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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    for the quarterly period ended September 30, 2007 or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    for the transition period from                      to                     
Commission file number 001-15062
 
TIME WARNER INC.
(Exact name of Registrant as specified in its charter)
     
Delaware   13-4099534
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
One Time Warner Center
New York, NY 10019-8016

(Address of Principal Executive Offices) (Zip Code)
(212) 484-8000
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ       No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Act). Yes o       No þ
       
Description of Class
  Shares Outstanding   
as of November 2, 2007
Common Stock – $.01 par value   3,614,595,917
 
 

 


 

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

 


Table of Contents

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
     Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of Time Warner Inc.’s (“Time Warner” or the “Company”) financial condition, cash flows and results of operations. MD&A is organized as follows:
   
Overview. This section provides a general description of Time Warner’s business segments, as well as recent developments the Company believes are important in understanding the results of operations and financial condition or in understanding anticipated future trends.
 
   
Results of operations. This section provides an analysis of the Company’s results of operations for the three and nine months ended September 30, 2007. This analysis is presented on both a consolidated and a business segment basis. In addition, a brief description is provided of significant transactions and events that impact the comparability of the results being analyzed.
 
   
Financial condition and liquidity. This section provides an analysis of the Company’s financial condition as of September 30, 2007 and cash flows for the nine months ended September 30, 2007.
 
   
Caution concerning forward-looking statements. This section provides a description of the use of forward-looking information appearing in this report, including in MD&A and the consolidated financial statements. Such information is based on management’s current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “2006 Form 10-K”) for a discussion of the risk factors applicable to the Company.
     As discussed more fully in Note 1 to the accompanying consolidated financial statements, the 2006 financial information has been recast so that the basis of presentation is consistent with that of the 2007 financial information. Specifically, amounts were recast to reflect the retrospective presentation of certain businesses that were sold as discontinued operations.

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

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

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

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

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
segment results included the operations of The WB Network through the date of its shutdown on September 17, 2006. For the nine months ended September 30, 2007, the Networks segment delivered revenues of $7.566 billion (20% of the Company’s overall revenues), $2.479 billion in Operating Income before Depreciation and Amortization and $2.245 billion in Operating Income.
     The Turner networks — including such recognized brands as TNT, TBS, CNN, Cartoon Network and CNN Headline News — are among the leaders in advertising-supported cable TV networks. For five consecutive years, more prime-time households have watched advertising-supported cable TV networks than the national broadcast networks. For the nine months ended September 30, 2007, TNT ranked first among advertising-supported cable networks in total-day delivery of its key demographics, Adults 18-49 and Adults 25-54 and in prime-time delivery ranked second for Adults 18-49 and Adults 25-54. TBS ranked second among advertising-supported cable networks in prime-time delivery of its key demographic, Adults 18-34.
     The Turner networks generate revenues principally from the sale of advertising time and monthly subscriber fees paid by cable system operators, direct-to-home satellite operators and other distributors. Key contributors to Turner’s success are its continued investments in high-quality programming focused on sports, network movie premieres, original and syndicated series, news and animation, leading to strong ratings and Advertising and Subscription revenue growth, as well as strong brands and operating efficiency.
     HBO operates the HBO and Cinemax multichannel pay television programming services, with the HBO service ranking as the nation’s most widely distributed pay television network. HBO generates revenues principally from monthly subscriber fees from cable system operators, direct-to-home satellite operators and other distributors. An additional source of revenues are the ancillary sales of its original programming, including The Sopranos, Sex and the City, Rome and Entourage.
      Publishing. Time Warner’s Publishing segment consists principally of magazine publishing and a number of direct-marketing and direct-selling businesses. The segment generated revenues of $3.500 billion (10% of the Company’s overall revenues), $690 million in Operating Income before Depreciation and Amortization and $545 million in Operating Income for the nine months ended September 30, 2007.
     As of September 30, 2007, Time Inc. published over 120 magazines globally, including People, Sports Illustrated, In Style, Southern Living, Real Simple, Entertainment Weekly, Time, Cooking Light and Fortune. It generates revenues primarily from advertising, magazine subscriptions and newsstand sales, and its growth is derived from higher circulation of and advertising in existing magazines, new magazine launches, acquisitions and advertising from digital properties. Time Inc. owns IPC Media, the U.K.’s largest magazine company (“IPC”), and the magazine subscription marketer Synapse Group, Inc. The Company’s Publishing segment has experienced sluggish print advertising sales as advertisers are shifting advertising expenditures to digital media. As a result, Time Inc. continues to invest in developing digital content, including the launch of MyRecipes.com, increased functionality for CNNMoney.com, the expansion of Sports Illustrated ’s digital properties and the launch of various digital sites in the U.K. by IPC. For the nine months ended September 30, 2007, digital Advertising revenues reflected approximately 6% of Time Inc.’s Advertising revenues. Time Inc.’s direct-selling division, Southern Living At Home, sells home decor products through independent consultants at parties hosted in people’s homes throughout the U.S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Table of Contents

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

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

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

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

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

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

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

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION — (Continued)
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
     This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues, Operating Income before Depreciation and Amortization and cash from operations. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. These forward-looking statements are based on management’s current expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the Company is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise.
     Various factors could adversely affect the operations, business or financial results of Time Warner or its business segments in the future and cause Time Warner’s actual results to differ materially from those contained in the forward-looking statements, including those factors discussed in detail in Item 1A, “Risk Factors,” in the 2006 Form 10-K, and in Time Warner’s other filings made from time to time with the SEC after the date of this report. In addition, Time Warner operates in highly competitive, consumer and technology-driven and rapidly changing media, entertainment, interactive services and cable businesses. These businesses are affected by government regulation, economic, strategic, political and social conditions, consumer response to new and existing products and services, technological developments and, particularly in view of new technologies, the continued ability to protect intellectual property rights. Time Warner’s actual results could differ materially from management’s expectations because of changes in such factors.
     Further, for Time Warner generally, lower than expected valuations associated with the cash flows and revenues at Time Warner’s segments may result in Time Warner’s inability to realize the value of recorded intangibles and goodwill at those segments. In addition, achieving the Company’s financial objectives, including growth in operations, maintaining financial ratios and a strong balance sheet, could be adversely affected by the factors discussed in detail in Item 1A, “Risk Factors,” in the 2006 Form 10-K, as well as:
   
economic slowdowns;
 
   
the impact of terrorist acts and hostilities;
 
   
changes in the Company’s plans, strategies and intentions;
 
   
the impacts of significant acquisitions, dispositions and other similar transactions;
 
   
the failure to meet earnings expectations; and
 
   
decreased liquidity in the capital markets, including any reduction in the ability to access the capital markets for debt securities or bank financings.

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TIME WARNER INC.
Item 4. CONTROLS AND PROCEDURES
Item 4. Controls and Procedures .
Evaluation of Disclosure Controls and Procedures
     The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in reports filed or submitted by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by the Company is accumulated and communicated to the Company’s management to allow timely decisions regarding the required disclosure.
Changes in Internal Control Over Financial Reporting
     There have not been any changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Consolidating Statement of Cash Flows
For The Nine Months Ended September 30, 2006
                                         
                                    Time  
    Parent     Guarantor     Non-Guarantor             Warner  
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                    (recast, millions)  
OPERATIONS
                                       
Net income
  $ 4,799     $ 5,176     $ 5,569     $ (10,745 )   $ 4,799  
Adjustments for noncash and nonoperating items:
                                       
Cumulative effect of accounting change, net of tax
    (25 )     (2 )     (2 )     4       (25 )
Depreciation and amortization
    34       40       2,430             2,504  
Amortization of film costs
          295       4,154             4,449  
Asset impairments
                200             200  
Gain on investments and other assets, net
    (5 )     (90 )     (949 )           (1,044 )
Excess (deficiency) of distributions over equity in pretax income of consolidated subsidiaries
    (5,500 )     (6,089 )           11,589        
Equity in (income) losses of investee companies, net of cash distributions
                (33 )           (33 )
Equity-based compensation
    39       18       155             212  
Minority interests
                228       37       265  
Deferred income taxes
    1,030       (350 )     (336 )     686       1,030  
Amounts related to securities litigation and government investigations
    (177 )                       (177 )
Changes in operating assets and liabilities, net of acquisitions
    5,432       11,153       (1,845 )     (19,094 )     (4,354 )
Adjustments relating to discontinued operations
    (1,412 )     (1,411 )     (1,258 )     2,825       (1,256 )
 
                             
Cash provided by operations
    4,215       8,740       8,313       (14,698 )     6,570  
INVESTING ACTIVITIES
                                       
Investments and acquisitions, net of cash acquired
    (8 )     (67 )     (12,107 )           (12,182 )
Investments in Wireless Spectrum Joint Venture
                (182 )           (182 )
Capital expenditures and product development costs
    (25 )     (98 )     (2,547 )           (2,670 )
Capital expenditures from discontinued operations
                (63 )           (63 )
Investment proceeds from available-for-sale securities
    1       38       3             42  
Advances to parents and consolidated subsidiaries
    (1,073 )                 1,073        
Other investment proceeds
    11       473       2,590             3,074  
 
                             
Cash provided (used) by investing activities
    (1,094 )     346       (12,306 )     1,073       (11,981 )
FINANCING ACTIVITIES
                                       
Borrowings
    4,843             10,737             15,580  
Issuance of mandatorily redeemable preferred membership units by a subsidiary
                300             300  
Debt repayments
    (1,500 )     (546 )     (505 )           (2,551 )
Proceeds from exercise of stock options
    378                         378  
Excess tax benefit on stock options
    61                         61  
Principal payments on capital leases
          (2 )     (62 )           (64 )
Repurchases of common stock
    (10,659 )                       (10,659 )
Dividends paid
    (658 )                       (658 )
Other
                (18 )           (18 )
Change in due to/from parent and investment in segment
    830       (8,618 )     (5,837 )     13,625        
 
                             
Cash provided (used) by financing activities
    (6,705 )     (9,166 )     4,615       13,625       2,369  
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
    (3,584 )     (80 )     622             (3,042 )
 
                             
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD
    3,798       95       327             4,220  
 
                             
CASH AND EQUIVALENTS AT END OF PERIOD
  $ 214     $ 15     $ 949     $     $ 1,178  
 
                             

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Part II. Other Information
Item 1. Legal Proceedings
Securities Matters
Other Related Securities Litigation Matters
     Reference is made to the shareholder derivative, ERISA and individual securities matters described on pages 52-56 of the 2006 Form 10-K, page 68 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (the “March 2007 Form 10-Q”) and page 76 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (the “June 2007 Form 10-Q”). At September 30, 2007, the Company’s remaining reserve related to these matters is approximately $10 million, including approximately $8 million that has been reserved for an expected attorneys’ fee award related to a previously settled matter. The Company believes the potential exposure in the securities litigation matters that remain pending at September 30, 2007 to be de minimis.
     Reference is made to the consolidated ERISA class action lawsuits described on page 52 of the 2006 Form 10-K. On October 26, 2007, the court issued an order approving certain attorneys’ fees and expenses requested by plaintiffs’ counsel, as well as approving certain incentive awards to the lead plaintiffs. The time to appeal this decision has not yet expired.
     Reference is made to the lawsuits described on page 53 of the 2006 Form 10-K and page 68 of the March 2007 Form 10-Q filed by shareholders who determined to “opt-out” of the settlement reached in the consolidated federal securities class action. All of these matters have now been settled.
     Reference is made to the putative class action filed by Staro Asset Management, LLC described on page 54 of the 2006 Form 10-K. On September 27, 2007, the Company filed a motion to dismiss this action based on plaintiff’s failure to take any action to prosecute the case for nearly four years.
     Reference is made to the lawsuit filed on behalf of purchasers of stock in Homestore.com, Inc. described on page 55 of the 2006 Form 10-K. On August 6, 2007, the court issued preliminary approval of the settlement of this lawsuit. The settlement agreement remains subject to final approval by the district court.
Other Matters
     Reference is made to the Warner Bros. (South) Inc. (“WBS”) tax cases in Brazil described on page 57 of the 2006 Form 10-K and page 76 of the June 2007 Form 10-Q. In September 2007, WBS elected to participate in a government-sponsored amnesty program, which resolved ten of the state tax matters, including the Superior Court case in which WBS had previously received an adverse ruling, for a payment of approximately $20 million (based on the real /U.S. dollar exchange rate on the date the payment was made). The payment made was consistent with the reserve previously established for these matters.
     Reference is made to the lawsuit filed by certain heirs of Jerome Siegel relating to the Superman character described on page 57 of the 2006 Form 10-K and page 68 of the March 2007 Form 10-Q. This case is scheduled for trial starting in January 2008.
     Reference is made to the lawsuit filed by Thomas Dreiling described on page 58 of the 2006 Form 10-K and page 76 of the June 2007 Form 10-Q. On October 11, 2007, the parties filed cross-motions for summary judgment.
     On February 28, 2005, Wingnut Films, Ltd. filed a case against New Line Cinema Corporation, and Katja Motion Pictures Corp. and New Line Productions, Inc., both of which are wholly owned subsidiaries of New Line Cinema Corporation, as well as other unnamed defendants, in the U.S. District Court for the Central District of California relating to The Lord of the Rings: The Fellowship of the Ring; The Lord of the Rings: The Two Towers; and The Lord of the Rings: The Return of the King (collectively, “the Trilogy”). The complaint alleges that New Line Cinema Corporation failed to make full payment to plaintiff with respect to its participation in Adjusted Gross Receipts (as defined in the parties’ contract). A trial in this matter has been scheduled for January 2008. Claims have also been made by other profit participants relating to the Trilogy, including the Estate of J.R.R. Tolkien. The Company intends to defend against these matters vigorously, but is unable to predict the outcome of the proceedings.
     On August 30, 2007, eight years after the case was initially filed, the Supreme Court of the Republic of Indonesia overturned the rulings of two lower courts and issued a judgment against Time Inc. Asia and six journalists in the matter of H.M. Suharto v. Time Inc. Asia et al. The underlying libel lawsuit was filed in July 1999 by the former dictator of Indonesia following the publication of TIME magazine’s May 24, 1999 cover story “Suharto Inc.” Following a trial in the Spring of 2000, a three-judge panel of an Indonesian court found in favor of Time Inc. and the journalists, and that

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decision was affirmed by an intermediate appellate court in March 2001. The court’s August 30, 2007 decision reversed those prior determinations and ordered defendants to, among other things, apologize for certain aspects of the May 1999 article and pay Mr. Suharto damages in the amount of one trillion rupiah (approximately $110 million based on the exchange rate as of September 30, 2007). The Company continues to defend this matter vigorously and intends to challenge the judgment by filing a petition for review with the Supreme Court of the Republic of Indonesia. The Company does not believe it is likely that efforts to enforce such judgment within Indonesia, or in those jurisdictions outside of Indonesia in which the Company has substantial assets, would result in any material loss to the Company. Consequently, no loss has been accrued for this matter as of September 30, 2007. Moreover, the Company believes that insurance coverage is available for the judgment, were it to be sustained and, eventually, enforced.
     On September 20, 2007, Brantley, et al. v. NBC Universal, Inc., et al. was filed in the U.S. District Court for the Central District of California against the Company and TWC. The complaint, which also names as defendants several other programming content providers (collectively, the “programmer defendants”) as well as other cable and satellite providers (collectively, the “distributor defendants”), alleges violations of Sections 1 and 2 of the Sherman Antitrust Act. Among other things, the complaint alleges coordination between and among the programmer defendants to sell and/or license programming on a “bundled” basis to the distributor defendants, who in turn purportedly offer that programming to subscribers in packaged tiers, rather than on a per channel (or “à la carte”) basis. Plaintiffs, who seek to represent a purported nationwide class of cable and satellite subscribers, demand, among other things, unspecified treble monetary damages and an injunction to compel the offering of channels to subscribers on an “à la carte” basis. The Company intends to defend against this lawsuit vigorously, but is unable to predict the outcome of this suit or reasonably estimate a range of possible loss.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Company Purchases of Equity Securities
     The following table provides information about purchases by the Company during the quarter ended September 30, 2007 of equity securities registered by the Company pursuant to Section 12 of the Exchange Act.
Issuer Purchases of Equity Securities
                                 
                    Total Number of     Approximate Dollar  
                    Shares Purchased as     Value of Shares that
                    Part of Publicly     May Yet Be  
    Total Number of     Average Price     Announced Plans or     Purchased Under the  
Period   Shares Purchased (1)     Paid Per Share (2)     Programs (3)     Plans or Programs (4)  
July 1, 2007 – July 31, 2007
    7,030     $ 20.61       0     $      540,483,206  
August 1, 2007 – August 31, 2007
    99,678,500     $ 18.64       99,678,500     $      3,682,115,490  
September 1, 2007 – September 30, 2007
    7,352,954     $ 19.04       7,348,200     $      3,542,171,013  
 
                               
Total
    107,038,484     $ 18.67       107,026,700          
 
(1)  
The total number of shares purchased includes (a) shares of Common Stock purchased by the Company under the Stock Repurchase Program and the New Stock Repurchase Program, each as described in footnote 3 below, and (b) shares of Common Stock that are tendered by employees to the Company to satisfy the employees’ tax withholding obligations in connection with the vesting of awards of restricted stock, which are repurchased by the Company based on their fair market value on the vesting date. The number of shares of Common Stock purchased by the Company in connection with the vesting of such awards totaled 7,030 shares, 0 shares and 4,754 shares, respectively, for the months of July, August and September.
 
(2)  
The calculation of the average price paid per share does not give effect to any fees, commissions or other costs associated with the repurchase of such shares.
 
(3)  
On August 3, 2005, the Company announced that its Board of Directors had authorized a Common Stock repurchase program that allows the Company to repurchase, from time to time, up to $5 billion of Common Stock over a two-year period (the “Stock Repurchase Program”). On November 2, 2005, the Company announced the increase of the amount that could be repurchased under the Stock Repurchase Program to an aggregate of up to $12.5 billion of Common Stock. In addition, on February 17, 2006, the Company announced a further increase of the amount of the Stock Repurchase Program and the extension of the program’s ending date. Under the extended program, the Company has authority to repurchase up to an aggregate of $20 billion of Common Stock during the period from July 29, 2005 through December 31, 2007. On August 1, 2007, the Company announced that its Board of Directors had authorized a new stock repurchase program that allows Time Warner to repurchase, from time to time, up to $5 billion of Common Stock (the “New Stock Repurchase Program”). Purchases under the Stock Repurchase Program and the New Stock Repurchase Program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases will be based on a number of factors, including price and business and market conditions. In the past, the Company has repurchased shares of Common Stock pursuant to trading programs under Rule 10b5-1 promulgated under the Exchange Act, and it may repurchase shares of Common Stock under such trading programs in the future.
 
(4)  
This amount does not reflect (i) the fees, commissions and other costs associated with the Stock Repurchase Program and the New Stock Repurchase Program, (ii) the dollar value of the 4,000,000 shares of Common Stock that are subject to a working capital adjustment in the transaction with Liberty Media Corporation (“Liberty”) described below, and (iii) the dollar value of the 18,784,759 shares of Series LMCN-V Common Stock received by the Company on May 16, 2007 in the Liberty Transaction, which were acquired as part of the Stock Purchase Program. On May 16, 2007, the Company and Liberty completed a transaction in which Liberty exchanged shares of the Company’s Series LMCN-V Common Stock and shares of the Company’s Common Stock for a subsidiary of the Company that owned specified assets and cash (the “Liberty Transaction”). In connection with the Liberty Transaction, Liberty continues to hold 4,000,000 shares of the Company’s Common Stock that are expected to be delivered to the Company upon the resolution of a working capital adjustment and applied to the Company’s share repurchases under the Stock Repurchase Program.

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Item 5. Other Information.
Amendment of Compensation Plans and Form of Restricted Stock Units Agreement to Address Section 409A
     On October 25, 2007, the Board of Directors approved amendments to a number of compensation plans maintained by the Company to address compliance with Section 409A of the Internal Revenue Code, which was enacted in 2004 and for which final regulations were issued in April 2007. With respect to the Time Warner Inc. Deferred Compensation Plan, the amendments included (i) specifying when elections to defer compensation and select the form and time of distribution must be made, generally before the end of the calendar year prior to the year in which the compensation is earned, (ii) limiting the ability to change deferral elections, (iii) provisions to delay for six months payments to employees who are among the top-50 compensated officers of the Company who separate from service, (iv) removing the ability to receive an in-service distribution with a 10% reduction, and (v) adding “savings language” for Section 409A. These amendments are effective as of January 1, 2005.
     With respect to the Time Warner Inc. Non-Employee Directors’ Deferred Compensation Plan, the amendments included (i) specifying when a deferral election must be made, (ii) adding language regarding the irrevocable nature of the election, and (iii) adding “savings language” for Section 409A. These amendments are effective as of January 1, 2005.
     With respect to the Time Warner Inc. Annual Bonus Plan for Executive Officers, the amendments add (i) specified payment dates, and (ii) “savings language” for Section 409A. In addition, the Board approved an amendment to the definition of EBITDA so that the definition conforms to the definition of Adjusted Operating Income before Depreciation and Amortization the Company uses in connection with its earnings and business outlook releases. The changes will be effective for years beginning January 1, 2008.
     For the equity plans listed below, the amendments, which are all effective October 25, 2007, consist of either including a “savings provision” for Section 409A that provides for a delay in the delivery of payments until the first date on which additional taxation would not result under Section 409A or modifying an existing savings provision:
   
Time Warner Inc. 2006 Stock Incentive Plan
 
   
Time Warner Inc. 2003 Stock Incentive Plan
 
   
Time Warner Inc. 1999 Stock Plan
 
   
AOL Time Warner Inc. 1994 Stock Option Plan
 
   
Time Warner Inc. 1988 Restricted Stock and Restricted Stock Unit Plan for Non-Employee Directors
In addition, the definition of “change in control” in the Time Warner Inc. 1988 Restricted Stock and Restricted Stock Unit Plan for Non-Employee Directors was amended to be consistent with the definition used in the other equity plans listed above. The amendment to the AOL Time Warner Inc. 1994 Stock Option Plan also removed an option exercise deferral feature.
     The Compensation and Human Development Committee of the Board of Directors approved a new form of agreement governing restricted stock units (“RSUs”) on October 24, 2007 to address compliance with Section 409A. The changes to the form of RSU Agreement: (i) include language specifying when shares of Time Warner common stock will be paid out following vesting or a partial vesting in connection with a termination of employment without cause, (ii) modify the definition of “disability” to fit within the Section 409A definition, and (iii) provide that distribution of shares following a change in control that results in an acceleration of vesting will be delayed to the regular vesting date if the change in control is not one that comes within the events permitted under Section 409A.
     Copies of the compensation plans described above, as amended, and the form of RSU Agreement are included as exhibits to this report.
Item 6. Exhibits.
     The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as a part of this report and such Exhibit Index is incorporated herein by reference.

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TIME WARNER INC.
SIGNATURE
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
 
  TIME WARNER INC.
(Registrant)
   
 
       
Date: November 7, 2007
  /s/ Wayne H. Pace    
 
 
 
Wayne H. Pace
   
 
  Executive Vice President and Chief Financial Officer    

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EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
     
Exhibit No.   Description of Exhibit
 
   
10.1
 
Time Warner Inc. 2006 Stock Incentive Plan, as amended October 25, 2007.
 
   
10.2
 
Time Warner Inc. 2003 Stock Incentive Plan, as amended October 25, 2007.
 
   
10.3
 
Time Warner Inc. 1999 Stock Plan, as amended October 25, 2007.
 
   
10.4
 
AOL Time Warner Inc. 1994 Stock Option Plan, as amended October 25, 2007.
 
   
10.5
 
Time Warner Inc. 1988 Restricted Stock and Restricted Stock Unit Plan for Non-Employee Directors, as amended October 25, 2007.
 
   
10.6
 
Form of Restricted Stock Units Agreement, for use after October 24, 2007.
 
   
10.7
 
Time Warner Inc. Deferred Compensation Plan, as amended October 25, 2007, effective as of January 1, 2005.
 
   
10.8
 
Time Warner Inc. Non-Employee Directors’ Deferred Compensation Plan, as amended October 25, 2007, effective as of January 1, 2005.
 
   
10.9
 
Amended and Restated Time Warner Inc. Annual Bonus Plan for Executive Officers, as amended October 25, 2007, to be effective January 1, 2008.
 
   
31.1
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.
 
   
31.2
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.
 
   
32
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. †
 
 
This certification will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Company specifically incorporates it by reference.

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Exhibit 10.1
Final as amended
on October 25, 2007
TIME WARNER INC.
2006 STOCK INCENTIVE PLAN
1. Purpose of the Plan
          The purpose of the Plan is to aid the Company and its Affiliates in recruiting and retaining employees, directors and advisors and to motivate such employees, directors and advisors to exert their best efforts on behalf of the Company and its Affiliates by providing incentives through the granting of Awards. The Company expects that it will benefit from the added interest which such employees, directors and advisors will have in the welfare of the Company as a result of their proprietary interest in the Company’s success.
2. Definitions
          The following capitalized terms used in the Plan have the respective meanings set forth in this Section:
  (a)   Act means The Securities Exchange Act of 1934, as amended, or any successor thereto.
 
  (b)   Affiliate means any entity that is consolidated with the Company for financial reporting purposes or any other entity designated by the Board in which the Company or an Affiliate has a direct or indirect equity interest of at least twenty percent (20%), measured by reference to vote or value.
 
  (c)   Award means an Option, Stock Appreciation Right, Restricted Stock or Other Stock-Based Award granted pursuant to the Plan.
 
  (d)   Board means the Board of Directors of the Company.
 
  (e)   Change in Control means the occurrence of any of the following events:
     (i) any “Person” within the meaning of Section 13(d)(3) or 14(d)(2) of the Act (other than the Company or any company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company) becomes the “Beneficial Owner” within the meaning of Rule 13d-3 promulgated under the Act of 30% or more of the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors; excluding , however , any circumstance in which such beneficial ownership resulted from any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or by any


 

2

corporation controlling, controlled by, or under common control with, the Company;
     (ii) a change in the composition of the Board since the Effective Date, such that the individuals who, as of such date, constituted the Board (the “ Incumbent Board ”) cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company subsequent to the Effective Date whose election, or nomination for election by the Company’s stockholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed a member of the Incumbent Board; and provided further , that any individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-12 of Regulation 14A promulgated under the Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any person or Entity other than the Board shall not be deemed a member of the Incumbent Board;
     (iii) a reorganization, recapitalization, merger or consolidation (a “ Corporate Transaction ”) involving the Company, unless securities representing 60% or more of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the Company or the corporation resulting from such Corporate Transaction (or the parent of such corporation) are held subsequent to such transaction by the person or persons who were the beneficial holders of the outstanding voting securities entitled to vote generally in the election of directors of the Company immediately prior to such Corporate Transaction, in substantially the same proportions as their ownership immediately prior to such Corporate Transaction; or
     (iv) the sale, transfer or other disposition of all or substantially all of the assets of the Company.
  (f)   Code means The Internal Revenue Code of 1986, as amended, or any successor thereto.
 
  (g)   Committee means the Compensation and Human Development Committee of the Board or its successor, or such other committee of the Board to which the Board has delegated power to act under or pursuant to the provisions of the Plan or a subcommittee of the Compensation and Human Development Committee (or such other committee) established by the Compensation and Human Development Committee or such other committee.
 
  (h)   Company means Time Warner Inc., a Delaware corporation.


 

3

  (i)   Effective Date means the date the Board approved the Plan (March 23, 2006).
 
  (j)   Employment means (i) a Participant’s employment if the Participant is an employee of the Company or any of its Affiliates and (ii) a Participant’s services as a non-employee director, if the Participant is a non-employee member of the Board or the board of directors of an Affiliate; provided , however that unless otherwise determined by the Committee, a change in a Participant’s status from employee to non-employee (other than a director of the Company or an Affiliate) shall constitute a termination of employment hereunder.
 
  (k)   Fair Market Value means, on a given date, (i) if there should be a public market for the Shares on such date, the average of the high and low prices of the Shares on the New York Stock Exchange, or, if the Shares are not listed or admitted on any national securities exchange, the average of the per Share closing bid price and per Share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System (or such market in which such prices are regularly quoted) (the “NASDAQ”), or, if no sale of Shares shall have been reported on the New York Stock Exchange or quoted on the NASDAQ on such date, then the immediately preceding date on which sales of the Shares have been so reported or quoted shall be used, and (ii) if there should not be a public market for the Shares on such date, the Fair Market Value shall be the value established by the Committee in good faith.
 
  (l)   ISO means an Option that is also an incentive stock option granted pursuant to Section 6(d).
 
  (m)   Option means a stock option granted pursuant to Section 6.
 
  (n)   Option Price ” means the price for which a Share can be purchased upon exercise of an Option, as determined pursuant to Section 6(a).
 
  (o)   Other Stock-Based Awards means awards granted pursuant to Section 9.
 
  (p)   Participant means an employee, prospective employee, director or advisor of the Company or an Affiliate who is selected by the Committee to participate in the Plan.
 
  (q)   Performance-Based Awards means certain Other Stock-Based Awards granted pursuant to Section 9(b).
 
  (r)   Plan means the Time Warner Inc. 2006 Stock Incentive Plan, as amended from time to time.


 

4

  (s)   Restricted Stock means any Share granted under Section 8.
 
  (t)   Shares means shares of common stock of the Company, $.01 par value per share.
 
  (u)   Stock Appreciation Right means a stock appreciation right granted pursuant to Section 7.
 
  (v)   Subsidiary means a subsidiary corporation, as defined in Section 424(f) of the Code (or any successor section thereto), of the Company.
3. Shares Subject to the Plan
          The total number of Shares which may be issued under the Plan is 150,000,000, of which no more than 30% may be issued in the form of Restricted Stock or Other Stock-Based Awards payable in Shares. The maximum aggregate number of Shares with respect to which Awards may be granted during a calendar year, net of any Shares which are subject to Awards (or portions thereof) which, during such year, terminate or lapse without payment of consideration, shall be equal to 1.5% of the number of Shares outstanding on December 31 of the preceding calendar year. The maximum number of Shares with respect to which Awards may be granted during a calendar year to any Participant shall be 2,000,000; provided that the maximum number of Shares that may be awarded in the form of Restricted Stock or Other Stock-Based Awards payable in Shares during any calendar year to any Participant shall be 600,000. The number of Shares available for issuance under the Plan shall be reduced by the full number of Shares covered by Awards granted under the Plan (including, without limitation, the full number of Shares covered by any Stock Appreciation Right, regardless of whether any such Stock Appreciation Right or other Award covering Shares under the Plan is ultimately settled in cash or by delivery of Shares); provided, however , that the number of Shares covered by Awards (or portions thereof) that are forfeited or that otherwise terminate or lapse without the payment of consideration in respect thereof shall again become available for issuance under the Plan; and provided further that any Shares that are forfeited after the actual issuance of such Shares to a Participant under the Plan shall not become available for re-issuance under the Plan.
4. Administration
  (a)   The Plan shall be administered by the Committee, which may delegate its duties and powers in whole or in part to any subcommittee thereof consisting solely of at least two individuals who are intended to qualify as “independent directors” within the meaning of the New York Stock Exchange listed company rules, “Non-Employee Directors” within the meaning of Rule 16b-3 under the Act (or any successor rule thereto) and, to the extent required by Section 162(m) of the Code (or any successor section thereto), “outside directors” within the meaning thereof. In addition, the Committee may delegate the authority to grant Awards under the Plan to any employee or group of employees of the Company or an Affiliate; provided that such grants are consistent with guidelines established by the Committee from time to time.


 

5

  (b)   The Committee shall have the full power and authority to make, and establish the terms and conditions of, any Award to any person eligible to be a Participant, consistent with the provisions of the Plan and to waive any such terms and conditions at any time (including, without limitation, accelerating or waiving any vesting conditions). Awards may, in the discretion of the Committee, be made under the Plan in assumption of, or in substitution for, outstanding awards previously granted by the Company or its affiliates or a company acquired by the Company or with which the Company combines. The number of Shares underlying such substitute awards shall be counted against the aggregate number of Shares available for Awards under the Plan.
 
  (c)   The Committee is authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make any other determinations that it deems necessary or desirable for the administration of the Plan, and may delegate such authority, as it deems appropriate. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent the Committee deems necessary or desirable. Any decision of the Committee in the interpretation and administration of the Plan, as described herein, shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned (including, but not limited to, Participants and their beneficiaries or successors).
 
  (d)   The Committee shall require payment of any amount it may determine to be necessary to withhold for federal, state, local or other taxes as a result of the exercise, grant or vesting of an Award. Unless the Committee specifies otherwise, the Participant may elect to pay a portion or all of such withholding taxes by (a) delivery of Shares or (b) having Shares withheld by the Company with a Fair Market Value equal to the minimum statutory withholding rate from any Shares that would have otherwise been received by the Participant.
5. Limitations
  (a)   No Award may be granted under the Plan after the fifth anniversary of the meeting of shareholders of the Company at which the Plan is approved, but Awards granted prior to such fifth anniversary may extend beyond that date.
 
  (b)   No Option or Stock Appreciation Right, once granted hereunder, may be repriced.
 
  (c)   With respect to any Awards granted to a Participant who is a non-employee member of the Board at the time of grant, such Awards shall be made pursuant to formulas established by the Board in advance of such grant. Any such Awards shall be made at the time such a Participant first


 

6

      becomes a member of the Board and, thereafter, on an annual basis at or following the annual meeting of stockholders. Such formulas may include any one or more of the following: (i) a fixed number of Options or Stock Appreciation Rights, (ii) a fixed number of Shares of Restricted Stock or a number of Shares of Restricted Stock determined by reference to a fixed dollar amount (calculated based on the Fair Market Value of a Share on the date of grant), and (iii) Other Stock-Based Awards determined either by reference to a fixed number of Shares or to a fixed dollar amount (calculated based on the Fair Market Value of a Share on the date of grant).
6. Terms and Conditions of Options
          Options granted under the Plan shall be, as determined by the Committee, nonqualified or incentive stock options for federal income tax purposes, as evidenced by the related Award agreements, and shall be subject to the foregoing and the following terms and conditions and to such other terms and conditions, not inconsistent therewith, as the Committee shall determine, and as evidenced by the related Award agreement:
  (a)   Option Price . The Option Price per Share shall be determined by the Committee, but shall not be less than 100% of the Fair Market Value of a Share on the date an Option is granted.
 
