on acceptable terms, if at all.

      In addition, increased demands by owners of some broadcast stations for carriage of other services or payments to those broadcasters for retransmission consent could further increase TWC Inc.’s programming costs. Federal law allows commercial television broadcast stations to make an election between “must-carry” rights and an alternative “retransmission-consent” regime. When a station opts for the latter, cable operators are not allowed to carry the station’s signal without the station’s permission. TWC Inc. currently has multi-year agreements with most of the retransmission-consent stations that it carries. In other cases, TWC Inc. carries stations under short-term arrangements while it attempts to negotiate new long-term retransmission agreements. If negotiations with these programmers prove unsuccessful, they could require TWC Inc. to cease carrying their signals, possibly for an indefinite period. Any loss of stations could make TWC Inc.’s video service less attractive to subscribers, which could result in less subscription and advertising revenue. In retransmission-consent negotiations, broadcasters often condition consent with respect to one station on carriage of one or more other stations or programming services in which they or their affiliates have an interest. Carriage of these other services may increase TWC Inc.’s programming expenses and diminish the amount of spectrum it has available to introduce new services, which may reduce its future revenue.

      TWC Inc. faces a wide range of competition, which could affect the future results of operations of TWC Inc. The industry in which TWC Inc. operates is highly competitive and has become more so in recent years. TWC Inc. faces intense competition with respect to its video services, particularly from direct-to -home satellite providers, with respect to its high-speed data services, particularly from incumbent local telephone companies and other providers of DSL service and, with respect to its Digital Phone service, particularly from incumbent local telephone companies and Internet phone providers.

      The multi-channel video service business is relatively mature, and TWC Inc. competes with a number of types of businesses that provide video services. Because of the broad footprint of satellite providers, TWC Inc. competes with satellite providers for video subscribers in almost all of the geographic areas served by its cable systems. Technological advancements may, in the future, allow satellite providers to offer certain products and services that are similar to or better than advanced products and services currently available on cable systems, such as video-on -demand. In the future, TWC Inc.’s traditional video services may also compete with video services delivered over broadband internet connections. TWC Inc. also may face significant competition from one or more other providers of paid television services, such as satellite-master antenna television. From time to time, TWC Inc. also faces competition from other cable operators that provide service in some TWC Inc. franchise areas under non-exclusive franchise agreements. In addition, local telephone companies are seeking

to compete in the subscription television business, either through co-marketing arrangements with satellite operators or directly, and they may increase their efforts to do so in the future. In particular, a number of incumbent local telephone companies are in the process of fiber upgrades to their networks that enable the delivery of video services direct to consumer residences, and a number of these companies have begun offering video services. TWC Inc.’s video service business also faces competition from broadcast companies distributing television broadcast signals without a subscription fee and from other communications and entertainment media, including conventional radio broadcasting services, newspapers, movie theaters, the Internet, live sports events and home video products.

      TWC Inc.’s high-speed data (or HSD) service faces competition from DSL providers, Wi-Fi broadband providers, Internet over power line providers, as well as from providers of traditional dial-up Internet access. Some Internet service providers carried by TWC Inc. also may be available from DSL providers operating in TWC Inc.’s service area, which may enhance DSL’s ability to compete with TWC Inc.’s offerings. For example, AOL, whose online services are available in conjunction with TWC Inc.’s high-speed data service, recently announced that it had entered into new arrangements with several DSL providers that compete with TWC Inc. for high-speed data customers. A number of incumbent local telephone companies are in the process of fiber upgrades to their networks that enable the delivery of high speed data services in a manner that may provide greater speed and reliability than these companies’ existing DSL offerings. TWC Inc. also faces HSD service competition from other cable operators who provide service in TWC Inc. operating areas, satellite providers, terrestrial wireless providers and power companies, all of which currently, or may in the future, offer HSD service. Some municipalities also have announced their intentions to create wireless broadband networks that could compete with TWC Inc.’s high-speed data service. In addition, satellite providers have entered into marketing arrangements with incumbent local telephone companies or other providers of DSL and voice services to provide packaged digital video, HSD and voice services to compete with TWC Inc.’s bundled service offerings.

