UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

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

for the quarterly period ended June 30, 2007 or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from                      to                     

Commission file number 001-15062

One Time Warner Center
New York, NY 10019-8016
(Address of Principal Executive Offices) (Zip Code)

(212) 484-8000
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o

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

 

 

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

		Page
PART I. FINANCIAL INFORMATION
Management’s Discussion and Analysis of Results of Operations and Financial Condition			1
Item 4. Controls and Procedures			35
Consolidated Balance Sheet at June 30, 2007 and December 31, 2006			36
Consolidated Statement of Operations for the Three and Six Months Ended June 30, 2007 and 2006			37
Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2007 and 2006			38
Consolidated Statement of Shareholders’ Equity			39
Notes to Consolidated Financial Statements			40
Supplementary Information			68
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			76
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			77
Item 4. Submission of Matters to a Vote of Security Holders			78
Item 5. Other Information			79
Item 6. Exhibits			80
EX-3.2 CERTIFICATE OF ELIMINATION FILED JULY 27, 2007
EX-3.3 CERTIFICATION OF ELIMINATION FILED JULY 27, 2007
EX-3.4 RESTATED CERTIFICATE OF INCORPORATION FILED JULY 27, 2007
EX-3.5 BY-LAWS AMENDED THROUGH JULY 26, 2007
EX-31.1 SECTION 302 CERTIFICATION OF THE PEO
EX-31.2 SECTION 302 CERTIFICATION OF PFO
EX-32 SECTION 906 CERTIFICATION OF THE PEO & PFO

TIME WARNER INC.

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

OVERVIEW

     Time Warner is a leading media and entertainment company, whose major businesses encompass an array of the most respected and successful media brands. Among the Company’s brands are HBO, CNN, AOL, People, Sports Illustrated, Time and Time Warner Cable. The Company produces and distributes films through Warner Bros. and New Line Cinema, including Harry Potter and the Order of the Phoenix , 300 , Happy Feet and Ocean’s 13 , as well as television programs, including ER, Two and a Half Men, Cold Case and Without a Trace. During the six months ended June 30, 2007, the Company generated revenues of $22.164 billion (up 8% from $20.599 billion in 2006), Operating Income before Depreciation and Amortization of $6.640 billion (up 29% from $5.129 billion in 2006), Operating Income of $4.476 billion (up 25% from $3.571 billion in 2006), Net Income of $2.270 billion (down 8% from $2.477 billion in 2006) and Cash Provided by Operations of $3.119 billion (down 25% from $4.157 billion in 2006).

Time Warner Businesses

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

      AOL. AOL LLC (together with its subsidiaries, “AOL”) is a leader in interactive services. In the U.S. and internationally, AOL operates a leading network of web brands, offers free client software and services to users who have their own Internet connection and provides services to advertisers on the Internet. In addition, AOL operates one of the largest Internet access subscription services in the United States. At June 30, 2007, AOL had 10.9 million AOL brand subscribers in the U.S., which does not include registrations for the free AOL service. For the six months ended June 30, 2007, AOL reported total revenues of $2.711 billion (12% of the Company’s overall revenues) and had $1.695 billion in Operating Income before Depreciation and Amortization and $1.444 billion in Operating Income, both of which included a pretax gain of approximately $670 million related to the sale of AOL’s German access business.

     Historically, AOL’s primary product offering has been an online subscription service that includes dial-up Internet access, and this product currently generates the majority of AOL’s revenues. AOL continued to experience significant declines in the first half of 2007 in the number of its U.S. subscribers and related revenues, due primarily to AOL’s decisions to focus on its advertising business and offer most of its services (other than Internet access) for free, AOL’s reduction of subscriber acquisition and retention efforts, and the industry-wide decline of the premium dial-up ISP business and growth in the broadband Internet access business. The decline in subscribers has had an adverse impact on AOL’s Subscription revenues. However, dial-up network costs have also decreased and are anticipated to continue to decrease as subscribers decline. AOL’s Advertising revenues, in large part, are generated from the traffic to and usage of the AOL service by AOL’s subscribers. Therefore, the decline in subscribers also could have an adverse impact on AOL’s Advertising revenues to the extent that subscribers canceling their subscriptions do not maintain their relationship with and usage of the AOL Network (as defined below).

     AOL’s strategy (as announced on August 2, 2006) is to transition from a business that has relied heavily on Subscription revenues from dial-up subscribers to one that attracts and engages more Internet users and takes advantage of the growth in online advertising. AOL’s focus is on growing its global web services business and managing costs in its access services business. A goal of AOL’s strategy is to maintain and expand relationships with current and former AOL subscribers, whether they continue to purchase the dial-up Internet access subscription service or not. Another component of the strategy is to permit access to most of the AOL services, including use of the AOL client software and AOL e-mail accounts, without charge. Therefore, as long as an individual has a means to connect to the Internet, that person can access and use most of the AOL services for free.

     The components of this strategy primarily include the following:

	•		providing advertising services domestically and internationally on the AOL Network and on Internet sites of third-party entities (referred to as “Partner Sites”) through display advertising and paid-search advertising;
	•		attracting highly-engaged users to and retaining those users on AOL’s interactive properties, including AIM, AOL.com, MapQuest and Moviefone, as well as attracting and retaining former and current subscribers, by:

•

offering compelling content, features and tools, including e-mail, instant messaging and the AOL client software, which generally are available to Internet users for free; and

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

•

implementing a cost-effective distribution strategy for its free and paid products and services by entering into or maintaining relationships with computer manufacturers, retailers, third-party high-speed Internet access providers, or other aggregators of Internet activity, and search engine optimization and search engine marketing;

	•		providing paid services, including certain online safety and security products on a subscription basis; and
	•		providing software for mobile devices that will further the distribution of AOL products and services.

     The AOL Network consists of a variety of websites, related applications and services, and the AOL and low-cost ISP services. Specifically, the AOL Network includes AOL.com, AIM, MapQuest, Moviefone, ICQ and Netscape as well as other co-branded websites for which certain criteria have been met, including that the Internet traffic has been assigned to AOL. Advertising services on Partner Sites are provided primarily through AOL’s wholly owned subsidiary, Advertising.com, but also directly by AOL, and paid-search advertising activities on the AOL Network are conducted primarily through AOL’s strategic relationship with Google Inc. (“Google”). Following the expansion of this strategic alliance in April 2006, 95% of the equity interests in AOL are indirectly held by the Company and 5% are indirectly held by Google.

     Consistent with its strategy, in the second quarter of 2007, AOL acquired Third Screen Media, Inc., a mobile advertising network and mobile ad-serving management platform provider, and a controlling interest in ADTECH AG, an international online ad-serving company. In addition, as noted under “Recent Developments,” in the third quarter of 2007, the Company entered into an agreement to purchase TACODA, Inc. (“TACODA”), an online behavioral targeting advertising network.

     In connection with its strategy, AOL undertook certain restructuring and related activities in 2006 and the first half of 2007, including involuntary employee terminations, contract terminations, facility closures and asset write-offs. Additional restructuring and related activities of this nature are anticipated during the remainder of 2007.

      Cable. Time Warner’s cable business, Time Warner Cable Inc. and its subsidiaries (“TWC”), is the second-largest cable operator in the U.S. and is an industry leader in developing and launching innovative video, data and voice services. At June 30, 2007, TWC had approximately 13.4 million basic video subscribers in technologically advanced, well-clustered systems located mainly in five geographic areas — New York state, the Carolinas, Ohio, southern California and Texas. As of June 30, 2007, TWC was the largest cable operator in a number of large cities, including New York City and Los Angeles. For the six months ended June 30, 2007, TWC delivered revenues of $7.865 billion (35% of the Company’s overall revenues), $2.751 billion in Operating Income before Depreciation and Amortization and $1.290 billion in Operating Income.

     On July 31, 2006, a subsidiary of TWC, Time Warner NY Cable LLC (“TW NY”), and Comcast Corporation (together with its subsidiaries, “Comcast”) completed the acquisition of substantially all of the cable assets of Adelphia Communications Corporation (“Adelphia”) and related transactions. In addition, effective January 1, 2007, TWC began consolidating the results of certain cable systems located in Kansas City, south and west Texas and New Mexico (the “Kansas City Pool”) upon the distribution of the assets of Texas and Kansas City Cable Partners, L.P. (“TKCCP”) to TWC and Comcast. Prior to January 1, 2007, TWC’s interest in TKCCP was reported as an equity method investment. Refer to “Recent Developments” for further details.

     TWC principally offers three services — video, high-speed data and voice, which have been primarily targeted to residential customers. Video is TWC’s largest service in terms of revenues generated. TWC expects to continue to increase video revenues through the offering of advanced digital video services such as video-on-demand (“VOD”), subscription-video-on-demand (“SVOD”), high definition television (“HDTV”) and set-top boxes equipped with digital video recorders (“DVRs”), as well as through price increases and subscriber growth. TWC’s digital video subscribers provide a broad base of potential customers for additional advanced services. Providing basic video services is a competitive and highly penetrated business, and, as a result, TWC expects slower incremental growth in the number of basic video subscribers compared to the growth in TWC’s advanced service offerings. Video programming costs represent a major component of TWC’s expenses and are expected to continue to increase, reflecting contractual rate increases, subscriber growth and the expansion of service offerings, and it is expected that TWC’s video service margins will decline over the next few years as programming cost increases outpace growth in video revenues.

     High-speed data has been one of TWC’s fastest-growing services over the past several years and is a key driver of its results. As of June 30, 2007, TWC had approximately 7.2 million residential high-speed data subscribers. TWC expects continued strong growth in residential high-speed data subscribers and revenues for the foreseeable future; however, the

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

rate of growth of both subscribers and revenues is expected to slow over time as high-speed data services become increasingly well-penetrated. In addition, as narrowband Internet users continue to migrate to broadband connections, TWC anticipates that an increasing percentage of its new high-speed data customers will elect to purchase its entry-level high-speed data service, which is generally less expensive than TWC’s flagship service. As a result, over time, TWC’s average high-speed data revenue per subscriber may decline reflecting this shift in mix. TWC also offers commercial high-speed data services and had approximately 263,000 commercial high-speed data subscribers as of June 30, 2007.