  (b)   Exercisability . Options granted under the Plan shall be exercisable at such time and upon such terms and conditions as may be determined by the Committee, but in no event shall an Option be exercisable more than ten years after the date it is granted, except as may be provided pursuant to Section 15.
 
  (c)   Exercise of Options . Except as otherwise provided in the Plan or in an Award agreement, an Option may be exercised for all, or from time to time any part, of the Shares for which it is then exercisable. For purposes of this Section 6, the exercise date of an Option shall be the date a notice of exercise is received by the Company, together with provision for payment of the full purchase price in accordance with this Section 6(c). The purchase price for the Shares as to which an Option is exercised shall be paid to the Company, as designated by the Committee, pursuant to one or more of the following methods: (i) in cash or its equivalent (e.g., by check); (ii) in Shares having a Fair Market Value equal to the aggregate Option Price for the Shares being purchased and satisfying such other requirements as may be imposed by the Committee; provided that such Shares have been held by the Participant for no less than six months (or such other period as established from time to time by the Committee in order to avoid adverse accounting treatment applying generally accepted accounting principles); (iii) partly in cash and partly in such Shares or (iv) if there is a public market for the Shares at such time, through the delivery of irrevocable instructions to a broker to sell Shares obtained


 

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      upon the exercise of the Option and to deliver promptly to the Company an amount out of the proceeds of such Sale equal to the aggregate Option Price for the Shares being purchased. No Participant shall have any rights to dividends or other rights of a stockholder with respect to Shares subject to an Option until the Shares are issued to the Participant.
 
  (d)   ISOs . The Committee may grant Options under the Plan that are intended to be ISOs. Such ISOs shall comply with the requirements of Section 422 of the Code (or any successor section thereto). No ISO may be granted to any Participant who at the time of such grant, owns more than ten percent of the total combined voting power of all classes of stock of the Company or of any Subsidiary, unless (i) the Option Price for such ISO is at least 110% of the Fair Market Value of a Share on the date the ISO is granted and (ii) the date on which such ISO terminates is a date not later than the day preceding the fifth anniversary of the date on which the ISO is granted. Any Participant who disposes of Shares acquired upon the exercise of an ISO either (i) within two years after the date of grant of such ISO or (ii) within one year after the transfer of such Shares to the Participant, shall notify the Company of such disposition and of the amount realized upon such disposition. All Options granted under the Plan are intended to be nonqualified stock options, unless the applicable Award agreement expressly states that the Option is intended to be an ISO. If an Option is intended to be an ISO, and if for any reason such Option (or portion thereof) shall not qualify as an ISO, then, to the extent of such nonqualification, such Option (or portion thereof) shall be regarded as a nonqualified stock option granted under the Plan; provided that such Option (or portion thereof) otherwise complies with the Plan’s requirements relating to nonqualified stock options. In no event shall any member of the Committee, the Company or any of its Affiliates (or their respective employees, officers or directors) have any liability to any Participant (or any other person) due to the failure of an Option to qualify for any reason as an ISO.
 
  (e)   Attestation . Wherever in this Plan or any agreement evidencing an Award a Participant is permitted to pay the exercise price of an Option or taxes relating to the exercise of an Option by delivering Shares, the Participant may, subject to procedures satisfactory to the Committee, satisfy such delivery requirement by presenting proof of beneficial ownership of such Shares, in which case the Company shall treat the Option as exercised without further payment and/or shall withhold such number of Shares from the Shares acquired by the exercise of the Option, as appropriate.
7. Terms and Conditions of Stock Appreciation Rights
  (a)   Grants . The Committee may grant (i) a Stock Appreciation Right independent of an Option or (ii) a Stock Appreciation Right in connection with an Option, or a portion thereof. A Stock Appreciation Right granted


 

8

      pursuant to clause (ii) of the preceding sentence (A) may be granted at the time the related Option is granted or at any time prior to the exercise or cancellation of the related Option, (B) shall cover the same number of Shares covered by an Option (or such lesser number of Shares as the Committee may determine) and (C) shall be subject to the same terms and conditions as such Option except for such additional limitations as are contemplated by this Section 7 (or such additional limitations as may be included in an Award agreement).
 
  (b)   Terms . The exercise price per Share of a Stock Appreciation Right shall be an amount determined by the Committee but in no event shall such amount be less than the Fair Market Value of a Share on the date the Stock Appreciation Right is granted; provided , however , that notwithstanding the foregoing in the case of a Stock Appreciation Right granted in conjunction with an Option, or a portion thereof, the exercise price may not be less than the Option Price of the related Option. Each Stock Appreciation Right granted independent of an Option shall entitle a Participant upon exercise to an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one Share over (B) the exercise price per Share, times (ii) the number of Shares covered by the Stock Appreciation Right. Each Stock Appreciation Right granted in conjunction with an Option, or a portion thereof, shall entitle a Participant to surrender to the Company the unexercised Option, or any portion thereof, and to receive from the Company in exchange therefor an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one Share over (B) the Option Price per Share, times (ii) the number of Shares covered by the Option, or portion thereof, which is surrendered. Payment shall be made in Shares or in cash, or partly in Shares and partly in cash (any such Shares valued at such Fair Market Value), all as shall be determined by the Committee. Stock Appreciation Rights may be exercised from time to time upon actual receipt by the Company of written notice of exercise stating the number of Shares with respect to which the Stock Appreciation Right is being exercised. The date a notice of exercise is received by the Company shall be the exercise date. No fractional Shares will be issued in payment for Stock Appreciation Rights, but instead cash will be paid for a fraction or, if the Committee should so determine, the number of Shares will be rounded downward to the next whole Share. No Participant shall have any rights to dividends or other rights of a stockholder with respect to Shares covered by Stock Appreciation Rights until the Shares are issued to the Participant.
 
  (c)   Limitations . The Committee may impose, in its discretion, such conditions upon the exercisability of Stock Appreciation Rights as it may deem fit, but in no event shall a Stock Appreciation Right be exercisable more than ten years after the date it is granted, except as may be provided pursuant to Section 15.


 

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8. Restricted Stock
  (a)   Grant . Subject to the provisions of the Plan, the Committee shall determine the number of Shares of Restricted Stock to be granted to each Participant, the duration of the period during which, and the conditions, if any, under which, the Restricted Stock may be forfeited to the Company, and the other terms and conditions of such Awards; provided that not less than 95% of the Shares of Restricted Stock shall remain subject to forfeiture for at least three years after the date of grant, subject to earlier termination of such potential for forfeiture in whole or in part in the event of a Change in Control or the death, disability or other termination of the Participant’s employment.
 
  (b)   Transfer Restrictions . Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as provided in the Plan or the applicable Award agreement. Certificates, or other evidence of ownership, issued in respect of Shares of Restricted Stock shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Company. After the lapse of the restrictions applicable to such Shares of Restricted Stock, the Company shall deliver such certificates, or other evidence of ownership, to the Participant or the Participant’s legal representative.
 
  (c)   Dividends . Dividends paid on any Shares of Restricted Stock may be paid directly to the Participant, withheld by the Company subject to vesting of the Restricted Shares pursuant to the terms of the applicable Award agreement, or may be reinvested in additional Shares of Restricted Stock, as determined by the Committee in its sole discretion.
 
  (d)   Performance-Based Grants . Notwithstanding anything to the contrary herein, certain Shares of Restricted Stock granted under this Section 8 may, at the discretion of the Committee, be granted in a manner which is intended to be deductible by the Company under Section 162(m) of the Code (or any successor section thereto). The restrictions applicable to such Restricted Stock shall lapse based wholly or partially on the attainment of written performance goals approved by the Committee for a performance period established by the Committee (i) while the outcome for that performance period is substantially uncertain and (ii) no more than 90 days after the commencement of the performance period to which the performance goal relates or, if less, the number of days which is equal to 25 percent of the relevant performance period. The performance goals, which must be objective, shall be based upon one or more of the criteria set forth in Section 9(b) below. The Committee shall determine in its discretion whether, with respect to a performance period, the applicable performance goals have been met with respect to a given Participant and,


 

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      if they have, shall so certify prior to the release of the restrictions on the Shares.
9. Other Stock-Based Awards
  (a)   Generally . The Committee, in its sole discretion, may grant or sell Awards of Shares and Awards that are valued in whole or in part by reference to, or are otherwise based on the Fair Market Value of, Shares (“Other Stock-Based Awards”). Such Other Stock-Based Awards shall be in such form, and dependent on such conditions, as the Committee shall determine, including, without limitation, the right to receive, or vest with respect to, one or more Shares (or the equivalent cash value of such Shares) upon the completion of a specified period of service, the occurrence of an event and/or the attainment of performance objectives. Other Stock-Based Awards may be granted alone or in addition to any other Awards granted under the Plan. Subject to the provisions of the Plan, the Committee shall determine the number of Shares to be awarded to a Participant under (or otherwise related to) such Other Stock-Based Awards; whether such Other Stock-Based Awards shall be settled in cash, Shares or a combination of cash and Shares; and all other terms and conditions of such Awards (including, without limitation, the vesting provisions thereof and provisions ensuring that all Shares so awarded and issued shall be fully paid and non-assessable). The maximum amount of Other Stock-Based Awards that may be granted during a calendar year to any Participant shall be: (x) with respect to Other Stock-Based Awards that are denominated or payable in Shares, 600,000 Shares and (y) with respect to Other Stock-Based Awards that are not denominated or payable in Shares, $10 million. Notwithstanding any other provision, with respect to (i) Other Stock-Based Awards settled in Shares that are subject to time-based vesting, not less than 95% of such Other Stock Based Awards payable in Shares shall vest and become payable at least three years after the date of grant, subject to earlier vesting in whole or in part in the event of a Change in Control or the death, disability or other termination of the Participant’s employment, and (ii) Other Stock-Based Awards settled in Shares that are subject to vesting upon the attainment of performance objectives, the minimum performance period shall be one year.
 
  (b)   Performance-Based Awards . Notwithstanding anything to the contrary herein, certain Other Stock-Based Awards granted under this Section 9 may be granted in a manner which is intended to be deductible by the Company under Section 162(m) of the Code (or any successor section thereto) (“Performance-Based Awards”). A Participant’s Performance-Based Award shall be determined based on the attainment of written performance goals approved by the Committee for a performance period of not less than one year established by the Committee (i) while the outcome for that performance period is substantially uncertain and (ii) no more than 90 days after the commencement of the performance period to


 

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      which the performance goal relates or, if less, the number of days which is equal to 25 percent of the relevant performance period. The performance goals, which must be objective, shall be based upon one or more of the following criteria: (i) operating income before depreciation and amortization; (ii) operating income; (iii) earnings per Share; (iv) return on shareholders’ equity; (v) revenues or sales; (vi) free cash flow; (vii) return on invested capital and (viii) total shareholder return. The foregoing criteria may relate to the Company, one or more of its Affiliates or one or more of its or their divisions or units, or any combination of the foregoing, and may be applied on an absolute basis and/or be relative to one or more peer group companies or indices, or any combination thereof, all as the Committee shall determine. In addition, to the degree consistent with Section 162(m) of the Code (or any successor section thereto), the performance goals may be calculated without regard to extraordinary items. The Committee shall determine whether, with respect to a performance period, the applicable performance goals have been met with respect to a given Participant and, if they have, shall so certify and ascertain the amount of the applicable Performance-Based Award. No Performance-Based Awards will be paid for such performance period until such certification is made by the Committee. The amount of the Performance-Based Award actually paid to a given Participant may be less than the amount determined by the applicable performance goal formula, at the discretion of the Committee. The amount of the Performance-Based Award determined by the Committee for a performance period shall be paid to the Participant at such time as determined by the Committee in its sole discretion after the end of such performance period; provided , however , that a Participant may, if and to the extent permitted by the Committee and consistent with the provisions of Section 162(m) of the Code and Section 19 below, elect to defer payment of a Performance-Based Award.
10. Adjustments Upon Certain Events
          Notwithstanding any other provisions in the Plan to the contrary, the following provisions shall apply to all Awards granted under the Plan:
  (a)   Generally . In the event of any change in the outstanding Shares (including, without limitation, the value thereof) after the Effective Date by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination, combination or transaction or exchange of Shares or other corporate exchange, or any distribution to shareholders of Shares other than regular cash dividends or any transaction similar to the foregoing, the Committee in its sole discretion and without liability to any person shall make such substitution or adjustment, if any, as it deems to be equitable (subject to Section 19), as to (i) the number or kind of Shares or other securities issued or reserved for issuance pursuant to the Plan or pursuant to outstanding Awards, (ii) the maximum number


 

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      of Shares for which Awards (including limits established for Restricted Stock or Other Stock-Based Awards) may be granted during a calendar year to any Participant, (iii) the Option Price or exercise price of any Stock Appreciation Right and/or (iv) any other affected terms of such Awards.
 
  (b)   Change in Control . In the event of a Change in Control after the Effective Date, the Committee may (subject to Section 19), but shall not be obligated to, (A) accelerate, vest or cause the restrictions to lapse with respect to, all or any portion of an Award, (B) cancel Awards for fair value (as determined in the sole discretion of the Committee) which, in the case of Options and Stock Appreciation Rights, may equal the excess, if any, of value of the consideration to be paid in the Change in Control transaction to holders of the same number of Shares subject to such Options or Stock Appreciation Rights (or, if no consideration is paid in any such transaction, the Fair Market Value of the Shares subject to such Options or Stock Appreciation Rights) over the aggregate exercise price of such Options or Stock Appreciation Rights, (C) provide for the issuance of substitute Awards that will substantially preserve the otherwise applicable terms of any affected Awards previously granted hereunder as determined by the Committee in its sole discretion or (D) provide that for a period of at least 30 days prior to the Change in Control, such Options shall be exercisable as to all shares subject thereto and that upon the occurrence of the Change in Control, such Options shall terminate and be of no further force and effect.
11. No Right to Employment or Awards
          The granting of an Award under the Plan shall impose no obligation on the Company or any Affiliate to continue the Employment of a Participant and shall not lessen or affect the Company’s or Subsidiary’s right to terminate the Employment of such Participant. No Participant or other person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Participants, or holders of Awards. The terms and conditions of Awards and the Committee’s determinations and interpretations with respect thereto need not be the same with respect to each Participant (whether or not such Participants are similarly situated).
12. Successors and Assigns
          The Plan shall be binding on all successors and assigns of the Company and a Participant, including without limitation, the estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant’s creditors.
13. Nontransferability of Awards
          Unless otherwise determined by the Committee (and subject to the limitation that in no circumstances may an Award may be transferred by the Participant for consideration or


 

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value), an Award shall not be transferable or assignable by the Participant otherwise than by will or by the laws of descent and distribution. An Award exercisable after the death of a Participant may be exercised by the legatees, personal representatives or distributees of the Participant.
14. Amendments or Termination
          The Board or the Committee may amend, alter or discontinue the Plan, but no amendment, alteration or discontinuation shall be made, (a) without the approval of the shareholders of the Company, if such action would (except as is provided in Section 10 of the Plan), increase the total number of Shares reserved for the purposes of the Plan or increase the maximum number of Shares of Restricted Stock or Other Stock-Based Awards that may be awarded hereunder, or the maximum number of Shares for which Awards may be granted to any Participant, (b) without the consent of a Participant, if such action would diminish any of the rights of the Participant under any Award theretofore granted to such Participant under the Plan or (c) to Section 5(b), relating to repricing of Options or Stock Appreciation Rights, to permit such repricing; provided , however , that the Committee may amend the Plan in such manner as it deems necessary to permit the granting of Awards meeting the requirements of the Code or other applicable laws.
          Without limiting the generality of the foregoing, to the extent applicable, notwithstanding anything herein to the contrary, this Plan and Awards issued hereunder shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretative guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the Effective Date. Notwithstanding any provision of the Plan to the contrary, in the event that the Committee determines that any amounts payable hereunder will be taxable to a Participant under Section 409A of the Code and related Department of Treasury guidance, prior to payment to such Participant of such amount, the Company may (a) adopt such amendments to the Plan and Awards and appropriate policies and procedures, including amendments and policies with retroactive effect, that the Committee determines necessary or appropriate to preserve the intended tax treatment of the benefits provided by the Plan and Awards hereunder and/or (b) take such other actions as the Committee determines necessary or appropriate to avoid the imposition of an additional tax under Section 409A of the Code.
15. International Participants
          With respect to Participants who reside or work outside the United States of America and who are not (and who are not expected to be) “covered employees” within the meaning of Section 162(m) of the Code, the Committee may, in its sole discretion, amend the terms of the Plan or Awards with respect to such Participants in order to conform such terms with the requirements of local law or to obtain more favorable tax or other treatment for a Participant, the Company or an Affiliate.
16. Other Benefit Plans
          All Awards shall constitute a special incentive payment to the Participant and shall not be taken into account in computing the amount of salary or compensation of the


 

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Participant for the purpose of determining any benefits under any pension, retirement, profit-sharing, bonus, life insurance or other benefit plan of the Company or under any agreement between the Company and the Participant, unless such plan or agreement specifically provides otherwise.
17. Choice of Law
          The Plan shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws, and except as otherwise provided in the pertinent Award agreement, any and all disputes between a Participant and the Company or any Affiliate relating to an Award shall be brought only in a state or federal court of competent jurisdiction sitting in Manhattan, New York.
18. Effectiveness of the Plan
          The Plan shall be effective as of the Effective Date, subject to the approval of the shareholders of the Company.
19. Section 409A
          Notwithstanding other provisions of the Plan or any Award agreements thereunder, no Award shall be granted, deferred, accelerated, extended, paid out or modified under this Plan in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon a Participant. In the event that it is reasonably determined by the Committee that, as a result of Section 409A of the Code, payments in respect of any Award under the Plan may not be made at the time contemplated by the terms of the Plan or the relevant Award agreement, as the case may be, without causing the Participant holding such Award to be subject to taxation under Section 409A of the Code, the Company will make such payment on the first day that would not result in the Participant incurring any tax liability under Section 409A of the Code; which, if the Participant is a “specified employee” within the meaning of the Section 409A, shall be the first day following the six-month period beginning on the date of Participant’s termination of Employment. The Company shall use commercially reasonable efforts to implement the provisions of this Section 19 in good faith; provided that neither the Company, the Committee nor any of the Company’s employees, directors or representatives shall have any liability to Participants with respect to this Section 19.

 

 

Exhibit 10.2
As Amended Through
October 25, 2007
TIME WARNER INC.
2003 STOCK INCENTIVE PLAN
1. Purpose of the Plan
     The purpose of the Plan is to aid the Company and its Affiliates in recruiting and retaining employees, directors, advisors and consultants and to motivate such employees, directors, advisors and consultants to exert their best efforts on behalf of the Company and its Affiliates by providing incentives through the granting of Awards. The Company expects that it will benefit from the added interest which such employees, directors, advisors and consultants will have in the welfare of the Company as a result of their proprietary interest in the Company’s success.
2. Definitions
     The following capitalized terms used in the Plan have the respective meanings set forth in this Section:
  (a)   Act means The Securities Exchange Act of 1934, as amended, or any successor thereto.
 
  (b)   Affiliate means any entity that is consolidated with the Company for financial reporting purposes or any other entity designated by the Board in which the Company or an Affiliate has a direct or indirect equity interest of at least twenty percent (20%), measured by reference to vote or value.
 
  (c)   Award means an Option, Stock Appreciation Right, Restricted Stock or Other Stock-Based Award granted pursuant to the Plan.
 
  (d)   Board means the Board of Directors of the Company.
 
  (e)   Change in Control means the occurrence of any of the following events:
     (i) any “Person” within the meaning of Section 13(d)(3) or 14(d)(2) of the Act (other than the Company or any company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company) becomes the “Beneficial Owner” within the meaning of Rule 13d-3 promulgated under the Act of 30% or more of the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors; excluding, however, any circumstance in which such beneficial ownership resulted from any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or by any corporation controlling, controlled by, or under common control with, the Company;


 

2

     (ii) a change in the composition of the Board since the Effective Date, such that the individuals who, as of such date, constituted the Board (the “ Incumbent Board ”) cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company subsequent to the Effective Date whose election, or nomination for election by the Company’s stockholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed a member of the Incumbent Board; and provided further, that any individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-12 of Regulation 14A promulgated under the Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any person or Entity other than the Board shall not be deemed a member of the Incumbent Board;
     (iii) a reorganization, recapitalization, merger or consolidation (a “ Corporate Transaction ”) involving the Company, unless securities representing 60% or more of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the Company or the corporation resulting from such Corporate Transaction (or the parent of such corporation) are held subsequent to such transaction by the person or persons who were the beneficial holders of the outstanding voting securities entitled to vote generally in the election of directors of the Company immediately prior to such Corporate Transaction, in substantially the same proportions as their ownership immediately prior to such Corporate Transaction; or
     (iv) the sale, transfer or other disposition of all or substantially all of the assets of the Company.
  (f)   Code means The Internal Revenue Code of 1986, as amended, or any successor thereto.
 
  (g)   Committee means the Compensation and Human Development Committee of the Board or its successor, or such other committee of the Board to which the Board has delegated power to act under or pursuant to the provisions of the Plan or a subcommittee of the Compensation and Human Development Committee (or such other committee) established by the Compensation and Human Development Committee or such other committee.
 
  (h)   Company means Time Warner Inc., a Delaware corporation named AOL Time Warner Inc. prior to October 16, 2003.
 
  (i)   Effective Date means the date the Board approved the Plan (March 20, 2003).


 

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  (j)   Employment means (i) a Participant’s employment if the Participant is an employee of the Company or any of its Affiliates, (ii) a Participant’s services as a consultant, if the Participant is a consultant to the Company or any of its Affiliates and (iii) a Participant’s services as a non-employee director, if the Participant is a non-employee member of the Board or the board of directors of an Affiliate; provided however that unless otherwise determined by the Committee, a change in a Participant’s status from employee to non-employee (other than a director of the Company or an Affiliate) shall constitute a termination of employment hereunder.
 
  (k)   Fair Market Value means, on a given date, (i) if there should be a public market for the Shares on such date, the average of the high and low prices of the Shares on the New York Stock Exchange, or, if the Shares are not listed or admitted on any national securities exchange, the average of the per Share closing bid price and per Share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System (or such market in which such prices are regularly quoted)(the “NASDAQ”), or, if no sale of Shares shall have been reported on the New York Stock Exchange or quoted on the NASDAQ on such date, then the immediately preceding date on which sales of the Shares have been so reported or quoted shall be used, and (ii) if there should not be a public market for the Shares on such date, the Fair Market Value shall be the value established by the Committee in good faith.
 
  (l)   ISO means an Option that is also an incentive stock option granted pursuant to Section 6(e).
 
  (m)   Other Stock-Based Awards means awards granted pursuant to Section 9.
 
  (n)   Option means a stock option granted pursuant to Section 6.
 
  (o)   Option Price ” means the price for which a Share can be purchased upon exercise of an Option, as determined pursuant to Section 6(a).
 
  (p)   Participant means an employee, prospective employee, director, advisor or consultant of the Company or an Affiliate who is selected by the Committee to participate in the Plan.
 
  (q)   Performance-Based Awards means certain Other Stock-Based Awards granted pursuant to Section 9(b).
 
  (r)   Plan means the Time Warner Inc. 2003 Stock Incentive Plan, as amended from time to time.
 
  (s)   Restricted Stock means any Share granted under Section 8.


 

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  (t)   Shares means shares of common stock of the Company, $.01 par value per share.
 
  (u)   Stock Appreciation Right means a stock appreciation right granted pursuant to Section 7.
 
  (v)   Subsidiary means a subsidiary corporation, as defined in Section 424(f) of the Code (or any successor section thereto), of the Company.
3. Shares Subject to the Plan
     The total number of Shares which may be issued under the Plan is 200,000,000, of which no more than 20% may be issued in the form of Restricted Stock or Other Stock-Based Awards payable in Shares. The maximum aggregate number of Shares with respect to which Awards may be granted during a calendar year, net of any Shares which are subject to Awards (or portions thereof) which, during such year, terminate or lapse without payment of consideration, shall be equal to 2% of the number of Shares outstanding on December 31 of the preceding calendar year. The maximum number of Shares with respect to which Awards may be granted during a calendar year to any Participant shall be 2,000,000; provided that the maximum number of Shares that may be awarded in the form of Restricted Stock or Other Stock-Based Awards payable in Shares during any calendar year to any Participant shall be 600,000. The Shares may consist, in whole or in part, of unissued Shares or treasury Shares. The number of Shares available for issuance under the Plan shall be reduced by the full number of Shares covered by Awards granted under the Plan (including, without limitation, the full number of Shares covered by any Stock Appreciation Right, regardless of whether any such Stock Appreciation Right or other Award covering Shares under the Plan is ultimately settled in cash or by delivery of Shares); provided, however , that the number of Shares covered by Awards (or portions thereof) that are forfeited or that otherwise terminate or lapse without the payment of consideration in respect thereof shall again become available for issuance under the Plan; and provided further that any Shares that are forfeited after the actual issuance of such Shares to a Participant under the Plan shall not become available for re-issuance under the Plan.
4. Administration
  (a)   The Plan shall be administered by the Committee, which may delegate its duties and powers in whole or in part to any subcommittee thereof consisting solely of at least two individuals who are intended to qualify as “Non-Employee Directors” within the meaning of Rule 16b-3 under the Act (or any successor rule thereto) and, to the extent required by Section 162(m) of the Code (or any successor section thereto), “outside directors” within the meaning thereof. In addition, the Committee may delegate the authority to grant Awards under the Plan to any employee or group of employees of the Company or an Affiliate; provided, that such grants are consistent with guidelines established by the Committee from time to time.


 

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  (b)   The Committee shall have the full power and authority to make, and establish the terms and conditions of, any Award to any person eligible to be a Participant, consistent with the provisions of the Plan and to waive any such terms and conditions at any time (including, without limitation, accelerating or waiving any vesting conditions). Awards may, in the discretion of the Committee, be made under the Plan in assumption of, or in substitution for, outstanding awards previously granted by the Company or its affiliates or a company acquired by the Company or with which the Company combines. The number of Shares underlying such substitute awards shall be counted against the aggregate number of Shares available for Awards under the Plan.
 
  (c)   The Committee is authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make any other determinations that it deems necessary or desirable for the administration of the Plan, and may delegate such authority, as it deems appropriate. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent the Committee deems necessary or desirable. Any decision of the Committee in the interpretation and administration of the Plan, as described herein, shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned (including, but not limited to, Participants and their beneficiaries or successors).
 
  (d)   The Committee shall require payment of any amount it may determine to be necessary to withhold for federal, state, local or other taxes as a result of the exercise, grant or vesting of an Award. Unless the Committee specifies otherwise, the Participant may elect to pay a portion or all of such withholding taxes by (a) delivery of Shares or (b) having Shares withheld by the Company with a Fair Market Value equal to the minimum statutory withholding rate from any Shares that would have otherwise been received by the Participant.
5. Limitations
  (a)   No Award may be granted under the Plan after the fifth anniversary of the meeting of shareholders of the Company at which the Plan is approved (which meeting was held on May 16, 2003), but Awards granted prior to such fifth anniversary may extend beyond that date.
 
  (b)   No Option or Stock Appreciation Right, once granted hereunder, may be repriced.
 
  (c)   With respect to any Awards granted to a Participant who is a non-employee member of the Board at the time of grant, such Awards shall be made pursuant to formulas established by the Board in advance of such grant. Any such Awards shall be made at the time such a Participant first


 

6

      becomes a member of the Board and, thereafter, on an annual basis at or following the annual meeting of stockholders. Such formulas may include any one or more of the following: (i) a fixed number of Options or Stock Appreciation Rights, (ii) a fixed number of Shares of Restricted Stock or a number of Shares of Restricted Stock determined by reference to a fixed dollar amount (calculated based on the Fair Market Value of a Share on the date of grant), and (iii) Other Stock-Based Awards determined either by reference to a fixed number of Shares or to a fixed dollar amount (calculated based on the Fair Market Value of a Share on the date of grant).
6. Terms and Conditions of Options
     Options granted under the Plan shall be, as determined by the Committee, nonqualified or incentive stock options for federal income tax purposes, as evidenced by the related Award agreements, and shall be subject to the foregoing and the following terms and conditions and to such other terms and conditions, not inconsistent therewith, as the Committee shall determine, and as evidenced by the related Award agreement:
  (a)   Option Price . The Option Price per Share shall be determined by the Committee, but shall not be less than 100% of the Fair Market Value of a Share on the date an Option is granted.
 
  (b)   Exercisability . Options granted under the Plan shall be exercisable at such time and upon such terms and conditions as may be determined by the Committee, but in no event shall an Option be exercisable more than ten years after the date it is granted, except as may be provided pursuant to Section 15.
 
  (c)   Exercise of Options . Except as otherwise provided in the Plan or in an Award agreement, an Option may be exercised for all, or from time to time any part, of the Shares for which it is then exercisable. For purposes of this Section 6, the exercise date of an Option shall be the date a notice of exercise is received by the Company, together with provision for payment of the full purchase price in accordance with this Section 6(c). The purchase price for the Shares as to which an Option is exercised shall be paid to the Company, as designated by the Committee, pursuant to one or more of the following methods: (i) in cash or its equivalent (e.g., by check); (ii) in Shares having a Fair Market Value equal to the aggregate Option Price for the Shares being purchased and satisfying such other requirements as may be imposed by the Committee; provided, that such Shares have been held by the Participant for no less than six months (or such other period as established from time to time by the Committee in order to avoid adverse accounting treatment applying generally accepted accounting principles); (iii) partly in cash and partly in such Shares or (iv) if there is a public market for the Shares at such time, through the delivery of irrevocable instructions to a broker to sell Shares obtained


 

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      upon the exercise of the Option and to deliver promptly to the Company an amount out of the proceeds of such Sale equal to the aggregate Option Price for the Shares being purchased. No Participant shall have any rights to dividends or other rights of a stockholder with respect to Shares subject to an Option until the Participant has given written notice of exercise of the Option, paid in full for such Shares and, if applicable, has satisfied any other conditions imposed by the Committee pursuant to the Plan.
 
  (d)   Deferral . In the sole discretion of the Committee, in accordance with procedures established by the Committee, the Participant may be permitted to defer the issuance of Shares deliverable upon the exercise of an Option for a specified period or until a specified date.
 
  (e)   ISOs . The Committee may grant Options under the Plan that are intended to be ISOs. Such ISOs shall comply with the requirements of Section 422 of the Code (or any successor section thereto). No ISO may be granted to any Participant who at the time of such grant, owns more than ten percent of the total combined voting power of all classes of stock of the Company or of any Subsidiary, unless (i) the Option Price for such ISO is at least 110% of the Fair Market Value of a Share on the date the ISO is granted and (ii) the date on which such ISO terminates is a date not later than the day preceding the fifth anniversary of the date on which the ISO is granted. Any Participant who disposes of Shares acquired upon the exercise of an ISO either (i) within two years after the date of grant of such ISO or (ii) within one year after the transfer of such Shares to the Participant, shall notify the Company of such disposition and of the amount realized upon such disposition. All Options granted under the Plan are intended to be nonqualified stock options, unless the applicable Award agreement expressly states that the Option is intended to be an ISO. If an Option is intended to be an ISO, and if for any reason such Option (or portion thereof) shall not qualify as an ISO, then, to the extent of such nonqualification, such Option (or portion thereof) shall be regarded as a nonqualified stock option granted under the Plan; provided that such Option (or portion thereof) otherwise complies with the Plan’s requirements relating to nonqualified stock options. In no event shall any member of the Committee, the Company or any of its Affiliates (or their respective employees, officers or directors) have any liability to any Participant (or any other person) due to the failure of an Option to qualify for any reason as an ISO.
 
  (f)   Attestation . Wherever in this Plan or any agreement evidencing an Award a Participant is permitted to pay the exercise price of an Option or taxes relating to the exercise of an Option by delivering Shares, the Participant may, subject to procedures satisfactory to the Committee, satisfy such delivery requirement by presenting proof of beneficial ownership of such Shares, in which case the Company shall treat the Option as exercised


 

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      without further payment and/or shall withhold such number of Shares from the Shares acquired by the exercise of the Option, as appropriate.


 

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7. Terms and Conditions of Stock Appreciation Rights
  (a)   Grants . The Committee may grant (i) a Stock Appreciation Right independent of an Option or (ii) a Stock Appreciation Right in connection with an Option, or a portion thereof. A Stock Appreciation Right granted pursuant to clause (ii) of the preceding sentence (A) may be granted at the time the related Option is granted or at any time prior to the exercise or cancellation of the related Option, (B) shall cover the same number of Shares covered by an Option (or such lesser number of Shares as the Committee may determine) and (C) shall be subject to the same terms and conditions as such Option except for such additional limitations as are contemplated by this Section 7 (or such additional limitations as may be included in an Award agreement).
 
  (b)   Terms . The exercise price per Share of a Stock Appreciation Right shall be an amount determined by the Committee but in no event shall such amount be less than the Fair Market Value of a Share on the date the Stock Appreciation Right is granted; provided, however, that notwithstanding the foregoing in the case of a Stock Appreciation Right granted in conjunction with an Option, or a portion thereof, the exercise price may not be less than the Option Price of the related Option. Each Stock Appreciation Right granted independent of an Option shall entitle a Participant upon exercise to an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one Share over (B) the exercise price per Share, times (ii) the number of Shares covered by the Stock Appreciation Right. Each Stock Appreciation Right granted in conjunction with an Option, or a portion thereof, shall entitle a Participant to surrender to the Company the unexercised Option, or any portion thereof, and to receive from the Company in exchange therefor an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one Share over (B) the Option Price per Share, times (ii) the number of Shares covered by the Option, or portion thereof, which is surrendered. Payment shall be made in Shares or in cash, or partly in Shares and partly in cash (any such Shares valued at such Fair Market Value), all as shall be determined by the Committee. Stock Appreciation Rights may be exercised from time to time upon actual receipt by the Company of written notice of exercise stating the number of Shares with respect to which the Stock Appreciation Right is being exercised. The date a notice of exercise is received by the Company shall be the exercise date. No fractional Shares will be issued in payment for Stock Appreciation Rights, but instead cash will be paid for a fraction or, if the Committee should so determine, the number of Shares will be rounded downward to the next whole Share.