      TWC Inc.’s Digital Phone service faces intense competition for voice customers from incumbent local telephone companies, cellular telephone service providers, Internet phone providers and others. The incumbent local telephone companies have substantial capital and other resources, as well as longstanding customer relationships. Some of these competitors also offer HSD services and have entered into co-marketing arrangements with direct-to -home satellite service providers to offer video services, and some are in the process of fiber upgrades to their networks that enable the direct delivery of video services, together with their telephone and DSL offerings. Such bundled offerings by telephone companies may compete with TWC Inc.’s offerings and could adversely impact TWC Inc. In addition, in January 2006, MCI, one of TWC Inc.’s two interconnect and provisioning partners in the Digital Phone business, merged with Verizon, a regional phone company that competes with TWC Inc. in some areas. It is currently not known whether, or to what extent, the proposed acquisition will have any negative impact on TWC Inc.’s Digital Phone, or other, business and operations.

      In addition, future advances in technology, as well as changes in the marketplace and the regulatory and legislative environment may result in changes to the competitive landscape.

      Any inability to compete effectively or an increase in competition with respect to video, voice or HSD services could have an adverse effect on the Cable segment’s financial results and return on capital expenditures due to possible increases in the cost of gaining and retaining subscribers and lower per-subscriber revenue. In addition, any inability to compete effectively or an increase in competition may slow or cause a decline in TWC Inc.’s growth rates, reduce the number of TWC Inc. subscribers or reduce TWC Inc.’s ability to increase its penetration rates for services. As TWC Inc. expands and introduces new and enhanced products and services, TWC Inc. may be subject to competition from other providers of those products and services, such as telecommunications providers, ISPs and consumer electronics companies, among others. The Company cannot predict the extent to which this competition will affect the Cable segment’s future financial results or return on capital expenditures. See “Business — Cable — Competition.”

      TWC Inc.’s business is subject to extensive governmental regulation, which could adversely affect its business. TWC Inc.’s video and Digital Phone services are subject to extensive regulation by federal, state,

and local governmental agencies. In addition, the federal government also has begun to explore possible regulation of high speed data services. TWC Inc. expects that legislative enactments, court actions, and regulatory proceedings will continue to clarify and in some cases change the rights of cable companies and other entities providing video, voice, and data services under the Communications Act of 1934, as amended, and other laws, possibly in ways that it has not foreseen. The results of these legislative, judicial, and administrative actions may materially affect TWC Inc.’s business operations in areas such as:

RISKS RELATING TO BOTH THE TIME WARNER

NETWORKS AND FILMED ENTERTAINMENT BUSINESSES

      The Networks and Filmed Entertainment segments must respond to recent and future changes in technology, services and standards to remain competitive and continue to increase their revenue. Technology

in the video, telecommunications and data services used in the entertainment industry is changing rapidly, and advances in technology, such as video-on -demand, new video formats and distribution via the Internet, have led to alternative methods of product delivery and storage. Certain changes in consumer behavior driven by these methods of delivery and storage could have a negative effect on the revenue of the Networks and Filmed Entertainment segments. For example, devices that allow users to view television programs or motion pictures from a remote location may cause changes in consumer behavior that could negatively affect the subscription revenue of cable and DTH satellite operators and therefore have a corresponding negative effect on the subscription revenue generated by the Networks segment and the licensing revenue generated by the Networks and Filmed Entertainment segments. Devices that enable users to view television programs or motion pictures on a time-delayed basis or allow them to fast-forward or skip advertisements may cause changes in consumer behavior that could adversely affect the advertising revenue of the advertising-supported networks in the Networks segment and have an indirect negative impact on the licensing revenue generated by the Filmed Entertainment segment and the revenue generated by Home Box Office from the licensing of its original programming in syndication and to basic cable channels. In addition, further increased use of portable digital devices that allow users to view content of their own choice, at a time of their choice, while avoiding traditional commercial advertisements, could adversely affect such advertising and licensing revenue.