     Approximately 2.3 million subscribers received Digital Phone service, TWC’s voice service, as of June 30, 2007. Under TWC’s primary calling plan, for a monthly fixed fee, Digital Phone customers typically receive the following services: an unlimited local, in-state and U.S., Canada and Puerto Rico calling plan, as well as call waiting, caller ID and E911 services. TWC is also currently deploying lower-priced calling plans to serve those customers that do not use interstate and/or long-distance calling plans extensively and intends to offer additional plans with a variety of callings plan options in the future. Digital Phone enables TWC to offer its customers a convenient package, or “bundle,” of video, high-speed data and voice services, and to compete effectively against bundled services available from its competitors. TWC expects strong increases in Digital Phone subscribers and revenues for the foreseeable future. TWC has begun to introduce Business Class Phone, a commercial Digital Phone service, to small- and medium-sized businesses and will continue to roll out this service during the remainder of 2007 in most of the systems TWC owned before and retained after the transactions with Adelphia and Comcast (the “Legacy Systems”). TWC is also introducing this service in some of the systems acquired in and retained after the transactions with Adelphia and Comcast (the “Acquired Systems”).

     Some of TWC’s principal competitors, in particular, direct broadcast satellite operators and incumbent local telephone companies, either offer or are making significant capital investments that will allow them to offer services that provide features and functions comparable to the video, data and/or voice services that TWC offers and they are aggressively seeking to offer them in bundles similar to TWC’s. TWC expects that the availability of these bundled service offerings will continue to intensify competition.

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

     As of July 31, 2006, the date the transactions with Adelphia and Comcast closed, the penetration rates for basic video, digital video and high-speed data services were generally lower in the Acquired Systems than in the Legacy Systems. Furthermore, certain advanced services were not available in some of the Acquired Systems, and an IP-based telephony service was not available in any of the Acquired Systems. To increase the penetration of these services in the Acquired Systems, TWC is in the midst of a significant integration effort that includes upgrading the capacity and technical performance of these systems to levels that will allow the delivery of these advanced services and features. Such integration-related efforts are expected to be largely complete by the end of 2007. As of June 30, 2007, Digital Phone was available to over 40% of the homes passed in the Acquired Systems. TWC expects to continue to roll out Digital Phone service across the Acquired Systems during the remainder of 2007.

     Improvement in the financial and operating performance of the Acquired Systems depends in part on the completion of these initiatives and the subsequent availability of TWC’s bundled advanced services in the Acquired Systems. In addition, due to various operational and competitive challenges, TWC expects that the acquired systems located in Los Angeles, CA and Dallas, TX will continue to require more time and resources than the other acquired systems to stabilize and then meaningfully improve their financial and operating performance. As of June 30, 2007, the Los Angeles and Dallas acquired systems together served approximately 1.9 million basic video subscribers (about 50% of the basic video subscribers served by the Acquired Systems). TWC believes that by upgrading the plant and integrating the Acquired Systems into its operations, there is a significant opportunity over time to increase service penetration rates, and improve Subscription revenues and Operating Income before Depreciation and Amortization in the Acquired Systems.

      Filmed Entertainment. Time Warner’s Filmed Entertainment businesses, Warner Bros. Entertainment Group (“Warner Bros.”) and New Line Cinema Corporation (“New Line”), generated revenues of $4.996 billion (22% of the Company’s overall revenues), $506 million in Operating Income before Depreciation and Amortization and $324 million in Operating Income for the six months ended June 30, 2007. The Filmed Entertainment segment experienced a decline in revenues and operating results for the six months ended June 30, 2007 due to difficult comparisons to the six months ended June 30, 2006.

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

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

     Warner Bros. continues to develop its industry-leading television business, including the successful releases of television series on home video. Throughout the 2006-2007 television season, Warner Bros. produced prime-time series for all five broadcast networks (including ER, Two and a Half Men, Without a Trace, Cold Case, Smallville and Men In Trees ), as well as original series for cable networks (including The Closer and Nip/Tuck ). For the 2007-2008 television season, Warner Bros. anticipates having approximately 25 prime-time series across the five broadcast networks, as well as original series for cable networks.

     The sale of DVDs has been one of the largest drivers of the segment’s profit over the last several years, and Warner Bros.’ extensive library of theatrical and television titles positions it to continue to benefit from sales of home video product to consumers. However, the industry and the Company have experienced a leveling of DVD sales due to several factors, including increasing competition for consumer discretionary spending, piracy, the maturation of the standard definition DVD format and the fragmentation of consumer time.

     Piracy, including physical piracy as well as illegal online file-sharing, continues to be a significant issue for the filmed entertainment industry. Due to technological advances, piracy has expanded from music to movies and television programming. The Company has taken a variety of actions to combat piracy over the last several years, including the launch of new services for consumers at competitive price points, aggressive online and customs enforcement, compressed release windows and educational campaigns, and will continue to do so, both individually and together with cross-industry groups, trade associations and strategic partners.

      Networks. Time Warner’s Networks segment comprises Turner Broadcasting System, Inc. (“Turner”) and Home Box Office, Inc. (“HBO”). On September 17, 2006, Warner Bros. and CBS Corp. (“CBS”) ceased the stand-alone operations of The WB Network and UPN, respectively, and formed The CW, an equity method investee of the Company. The Networks segment results included the operations of The WB Network through the date of its shutdown on September 17, 2006. For the six months ended June 30, 2007, the Networks segment delivered revenues of $5.011 billion (21% of the Company’s overall revenues), $1.649 billion in Operating Income before Depreciation and Amortization and $1.494 billion in Operating Income.

     The Turner networks — including such recognized brands as TNT, TBS, CNN, Cartoon Network and CNN Headline News — are among the leaders in advertising-supported cable TV networks. For five consecutive years, more prime-time viewers have watched advertising-supported cable TV networks than the national broadcast networks. For the six months ended June 30, 2007, TNT ranked first among advertising-supported cable networks in total-day delivery of its key demographics, Adults 18-49 and Adults 25-54 and in prime-time delivery ranked second for Adults 18-49 and Adults 25-54. TBS ranked second among advertising-supported cable networks in prime-time delivery of its key demographic, Adults 18-34.

     The Turner networks generate revenues principally from the sale of advertising time and monthly subscriber fees paid by cable system operators, direct-to-home satellite operators and other affiliates. Key contributors to Turner’s success are its continued investments in high-quality programming focused on sports, network movie premieres, licensed and original series, news and animation, leading to strong ratings and Advertising and Subscription revenue growth, as well as strong brands and operating efficiency.

     HBO operates the HBO and Cinemax multichannel pay television programming services, with the HBO service ranking as the nation’s most widely distributed pay television network. HBO generates revenues principally from monthly subscriber fees from cable system operators, direct-to-home satellite operators and other affiliates. An additional source of revenue is the ancillary sales of its original programming, including The Sopranos, Sex and the City, Rome and Entourage.

      Publishing. Time Warner’s Publishing segment consists principally of magazine publishing and a number of direct-marketing and direct-selling businesses. The segment generated revenues of $2.301 billion (10% of the Company’s overall

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

revenues), $386 million in Operating Income before Depreciation and Amortization and $294 million in Operating Income for the six months ended June 30, 2007.

     As of June 30, 2007, Time Inc. published over 125 magazines globally, including People, Sports Illustrated, In Style, Southern Living, Real Simple, Entertainment Weekly, Time, Cooking Light and Fortune. It generates revenues primarily from advertising, magazine subscriptions and newsstand sales, and its growth is derived from higher circulation and advertising on existing magazines, new magazine launches, acquisitions and advertising from digital properties. Time Inc. owns IPC Media, the U.K.’s largest magazine company (“IPC”), and the magazine subscription marketer Synapse Group, Inc. The Company’s Publishing segment has experienced sluggish print advertising sales as advertisers are shifting advertising expenditures to digital media. As a result, Time Inc. continues to invest in developing digital content, including the launch of MyRecipes.com, increased functionality for CNNMoney.com, the expansion of Sports Illustrated ’s digital properties and the launch of various digital sites in the U.K. by IPC. Time Inc.’s direct-selling division, Southern Living At Home, sells home decor products through independent consultants at parties hosted in people’s homes throughout the U.S.

     On March 3, 2007, the Company sold its Parenting Group and most of the Time4 Media magazine titles, consisting of 18 of Time Inc.’s smaller niche magazines, to a subsidiary of Bonnier AB, a Swedish media company (“Bonnier”). Refer to “Recent Developments” for further discussion.

Recent Developments

Common Stock Repurchase Program

     In July 2005, Time Warner’s Board of Directors authorized a common stock repurchase program that, as amended over time, allowed the Company to purchase up to an aggregate of $20 billion of common stock during the period from July 29, 2005 through December 31, 2007. As of June 30, 2007, the Company completed this common stock repurchase program, having repurchased approximately 1.1 billion shares of common stock from the program’s inception through such date.

     On July 26, 2007, Time Warner’s Board of Directors authorized a new common stock repurchase program that allows the Company to purchase, from time to time, up to an aggregate of $5 billion of common stock. Purchases under this new stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. Size and timing of these purchases are based on a number of factors, including price and business and market conditions (Note 6).

Transaction with Liberty

     On May 16, 2007, the Company completed a transaction in which Liberty Media Corporation (“Liberty”) exchanged 68.5 million shares of Time Warner common stock for the stock of a subsidiary of Time Warner that owned assets including the Atlanta Braves baseball franchise (the “Braves”) and Leisure Arts, Inc. (“Leisure Arts”) (at a fair value of $473 million) and $960 million of cash (collectively, the “Liberty Transaction”). Included in the 68.5 million shares of Time Warner common stock are 4 million shares expected to be delivered to the Company upon the resolution of a working capital adjustment that is expected to be completed in the third quarter of 2007. The 4 million shares have a value of $83 million and have been reflected as common stock due from Liberty in the accompanying consolidated balance sheet at June 30, 2007. In the second quarter of 2007, the Company recorded a pretax gain of $72 million on the sale of the Braves, which is net of indemnification obligations valued at $60 million. The Company has agreed to indemnify Liberty for, among other things, increases in the amount due by the Braves under Major League Baseball’s revenue sharing rules from expected amounts for fiscal years 2007 to 2027, to the extent attributable to local broadcast and other contracts in place prior to the Liberty Transaction. The Liberty Transaction was designed to qualify as a tax-free split-off under Section 355 of the Internal Revenue Code of 1986, as amended, and, as a result, the historical deferred tax liabilities of $83 million associated with the Braves were no longer required. In the first quarter of 2007, the Company recorded an impairment charge of $13 million on its investment in Leisure Arts. The results of operations of the Braves and Leisure Arts have been reflected as discontinued operations for all periods presented (Note 3).