 

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  (c)   Limitations . The Committee may impose, in its discretion, such conditions upon the exercisability of Stock Appreciation Rights as it may deem fit, but in no event shall a Stock Appreciation Right be exercisable more than ten years after the date it is granted, except as may be provided pursuant to Section 15.
8. Restricted Stock
  (a)   Grant . Subject to the provisions of the Plan, the Committee shall determine the number of Shares of Restricted Stock to be granted to each Participant, the duration of the period during which, and the conditions, if any, under which, the Restricted Stock may be forfeited to the Company, and the other terms and conditions of such Awards; provided that not less than 95% of the Shares of Restricted Stock shall remain subject to forfeiture for at least three years after the date of grant, subject to earlier termination of such potential for forfeiture in whole or in part in the event of a Change in Control or the death, disability or other termination of the Participant’s employment.
 
  (b)   Transfer Restrictions . Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as provided in the Plan or the applicable Award agreement. Certificates, or other evidence of ownership, issued in respect of Shares of Restricted Stock shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Company. After the lapse of the restrictions applicable to such Shares of Restricted Stock, the Company shall deliver such certificates, or other evidence of ownership, to the Participant or the Participant’s legal representative.
 
  (c)   Dividends . Dividends paid on any Shares of Restricted Stock may be paid directly to the Participant, withheld by the Company subject to vesting of the Restricted Shares pursuant to the terms of the applicable Award agreement, or may be reinvested in additional Shares of Restricted Stock, as determined by the Committee in its sole discretion.
 
  (d)   Performance-Based Grants . Notwithstanding anything to the contrary herein, certain Shares of Restricted Stock granted under this Section 8 may, at the discretion of the Committee, be granted in a manner which is intended to be deductible by the Company under Section 162(m) of the Code (or any successor section thereto). The restrictions applicable to such Restricted Stock shall lapse based wholly or partially on the attainment of written performance goals approved by the Committee for a performance period established by the Committee (i) while the outcome for that performance period is substantially uncertain and (ii) no more than 90 days after the commencement of the performance period to which the performance goal relates or, if less, the number of days which is equal to


 

11

    25 percent of the relevant performance period. The performance goals, which must be objective, shall be based upon one or more of the criteria set forth in Section 9(b) below. The Committee shall determine in its discretion whether, with respect to a performance period, the applicable performance goals have been met with respect to a given Participant and, if they have, shall so certify prior to the release of the restrictions on the Shares.
9. Other Stock-Based Awards
  (a)   Generally . The Committee, in its sole discretion, may grant or sell Awards of Shares and Awards that are valued in whole or in part by reference to, or are otherwise based on the Fair Market Value of, Shares (“Other Stock-Based Awards”). Such Other Stock-Based Awards shall be in such form, and dependent on such conditions, as the Committee shall determine, including, without limitation, the right to receive, or vest with respect to, one or more Shares (or the equivalent cash value of such Shares) upon the completion of a specified period of service, the occurrence of an event and/or the attainment of performance objectives. Other Stock-Based Awards may be granted alone or in addition to any other Awards granted under the Plan. Subject to the provisions of the Plan, the Committee shall determine the number of Shares to be awarded to a Participant under (or otherwise related to) such Other Stock-Based Awards; whether such Other Stock-Based Awards shall be settled in cash, Shares or a combination of cash and Shares; and all other terms and conditions of such Awards (including, without limitation, the vesting provisions thereof and provisions ensuring that all Shares so awarded and issued shall be fully paid and non-assessable). The maximum amount of Other Stock-Based Awards that may be granted during a calendar year to any Participant shall be: (x) with respect to Other Stock-Based Awards that are denominated or payable in Shares, 600,000 Shares and (y) with respect to Other Stock-Based Awards that are not denominated or payable in Shares, $10 million. Notwithstanding any other provision, with respect to (i) Other Stock-Based Awards settled in Shares that are subject to time-based vesting, not less than 95% of such Other Stock Based Awards payable in Shares shall vest and become payable at least three years after the date of grant, subject to earlier vesting in whole or in part in the event of a Change in Control or the death, disability or other termination of the Participant’s employment, and (ii) Other Stock-Based Awards settled in Shares that are subject to vesting upon the attainment of performance objectives, the minimum performance period shall be one year.
 
  (b)   Performance-Based Awards . Notwithstanding anything to the contrary herein, certain Other Stock-Based Awards granted under this Section 9 may be granted in a manner which is intended to be deductible by the Company under Section 162(m) of the Code (or any successor section thereto) (“Performance-Based Awards”). A Participant’s Performance-


 

12

      Based Award shall be determined based on the attainment of written performance goals approved by the Committee for a performance period of not less than one year established by the Committee (i) while the outcome for that performance period is substantially uncertain and (ii) no more than 90 days after the commencement of the performance period to which the performance goal relates or, if less, the number of days which is equal to 25 percent of the relevant performance period. The performance goals, which must be objective, shall be based upon one or more of the following criteria: (i) consolidated earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization); (ii) net income; (iii) operating income; (iv) earnings per Share; (v) book value per Share; (vi) return on shareholders’ equity; (vii) expense management; (viii) return on investment; (ix) improvements in capital structure; (x) profitability of an identifiable business unit or product; (xi) maintenance or improvement of profit margins; (xii) stock price; (xiii) market share; (xiv) revenues or sales; (xv) costs; (xvi) cash flow; (xvii) working capital and (xviii) return on assets. The foregoing criteria may relate to the Company, one or more of its Affiliates or one or more of its or their divisions or units, or any combination of the foregoing, and may be applied on an absolute basis and/or be relative to one or more peer group companies or indices, or any combination thereof, all as the Committee shall determine. In addition, to the degree consistent with Section 162(m) of the Code (or any successor section thereto), the performance goals may be calculated without regard to extraordinary items. The Committee shall determine whether, with respect to a performance period, the applicable performance goals have been met with respect to a given Participant and, if they have, shall so certify and ascertain the amount of the applicable Performance-Based Award. No Performance-Based Awards will be paid for such performance period until such certification is made by the Committee. The amount of the Performance-Based Award actually paid to a given Participant may be less than the amount determined by the applicable performance goal formula, at the discretion of the Committee. The amount of the Performance-Based Award determined by the Committee for a performance period shall be paid to the Participant at such time as determined by the Committee in its sole discretion after the end of such performance period; provided , however , that a Participant may, if and to the extent permitted by the Committee and consistent with the provisions of Section 162(m) of the Code, elect to defer payment of a Performance-Based Award.
10. Adjustments Upon Certain Events
     Notwithstanding any other provisions in the Plan to the contrary, the following provisions shall apply to all Awards granted under the Plan:
  (a)   Generally . In the event of any change in the outstanding Shares after the Effective Date by reason of any Share dividend or split, reorganization,


 

13

      recapitalization, merger, consolidation, spin-off, combination, combination or transaction or exchange of Shares or other corporate exchange, or any distribution to shareholders of Shares other than regular cash dividends or any transaction similar to the foregoing, the Committee in its sole discretion and without liability to any person may make such substitution or adjustment, if any, as it deems to be equitable, as to (i) the number or kind of Shares or other securities issued or reserved for issuance pursuant to the Plan or pursuant to outstanding Awards, (ii) the maximum number of Shares for which Awards (including limits established for Restricted Stock or Other Stock-Based Awards) may be granted during a calendar year to any Participant, (iii) the Option Price or exercise price of any Stock Appreciation Right and/or (iv) any other affected terms of such Awards.
 
  (b)   Change in Control . In the event of a Change in Control after the Effective Date, the Committee may, but shall not be obligated to, (A) accelerate, vest or cause the restrictions to lapse with respect to, all or any portion of an Award or (B) cancel Awards for fair value (as determined in the sole discretion of the Committee) which, in the case of Options and Stock Appreciation Rights, may equal the excess, if any, of value of the consideration to be paid in the Change in Control transaction to holders of the same number of Shares subject to such Options or Stock Appreciation Rights (or, if no consideration is paid in any such transaction, the Fair Market Value of the Shares subject to such Options or Stock Appreciation Rights) over the aggregate exercise price of such Options or Stock Appreciation Rights or (C) provide for the issuance of substitute Awards that will substantially preserve the otherwise applicable terms of any affected Awards previously granted hereunder as determined by the Committee in its sole discretion or (D) provide that for a period of at least 30 days prior to the Change in Control, such Options shall be exercisable as to all shares subject thereto and that upon the occurrence of the Change in Control, such Options shall terminate and be of no further force and effect.
11. No Right to Employment or Awards
     The granting of an Award under the Plan shall impose no obligation on the Company or any Affiliate to continue the Employment of a Participant and shall not lessen or affect the Company’s or Subsidiary’s right to terminate the Employment of such Participant. No Participant or other person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Participants, or holders of Awards. The terms and conditions of Awards and the Committee’s determinations and interpretations with respect thereto need not be the same with respect to each Participant (whether or not such Participants are similarly situated).
12.  Successors and Assigns


 

14

     The Plan shall be binding on all successors and assigns of the Company and a Participant, including without limitation, the estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant’s creditors.
13. Nontransferability of Awards
     Unless otherwise determined by the Committee, an Award shall not be transferable or assignable by the Participant otherwise than by will or by the laws of descent and distribution. An Award exercisable after the death of a Participant may be exercised by the legatees, personal representatives or distributees of the Participant.
14. Amendments or Termination
     The Board or the Committee may amend, alter or discontinue the Plan, but no amendment, alteration or discontinuation shall be made, (a) without the approval of the shareholders of the Company, if such action would (except as is provided in Section 10 of the Plan), increase the total number of Shares reserved for the purposes of the Plan or increase the maximum number of Shares of Restricted Stock or Other Stock-Based Awards that may be awarded hereunder, or the maximum number of Shares for which Awards may be granted to any Participant, (b) without the consent of a Participant, if such action would diminish any of the rights of the Participant under any Award theretofore granted to such Participant under the Plan or (c) to Section 5(b), relating to repricing of Options or Stock Appreciation Rights, to permit such repricing; provided , however , that the Committee may amend the Plan in such manner as it deems necessary to permit the granting of Awards meeting the requirements of the Code or other applicable laws.
15. International Participants
     With respect to Participants who reside or work outside the United States of America and who are not (and who are not expected to be) “covered employees” within the meaning of Section 162(m) of the Code, the Committee may, in its sole discretion, amend the terms of the Plan or Awards with respect to such Participants in order to conform such terms with the requirements of local law or to obtain more favorable tax or other treatment for a Participant, the Company or an Affiliate.
16. Other Benefit Plans
     All Awards shall constitute a special incentive payment to the Participant and shall not be taken into account in computing the amount of salary or compensation of the Participant for the purpose of determining any benefits under any pension, retirement, profit-sharing, bonus, life insurance or other benefit plan of the Company or under any agreement between the Company and the Participant, unless such plan or agreement specifically provides otherwise.
17.  Choice of Law


 

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     The Plan shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws, and except as otherwise provided in the pertinent Award agreement, any and all disputes between a Participant and the Company or any Affiliate relating to an Award shall be brought only in a state or federal court of competent jurisdiction sitting in Manhattan, New York.
18. Effectiveness of the Plan
     The Plan shall be effective as of the Effective Date, subject to the approval of the shareholders of the Company.
19. Section 409A
     Notwithstanding other provisions of the Plan or any Award agreements thereunder, no Award shall be granted, deferred, accelerated, extended, paid out or modified under this Plan in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon a Participant. In the event that it is reasonably determined by the Committee that, as a result of Section 409A of the Code, payments in respect of any Award under the Plan may not be made at the time contemplated by the terms of the Plan or the relevant Award agreement, as the case may be, without causing the Participant holding such Award to be subject to taxation under Section 409A of the Code, the Company will make such payment on the first day that would not result in the Participant incurring any tax liability under Section 409A of the Code; which, if the Participant is a “specified employee” within the meaning of the Section 409A, shall be the first day following the six-month period beginning on the date of Participant’s termination of Employment. The Company shall use commercially reasonable efforts to implement the provisions of this Section 19 in good faith; provided that neither the Company, the Committee nor any of the Company’s employees, directors or representatives shall have any liability to Participants with respect to this Section 19.

 

 

Exhibit 10.3
As amended through
October 25, 2007
TIME WARNER INC.
1999 STOCK PLAN
1.   PURPOSES OF THE PLAN .
     The Plan is intended to encourage ownership of Shares by Key Employees and directors of and certain consultants to the Company or its Affiliates in order to attract and retain such people, to motivate them to work for the benefit of the Company or an Affiliate, and to provide an additional incentive for them to promote the success of the Company or of an Affiliate. The Plan provides for the granting of ISOs and Non-Qualified Options and awards of Stock Purchase Rights and Restricted Stock Units.
2.   DEFINITIONS .
Unless otherwise specified or unless the context otherwise requires, the following terms, as used in this Time Warner Inc. 1999 Stock Plan, have the following meanings:
Administrator means the Board of Directors, unless it has delegated power to act on its behalf to the Committee, in which case the Administrator means the Committee.
Affiliate , with respect to ISOs, means a corporation which, for purposes of Section 424 of the Code, is a parent or subsidiary of the Company, direct or indirect, and, with respect to Non-Qualified Options, means any corporation, company or other entity whose financial results are consolidated with those of the Company in accordance with U.S. generally accepted accounting principles, all as determined by the Administrator.
Board of Directors means the Board of Directors of the Company.
Change in Control means either a Corporate Change in Control or a Transactional Change in Control.
Code means the United States Internal Revenue Code of 1986, as amended.
Committee means the Compensation Committee of the Board of Directors, or its successor, or such other committee of the Board of Directors to which the Board of Directors has delegated power to act under or pursuant to the provisions of the Plan or a subcommittee of the Compensation Committee established by the Compensation Committee.
Common Stock means shares of the Company’s common stock, $.01 par value per share.

 


 

Company means (i) with respect to the periods prior to January 11, 2001, America Online, Inc., a Delaware corporation and (ii) with respect to periods on and after January 11, 2001, Time Warner Inc., a Delaware corporation named AOL Time Warner Inc. prior to October 16, 2003.
Corporate Change in Control means the happening of any of the following events:
(1) the acquisition by any individual, entity or group (an “Entity”), including any “person” within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (i) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); excluding, however, the following: (A) any acquisition directly from the Company (excluding any acquisition by virtue of the exercise of an exercise, conversion or exchange privilege unless the security being so exercised, converted or exchanged was itself acquired directly from the Company), (B) any acquisition by the Company, or (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or by any corporation controlled by the Company; or
(2) a change in the composition of the Board of Directors since October 28, 1999, such that the individuals who, as of such date, constituted the Board of Directors (the “Incumbent Board”) cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company subsequent to October 28, 1999 whose election, or nomination for election by the Company’s stockholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed a member of the Incumbent Board; and provided further, that any individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any person or Entity other than the Board shall not be deemed a member of the Incumbent Board.
Disability or Disabled means permanent and total disability as defined in Section 22(e)(3) of the Code.
Fair Market Value of a Share of Common Stock means:
(1) If the Common Stock is listed on a national securities exchange or traded in the over-the-counter market and sales prices are regularly reported for the Common Stock, the average of the high and low sales prices of a share of the Common Stock on the New York Stock Exchange or other comparable reporting system for the applicable date, or if the applicable date is not a trading day, the trading day immediately preceding the applicable date;

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(2) If the Common Stock is not traded on a national securities exchange but is traded on the over-the-counter market, if sales prices are not regularly reported for the Common Stock for the trading day referred to in clause (1), and if bid and asked prices for the Common Stock are regularly reported, the mean between the bid and the asked price for the Common Stock at the close of trading in the over-the-counter market on the applicable date, or if the applicable date is not a trading day, on the trading day immediately preceding the applicable date; and
(3) If the Common Stock is neither listed on a national securities exchange nor traded in the over-the-counter market, such value as the Administrator, in good faith, shall determine.
Involuntary Employment Action shall mean any change in the terms and conditions of the Participant’s employment with the Company or any successor, without cause (as defined herein), to such extent that:
(1) the Participant shall fail to be vested with power, authority and resources analogous to the Participant’s title and/or office prior to the Change in Control, or
(2) the Participant shall lose any significant duties or responsibilities attending such office, or
(3) there shall occur a reduction in the Participant’s base compensation, or
(4) the Participant’s employment with the Company, or its successor, is terminated without cause (as defined herein).
ISO means an option meant to qualify as an incentive stock option under Section 422 of the Code.
Key Employee means an employee of the Company or of an Affiliate (including, without limitation, an employee who is also serving as an officer or director of the Company or of an Affiliate), designated by the Administrator to be eligible to be granted one or more Options, Stock Purchase Rights or Restricted Stock Units under the Plan; provided however, that Key Employee shall not include any person who: (i) is not on the payroll of the Company or an Affiliate as a full-time or part-time employee or (ii) directly or indirectly provides services to the Company or an Affiliate pursuant to a contractual or other arrangement, written or otherwise between the Company or an Affiliate and either that person or a third party, which does not designate such person as an employee (regardless of whether a government agency, court or other entity subsequently determines that such person is an employee of the Company or an Affiliate for purposes of employment taxes or for any other purpose). Anything in the prior sentence to the contrary notwithstanding, a person who is providing services pursuant to a contractual or other arrangement may be eligible for participation in the Plan as a consultant who is designated by the Administrator in accordance with Paragraph 5 of the Plan.

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Non-Qualified Option means an option which is not intended to qualify as an ISO.
Option means an ISO or Non-Qualified Option granted under the Plan.
Option Agreement means an agreement between the Company and a Participant delivered pursuant to the Plan, in such form as the Administrator shall approve.
Participant means a Key Employee, director or consultant of the Company or of an Affiliate to whom one or more Options, Stock Purchase Rights or Restricted Stock Units are granted under the Plan. As used herein, “Participant” shall include “Participant’s Survivors” where the context requires.
Plan means this Time Warner Inc. 1999 Stock Plan.
Restricted Stock means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Paragraph 14 below.
Restricted Stock Purchase Agreement means a written agreement between the Company and a Participant evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right, in such form as the Administrator shall approve.
Restricted Stock Unit means the right to receive Shares pursuant to Paragraph 15 of the Plan, as evidenced by a Restricted Stock Units Agreement.
Restricted Stock Units Agreement means a written agreement between the Company and a Participant evidencing the terms and restrictions applying to the grant of a Restricted Stock Unit, in such form as the Administrator shall approve.
Shares means shares of the Common Stock as to which Options or Stock Purchase Rights or Restricted Stock Units have been or may be granted under the Plan or any shares of capital stock into which the Shares are changed or for which they are exchanged within the provisions of Paragraph 3 of the Plan. The Shares issued upon exercise of Options or Stock Purchase Rights or payment with respect to Restricted Stock Units granted under the Plan may be authorized and unissued shares or shares held by the Company in its treasury, or both.
Stock Purchase Right means the right to purchase Common Stock pursuant to Paragraph 14 of the Plan, as evidenced by a Restricted Stock Purchase Agreement.
Survivors means a deceased Participant’s legal representatives and/or any person or persons who acquired the Participant’s rights to an Option. Stock Purchase Right or Restricted Stock Unit by will or by the laws of descent and distribution.
Transactional Change in Control shall mean any of the following transactions to which the Company is a party:

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(1) a reorganization, recapitalization, merger or consolidation (a “Corporate Transaction”) of the Company, unless securities representing 60% or more of either the outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the Company or the corporation resulting from such Corporate Transaction (or the parent of such corporation) are held subsequent to such transaction by the person or persons who were the beneficial holders of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction, in substantially the same proportions as their ownership immediately prior to such Corporate Transaction; or
(2) the sale, transfer or other disposition of all or substantially all of the assets of the Company.
To Vest means that you have obtained a contingent right to exercise, purchase or receive Shares pursuant to a defined number of your awards hereunder, as defined by and subject to the terms and conditions set forth in the pertinent Agreement and this Plan. Unless and until your award Vests pursuant to the terms of the pertinent Agreement and this Plan, as well as the vesting schedule included in your notice of grant, you have not obtained any such right to exercise, purchase or receive Shares pursuant to any of your unvested awards (except as may be provided in Paragraphs 12 and 13 of this Plan and in the pertinent Agreement).
3.   SHARES SUBJECT TO THE PLAN .
     The number of Shares which may be issued from time to time pursuant to this Plan shall be 100,000,000 or the equivalent of such number of Shares after the effect of any stock split, stock dividend, combination, recapitalization or similar transaction in accordance with Paragraph 18 of the Plan. No more than 5% of such number of Shares may be issued in connection with grants of Stock Purchase Rights or Restricted Stock Units.
     If an Option ceases to be “outstanding”, in whole or in part, the Shares which were subject to such Option shall be available for the granting of other Options under the Plan. Any Option shall be treated as “outstanding” until such Option is exercised in full, or terminates or expires under the provisions of the Plan, or by agreement of the parties to the pertinent Option Agreement. Shares that have actually been issued under the Plan upon exercise of an Option or a Stock Purchase Right or delivery of Shares pursuant to a Restricted Stock Unit shall not be returned to the Plan and shall not become available for the granting of other Options, Stock Purchase Rights or Restricted Stock Units under the Plan.
4.   ADMINISTRATION OF THE PLAN .
     Subject to the provisions of the Plan, the Administrator is authorized to:
  a.   Interpret the provisions of the Plan or of any Option, Option Agreement, Stock Purchase Right, Restricted Stock Purchase Agreement, Restricted Stock Unit or

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      Restricted Stock Units Agreement and to make all rules and determinations which it deems necessary or advisable for the administration of the Plan;
 
  b.   Determine which employees of the Company or of an Affiliate shall be designated as Key Employees and which of the Key Employees, directors and consultants shall be granted Options, Stock Purchase Rights or Restricted Stock Units;
 
  c.   Determine the number of Shares for which an Option, Options, Stock Purchase Rights or Restricted Stock Units shall be granted, provided, however, that in no event shall Options, Stock Purchase Rights or Restricted Stock Units to purchase more than 4,000,000 Shares be granted to any Participant in any fiscal year;
 
  d.   Specify the terms and conditions upon which an Option, Options, Stock Purchase Rights or Restricted Stock Units may be granted; and
 
  e.   Award Options, Stock Purchase Rights or Restricted Stock Units to Participants who are foreign nationals or employed or located outside the United States, or both, on such terms and conditions, including imposing conditions on the exercise or Vesting of Options, Stock Purchase Rights or Restricted Stock Units, different from those applicable to Options, Stock Purchase Rights or Restricted Stock Units granted to Participants employed or located in the United States as may, in the judgment of the Administrator, be necessary or desirable in order to recognize differences in local law, tax policy or customs;
provided, however, that all such interpretations, rules, determinations, terms and conditions shall be made and prescribed in the context of preserving the tax status under Section 422 of the Code of those Options which are designated as ISOs. Subject to the foregoing, the interpretation and construction by the Administrator of any provisions of the Plan or of any Option, Stock Purchase Right or Restricted Stock Units granted under it shall be final, unless otherwise determined by the Board of Directors, if the Administrator is the Committee. The Administrator’s determinations under the Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Options, Stock Purchase Rights or Restricted Stock Units under the Plan (whether or not such persons are similarly situated). Without limiting the generality of the foregoing, the Administrator shall be entitled, among other things, to make non-uniform and selective determinations, and to enter into non-uniform and selective Option Agreements, Restricted Stock Purchase Agreements or Restricted Stock Units Agreements as to (a) the persons to receive Options, Stock Purchase Rights or Restricted Stock Units under the Plan, (b) the terms and provisions of Options, Stock Purchase Rights or Restricted Stock Units under the Plan, and (c) whether a termination of service with the Company and any Affiliate has occurred.
     No member of the Board of Directors or the Administrator shall be liable for any action or determination made in good faith with respect to the Plan or any Option.
5.   ELIGIBILITY FOR PARTICIPATION .
     The Administrator will, in its sole discretion, name the Participants in the Plan, provided, however, that each Participant must be a Key Employee, director or consultant of the Company

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or of an Affiliate at the time an Option, Stock Purchase Right or Restricted Stock Unit is granted. Members of the Company’s Board of Directors who are not employees of the Company or of an Affiliate may receive Options, Stock Purchase Rights or Restricted Stock Units pursuant to Paragraph 6, Subparagraph A (f), but only pursuant thereto. Notwithstanding any of the foregoing provisions, the Administrator may authorize the grant of an Option, Stock Purchase Right, or Restricted Stock Unit to a person not then a Key Employee, director or consultant of the Company or of an Affiliate. The actual grant of such Option, Stock Purchase Right or Restricted Stock Unit, however, shall be conditioned upon such person becoming eligible to become a Participant at or prior to the time of the execution of the Option Agreement, Restricted Stock Purchase Agreement or Restricted Stock Units Agreement evidencing such Option, Stock Purchase Right or Restricted Stock Unit, as applicable. ISOs may be granted only to Key Employees. Non-Qualified Options may be granted to any Key Employee, director or consultant of the Company or an Affiliate. Stock Purchase Rights and Restricted Stock Units shall be granted only in connection with the hiring or retention of a Key Employee. The granting of any Option, Stock Purchase Right or Restricted Stock Unit to any individual shall neither entitle that individual to, nor disqualify him or her from, participation in any other grant of Options, Stock Purchase Rights or Restricted Stock Unit.
6.   TERMS AND CONDITIONS OF OPTIONS .
     Each Option shall be set forth in writing in an Option Agreement, duly executed by the Company and, to the extent required by law or requested by the Company, by the Participant. The Administrator may provide that Options be granted subject to such terms and conditions as the Administrator may deem appropriate including, without limitation, subsequent approval by the stockholders of the Company of this Plan or any amendments thereto. The Option Agreements shall be subject to at least the following terms and conditions:
  A.   Non-Qualified Options : Each Option intended to be a Non-Qualified Option shall be subject to the terms and conditions which the Administrator determines to be appropriate and in the best interest of the Company, subject to the following minimum standards for any such Non-Qualified Option:
  a.   Option Price: The option price (per share) of the Shares covered by each Option shall be determined by the Administrator but shall not be less than one hundred percent (100%) of the Fair Market Value (per share) of the Shares on the date of grant of the Option.
 
  b.   Each Option Agreement shall state the number of Shares to which it pertains;
 
  c.   Each Option Agreement shall state the date or dates on which it first is exercisable and the date after which it may no longer be exercised, and may provide that the Option rights Vest or become exercisable in installments over a period of months or years, or upon the occurrence of certain conditions or the attainment of stated goals or events; and

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  d.   Exercise of any Option may be conditioned upon the Participant’s execution of a stock purchase agreement in form satisfactory to the Administrator providing for certain protections for the Company and its other stockholders, including requirements that:
  i.   The Participant’s or the Participant’s Survivors’ right to sell or transfer the Shares may be restricted; and
 
  ii.   The Participant or the Participant’s Survivors may be required to execute letters of investment intent and must also acknowledge that the Shares will bear legends noting any applicable restrictions.
  e.   Limitation on Grant of Non-Qualified Options: No Non-Qualified Option shall be granted after the date provided in Paragraph 24 of this Plan.
 
  f.   Directors’ Options: Each director of the Company who is not an employee of the Company or any Affiliate, upon first being elected or appointed to the Board of Directors, shall be granted a Non-Qualified Option to purchase 8,000 Shares; provided, however, that the Administrator shall be entitled to grant an Option for such higher number of Shares as may be appropriate (as determined by the Board of Directors) for recruitment purposes. Each director of the Company who is not an employee of the Company or any Affiliate on January 18, 2001, shall be granted on such date a Non-Qualified Option to purchase 52,000 Shares as an initial grant for joining the Board of Directors. For the annual meeting of stockholders in 2002, on the date following the annual meeting of stockholders of the Company, giving effect to the election of any director or directors at such annual meeting of stockholders, each director who is not an employee of the Company or any Affiliate and who has served at least six months as a director shall be granted a Non-Qualified Option to purchase 40,000 Shares. Beginning with the annual meeting of stockholders in 2003, on the date following the annual meeting of stockholders of the Company each year, giving effect to the election of any director or directors at such annual meeting of stockholders, each director who is not an employee of the Company or any Affiliate and who has served at least six months as a director shall be granted a Non-Qualified Option to purchase 8,000 Shares. Each Option granted pursuant to this Paragraph 6(A)(f) shall (i) have an exercise price equal to the Fair Market Value (per share) of the Shares on the date of grant of the Option, (ii) have a term of ten (10) years, and (iii) Vest in installments of 25% annually over a four-year period and on the date of a meeting of stockholders at which directors are elected if the director does not stand for re-election or is not re-elected at such meeting, unless a different vesting schedule is established by the Administrator in the applicable Option Agreement. The Board of Directors may amend this Paragraph 6(A)(f) to increase, reduce, eliminate, or institute option grants for Board, Committee or other individual or collective service under this Plan.

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  B.   ISOs : Each Option intended to be an ISO shall so state and shall be issued only to a Key Employee and be subject to at least the following terms and conditions, with such additional restrictions or changes as the Administrator determines are appropriate but not in conflict with Section 422 of the Code and relevant regulations and rulings of the Internal Revenue Service:
  a.   Minimum standards: The ISO shall meet the minimum standards required of Non-Qualified Options, as described in Paragraph 6(A) above, except clauses (a) and (f) thereunder.
 
  b.   Option Price: Immediately before the Option is granted, if the Participant owns, directly or by reason of the applicable attribution rules in Section 424(d) of the Code:
  i.   Ten percent (10%) or less of the total combined voting power of all classes of stock of the Company or an Affiliate, the Option price per share of the Shares covered by each Option shall not be less than one hundred percent (100%) of the Fair Market Value per share of the Shares on the date of the grant of the Option.
 
  ii.   More than ten percent (10%) of the total combined voting power of all classes of stock of the Company or an Affiliate, the Option price per share of the Shares covered by each Option shall not be less than one hundred ten percent (110%) of the Fair Market Value on the date of grant.
  c.   Term of Option: For Participants who own
  i.   Ten percent (10%) or less of the total combined voting power of all classes of stock of the Company or an Affiliate, each Option shall terminate ten (10) years from the date of the grant or at such earlier time as the Option Agreement may provide.
 
  ii.   More than ten percent (10%) of the total combined voting power of all classes of stock of the Company or an Affiliate, each Option shall terminate five (5) years from the date of the grant or at such earlier time as the Option Agreement may provide.
  d.   Limitation on Yearly Exercise: The Option Agreements shall restrict the amount of Options which may be exercisable in any calendar year (under this or any other ISO plan of the Company or an Affiliate) so that the aggregate Fair Market Value (determined at the time each ISO is granted) of the stock with respect to which ISOs are exercisable for the first time by the Participant in any calendar year does not exceed one hundred thousand dollars ($100,000), provided that this subparagraph (d) shall have no force or effect if its inclusion in the Plan is not necessary for Options issued as ISOs to qualify as ISOs pursuant to Section 422(d) of the Code.

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  e.   Limitation on Grant of ISOs: No ISOs shall be granted after the date provided in Paragraph 24 of this Plan.
 
  f.   To the extent that an Option which is intended to be an ISO fails to so qualify, it shall be treated as a Non-Qualified Option.
7.   EXERCISE OF OPTIONS AND ISSUANCE OF SHARES .
     An Option (or any part or installment thereof) shall be exercised in accordance with procedures established by the Company by giving written notice to the Company at its principal executive office address, or such other address as the Company shall determine, together with provision for payment of the full purchase price in accordance with this Paragraph for the Shares as to which the Option is being exercised, and upon compliance with any other condition(s) set forth in the Option Agreement. Such written notice shall be signed by the person exercising the Option, shall state the number of Shares with respect to which the Option is being exercised and shall contain any representation required by the Plan or the Option Agreement. Payment of the purchase price for the Shares as to which such Option is being exercised shall be made (a) in United States dollars in cash or by check, or (b) at the discretion of the Administrator, through delivery of shares of Common Stock having a Fair Market Value equal as of the date of the exercise to the cash exercise price of the Option, or (c) at the discretion of the Administrator, by delivery of the grantee’s personal recourse note bearing interest payable not less than annually at no less than 100% of the applicable Federal rate, as defined in Section 1274(d) of the Code, or (d) at the discretion of the Administrator, in accordance with a cashless exercise program established with a securities brokerage firm, and approved by the Administrator, or (e) at the discretion of the Administrator, through such other method of payment approved by the Administrator, or (f) at the discretion of the Administrator, by any combination of (a), (b), (c), (d) and (e) above. Notwithstanding the foregoing, the Administrator shall accept only such payment on exercise of an ISO as is permitted by Section 422 of the Code.
     The Company shall then reasonably promptly deliver the Shares as to which such Option was exercised to the Participant (or to the Participant’s Survivors, as the case may be). In determining what constitutes “reasonably promptly,” it is expressly understood that the delivery of the Shares may be delayed by the Company in order to comply with any law or regulation (including, without limitation, state securities or “blue sky” laws) which requires the Company to take any action with respect to the Shares prior to their issuance. The Shares shall, upon delivery, be evidenced by an appropriate certificate or certificates for fully paid, non-assessable Shares.
     The Administrator shall have the right to accelerate the date of exercise of any installment of any Option; provided that the Administrator shall not accelerate the exercise date of any installment of any Option granted to any Key Employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to Paragraph 21) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in Paragraph 6(B)(d).
     The Administrator may, in its discretion, amend any term or condition of an outstanding Option provided (i) such term or condition as amended is permitted by the Plan, (ii) if any

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amendment is materially adverse to the Participant, any such amendment shall be made only with the consent of the Participant to whom the Option was granted, or in the event of the death of the Participant, the Participant’s Survivors, and (iii) any such amendment of any ISO shall be made only after the Administrator, after consulting with counsel for the Company, determines whether such amendment would constitute a “modification” of any Option which is an ISO (as that term is defined in Section 424(h) of the Code) or would cause any adverse tax consequences for the holder of such ISO.
8.   RIGHTS AS A STOCKHOLDER .
     No Participant to whom an Option has been granted shall have rights as a stockholder with respect to any Shares covered by such Option, except after due exercise of the Option and tender of the full purchase price for the Shares being purchased pursuant to such exercise (and satisfaction of such other conditions for the transfer of Shares as may be required pursuant to the Option) and registration of the Shares in the Company’s share register in the name of the Participant. No Participant to whom a Stock Purchase Right has been granted shall have rights as a stockholder with respect to any Shares covered by such Stock Purchase Right, except after tender of the full purchase price for the Shares being purchased (and satisfaction of such other conditions for the transfer of Shares as may be required pursuant to the Stock Purchase Right) and registration of the Shares in the Company’s share register in the name of the purchaser. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a stockholder, and shall be a stockholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Paragraph 18 of this Plan. No Participant to whom a Restricted Stock Unit has been granted shall have rights as a stockholder with respect to any Shares covered by such Restricted Stock Unit until the registration of the Shares in the Company’s share register in the name of the Participant has occurred.
9.   ASSIGNABILITY AND TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS AND RESTRICTED STOCK UNITS .
     By its terms, an Option, Stock Purchase Right or Restricted Stock Unit granted to a Participant shall not be transferable by the Participant other than (i) by will or by the laws of descent and distribution, or (ii) as otherwise determined by the Administrator and set forth in the applicable Option Agreement, Restricted Stock Purchase Agreement or Restricted Stock Units Agreement. The designation of a beneficiary of an Option by a Participant shall not be deemed a transfer prohibited by this Paragraph. Except as provided above, an Option or Stock Purchase Right shall be exercisable, and a Restricted Stock Unit may be held, during the Participant’s lifetime, only by such Participant (or by his or her legal representative) and shall not be assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. Any attempted transfer, assignment, pledge, hypothecation or other disposition of any Option, Stock Purchase Right or Restricted Stock Unit or of any rights granted thereunder contrary to the provisions of this Plan, or the levy of any attachment or similar process upon an Option, Stock Purchase Right or Restricted Stock Unit, shall be null and void.