      Technological developments also pose other challenges for the Networks and Filmed Entertainment segments that could adversely impact their revenue and competitive position. For example, the Networks and Filmed Entertainment segments may not have the right, and may not be able to secure the right, to distribute their licensed content across new delivery platforms that are developed. In addition, technological developments could enable third-party owners of programming to bypass traditional content aggregators, such as the Turner networks and Home Box Office, and deal directly with cable and DTH satellite operators or other businesses that develop to offer content to viewers. Such limitations on the ability of the segments to distribute their content could have an adverse impact on their revenue. Cable system and DTH satellite operators are developing new techniques that enable them to transmit more channels on their existing equipment to highly targeted audiences, reducing the cost of creating channels and potentially furthering the development of more specialized niche audiences. A greater number of options increases competition for viewers, and competitors targeting programming to narrowly defined audiences may improve their competitive position compared to the Networks and Filmed Entertainment segments for television advertising and for subscription and licensing revenue. The ability to anticipate and adapt to changes in technology on a timely basis and exploit new sources of revenue from these changes will affect the ability of the Networks and Filmed Entertainment segments to continue to grow and increase their revenue.

      The Networks and Filmed Entertainment segments operate in highly competitive industries. The Company’s Networks and Filmed Entertainment businesses generate revenue through the production and distribution of feature films, television programming and home video products, licensing fees, the sale of advertising and subscriber fees paid by affiliates. Competition faced by the businesses within these segments is intense and comes from many different sources. For example:

      The ability of the Company’s Networks and Filmed Entertainment segments to compete successfully depends on many factors, including their ability to provide high-quality and popular entertainment product and their ability to achieve high distribution levels. There has been consolidation in the media industry, and the Company’s Networks and Filmed Entertainment segments’ competitors include industry participants with interests in other multiple media businesses that are often vertically integrated. Vertical integration of other television networks and television and film production companies could adversely impact the Networks segment if it hinders the ability of the Networks segment to obtain programming for its networks. In addition, if purchasers of programming increasingly purchase their programming from production companies with which they are affiliated, such vertical integration could have a negative effect on the Filmed Entertainment segment’s licensing revenue. Furthermore, as described above, there is increased competition in the television industry evidenced by the increasing number and variety of broadcast networks and basic cable and pay television programming services now available. Although this increase could result in greater licensing revenue for the Filmed Entertainment segment, it also could result in higher licensing costs for the Networks segment. There can be no assurance that the Networks and Filmed Entertainment segments will be able to compete successfully in the future against existing or potential competitors, or that competition will not have an adverse effect on their businesses or results of operations.

      The popularity of the Company’s television programs and films and other factors is difficult to predict and could lead to fluctuations in the revenue of the Networks and Filmed Entertainment segments. Television program and film production and distribution are inherently risky businesses largely because the revenue derived from the production and distribution of a television program or motion picture, as well as the licensing of rights to the intellectual property associated with a program or film, depends primarily on its acceptance by the public, which is difficult to predict. The commercial success of a television program or feature film also depends on the quality and acceptance of other competing programs and films released at or near the same time, the availability of alternate forms of entertainment and leisure time activities, general economic conditions and other tangible and intangible factors, many of which are difficult to predict. In the case of the Turner networks, audience sizes are also factors that are weighed when determining their advertising rates. Poor ratings in targeted demographics can lead to a reduction in pricing and advertising spending. Further, the theatrical success of a motion picture may affect revenue from other distribution channels, such as home entertainment and pay television programming services, and sales of licensed consumer products. Therefore, low public acceptance of the television programs or feature films of the Networks and Filmed Entertainment segments may adversely affect their respective results of operations.

      The Networks and Filmed Entertainment segments are subject to potential labor interruption. The Networks and Filmed Entertainment segments and certain of their suppliers retain the services of writers, directors, actors, trade employees and others involved in the production of motion pictures and television programs who are covered by collective bargaining agreements. If expiring collective bargaining agreements are not renewed, it is possible that the affected unions could take action in the form of strikes, work slowdowns or work stoppages. Such actions could cause delays in the production or the release date of the segments’ television programs or feature films as well as higher costs resulting either from such action or less favorable terms of these agreements on renewal.