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

TACODA

     On July 23, 2007, the Company entered into an agreement to purchase TACODA, an online behavioral targeting advertising network, for approximately $275 million in cash. The transaction, which is subject to customary closing conditions, is expected to close in the third quarter of 2007 (Note 3).

Texas/Kansas City Cable Joint Venture

     TKCCP was a 50-50 joint venture between a consolidated subsidiary of TWC (Time Warner Entertainment-Advance/Newhouse Partnership (“TWE-A/N”)) and Comcast. On January 1, 2007, TKCCP distributed its assets to TWC and Comcast. TWC received the Kansas City Pool, which served approximately 788,000 basic video subscribers as of December 31, 2006, and Comcast received the pool of assets consisting of the Houston cable systems (the “Houston Pool”), which served approximately 795,000 basic video subscribers as of December 31, 2006. TWC began consolidating the results of the Kansas City Pool on January 1, 2007. TKCCP was formally dissolved on May 15, 2007. For accounting purposes, the Company has treated the distribution of TKCCP’s assets as a sale of the Company’s 50% equity interest in the Houston Pool and as an acquisition of Comcast’s 50% equity interest in the Kansas City Pool. As a result of the sale of the Company’s 50% equity interest in the Houston Pool, the Company recorded a pretax gain of approximately $146 million in the first quarter of 2007, which is included as a component of other income, net in the accompanying consolidated statement of operations for the six months ended June 30, 2007 (Note 2).

Bookspan

     On April 9, 2007, the Company sold its 50% interest in Bookspan, a joint venture accounted for as an equity method investment that primarily owns and operates book clubs via direct mail and e-commerce, to a subsidiary of Bertelsmann AG (“Bertelsmann”) for a purchase price of $145 million, which resulted in a pretax gain of approximately $100 million (Note 3).

Parenting and Time4 Media

     On March 3, 2007, the Company sold its Parenting Group and most of the Time4 Media magazine titles, consisting of 18 of Time Inc.’s smaller niche magazines, to a subsidiary of Bonnier for approximately $220 million, which resulted in a pretax gain of approximately $54 million. The results of operations of the Parenting Group and Time4 Media magazine titles that were sold have been reflected as discontinued operations for all periods presented (Note 3).

Sales of AOL’s European Access Businesses

     On February 28, 2007, the Company completed the sale of AOL’s German access business to Telecom Italia S.p.A. for $850 million in cash, resulting in a pretax gain of approximately $670 million. In connection with this sale, the Company entered into a separate agreement to provide ongoing web services, including content, e-mail and other online tools and services to Telecom Italia S.p.A. As a result of the historical interdependency of AOL’s European access and audience businesses, the historical cash flows and operations of the access and audience businesses were not clearly distinguishable. Accordingly, AOL’s German access business and its other European access businesses, which were sold in 2006, have not been reflected as discontinued operations in the accompanying consolidated financial statements (Note 3).

Divestitures of Certain Non-Core AOL Wireless Businesses

     On June 21, 2007, the Company announced an agreement to sell Tegic Communications, Inc. (“Tegic”), a wholly owned subsidiary of AOL, to Nuance Communications, Inc. (“Nuance”) for approximately $265 million in cash. This transaction, which is subject to customary closing conditions, is expected to close in the third quarter of 2007. The Company expects to record a pretax gain on this sale ranging from approximately $160 million to $190 million. In addition, in the second quarter of 2007, the Company agreed to transfer the assets of Wildseed LLC (“Wildseed”), a wholly owned subsidiary of AOL, to a third party. The Company recorded a pretax charge of approximately $7 million related to this divestiture in the second quarter of 2007 and an impairment charge of approximately $18 million on the long-lived assets of Wildseed in the first quarter of 2007. The results of operations of both Tegic and Wildseed have been reflected as discontinued operations for all periods presented (Note 3).

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

Claxson

     On December 14, 2006, Turner announced an agreement with Claxson Interactive Group, Inc. (“Claxson”) to purchase seven pay television networks operating in Latin America for approximately $235 million (net of cash acquired). The transaction, which is subject to customary closing conditions, is expected to close in the second half of 2007 (Note 3).

Transactions with Adelphia and Comcast

     On July 31, 2006, TW NY and Comcast completed their respective acquisitions of assets comprising in the aggregate substantially all of the cable assets of Adelphia (the “Adelphia Acquisition”). Additionally, on July 31, 2006, immediately before the closing of the Adelphia Acquisition, Comcast’s interests in TWC and Time Warner Entertainment Company, L.P. (“TWE”), a subsidiary of TWC, were redeemed (the “Redemptions”). Following the Redemptions and the Adelphia Acquisition, on July 31, 2006, TW NY and Comcast swapped certain cable systems, most of which were acquired from Adelphia, in order to enhance TWC’s and Comcast’s respective geographic clusters of subscribers (the “Exchange” and, together with the Adelphia Acquisition and the Redemptions, the “Adelphia/Comcast Transactions”). The results of the systems acquired in connection with the Adelphia/Comcast Transactions have been included in the accompanying consolidated statement of operations since the closing of the transactions. As a result of the closing of the Adelphia/Comcast Transactions, TWC acquired systems with approximately 4.0 million basic video subscribers and disposed of systems with approximately 0.8 million basic video subscribers previously owned by TWC that were transferred to Comcast in connection with the Redemptions and the Exchange for a net gain of approximately 3.2 million basic video subscribers.

     On February 13, 2007, Adelphia’s Chapter 11 reorganization plan became effective and, under applicable securities law regulations and provisions of the U.S. bankruptcy code, TWC became a public company subject to the requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Under the terms of the reorganization plan, the shares of TWC’s Class A common stock that Adelphia received in the Adelphia Acquisition (representing approximately 16% of TWC’s outstanding common stock) are being distributed to Adelphia’s creditors. On March 1, 2007, TWC’s Class A common stock began trading on the New York Stock Exchange under the symbol “TWC.” As of June 30, 2007, Time Warner owned approximately 84% of TWC’s outstanding common stock (Note 2).

Amounts Related to Securities Litigation

     During the first and second quarters of 2007, the Company reached agreements to settle substantially all of the remaining securities litigation claims, a substantial portion of which had been reserved for at December 31, 2006. For the three and six months ended June 30, 2007, the Company recorded charges of approximately $1 million and $153 million, respectively, for these settlements. At June 30, 2007, the Company’s remaining reserve related to these matters is approximately $17 million, including approximately $8 million that has been reserved for an expected attorneys’ fee award related to a previously settled matter. The Company believes the potential exposure in the securities litigation matters that remain pending at June 30, 2007 to be de minimis.

     The Company recognizes insurance recoveries when it becomes probable that such amounts will be received. The Company recognized insurance recoveries related to Employee Retirement Income Security Act (“ERISA”) matters of approximately $1 million and $9 million for the three and six months ended June 30, 2007, respectively, and approximately $3 million and $53 million for the three and six months ended June 30, 2006, respectively (Note 1).

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

RESULTS OF OPERATIONS

Changes in Basis of Presentation

Discontinued Operations

     As discussed more fully in Note 1 to the accompanying consolidated financial statements, the 2006 financial information has been recast so that the basis of presentation is consistent with that of the 2007 financial information. Specifically, the Company has reflected as discontinued operations for all periods presented the financial condition and results of operations of certain businesses sold during the first six months of 2007, which include the Parenting Group, most of the Time4 Media magazine titles, The Progressive Farmer magazine, Leisure Arts and the Braves, as well as certain businesses the Company entered into agreements to sell during the first six months of 2007, which include Tegic and Wildseed.

Consolidation of Kansas City Pool

     On January 1, 2007, the Company began consolidating the results of the Kansas City Pool it received upon the distribution of the assets of TKCCP to TWC and Comcast.

Recent Accounting Standards

Accounting for Sabbatical Leave and Other Similar Benefits

     On January 1, 2007, the Company adopted the provisions of Emerging Issues Task Force (“EITF”) Issue No. 06-02, Accounting for Sabbatical Leave and Other Similar Benefits (“EITF 06-02”), related to certain sabbatical leave and other employment arrangements that are similar to a sabbatical leave. EITF 06-02 provides that an employee’s right to a compensated absence under a sabbatical leave or similar benefit arrangement in which the employee is not required to perform any duties during the absence is an accumulating benefit. Therefore, such arrangements should be accounted for as a liability with the cost recognized over the service period during which the employee earns the benefit. Adoption of this guidance resulted in an increase to accumulated deficit of approximately $97 million (approximately $59 million, net of tax) on January 1, 2007. The resulting change in the accrual for the six months ended June 30, 2007 was not material.

Accounting for Uncertainty in Income Taxes

     On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. This interpretation requires the Company to recognize in the consolidated financial statements only those tax positions determined to be more likely than not of being sustained upon examination, based on the technical merits of the positions. Upon adoption, the Company recognized approximately $445 million of tax benefits for positions that were previously unrecognized, of which approximately $433 million was accounted for as a reduction to the accumulated deficit balance and approximately $12 million was accounted for as an increase to the paid-in-capital balance as of January 1, 2007. Additionally, the adoption of FIN 48 resulted in the recognition of additional tax reserves for positions where there is uncertainty about the timing or character of such deductibility. These additional reserves were largely offset by increased deferred tax assets (Note 1).

Accounting for Deferred Compensation and Postretirement Benefit Aspects of Split-Dollar Life Insurance Arrangements

     The EITF has reached consensuses on EITF Issue No. 06-10, Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements (“EITF 06-10”), and EITF Issue No. 06-04, Deferred Compensation and Postretirement Benefits Aspects of Endorsement Split-Dollar Life Insurance Arrangements (“EITF 06-04”), which require that a company recognize a liability for the postretirement benefits associated with endorsement and collateral assignment split-dollar life insurance arrangements. The provisions of EITF 06-10 and EITF 06-04 will be effective for Time Warner as of January 1, 2008 and will impact the Company in instances where the Company has contractually agreed to maintain a life insurance policy (i.e., the Company pays the premiums) for an employee in

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

periods in which the employee is no longer providing services. The provisions of EITF 06-10 and EITF 06-04 are not expected to have a material impact on the Company’s consolidated financial statements.