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10.   EFFECT OF TERMINATION OF SERVICE OTHER THAN “FOR CAUSE” OR DEATH OR DISABILITY .
     Except as otherwise provided in the pertinent Option Agreement, in the event of a termination of service (whether as an employee, director or consultant) with the Company or an Affiliate before the Participant has exercised all Options, the following rules apply:
  a.   A Participant who ceases to be an employee, director or consultant of the Company or of an Affiliate (for any reason other than termination “for cause”, Disability, or death for which events there are special rules in Paragraphs 11, 12, and 13, respectively), may exercise any Option granted to him or her to the extent that the Option is exercisable on the date of such termination of service, but only within such term as the Administrator has designated in the pertinent Option Agreement. An Option that is not exercisable on the date of termination of service is canceled on such date and may not be exercised. An Option that is exercisable on the date of termination of service, but not exercised within the term as the Administrator has designated in the pertinent Option Agreement is canceled and may not be exercised thereafter.
 
  b.   Except as provided in Paragraph 12, in no event may an Option Agreement provide, if the Option is intended to be an ISO, that the time for exercise be later than three (3) months after the Participant’s termination of employment.
 
  c.   The provisions of this Paragraph, and not the provisions of Paragraph 12 or 13, shall apply to a Participant who subsequently becomes Disabled or dies after the termination of employment, director status or consultancy, provided, however, in the case of a Participant’s Disability or death within three (3) months after the termination of employment, director status or consultancy, the Participant or the Participant’s Survivors may exercise the Option within one (1) year after the date of the Participant’s termination of employment, but in no event after the date of expiration of the term of the Option.
 
  d.   Notwithstanding anything herein to the contrary, if subsequent to a Participant’s termination of employment, termination of director status or termination of consultancy, but prior to the exercise of an Option, the Board of Directors determines that, either prior or subsequent to the Participant’s termination, the Participant engaged in conduct which would constitute “cause” (as defined in Paragraph 11 below), then such Participant shall forthwith cease to have any right to exercise any Option, whether or not such Option was previously exercisable.
 
  e.   A Participant to whom an Option has been granted under the Plan who is absent from work with the Company or with an Affiliate because of temporary disability (any disability other than a permanent and total Disability as defined in Paragraph 2 hereof), or who is on leave of absence for any purpose, shall not, during the period of any such absence, be deemed, by virtue of such absence alone, to have terminated such Participant’s employment, director status or consultancy with the Company or with an Affiliate, except to the extent that the Administrator so

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      determines as Company policy or to the extent that the Option Agreement may otherwise expressly provide.
 
  f.   Except as required by law or as set forth in the pertinent Option Agreement, Options granted under the Plan shall not be affected by any change of a Participant’s status within or among the Company and any Affiliates, so long as the Participant continues to be a Key Employee, director or consultant of the Company or any Affiliate.
11.   EFFECT OF TERMINATION OF SERVICE “FOR CAUSE” .
     Except as otherwise provided in the pertinent Option Agreement, the following rules apply if the Participant’s service (whether as an employee, director or consultant) with the Company or an Affiliate is terminated for “cause” prior to the time that all his or her outstanding Options have been exercised:
  a.   All outstanding and unexercised Options as of the time the Participant is notified his or her service is terminated for “cause” will immediately be forfeited.
 
  b.   For purposes of this Plan, except as otherwise provided in the pertinent Option Agreement, Restricted Stock Purchase Agreement or Restricted Stock Units Agreement, “cause” shall include (and is not limited to) dishonesty with respect to the Company or any Affiliate, insubordination, substantial malfeasance or non-feasance of duty, unauthorized disclosure of confidential information, and conduct substantially prejudicial to the business of the Company or any Affiliate. The determination of the Administrator as to the existence of “cause” will be conclusive on the Participant and the Company.
 
  c.   “Cause” is not limited to events which have occurred prior to a Participant’s termination of service, nor is it necessary that the Administrator’s finding of “cause” occur prior to termination. If the Administrator determines, subsequent to a Participant’s termination of service but prior to the exercise of an Option, that either prior or subsequent to the Participant’s termination the Participant engaged in conduct which would constitute “cause,” then the right to exercise any Option is forfeited.
 
  d.   Any definition in an agreement between the Participant and the Company or an Affiliate, which contains a conflicting definition of “cause” for termination and which is in effect at the time of such termination, shall supersede the definition in this Plan with respect to such Participant.
12.   EFFECT OF TERMINATION OF SERVICE FOR DISABILITY .
     Except as otherwise provided in the pertinent Option Agreement, a Participant who terminates his or her employment, directorship or consultancy with the Company or an Affiliate by reason of Disability may exercise any Option granted to such Participant:
  a.   To the extent exercisable but not exercised on the date of such cessation; and

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  b.   In the event rights to exercise the Option Vest periodically, to the extent of a pro rata portion of any additional rights as would have Vested had the Participant not terminated his or her employment, directorship or consultancy by reason of such Disability, prior to the end of the Vesting period which next ends following the date of such termination. The proration shall be based upon the number of days of such Vesting period prior to the date of such termination.
     Except as otherwise provided in the pertinent Option Agreement, a Disabled Participant may exercise such rights only within the period ending one (1) year after the date of the Participant’s termination of employment, directorship or consultancy, as the case may be, notwithstanding that the Participant might have been able to exercise the Option as to some or all of the Shares on a later date if the Participant had not become disabled and had continued to be an employee, director or consultant or, if earlier, within the originally prescribed term of the Option.
     The Company shall make the determination both of whether Disability has occurred and the date of its occurrence (unless a procedure for such determination is set forth in another agreement between the Company and such Participant, in which case such procedure shall be used for such determination). If requested, the Participant shall be examined by a physician selected or approved by the Company, the cost of which examination shall be paid for by the Company.

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13.   EFFECT OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR CONSULTANT .
     Except as otherwise provided in the pertinent Option Agreement, in the event of the death of a Participant while the Participant is an employee, director or consultant of the Company or of an Affiliate, such Option may be exercised by the Participant’s Survivors:
  a.   To the extent exercisable but not exercised on the date of death; and
 
  b.   In the event rights to exercise the Option Vest periodically, to the extent of a pro rata portion of any additional rights which would have Vested had the Participant not died prior to the end of the Vesting period which next ends following the date of death. The proration shall be based upon the number of days of such Vesting period prior to the Participant’s death.
     Except as otherwise provided in the pertinent Option Agreement, if the Participant’s Survivors wish to exercise the Option, they must take all necessary steps to exercise the Option within one (1) year after the date of Participant’s termination of employment, directorship or consultancy, as the case may be, notwithstanding that the decedent might have been able to exercise the Option as to some or all of the Shares on a later date if he or she had not died and had continued to be an employee, director or consultant or, if earlier, within the originally prescribed term of the Option.
14.   STOCK PURCHASE RIGHTS .
  a.   Rights to Purchase . Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing, by means of an Agreement, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid (which shall not be less than the par value of the Shares), and the time within which the offeree must accept such offer, which shall in no event exceed six (6) months from the date upon which the Administrator made the determination to grant the Stock Purchase Right. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator.
 
  b.   Repurchase Option . Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser’s employment with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator.
 
  c.   Other Provisions . The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions

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      of Restricted Stock Purchase Agreements need not be the same with respect to each purchaser.
15.   RESTRICTED STOCK UNITS .
  a.   Grant . Restricted Stock Units may be granted either alone, in addition to, or in tandem with other awards granted under the Plan. After the Administrator determines that it will grant Restricted Stock Units under the Plan, it shall advise the Participant in writing, by means of an Agreement, of the terms, conditions and restrictions related to the award, including the number of Shares subject to the Restricted Stock Unit.
 
  b.   Forfeiture Provisions . Unless the Administrator determines otherwise, the Restricted Stock Units Agreement shall provide that the Restricted Stock Unit shall be forfeited upon the voluntary or involuntary termination of the Participant’s employment with the Company for any reason (including death or Disability).
 
  c.   Other Provisions . The Restricted Stock Units Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock Units Agreements need not be the same with respect to each Participant.
16.   PURCHASE FOR INVESTMENT .
     Unless the offering and sale of the Shares to be issued upon the particular exercise of or delivery pursuant to an Option, Stock Purchase Right or Restricted Stock Unit shall have been effectively registered under the Securities Act of 1933, as now in force or hereafter amended (the “1933 Act”), the Company shall be under no obligation to issue the Shares covered by such exercise unless and until the following conditions have been fulfilled:
  a.   The person(s) who exercise(s) or is to receive Shares pursuant to such Option, Stock Purchase Right or Restricted Stock Unit shall warrant to the Company, prior to the receipt of such Shares, that such person(s) are acquiring such Shares for their own respective accounts, for investment, and not with a view to, or for sale in connection with, the distribution of any such Shares, in which event the person(s) acquiring such Shares shall be bound by the provisions of the following legend which shall be endorsed upon the certificate(s) evidencing their Shares issued pursuant to such exercise of such grant:
      “The shares represented by this certificate have been taken for investment and they may not be sold or otherwise transferred by any person, including a pledgee, unless (1) either (a) a Registration Statement with respect to such shares shall be effective under the Securities Act of 1933, as amended, or (b) the Company shall have received an opinion of counsel satisfactory to it that an exemption from registration under such Act is

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      then available, and (2) there shall have been compliance with all applicable state securities laws.”
  b.   At the discretion of the Administrator, the Company shall have received an opinion of its counsel that the Shares may be issued upon such particular exercise in compliance with the 1933 Act without registration thereunder.
     The Company may delay issuance of the Shares until completion of any action or obtaining of any consent which the Company deems necessary under any applicable law (including, without limitation, state securities or “blue sky” laws.)
17.   DISSOLUTION OR LIQUIDATION OF THE COMPANY .
     Upon the dissolution or liquidation of the Company, all Options, Stock Purchase Rights and Restricted Stock Units granted under this Plan which as of such date shall not have been exercised will terminate and become null and void; provided, however, that if the rights of a Participant or a Participant’s Survivors have not otherwise terminated and expired, (i) the Participant or the Participant’s Survivors will have the right immediately prior to such dissolution or liquidation (A) to exercise any Option or Stock Purchase Right to the extent that the Option or Stock Purchase Right is exercisable as of the date immediately prior to such dissolution or liquidation and (B) to receive Shares pursuant to any Vested and outstanding Restricted Stock Unit; and (ii) if a Change in Control shall have occurred within the twelve months immediately prior to the date of such dissolution or liquidation, such Participant or such Participant’s Survivors will have the right immediately prior to such dissolution or liquidation to exercise any Option, Stock Purchase Right or receive Shares pursuant to any Restricted Stock Unit then outstanding whether or not such Option, Stock Purchase Right or Restricted Stock Unit is Vested and/or exercisable as of such date.
18.   ADJUSTMENTS .
     Upon the occurrence of any of the following events, the adjustments as hereinafter provided shall be made, unless otherwise specifically provided in a pertinent Option Agreement, Restricted Stock Purchase Agreement or Restricted Stock Units Agreement:
     A.  Stock Dividends and Stock Splits . If (i) the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, or (ii) additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of Common Stock, the number of Shares deliverable upon the exercise of an Option or Stock Purchase Right or pursuant to a Restricted Stock Unit may be appropriately increased or decreased proportionately, and appropriate adjustments may be made in the purchase price per share to reflect such subdivision, combination or stock dividend. The number of Shares subject to options to be granted (i) pursuant to Paragraph 3 or to directors pursuant to Paragraph 6(A)(f) shall also be proportionately adjusted upon the occurrence of such events, except as the Administrator shall otherwise determine in its sole discretion or (ii) pursuant to Paragraph 4(c) shall also be proportionately adjusted upon the occurrence of such events.

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B.   Corporate Changes in Control . In the event of a Corporate Change in Control,
     i. Each Option, Stock Purchase Right or Restricted Stock Unit outstanding as of the date such Corporate Change in Control is determined to have occurred, and which is not then exercisable or Vested by reason of Vesting requirements, shall automatically accelerate the Vesting so that the Option, Stock Purchase Right or Restricted Stock Unit shall become fully Vested and, where applicable, shall become fully exercisable and, in the case of Restricted Stock Units, Shares shall be transferred to the Participant, on the first to occur of (x) the date the Option, Stock Purchase Right or Restricted Stock Unit becomes Vested and, if applicable, exercisable under its original terms (with respect only to such Options, Stock Purchase Rights or Restricted Stock Units as otherwise would Vest during such one-year period under their terms), (y) the first anniversary of the date such Corporate Change in Control is determined to have occurred, and (z) the occurrence of an Involuntary Employment Action; and
     ii. The Options or Stock Purchase Rights so accelerated shall remain so exercisable until the earlier of the original expiration date of the Option or Stock Purchase Right and the earlier termination of the Option or Stock Purchase Right in accordance with the Plan and the applicable Agreement.
     C.  Transactional Changes in Control . In the event of a Transactional Change in Control,
     i. Each Option, Stock Purchase Right or Restricted Stock Unit outstanding as of the date such Transactional Change in Control is determined to have occurred shall be: (a) assumed by the successor corporation (or its parent) or replaced with a comparable option, stock purchase right or restricted stock unit with respect to shares of the capital stock of the successor corporation (or its parent) on an equitable basis, (b) terminated upon written notice to the Participants stating that (i), in the case of Options and Stock Purchase Rights, all such Options or Stock Purchase Rights (for purposes of this Subparagraph all Options or Stock Purchase Rights then outstanding shall be deemed to be exercisable) must be exercised within a specified number of days (which shall not be less than 15 days) from the date such notice is given, at the end of which period the Options or Stock Purchase Rights shall terminate and (ii) in the case of Restricted Stock Units, that Shares shall be delivered to the Participant pursuant to such awards within 15 days after the date such notice is given, or (c) terminated in exchange for a cash payment equal to (i), in the case of Options and Stock Purchase Rights, the excess of the Fair Market Value of the shares subject to such Options or Stock Purchase Rights (for purposes of this Subparagraph all Options then outstanding shall be deemed to be exercisable) over the exercise price thereof and (ii) in the case of Restricted Stock Units, the Fair Market Value of the Shares subject to such Restricted Stock Units. The determination of which of the treatments set forth in clauses (a), (b) and (c) above to provide and of comparability under clause (a) above shall be made by the Administrator and its determinations shall be final, binding and conclusive.
     ii. The Vesting of each Option, Stock Purchase Right or Restricted Stock Unit that is assumed or replaced in connection with a Transactional Change in Control shall automatically accelerate so that the Option, Stock Purchase Right or Restricted Stock Unit shall become fully Vested and, where applicable, shall become fully exercisable, and, in the case of Restricted Stock Units, Shares shall be transferred to the Participant, on the first to occur of (x) the date the

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Option, Stock Purchase Right or Restricted Stock Unit becomes Vested and, if applicable, exercisable under its original terms (with respect only to such Options, Stock Purchase Rights or Restricted Stock Units as otherwise would Vest during such one-year period under their terms), (y) the first anniversary of the date such Transactional Change in Control is determined to have occurred, and (z) the occurrence of an Involuntary Employment Action. The Options or Stock Purchase Rights so accelerated shall remain so exercisable until the earlier of the original expiration date of the Option or Stock Purchase Right and the earlier termination of the Option or Stock Purchase Right in accordance with the Plan and the applicable Agreement.
     D.  Corporate Transaction . In the event of a Corporate Transaction that does not constitute a Transactional Change in Control or in the event of a similar event, pursuant to which securities of the Company or of another corporation or entity are issued with respect to the outstanding shares of Common Stock, a Participant upon exercising an Option or Stock Purchase Right or becoming Vested under a Restricted Stock Unit shall be entitled to receive (where applicable, for the purchase price paid upon such exercise) the securities which would have been received if such Option or Stock Purchase Right had been exercised, or such Restricted Stock Unit had become Vested, prior to such Corporate Transaction.
     E.  Modification of ISOs . Notwithstanding the foregoing, any adjustments made pursuant to Subparagraph A, B, C, or D with respect to ISOs shall be made only after the Administrator, after consulting with counsel for the Company, determines whether such adjustments would constitute a “modification” of such ISOs (as that term is defined in Section 424(h) of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Administrator determines that such adjustments made with respect to ISOs would constitute a “modification” of such ISOs, it may refrain from making such adjustments, unless the holder of an ISO specifically requests in writing that such adjustment be made and such writing indicates that the holder has full knowledge of the consequences of such “modification” on his or her income tax treatment with respect to the ISO.
19.   ISSUANCES OF SECURITIES .
     Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Options, Stock Purchase Rights or Restricted Stock Units. Except as expressly provided herein, no adjustments shall be made for dividends paid in cash or in property (including without limitation, securities) of the Company.

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20.   FRACTIONAL SHARES .
     No fractional shares shall be issued under the Plan and the person exercising such right shall receive from the Company cash in lieu of such fractional shares equal to the Fair Market Value thereof.
21.   CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOs .
     The Administrator, at the written request of any Participant, may in its discretion take such actions as may be necessary to convert such Participant’s ISOs (or any portions thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the Participant is an employee of the Company or an Affiliate at the time of such conversion. Such actions may include, but not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such Options. At the time of such conversion, the Administrator (with the consent of the Participant) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Administrator in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any Participant the right to have such Participant’s ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Administrator takes appropriate action. The Administrator, with the consent of the Participant, may also terminate any portion of any ISO that has not been exercised at the time of such conversion.
22.   WITHHOLDING .
     In the event that any federal, state, or local income taxes, employment taxes, Federal Insurance Contributions Act (“F.I.C.A.”) withholdings or other amounts are required by applicable law or regulation to be withheld from the Participant’s salary, wages or other remuneration in connection with the exercise of an Option or a Disqualifying Disposition (as defined in Paragraph 23) or the Vesting of Shares issued pursuant to Stock Purchase Rights or the delivery of Shares pursuant to Restricted Stock Units, the Company may deduct from any amounts due to the Participant, such as compensation or reimbursements, or may require that the Participant advance in cash to the Company, or to any Affiliate of the Company which employs or employed the Participant, the amount of such withholdings unless a different withholding arrangement, including the use of shares of the Company’s Common Stock or a promissory note, is authorized by the Administrator (and permitted by law), provided, however, that with respect to persons subject to Section 16 of the 1934 Act, any such withholding arrangement shall be in compliance with any applicable provisions of Rule 16b-3 promulgated under Section 16 of the 1934 Act. For purposes hereof, the fair market value of the shares withheld for purposes of payroll withholding shall be determined in the manner provided in Paragraph 2 above, as of the most recent practicable date prior to the date of exercise. If the fair market value of the shares withheld is less than the amount of payroll withholdings required, the Participant may be required to advance the difference in cash to the Company or the Affiliate employer. The Administrator in its discretion may condition the exercise of an Option for less than the then Fair Market Value on the Participant’s payment of such additional withholding.

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23.   NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION .
     Each Key Employee who receives an ISO must agree to notify the Company in writing immediately after the Key Employee makes a Disqualifying Disposition of any shares acquired pursuant to the exercise of an ISO. A Disqualifying Disposition is any disposition (including any sale) of such shares before the later of (a) two years after the date the Key Employee was granted the ISO, or (b) one year after the date the Key Employee acquired Shares by exercising the ISO. If the Key Employee has died before such stock is sold, these holding period requirements do not apply and no Disqualifying Disposition can occur thereafter.
24.   TERMINATION OF THE PLAN .
     Unless sooner terminated by the Board of Directors, the Plan shall terminate on October 28, 2009, and no Options, Stock Purchase Rights or Restricted Stock Units shall thereafter be granted under the Plan. All Options, Stock Purchase Rights or Restricted Stock Units granted under the Plan prior to that date shall remain in effect until such Options, Stock Purchase Rights or Restricted Stock Units shall have been exercised, paid out or terminated in accordance with the terms and provisions of the Plan and the applicable Agreements. The Board of Directors may terminate the Plan at any time; provided, however, that any such termination will not materially impair any rights under any Option, Stock Purchase Right or Restricted Stock Unit theretofore made under the Plan without the consent of the Participant.
25.   AMENDMENT OF THE PLAN AND AGREEMENTS .
     The Plan may be amended by the stockholders of the Company. The Plan may also be amended by the Board of Directors or the Administrator, including, without limitation, to the extent necessary to qualify any or all outstanding Options granted under the Plan or Options to be granted under the Plan for favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code, for as long as the Company has a class of stock registered pursuant to Section 12 of the 1934 Act and to the extent necessary to qualify the shares issuable upon exercise of any outstanding Options granted, or Options to be granted, under the Plan for listing on any national securities exchange or quotation in any national automated quotation system of securities dealers. Any amendment approved by the Administrator which the Administrator determines is of a scope that requires stockholder approval shall be subject to obtaining such stockholder approval. Any modification or amendment of the Plan shall not, without the consent of a Participant, materially adversely affect his or her rights under an Option, Stock Purchase Right or Restricted Stock Unit previously granted to him or her. With the consent of the Participant affected, the Administrator may amend outstanding Option Agreements, Restricted Stock Purchase Agreements or Restricted Stock Units Agreements in a manner which may be materially adverse to the Participant but which is not inconsistent with the Plan. In the discretion of the Administrator, outstanding Option Agreements, Restricted Stock Purchase Agreements or Restricted Stock Units Agreements may be amended by the Administrator in a manner which is not materially adverse to the Participant.

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26.   EMPLOYMENT OR OTHER RELATIONSHIP .
     Nothing in this Plan or any Option Agreement, Restricted Stock Purchase Agreement or Restricted Stock Units Agreement shall be deemed to prevent the Company or an Affiliate from terminating the employment, consultancy or director status of a Participant, nor to prevent a Participant from terminating his or her own employment, consultancy or director status or to give any Participant a right to be retained in employment or other service by the Company or any Affiliate for any period of time.
     All Options, Stock Purchase Rights and Restricted Stock Units shall constitute a special incentive payment to the Participant and shall not be taken into account in computing the amount of salary or compensation of the Participant for the purpose of determining any benefits under any pension, retirement, profit-sharing, bonus, life insurance or other benefit plan of the Company or under any agreement between the Company and the Participant, unless such plan or agreement specifically provides otherwise.
27.   GOVERNING LAW .
     With respect to Options and Stock Purchase Rights granted prior to January 18, 2001, this Plan shall be governed by and construed in accordance with the laws of the State of Delaware, the Company’s state of incorporation and, except as otherwise provided in the pertinent Option Agreement or Restricted Stock Purchase Agreement, the United States District Court for the Eastern District of Virginia shall have exclusive jurisdiction over any and all disputes between a Participant and the Company related to or arising out of Options or Restricted Stock Purchase Rights granted under this Plan. With respect to Options, Stock Purchase Rights and Restricted Stock Units granted on or after January 18, 2001, this Plan shall be governed by and construed in accordance with the laws of the State of New York and, except as otherwise provided in the pertinent Option Agreement, Restricted Stock Purchase Agreement or Restricted Stock Units Agreement, any and all disputes between a Participant and the Company related to or arising out of Options, Stock Purchase Rights or Restricted Stock Units granted under this Plan shall be brought only in a state or federal court of competent jurisdiction sitting in Manhattan, New York.
28.   Section 409A
          Notwithstanding other provisions of the Plan or any award agreements thereunder, no award shall be granted, deferred, accelerated, extended, paid out or modified under this Plan in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon a Participant. In the event that it is reasonably determined by the Committee that, as a result of Section 409A of the Code, payments in respect of any award under the Plan may not be made at the time contemplated by the terms of the Plan or the relevant award agreement, as the case may be, without causing the Participant holding such award to be subject to taxation under Section 409A of the Code, the Company will make such payment on the first day that would not result in the Participant incurring any tax liability under Section 409A of the Code; which, if the Participant is a “specified employee” within the meaning of the Section 409A, shall be the first day following the six-month period beginning on the date of Participant’s termination of employment. The Company shall use commercially reasonable efforts to implement the provisions of this Section 28 in good faith; provided that neither the Company, the

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Committee nor any of the Company’s employees, directors or representatives shall have any liability to Participants with respect to this Section 28.

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Exhibit 10.4
As Amended Through
October 25, 2007
AOL TIME WARNER INC.
1994 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
     The purpose of the AOL Time Warner Inc. 1994 Stock Option Plan (hereinafter the “Plan”) is to provide for the granting of nonqualified stock options and stock appreciation rights to certain employees of and consultants and advisors to the Company and its Subsidiaries in recognition of the valuable services provided, and contemplated to be provided, by such employees, consultants and advisors. The general purpose of the Plan is to promote the interests of the Company and its stockholders and to reward dedicated employees, consultants and advisors of the Company and its Subsidiaries by providing them additional incentives to continue and increase their efforts with respect to, and to remain in the employ of, the Company or its Subsidiaries.
2. CERTAIN DEFINITIONS
     The following terms (whether used in the singular or plural) have the meanings indicated when used in the Plan:
     (a) “Agreement” means the stock option agreement and stock appreciation rights agreement specified in Section 12, both individually and collectively, as the context so requires.
     (b) “Affiliate” means any corporation, company or other entity whose financial results are consolidated with those of the Company in accordance with U.S. generally accepted accounting principles.
     (c) “AOL Time Warner” means AOL Time Warner Inc., a Delaware corporation, and any successor thereto.
     (d) “Approved Transaction” means any transaction in which the Board (or, if approval of the Board is not required as a matter of law, the stockholders of the Company) shall approve (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock would be converted into cash, securities or other property, other than

 


 

(x) a merger of Time Warner as contemplated in the Amended and Restated Agreement and Plan of Merger dated as of September 22, 1995 among Time Warner , TW Inc., Time Warner Acquisition Corp., TW Acquisition Corp. and Turner Broadcasting System, Inc., as the same may be amended from time to time, or (y) a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (ii) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (iii) the adoption of any plan or proposal for the liquidation or dissolution of the Company.
     (e) “Award” means grants of Options and/or SARs under this Plan.
     (f) “Board” means the Board of Directors of the Company.
     (g) “Board Change” means, during any period of two consecutive years, individuals who at the beginning of such period constituted the entire Board ceased for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company’s stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.
     (h) “Change in Control” means either a Corporate Change in Control or a Transactional Change in Control.
     (i) “Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Code section shall include any successor section.
     (j) “Committee” means the Committee appointed pursuant to Section 4.
     (k) “Common Stock” means the common stock, par value $.01 per share, of the Company.
     (l) “Company” means (i) with respect to periods prior to January 11, 2001, Time Warner and (ii) with respect to periods on and after January 11, 2001, AOL Time Warner.
     (m) “Composite Tape” means the New York Stock Exchange Composite Tape.
     (n) “Control Purchase” means any transaction in which any person (as such

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term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or any employee benefit plan sponsored by the Company or any of its Subsidiaries) (i) shall purchase any Common Stock (or securities convertible into Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board, or (ii) shall become the “beneficial owner” (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) in the case of rights to acquire the Company’s securities).
     (o) “Corporate Change in Control” means the happening of any of the following events:
(1) the acquisition by any individual, entity or group (an “Entity”), including any “person” within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (i) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); excluding, however, the following: (A) any acquisition directly from the Company (excluding any acquisition by virtue of the exercise of an exercise, conversion or exchange privilege unless the security being so exercised, converted or exchanged was itself acquired directly from the Company), (B) any acquisition by the Company, or (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or by any corporation controlled by the Company; or
(2) a change in the composition of the Board since January 12, 2001, such that the individuals who, as of such date, constituted the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company subsequent to January 12, 2001 whose election, or nomination for election by the stockholders of the Company, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed a member of the Incumbent Board; and provided further, that any individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule

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14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any person or Entity other than the Board shall not be deemed a member of the Incumbent Board.
     (p) “Effective Date” means the date the Plan becomes effective pursuant to Section 15.
     (q) “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Exchange Act section shall include any successor section.
     (r) “Fair Market Value” of a share of Common Stock means the average of the high and low sales prices of a share of Common Stock on the New York Stock Exchange on the date in question, except as otherwise provided in Section 6.5.
     (s) “General SARs” means stock appreciation rights subject to the terms of Section 6.5(b).
     (t) “Holder” means an employee of or a consultant or advisor to the Company or any of its Subsidiaries who has received an Award under this Plan.
     (u) “Involuntary Employment Action” means any change in the terms and conditions of the Holder’s employment with the Company or any successor, without cause (as defined herein), to such extent that:
  (1)   the Holder shall fail to be vested with power, authority and resources analogous to the Holder’s title and/or office prior to the Change in Control, or
 
  (2)   the Holder shall lose any significant duties or responsibilities attending such office, or
 
  (3)   there shall occur a reduction in the Holder’s base compensation or

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  (4)   the Holder’s employment with the Company, or its successor, is terminated without cause (as defined herein).
     (v) “Limited SARs” means stock appreciation rights subject to the terms of Section 6.5(c).
     (w) “Minimum Price Per Share” means the highest gross price (before brokerage commissions, soliciting dealers’ fees and similar charges) paid or to be paid for any share of Common Stock (whether by way of exchange, conversion, distribution, liquidation or otherwise) in, or in connection with, any Approved Transaction or Control Purchase which occurs at any time during the period beginning on the sixtieth day prior to the date on which Limited SARs are exercised and ending on the date on which Limited SARs are exercised. If the consideration paid or to be paid in any such Approved Transaction or Control Purchase shall consist, in whole or in part, of consideration other than cash, the Board shall take such action, as in its judgment it deems appropriate, to establish the cash value of such consideration, but such valuation shall not be less than the value, if any, attributed to such consideration by any other party to such Approved Transaction or Control Purchase.
     (x) “Option” means any nonqualified stock option granted pursuant to this Plan.
     (y) “Plan” has the meaning ascribed thereto in Section 1.
     (z) “SARs” means General SARs and Limited SARs.
     (aa) “SEC” means the Securities and Exchange Commission.
     (bb) “Subsidiary” of a person means any present or future subsidiary of such person as such term is defined in section 425 of the Code and any present or future trade or business, whether or not incorporated, controlled by or under common control with such person. An entity shall be deemed a Subsidiary of a person only for such periods as the requisite ownership or control relationship is maintained.
     (cc) “Survivors” means a deceased Holder’s legal representatives and/or any person or persons who acquired the Holder’s rights to an Option by will or by the laws of descent and distribution.
     (dd) “Time Warner Inc.” means Time Warner Inc., a Delaware corporation.