      Although piracy poses risks to several of Time Warner’s businesses, such risks are especially significant for the Networks and Filmed Entertainment segments due to the prevalence of piracy of feature films and television programming. See “Risks Relating to Time Warner Generally — Piracy of the Company’s feature films, television programming and other content may decrease the revenues received from the exploitation of the Company’s entertainment content and adversely affect its business and profitability.”

RISKS RELATING TO TIME WARNER’S FILMED ENTERTAINMENT BUSINESS

      Box office receipts and the growth rate of DVD sales have recently been declining, which may adversely affect the Filmed Entertainment segment’s growth prospects and results of operations. Several factors, including increasing competition for consumer discretionary spending, piracy, the maturation of the DVD format, increased competition for retailer shelf space and the fragmentation of consumer leisure time, may be contributing to a recent industry-wide decline in box office receipts and in a reduced growth rate of DVD sales. DVD sales also may be affected by consumer anticipation of the release of next-generation, high-definition, optical disc formats. The potential format war between such next-generation formats may slow consumer adoption of those formats once they launch and may likewise result in increased competition for retailer shelf space. In addition, there can be no assurance that home video wholesale prices can be maintained at current levels due to aggressive retail pricing or other factors. A continuing decline in attendance by moviegoers and in DVD sales growth could have an adverse impact on the segment’s results of operations and growth prospects.

      The Filmed Entertainment segment’s strategy includes the release of a limited number of “event” films each year, and the underperformance of one or more of these films could have an adverse effect on the Filmed Entertainment segment’s results of operations and financial condition. The Filmed Entertainment segment expects to theatrically release a limited number of feature films each year that are expected to be “event” or “tent-pole” films and that generally have higher production and marketing costs than the other films released during the year. The underperformance of one of these films can have an adverse impact on the segment’s results of operations in both the year of release and in the future. Historically, there has been a correlation between domestic box office success and international box office success, as well as a correlation between box office success and success in the subsequent distribution channels of home video and television. If the segment’s films fail to achieve box office success, the results of operations and financial condition of the Filmed Entertainment segment could be adversely affected. Further, there can be no assurance that these historical correlations will continue in the future.

      The costs of producing and marketing feature films have increased and may increase in the future, which may make it more difficult for a film to generate a profit. The production and marketing of feature films require substantial capital, and the costs of producing and marketing feature films have generally increased in recent years. These costs may continue to increase in the future, which may make it more difficult for the segment’s films to generate a profit. As production and marketing costs increase, it creates a greater need to generate revenue internationally or from other media, such as home video, television and new media.

      Changes in estimates of future revenues from feature films could result in the write-off or the acceleration of the amortization of film production costs. The Filmed Entertainment segment is required to amortize capitalized film production costs over the expected revenue streams as it recognizes revenue from the associated films. The amount of film production costs that will be amortized each quarter depends on how much future revenue the segment expects to receive from each film. Unamortized film production costs are evaluated for impairment each reporting period on a film-by-film basis. If estimated remaining revenue is not sufficient to recover the unamortized film production costs plus expected but unincurred marketing costs, the unamortized film production costs will be written down to fair value. In any given quarter, if the segment lowers its forecast with respect to total anticipated revenue from any individual feature film, it would be required to accelerate amortization of related film costs. Such a write-down or accelerated amortization could adversely impact the operating results of the Filmed Entertainment segment.

      A decrease in demand for television product could adversely affect Warner Bros.’ revenues. Warner Bros. is a leading supplier of television programming. If there is a decrease in the demand for Warner Bros.’

television product, it could lead to the launch of fewer new television series and the reduction of license fees in the near term and a reduction in syndication revenues in the future. Various factors may increase the risk of such a decrease, including station group consolidation and vertical integration between station groups and broadcast networks, as well as the vertical integration between television production studios and broadcast networks, which can increase reliance by networks on their in-house or affiliated studios.