Significant Transactions and Other Items Affecting Comparability

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

     In addition to the items affecting comparability above, the Company incurred merger-related, restructuring and shutdown costs of approximately $33 million and $101 million during the three and six months ended June 30, 2007, respectively, and approximately $102 million and $132 million during the three and six months ended June 30, 2006, respectively.

     The Company incurred restructuring costs for the three and six months ended June 30, 2007 of approximately $30 million and $94 million, respectively, primarily related to various employee terminations and other exit activities, including $4 million and $27 million, respectively, at the AOL segment for the three and six months ended June 30, 2007, $3 million and $9 million, respectively, at the Cable segment for the three and six months ended June 30, 2007, $16 million at the Networks segment for the three and six months ended June 30, 2007 and $7 million and $42 million, respectively, at the Publishing segment for the three and six months ended June 30, 2007. In addition, for the three and six months ended June 30, 2007, the Cable segment also expensed approximately $3 million and $7 million, respectively, of non-capitalizable merger-related and restructuring costs associated with the Adelphia/Comcast Transactions.

     The Company incurred restructuring costs for the three and six months ended June 30, 2006 of approximately $41 million and $64 million, respectively, primarily related to various employee terminations, including $15 million at the AOL segment for the three and six months ended June 30, 2006, $4 million and $10 million, respectively, at the Cable segment for the three and six months ended June 30, 2006, $22 million and $34 million, respectively, at the Publishing segment for the three and six months ended June 30, 2006 and $5 million at the Corporate segment for the six months ended June 30, 2006. The Company also expensed $2 million and $4 million, respectively, at the Filmed Entertainment segment for the three and six months ended June 30, 2006 and $1 million at the AOL segment for the six months ended June 30, 2006 as a result of changes in estimates of previously established restructuring accruals. In addition, during the three and six months ended June 30, 2006, the Cable segment expensed approximately $7 million and $11 million, respectively, of non-capitalizable merger-related costs associated with the Adelphia Acquisition. The results for the three and six months ended June 30, 2006 include shutdown costs of $81 million at The WB Network in connection with the agreement between Warner Bros. and CBS to form The CW. Included in the shutdown costs are termination charges related to terminating intercompany programming arrangements with other Time Warner divisions, of which $29 million has been eliminated in consolidation, resulting in a net pretax charge of $52 million.

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

Amounts Related to Securities Litigation

     The Company recognized legal reserves as well as legal and other professional fees related to the defense of various shareholder lawsuits, totaling $5 million and $176 million for the three and six months ended June 30, 2007, respectively, and $35 million and $114 million for the three and six months ended June 30, 2006, respectively. In addition, the Company recognized related insurance recoveries of $1 million and $9 million for the three and six months ended June 30, 2007, respectively, and $3 million and $53 million for the three and six months ended June 30, 2006, respectively.

Asset Impairments

     During the three and six months ended June 30, 2007, the Company recorded a $34 million noncash charge at the Networks segment related to the impairment of the Court TV tradename as a result of rebranding the Court TV network name to truTV, effective January 1, 2008. During the six months ended June 30, 2007, the Company recorded a $1 million noncash asset impairment charge at the AOL segment related to asset write-offs in connection with facility closures primarily as a result of AOL’s revised strategy.

Gains on Disposal of Assets, Net

     For the three and six months ended June 30, 2007, the Company recorded a net $1 million reduction to the gains on the sales of AOL’s German and U.K. access businesses, and for the six months ended June 30, 2007 the Company recorded a gain of approximately $670 million on the sale of AOL’s German access business.

     For the six months ended June 30, 2006, the Company recorded a gain of approximately $20 million at the Corporate segment related to the sale of two aircraft and a $2 million gain at the AOL segment from the resolution of a previously contingent gain related to the 2004 sale of Netscape Security Solutions (“NSS”).

Investment Gains, Net

     For the three and six months ended June 30, 2007, the Company recognized net gains of $111 million and $274 million, respectively, primarily related to the sale of investments, including an approximate $100 million gain on the Company’s sale in April 2007 of its 50% interest in Bookspan, and for the six months ended June 30, 2007 a $146 million gain on TWC’s deemed sale of its 50% interest in the Houston Pool in connection with the distribution of TKCCP’s assets at the Cable segment. For the three and six months ended June 30, 2007, investment gains, net also included a $2 million loss and a $4 million gain, respectively, which resulted from market fluctuations in equity derivative instruments.

     For the three and six months ended June 30, 2006, the Company recognized net gains of $20 million and $315 million, respectively, primarily related to the sale of investments, including for the six months ended June 30, 2006 a $239 million gain on the sale of a portion of the Company’s investment in Time Warner Telecom Inc. (“TWT”) and a $51 million gain on the sale of the Company’s investment in Canal Satellite Digital. For the three and six months ended June 30, 2006, investment gains, net also included gains of $4 million and $11 million, respectively, which resulted from market fluctuations in equity derivative instruments.

Minority Interest Impact

     For the six months ended June 30, 2007, income of $57 million was attributed to minority interests, which primarily reflects the respective minority owner’s share of the gains on TWC’s deemed sale of the Houston Pool interest and on the sale of AOL’s German access business.

Income Tax Impact and Other Tax Items Affecting Comparability

     The income tax impact reflects the estimated tax or tax benefit associated with each item affecting comparability. Such estimated taxes or tax benefits vary based on certain factors, including the taxability or deductibility of the items and foreign tax on certain gains. The Company’s tax provision may also include certain other items affecting comparability. For the three and six months ended June 30, 2007, these items included approximately $77 million and $80 million, respectively, of tax benefits related primarily to the realization of tax attribute carryforwards and changes in certain state tax

     The increase in Subscription revenues for the three and six months ended June 30, 2007 was primarily related to increases at the Cable and Networks segments, offset partially by a decline at the AOL segment. The increase at the Cable segment was driven by the impact of the Acquired Systems, the consolidation of the Kansas City Pool, the continued penetration of digital video services, video price increases and growth in basic video, high-speed data and Digital Phone subscriber levels in the Legacy Systems. The increase at the Networks segment was due primarily to higher subscription rates and, to a lesser extent, an increase in the number of subscribers at Turner. The decline in Subscription revenues at the AOL segment resulted from decreases in the number of AOL brand domestic subscribers and related revenues as a result of AOL’s revised strategy, as well as the sales of AOL’s European access businesses in the fourth quarter of 2006 and first quarter of 2007.

     The increase in Advertising revenues for the three and six months ended June 30, 2007 was primarily due to growth at the AOL and Cable segments, offset partially by a decline at the Networks segment. The increase at the AOL segment was due to growth in Advertising revenues on both the AOL Network and on Partner Sites. The increase at the Cable segment was primarily attributable to the impact of the Acquired Systems and, to a lesser extent, the consolidation of the Kansas City Pool and growth in the Legacy Systems. The decline at the Networks segment was primarily driven by the impact of the shutdown of The WB Network on September 17, 2006, partially offset by higher Advertising revenues across Turner’s primary networks.

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

      Costs of Revenues. For the three months ended June 30, 2007 and 2006, costs of revenues totaled $6.417 billion and $5.814 billion, respectively, and as a percentage of revenues were 58% and 56%, respectively. For the six months ended June 30, 2007 and 2006, costs of revenues totaled $12.913 billion and $11.491 billion, respectively, and as a percentage of revenues were 58% and 56%, respectively. The increase in costs of revenues as a percentage of revenues for the three and six months ended June 30, 2007 was primarily attributable to increases at the Cable segment, primarily related to the Acquired Systems and the consolidation of the Kansas City Pool, and at the Filmed Entertainment segment, primarily reflecting the change in the quantity and mix of products released, partially offset by a decline at the AOL segment, primarily reflecting a shift to Advertising revenues, which have higher margins. The segment variations are discussed in detail in “Business Segment Results.”

      Selling, General and Administrative Expenses. For the three months ended June 30, 2007, selling, general and administrative expenses decreased 6% to $2.397 billion in 2007 from $2.555 billion in 2006. For the six months ended June 30, 2007, selling, general and administrative expenses decreased 6% to $4.806 billion in 2007 from $5.110 billion in 2006. The decrease in selling, general and administrative expenses for the three and six months ended June 30, 2007 related primarily to a significant decline at the AOL segment, substantially due to reduced subscriber acquisition marketing as part of AOL’s revised strategy, partially offset by an increase at the Cable segment related to the Acquired Systems and the consolidation of the Kansas City Pool. The segment variations are discussed in detail in “Business Segment Results.”

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

      Amounts Related to Securities Litigation. As previously noted in “Recent Developments,” the Company recognized legal reserves as well as legal and other professional fees related to the defense of various shareholder lawsuits, totaling $5 million and $176 million for the three and six months ended June 30, 2007, respectively, and $35 million and $114 million for the three and six months ended June 30, 2006, respectively. In addition, the Company recognized related insurance recoveries of $1 million and $9 million for the three and six months ended June 30, 2007, respectively, and $3 million and $53 million for the three and six months ended June 30, 2006, respectively.

Reconciliation of Operating Income before Depreciation and Amortization to Operating Income.

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

      Operating Income before Depreciation and Amortization. Operating Income before Depreciation and Amortization increased 20% to $3.022 billion for the three months ended June 30, 2007 from $2.511 billion for the three months ended June 30, 2006. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $39 million and $32 million of expense, net for 2007 and 2006, respectively, Operating Income before Depreciation and Amortization increased $518 million, principally as a result of growth at the Cable, Networks and Publishing segments, partially offset by declines at the AOL and Filmed Entertainment segments.

     Operating Income before Depreciation and Amortization increased 29% to $6.640 billion for the six months ended June 30, 2007 from $5.129 billion for the six months ended June 30, 2006. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $467 million of income, net and $39 million of expense, net for 2007 and 2006, respectively, Operating Income before Depreciation and Amortization increased $1.005 billion, principally as a result of growth at the AOL, Cable and Networks segments, partially offset by a decline at the Filmed Entertainment segment.

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

      Depreciation Expense. Depreciation expense increased to $928 million and $1.829 billion for the three and six months ended June 30, 2007, respectively, from $653 million and $1.302 billion for the three and six months ended June 30, 2006, respectively. The increase in depreciation expense for the three and six months ended June 30, 2007 primarily related to an

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

increase at the Cable segment reflecting the impact of the Acquired Systems, the consolidation of the Kansas City Pool and demand-driven increases in recent years of purchases of customer premise equipment, which generally has a significantly shorter useful life compared to the mix of assets previously purchased.