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     (ee) “Total Disability” or “Disability” means a permanent and total disability as defined in section 22(e)(3) of the Code.
     (ff) “Transactional Change in Control” means any of the following transactions to which the Company is a party:
     (1) a reorganization, recapitalization, merger or consolidation (a “Corporate Transaction”) of the Company, unless securities representing 60% or more of either the outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the Company or the corporation resulting from such Corporate Transaction (or the parent of such corporation) are held subsequent to such transaction by the person or persons who were the beneficial holders of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction, in substantially the same proportions as their ownership immediately prior to such Corporate Transaction; or
     (2) the sale, transfer or other disposition of all or substantially all of the assets of the Company.
3. STOCK SUBJECT TO THE PLAN
     3.1. Number of Shares . Subject to the provisions of Section 12 and this Section 3, the maximum number of shares of Common Stock in respect of which Awards may be granted is (x) 1.5 (one and one-half) times the sum of (a) 1.5% (one and one-half percent) of the number of shares of Common Stock outstanding on December 31, 1993, (b) 1.25% (one and one-quarter percent) of the number of shares of Common Stock outstanding on December 31, 1994, (c) 1% (one percent) of the number of shares of Common Stock outstanding on December 31, 1995, (d) 1.2% (one and two-tenths percent) of the aggregate number of shares of Common Stock and Series LMCN-V Common Stock, par value $.01 per share, outstanding on December 31, 1996, (e) 1.4% (one and four-tenths percent) of the aggregate number of shares of Common Stock and Series LMCN-V Common Stock, par value $.01 per share, outstanding on December 31, 1997, (f) 1.05% (one and five-hundredths percent) of the aggregate number of shares of Common Stock and Series LMCN-V Common Stock, par value $.01 per share, outstanding on December 31, 1998, (g) 1.175% (one and one hundred seventy five thousandths percent) of the aggregate number of shares of Common Stock and Series LMCN-V Common Stock, par value $.01 per share, outstanding on December 31, 1999, and (h) two million; plus (y) 178,100,000; plus (z) 110,000,000; plus (aa) 27,816,788. If and to the extent that an Option shall expire,

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terminate or be canceled for any reason without having been exercised (or without having been considered to have been exercised as provided in Section 6.5(a)), the shares of Common Stock subject to such expired, terminated or canceled portion of the Option shall again become available for purposes of the Plan.
     3.2. Character of Shares . Shares of Common Stock deliverable under the terms of the Plan may be, in whole or in part, authorized and unissued shares of Common Stock or issued shares of Common Stock held in the Company’s treasury, or both.
     3.3. Reservation of Shares . The Company shall at all times reserve a number of shares of Common Stock (authorized and unissued Common Stock, issued Common Stock held in the Company’s treasury, or both) equal to the maximum number of shares that may be subject to outstanding Awards and future Awards under the Plan.
4. ADMINISTRATION
     4.1. Powers . The Plan shall be administered by the Board. Subject to the express provisions of the Plan, the Board shall have plenary authority, in its discretion, to grant Awards under the Plan and to determine the terms and conditions (which need not be identical) of all Awards so granted, including without limitation, (a) the individuals to whom, and the time or times at which, Awards shall be granted or awarded, (b) the number of shares to be subject to each Award, (c) when an Option or SAR can be exercised and whether in whole or in installments, and (d) the form, terms and provisions of any Agreement (which terms may be amended, subject to Section 14).
     4.2. Factors to Consider . In making determinations hereunder, the Board may take into account the nature of the services rendered by the respective employees, consultants or advisors, their dedication and past contributions to the Company and its Subsidiaries, their present and potential contributions to the success of the Company and its Subsidiaries and such other factors as the Board in its discretion shall deem relevant.
     4.3. Interpretation . Subject to the express provisions of the Plan, the Board shall have plenary authority to interpret the Plan, to prescribe, amend and rescind the rules and regulations relating to it and to make all other determinations deemed necessary or advisable for the administration of the Plan. The determinations of the Board on the matters referred to in this Section 4 shall be conclusive. The Board’s determinations under the Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan (whether or not such persons are similarly situated). Without limiting the generality of the foregoing, the Board shall be entitled, among other things, to make non-uniform and selective determinations, and to enter into non-uniform and selective Agreements

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as to (a) the persons to receive Awards under the Plan, (b) the terms and provisions of Awards under the Plan and (c) whether a termination of service with the Company or any Subsidiary or Affiliate has occurred.
     4.4. Delegation to Committee . Notwithstanding anything to the contrary contained herein, the Board may at any time, or from time to time, appoint a Committee and delegate to such Committee the authority of the Board to administer the Plan, including to the extent provided by the Board, the power to further delegate such authority. Upon such appointment and delegation, any such Committee shall have all the powers, privileges and duties of the Board in the administration of the Plan to the extent provided in such delegation, except for the power to appoint members of the Committee and to terminate, modify or amend the Plan. The Board may from time to time appoint members of any such Committee in substitution for or in addition to members previously appointed, may fill vacancies in such Committee and may discharge such Committee.
     Any such Committee shall select one of its members as its chairman and shall hold its meetings at such times and places as it shall deem advisable. A majority of members shall constitute a quorum and all determinations shall be made by a majority of such quorum. Any determination reduced to writing and signed by all of the members shall be fully as effective as if it had been made by a majority vote at a meeting duly called and held.
5. ELIGIBILITY
     Prior to January 18, 2001, Awards may be made only to (a) employees of the Company or any of its Subsidiaries (including officers and directors of any of the Company’s Subsidiaries), other than officers or directors of the Company who are subject to Section 16 of the Exchange Act, (b) prospective employees of the Company or any of its Subsidiaries and (c) consultants or advisors to the Company or any of its Subsidiaries. On or after January 18, 2001, Awards may be made only to (a) employees of the Company or any of its Affiliates (including officers and directors of any of the Company’s Affiliates), other than officers and directors of the Company who are subject to Section 16 of the Exchange Act, (b) prospective employees of the Company or any of its Affiliates and (c) consultants to the Company or any of its Affiliates. The exercise of Options and SARs granted to a prospective employee shall be conditioned upon such person becoming an employee of the Company or any of its Subsidiaries or Affiliates, as the case may be. For purposes of the Plan, the term “prospective employee” shall mean any person who holds an outstanding offer of employment on specific terms from the Company or any of its Subsidiaries or Affiliates, as the case may be. Only employees designated by the Board to be eligible to be granted one or more Options or SARs under the Plan shall be eligible to receive Awards and “employee” shall not include any person who is not on the payroll of the Company as a full-time or part-time employee (regardless of whether a

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government agency, court or other entity subsequently determines that such person is an employee of the Company or any of its Subsidiaries or Affiliates for purposes of employment taxes, benefits or any other purpose). Awards may be made to employees, consultants and advisors who hold or have held Awards under this Plan or any similar or other awards under any other plan of the Company or its Subsidiaries or Affiliates, as the case may be.
6. OPTIONS AND SARS
     6.1. Option Prices . The purchase price of the Common Stock under each Option shall be determined by the Board and set forth in the applicable Agreement, but shall not be less than 100% of the Fair Market Value of the Common Stock on the date of grant.
     6.2. Term of Options . The term of each Option shall be for such period as the Board shall determine, as set forth in the applicable Agreement.
     6.3. Exercise of Options . An Option granted under the Plan shall become (and remain) exercisable during the term of the Option to the extent provided in the applicable Agreement and this Plan and, unless the Agreement otherwise provides, may be exercised to the extent exercisable, in whole or in part, at any time and from time to time during such term; provided, however, that subsequent to the grant of an Option, the Board, at any time before complete termination of such Option, may accelerate the time or times at which such Option may be exercised in whole or in part (without reducing the term of such Option). The Agreement may contain conditions precedent to the exercisability of Options, including without limitation, the achievement of minimum performance criteria.
     6.4. Manner of Exercise . Payment of the Option purchase price shall be made in cash or in whole shares of Common Stock already owned by the person exercising an Option or, partly in cash and partly in such Common Stock; provided, however, that such payment may be made in whole or in part in shares of Common Stock only if and to the extent permitted by the applicable Agreement. An Option shall be exercised by written notice to the Company upon such terms and conditions as provided in the Agreement. The Company shall effect the transfer of the shares of Common Stock purchased under the Option as soon as practicable, and within a reasonable time thereafter such transfer shall be evidenced on the books of the Company. No Holder or other person exercising an Option shall have any of the rights of a stockholder of the Company with respect to shares of Common Stock subject to an Option granted under the Plan until due exercise and full payment has been made. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date of such due exercise and full payment.
     6.5. SARs . (a) General Conditions. The Board may (but shall not be obligated to)

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grant General SARs and/or Limited SARs pursuant to the provisions of this Section 6.5 to a Holder of any Option (hereinafter called a “related Option”), with respect to all or a portion of the shares of Common Stock subject to the related Option.
     A SAR may be granted either concurrently with the grant of the related Option or at any time thereafter prior to the complete exercise, termination, expiration or cancellation of such related Option. Subject to the terms and provisions of this Section 6.5, each SAR shall be exercisable to the extent the related Option is then exercisable (and may be subject to such additional limitations on exercisability as the Agreement may provide), and in no event after the complete termination or full exercise of the related Option. SARs shall be exercisable in whole or in part upon notice to the Company upon such terms and conditions as provided in the Agreement.
     Upon the exercise of SARs, the related Option shall be considered to have been exercised to the extent of the number of shares of Common Stock with respect to which such SARs are exercised and shall be considered to have been exercised to that extent for purposes of determining the number of shares of Common Stock in respect of which other Awards may be granted. Upon the exercise or termination of the related Option, the SARs with respect thereto shall be considered to have been exercised or terminated to the extent of the number of shares of Common Stock with respect to which the related Option was so exercised or terminated.
     The provisions of Sections 4 and 6 through 21 (to the extent that such provisions are applicable to Options) shall also be applicable to SARs unless the context otherwise requires.
     (b) General SARs. General SARs shall be exercisable only at the time the related Option is exercisable and subject to the terms and provisions of this Section 6.5, upon the exercise of General SARs, the person exercising the General SAR shall be entitled to receive consideration (in the form hereinafter provided) equal in value to the excess of the Fair Market Value on the date of exercise of the shares of Common Stock with respect to which such General SARs have been exercised over the aggregate related Option purchase price for such shares; provided, however, that the Board may, in any Agreement granting General SARs provide that the appreciation realizable upon exercise thereof shall be measured from a base higher than the related Option purchase price.

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     Upon the exercise of a General SAR, the person exercising the General SAR may specify the form of consideration to be received by such person exercising the General SAR, which shall be in shares of Common Stock (valued at Fair Market Value on the date of exercise of such General SAR), or in cash, or partly in cash and partly in shares of Common Stock. Any election by the person exercising the General SAR to receive cash in full or partial settlement of such General SAR shall comply with all applicable laws and shall be subject to the discretion of the Board to settle General SARs only in shares of Common Stock if necessary or advisable in the judgment of the Board to preserve pooling of interests accounting treatment for any proposed transaction involving the Company. Unless otherwise specified in the applicable Agreement, the number of General SARs which may be exercised for cash, or partly for cash and partly for shares of Common Stock, during any calendar quarter, may not exceed 20% of the aggregate number of shares of Common Stock originally subject to the related Option (as such original number, without giving effect to the exercise of any portion of the related Option, shall have been retroactively adjusted in accordance with Section 13 or any corresponding provisions of an applicable Agreement).
     For purposes of this Section 6.5, the date of exercise of a General SAR shall mean the date on which the Company shall have received notice from the person exercising the General SAR of the exercise of such General SAR.
     (c) Limited SARs. Limited SARs may be exercised only during the period (a) beginning on the first day following either (i) the date of an Approved Transaction, (ii) the date of a Control Purchase, or (iii) the date of a Board Change, and (b) ending on the ninetieth day (or such other date specified in the Agreement) following such date. The effective date of exercise of a Limited SAR shall be deemed to be the date on which the Company shall have received notice from the person exercising the Limited SAR of the exercise thereof.
     Upon the exercise of Limited SARs granted in connection with an Option, except as otherwise provided in the Agreement and the immediately succeeding sentence, the person exercising the Limited SAR shall receive in cash an amount equal to the product computed by multiplying (a) the excess of (i) the higher of (A) the Minimum Price Per Share, or (B) the highest reported closing sales price of a share of Common Stock as reported on the Composite Tape at any time during the period beginning on the sixtieth day prior to the date on which such Limited SARs are exercised and ending on the date on which such Limited SARs are exercised over (ii) the per share Option price of the related Nonqualified Stock Option, by (b) the number of shares of Common Stock with respect to which such Limited SARs are being exercised. The Board shall have the discretion to settle Limited SARs by the delivery of Common Stock rather than cash if in the judgment of the Board such action is necessary or advisable to preserve pooling of interests accounting treatment for any proposed transaction involving the Company.
     6.6. Limited Transferability of Options and SARs . Except as set forth in this Section

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6.6 and Section 22, Options and SARs shall not be transferable other than by will or the laws of descent and distribution, and Options and SARs may be exercised during the lifetime of the Holder thereof only by such Holder (or his or her court appointed legal representative). The Agreement may provide that Options and SARs are transferable by gift to such persons or entities and upon such terms and conditions specified in the Agreement.
7. ACCELERATION OF OPTIONS AND SARS
     7.1 Death, Disability and Total Disability . Unless the applicable Agreement provides otherwise, if a Holder’s employment shall terminate by reason of Death, Disability or Total Disability, then notwithstanding any contrary waiting period or installment period in any Agreement or in the Plan, each outstanding Option or SAR granted under the Plan shall immediately become exercisable in full in respect of the aggregate number of shares covered thereby.
     7.2 Approved Transaction, Board Change and Control Purchase . For Options and SARs granted prior to January 18, 2001, unless the applicable Agreement provides otherwise, each outstanding Option or SAR granted under the Plan shall immediately become exercisable in full in respect of the aggregate number of shares covered thereby in the event of any Approved Transaction, Board Change or Control Purchase.
     7.3 Corporate Changes in Control . For Options and SARs granted on or after January 18, 2001, unless the applicable Agreement provides otherwise, in the event of a Corporate Change in Control,
          (a) Each Option or SAR outstanding as of the date such Corporate Change in Control is determined to have occurred, and which is not then exercisable, shall automatically accelerate so that the Option or SAR shall become fully exercisable on the first to occur of (i) the date the Option or SAR becomes exercisable under its original terms (with respect only to such Options or SAR as otherwise would become exercisable during such one-year period under their terms), (ii) the first anniversary of the date such Corporate Change in Control is determined to have occurred, and (iii) the occurrence of an Involuntary Employment Action; and
          (b) The Options or SARs so accelerated shall remain so exercisable until the earlier of the original expiration date of the Option or SAR and the earlier termination of the Option or SAR in accordance with the Plan and the Agreement.
     7.4 Transactional Changes in Control . For Options and SARs granted on or after January 18, 2001, unless the applicable Agreement provides otherwise, in the event of a

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Transactional Change in Control,
          (a) Each Option or SAR outstanding as of the date such Transactional Change in Control is determined to have occurred shall be (i) assumed by the successor corporation (or its parent) or replaced with a comparable option or stock appreciation right to purchase shares of the capital stock of the successor corporation (or its parent) on an equitable basis, (ii) terminated upon written notice to the Holders stating that all Options or SARs (for purposes of this clause (ii) all Options or SARs then outstanding shall be deemed to be exercisable) must be exercised within a specified number of days (which shall not be less than 15 days) from the date such notice is given, at the end of which period the Options or SARs shall terminate, or (iii) terminated in exchange for a cash payment equal to the excess of the Fair Market Value of the shares subject to such Options or SARs (for purposes of this clause (iii) all Options and SARs then outstanding shall be deemed to be exercisable) over the exercise price thereof; provided, however, that if any of the treatments of Options or SARs pursuant to this Plan set forth in clause (i), (ii) or (iii) above would make a Transactional Change in Control transaction ineligible for pooling-of-interest accounting under APB No. 16 such that but for the nature of such treatment such transaction would otherwise be eligible for such accounting treatment, the Board shall have the ability to substitute for any cash or other consideration payable under such treatment shares of Common Stock with a Fair Market Value or other consideration with value equal to the cash or other consideration that would otherwise be payable pursuant to such treatment. The determination of which of the treatments set forth in clauses (i), (ii) and (iii) above to provide and of comparability under clause (i) above shall be made by the Board and its determinations shall be final, binding and conclusive.
          (b) Each Option or SAR that is assumed or replaced in connection with a Transactional Change in Control shall automatically accelerate so that the Option or SAR shall become fully exercisable on the first to occur of (i) the date the Option or SAR becomes exercisable under its original terms (with respect only to such Options or SARs as otherwise would become exercisable during such one-year period under their terms), (ii) the first anniversary of the date such Transactional Change in Control is determined to have occurred, and (iii) the occurrence of an Involuntary Employment Action. The Options or SARs so accelerated shall remain so exercisable until the earlier of the original expiration date of the Option or SAR and the earlier termination of the Option or SAR in accordance with the Plan and the Agreement.
     7.5 Corporate Transaction . For Options and SARs granted on or after January 18, 2001, unless the applicable Agreement provides otherwise, in the event of a Corporate Transaction that does not constitute a Transactional Change in Control or in the event of a similar event, pursuant to which securities of the Company or of another corporation or entity are issued with respect to the outstanding shares of Common Stock, a Holder upon exercising an Option or SAR shall be entitled to receive for the purchase price paid under such exercise

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the securities which would have been received if such Option or SAR had been exercised prior to such Corporate Transaction.
     7.6 Dissolution or Liquidation of the Company . Upon the dissolution or liquidation of the Company, all Awards granted under this Plan which as of such date shall not have been exercised will terminate and become null and void; provided; however, that if the rights of a Holder have not otherwise terminated and expired, (i) the Holder will have the right immediately prior to such dissolution or liquidation to exercise any Option to the extent that the Option is exercisable as of the date immediately prior to such dissolution or liquidation; and (ii) if a Change in Control shall have occurred within the twelve months immediately prior to the date of such dissolution or liquidation such Holder will have the right immediately prior to such dissolution or liquidation to exercises any Option then outstanding whether or not such Option is exercisable as of such date.
8. TERMINATION OF EMPLOYMENT
     8.1. General . If a Holder’s employment shall terminate prior to the complete exercise of an Option (or deemed exercise thereof, as provided in Section 6.5(a)), then such Option shall thereafter be exercisable solely to the extent provided in the applicable Agreement; provided, however, that, unless the applicable Agreement provides otherwise, (a) no Option may be exercised after the scheduled expiration date of such Option; (b) if the Holder’s employment terminates by reason of Death, Disability or Total Disability, the Option shall remain exercisable for a period of at least one year following such termination (but not later than the scheduled expiration of such Option); and (c) any termination by the employing company for cause will be treated in accordance with the provisions of Section 8.2.
     8.2. Termination for Cause . If a Holder’s employment with the Company or any of its Subsidiaries or Affiliates shall be terminated for cause by the Company or such Subsidiary or Affiliate prior to the exercise of any Option, then unless the applicable Agreement provides otherwise, all Options held by such Holder and any permitted transferee pursuant to Section 6.6. shall terminate one month after the date of a termination for cause; provided, that if such termination for cause is for fraud, misappropriation or embezzlement, all Options shall terminate immediately. For the purposes of Options granted prior to January 18, 2001, cause (a) shall have the meaning provided for in any employment, advisory or consulting agreement to which such Holder and the Company or any Subsidiary or Affiliate are parties or (b) in the absence thereof, shall mean insubordination, dishonesty, incompetence, moral turpitude, other misconduct of any kind and the refusal to perform such Holder’s duties and responsibilities for any reason other than illness or incapacity, except that if the termination occurs within 12 months after an Approved Transaction, Control Purchase or Board Change, cause under this clause (b) shall mean only a felony conviction for fraud, misappropriation or embezzlement.

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For purposes of Options granted on or after January 18, 2001, except as otherwise provided in the applicable Agreement, (x) cause shall have the meaning provided for in any employment or consulting agreement to which the Holder and the Company or any Subsidiary or Affiliate are parties or (y) in the absence thereof, cause shall include (and is not limited to) dishonesty with respect to the Company or any Affiliate, insubordination, substantial malfeasance or non-feasance of duty, unauthorized disclosure of confidential information and conduct substantially prejudicial to the business of the Company or any Affiliate. For purposes of Options granted on or after January 18, 2001, cause is not limited to events which have occurred prior to a Holder’s termination of service, nor is it necessary that the Board’s finding of cause occur prior to termination but rather, if the Board determines, subsequent to a Holder’s termination of service but prior to the exercise of an Option, that either prior or subsequent to the Holder’s termination the Holder engaged in conduct which could constitute cause, then the right to exercise any Option is forfeited. The determination of the Board as to the existence of cause will be conclusive on the Holder and the Company.
     8.3. Special Rule . Notwithstanding any other provision of the Plan, the Board may provide in the applicable Agreement that the Award shall become and/or remain exercisable at rates and times at variance with the rules otherwise herein set forth; provided, however, that any such Agreement provisions at variance with the exercisability rules otherwise set forth herein shall be effective only if reflected in the terms of an employment agreement approved or ratified by the Board.
     8.4. Miscellaneous . The Board may determine whether any given leave of absence constitutes a termination of employment and may make other provisions in the applicable Agreement relating to leaves of absence. Awards made under the Plan shall not be affected by any change of employment so long as the Holder continues to be an employee of (a) for Options granted prior to January 18, 2001, the Company or one of its Subsidiaries and (b) for Options granted on or after January 18, 2001, the Company or one of its Affiliates.
9. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT
     Nothing contained in the Plan or in any Award shall confer on any Holder any right to continue in the employ of the Company or any of its Subsidiaries or Affiliates or interfere in any way with the right of the Company or a Subsidiary or Affiliate to terminate the employment of the Holder at any time, with or without cause; subject, however, to the provisions of any employment agreement between the Holder and the Company or any of its Subsidiaries or Affiliates.
10. NONALIENATION OF BENEFITS

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     Except as specifically provided in Section 6.6, no right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, hypothecation, pledge, exchange, transfer, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge the same shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefits.
11. WRITTEN AGREEMENT
     Each grant of an Option shall be evidenced by a stock option agreement and each SAR shall be evidenced by a stock appreciation rights agreement, each in such form and containing such terms and provisions not inconsistent with the provisions of the Plan as the Board from time to time shall approve; provided, however, that such Awards may be evidenced by a single agreement. The effective date of the granting of an Award shall be the date on which the Board approves such grant. Each grantee of an Option or SAR shall be notified promptly of such grant and a written Agreement shall be promptly executed and delivered by the Company and the grantee, provided that for Options granted prior to January 18, 2001, such grant of Options or SARs shall terminate if such written Agreement is not signed by such grantee (or his attorney) and delivered to the Company within 90 days after the date the Agreement is sent to such grantee for signature. Any such written Agreement may contain (but shall not be required to contain) such provisions as the Board deems appropriate to ensure that the penalty provisions of section 4999 of the Code will not apply to any stock or cash received by the Holder or such Holder’s permitted transferee pursuant to Section 6.6 from the Company or any of its Subsidiaries or Affiliates.
12. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
     12.1 Options Granted Prior to January 18, 2001 . The provisions of this Section 12.1 shall apply to Options and SARs granted prior to January 18, 2001. In the event of any stock split, dividend, distribution, combination, reclassification or recapitalization that changes the character or amount of the Common Stock while any portion of any Award theretofore granted under the Plan is outstanding but unexercised, the Board shall make such adjustments in the character and number of shares subject to such Award and, in the option price, as shall be applicable, equitable and appropriate in order to make such Award, immediately after any such change, as nearly as may be practicable, equivalent to such Award, immediately prior to any such change. If any merger, consolidation or similar transaction affects the Common Stock subject to any unexercised Award theretofore granted under the Plan, the Board or any surviving or acquiring corporation shall take such action as is equitable and appropriate to

16


 

substitute a new award for such Award or to assume such Award in order to make such new or assumed Award, as nearly as may be practicable, equivalent to the old Award. If any such change or transaction shall occur, the number and kind of shares for which Awards may thereafter be granted under the Plan shall be adjusted to give effect thereto.
     12.2 Options Granted On or After January 18, 2001 . The provisions of this Section 12.2 shall apply to Options and SARs granted on or after January 18, 2001. If (a) the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, or (b) additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of Common Stock, the number of shares of Common Stock deliverable upon the exercise of an Option or SAR may be appropriately increased or decreased proportionately, and appropriate adjustments may be made in the purchase price per share to reflect such subdivision, combination or stock dividend. The number of Shares subject to options to be granted pursuant to Section 3 of the Plan shall also be proportionately adjusted upon the occurrence of such events, except as the Board shall otherwise determine in its sole discretion.
13. RIGHT OF FIRST REFUSAL
     The Agreements may contain such provisions as the Board shall determine to the effect that if a Holder, or such other person exercising an Option, elects to sell all or any shares of Common Stock that such Holder or other person acquired upon the exercise of an Option awarded under the Plan, then such Holder or other person shall not sell such shares unless such Holder or other person shall have first offered in writing to sell such shares to the Company at Fair Market Value on a date specified in such offer (which date shall be at least three business days and not more than 10 business days following the date of such offer). In any such event, certificates (or other evidence of ownership) representing shares issued upon exercise of Options shall bear a restrictive legend to the effect that transferability of such shares are subject to the restrictions contained in the Plan and the applicable Agreement and the Company may cause the registrar of its Common Stock to place a stop transfer order with respect to such shares.
14. TERMINATION AND AMENDMENT
     14.1. General . Unless the Plan shall theretofore have been terminated as hereinafter provided, no Awards may be made under the Plan on or after the tenth anniversary of the Effective Date. The Board may at any time prior to the tenth anniversary of the Effective Date terminate the Plan, and the Board may at any time modify or amend the Plan in such respects as it shall deem advisable; provided, however, that any such modification or amendment shall

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comply with all applicable laws and stock exchange listing requirements.
     14.2. Modification . (a) The following provisions shall apply to Options and SARs granted prior to January 18, 2001. No termination, modification or amendment of the Plan may, without the consent of the person to whom any Award shall theretofore have been granted (or a transferee of such person if the Award, or any part thereof, has been transferred pursuant to Section 6.6), adversely affect the rights of such person with respect to such Award. No modification, extension, renewal or other change in any Award granted under the Plan shall be made after the grant of such Award, unless the same is consistent with the provisions of the Plan. With the consent of the Holder (or a transferee of such Holder if the Award, or any part thereof, has been transferred pursuant to Section 6.6) and subject to the terms and conditions of the Plan (including Section 14.1), the Board may amend outstanding Agreements with any Holder (or any such transferee), including, without limitation, any amendment which would (a) accelerate the time or times at which the Award may be exercised and/or (b) extend the scheduled expiration date of the Award. Without limiting the generality of the foregoing, the Board may but solely with the Holder’s consent, agree to cancel any Award under the Plan held by such Holder and issue a new Award in substitution therefor, provided that the Award so substituted shall satisfy all of the requirements of the Plan as of the date such new Award is made.
          (b) The following provisions shall apply to Options and SARs granted on or after January 18, 2001. The Plan may be amended by the Board, including, without limitation, to the extent necessary to qualify any or all outstanding Options granted under the Plan or Options to be granted under the Plan for favorable federal income tax treatment (including deferral of taxation upon exercise), for as long as the Company has a class of stock registered pursuant to Section 12 of the 1934 Act and to the extent necessary to qualify the shares issuable upon exercise of any outstanding Options granted, or Options to be granted, under the Plan for listing on any national securities exchange or quotation in any national automated quotation system of securities dealers. Any termination, modification or amendment of the Plan shall not, without the consent of a Holder (or a transferee of such Holder if the Award, or any part thereof, has been transferred pursuant to Section 6.6) materially adversely affect his or her rights under an Option or SAR previously granted to him or her. With the consent of the affected Holder or any such transferee, the Board may amend outstanding Agreements in a manner which may be materially adverse to the Holder but which is not inconsistent with the Plan. In the discretion of the Board, outstanding Agreements may be amended by the Board in a manner which is not materially adverse to the Holder or any such transferee.
15. EFFECTIVENESS OF THE PLAN
     The Plan shall become effective on November 18, 1993.

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16. GOVERNMENT AND OTHER REGULATIONS
     The obligation of the Company with respect to Awards shall be subject to all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required, including, without limitation, the effectiveness of any registration statement required under the Securities Act of 1933, and the rules and regulations of any securities exchange on which the Common Stock may be listed. For so long as the Common Stock is registered under the Exchange Act, the Company shall use its reasonable efforts to comply with any legal requirements (a) to maintain a registration statement in effect under the Securities Act of 1933 with respect to all shares of Common Stock that may be issued to Holders under the Plan, and (b) to file in a timely manner all reports required to be filed by it under the Exchange Act.
17. WITHHOLDING
     The Company’s obligation to deliver shares of Common Stock or pay cash in respect of any Award under the Plan shall be subject to applicable federal, state and local tax withholding requirements. Federal, state and local withholding taxes paid upon the exercise of any Option may be paid in shares of Common Stock upon such terms and conditions as the Board shall determine; provided, however, that the Board in its sole discretion may disapprove such payment and require that such taxes be paid in cash.
18. SEPARABILITY
     If any of the terms or provisions of this Plan conflict with the requirements of applicable law, then such terms or provisions shall be deemed inoperative to the extent necessary to avoid the conflict with applicable law without invalidating the remaining provisions hereof.
19. NON-EXCLUSIVITY OF THE PLAN
     The adoption of the Plan by the Board shall not be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options and the awarding of stock and cash otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases.

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20. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION
     By acceptance of an Award, each Holder shall be deemed to have agreed that such Award is special incentive compensation that will not be taken into account, in any manner, as salary, compensation or bonus in determining the amount of any payment under any pension, retirement or other employee benefit plan of the Company or any of its Subsidiaries or Affiliates. In addition, each beneficiary of a deceased Holder shall be deemed to have agreed that such Award will not affect the amount of any life insurance coverage, if any, provided by the Company or any of its Subsidiaries or Affiliates on the life of the Holder which is payable to such beneficiary under any life insurance plan covering employees of the Company or any of its Subsidiaries or Affiliates.
21. GOVERNING LAW
     The Plan shall be governed by, and construed in accordance with, the laws of the State of New York.
22. BENEFICIARIES
     The Holder’s beneficiary shall be his or her estate.
23. SECTION 409A
     Notwithstanding other provisions of the Plan or any Award agreements thereunder, no Award shall be granted, deferred, accelerated, extended, paid out or modified under this Plan in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon a participant. In the event that it is reasonably determined by the Committee that, as a result of Section 409A of the Code, payments in respect of any Award under the Plan may not be made at the time contemplated by the terms of the Plan or the relevant Award agreement, as the case may be, without causing the participant holding such Award to be subject to taxation under Section 409A of the Code, the Company will make such payment on the first day that would not result in the Participant incurring any tax liability under Section 409A of the Code; which, if the participant is a “specified employee” within the meaning of the Section 409A of the Code, shall be the first day following the six-month period beginning on the date of participant’s termination of Employment. The Company shall use commercially reasonable efforts to implement the provisions of this Section 24 in good faith; provided that neither the Company, nor the Committee, nor any of the Company’s employees, directors or

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representatives shall have any liability to Participants with respect to this Section 24.

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Exhibit 10.5
As Amended through
October 25, 2007
TIME WARNER INC.
1988 Restricted Stock and Restricted Stock Unit Plan For
Non-Employee Directors
          1.      PURPOSE . The purpose of the Plan is to supplement the compensation paid to Outside Directors and to increase their proprietary interest in the Company and their identification with the interests of the Company’s stockholders, by grants of annual awards with respect to Common Stock.
          2.      CERTAIN DEFINITIONS .
                    (a)      “Time Warner” shall mean Time Warner Inc. (formerly named AOL Time Warner Inc.), a Delaware corporation, and any successor thereto.
                    (b)      “Average Market Price” shall mean the average (rounded to the nearest cent) of the means between the high and low sales prices of a share of Common Stock as reported on the New York Stock Exchange Composite Tape for the ten consecutive trading days ending on the date of the annual meeting of stockholders of the Company for the year with respect to which an annual grant of Restricted Shares or Restricted Stock Units is made pursuant to paragraph 5 of the Plan.
                    (c)      “Board” shall mean the Board of Directors of the Company.
                    (d)      “Commission” shall mean the Securities and Exchange Commission.
                    (e)      “Common Stock” shall mean the Common Stock, par value $.01 per share, of the Company.
                    (f)      “Company” shall mean (i) with respect to periods prior to January 11, 2001, Historic TW Inc. (formerly named Time Warner Inc.) and (ii) with respect to periods on and after January 11, 2001, Time Warner.
                    (g)      “Grant Date” shall have the meaning set forth in paragraph 5 of the Plan.
                    (h)      “Outside Director” shall mean a member of the Board of Directors of the Company who, as of the close of business on the date of the annual meeting of stockholders of the Company, is not an employee of the Company or any subsidiary of the Company. For the purposes hereof, a “subsidiary” of the Company shall mean any corporation, partnership or other entity in which the Company owns, directly or indirectly, an equity interest of 50% or more.