RISKS RELATING TO TIME WARNER’S NETWORKS BUSINESS

      The loss of affiliation agreements could cause the revenue of the Networks segment to decline in any given period, and further consolidation of multichannel video programming distributors could adversely affect the segment. The Networks segment depends on affiliation agreements with cable system and DTH satellite operators for the distribution of its networks, and there can be no assurance that these affiliation agreements will be renewed in the future on terms that are acceptable to the Networks segment. The renewal of such agreements on less favorable terms may adversely affect the segment’s results of operations. In addition, the loss of any one of these arrangements representing a significant number of subscribers or the loss of carriage on the most widely penetrated programming tiers could reduce the distribution of the segment’s programming, which may adversely affect its advertising and subscription revenue. The loss of favorable packaging, positioning, pricing or other marketing opportunities with any distributor of the segment’s networks also could reduce subscription revenue. In addition, further consolidation among cable system and DTH satellite operators has provided greater negotiating power to such distributors, and increased vertical integration of such distributors could adversely affect the segment’s ability to maintain or obtain distribution and/or marketing for its networks on commercially reasonable terms, or at all.

      The inability of the Networks segment to license rights to popular programming or create popular original programming could adversely affect the segment’s revenue. The Networks segment obtains a significant portion of its popular programming from third parties. For example, some of Turner’s most widely viewed programming, including sports programming, is made available based on programming rights of varying durations that it has negotiated with third parties. Home Box Office also enters into commitments to acquire rights to feature films and other programming for its HBO and Cinemax pay television programming services from feature film producers and other suppliers for varying durations. Competition for popular programming licensed from third parties is intense, and the businesses in the segment may be outbid by their competitors for the rights to new popular programming or in connection with the renewal of popular programming they currently license. In addition, renewal costs could substantially exceed the existing contract costs. Alternatively, third parties from which the segment obtains programming, such as professional sports teams or leagues, could create their own networks.

      The operating results of the Networks segment also fluctuate with the popularity of its programming with the public, which is difficult to predict. Revenue from the segment’s businesses is therefore partially dependent on the segment’s ability to develop strong brand awareness and to target key areas of the television viewing audience, including both newer demographics and preferences for particular genres, as well as its ability to continue to anticipate and adapt to changes in consumer tastes and behavior on a timely basis. Moreover, the Networks segment derives a portion of its revenue from the exploitation of the Company’s library of feature films, animated titles and television titles. If the content of the Company’s programming libraries ceases to be of interest to audiences or is not continuously replenished with popular original content, the revenue of the Networks segment could be adversely affected.

      Increases in the costs of programming licenses and other significant costs may adversely affect the gross margins of the Networks segment. As described above, the Networks segment licenses a significant amount of its programming, such as motion pictures, television series, and sports events, from movie studios, television production companies and sports organizations. For example, the Turner networks license the rights to broadcast significant sports events such as NBA play-offs and a series of NASCAR races. In addition, Home Box Office relies on film studios for a significant portion of its content. If the level of demand for quality content exceeds the amount of quality content available, the networks may have to pay significantly higher licensing costs, which in turn will exert greater pressure on the segment to offset such increased costs with

higher advertising and/or subscription revenue. There can be no assurance that the Networks segment will be able to renew existing or enter into additional license agreements for its programming and, if so, if it will be able to do so on terms that are similar to existing terms. There also can be no assurance that it will be able to obtain the rights to distribute the content it licenses over new distribution platforms on acceptable terms. If it is unable to obtain such extensions, renewals or agreements on acceptable terms, the gross margins of the Networks segment may be adversely affected.

      The Networks segment also produces programming, and it incurs costs for new show concepts and all types of creative talent, including actors, writers and producers. The segment incurs additional significant costs, such as newsgathering and marketing costs. Unless they are offset by increased revenue, increases in the costs of creative talent or in production, newsgathering or marketing costs may lead to decreased profits at the Networks segments.

      The continued decline in the growth rate of U.S. basic cable and DTH satellite households, together with rising retail rates, distributors’ focus on selling alternative products and other factors, could adversely affect the future revenue growth of the Networks segment. The U.S. video services business generally is a mature business, which may have a negative impact on the ability of the Networks segment to achieve incremental growth in its advertising and subscription revenues. In addition, programming distributors may increase their resistance to wholesale programming price increases, and programming distributors are increasingly focused on selling services other than video, such as high-speed data access and voice services. Also, consumers’ basic cable rates have continued to increase, which could cause consumers to cancel their cable or satellite service subscriptions. The inability of the Networks segment to implement measures to maintain future revenue growth may adversely affect its business.