      Amortization Expense. Amortization expense increased to $158 million and $335 million for the three and six months ended June 30, 2007, respectively, from $127 million and $256 million for the three and six months ended June 30, 2006, respectively. The increase in amortization expense for the three and six months ended June 30, 2007 primarily related to the Cable segment and was driven by the amortization of intangible assets related to customer relationships associated with the Acquired Systems. This was partially offset by a decrease due to the absence during the second quarter of 2007 of amortization expense associated with customer relationships recorded in connection with the restructuring of TWE in 2003, which were fully amortized at the end of the first quarter of 2007.

      Operating Income. Operating Income increased to $1.936 billion for the three months ended June 30, 2007 from $1.731 billion for the three months ended June 30, 2006. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $39 million and $32 million of expense, net for 2007 and 2006, respectively, Operating Income increased $212 million, reflecting the changes in Operating Income before Depreciation and Amortization, offset partially by the increases in both depreciation and amortization expense noted above.

     Operating Income increased to $4.476 billion for the six months ended June 30, 2007 from $3.571 billion for the six months ended June 30, 2006. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $467 million of income, net and $39 million of expense, net for 2007 and 2006, respectively, Operating Income increased $399 million, reflecting the changes in Operating Income before Depreciation and Amortization, offset partially by the increases in both depreciation and amortization expense noted above.

      Interest Expense, Net. Interest expense, net, increased to $574 million and $1.125 billion for the three and six months ended June 30, 2007, respectively, from $336 million and $635 million for the three and six months ended June 30, 2006, respectively. The increase in interest expense, net is primarily due to higher average outstanding balances of borrowings as a result of the Company’s stock repurchase program and the Adelphia/Comcast Transactions, higher interest rates on borrowings and lower interest income related primarily to a smaller amount of short-term investments.

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

     The changes in investment gains, net are discussed under “Significant Transactions and Other Items Affecting Comparability.” Excluding the impact of investment gains, other income, net, decreased primarily due to lower income from equity method investees and higher foreign exchange losses. For the three and six months ended June 30, 2007, the decrease in equity income primarily reflects the absence of equity income during these periods due to the Company no longer treating TKCCP as an equity method investment.

      Minority Interest Expense, Net. Time Warner had $91 million and $221 million of minority interest expense, net for the three and six months ended June 30, 2007, respectively, compared to $105 million and $176 million for the three and six months ended June 30, 2006, respectively. The decrease for the three months ended June 30, 2007 primarily related to the change in the ownership structure at the Cable segment as a result of the Adelphia/Comcast Transactions, partially offset by larger profits recorded at the Cable segment. The increase for the six months ended June 30, 2007 related primarily to the 5% minority interest in AOL issued to Google in the second quarter of 2006 and reflected the gain recognized by AOL on the sale of its German access business, and to larger profits recorded by the Cable segment, including the gain on the deemed sale of the Houston Pool in connection with the TKCCP asset distribution, partially offset by the change in the ownership structure at the Cable segment. Comcast held an effective 21% minority interest in TWC

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

until the closing of the Adelphia/Comcast Transactions on July 31, 2006, upon which Comcast’s interest in TWC was redeemed and Adelphia received an approximate 16% minority interest in TWC.

      Income Tax Provision. Income tax expense from continuing operations was $434 million for the three months ended June 30, 2007 compared to $505 million for the three months ended June 20, 2006 and was $1.231 billion for the six months ended June 30, 2007 compared to $1.103 billion for the six months ended June 30, 2006. The Company’s effective tax rate for continuing operations was 31% and 37% for the three and six months ended June 30, 2007, respectively, compared to 38% and 35% for the three and six months ended June 30, 2006, respectively. The decrease for the three months ended June 30, 2007 is primarily attributable to the realization of tax attribute carryovers in connection with the sale of the Company’s interest in Bookspan. The increase for the six months ended June 30, 2007 is primarily attributable to the impact of nondeductible goodwill associated with the sale of AOL’s German access business.

      Income before Discontinued Operations and Cumulative Effect of Accounting Change. Income before discontinued operations and cumulative effect of accounting change was $945 million for the three months ended June 30, 2007 compared to $832 million for the three months ended June 30, 2006. Basic and diluted net income per share before discontinued operations and cumulative effect of accounting change were both $0.25 in 2007 compared to $0.20 for both in 2006. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $118 million and $3 million of income, net for the three months ended June 30, 2007 and 2006, respectively, income before discontinued operations and cumulative effect of accounting change decreased by $2 million, primarily reflecting the dilutive effect of the Adelphia/Comcast Transactions, which resulted in higher depreciation, amortization and interest expense, and the Company’s common stock repurchase program, which resulted in higher interest expense, partially offset by higher Operating Income before Depreciation and Amortization and higher other income, net, as noted above. Basic and diluted net income per share before discontinued operations and cumulative effect of accounting change for the three months ended June 30, 2007 reflect the favorable impact of the shares repurchased under the $20 billion stock repurchase program.

     Income before discontinued operations and cumulative effect of accounting change was $2.132 billion for the six months ended June 30, 2007 compared to $2.015 billion for the six months ended June 30, 2006. Basic and diluted net income per share before discontinued operations and cumulative effect of accounting change were $0.56 and $0.55, respectively, in 2007 compared to $0.46 for both in 2006. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $443 million and $279 million of income, net for the six months ended June 30, 2007 and 2006, respectively, income before discontinued operations and cumulative effect of accounting change decreased by $47 million, primarily reflecting the dilutive effect of the Adelphia/Comcast Transactions, which resulted in higher depreciation, amortization and interest expense, the Company’s common stock repurchase program, which resulted in higher interest expense, and higher minority interest expense, net, partially offset by higher Operating Income before Depreciation and Amortization, as noted above. Basic and diluted net income per share before discontinued operations and cumulative effect of accounting change for the six months ended June 30, 2007 reflect the favorable impact of the shares repurchased under the $20 billion stock repurchase program.

      Discontinued Operations. Discontinued operations for the three and six months ended June 30, 2007 and 2006 reflect certain businesses sold, which include the Parenting Group, most of the Time4 Media magazine titles, The Progressive Farmer magazine, Leisure Arts and the Braves, as well as certain businesses the Company entered into agreements to sell, which include Tegic and Wildseed. Also included in discontinued operations for the three and six months ended June 30, 2006 are the operations of the systems transferred to Comcast in connection with the Redemptions and the Exchange, the Turner South network and Time Warner Book Group (“TWBG”).

     Included in discontinued operations for the three and six months ended June 30, 2007 was a pretax gain of approximately $72 million and a related tax benefit of approximately $82 million on the sale of the Braves. In addition, discontinued operations for the six months ended June 30, 2007 included a pretax gain of approximately $54 million and a related tax benefit of approximately $2 million on the sale of the Parenting Group and most of the Time4 Media magazine titles, an impairment of approximately $18 million on AOL’s long-lived assets associated with Wildseed and an impairment of approximately $13 million on the Company’s investment in Leisure Arts. For the three months ended June 30, 2007, the tax benefit on the pretax gains resulted primarily from the reversal of certain deferred tax liabilities in connection with the Liberty Transaction. The Liberty Transaction was designed to qualify as a tax-free split-off under Section 355 of the Internal Revenue Code of 1986, as amended, and, as a result, the historical deferred tax liabilities associated with the Braves were no longer required. For the six months ended June 30, 2007, the tax benefit on the pretax gains resulted primarily from the reversal of the deferred tax liabilities in connection with the Liberty Transaction and the recognition of deferred tax assets associated with the sale of the magazine titles in the first quarter of 2007. In addition, for the three and six months ended June 30, 2007, the Company incurred an additional $17 million accrual related to changes in estimates of Warner Music Group

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

indemnification liabilities. For the six months ended June 30, 2007, payments of $26 million were made related to Warner Music Group indemnification liabilities previously established and are disclosed on the Company’s accompanying consolidated statement of cash flows as “Investment activities of discontinued operations.” These indemnification liabilities were accrued for in prior years. Included in the results for the three and six months ended June 30, 2006, was a pretax gain of approximately $129 million and a tax benefit of approximately $21 million related to the sale of Turner South. In addition, the results for the six months ended June 30, 2006, included a pretax gain of approximately $194 million and a related tax benefit of approximately $28 million on the sale of TWBG. For the three and six months ended June 30, 2006, the tax benefit on the sales of Turner South and TWBG resulted primarily from the release of a valuation allowance associated with tax attribute carryforwards offsetting the gains on these transactions.

      Cumulative Effect of Accounting Change, Net of Tax. For the six months ended June 30, 2006, the Company recorded a benefit of $25 million, net of tax, as the cumulative effect of a change in accounting principle upon the adoption of FASB Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“FAS 123R”) in 2006, to recognize the effect of estimating the number of awards granted prior to January 1, 2006 that are not ultimately expected to vest.

      Net Income and Net Income Per Common Share. Net income was $1.067 billion for the three months ended June 30, 2007 compared to $1.014 billion for the three months ended June 30, 2006. Basic and diluted net income per common share were both $0.28 in 2007 compared to $0.24 for both in 2006. Net income was $2.270 billion for the six months ended June 30, 2007 compared to $2.477 billion for the six months ended June 30, 2006. Basic and diluted net income per common share were $0.60 and $0.59, respectively, in 2007 compared to $0.57 and $0.56, respectively, in 2006. Net income per common share for the three and six months ended June 30, 2007 and 2006 reflect the favorable impact of the shares repurchased under the $20 billion stock repurchase program.

Business Segment Results

      AOL. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the AOL segment for the three and six months ended June 30, 2007 and 2006 are as follows (millions):

     The decline in Subscription revenues for the three and six months ended June 30, 2007 compared to the three and six months ended June 30, 2006 was due to decreases in the number of AOL brand domestic subscribers and related revenues as a result of AOL’s revised strategy, as well as the sales of AOL’s European access businesses (for which Subscription revenues declined by approximately $400 million and $700 million for the three and six months, respectively) in the fourth quarter of 2006 and first quarter of 2007.