 

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                    (i)      “Plan” shall mean this 1988 Restricted Stock and Restricted Stock Unit Plan for Non-Employee Directors of the Company.
                    (j)      “Retained Distributions” shall mean distributions which are retained by the Company pursuant to paragraph 6(b) and (c) of the Plan.
                    (k)      “Restricted Shares” shall mean shares of Common Stock granted to an Outside Director pursuant to paragraph 5 of the Plan.
                    (l)      “Restricted Stock Units” means a contingent obligation of the Company to deliver shares of Common Stock granted to an Outside Director pursuant to paragraph 5 of the Plan.
                    (m)      “Restriction Period” shall mean the period of time specified in paragraph 6(a) hereof applicable to all awards granted under the Plan.
          3.      SHARES SUBJECT TO THE PLAN . Subject to the provisions of paragraph 9 hereof, the maximum aggregate number of Restricted Shares and Restricted Stock Units which may be issued under the Plan in any calendar year, commencing with calendar year 1999, shall be equal to .003% of the shares of Common Stock outstanding on December 31 st of the preceding calendar year. Any Restricted Shares and Restricted Stock Units available for grant in any calendar year which are not granted in that calendar year shall not be available for grant in any subsequent calendar year and any Restricted Shares and Restricted Stock Units awarded in any calendar year that are forfeited by the terms of the Plan in any subsequent calendar year shall not again be available for awards. No fractional shares of Common Stock shall be granted or issued under the Plan.
          Shares utilized in respect of Restricted Shares or Restricted Stock Units may be, in whole or in part, authorized but unissued shares of Common Stock or shares of Common Stock previously issued and outstanding and reacquired by the Company.
          4.      ELIGIBILITY . Subject to the last sentence of paragraph 5 hereof, the only persons eligible to participate in the Plan shall be Outside Directors.
          5.       ANNUAL GRANTS . Subject to the provisions of paragraph 3 hereof, each Outside Director shall automatically be granted under the Plan, as of the conclusion of each annual meeting of stockholders of the Company (the “Grant Date”), (a) for Grant Dates occurring during calendar years 1990 through 1998, that number of Restricted Shares equal to $30,000 divided by the Average Market Price of the Common Stock on the Grant Date and (b) for Grant Dates occurring during calendar year 1999 and thereafter, that number of Restricted Shares or Restricted Stock Units, as determined by the Board prior to the Grant Date, as is equal to a dollar amount determined by the Board of Directors on or before the Grant Date divided by the Average Market Price of the Common Stock on the Grant Date, and except as hereinafter provided, the Company shall promptly thereafter issue such Restricted Shares or Restricted Stock Units, in each case without any further action required to be taken by the Board or any


 

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committee thereof. The Company shall not be required to issue fractions of Restricted Shares or Restricted Stock Units and in lieu thereof any fractional Restricted Share or Restricted Stock Unit shall be rounded up to the next whole number. Notwithstanding the foregoing, in the case of an Outside Director who, as of any Grant Date, has not continuously served as a member of the Board for a period of at least six consecutive months (a “new Outside Director”), the Restricted Shares or Restricted Stock Units granted to such new Outside Director on such Grant Date shall not be issued in such new Outside Director’s name until six months after such new Outside Director shall have first become a new Outside Director. An individual who shall become an Outside Director subsequent to the date of the annual meeting of stockholders of the Company for any year shall first become eligible to participate in the Plan commencing on the date of the next annual meeting of stockholders of the Company.
          6.      RESTRICTION PERIOD; RESTRICTIONS APPLICABLE TO RESTRICTED SHARES AND RESTRICTED STOCK UNITS; CERTIFICATES REPRESENTING RESTRICTED SHARES; DIVIDEND EQUIVALENTS APPLICABLE TO RESTRICTED STOCK UNITS .
                    (a) Restricted Shares and Restricted Stock Units granted to an Outside Director pursuant to the Plan shall be subject to the possibility of forfeiture for a period (the “Restriction Period”) commencing on the date such Restricted Shares or Restricted Stock Units shall have been granted to such Outside Director pursuant to paragraph 5 of the Plan and ending on the earliest of the following events:
                         (i)      (A) the date such Outside Director ceases to be a director of the Company by reason of mandatory retirement pursuant to any policy or plan of the Company applicable to Outside Directors, or (B) with respect to Restricted Stock Units only, the date such Outside Director ceases to be a director of the Company, provided the Outside Director has either (x) completed at least five years of service as a director, in the aggregate or (y) served as a director of the Company for at least five consecutive annual meetings of stockholders of the Company;
                         (ii)      the date such Outside Director, having been nominated for reelection, is not re-elected by the stockholders of the Company to serve as a member of the Board or, having been re-elected by fewer than a majority “for” votes of the votes cast by the stockholders at a stockholders’ meeting in an uncontested election of directors, the date such Outside Director’s offer to resign from the Board is accepted by the Board;
                         (iii)      the date of death of such Outside Director;
                         (iv)      the date such Outside Director terminates service on the Board on account of medical or health reasons which render such Outside Director unable to continue to serve as a member of the Board;


 

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                         (v)      the occurrence of a Change in Control of the Company (as defined in paragraph 6(c) below); or
                         (vi)      in each of the four years following the date of grant, on the first day of the month in which a grant of Restricted Shares or Restricted Stock Units was made to an Outside Director pursuant to paragraph 5 of the Plan with respect to 25% of the number of Restricted Shares or Restricted Stock Units in such grant, beginning with grants made in 2003;
provided , however , that, in the discretion of the Board on a case by case basis, the Restriction Period applicable to all Restricted Shares and Restricted Stock Units granted to an Outside Director shall end and be deemed completed for all purposes of the Plan in the event an Outside Director (a “withdrawing Outside Director”) terminates his or her service as a member of the Board (A) for reasons of personal or financial hardship; (B) to serve in any governmental, diplomatic or any other public service position or capacity; (C) to avoid or protect against a conflict of interest of any kind; (D) on the advice of legal counsel; or (E) for any other extraordinary circumstance that the Board determines to be comparable to the foregoing; provided that in the case of a Restricted Stock Unit, the payment of the shares shall not occur before the first date on which a payment could be made without subjecting the Outside Director to tax under the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). The withdrawing Outside Director shall abstain from participating in any determination made by the Board with respect to any matter relating to the foregoing.
                    (b)      Restricted Shares, when issued, will be represented by a stock certificate or certificates registered in the name of the Outside Director to whom such Restricted Shares shall have been granted. Each such certificate shall bear a legend in substantially the following form:
“The shares represented by this certificate are subject to the terms and conditions (including forfeiture and restrictions against transfer) contained in the Time Warner Inc. 1988 Restricted Stock and Restricted Stock Unit Plan for Non-Employee Directors. A copy of such Plan is on file in the Office of the Secretary of Time Warner Inc.”
                    Such certificates shall be deposited by such Outside Director with the Company, together with stock powers or other instruments of assignment, each endorsed in blank, which will permit transfer to the Company of all or any portion of the Restricted Shares and any securities constituting Retained Distributions that shall be forfeited or that shall not become vested in accordance with the Plan. Restricted Shares shall constitute issued and outstanding shares of Common Stock for all corporate purposes. The Outside Director will have the right to vote such Restricted Shares, to receive and retain all regular cash dividends paid on such Restricted Shares and to exercise all other rights, powers and privileges of a holder of Common Stock with respect to such Restricted Shares, with the exception that (i) the Outside Director will


 

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not be entitled to delivery of the stock certificate or certificates representing such Restricted Shares until the Restriction Period shall have expired and unless all other vesting requirements with respect thereto shall have been fulfilled; (ii) the Company will retain custody of the stock certificate or certificates representing the Restricted Shares during the Restriction Period; (iii) other than regular cash dividends, the Company will retain custody of all distributions (“Retained Distributions”) made or declared with respect to the Restricted Shares (and such Retained Distributions will be subject to the same restrictions, terms and conditions as are applicable to the Restricted Shares) until such time, if ever, as the Restricted Shares with respect to which such Retained Distributions shall have been made, paid or declared shall have become vested, and such Retained Distributions shall not bear interest or be segregated in separate accounts; (iv) an Outside Director may not sell, assign, transfer, pledge, exchange, encumber or dispose of any Restricted Shares or any Retained Distributions during the Restriction Period; and (v) a breach of any restrictions, terms or conditions provided in the Plan or established by the Board with respect to any Restricted Shares or Retained Distributions will cause a forfeiture of such Restricted Shares and any Retained Distributions with respect thereto.
                    (c)      If the Company shall pay any regular cash dividend on its shares of Common Stock, the Outside Director will have the right to receive and retain an amount equal to the dividends paid on the number of shares of Common Stock equal to the number of Restricted Stock Units held by the Outside Director on the dividend record date (“Dividend Equivalents”). If the Company shall pay any dividend other than a cash dividend on its shares of Common Stock, the Outside Director will not have the right to receive an amount equal or equivalent to such distribution with respect to the Restricted Stock Units outstanding on the record date for such distribution (the “RSU Retained Distribution”), but the Company will retain custody of such RSU Retained Distributions (and such RSU Retained Distributions will be subject to the same restrictions, terms and conditions as are applicable to the Restricted Stock Units) until such time, if ever, as the Restricted Stock Units with respect to which such RSU Retained Distributions shall relate shall have become vested, and such RSU Retained Distributions shall not bear interest or be segregated in separate accounts. An Outside Director may not sell, assign, transfer, pledge, exchange, encumber or dispose of any Restricted Stock Units or any RSU Retained Distributions during the Restriction Period. A breach of any restrictions, terms or conditions provided in the Plan or established by the Board with respect to any Restricted Stock Units will cause a forfeiture of such Restricted Stock Units and any RSU Retained Distributions with respect thereto. Notwithstanding anything else contained in this paragraph 6(c), no payment of Dividend Equivalents or RSU Retained Distributions to an Outside Director shall occur before the first date on which a payment could be made without subjecting the Outside Director to tax under the provisions of Section 409A of the Code.
                    (d)      A Change in Control means the occurrence of any of the following events:
                    (i) any “Person” within the meaning of Section 13(d)(3) or 14(d)(2) of the Act (other than the Company or any company owned, directly or indirectly, by the shareholders of the Company in substantially the same


 

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proportions as their ownership of stock of the Company) becomes the “Beneficial Owner” within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) of 30% or more of the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors; excluding , however , any circumstance in which such beneficial ownership resulted from any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or by any corporation controlling, controlled by, or under common control with, the Company;
          (ii) a change in the composition of the Board since October 25, 2007 (the “Initial Date”), such that the individuals who, as of such date, constituted the Board (the “ Incumbent Board ”) cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company subsequent to the Initial Date whose election, or nomination for election by the Company’s stockholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed a member of the Incumbent Board; and provided further , that any individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-12 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any person or entity other than the Board shall not be deemed a member of the Incumbent Board;
          (iii) a reorganization, recapitalization, merger or consolidation (a “ Corporate Transaction ”) involving the Company, unless securities representing 60% or more of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the Company or the corporation resulting from such Corporate Transaction (or the parent of such corporation) are held subsequent to such transaction by the person or persons who were the beneficial holders of the outstanding voting securities entitled to vote generally in the election of directors of the Company immediately prior to such Corporate Transaction, in substantially the same proportions as their ownership immediately prior to such Corporate Transaction; or
          (iv) the sale, transfer or other disposition of all or substantially all of the assets of the Company.


 

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          7.      COMPLETION OF RESTRICTION PERIOD; FORFEITURE . Upon the completion of the Restriction Period with respect to Restricted Shares or Restricted Stock Units of an Outside Director, and the satisfaction of any other applicable restrictions, terms and conditions, such Restricted Shares issued to such Outside Director and any Retained Distributions with respect to such Restricted Shares shall become vested and shares of Common Stock subject to Restricted Stock Units shall be thereafter delivered to the Outside Director. The Company shall promptly thereafter issue and deliver to the Outside Director new stock certificates or instruments representing the Restricted Shares and any other Retained Distributions related to such Restricted Shares registered in the name of the Outside Director or, if deceased, his or her legatee, personal representative or distributee, which do not contain the legend set forth in paragraph 6(b) hereof.
                    If an Outside Director ceases to be a member of the Board for any reason other than as set forth in clauses (i) through (v) of paragraph 6(a) hereof or as the Board may otherwise approve in accordance with paragraph 6(a), then those Restricted Shares and Restricted Stock Units granted to such Outside Director and all Retained Distributions with respect to the Restricted Shares or Restricted Stock Units that have not satisfied the Restriction Period because the time periods set forth in clause (vi) of paragraph 6(a) have not passed, shall be forfeited to the Company, and the Outside Director shall not thereafter have any rights (including dividend and voting rights) with respect to such Restricted Shares, Restricted Stock Units and Retained Distributions with respect thereto.
          8.       STATEMENT OF ACCOUNT . Each Outside Director shall receive an annual statement, on or about June 1st, showing the number of Restricted Shares and Restricted Stock Units granted to such Outside Director for that year and the aggregate number of Restricted Shares and Restricted Stock Units that have been granted to such Outside Director under the Plan in or after 2003.
          9.       ADJUSTMENT IN EVENT OF CHANGES IN COMMON STOCK . In the event of a recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation or liquidation or the like, the aggregate number and class of Restricted Shares and Restricted Stock Units available for grant under the Plan and the number and character of shares subject to any outstanding award thereunder shall be appropriately adjusted by the Board, whose determination shall be conclusive.
          10.      NO RIGHT TO NOMINATION . Nothing contained in the Plan shall confer upon any Outside Director the right to be nominated for reelection to the Board.
          11.      NONALIENATION OF BENEFITS . No right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, hypothecation, pledge, exchange, transfer, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge the same shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefit. If any Outside Director or beneficiary hereunder should become


 

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bankrupt or attempt to anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge any right or benefit hereunder, then such right or benefit shall, in the discretion of the Board, cease and terminate, and in such event, the Board in its discretion may hold or apply the same or any part thereof for the benefit of the Outside Director, his or her beneficiary, spouse, children or other dependents, or any of them, in such manner and in such proportion as the Board may deem proper.
          12.      APPOINTMENT OF ATTORNEY-IN-FACT . Upon the issuance of any Restricted Shares hereunder and the delivery by an Outside Director of the stock power referred to in paragraph 6(b) hereof, such Outside Director shall be deemed to have appointed the Company, its successors and assigns, the attorney-in-fact of the Outside Director, with full power of substitution, for the purpose of carrying out the provisions of this Plan and taking any action and executing any instruments which such attorney-in-fact may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact shall be irrevocable and coupled with an interest. The Company as attorney-in-fact for the Outside Director may in the name and stead of the Outside Director make and execute all conveyances, assignments and transfers of the Restricted Shares and Retained Distributions deposited with the Company pursuant to paragraph 6(b) of the Plan and the Outside Director hereby ratifies and confirms all that the Company, as said attorney-in-fact, shall do by virtue thereof.
                    Nevertheless, the Outside Director shall, if so requested by the Company, execute and deliver to the Company all such instruments as may, in the judgment of the Company, be advisable for the purpose.
          13.      SECTION 4999 RULES . Notwithstanding any provisions to the contrary contained in the Plan, if the Payment (as hereinafter defined) due to the Outside Director hereunder upon the occurrence of a Change in Control of the Company would be subject to the excise tax imposed by Section 4999 (or any successor thereto) of the Code, then any such Payment hereunder payable to the Outside Director shall be reduced to the largest amount that will result in no portion of the aggregate of the Payments from the Company being subject to such excise tax. The term “Payment” shall mean any transfer of property within the meaning of Section 280G (or any successor thereto) of the Code.
                    The determination of any reduction in Payments under the Plan shall be made by the Outside Director in good faith, and such determination shall be conclusive and binding on the Company. The Outside Director shall have the right to determine the extent to which the aggregate amount of any such reduction shall be applied against any cash or any shares of stock of the Company or any other securities or property to which the Outside Director would otherwise have been entitled under the Plan, the extent to which the Payments hereunder and any other payments due to the Outside Director from the Company shall be reduced, and whether to waive the right to the acceleration of any portion of the Payment due hereunder or otherwise due to the Outside Director from the Company, and any such determination shall be conclusive and binding on the Company. To the extent that Payments hereunder are not paid as a consequence of the limitation contained in this paragraph 13, then the Restricted Shares, Restricted Stock


 

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Units and Retained Distributions not so accelerated shall be deemed to remain outstanding and shall be subject to the provisions of the Plan as if no acceleration had occurred.
                    If (a) the Company shall make any Payments pursuant to the Plan to the Outside Director, (b) an excise tax under Section 4999 (or any successor thereto) of the Code is in fact paid by the Outside Director (or is claimed by the Internal Revenue Service to be due) as a result of any such Payment, either alone or together with any other Payments received or to be received by the Outside Director from the Company, and (c) if nationally recognized counsel to the Outside Director or the Company shall have given an opinion of counsel that repayment of all or a portion of such Payments would result in such excise tax being refunded to the Outside Director (or, if not paid, in such excise tax not being imposed), then the Outside Director shall repay to the Company all or such portion of such Payments so that such excise tax will be refunded (or will not apply).
                    The Company shall pay all legal fees and expenses which the Outside Director may incur in any contest of the Outside Director’s interpretation of, or determinations under, the provisions of this paragraph 13.
          14.      WITHHOLDING TAXES .
                    (a)      At the time any Restricted Shares or Retained Distributions become vested, or amounts become payable pursuant to a Restricted Stock Unit, each Outside Director shall pay to the Company the amount of any Federal, state or local taxes of any kind required by law to be withheld with respect thereto.
                    (b)      If an Outside Director properly elects (which, apart from any other notice required by law, shall require that the Outside Director notify the Company of such election at the time it is made) within 30 days after the Company grants Restricted Shares to an Outside Director to include in gross income for Federal income tax purposes an amount equal to the fair market value of such Restricted Shares at the Grant Date, he or she shall pay to the Company at the time of such election the amount of any Federal, state or local taxes required to be withheld with respect to such Restricted Shares.
                    (c)      If an Outside Director shall fail to make the payments required hereunder, the Company shall, to the extent permitted by law, have the right to deduct from any payment of any kind otherwise due to such Outside Director any Federal, state or local taxes of any kind required by law to be withheld with respect to such Restricted Shares and Restricted Stock Units.
          15.      AMENDMENT AND TERMINATION OF PLAN . The Plan shall have a term of 10 years from the date stockholder approval regarding the Plan was last obtained and, therefore, the Plan shall terminate on May 19, 2009, and no further Restricted Shares or Restricted Stock Units may be granted pursuant to the Plan after that date. The Board may terminate the Plan at any time prior to such termination date and may make such amendments to the Plan as it shall deem advisable; provided , however , that no termination or amendment of the


 

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Plan shall adversely affect the right of any Outside Director (without his or her consent) under any grant previously made and any amendment shall comply with all applicable laws and regulations and stock exchange listing requirements.
          16.      GOVERNMENT AND OTHER REGULATIONS . Notwithstanding any other provisions of the Plan, the obligations of the Company with respect to Restricted Shares and Restricted Stock Units shall be subject to all applicable laws, rules and regulations, and such approvals by any governmental agencies as may be required or deemed appropriate by the Company. The Company reserves the right to delay or restrict, in whole or in part, the issuance or delivery of Common Stock pursuant to any grants of Restricted Shares or Restricted Stock Units under the Plan until such time as:
                    (a) any legal requirements or regulations shall have been met relating to the issuance of such shares or to their registration, qualification or exemption from registration or qualification under the Securities Act of 1933 or any applicable state securities laws; and
                    (b) satisfactory assurances shall have been received that such shares when delivered will be duly listed on any applicable stock exchange.
          17.      NONEXCLUSIVITY OF PLAN . Neither the adoption of the Plan by the Board nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including without limitation, the awarding of stock otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases.
          18.       GOVERNING LAW . The Plan shall be governed by, and construed in accordance with, the laws of the State of New York.
          19.       EFFECTIVE DATE OF THE PLAN . The Plan shall become effective on a date which is the latter of (i) the date the Plan is approved by the stockholders of the Company entitled to vote at the annual meeting of stockholders of the Company to be held in 1988, or any adjournment thereof; and (ii) the date on which the Company receives a favorable interpretative letter from the Commission to the effect that (x) the grant of Restricted Shares under the Plan is exempt from the operation of Section 16(b) of the Exchange Act and (y) Outside Directors who receive Restricted Shares under the Plan will continue to be “disinterested persons” within the meaning of Rule 16b-3 under the Exchange Act with respect to administration of the Company’s other stock related plans in which only employees of the Company (including officers, whether or not they are directors) and its subsidiaries may participate.
          20.      BENEFICIARIES . The Outside Director’s beneficiary in the event of his or her death shall be his or her estate.


 

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          21.       SECTION 409A.
                    Notwithstanding other provisions of the Plan or any award agreements thereunder, no award shall be granted, deferred, accelerated, extended, paid out or modified under this Plan in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon a participant. In the event that it is reasonably determined by the Board that, as a result of Section 409A of the Code, payments in respect of any award under the Plan may not be made at the time contemplated by the terms of the Plan or the relevant award agreement, as the case may be, without causing the participant holding such award to be subject to taxation under Section 409A of the Code, the Company will make such payment on the first day that would not result in the participant incurring any tax liability under Section 409A of the Code; which, if the participant is a “specified employee” within the meaning of the Section 409A, shall be the first day following the six-month period beginning on the date of participant’s termination of Employment. The Company shall use commercially reasonable efforts to implement the provisions of this Section 21 in good faith; provided that neither the Company, nor the Board, nor any of the Company’s employees, directors or representatives, shall have any liability to participants with respect to this Section 21.

 

 

Exhibit 10.6
Time Warner Inc. 2003 Stock Incentive Plan
RSU Agreement, Version 1
For Use from October 2007
Restricted Stock Units Agreement
General Terms and Conditions
          WHEREAS, the Company has adopted the Plan (as defined below), the terms of which are hereby incorporated by reference and made a part of this Agreement; and
          WHEREAS, the Committee has determined that it would be in the best interests of the Company and its stockholders to grant the restricted stock units (the “ RSUs ”) provided for herein to the Participant pursuant to the Plan and the terms set forth herein.
          NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows:
1.   Definitions . Whenever the following terms are used in this Agreement, they shall have the meanings set forth below. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.
  a)   Cause means, “Cause” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there is no such agreement, “Cause” means (i) Participant’s continued failure substantially to perform such Participant’s duties (other than as a result of total or partial incapacity due to physical or mental illness) for a period of ten (10) days following written notice by the Company or any of its Affiliates to the Participant of such failure, (ii) dishonesty in the performance of the Participant’s duties, (iii) Participant’s conviction of, or plea of nolo contendere to, a crime constituting (A) a felony under the laws of the United States or any state thereof or (B) a misdemeanor involving moral turpitude, (iv) Participant’s insubordination, willful malfeasance or willful misconduct in connection with Participant’s duties or any act or omission which is injurious to the financial condition or business reputation of the Company or any of its Affiliates, or (v) Participant’s breach of any non-competition, non-solicitation or confidentiality provisions to which the Participant is subject. The determination of the Committee as to the existence of “Cause” will be conclusive on the Participant and the Company.
 
  b)   Disability means, “Disability” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there shall be no such agreement, “disability” of the Participant shall have the meaning ascribed to such term in the Company’s long-term disability plan or policy, as in effect from time to time, to the extent that such definition also constitutes such Participant being considered “disabled” under Section 409A(a)(2)(C) of the Code.
 
  c)   Good Reason ” means “Good Reason” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined

 


 

      therein or if there is no such agreement, “Good Reason” means (i) the failure of the Company to pay or cause to be paid the Participant’s base salary or annual bonus when due or (ii) any substantial and sustained diminution in the Participant’s authority or responsibilities materially inconsistent with the Participant’s position; provided that either of the events described in clauses (i) and (ii) will constitute Good Reason only if the Company fails to cure such event within 30 days after receipt from the Participant of written notice of the event which constitutes Good Reason; provided , further , that “Good Reason” will cease to exist for an event on the sixtieth (60 th ) day following the later of its occurrence or the Participant’s knowledge thereof, unless the Participant has given the Company written notice of his or her termination of employment for Good Reason prior to such date.
 
  d)   Plan means the Time Warner Inc. 2003 Stock Incentive Plan, as the same may be amended, supplemented or modified from time to time.
 
  e)   Retirement ” means a voluntary termination of employment by the Participant (i) following the attainment of age 55 with ten (10) or more years of service as an employee or a director with the Company or any Affiliate or (ii) pursuant to the retirement plan or program of the Company or any Affiliate that is applicable to the Participant.
 
  f)   Severance Period ” means the period of time following a termination of Employment during which a Participant is entitled to receive both salary continuation payments and continued participation under the health benefit plans of the Company or any of its Affiliates, whether pursuant to an employment contract with, or a severance plan or other arrangement maintained by, the Company or any Affiliate. For the avoidance of doubt, unless otherwise determined by the Committee, the Severance Period shall not include any time period following the date on which a Participant commences employment with a subsequent employer that is not an Affiliate, regardless of whether the Participant continues to receive salary continuation payments from the Company or any Affiliate after such date.
 
  g)   Vesting Date ” means each vesting date set forth in the Notice.
2.   Grant of Restricted Stock Units . The Company hereby grants to the Participant (the “ Award ”), on the terms and conditions hereinafter set forth, the number of RSUs set forth on the Notice of Grant of Restricted Stock Units (the “ Notice ”). Each RSU represents the unfunded, unsecured right of the Participant to receive a Share on the date(s) specified herein. RSUs do not constitute issued and outstanding shares of Common Stock for any corporate purposes and do not confer on the Participant any right to vote on matters that are submitted to a vote of holders of Shares.
 
3.   Dividend Equivalents and Retained Distributions . If on any date while RSUs are outstanding hereunder the Company shall pay any regular cash dividend on the Shares, the Participant shall be paid, for each RSU held by the Participant on the record date, an

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amount of cash equal to the dividend paid on a Share (the “ Dividend Equivalents ”) at the time that such dividends are paid to holders of Shares. If on any date while RSUs are outstanding hereunder the Company shall pay any dividend other than a regular cash dividend or make any other distribution on the Shares, the Participant shall be credited with a bookkeeping entry equivalent to such dividend or distribution for each RSU held by the Participant on the record date for such dividend or distribution, but the Company shall retain custody of all such dividends and distributions unless the Board has in its sole discretion determined that an amount equivalent to such dividend or distribution shall be paid currently to the Participant (the “ Retained Distributions ”); provided , however , that if the Retained Distribution relates to a dividend paid in Shares, the Participant shall receive an additional amount of RSUs equal to the product of (I) the aggregate number of RSUs held by the Participant pursuant to this Agreement through the related dividend record date, multiplied by (II) the number of Shares (including any fraction thereof) payable as a dividend on a Share. Retained Distributions will not bear interest and will be subject to the same restrictions as the RSUs to which they relate. Notwithstanding anything else contained in this paragraph 3, no payment of Dividend Equivalents or Retained Distributions shall occur before the first date on which a payment could be made without subjecting the Participant to tax under the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”).
4.   Vesting and Delivery of Vested Securities .
  a)   Subject to the terms and provisions of the Plan and this Agreement, no later than 60 days after each Vesting Date with respect to the Award, the Company shall issue or transfer to the Participant the number of Shares corresponding to such Vesting Date and the Retained Distributions, if any, covered by that portion of the Award. Except as otherwise provided in paragraphs 6 and 7, the vesting of such RSUs and any Retained Distributions relating thereto shall occur only if the Participant has continued in Employment of the Company or any of its Affiliates on the Vesting Date and has continuously been so employed since the Date of Grant (as defined in the Notice).
 
  b)   RSUs Extinguished . Upon each issuance or transfer of Shares in accordance with this Agreement, a number of RSUs equal to the number of Shares issued or transferred to the Participant shall be extinguished and such number of RSUs will not be considered to be held by the Participant for any purpose.
 
  c)   Final Issuance . Upon the final issuance or transfer of Shares and Retained Distributions, if any, to the Participant pursuant to this Agreement, in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share.
 
  d)   Section 409A . Notwithstanding anything else contained in this Agreement, no Shares shall be issued or transferred to a Participant before the first date on which a payment could be made without subjecting the Participant to tax under the provisions of Section 409A of the Code.

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5.   Termination of Employment .
  (a)   If the Participant’s Employment with the Company and its Affiliates is terminated by the Participant for any reason other than those described in clauses (b) and (c) below prior to the Vesting Date with respect to any portion of the Award, then the RSUs covered by any such portion of the Award and all Retained Distributions relating thereto shall be completely forfeited on the date of any such termination, unless otherwise provided in an employment agreement between the Participant and the Company or an Affiliate.
 
  (b)   If the Participant’s Employment terminates (i) as a result of his or her death or Disability or (ii) as a result of his or her Retirement or is terminated by the Company and its Affiliates for any reason other than for Cause on a date when the Participant satisfies the requirements for Retirement, then the RSUs for which a Vesting Date has not yet occurred and all Retained Distributions relating thereto shall, to the extent the RSUs were not extinguished prior to such termination of Employment, fully vest on the date of any such termination and Shares subject to the RSUs shall be issued or transferred to the Participant, as soon as practicable, but no later than 90 days following such termination of Employment.
 
  (c)   If the Participant’s Employment is terminated by the Company and its Affiliates for any reason other than for Cause (unless such termination is due to death or Disability), then a pro rata portion of the RSUs that were scheduled to vest on the next Vesting Date, and on any subsequent Vesting Dates that occur during a Severance Period, and any Retained Distributions relating thereto, shall, to the extent the RSUs were not extinguished prior to such termination of Employment, become vested, and Shares subject to such RSUs shall be issued or transferred to the Participant on each such Vesting Date following such termination of Employment, determined as follows:
  (x)   the number of RSUs covered by the portion of the Award that were scheduled to vest on such Vesting Date multiplied by;
  (y)   a fraction, the numerator of which shall be the number of days from the last Vesting Date (or the Date of Grant if there was no prior Vesting Date) during which the Participant either remained in Employment or was within a covered Severance Period, and the denominator of which shall be the number of days from the last Vesting Date (or the Date of Grant if there was no prior Vesting Date).
If the product of (x) and (y) results in a fractional share, such fractional share shall be rounded to the next higher whole share.

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The RSUs and any Retained Distributions related thereto that have not vested shall be completely forfeited on the date of any such termination.
For purposes of this paragraph 5, a temporary leave of absence shall not constitute a termination of Employment or a failure to be continuously employed by the Company or any Affiliate regardless of the Participant’s payroll status during such leave of absence if such leave of absence is approved in writing by the Company or any Affiliate; provided, that such leave of absence constitutes a bona fide leave of absence and not a Separation From Service under Treas. Reg. 1.409A-1(h)(1)(i). Notice of any such approved leave of absence should be sent to the Company at One Time Warner Center, New York, New York 10019, attention: Director, Global Stock Plans Administration, but such notice shall not be required for the leave of absence to be considered approved.
In the event the Participant’s Employment with the Company or any of its
Affiliates is terminated, the Participant shall have no claim against the Company with respect to the RSUs and related Retained Distributions, if any, other than as set forth in this paragraph 5, the provisions of this paragraph 5 being the sole remedy of the Participant with respect thereto.
6.   Acceleration of Vesting Date . In the event a Change in Control, subject to paragraph 7, has occurred, to the extent that any such occurrence also constitutes a change in ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company, within the meaning of Section 409A(a)(2)(A)(v) of the Code (a “409A Change of Control Event”), (A) the Award will vest in full upon the earlier of (i) the expiration of the one-year period immediately following the Change in Control, provided the Participant’s Employment with the Company and its Affiliates has not terminated, (ii) the original Vesting Date with respect to each portion of the Award, or (iii) the termination of the Participant’s Employment by the Company or any of its Affiliates (I) by the Company other than for Cause (unless such termination is due to death or Disability) or (II) by the Participant for Good Reason and (B) Shares subject to the RSUs shall be issued or transferred to the Participant, as soon as practicable, but in no event later than 60 days following such Vesting Date, along with the Retained Distributions related thereto; provided, however, that notwithstanding the foregoing, to the extent that any such occurrence does not constitute a 409A Change of Control Event, the RSUs shall vest as described under this paragraph 6, but the issuance of Shares shall be made at the times otherwise provided hereunder as if no Change of Control had occurred. In the event of any such vesting as described in clauses (i) and (iii) of the preceding sentence, the date described in such clauses shall be treated as the Vesting Date.
7.   Limitation on Acceleration . Notwithstanding any provision to the contrary in the Plan or this Agreement, if the Payment (as hereinafter defined) due to the Participant hereunder as a result of the acceleration of vesting of the RSUs pursuant to paragraph 6 of this Agreement, either alone or together with all other Payments received or to be received by the Participant from the Company or any of its Affiliates (collectively, the “ Aggregate Payments ”), or any portion thereof, would be subject to the excise tax

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imposed by Section 4999 of the Code (or any successor thereto), the following provisions shall apply:
  a)   If the net amount that would be retained by the Participant after all taxes on the Aggregate Payments are paid would be greater than the net amount that would be retained by the Participant after all taxes are paid if the Aggregate Payments were limited to the largest amount that would result in no portion of the Aggregate Payments being subject to such excise tax, the Participant shall be entitled to receive the Aggregate Payments.
 
  b)   If, however, the net amount that would be retained by the Participant after all taxes were paid would be greater if the Aggregate Payments were limited to the largest amount that would result in no portion of the Aggregate Payments being subject to such excise tax, the Aggregate Payments to which the Participant is entitled shall be reduced to such largest amount.
The term “ Payment ” shall mean any transfer of property within the meaning of Section 280G of the Code.
The determination of whether any reduction of Aggregate Payments is required and the timing and method of any such required reduction in Payments under this Agreement or in any such other Payments otherwise payable by the Company or any of its Affiliates consistent with any such required reduction, shall be made by the Participant, including whether any portion of such reduction shall be applied against any cash or any shares of stock of the Company or any other securities or property to which the Participant would otherwise have been entitled under this Agreement or under any such other Payments, and whether to waive the right to the acceleration of the Payment due under this Agreement or any portion thereof or under any such other Payments or portions thereof, and all such determinations shall be conclusive and binding on the Company and its Affiliates. To the extent that Payments hereunder or any such other Payments are not paid as a consequence of the limitation contained in this paragraph 7, then the RSUs and Retained Distributions related thereto (to the extent not so accelerated) and such other Payments (to the extent not vested) shall be deemed to remain outstanding and shall be subject to the provisions hereof and of the Plan as if no acceleration or vesting had occurred. Under such circumstances, if the Participant terminates Employment for Good Reason or is terminated by the Company or any of its Affiliates without Cause, the RSUs and Retained Distributions related thereto (to the extent that they have not already become vested) shall become immediately vested in their entirety upon such termination and Shares subject to the RSUs shall be issued or transferred to the Participant, as soon as practicable following such termination of Employment, subject to the provisions relating to Section 4999 of the Code set forth herein.
The Company shall promptly pay, upon demand by the Participant, all legal fees, court costs, fees of experts and other costs and expenses which the Participant incurred in any actual, threatened or contemplated contest of the Participant’s interpretation of, or determination under, the provisions of this paragraph 7.

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8.   Withholding Taxes . The Participant agrees that,
  a)   Obligation to Pay Withholding Taxes . Upon the payment of any Dividend Equivalents and the vesting of any portion of the Award of RSUs and the Retained Distributions relating thereto, the Participant will be required to pay to the Company any applicable Federal, state, local or foreign withholding tax due as a result of such payment or vesting. The Company’s obligation to deliver the Shares subject to the RSUs or to pay any Dividend Equivalents or Retained Distributions shall be subject to such payment. The Company and its Affiliates shall, to the extent permitted by law, have the right to deduct from the Dividend Equivalent, Shares issued in connection with the vesting or Retained Distribution, as applicable, or any payment of any kind otherwise due to the Participant any Federal, state, local or foreign withholding taxes due with respect to such vesting or payment.
 
  b)   Payment of Taxes with Stock . Subject to the Committee’s right to disapprove any such election and require the Participant to pay the required withholding tax in cash, the Participant shall have the right to elect to pay the required withholding tax associated with a vesting with Shares to be received upon vesting. Unless the Company shall permit another valuation method to be elected by the Participant, Shares used to pay any required withholding taxes shall be valued at the average of the high and low sales price of a Share on the New York Stock Exchange on the date the withholding tax becomes due (hereinafter called the “Tax Date”). Notwithstanding anything herein to the contrary, if a Participant who is required to pay the required withholding tax in cash fails to do so within the time period established by the Company, then the Participant shall be deemed to have elected to pay such withholding taxes with Shares to be received upon vesting. Elections must be made in conformity with conditions established by the Committee from time to time
 
  c)   Conditions to Payment of Taxes with Stock . Any election to pay withholding taxes with stock must be made on or prior to the Tax Date and will be irrevocable once made.
9.   Changes in Capitalization and Government and Other Regulations . The Award shall be subject to all of the terms and provisions as provided in this Agreement and in the Plan, which are incorporated by reference herein and made a part hereof, including, without limitation, the provisions of Section 10 of the Plan (generally relating to adjustments to the number of Shares subject to the Award, upon certain changes in capitalization and certain reorganizations and other transactions).
10.   Forfeiture . A breach of any of the foregoing restrictions or a breach of any of the other restrictions, terms and conditions of the Plan or this Agreement, with respect to any of the RSUs or any Dividend Equivalents and Retained Distributions relating thereto, except as

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waived by the Board or the Committee, will cause a forfeiture of such RSUs and any Dividend Equivalents or Retained Distributions relating thereto.
11.   Right of Company to Terminate Employment . Nothing contained in the Plan or this Agreement shall confer on any Participant any right to continue in the employ of the Company or any of its Affiliates and the Company and any such Affiliate shall have the right to terminate the Employment of the Participant at any such time, with or without cause, notwithstanding the fact that some or all of the RSUs and related Retained Distributions covered by this Agreement may be forfeited as a result of such termination. The granting of the RSUs under this Agreement shall not confer on the Participant any right to any future Awards under the Plan.
 