      Changes in U.S. or foreign communications laws or other regulations may have an adverse effect on the business of the Networks segment. The multichannel video programming and distribution industries in the United States, as well as broadcast networks, are regulated by U.S. federal laws and regulations issued and administered by various federal agencies, including the FCC. For example, federal legislation and FCC rules limit the amount and content of commercial material that may be shown on cable, satellite and broadcast network channels during programming designed for children 12 years of age and younger. In November 2004, the FCC issued rules that would, as of January 1, 2006, classify promotions aired during children’s programming on a channel for other programs also aired on that channel as commercial material unless the programs being promoted are educational or informational, as defined under FCC rules. If not clarified, these rules could have an adverse impact on Turner’s children-oriented programming, including children’s programs on the Cartoon Network, because they would require a reduction of promotional or advertising time during such programming. The rules also would: (1) limit the display during children’s cable programming of the Internet addresses of websites that primarily contain or link to commercial material, including the websites for the segment’s cable channels, and (2) prohibit during children’s programming the display of Internet addresses of websites that contain host selling, as defined under FCC rules. These rules, if not clarified, could have an adverse impact on the segment’s revenue from its websites for children. Time Warner and several other companies have proposed to the FCC a clarified set of rules relating to these issues, based on an agreement with a coalition of advocacy groups about the appropriate scope of the rules. This agreement would: (1) count promotions for children’s and other age-appropriate programming on the same channel, and educational and information programming on any channel, as non-commercial time; (2) retain the limit on the display of website addresses in children’s programming for non-compliant websites; and (3) limit the applicability of the host selling rule to pages mixing program-related editorial content and ads or products featuring that program or its characters, if the website address is referenced during or adjacent to that program. Jointly, all parties have asked the FCC to reconsider both rules and have been granted a stay of the effective date of the rules while the FCC considers whether to amend them as proposed by the parties.

      In addition, the U.S. Congress and the FCC currently are considering, and may in the future adopt, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect the operations of the Networks segment. For example, the FCC has been examining whether cable operators should offer “à la carte” programming to subscribers on a network-by-network basis or provide “family-friendly” tiers. A number of cable operators, including TWC Inc., have voluntarily agreed to offer family tiers

in light of this interest. The unbundling or tiering of program services may reduce distribution of certain cable networks, thereby creating the risk of reduced viewership and increased marketing expenses, and may affect the segment’s ability to compete for or attract the same level of advertising dollars. Any decline in subscribers could lead to a decrease in the segment’s advertising and subscription revenues.

      There also has been consideration of the extension of indecency rules applicable to over-the -air broadcasters to cable and satellite programming and stricter enforcement of existing laws and rules. If such an extension or attempt to increase enforcement occurred and were upheld, the content of the Networks segment could be subject to additional regulation, which could affect subscriber and viewership levels. Moreover, the determination of whether content is indecent is inherently subjective and, as such, it can be difficult to predict whether particular content would violate indecency standards. The difficulty in predicting whether individual programs, words or phrases may violate the FCC’s indecency rules adds uncertainty to the ability of the Networks segment to comply with the rules. Violation of the indecency rules could lead to sanctions that may adversely affect the businesses and results of operations of the Networks segment.

RISKS RELATING TO TIME WARNER’S PUBLISHING BUSINESS

      The Publishing segment’s operating income could decrease as a result of increases in paper costs and postal rates. The Publishing segment’s principal raw material is paper, and paper prices have fluctuated over the past several years. Accordingly, significant unanticipated increases in paper prices could adversely affect the segment’s operating income. Postage for magazine distribution and direct solicitation is another significant operating expense of the Publishing segment, which primarily uses the U.S. Postal Service to distribute its products. The U.S. Postal Service implemented a postal rate increase of 5.4% effective January 8, 2006. If there are further significant increases in paper costs and/or postal rates and the Publishing segment is not able to offset these increases, they could have a negative impact on the segment’s operating income.