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

     The number of AOL brand domestic subscribers was 10.9 million, 12.0 million, and 17.7 million as of June 30, 2007, March 31, 2007 and June 30, 2006, respectively. The AOL brand domestic average revenue per subscriber (“ARPU”) was $18.59 and $19.42 for the three months ended June 30, 2007 and 2006, respectively, and $18.78 and $18.92 for the six months ended June 30, 2007 and 2006, respectively. AOL includes in its subscriber numbers individuals, households and entities that have provided billing information and completed the registration process sufficiently to allow for an initial log-on to the AOL service. Subscribers to the AOL brand service include subscribers participating in introductory free-trial periods and subscribers that are paying no or reduced monthly fees through member service and retention programs. Total AOL brand subscribers include free-trial and retention members of approximately 3% at June 30, 2007, 4% at March 31, 2007 and 8% at June 30, 2006. Individuals who have registered for the free AOL service, including subscribers who have migrated from paid subscription plans, are not included in the AOL brand subscriber numbers presented above. As previously noted, due to the sales of AOL’s access businesses in the U.K., Germany and France, AOL no longer has AOL brand Internet access subscribers in Europe, although the purchasers of AOL’s European access businesses have certain rights to use specific AOL brands for a period of time.

     The decreases in subscribers are the result of a number of factors, including the effects of AOL’s strategy, which has resulted in the migration of subscribers to the free AOL service offering, declining registrations for the paid service in response to AOL’s reduced marketing and retention campaigns, and competition from broadband access providers. The decreases in ARPU for the three and six months ended June 30, 2007 compared to the similar periods in the prior year were due primarily to a shift in the subscriber mix to lower-priced subscriber price plans, partially offset by an increase in the percentage of revenue generating customers and, for the six months ended June 30, 2007, due to a price increase implemented late in the first quarter of 2006.

     In addition to the AOL brand service, AOL has subscribers to other services, both domestically and internationally, including the Netscape and CompuServe brands. These other brand services are not significant sources of revenues.

     Advertising services include display advertising and paid-search advertising, both domestically and internationally, which are provided on both the AOL Network and on Partner Sites. Total Advertising revenues improved for the three and six months ended June 30, 2007 compared to the three and six months ended June 30, 2006 due to increased Advertising revenues generated on both the AOL Network and on Partner Sites as follows (millions):

     The increases in display Advertising revenues were primarily attributable to increased inventory sold as well as operational improvements, offset partially by pricing declines and shifts in the mix of inventory sold from higher-priced inventory to lower-priced inventory. In addition, display Advertising revenues for the six months ended June 30, 2007 included a benefit of approximately $19 million related to a change in an accounting estimate resulting from more timely system data. The increases in paid-search Advertising revenues, which are generated primarily through AOL’s strategic relationship with Google, were attributable primarily to both higher revenues per search query and increases in search query volume on certain AOL Network properties.

     The increase in Advertising revenues on Partner Sites is partly attributable to the expansion of a relationship with a major customer in the second quarter of 2006. The revenues associated with this relationship increased $12 million to $48 million and $58 million to $104 million for the three and six months ended June 30, 2007, respectively, compared to the three and six months ended June 30, 2006. Continued growth in revenues from other advertisers also contributed to the growth in Advertising revenues on Partner Sites.

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

     Total Advertising revenues for the three months ended June 30, 2007 declined $27 million from the three months ended March 31, 2007, primarily due to the absence of a $19 million benefit recognized in the first quarter of 2007 related to a change in an accounting estimate resulting from more timely system data.

     AOL expects Advertising revenues to continue to increase during the remainder of 2007 as compared to the similar period in 2006 due to expected increases in display and paid-search advertising on the AOL Network and expected increases in sales of advertising run on Partner Sites. However, total Advertising revenues are expected to increase at a rate less than that experienced in the first half of 2007 and more in line with the growth rate achieved in the second quarter of 2007.

     For the three and six months ended June 30, 2007, costs of revenues decreased 43% and 39%, respectively, and as a percentage of revenues were 43% for both the three and six months ended June 30, 2007 compared to 47% for both the three and six months ended June 30, 2006. For the three and six months ended June 30, 2007, approximately $270 million and $470 million, respectively, of the decrease in costs of revenues were attributable to the sales of AOL’s European access businesses. The remaining decreases for the three and six months ended June 30, 2007 were attributable to lower network-related expenses and lower customer service expenses associated with the closure of customer support call centers, partially offset by increases in traffic acquisition costs associated with advertising run on Partner Sites. Network-related expenses decreased 79% to $67 million for the three months ended June 30, 2007 from $315 million for the three months ended June 30, 2006 and decreased 74% to $165 million for the six months ended June 30, 2007 from $633 million for the six months ended June 30, 2006. For the three and six months ended June 30, 2007, approximately $180 million and $330 million, respectively, of the decreases were attributable to the sales of AOL’s European access businesses. The remaining declines in network-related expenses for the three and six months ended June 30, 2007 were principally attributable to lower usage of AOL’s dial-up network associated with the declining AOL brand domestic dial-up subscriber base, improved pricing and network utilization and decreased levels of long-term fixed commitments.

     Selling, general and administrative expenses decreased 61% to $225 million and 57% to $497 million for the three and six months ended June 30, 2007, respectively, of which approximately $110 million and $190 million, respectively, were attributable to the sales of AOL’s European access businesses. The remaining decreases in selling, general and administrative expenses for the three and six months ended June 30, 2007 reflect a reduction in direct marketing costs of approximately $170 million and $380 million, respectively, primarily due to reduced subscriber acquisition marketing as part of AOL’s revised strategy, and other cost savings initiatives. The three and six months ended June 30, 2006 also included a $7 million charge related to America Online Latin America, Inc.’s bankruptcy resolution and the six months ended June 30, 2006 also benefited from the reversal of previously established employee incentive compensation accruals that were no longer required and an approximate $14 million benefit related to the favorable resolution of certain tax matters.

     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the three and six months ended June 30, 2007 included restructuring charges of $6 million and $38 million, respectively, primarily related to involuntary employee terminations and facility closures, partially offset by the reversal of $2 million and $11 million of restructuring charges that were no longer needed due to changes in estimates for the three and six months ended June 30, 2007, respectively. In addition, the results for the three and six months ended June 30, 2007 included a net $1 million reduction to the gains on the sales of AOL’s German and U.K. access businesses, and the results for the six months ended June 30, 2007 included a gain of approximately $670 million on the sale of AOL’s German access business and a $1 million noncash asset impairment charge related to asset write-offs in connection with facility closures primarily as a result of AOL’s revised strategy. Further restructuring actions associated with the strategy are expected to result in additional restructuring and related charges during the remainder of 2007 of up to $50 million. The results for the three and six months ended June 30, 2006 included a $15 million restructuring charge related to a reduction in headcount. In addition, the results for the six months ended June 30, 2006 included a $1 million restructuring charge primarily related to changes in estimates of previously established restructuring accruals and a $2 million gain from the resolution of a previously contingent gain related to the 2004 sale of NSS.

     For the three months ended June 30, 2007, Operating Income before Depreciation and Amortization decreased slightly compared to the three months ended June 30, 2006, due primarily to a decline in Subscription revenues, partially offset by lower costs of revenues, lower selling, general and administrative expenses, and higher Advertising revenues. For the six months ended June 30, 2007, Operating Income before Depreciation and Amortization increased compared to the six

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

months ended June 30, 2006, due primarily to the gain on the sale of the German access business, higher Advertising revenues and lower costs of revenues and selling, general and administrative expenses, partially offset by lower Subscription revenues and higher restructuring costs. The increases in Operating Income for the three and six months ended June 30, 2007 compared to the three and six months ended June 30, 2006, are due primarily to the changes in Operating Income before Depreciation and Amortization discussed above and lower depreciation expense as a result of a decline in network assets due to membership declines.

     In connection with AOL’s strategy, including its reduction of subscriber acquisition efforts, AOL expects to experience a continued decline in its subscribers and related Subscription revenues, and, for the remainder of 2007, a decline in subscriber ARPU as compared to the similar period in 2006. In addition, over the remainder of 2007, AOL expects to continue to reduce costs of revenues, including dial-up network and customer service expenses, and selling, general and administrative expenses.

     The Company expects that AOL’s growth rates for Operating Income before Depreciation and Amortization and Operating Income for the remainder of the year compared to the corresponding six-month period in the prior year, excluding the gains on the sales of AOL’s European access businesses, will be significantly lower than the levels of growth achieved for the first half of 2007 primarily as a result of continued declines in Subscription revenues, including the impact on Subscription revenues of the divestiture of AOL’s European access businesses.

     As previously noted under “Recent Developments,” on February 28, 2007, the Company completed the sale of AOL’s German access business to Telecom Italia S.p.A. for $850 million in cash, resulting in a pretax gain of approximately $670 million. In connection with this sale, the Company entered into a separate agreement to provide ongoing web services, including content, e-mail and other online tools and services to Telecom Italia S.p.A. As a result of the historical interdependency of AOL’s European access and audience businesses, the historical cash flows and operations of the access and audience businesses were not clearly distinguishable. Accordingly, AOL’s German access business and its other European access businesses, which were sold in 2006, have not been reflected as discontinued operations in the accompanying consolidated financial statements.

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

      Cable. As previously noted under “Recent Developments,” on July 31, 2006, the Company completed the Adelphia/Comcast Transactions and began consolidating the results of the Acquired Systems. Additionally, on January 1, 2007, the Company began consolidating the results of the Kansas City Pool. Accordingly, the operating results for the three and six months ended June 30, 2007 include the results of the Legacy Systems, the Acquired Systems and the Kansas City Pool, and the operating results for the three and six months ended June 30, 2006 consist only of the results of the Legacy Systems. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Cable segment for the three and six months ended June 30, 2007 and 2006 are as follows (millions):

     Revenues, including the components of Subscription revenues, for the Legacy Systems, the Acquired Systems, the Kansas City Pool and Total Systems are as follows for the three and six months ended June 30, 2007 and 2006 (millions):

     For the three and six months ended June 30, 2007, Subscription revenues increased, driven by the impact of the Acquired Systems, the consolidation of the Kansas City Pool, the continued penetration of digital video services, video price increases and growth in basic video, high-speed data and Digital Phone subscriber levels in the Legacy Systems. Aggregate revenues associated with TWC’s digital video services, including digital tiers, digital pay channels, pay-per-view, VOD, SVOD and DVRs, increased 71% to $609 million for the three months ended June 30, 2007 from $357 million for the three months ended June 30, 2006, and increased 70% to $1.172 billion for the six months ended June 30, 2007 from $689 million for the six months ended June 30, 2006. Strong growth rates for Subscription revenues associated with high-speed data and voice services are expected to continue during the remainder of 2007.