12.   Notices . Any notice which either party hereto may be required or permitted to give the other shall be in writing and may be delivered personally or by mail, postage prepaid, addressed to Time Warner Inc., at One Time Warner Center, New York, NY 10019, attention Director, Global Stock Plans Administration, and to the Participant at his or her address, as it is shown on the records of the Company or its Affiliate, or in either case to such other address as the Company or the Participant, as the case may be, by notice to the other may designate in writing from time to time.
 
13.   Interpretation and Amendments . The Board and the Committee (to the extent delegated by the Board) have plenary authority to interpret this Agreement and the Plan, to prescribe, amend and rescind rules relating thereto and to make all other determinations in connection with the administration of the Plan. The Board or the Committee may from time to time modify or amend this Agreement in accordance with the provisions of the Plan, provided that no such amendment shall adversely affect the rights of the Participant under this Agreement without his or her consent.
 
14.   Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and shall be binding upon and inure to the benefit of the Participant and his or her legatees, distributees and personal representatives.
 
15.   Copy of the Plan . By entering into the Agreement, the Participant agrees and acknowledges that he or she has received and read a copy of the Plan.
 
16.   Governing Law . The Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without regard to any choice of law rules thereof which might apply the laws of any other jurisdiction.
 
17.   Waiver of Jury Trial . To the extent not prohibited by applicable law which cannot be waived, each party hereto hereby waives, and covenants that it will not assert (whether as plaintiff, defendant or otherwise), any right to trial by jury in any forum in respect of any suit, action, or other proceeding arising out of or based upon this Agreement.

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18.   Submission to Jurisdiction; Service of Process . Each of the parties hereto hereby irrevocably submits to the jurisdiction of the state courts of the State of New York and the jurisdiction of the United States District Court for the Southern District of New York for the purposes of any suit, action or other proceeding arising out of or based upon this Agreement. Each of the parties hereto to the extent permitted by applicable law hereby waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding brought in such courts, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that such suit, action or proceeding in the above-referenced courts is brought in an inconvenient forum, that the venue of such suit, action or proceedings, is improper or that this Agreement may not be enforced in or by such court. Each of the parties hereto hereby consents to service of process by mail at its address to which notices are to be given pursuant to paragraph 12 hereof.
19.   Personal Data . The Company, the Participant’s local employer and the local employer’s parent company or companies may hold, collect, use, process and transfer, in electronic or other form, certain personal information about the Participant for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. Participant understands that the following personal information is required for the above named purposes: his/her name, home address and telephone number, office address (including department and employing entity) and telephone number, e-mail address, date of birth, citizenship, country of residence at the time of grant, work location country, system employee ID, employee local ID, employment status (including international status code), supervisor (if applicable), job code, title, salary, bonus target and bonuses paid (if applicable), termination date and reason, tax payer’s identification number, tax equalization code, US Green Card holder status, contract type (single/dual/multi), any shares of stock or directorships held in the Company, details of all grants of RSUs (including number of grants, grant dates, vesting type, vesting dates, and any other information regarding RSUs that have been granted, canceled, vested, or forfeited) with respect to the Participant, estimated tax withholding rate, brokerage account number (if applicable), and brokerage fees (the “ Data ”). Participant understands that Data may be collected from the Participant directly or, on Company’s request, from Participant’s local employer. Participant understands that Data may be transferred to third parties assisting the Company in the implementation, administration and management of the Plan, including the brokers approved by the Company, the broker selected by the Participant from among such Company-approved brokers (if applicable), tax consultants and the Company’s software providers (the “ Data Recipients ”). Participant understands that some of these Data Recipients may be located outside the Participant’s country of residence, and that the Data Recipient’s country may have different data privacy laws and protections than the Participant’s country of residence. Participant understands that the Data Recipients will receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of Shares on the Participant’s behalf by a broker or other third party with whom the Participant may elect to deposit any Shares acquired pursuant

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to the Plan. Participant understands that Data will be held only as long as necessary to implement, administer and manage the Participant’s participation in the Plan. Participant understands that Data may also be made available to public authorities as required by law, e.g., to the U.S. government. Participant understands that the Participant may, at any time, review Data and may provide updated Data or corrections to the Data by written notice to the Company. Except to the extent the collection, use, processing or transfer of Data is required by law, Participant may object to the collection, use, processing or transfer of Data by contacting the Company in writing. Participant understands that such objection may affect his/her ability to participate in the Plan. Participant understands that he/she may contact the Company’s Stock Plan Administration to obtain more information on the consequences of such objection.

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Exhibit 10.7
TIME WARNER INC.
DEFERRED COMPENSATION PLAN
(Amended and Restated as of January 1, 2005)
ARTICLE I
ESTABLISHMENT OF THE PLAN
      1.1   Establishment of Plan. Time Warner Inc. established this plan effective as of November 18, 1998, to be known as the Time Warner Inc. Deferred Compensation Plan. Effective January 11, 2001 AOL Time Warner Inc. (the “Company”) became the plan sponsor and the plan was renamed the AOL Time Warner Inc. Deferred Compensation Plan (the “Plan”). The Plan was initially amended and restated effective as of August 1, 2001. Effective October 16, 2003, AOL Time Warner Inc. was renamed Time Warner Inc. and effective January 1, 2004 the name of the Plan was amended to be the Time Warner Inc. Deferred Compensation Plan. The Plan has been further amended and restated effective as of January 1, 2005.
      1.2   Purpose of Plan. The Plan is intended to be an unfunded, non-qualified deferred compensation plan maintained to provide deferred compensation for a select group of management or highly compensated employees under Section 201(2) of the Employee Retirement Income Security Act of 1974, by providing Eligible Employees a means of irrevocably deferring to a future Year the receipt of certain compensation from Employing Companies in excess of the Compensation Limit.
      1.3   Applicability of Plan. The provisions of the Plan as currently amended and restated are applicable only to amounts deferred under the Plan on or after January 1, 2005. All amounts deferred under the Plan on or prior to December 31, 2004 shall remain subject to the terms of the Plan as in effect on October 3, 2004.
ARTICLE II
DEFINITIONS
      2.1   Definitions. Whenever used in the Plan, the following terms shall have the respective meanings set forth below unless otherwise expressly provided, and when the defined meaning is intended, the term is capitalized.
      2.2   Administrative Committee: The Administrative Committee as provided for herein.
      2.3   Affiliate: An Employing Company and any entity affiliated with the Employing Company within the meaning of Code Section 414(b), with respect to controlled groups of corporations, Section 414(c) with respect to trades or businesses under common control with the Employing Company, and Section 414(m) with respect to affiliated service groups, and any other

 


 

entity required to be aggregated with an Employing Company pursuant to regulations under Section 414(o) of the Code.
      2.4   Assistant Benefits Officer: The Assistant Benefits Officer provided for herein.
      2.5   Beneficiary: The person or persons designated from time to time by a Participant or Inactive Participant, by notice to the Benefits Officer, to receive any benefits payable under the Plan after his or her death, which designation has not been revoked by notice to the Benefits Officer at the date of the Participant’s or Inactive Participant’s death. Such notice shall be in a form as required by the Benefits Officer or acceptable to such officer which is properly completed and delivered to the Benefits Officer or such officer’s designee. Notice to the Benefits Officer shall be deemed to have been given when it is actually received by or on behalf of such officer.
      2.6   Benefits Officer: The Benefits Officer as provided for herein.
      2.7   Board: The Board of Directors of the Company or a committee thereof authorized to act in the name of the Board.
      2.8   Code: The Internal Revenue Code of 1986, as amended.
      2.9   Company: Time Warner Inc. or any successor thereto.
      2.10   Compensation Limit: The compensation limit of Section 401(a)(17) of the Code, as adjusted under Section 401(a)(17)(B) of the Code for increases in the cost of living.
      2.11   Deferred Compensation Account: The separate account established under Article V of the Plan for each Participant and Inactive Participant representing amounts deferred by a Participant pursuant to Article III.
      2.12   Disability: Permanent and total disability as determined by the Social Security Administration or any disability for which a Participant is receiving monthly benefits under the provisions of the Time Warner Long Term Disability Plan or, in the case of an employee covered by a long term disability plan of an Affiliate, under the provisions of such plan, whichever shall occur first, to the extent that such definition also constitutes such Participant being considered “disabled” under Section 409A(a)(2)(C) of the Code.
      2.13   Eligible Employee: An individual who meets the eligibility requirements of Section 3.1.
      2.14   Employee: An individual employed by an Employing Company.
      2.15   Employing Company: The Company and each Affiliate which has been authorized by the Benefits Officer to participate in the Plan and has adopted the Plan.
      2.16   ERISA: The Employee Retirement Income Security Act of 1974, as amended.

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      2.17   Inactive Participant: A Participant who has had a Separation From Service with the Company and any Affiliate and whose Deferred Compensation Account has not been fully distributed.
      2.18   Investment Committee: The Investment Committee as provided for herein.
      2.19   Investment Direction: A Participant’s or Inactive Participant’s direction to the recordkeeper of the Plan, in the form and manner prescribed by the Benefits Officer, in accordance with directions made by telephone, through the intranet of the applicable Employing Company or through the Internet, directing which Investment Funds will be credited with his or her deferrals and transfers of all or part of the deferred amounts and any earnings thereon from other Investment Funds and certain employment agreements, as provided for herein.
      2.20   Investment Funds: The hypothetical investment funds, as determined from time to time by the Board or the Investment Committee.
      2.21   Participant: Each Employee who participates in the Plan in accordance with the terms and conditions of the Plan.
      2.22   Plan: This Plan, the Time Warner Inc. Deferred Compensation Plan, as set forth herein and as it may be amended from time to time.
      2.23   Separation From Service: The term used to indicate a termination of employment with an Employing Company that also constitutes a “separation from service” under Section 409A(a)(2)(A)(i) of the Code; provided, however, that for purposes for determining the controlled group of entities comprising the Participant’s employer under Treas. Reg. 1.409A-1(h)(3), the determination shall be made pursuant to the test for controlled groups under Section 414(b) and (c) of the Code, using a common control ownership threshold of “at least 80%” ownership, rather than “at least 50%” ownership.
      2.24   Valuation Date: With respect to the Investment Funds, each business day when the New York Stock Exchange is open.
      2.25   Year: A calendar year.
ARTICLE III
PARTICIPANT DEFERRALS
      3.1   Eligibility. The Employees who shall be eligible to make deferral elections under the Plan are those salaried officers and other key employees of an Employing Company who at the time of a deferral election pursuant to Section 3.3 below:
  (i)   are on a regular periodic U.S. payroll of the Employing Company; and
 
  (ii)   have a current base salary plus bonus in excess of, or projected to be in excess of, the Compensation Limit or are otherwise designated as eligible by the Benefits Officer. For purposes of this subsection 3.1(ii), “bonus”

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      means any annual bonus (paid or deferred) pursuant to a regular program (but excluding long-term cash incentive plan payments other than those specified in Section 3.5 and commission, spot and similar bonuses) for the Year preceding the current Year, except that, in the case of a deferral election to be made by a newly hired Employee (which election shall be made available at the sole discretion of the Employing Company), with respect to a bonus to be earned in (A) the current Year, “bonus” means the target or otherwise estimated bonus for that portion of the current Year after the date of his or her hire, and (B) the Year following hire, “bonus” means the target or otherwise estimated bonus for the current Year.
     The Benefits Officer may, from time to time, modify the above eligibility requirements and make such additional or other requirements for eligibility as such officer may determine.
      3.2   Compensation Eligible for Deferral. (a)  An Eligible Employee may elect to defer receipt of all or a specified portion of any bonus, but only to the extent the receipt thereof would cause the Eligible Employee’s compensation to exceed the Compensation Limit. Each such deferral may be expressed as a percentage, in 10% increments only, but in no event shall any election result in a deferral of less than $5,000. The Eligible Employee may elect to have the designated percentage apply only to that portion of the bonus in excess of a certain dollar amount that he or she specifies when making the election. For purposes of this Section 3.2, “bonus” means any annual bonus earned by such Eligible Employee in respect of services performed in a Year payable pursuant to a regular program and signing bonuses (but excluding long-term cash incentive plan payments other than those specified in Section 3.5 and commission, spot and similar bonuses) and which would otherwise be payable in cash to an Eligible Employee for services as an Employee. In lieu of designating a percentage, the Eligible Employee may elect to have a specific dollar amount of the bonus deferred or may make such other deferral election as may be approved from time to time by the Benefits Officer.
          (b)   An Eligible Employee whose compensation is payable under an employment agreement with an Employing Company which provides for deferred compensation may elect to defer such deferred compensation under the Plan, subject to the terms of such agreement. Any such deferral so elected shall be made in the same manner as provided for in subsection (a). Notwithstanding the foregoing, any compensation previously deferred under an employment agreement shall be subject to deferral under the Plan only as provided for in Section 3.6. An Eligible Employee’s employment agreement with the Company or another Employing Company may also provide for a mandatory deferral of certain compensation under the Plan.
          (c)   An Employing Company may designate a special bonus to be paid to an Eligible Employee under an agreement with such employee as eligible for deferral, subject to the terms of such agreement. Any such deferral so elected shall be made in the same manner as provided for in subsection (a).
          (d)   Whenever any compensation eligible for deferral under the Plan is also eligible for deferral, in whole or part, under any other deferred compensation plan (such as an excess 401(k) plan), the amount of such compensation eligible for deferral under the Plan shall be net of any amount elected for deferral under the other plan.

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      3.3   Deferral Elections. (a)  An Eligible Employee with the consent of the Benefits Officer may annually make an irrevocable election to defer under the Plan certain compensation described in Section 3.2 and participate herein by timely delivering a properly executed election to the Benefits Officer or such officer’s designee on a form prescribed by the Benefits Officer. The election form shall specify with respect to the compensation to be deferred under the Plan for the Year, pursuant to the provisions of Section 3.2 and Article V:
  (i)   the percentage of the bonus or compensation specified in Section 3.2 (b) to be deferred or the specific dollar amount to be deferred (provided, however, that if such specific dollar amount exceeds the amount eligible for deferral, no deferral shall be made); and
 
  (ii)   the time for the commencement of payment of the deferred compensation, which must be either on account of a Separation From Service or at an in-service Year to be specified by the Eligible Employee. Compensation which is to be deferred to an in-service payment date must be deferred for no fewer than three Years following the Year in which it was earned.
 
  (b)   A deferral election shall apply only with respect to the Year for which it is made and shall not continue in effect for any subsequent Year.
      3.4   Effective Date of Election. (a)  An election to defer compensation under the Plan must be received by or on behalf of the Benefits Officer on or prior to December 31 of the Year preceding that in which the services related to the compensation will be performed, at which time it shall become irrevocable (subject to any re-deferral elections made pursuant to Section 5.3); provided, however, that in the case of any compensation that constitutes “performance-based compensation” within the meaning of Treas. Reg. § 1.409A-1(e), the Benefits Officer may permit a Participant to make a deferral election with respect to such compensation until the date that is six months prior to the end of the applicable performance period, to the extent permitted under Treas. Reg. § 1.409A-2(a)(8).
          (b)   Notwithstanding the deferral election deadlines specified in subsection (a) above, the Benefits Officer may prescribe an earlier or later date by which time an Eligible Employee must elect to defer such compensation to the extent permitted under Section 409A of the Code and any regulations or other guidance promulgated thereunder from time to time.
          (c)   Under no circumstances may an Eligible Employee at any time defer compensation to which he or she has attained a legally enforceable right to receive currently.
      3.5   Certain Incentive Plans. Notwithstanding anything to the contrary herein, the term “bonus” wherever used in this Article III shall include any amounts payable to Eligible Employees under a long-term incentive plan (“LTIP”) of the Company or an Affiliate, which provides under the terms of the LTIP for an election to defer payments thereunder into the Plan. Any such elections pursuant to this Section shall be made in accordance with Section 3.4.
      3.6   Transfers. Each Eligible Employee, whose compensation is payable under an employment agreement with an Employing Company which provides for deferred compensation,

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may elect to have transferred to and deferred under his or her Deferred Compensation Account in the Plan the balance, in whole or in part, of the compensation previously deferred under such agreement, subject to the terms thereof. Such an election can be made at any time, but only once in the Eligible Employee’s lifetime. Notwithstanding the foregoing, an Eligible Employee who has made an election to defer compensation under an employment agreement may, prior to the date that such compensation would be payable but for such election, make a subsequent election directing that the deferral be made under the Plan instead of under the employment agreement.
ARTICLE IV
DEFERRED COMPENSATION ACCOUNT
      4.1   Deferred Compensation Account. (a)  A Deferred Compensation Account shall be established for each Participant who makes a deferral election pursuant to Article III. A Participant’s or Inactive Participant’s Deferred Compensation Account shall consist of the compensation deferred by a Participant in any Year under the Plan, increased or decreased by any gains or losses thereon.
          (b)   The Company shall maintain the Deferred Compensation Accounts of all Participants and Inactive Participants.
          (c)   All payments made under the Plan shall be made directly by the Company from its general assets subject to the claims of any creditors and no deferred compensation under the Plan shall be segregated or earmarked or held in trust. The Plan is an unfunded and unsecured contractual obligation of the Company. Participants, Inactive Participants and Beneficiaries shall be unsecured creditors of the Company with respect to all obligations owed to them under the Plan. Participants, Inactive Participants and Beneficiaries shall not have any interest in any fund or specific asset of the Company by reason of any amount credited to a Deferred Compensation Account, nor shall any such person have any right to receive any distribution under the Plan except as explicitly stated herein. The Company shall not designate any funds or assets to specifically provide for the distribution of the value of a Deferred Compensation Account or issue any notes or security for the payment thereof. Any asset or reserve that the Company may purchase or establish shall not serve as security to Participants, Inactive Participants and Beneficiaries for the performance of the Company under the Plan.
      4.2   Hypothetical Investment. (a)  For crediting rate purposes, amounts credited to a Participant’s or Inactive Participant’s Deferred Compensation Account shall be deemed to be invested according to his or her Investment Direction in one or more of all of the similarly named funds (both core funds and mutual funds in the mutual funds option) offered under the Time Warner Defined Contribution Plans Master Trust. For any period, the deemed return on each of these Investment Funds shall be the same as the return for such period on each similarly named fund offered under such master trust.
          (b)   Notwithstanding anything to the contrary herein, the Company, by action of the Investment Committee or the Board, may add to, decrease or change the Investment Funds offered under the Plan, at any time and for any reason. Participants, Inactive Participants and Beneficiaries shall not have the right to continue any particular deferral option.

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          (c)   The Company shall be under no obligation to invest amounts corresponding to any deferral options chosen by Participants or Inactive Participants. Any such allocation to any Deferred Compensation Account shall be made solely for the purpose of determining the value of such account under the Plan.
      4.3   Investment Direction. Deferrals shall be credited to the Investment Funds in accordance with a Participant’s or Inactive Participant’s Investment Direction. A Participant or Inactive Participant shall direct that his or her deferrals be applied, in multiples of one percent, to deemed investments in any or all of the Investment Funds.
      4.4   Changes in Investment Direction. A Participant or Inactive Participant may make one Investment Direction in each calendar quarter, with respect to each of new deferrals and previous deferrals and any earnings thereon; provided, however, that one additional Investment Direction may be made in each calendar quarter in which any Investment Fund is made available, or ceases to be available, as provided for in Section 2.20, with respect to each of new deferrals and previous deferrals and any earnings thereon.
      4.5   Manner of Hypothetical Investment. (a)  For purposes of the hypothetical investment under Section 4.2, deferred compensation shall be considered to be invested on the date the recordkeeper of the Plan records the deferral amount.
          (b)   As of each Valuation Date, the recordkeeper of the Plan shall determine the value of each Participant’s, Inactive Participant’s or Beneficiary’s Deferred Compensation Account.
          (c)   For purposes of distribution pursuant to Article V, the balance of each Deferred Compensation Account shall be valued as of the Valuation Date immediately preceding the date that the Committee commences the processing of the distribution of the balance of such account, or the particular installment thereof.
      4.6   Participant Assumes Risk of Loss. Each Participant, Inactive Participant and Beneficiary assumes the risk in connection with any decrease in value of his or her Deferred Compensation Account deemed invested in the Investment Funds.
      4.7   Statement of Account. A statement of account shall be made available through the recordkeeper’s website and may be viewed and printed by a Participant or Inactive Participant at any time. Upon request, as soon as reasonably practicable after the end of each calendar quarter, a statement of account shall be sent to each Participant and Inactive Participant with respect to the value of his or her Deferred Compensation Account as of the end of such quarter.
ARTICLE V
PAYMENT OF DEFERRED COMPENSATION ACCOUNT
      5.1   Payment on Account of Separation From Service for Reasons other than Death or Disability. (a)  In the event of the Participant’s Separation From Service for reasons other than death or Disability, the Participant’s Deferred Compensation Account shall be distributed to

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him or her in ten annual installment payments, unless otherwise elected pursuant to the Participant’s deferral election(s) made hereunder.
          (b)   Notwithstanding any other provision of this Section 5.1, if the value of the Participant’s Deferred Compensation Account together with amounts deferred under any other nonqualified deferred compensation plan that is aggregated with the Plan under Treas. Reg. § 1.409A-1(c)(2) are less than or equal to the applicable dollar amount under Section 402(g)(1)(B) of the Code (determined as of December 31 of the Year in which he or she has the Separation From Service), payment shall be made in a lump sum.
          (c)   The first installment, or lump sum, as the case may be, shall be distributed as soon as practicable on or after April 1 (and in any event, no later than December 31) of the Year following the Year in which the Participant has a Separation From Service. Subsequent annual installment payments shall be distributed as soon as practicable on or after each following April 1 (and in any event, no later than each following December 31).
      5.2   Payment on Account of Disability. (a)  In the event a Participant meets the definition of Disability, the value of the Participant’s Deferred Compensation Account shall be distributed to him or her in five annual installment payments.
          (b)   Notwithstanding subsection (a) above, if the value of the Participant’s Deferred Compensation Account together with amounts deferred under any other nonqualified deferred compensation plan that is aggregated with the Plan under Treas. Reg. § 1.409A-1(c)(2) are less than the applicable dollar amount under Section 402(g)(1)(B) of the Code as of the Valuation Date immediately prior to the date the definition of Disability is met, payment shall be made in a lump sum.
          (c)   The first installment, or lump sum, as the case may be, shall be distributed as soon as practicable on or after April 1 (and in any event, no later than December 31) of the Year following the Year during which the Participant has met the definition of Disability. Subsequent annual installment payments shall be distributed as soon as practicable on or after each following April 1 (and in any event, no later than each following December 31).
          (d)   The payment schedule described under Section 5.2(c) shall not be affected by any subsequent changes to the Participant’s Disability status following the initial occurrence of the Participant’s Disability.
      5.3   In-Service Payments; Re-deferral Elections. (a)  An in-service payment elected by a Participant pursuant to Section 3.3(ii) shall be distributed in a lump sum as soon as practicable on or after April 1 (and in any event, no later than December 31) in the Year specified by the Participant.
          (b)   Notwithstanding subsection (a) above, a Participant may request, by delivering written notice to the Benefits Officer on a form prescribed by such officer prior to the date that is 12 months preceding the date on which the in-service payment is to be made, that the Benefits Officer, in such officer’s sole and absolute discretion, defer such payment until such later Year as the Participant requests. Any such additional deferral (i) must be for at least 5 full Years beyond the date the in-service payment was previously scheduled to be made, (ii) must be

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for the current value of the whole amount originally deferred, (iii) can only be made five times with respect to any in-service payment, (iv) may not take effect until at least twelve (12) months after the date on which such additional deferral election is made, and (v) shall be distributed in a lump sum as soon as practicable on or after April 1 (and in any event, no later than December 31) in the Year specified by the Participant.
          (c)   Notwithstanding the forgoing, the Benefits Officer may, in such officer’s sole and absolute discretion, permit Participants to change their deferral elections under the Plan without meeting the conditions set forth above provided that such deferral election changes comply with Section 409A of the Code or the transitional relief rules promulgated by the Treasury Department thereunder. In the event of a Participant’s Separation From Service for any reason prior to the time any in-service payment under this Section 5.3 would have been made, distribution of such payment shall be made according to the manner of payment specified in Section 5.1, 5.2, or 5.4, based on the Participant’s actual reason for Separation From Service.
      5.4   Payment to Beneficiary or Estate in the Event of Death. Notwithstanding the provisions for payment described in Sections 5.1 through 5.3 above, in the event of the death of a Participant or Inactive Participant before the distribution of his or her Deferred Compensation Account has commenced, or before such account has been fully distributed, the value of such account shall be determined as of the Valuation Date coincident with or immediately prior to the date that the Benefits Officer commences the processing of the distribution, after both a written notice of his or her death and a death certificate have been received by the Benefits Officer. Such account shall be distributed in a lump sum as soon as practicable to the Participant’s or Inactive Participant’s Beneficiary (or, if no person has been designated or if no person so designated survives the Participant or Inactive Participant, to such Participant’s or Inactive Participant’s estate or if such Beneficiary survives the Participant or Inactive Participant, but dies prior to payment, to such Beneficiary’s estate) prior to the end of the Year of the Participant’s or Inactive Participant’s death (or within 90 days after the date of death, if later). In case any Participant or Inactive Participant and his or her Beneficiary die in or as a result of a common accident or disaster and under such circumstances as to make it impossible to determine which of them was the last to die, the Participant or Inactive Participant shall be deemed to have survived his or her Beneficiary. Distributions hereunder shall be subject to such administrative and procedural requirements and forms as the Benefits Officer in such officer’s discretion may require.
      5.5   Severe Unforeseeable Financial Emergency Payments. Notwithstanding any other provisions of the Plan, a Participant or Inactive Participant may make an application to the Benefits Officer that he or she has a severe unforeseeable financial emergency; to the extent that such severe unforeseeable financial emergency also constitutes an “unforeseeable emergency” under Section 409A(a)(2)(B)(ii) of the Code. After consideration of the application, and a determination that such an emergency exists, the Benefits Officer shall direct that all or a portion of the balance of such individual’s Deferred Compensation Account be paid to him or her in such manner and at such time as the Benefits Officer shall specify; provided, that such amount shall be limited to the amount reasonably necessary to satisfy the emergency need, to the extent permitted under Section 409A(a)(2)(B)(ii) of the Code.

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      5.6   Incapacity. The Benefits Officer may direct that any amounts distributable under the Plan to a person under a legal disability be made to (and be withheld until the appointment of) a representative qualified pursuant to law to receive such payment on such person’s behalf.
      5.7   Method of Paying Installments. Installment payments as provided for in this Article V shall be paid on each payment date in an amount equal to the value of the Deferred Compensation Account on such payment date multiplied by a fraction, the numerator of which is one (1) and the denominator of which is the number of Years remaining in the period of installment payments elected by the Participant.
      5.8   Payments Only in Cash. All payments under the Plan shall be made only in cash.
      5.9   Rehire of Inactive Participant. If an Inactive Participant returns to work with the Company or an Affiliate, distribution of his or her remaining Deferred Compensation Account with respect to amounts deferred prior to the date of the Separation From Service shall continue to be made as if the Inactive Participant has not returned to work.
      5.10   Election Changes Pursuant to Transition Relief Rules Under Code Section 409A . To the extent permitted by the Committee or the Benefits Officer, Participants may elect to amend their deferral election to provide that a greater portion (or all) of the Participant’s bonus or long term incentive plan award amounts will be paid to the Participant in a subsequent year upon the regularly scheduled bonus or long term incentive plan award payment dates, in each case, in a manner consistent with the transition relief rules promulgated by the Treasury Department under Section 409A of the Code and pursuant to the terms established by the Benefits Officer.
ARTICLE VI
ADMINISTRATION
      6.1   The Administrative Committee; Appointment. The Plan shall be administered by a Administrative Committee, consisting of not less than three members to be appointed from time to time by the Board. The members of the Administrative Committee shall serve at the pleasure of, and may be removed by the Board at any time. Any member of the Administrative Committee may resign at any time by giving notice to the Board or to the President of the Company. Any such resignation shall take effect at the date of receipt of such notice or at any later date specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. No member of the Administrative Committee shall receive any compensation for his or her services as such. Participants and Inactive Participants may be members of the Administrative Committee but may not participate in any decision affecting their own account in any case where the Administrative Committee may take discretionary action under Article V.
      6.2   Quorum and Actions of Administrative Committee. A majority of the members of the Administrative Committee at the time in office shall constitute a quorum for the transaction of business. All resolutions or other action taken by the Administrative Committee

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shall be by vote of a majority of its members present at any meeting or, without a meeting, by instrument in writing signed by all its members. Members of the Administrative Committee may participate in a meeting of such Administrative Committee by means of a conference telephone or similar communications equipment that enables all persons participating in the meeting to hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
      6.3   Plan Administrator. The Administrative Committee shall be the administrator of the Plan and shall have all powers necessary to administer the Plan, including discretionary authority to determine eligibility for benefits and to decide claims under the terms of the Plan, except to the extent that any such powers are vested in any other fiduciary by the Plan or by the Administrative Committee. The Administrative Committee may from time to time establish rules for the administration of the Plan, and it shall have the exclusive right to interpret the Plan to decide any matters arising in connection with the administration and operation of the Plan. All its rules, interpretations and decisions shall be conclusive and binding on the Employing Companies and on Eligible Employees, Participants, Inactive Participants and Beneficiaries.
     The Administrative Committee may delegate any of its powers or duties to others as it shall determine and may retain counsel, agents and such clerical and accounting services as it may require in carrying out the provisions of the Plan.
      6.4   Reliance on Information. The Administrative Committee and the Investment Committee (as described below) may rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel, recordkeeper or other person who is employed or engaged for any purpose in connection with the administration of the Plan.
     Neither the Administrative Committee or Investment Committee nor any member of the Board or the board of directors (or governing body) of an Affiliate and no employee of the Company or any Affiliate shall be liable for any act or action hereunder, whether of omission or commission, by any other member or employee or by any agent to whom duties in connection with the administration of the Plan have been delegated or for anything done or omitted to be done in connection with the Plan.
      6.5   Committee Records. The Administrative Committee shall keep a record of all its proceedings and of all payments directed by it to be made to Participants, Inactive Participants or Beneficiaries or payments made by it for expenses or otherwise.
      6.6   The Benefits Officer; Appointment. The Benefits Officer shall be appointed by the Chief Executive Officer of the Company and may be removed by the Chief Executive Officer. The Benefits Officer may not serve concurrently on the Administrative Committee or the Investment Committee. The Benefits Officer may resign at any time by giving notice to the Chief Executive Officer of the Company. Any such resignation shall take effect at the date of receipt of such notice or at any later date specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. A Participant may be appointed as the Benefits Officer. The Benefits Officer shall not receive compensation for his or her services as such.