      The introduction and increased popularity of alternative technologies for the distribution of news, entertainment and other information and the resulting shift in consumer habits and/or advertising expenditures from print to other media could adversely affect the Publishing segment’s results of operations. The Publishing segment derives a substantial portion of its revenue from advertising in magazines. Distribution of news, entertainment and other information via the Internet has become increasingly popular over the past several years, and viewing news, entertainment and other content on a personal computer, cellular phone or other device has become increasingly popular as well. Accordingly, advertising dollars have started to shift from traditional print media to online media. The Publishing segment has taken various steps to diversify its advertising vehicles, including relaunching certain websites and expanding its existing online content. However, the Publishing segment’s strategies for achieving sustained revenue growth may not be sufficient to offset revenue losses resulting from a continued shift in advertising dollars over the long term from print to other media.

      The Publishing segment faces risks relating to various regulatory and legislative matters, including changes in Audit Bureau of Circulations rules and possible changes in regulation of direct marketing. The Publishing segment’s magazine subscription and direct marketing activities are subject to regulation by the FTC and the states under general consumer protection statutes prohibiting unfair or deceptive acts or practices. Certain areas of marketing activity are also subject to specific federal statutes and rules, such as the Telephone Consumer Protection Act, the Children’s Online Privacy Protection Act, the Gramm-Leach-Bliley Act (relating to financial privacy), the FTC Mail or Telephone Order Merchandise Rule and the FTC Telemarketing Sales Rule. Other statutes and rules also regulate conduct in areas such as privacy, data security and telemarketing. New statutes and regulations are adopted frequently. In addition, the Audit Bureau of Circulations recently implemented changes in its rules that changed the classification of certain magazine subscriptions. The Company is currently unable to assess the effect such changes may have on the Publishing segment, but it is possible that they may have a negative impact on spending by the segment’s advertisers. New rules, as well as new interpretations of existing rules, could lead to changes in the segment’s marketing methods which could have a negative effect on the segment’s ability to generate new magazine subscriptions, meet rate bases and support advertising sales.

      The Publishing segment faces significant competition for advertising and circulation. The Publishing segment faces significant competition from several direct competitors and other media, including the Internet. The Publishing segment’s magazine operations compete for circulation and audience with numerous other magazine publishers and other media. The Publishing segment’s magazine operations also compete with other magazine publishers and other media for advertising directed at the general public and at more focused demographic groups. Time Inc.’s direct marketing operations compete with other direct marketers through all media for the consumer’s attention.

      Competition for advertising revenue is primarily based on advertising rates, the nature and amount of readership, reader response to advertisers’ products and services and the effectiveness of sales teams. Other competitive factors in magazine publishing include product positioning, editorial quality, circulation, price and customer service, which impact readership audience, circulation revenue and, ultimately, advertising revenue. The magazine publishing business presents few barriers to entry and many new magazines are launched annually across multiple sectors. In recent years competitors launched and/or repositioned many magazines, primarily in the celebrity and women’s service sectors, that compete directly with People, In Style, Real Simple and other Publishing segment magazines, particularly at newsstand checkouts in mass-market retailers. The Company anticipates that it will face continuing competition from these new competitors and additional competitors may enter this field and further intensify competition, which could have an adverse impact on the segment’s revenue.

      The Publishing segment has in recent years made various changes in its circulation practices and consequently faces new challenges in identifying new subscribers and increasing circulation, which could have an adverse impact not only on its circulation revenue but also on its advertising revenue.

      The Publishing segment could face increased costs and business disruption resulting from instability in the newsstand distribution channel. The Publishing segment operates a national distribution business that relies on wholesalers to distribute magazines published by the Publishing segment and other publishers to newsstands and other retail outlets. Due to industry consolidation, four wholesalers represent more than 80% of the wholesale magazine distribution business. There is a possibility of further consolidation among these wholesalers and/or insolvency of one or more of these wholesalers. Should there be a disruption in this wholesale channel it could adversely affect the Publishing segment’s operating income and cash flow, including temporarily impeding the Publishing segment’s ability to distribute magazines to the retail marketplace.

      Not applicable.