     For the three and six months ended June 30, 2007, Advertising revenues increased due to an increase in local and national advertising, primarily due to the impact of the Acquired Systems and, to a lesser extent, the consolidation of the Kansas City Pool and growth in the Legacy Systems.

     For the three and six months ended June 30, 2007, costs of revenues increased 68% and 71%, respectively, and, as a percentage of revenues, were 47% and 48% for the three and six months ended June 30, 2007, respectively, compared to 44% and 45% for the three and six months ended June 30, 2006, respectively. The increases in costs of revenues were primarily related to the impact of the Acquired Systems and the consolidation of the Kansas City Pool, as well as increases in video programming, employee, voice and other costs. The increases in costs of revenues as a percentage of revenues reflect lower margins in the Acquired Systems.

     For the three and six months ended June 30, 2007, video programming costs increased 66% to $882 million and 69% to $1.762 billion, respectively, due primarily to the impact of the Acquired Systems ($256 million and $513 million for the three and six months ended June 30, 2007, respectively) and the consolidation of the Kansas City Pool ($51 million and $101 million for the three and six months ended June 30, 2007, respectively), as well as contractual rate increases, the increase in video subscribers and the expansion of service offerings in the Legacy Systems. Video programming costs for the six months ended June 30, 2006 also included an $11 million benefit reflecting an adjustment in the amortization of certain launch support payments. For the three and six months ended June 30, 2007, employee costs increased primarily due to the impact of the Acquired Systems, the consolidation of the Kansas City Pool, higher headcount resulting from the continued roll-out of advanced services and salary increases. Additionally, employee costs for the six months ended June 30, 2006 included a benefit of approximately $16 million (with an additional benefit of approximately $5 million included in selling, general and administrative expenses) due to changes in estimates related to prior period medical benefit accruals. For the three and six months ended June 30, 2007, voice costs increased $40 million to $111 million and $92 million to $223 million, respectively, primarily due to growth in Digital Phone subscribers and the consolidation of the Kansas City Pool, offset partially by a decrease in per subscriber connectivity costs. Other costs increased 75% to $309 million and 72% to $609 million, respectively, for the three and six months ended June 30, 2007 primarily due to the impact of the Acquired

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

Systems and the consolidation of the Kansas City Pool, as well as revenue-driven increases in fees paid to local franchise authorities and increases in other costs associated with the continued roll-out of advanced services in the Legacy Systems. In addition, other costs for the three and six months ended June 30, 2006 included a benefit of $10 million related to third-party maintenance support payment fees, reflecting the resolution of terms with an equipment vendor.

     The increase in selling, general and administrative expenses for the three and six months ended June 30, 2007 is primarily the result of higher employee, marketing and other costs due to the impact of the Acquired Systems and the consolidation of the Kansas City Pool, increased headcount and higher costs resulting from the continued roll-out of advanced services, salary increases and an increase in equity-based compensation. The three and six months ended June 30, 2006 also included an $11 million charge (with an additional $2 million charge included in costs of revenues) reflecting an adjustment to prior period facility rent expense.

     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the Cable segment expensed non-capitalizable merger-related and restructuring costs associated with the Adelphia/Comcast Transactions of $3 million and $7 million for the three and six months ended June 30, 2007, respectively, and $7 million and $11 million for the three and six months ended June 30, 2006, respectively. In addition, the results included other restructuring costs of $3 million and $9 million for the three and six months ended June 30, 2007, respectively, and $4 million and $10 million for the three and six months ended June 30, 2006, respectively. TWC’s restructuring activities are part of its broader plans to simplify its organizational structure and enhance its customer focus. TWC is in the process of executing these initiatives and expects to incur additional costs as these plans continue to be implemented throughout 2007.

     Operating Income before Depreciation and Amortization increased for the three and six months ended June 30, 2007 principally as a result of revenue growth, partially offset by higher costs of revenues and selling, general and administrative expenses, as discussed above.

     Operating Income increased for the three and six months ended June 30, 2007 primarily due to the increase in Operating Income before Depreciation and Amortization described above, partially offset by increases in both depreciation and amortization expense. Depreciation expense increased primarily due to the impact of the Acquired Systems, the consolidation of the Kansas City Pool and demand-driven increases in recent years of purchases of customer premise equipment, which generally has a significantly shorter useful life compared to the mix of assets previously purchased. Amortization expense increased primarily as a result of the amortization of intangible assets related to customer relationships associated with the Acquired Systems. This was partially offset by a decrease due to the absence during the second quarter of 2007 of amortization expense associated with customer relationships recorded in connection with the restructuring of TWE in 2003, which were fully amortized at the end of the first quarter of 2007.

     The Company anticipates that Operating Income before Depreciation and Amortization and Operating Income will continue to increase during the second half of 2007 as compared to the similar period in the prior year, although the full year rates of growth are expected to be lower than those experienced in the first half of 2007 because the last five months of 2006 also included contributions from the Acquired Systems.

     Content revenues include theatrical product (which is content made available for initial airing in theaters), television product (which is content made available for initial airing on television), and consumer product and other. The components of Content revenues for the three and six months ended June 30, 2007 and 2006 are as follows (millions):

     The increase in theatrical film revenues for the three and six months ended June 30, 2007 was due primarily to the success of certain key releases in 2007, which compared favorably to 2006. Revenues for the three and six months ended June 30, 2007 included the releases of 300, Ocean’s 13 and Music and Lyrics and for the six months ended June 30, 2007 included carryover from Blood Diamond . The 2006 releases included the June 28, 2006 domestic release of Superman Returns and the six months ended June 30, 2006 included international carryover of Harry Potter and the Goblet of Fire . The decline in theatrical product revenues from television licensing for the three months ended June 30, 2007 compared to the similar period in the prior year reflects the timing and quantity of availabilities, including Wedding Crashers for the three months ended June 30, 2006. For the six months ended June 30, 2007, this decline was more than offset by a greater number of significant titles in the first quarter of 2007. Home video sales of theatrical product declined for the three and six months ended June 30, 2007 primarily due to difficult comparisons as the similar periods in the prior year included revenues from the release of Harry Potter and the Goblet of Fire and Wedding Crashers compared to the release of Happy Feet for the three and six months ended June 30, 2007.

     The decline in license fees from television product for the three and six months ended June 30, 2007 was due primarily to difficult comparisons to the prior year periods, which included the initial off-network availability of the first three seasons of Without a Trace and second-cycle off-network non-continuance license arrangements for Friends in the second

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

quarter of 2006. The decline in home video sales of television product for the six months ended June 30, 2007 reflects difficult comparisons to the prior year period, which included higher revenues attributable to Seinfeld and Friends.

     The decrease in costs of revenues for the three months ended June 30, 2007 resulted primarily from lower film costs ($943 million for the three months ended June 30, 2007 compared to $1.036 billion for the three months ended June 30, 2006) and lower home video manufacturing and distribution costs related to a decline in volume, partially offset by higher theatrical advertising and print costs resulting from the timing, quantity and mix of films released. The increase in costs of revenues for the six months ended June 30, 2007 resulted primarily from higher theatrical advertising and print costs resulting from the timing, quantity and mix of films released, partially offset by lower film costs ($2.086 billion for the six months ended June 30, 2007 compared to $2.168 billion for the six months ended June 30, 2006) and lower home video manufacturing and distribution costs related to a decline in volume. Included in film costs are pre-release theatrical film valuation adjustments, which increased to $51 million for the three months ended June 30, 2007 from $36 million for the three months ended June 30, 2006, and remained flat at $104 million for the six months ended June 30, 2007 compared to $105 million for the six months ended June 30, 2006. Costs of revenues as a percentage of revenues increased to 76% for the three months ended June 30, 2007 from 74% for the three months ended June 30, 2006, and to 74% for the six months ended June 30, 2007 from 72% for the six months ended June 30, 2006, reflecting the quantity and mix of products released.

     For the three and six months ended June 30, 2007, selling, general and administrative expenses benefited from higher distribution fees earned, partially offset by higher employee costs for the six months ended June 30, 2007.

     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the three and six months ended June 30, 2006 included $2 million and $4 million, respectively, of restructuring charges as a result of changes in estimates of previously established restructuring accruals.

     Operating Income before Depreciation and Amortization and Operating Income decreased for the three and six months ended June 30, 2007 primarily due to a decline in revenues. The six months ended June 30, 2006 also included a benefit of $42 million from the sale of certain international film rights.

     The Company anticipates that both Operating Income before Depreciation and Amortization and Operating Income at the Filmed Entertainment segment will increase for the remainder of 2007 relative to the corresponding six-month period in 2006 due primarily to expectations of improved theatrical distribution and home video performance resulting from the current year’s theatrical release slate.

     On September 17, 2006, Warner Bros. and CBS ceased the stand-alone operations of The WB Network and UPN, respectively, and formed The CW, an equity method investee of the Company. The Networks segment results included the operations of The WB Network through the date of its shutdown on September 17, 2006. For the three and six months ended June 30, 2006, the Networks segment operating results included revenues of $160 million and $299 million, respectively, and an Operating Loss of $81 million and $110 million, respectively, from The WB Network.

     The increase in Subscription revenues for the three and six months ended June 30, 2007 was due primarily to higher subscription rates and, to a lesser extent, an increase in the number of subscribers at Turner.

     The decrease in Advertising revenues for the three and six months ended June 30, 2007 was driven primarily by the impact of the shutdown of The WB Network on September 17, 2006, partially offset by higher Advertising revenues across Turner’s primary networks.

     For the three and six months ended June 30, 2007, costs of revenues remained essentially flat due primarily to a decline in programming costs, offset by increases in distribution costs and costs related to digital initiatives. Programming costs decreased 2% to $1.028 billion for the three months ended June 30, 2007 from $1.049 billion for the three months ended June 30, 2006 and decreased 3% to $1.768 billion for the six months ended June 30, 2007 from $1.824 billion for the six months ended June 30, 2006. The decrease in programming costs for the three and six months ended June 30, 2007 was primarily due to the shutdown of The WB Network on September 17, 2006, partially offset by higher acquired theatrical programming costs at HBO and an increase in sports programming costs at Turner, particularly related to NASCAR and NBA programming. Costs of revenues as a percentage of revenues were 53% and 52% for the three months ended June 30, 2007 and 2006, respectively, and were 49% for both the six months ended June 30, 2007 and 2006.