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      6.7   Delegation of Duties. The Benefits Officer may authorize others to execute or deliver any instrument or to make any payment in his or her behalf and may delegate any of his or her powers or duties to others as he or she shall determine, including the delegation of such powers and duties to an Assistant Benefits Officer who shall be appointed by the Benefits Officer. In the event of such delegation, the Assistant Benefits Officer shall for all purposes of the Plan be considered the Benefits Officer and all references to the Benefits Officer shall be deemed to be references to such Assistant Benefits Officer when acting in such capacity. The Benefits Officer and the Assistant Benefits Officer may retain such counsel, agents and clerical, medical, accounting and actuarial services as they may require in carrying out their functions.
      6.8   Benefits Officer; Settlor and Ministerial Functions. The Benefits Officer shall have the duty to execute settlor and ministerial functions on behalf of the Company, including, without limitation, amending and modifying the terms of the Plan and performing ministerial functions with respect to the Plan, except to the extent specifically limited by resolution of the Board or by the terms herein. The Benefits Officer shall have solely ministerial and settlor functions, and shall have no fiduciary authority, obligations or status with respect to the Plan, such as, without limitation, authority or discretion to interpret or administer the Plan, set investment policy with respect to the Plan, or resolve factual disputes arising in connection with the interpretation, administration and operation of the Plan, and all such fiduciary authority, obligations and status shall be retained by the Administrative Committee and Investment Committee as set forth herein, and the Benefits Officer will present any issues related to such authority, obligations or status to the Administrative Committee for its resolution.
      6.9   Investment Committee; Appointment. An Investment Committee, consisting of three or more persons, shall be appointed from time to time by the Board. The members of the Investment Committee shall serve at the pleasure of, and may be removed by the Board at any time. Any member of the Investment Committee may resign at any time by giving notice to the Board or to the President of the Company. Any such resignation shall take effect at the date of receipt of such notice or at any later date specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Participants may be members of the Investment Committee. Unless otherwise directed by the Board, and except as may be required under ERISA, no bond or other security shall be required of any members of the Investment Committee as such. No member of the Investment Committee shall receive compensation for his services as such.
      6.10   Quorum and Actions of Investment Committee. A majority of the members of the Investment Committee at the time in office shall constitute a quorum for the transaction of business. All resolutions or other action taken by the Investment Committee shall be by vote of a majority of its members present at any meeting or, without a meeting, by instrument in writing signed by all its members. Members of the Investment Committee may participate in a meeting of such Investment Committee by means of a conference telephone or similar communications equipment that enables all persons participating in the meeting to hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
      6.11   Investment Committee Chairman; Delegation by Investment Committee. The members of the Investment Committee shall elect one of their number as chairman and may elect a secretary who may, but need not, be one of their number. The Investment Committee may

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delegate any of its powers or duties among its members or to others as it shall determine. It may authorize one or more of its members to execute or deliver any instrument or to make any payment in its behalf. It may employ such counsel, agents and clerical, accounting, actuarial and recordkeeping services as it may require in carrying out the provisions of the Plan.
      6.12   Investment Policy. The Board shall have the authority to establish the overall investment policy for the Plan and may delegate such responsibility to the Investment Committee. The Investment Committee shall take all prudent action necessary or desirable for the purpose of carrying out the foregoing.
      6.13   Indemnification. The Company shall, to the fullest extent permitted by law, indemnify each director, officer or employee of the Company or any Affiliate (including the heirs, executors, administrators and other personal representatives of such person) and each member of the Administrative Committee, Investment Committee and Benefits Officer against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred by such person in connection with any threatened, pending or actual suit, action or proceeding (whether civil, criminal, administrative or investigative in nature or otherwise) in which such person may be involved by reason of the fact that he or she is or was serving any employee benefit plans of the Company or any Affiliate in any capacity at the request of such company.
      6.14   Expenses of Administration. Any expense incurred by the Company, the Administrative Committee, the Investment Committee or the Benefits Officer relative to the administration of the Plan shall be paid by the Employing Companies in such proportions as the Company may direct.
ARTICLE VII
CLAIMS PROCEDURE
      7.1   Participant or Beneficiary Request for Claim. Any request for a benefit payable under the Plan shall be made in writing by a Participant or Beneficiary (or an authorized representative of any of them), as the case may be, and shall be delivered to any member of the Administrative Committee. Such written request shall be deemed filed upon receipt thereof by the Administrative Committee. Such request shall be made within one year after the claimant first knew or should have known that he had a claim for benefits under the Plan.
      7.2   Insufficiency of Information. In the event a request for benefits contains insufficient information, the Administrative Committee shall, within a reasonable period after receipt of such request, send a written notification to the claimant setting forth a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material is necessary. The claimant’s request shall be deemed filed with the Administrative Committee on the date the Administrative Committee receives in writing such additional information.
      7.3   Request Notification. The Administrative Committee shall make a determination with respect to a request for benefits within ninety (90) days after such request is filed (or within

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such extended period prescribed below). The Administrative Committee shall notify the claimant whether his claim has been granted or whether it has been denied in whole or in part. Such notification shall be in writing and shall be delivered, by mail or otherwise, to the claimant within the time period described above. If the claim is denied in whole or in part, the written notification shall set forth, in a manner calculated to be understood by the claimant:
  (i)   The specific reason or reasons for the denial;
 
  (ii)   Specific reference to pertinent provisions of the Plan on which the denial is based; and
 
  (iii)   An explanation of the Plan’s claim review procedure.
          Failure by the Administrative Committee to give notification pursuant to this Section within the time prescribed shall be deemed a denial of the request for the purpose of proceeding to the review stage.
      7.4   Extensions. If special circumstances require an extension of time for processing the claim, the Administrative Committee shall furnish the claimant with written notice of such extension. Such notice shall be furnished prior to the termination of the initial ninety (90)-day period and shall set forth the special circumstances requiring the extension and the date by which the Administrative Committee expects to render its decision. In no event shall such extension exceed a period of ninety (90) days from the end of such initial ninety (90)-day period.
      7.5   Claim Review. A claimant whose request for benefits has been denied in whole or in part, or his duly authorized representative, may, within sixty (60) days after written notification of such denial, file with a reviewer appointed for such purpose by the Administrative Committee (or, if none has been appointed, with the Administrative Committee itself), with a copy to the Administrative Committee, a written request for a review of his claim. Such written request shall be deemed filed upon receipt of same by the reviewer.
      7.6   Time Limitation on Review. A claimant who timely files a request for review of his claim for benefits, or his duly authorized representative, may review pertinent documents (upon reasonable notice to the reviewer) and may submit the issues and his comments to the reviewer in writing. The reviewer shall, within sixty (60) days after receipt of the written request for review (or within such extended period prescribed below), communicate its decision in writing to the claimant and/or his duly authorized representative setting forth, in a manner calculated to be understood by the claimant, the specific reasons for its decision and the pertinent provisions of the Plan on which the decision is based. If the decision is not communicated within the time prescribed, the claim shall be deemed denied on review.
      7.7   Special Circumstances. If special circumstances require an extension of time beyond the sixty (60)-day period described above for the reviewer to render his decision, the reviewer shall furnish the claimant with written notice of the extension required. Such notice shall be furnished prior to the termination of the initial sixty (60)-day period and shall set forth the special circumstances requiring the extension period. In no event shall such extension exceed a period of sixty (60) days from the end of such initial sixty (60)-day period.

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ARTICLE VIII
AMENDMENT AND TERMINATION
      8.1   Amendments. The Company (by action of the Board) or the Benefits Officer (for the Company and the other Employing Companies) may at any time amend the Plan.
      8.2   Termination or Suspension. The continuance of the Plan and the ability of an Eligible Employee to make a deferral for any Year are not assumed as contractual obligations of the Company or any other Employing Company. The Company reserves the right (for itself and the other Employing Companies) by action of the Board or the Benefits Officer, to terminate or suspend the Plan, or to terminate or suspend the Plan with respect to itself or an Employing Company, to the extent permitted under Treas. Reg. § 1.409A-3(j)(4)(ix). Any Employing Company may terminate or suspend the Plan with respect to itself by executing and delivering to the Company or the Benefits Officer such documents as the Company or Benefits Officer shall deem necessary or desirable.
      8.3   Participants’ Rights to Payment. No termination of the Plan or amendment thereto shall deprive a Participant, Inactive Participant or Beneficiary of the right to payment of deferred compensation credited as of the date of termination or amendment, in accordance with the terms of the Plan as of the date of such termination or amendment; provided, however, that in the event of termination of the Plan, or termination of the Plan with respect to the Company or one or more other Employing Companies, the Benefits Officer may, in such officer’s sole and absolute discretion, accelerate the payment of all such credited deferred compensation on a uniform basis for all Participants and Inactive Participants or, in the case of termination of the Plan with respect to one or more other Employing Companies, for all Participants and Inactive Participants of such other Employing Companies only, to the extent permitted under Treas. Reg. § 1.409A-3(j)(4)(ix).
ARTICLE IX
PARTICIPATING COMPANIES
      9.1   Adoption by Other Entities. Upon the approval of the Company or the Benefits Officer, the Plan may be adopted by any Affiliate by executing and delivering to the Company or the Benefits Officer such documents as the Company or Benefits Officer shall deem necessary or desirable. The provisions of the Plan shall be fully applicable to such entity except as may otherwise be agreed to by such adopting company and the Company or Benefits Officer.
ARTICLE X
GENERAL PROVISIONS
      10.1   Participants’ Rights Unsecured. The right of any Participant or Inactive Participant to receive future payments under the provisions of the Plan shall be a general unsecured claim against the general assets of the Employing Company employing the Participant at the time that his or her compensation is deferred. The Company, and any other Employing

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Company or former Employing Company shall not guarantee or be liable for payment of benefits to the employees of any other Employing Company or former Employing Company under the Plan.
      10.2   Non-Assignability. The right of any person to receive any benefit payable under the Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, lien or charge, and any such benefit shall not, except to such extent as may be required by law, in any manner be liable for or subject to the debts, contracts, liabilities, engagements or torts of the person who shall be entitled to such benefits, nor shall it be subject to attachment or legal process for or against such person.
      10.3   Affiliate Ceasing to be Such. (a)  In the event that a corporation or other entity ceases at any time to meet the definition of an Affiliate, such entity shall cease as of such time to be an Employing Company, if it had been such, and those of its Employees who would have been Eligible Employees under the Plan shall cease to be such, in each case, to the extent that the event causing such entity to no longer be an Affiliate constitutes a change in ownership or effective control of such entity within the meaning of Section 409A(a)(2)(A)(v) of the Code.
          (b)   Payments to Participants employed by any entity which ceases to be an Affiliate under the circumstances described under Section 10.3(a) shall be made pursuant to Article V as if the Participant had a Separation From Service.
      10.4   No Rights Against the Company. The establishment of the Plan, any amendment or other modification thereof; or any payments hereunder, shall not be construed as giving to any Employee, Eligible Employee, Participant or Inactive Participant any legal or equitable rights against the Company or any other Employing Company or former Employing Company, its shareholders, directors, officers or other employees, except as may be contemplated by or under the Plan including, without limitation, the right of any Participant or Inactive Participant to be paid as provided under the Plan. Participation in the Plan does not give rise to any actual or implied contract of employment. A Participant may be terminated at any time for any reason in accordance with the procedures of the Employing Company.
      10.5   Withholding. Each Employing Company, former Employing Company, or paying agent shall withhold any federal, state and local income or employment tax (including F.I.C.A. obligations for both social security and medicare) which by any present or future law it is, or may be, required to withhold with respect to any deferral of compensation pursuant to the Plan, any Employing Company Allocation, any income deemed accrued or any distribution under the Plan, with respect to any of its former or present Employees. The Benefits Officer shall provide or direct the provision of information necessary or appropriate to enable each such company to so withhold.
      10.6   No Guarantee of Tax Consequences. The Administrative Committee, the Benefits Officer, the Company and any Employing Company or former Employing Company do not make any commitment or guarantee that any amounts deferred for the benefit of a Participant or Inactive Participant will be excludible from the gross income of the Participant or Inactive Participant in the Year of deferral or distribution for federal, state or local income or employment tax purposes, or that any other federal, state or local tax treatment will apply to or be available to

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any Participant or Inactive Participant. It shall be the obligation of each Eligible Employee, Participant or Inactive Participant to determine whether any deferral under the Plan is excludible from his or her gross income for federal, state and local income or employment tax purposes, and to take appropriate action if he or she has reason to believe that any such deferral is not so excludible.
      10.7   Severability. If a provision of the Plan shall be held illegal or invalid, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included in the Plan.
      10.8   Governing Law. The provisions of the Plan shall be governed by and construed in accordance with the laws of the State of New York (other than its rules of conflicts of laws to the extent that the application of the laws of another jurisdiction would be required thereby), to the extent not preempted by the laws of the United States.
      10.9   Compliance with Section 409A of the Code . This Plan is intended to comply with Section 409A of the Code and will be interpreted in a manner intended to comply with Section 409A of the Code. In furtherance thereof, no payments may be accelerated under the Plan other than to the extent permitted under Section 409A of the Code. To the extent that any provision of the Plan violates Section 409A of the Code such that amounts would be taxable to a Participant prior to payment or would otherwise subject a Participant to a penalty tax under Section 409A, such provision shall be automatically reformed or stricken to preserve the intent hereof. Notwithstanding anything herein to the contrary, (i) if at the time of a Participant’s Separation From Service the Participant is a “specified employee” as defined in Section 409A of the Code (and any related regulations or other pronouncements thereunder) and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such Separation From Service is necessary in order to prevent any accelerated or additional tax under Section 409A of the Code, then the Company shall defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to the Participant) until the date that is six months following the Participant’s Separation From Service (or the earliest date as is permitted under Section 409A of the Code) and (ii) if any other payments due to a Participant hereunder could cause the application of an accelerated or additional tax under Section 409A of the Code, such payments or other benefits shall be deferred if deferral will make such payment compliant under Section 409A of the Code, or otherwise such payment shall be restructured, to the extent possible, in a manner, determined by the Benefits Officer or the Administrative Committee, that does not cause such an accelerated or additional tax. The Benefits Officer and the Administrative Committee shall implement the provisions of this Section 10.9 in good faith; provided that none of the Company, the Benefits Officer, the Administrative Committee nor any of the Company’s or its subsidiaries’ employees or representatives shall have any liability to Participants with respect to this Section 10.9.

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Exhibit 10.8
TIME WARNER INC.
NON-EMPLOYEE DIRECTORS’ DEFERRED COMPENSATION PLAN
1. Purpose of the Plan
          The purpose of the Plan is to enhance the Company’s ability to attract and retain talented individuals to serve as members of the Board.
2. Definitions
          The following capitalized terms used in the Plan have the respective meanings set forth in this Section:
  (a)   Act means The Securities Exchange Act of 1934, as amended, or any successor thereto.
 
  (b)   Affiliate means any entity that is consolidated with the Company for financial reporting purposes or any other entity designated by the Board in which the Company or an Affiliate has a direct or indirect equity interest of at least twenty percent (20%), measured by reference to vote or value.
 
  (c)   Annual Deferral Amount ” means the portion of a Participant’s Cash Compensation that is to be deferred.
 
  (d)   Board ” means the Board of Directors of the Company.
 
  (e)   Cash Compensation ” means cash compensation earned by a Participant as a director of the Company (including, but not limited to, annual retainer, board meeting fees, committee meeting fees and committee chairman fees).
 
  (f)   Code means The Internal Revenue Code of 1986, as amended, or any successor thereto.
 
  (g)   Company means Time Warner Inc., formerly named AOL Time Warner Inc., a Delaware corporation.
 
  (h)   Deferral Election Form ” means an election form approved by the Board.
 
  (i)   Deferred Cash ” means a bookkeeping entry credited in accordance with an election made by a Participant pursuant to Section 5.
Amended October 25, 2007 effective as of January 1, 2005


 

2

  (j)   Deferred Share Unit ” means a bookkeeping entry, equivalent in value to one Share, credited in accordance with an election made by a Participant pursuant to Section 5.
 
  (k)   Deferred Account ” means a bookkeeping account maintained by the Company pursuant to which the Company records amounts deferred by a Participant as Deferred Cash and/or Deferred Share Units.
 
  (l)   Effective Date means the date the Board approves the Plan.
 
  (m)   Eligible Director ” means any director of the Company who is not an employee of the Company or any Affiliate during any years of service covered by the election made on a Deferral Election Form.
 
  (n)   Fair Market Value means, on a given date, (i) if there should be a public market for the Shares on such date, the average of the high and low prices of the Shares on the New York Stock Exchange, or, if the Shares are not listed or admitted on any national securities exchange, the average of the per Share closing bid price and per Share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System (or such market in which such prices are regularly quoted)(the “NASDAQ”), or, if no sale of Shares shall have been reported on the New York Stock Exchange or quoted on the NASDAQ on such date, then the immediately preceding date on which sales of the Shares have been so reported or quoted shall be used, and (ii) if there should not be a public market for the Shares on such date, the Fair Market Value shall be the value established by the Board in good faith.
 
  (o)   Participant ” means any Eligible Director who elects to participate in the Plan.
 
  (p)   Plan ” means the Time Warner Inc. Non-Employee Directors’ Deferred Compensation Plan.
 
  (q)   Prime Rate ” means, with respect to each annual period ending on any April 30, the prime rate of interest per annum reported by the Wall Street Journal on the May 1 with which such annual period commenced (or if such May 1 is not a business day, the immediately preceding business day).
 
  (r)   Shares means shares of common stock of the Company, $.01 par value per share.


 

3

3. Administration
          The Plan shall be administered by the Board, which may delegate its duties and powers in whole or in part as it deems appropriate. The Board is authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make any other determinations that it deems necessary or desirable for the administration of the Plan. The Board may correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent the Board deems necessary or desirable. Any decision of the Board in the interpretation and administration of the Plan, as described herein, shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned (including, but not limited to, Participants and their beneficiaries or successors).
4. Eligibility
          All Eligible Directors shall be eligible to participate in the Plan.
5. Voluntary Deferral of Cash Compensation
          An Eligible Director may voluntarily elect to defer his or her Cash Compensation in the following manner:
  (a)   Method of Election . In order to make a voluntary election pursuant to the Plan, the Eligible Director must complete a Deferral Election Form, not later than December 31 of the calendar year immediately preceding the calendar year in which the Cash Compensation to be deferred will be earned (or with respect to newly elected Eligible Directors, no later than 30 days after the date on which such Eligible Director commences service as a director of the Company). Notwithstanding the foregoing, no later than 30 days following the Effective Date, each Eligible Director may make a voluntary election to defer Cash Compensation pursuant to the Plan. The Deferral Election Form shall designate (i) the Annual Deferral Amount, (ii) the portion of the Annual Deferral Amount that is to be deferred into (A) Deferred Share Units and/or (B) Deferred Cash and (iii) the timing of payments. Such an election shall only be effective with respect to the Cash Compensation earned after the date of the election. Such election shall remain effective for all future terms of service as an Eligible Director and become irrevocable with respect to each future term of service on December 31 of the calendar year immediately preceding the calendar year in which the Cash Compensation to be deferred will be earned, or on such earlier date as determined by the Board, unless the Participant revokes the election or makes a new election with respect to a subsequent term prior to the date on which the prior deferral election becomes irrevocable.
 
  (b)   Deferred Share Units . If a Participant elects to defer his or her Annual Deferral Amount into Deferred Share Units, such Participant will have Deferred Share Units credited (as of each date on which his or her Cash


 

4

      Compensation would otherwise have been paid) to the Participant’s Deferred Account. The number of Deferred Share Units (including fractional Deferred Share Units) to be credited shall be determined by dividing (i) the amount of Cash Compensation to be deferred into Deferred Share Units by (ii) the Fair Market Value of one Share on the date credited. Deferred Share Units outstanding as of the record date of a dividend on the Shares shall be credited with dividend equivalents when such dividend is paid on the Shares, and such dividend equivalents shall be converted into additional Deferred Share Units based on the Fair Market Value of a Share on the date such dividend is paid.
 
  (c)   Deferred Cash . If a Participant makes a voluntary election to defer his or her Annual Deferral Amount into Deferred Cash, such Participant will have Deferred Cash credited (as of each date on which his or her Cash Compensation would otherwise have been paid) to the Participant’s Deferred Account. The amount of Deferred Cash to be credited shall equal the amount of Cash Compensation to be deferred into Deferred Cash. A Participant’s Deferred Account shall be credited with additional Deferred Cash on April 30 of each calendar year equal to the amount of notional interest earned on the Deferred Cash in the Participant’s Deferred Account. For this purpose, such notional interest shall be earned at the Prime Rate plus two percent (2%).
6. Timing and Form of Payment
          Payments in settlement of Deferred Accounts shall be made in cash as soon as practicable after the date or dates, and in such number of installments, as may be directed by the Participant in the Participant’s Deferral Election Form. If a Participant has elected to receive installment payments, the amount of the distribution payable is based upon the value of a Deferred Account on the installment payment date.
7. Nontransferability of Deferred Accounts
          Deferred Accounts shall not be transferable or assignable by the Participant otherwise than by will or by the laws of descent and distribution. During the lifetime of a Participant, Deferred Accounts shall be payable only to such Participant. Deferred Accounts payable after the death of a Participant shall be paid to the beneficiary designated by the Participant on the Deferral Election Form; provided, that if no such beneficiary is designated the Deferred Accounts may be paid to the legatees, personal representatives or distributees of the Participant.
8. Unfunded Plan
          The Plan is intended to constitute an unfunded obligation of the Company, and Participants shall rely solely on the unsecured promise of the Company for payment hereunder. Nothing contained in the Plan shall give a Participant any rights that are greater than those of a general unsecured creditor of the Company. The Company may authorize the creation of a trust


 

5

or other arrangements to meet the Company’s obligations under the Plan, which trusts or other arrangements shall be consistent with the unfunded status of the Plan.
9. Adjustments Upon Certain Events
          In the event of any change in the outstanding Shares after the Effective Date by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination or transaction or exchange of Shares or other corporate exchange, or any distribution to shareholders of Shares other than regular cash dividends or any transaction similar to the foregoing, the Board in its sole discretion and without liability to any person may make such substitution or adjustment, if any, as it deems to be equitable, to any Deferred Share Units.
10. Successors and Assigns
          The Plan shall be binding on all successors and assigns of the Company and a Participant, including without limitation, the estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant’s creditors.
11. Amendments or Termination
          The Board may amend, alter or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would reduce the value of any Participant’s Deferred Account without such Participant’s consent.
12. Choice of Law
          The Plan shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws and any and all disputes between a Participant and the Company or any Affiliate relating to the Plan shall be brought only in a state or federal court of competent jurisdiction sitting in Manhattan, New York.
13. Effectiveness of the Plan
          The Plan shall be effective as of the Effective Date.
14. Compliance with Section 409A of the Code.
          This Plan is intended to comply with Section 409A of the Code and will be interpreted in a manner intended to comply with Section 409A of the Code. In furtherance thereof, no payments may be accelerated under the Plan other than to the extent permitted under Section 409A of the Code. To the extent that any provision of the Plan violates Section 409A of the Code such that amounts would be taxable to a Participant prior to payment or would otherwise subject a Participant to a penalty tax under Section 409A of the Code, such provision shall be automatically reformed or stricken to preserve the intent hereof. Notwithstanding anything herein to the contrary, (i) if at the time of a Participant’s termination of service the Participant is a “specified employee” as defined in Section 409A of the Code (and any related regulations or other pronouncements thereunder) and the deferral of the commencement of any


 

6

payments or benefits otherwise payable hereunder as a result of such termination of service is necessary in order to prevent any accelerated or additional tax under Section 409A of the Code, then the Company shall defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to the Participant) until the date that is six months following the Participant’s termination of service (or the earliest date as is permitted under Section 409A of the Code) and (ii) if any other payments due to a Participant hereunder could cause the application of an accelerated or additional tax under Section 409A of the Code, such payments or other benefits shall be deferred if deferral will make such payment compliant under Section 409A of the Code, or otherwise such payment shall be restructured, to the extent possible, in a manner, determined by the Board, that does not cause such an accelerated or additional tax. The Board shall implement the provisions of this Section 14 in good faith; provided that neither the Company nor its employees or representatives shall have any liability to Participants with respect to this Section 14.
 

 

Exhibit 10.9
As Amended October 25, 2007
Effective January 1, 2008
AMENDED AND RESTATED
TIME WARNER INC.
ANNUAL BONUS PLAN FOR EXECUTIVE OFFICERS
1. Purpose.
     The purpose of the Time Warner Inc. Annual Bonus Plan for Executive Officers (hereinafter the “ Plan ”) is to provide for the payment of annual cash bonuses to certain executive officers of the Company that qualify for income tax deduction by the Company.
2. Definitions.
     The following terms (whether used in the singular or plural) have the meanings indicated when used in the Plan:
     2.1 “ Annual Bonus ” means the annual cash bonus payable to a Participant pursuant to the Plan with respect to any calendar year, which (i) shall be determined by the Committee prior to the beginning of each such calendar year, or at such later time as may be permitted by the Code and the Regulations, (ii) shall be expressed as a percentage of the Bonus Pool and (iii) shall not exceed 50 percent of the Bonus Pool.
     2.2 “ AP ” means the applicable percent determined pursuant to Section 3.1.
     2.3 “ Base EBITDA ” means the average of the Company’s EBITDA for the three years preceding the year for which the Bonus Pool is being calculated.
     2.4 “ Board ” means the Board of Directors of the Company.
     2.5 “ Bonus Pool ” means the annual cash bonuses payable to all Participants calculated pursuant to Section 3.1.
     2.6 “ Code ” means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Code section shall include any successor section.
     2.7 “ Committee ” means the Compensation Committee of the Board, and any successor thereto.
     2.8 “ Company ” means Time Warner Inc. (formerly named AOL Time Warner Inc.), a Delaware corporation, and any successor thereto.
     2.9 “ Company’s EBITDA ” for any year shall mean (i) EBITDA of the Company for that year, plus (ii) a pro rata portion (based on the percentage ownership) of the EBITDA of any entity or business that the Company accounts for by the equity method of accounting if the Company’s pro rata share of the EBITDA of such entity or


 

2

business for the year with respect to which the Bonus Pool is being calculated exceeds $25 million, all determined in accordance with GAAP; provided , however , that to the extent that the Company’s EBITDA must be determined for any period on or before the “Closing” (as defined therein) of transactions described in the Agreement and Plan of Merger dated as of January 10, 2000 between America Online, Inc. and Time Warner Inc., such EBITDA shall equal the pro forma EBITDA for both such companies on a combined basis.
     2.10 “ Current EBITDA ” means the Company’s EBITDA for the year with respect to which the Bonus Pool is being calculated.
     2.11 “ EBITDA ” for any year of any entity or business shall mean the combined operating income (loss) before depreciation and amortization and excluding the impact of noncash impairments of goodwill, intangible and fixed assets, as well as gains and losses on asset sales, and amounts related to securities litigation and government investigations of such entity or business for that year.
     2.12 “ GAAP ” shall mean generally accepted accounting principles applicable to the Company as in effect from time to time.
     2.13 “ Participant ” means those executive officers of the Company and its affiliates as the Committee shall designate to participate in the Plan for any calendar year prior to the beginning of each such calendar year, or at such later time as may be permitted by the Code and the Regulations.
     2.14 “ Plan ” has the meaning ascribed thereto in Section 1.
     2.15 “ Regulations ” shall mean the rules and regulations under Section 162(m) of the Code.
     2.16 “ Significant Business ” has the meaning ascribed thereto in Section 3.2.
3. Calculation of Bonus Pool.
     3.1 Subject to the other provisions of this Section 3, the Bonus Pool under the Plan with respect to any year shall be determined pursuant to the following formula:
     Bonus Pool = (Current EBITDA — Base EBITDA) x AP
Where AP is the applicable percent determined pursuant to the following table (with the AP for percentage increases between the increases shown in the table determined by interpolation):


 

3

         
Percentage Increase    
in Current EBITDA    
over Base EBITDA   AP
no increase over Base EBITDA
    0 %
5% increase over Base EBITDA
    2.25 %
10% increase over Base EBITDA
    4.00 %
15% increase over Base EBITDA
    5.25 %
20% or higher increase over Base EBITDA
    6.00 %
     3.2 The Current EBITDA and/or Base EBITDA used to calculate the Bonus Pool for any year shall be adjusted as provided in this Section 3.2 if the Company or any entity or business included in the Company’s EBITDA for such year pursuant to Section 2.9(ii) engages in any acquisition or disposition during such year or in any of the prior three years, of any entity or business which (a) if wholly owned, had more than $25 million of EBITDA in the year prior to its acquisition or disposition or (b) if less than wholly owned, as to which more than $25 million of EBITDA was or would have been included in the Company’s EBITDA pursuant to Section 2.9(ii) in the year prior to its acquisition or disposition (each, a “ Significant Business ”). In the event of an acquisition, the EBITDA of the Significant Business shall be excluded from Current EBITDA for the year in which it was acquired. For each year subsequent to the year of acquisition, all or a portion of the EBITDA of the Significant Business for each applicable year shall be included in Current EBITDA and shall be included in each of the years used in the calculation of Base EBITDA. In the event of a disposition, all or a portion of the EBITDA of a Significant Business for each applicable year shall be excluded from Current EBITDA and from each of the three years included in the calculation of Base EBITDA for the year in which such disposition occurs and for each year subsequent to such disposition. For the purposes hereof, an acquisition or disposition of an entity or business shall include a change in ownership which results in a change in consolidation or equity accounting by the Company for such entity or business.
     3.3 The Base EBITDA used to calculate the Bonus Pool for any year shall be adjusted in the event any change in GAAP that is effective for such year was not effective for each of the three years included in the calculation of Base EBITDA; provided , however , that no such adjustment to Base EBITDA shall be made unless such change in GAAP would have increased or decreased Current EBITDA by more than $25 million in the year prior to the year in which such change in GAAP first becomes effective. The adjustment to Base EBITDA to be made pursuant to this Section 3.3 shall consist of applying the change in GAAP to each year included in the Base EBITDA calculation. In addition, if the change in GAAP is phased in so that the change is applied differently in successive years, then the adjustment to be made to each year included in Base EBITDA shall be the same as the change in GAAP that is applicable to the year for which the Bonus Pool is being calculated.
     3.4 The Committee may in its discretion (a) determine to make an award to any Participant for any year in an amount that is less than the Annual Bonus and (b) determine to make aggregate awards to all Participants for any year that total less than the Bonus Pool.
     3.5 Prior to paying any award under the Plan, the Company’s independent auditors shall review the calculation of the Bonus Pool and the Committee shall certify that the performance goals have been met within the meaning of the Code and the Regulations. Subject to Section 6 of this Plan, payments of an award, if any, under the Plan with respect to any year, shall be made between January 1 and March 15 of the calendar year following the applicable


 

4

performance year, as soon as practicable after the Committee certifies that the performance goals have been met.
4. Administration
     The Plan shall be administered by the Committee or a subcommittee thereof. Subject to the express provisions of the Plan and the requirements of Section 162(m) of the Code, the Committee shall have plenary authority to interpret the Plan, to prescribe, amend and rescind the rules and regulations relating to it and to make, in its discretion, all other determinations deemed necessary or advisable for the administration of the Plan. The determinations of the Committee on the matters referred to in this Section 4 shall be conclusive.
     Each member of the Committee (or a subcommittee thereof, consisting of at least two individuals, established to administer the Plan) shall be an “outside director” within the meaning of Section 162(m) of the Code and the Regulations.
5. Eligibility
     Payments with respect to any year may be made under the Plan only to a person who was a Participant during all or part of such year.
6. Deferral of Award
     Each Participant may elect by written notice delivered to the Company at the time and in the form required by the Company to defer payment of all or any portion of an award the Participant might earn with respect to a year, all in accordance with the Code and the Regulations and on such terms and conditions as the Committee may establish from time to time or as may be provided in any employment agreement between the Company and the Participant.
7. Termination and Amendment
     The Plan shall continue in effect until terminated by the Board. The Committee may at any time modify or amend the Plan in such respects as it shall deem advisable; provided, however , that any such modification or amendment shall comply with all applicable laws and applicable requirements for exemption (to the extent necessary) under Section 162(m) of the Code and the Regulations.
8. Effectiveness of the Plan
     The Plan, as amended and restated herein, shall become effective upon approval by the Board, subject to the affirmative vote of a majority of the votes cast at a duly called and held meeting of stockholders of the Company, and shall apply to the annual bonuses payable to each Participant in respect of 2003 and thereafter.
9. Withholding
     The obligations of the Company to make payments under the Plan shall be subject to applicable federal, state and local tax withholding requirements.


 

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10. Separability
     If any of the terms or provisions of this Plan conflict with the requirements of Section 162(m) of the Code, the Regulations or applicable law, then such terms or provisions shall be deemed inoperative to the extent necessary to avoid the conflict with the requirements of Section 162(m) of the Code, the Regulations or applicable law without invalidating the remaining provisions hereof. With respect to Section 162(m), if this Plan does not contain any provision required to be included herein under Section 162(m) of the Code or the Regulations, such provision shall be deemed to be incorporated herein with the same force and effect as if such provision had been set out at length herein.
11. Non-Exclusivity of the Plan
     Neither the adoption of the Plan by the Committee or the Board nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Committee or the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options and the awarding of stock or cash or other benefits otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases. None of the provisions of this Plan shall be deemed to be an amendment to or incorporated in any employment agreement between the Company and any Participant.
12. Beneficiaries
     Each Participant may designate a beneficiary or beneficiaries to receive, in the event of such Participant’s death, any payments remaining to be made to the Participant under the Plan. Each Participant shall have the right to revoke any such designation and to redesignate a beneficiary or beneficiaries by written notice to the Company to such effect. If any Participant dies without naming a beneficiary or if all of the beneficiaries named by a Participant predecease the Participant, then any amounts remaining to be paid under the Plan shall be paid to the Participant’s estate.
13. Governing Law
     The Plan shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to principles of conflicts of laws.
14. Compliance with IRC Section 409A
     The Plan is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and will be interpreted in a manner intended to comply with Section 409A of the Code. In furtherance thereof, no payments may be accelerated under the Plan other than to the extent permitted under Section 409A of the Code. To the extent that any provision of the Plan violates Section 409A of the Code such that amounts would be taxable to a Participant prior to payment or would otherwise subject a Participant to a penalty tax under Section 409A, such provision shall be automatically reformed or stricken to preserve the intent hereof. Notwithstanding anything herein to the contrary, (i) if at the time of a Participant’s termination of employment the Participant is a “specified employee” as defined in Section 409A of the Code


 

6

(and any related regulations or other pronouncements thereunder) and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such termination of employment is necessary in order to prevent any accelerated or additional tax under Section 409A of the Code, then the Company shall defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to the Participant) until the date that is six months following the Participant’s termination of employment (or the earliest date as is permitted under Section 409A of the Code) and (ii) if any other payments due to a Participant hereunder could cause the application of an accelerated or additional tax under Section 409A of the Code, such payments or other benefits shall be deferred if deferral will make such payment compliant under Section 409A of the Code, or otherwise such payment shall be restructured, to the extent possible, in a manner, determined by the Committee, that does not cause such an accelerated or additional tax. The Committee shall implement the provisions of this section in good faith; provided that neither the Company, nor the Committee, nor any of Company’s or its subsidiaries’ employees or representatives, shall have any liability to Participants with respect to this section.
 

 

EXHIBIT 31.1
CERTIFICATIONS
I, Richard D. Parsons, certify that:
  1.   I have reviewed this quarterly report on Form 10-Q of Time Warner Inc.;
 
  2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
                 
Date: November 7, 2007
  By:   /s/ Richard D. Parsons    
             
 
      Name:   Richard D. Parsons    
 
      Title:   Chief Executive Officer    
 
          Time Warner Inc.    
 

 

EXHIBIT 31.2
CERTIFICATIONS
I, Wayne H. Pace, certify that:
  1.   I have reviewed this quarterly report on Form 10-Q of Time Warner Inc.;
 
  2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
                 
Date: November 7, 2007
  By:   /s/ Wayne H. Pace  
             
 
      Name:   Wayne H. Pace    
 
      Title:   Chief Financial Officer    
 
          Time Warner Inc.    
 

 

EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     In connection with the Quarterly Report on Form 10-Q of Time Warner Inc., a Delaware corporation (the “Company”), for the quarter ended September 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his respective knowledge:
     1. the Report fully complies, in all material respects, with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
Date: November 7, 2007
       
 
  /s/ Richard D. Parsons    
 
       
 
            Richard D. Parsons    
 
            Chief Executive Officer    
 
            Time Warner Inc.    
 
       
Date: November 7, 2007
       
 
  /s/ Wayne H. Pace    
 
       
 
            Wayne H. Pace    
 
            Chief Financial Officer    
 
            Time Warner Inc.