     For the three and six months ended June 30, 2007, selling, general and administrative expenses decreased due primarily to the shutdown of The WB Network on September 17, 2006.

     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the three and six months ended June 30, 2007 include a $34 million noncash charge related to the impairment of the Court TV tradename as a result of rebranding the Court TV network name to truTV, effective January 1, 2008, and approximately $16 million of restructuring charges and severance related to recent senior management changes at HBO. The results for the three and six months ended June 30, 2006 include shutdown costs of $81 million related to the shutdown of The WB Network, including $8 million related to employee terminations, $19 million related to contractual settlements and $54

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

million related to the termination of certain programming arrangements (primarily licensed movie rights). Included in the $54 million of costs to terminate programming arrangements is $29 million of costs related to terminating intercompany programming arrangements with other Time Warner divisions (e.g., New Line) that have been eliminated in consolidation, resulting in a net charge related to programming arrangements of $25 million.

     Operating Income before Depreciation and Amortization and Operating Income increased for the three and six months ended June 30, 2007 primarily due to declines in selling, general and administrative expenses and the absence of restructuring and shutdown costs of The WB Network incurred in the prior year quarter, partially offset by the asset impairment recorded in the second quarter of 2007, as described above.

     The Company expects the growth rates for the Networks segment to be relatively flat for the third quarter of 2007, compared to the similar period in the prior year, reflecting primarily higher investments in programming.

      Publishing. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Publishing segment for the three and six months ended June 30, 2007 and 2006 are as follows (millions):

     For the three and six months ended June 30, 2007, Subscription revenues declined slightly primarily as a result of lower newsstand sales, lower subscription revenues for several domestic titles and the closure of Teen People in September 2006, partially offset by the favorable effects of foreign currency exchange rates at IPC.

     For the three and six months ended June 30, 2007, Advertising revenues increased due primarily to growth in digital revenues, reflecting contributions from People.com, CNNMoney.com and SI.com, and the favorable effects of foreign currency exchange rates at IPC, partially offset by a decrease in domestic print Advertising revenues including the impact of the closures of Teen People and LIFE .

     For the three and six months ended June 30, 2007, Other revenues decreased due primarily to declines at Southern Living At Home. In addition, for the six months ended June 30, 2007, the decrease in Other revenues is also due to declines at Synapse, a subscription marketing business.

     Costs of revenues decreased 3% for the three months ended June 30, 2007 and, as a percentage of revenues, were 38% and 39% for the three months ended June 30, 2007 and 2006, respectively. Costs of revenues decreased 2% for the six months ended June 30, 2007 and, as a percentage of revenues, were 40% for the six months ended both June 30, 2007 and 2006. Costs of revenues for the magazine publishing business include manufacturing costs (paper, printing and distribution) and editorial-related costs, which together decreased 7% to $414 million for the three months ended June 30, 2007 and decreased 5% to $798 million for the six months ended June 30, 2007, primarily due to editorial-related and manufacturing cost savings. These decreases at the magazine publishing business were offset by increased costs associated with investments in digital properties, including incremental editorial costs and the unfavorable effects of foreign currency exchange rates at IPC.

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

     Selling, general and administrative expenses remained essentially flat for the three and six months ended June 30, 2007 primarily due to recent cost savings initiatives and the closure of Teen People , offset by costs associated with the investment in digital properties and the unfavorable effects of foreign currency exchange rates at IPC .

     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the three and six months ended June 30, 2007 include $7 million and $42 million, respectively, of restructuring costs, primarily severance associated with continuing efforts to streamline operations and costs related to the shutdown of LIFE magazine in the first quarter of 2007. The results for the three and six months ended June 30, 2006 include $22 million and $34 million, respectively, of restructuring costs, primarily associated with continuing efforts to streamline operations.

     Operating Income before Depreciation and Amortization and Operating Income for the three months ended June 30, 2007 increased due primarily to a decrease in costs of revenues and restructuring costs. For the six months ended June 30, 2007, Operating Income before Depreciation and Amortization and Operating Income remained essentially flat due primarily to a decline in revenues and an increase in restructuring charges of $8 million, partially offset by a decline in costs of revenues.

      Corporate. Operating Loss before Depreciation and Amortization and Operating Loss of the Corporate segment for the three and six months ended June 30, 2007 and 2006 are as follows (millions):

     As previously noted, the Company recognized legal reserves as well as legal and other professional fees related to the defense of various shareholder lawsuits, totaling $5 million and $176 million for the three and six months ended June 30, 2007, respectively, and $35 million and $114 million for the three and six months ended June 30, 2006, respectively. In addition, the Company recognized related insurance recoveries of $1 million and $9 million for the three and six months ended June 30, 2007, respectively, and $3 million and $53 million for the three and six months ended June 30, 2006, respectively. Legal fees are expected to continue to be incurred in future periods, primarily related to ongoing proceedings with respect to certain former employees of the Company.

     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the six months ended June 30, 2006 include approximately $5 million of restructuring costs and a gain of approximately $20 million on the sale of two aircraft.

     Excluding the items noted above, for the three and six months ended June 30, 2007, Operating Loss before Depreciation and Amortization and Operating Loss decreased due primarily to lower professional and financial advisory costs.

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

FINANCIAL CONDITION AND LIQUIDITY

     Management believes that cash generated by or available to Time Warner should be sufficient to fund its capital and liquidity needs for the foreseeable future, including the quarterly dividend payments and its new $5 billion common stock repurchase program. Time Warner’s sources of cash include cash provided by operations, expected proceeds from recently announced sales of assets, cash and equivalents on hand, available borrowing capacity under its committed credit facilities and commercial paper programs of $3.114 billion at Time Warner and $3.327 billion at TWC, in each case as of June 30, 2007, and access to the capital markets. Time Warner increased the size of its unsecured commercial paper program from $5.0 billion to $7.0 billion in January 2007.

Current Financial Condition

     At June 30, 2007, Time Warner had $35.899 billion of debt, $890 million of cash and equivalents (net debt of $35.009 billion, defined as total debt less cash and equivalents), $300 million of mandatorily redeemable preferred membership units at a subsidiary and $59.215 billion of shareholders’ equity, compared to $34.997 billion of debt, $1.549 billion of cash and equivalents (net debt of $33.448 billion), $300 million of mandatorily redeemable preferred membership units at a subsidiary and $60.389 billion of shareholders’ equity at December 31, 2006.

     The following table shows the significant items contributing to the increase in net debt from December 31, 2006 to June 30, 2007 (millions):

     As noted under “Recent Developments,” in July 2005, Time Warner’s Board of Directors authorized a common stock repurchase program that, as amended over time, allowed the Company to purchase up to an aggregate of $20 billion of common stock during the period from July 29, 2005 through December 31, 2007. As of June 30, 2007, the Company completed its $20 billion common stock repurchase program, having repurchased approximately 1.1 billion shares of common stock from the program’s inception through such date (Note 6).

     As noted under “Recent Developments,” on July 26, 2007, Time Warner’s Board of Directors authorized a new common stock repurchase program that allows the Company to purchase, from time to time, up to an aggregate of $5 billion of common stock. Purchases under this new stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. Size and timing of these purchases are based on a number of factors, including price and business and market conditions.

     As noted under “Recent Developments,” on June 21, 2007, the Company announced an agreement to sell Tegic, a wholly owned subsidiary of AOL, to Nuance for approximately $265 million in cash. This transaction, which is subject to customary closing conditions, is expected to close in the third quarter of 2007. The Company expects to record a pretax gain on this sale ranging from approximately $160 million to $190 million. The results of operations of Tegic have been reflected as discontinued operations for all periods presented.

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

     As noted under “Recent Developments,” on July 23, 2007, the Company entered into an agreement to purchase TACODA, an online behavioral targeting advertising network, for approximately $275 million in cash. The transaction, which is subject to customary closing conditions, is expected to close in the third quarter of 2007.

     As noted under “Recent Developments,” on December 14, 2006, Turner announced an agreement with Claxson to purchase seven pay television networks operating in Latin America for approximately $235 million (net of cash acquired). The transaction, which is subject to customary closing conditions, is expected to close in the second half of 2007.

     TWC is a participant in a wireless spectrum joint venture with several other cable companies and Sprint (the “Wireless Joint Venture”), which, on November 29, 2006, was awarded certain advanced wireless spectrum licenses in an FCC auction. In 2006, TWC invested approximately $633 million in the Wireless Joint Venture. Under the joint venture agreement, Sprint has the right to exit the Wireless Joint Venture upon 60 days’ notice and to require that the Wireless Joint Venture purchase its interests for an amount equal to Sprint’s capital contributions. During the second quarter of 2007, Sprint notified the Wireless Joint Venture that it was exercising this option. TWC expects to contribute approximately $30 million to the Wireless Joint Venture during the third quarter of 2007 to fund its share of the payment to Sprint. Under certain circumstances, the remaining members have the ability to exit the Wireless Joint Venture and receive from the Wireless Joint Venture, subject to certain limitations and adjustments, advanced wireless spectrum licenses covering their operating areas.

     On December 29, 2006, the Company completed the sale of AOL’s U.K. access business for $712 million, $476 million of which was paid at closing and the remainder of which is payable over the eighteen months following the closing. As of June 30, 2007, the Company expects to receive the remaining approximately $200 million over the twelve months ending June 30, 2008. The receivable due from the purchaser of the U.K. access business is non-interest bearing, and was recorded at its discounted present value upon the closing of the sale transaction. In addition, the receivable is denominated in British pounds, and the U.S. dollar amount presented is subject to change based on fluctuations in the exchange rate between the U.S. dollar and the British pound.

     On May 1, 2007, Time Warner’s 6.15% notes due May 1, 2007 (aggregate principal amount of $1.0 billion) matured and were retired, and on August 15, 2007, Time Warner’s 8.18% notes due August 15, 2007 (aggregate principal amount of $546 million) will mature.

     Cash provided by operations decreased to $3.119 billion in 2007 compared to $4.157 billion in 2006. The decrease in cash provided by operations was related primarily to increases in payments made in connection with the settlements in the securities litigation and the government investigations, interest payments, income taxes paid and cash used for working capital, partially offset by an increase in Operating Income before Depreciation and Amortization. The changes in components of working capital are subject to wide fluctuations based on the timing of cash transactions related to production schedules, the acquisition of programming, collection of accounts receivable and similar items. The change in working capital between periods is primarily related to higher programming costs and production spending, as well as higher payments on accounts payable.