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 March 31, 2009 or

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

for the transition period from                                            to                                          

Commission file number 001-15062

One Time Warner Center
New York, NY 10019-8016

(Address of Principal Executive Offices) (Zip Code)

(212) 484-8000

(Registrant’s Telephone Number, Including Area Code)

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

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

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

Large accelerated filer þ		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

 

 

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

		Page
PART I. FINANCIAL INFORMATION
Management’s Discussion and Analysis of Results of Operations and Financial Condition		1
Item 4. Controls and Procedures		23
Consolidated Balance Sheet at March 31, 2009 and December 31, 2008		24
Consolidated Statement of Operations for the Three Months Ended March 31, 2009 and 2008		25
Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2009 and 2008		26
Consolidated Statement of Equity		27
Notes to Consolidated Financial Statements		28
Supplementary Information		54
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		61
Item 1A. Risk Factors		61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		62
Item 4. Submission of Matters to a Vote of Security Holders		62
Item 6. Exhibits		62
EX-10.1 1999 STOCK PLAN
EX-10.2 2006 STOCK INCENTIVE PLAN
EX-10.3 FORM OF PERFORMANCE STOCK UNITS AGREEMENT
EX-10.4 FIRST AMENDMENT AGREEMENT TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
EX-10.5 SECOND AMENDMENT AGREEMENT TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
EX-31.1 SECTION 302 CERTIFICATION OF THE PEO
EX-31.2 SECTION 302 CERTIFICATION OF THE PFO
EX-32 SECTION 906 CERTIFICATION OF THE PEO AND PFO

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

INTRODUCTION

     Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information on Time Warner Inc.’s (“Time Warner” or the “Company”) businesses, current developments, financial condition, cash flows and results of operations. MD&A is organized as follows:

	•		Overview. This section provides a general description of Time Warner’s business segments, as well as recent developments the Company believes are important in understanding the results of operations and financial condition or in understanding anticipated future trends.
	•		Results of operations. This section provides an analysis of the Company’s results of operations for the three months ended March 31, 2009. This analysis is presented on both a consolidated and a business segment basis. In addition, a brief description is provided of significant transactions and events that 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 March 31, 2009 and cash flows for the three months ended March 31, 2009.
	•		Caution concerning forward-looking statements. This section provides a description of the use of forward-looking information appearing in this report, including in MD&A and the consolidated financial statements. Such information is based on management’s current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (the “2008 Form 10-K”) for a discussion of the risk factors applicable to the Company.

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

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, TNT, CNN, AOL, People , Sports Illustrated and Time . The Company produces and distributes films through Warner Bros. and New Line Cinema, including The Dark Knight , Gran Torino , The Curious Case of Benjamin Button and the Harry Potter films, as well as television series, including Two and a Half Men , The Mentalist , The Big Bang Theory , Gossip Girl and The Closer . During the three months ended March 31, 2009, the Company generated revenues of $6.945 billion (down 7% from $7.470 billion in 2008), Operating Income of $1.198 billion (down 9% from $1.311 billion in 2008), Net Income of $661 million (down 14% from $771 million in 2008) and Cash Provided by Operations from Continuing Operations of $1.425 billion (down 12% from $1.616 billion in 2008).

Impact of the Current Economic Environment

     The current global economic recession has reduced the Company’s visibility into long-term business trends and has adversely affected its businesses in the first quarter of 2009 and is currently expected to continue to adversely affect them during the remainder of 2009. For example, during the first quarter of 2009, the Company’s Advertising revenues declined 16% compared to the similar period in the prior year. The Company currently expects Advertising revenues to continue to decline during the remainder of 2009 as compared to the similar period in 2008. Additionally, the current economic environment is adversely affecting the Company’s Content revenues due to, among other things, reduced consumer spending on DVDs.

     The significant losses in the market value of the Company’s pension plan assets in 2008 has resulted in an increase in pension expense of approximately $30 million in the first quarter of 2009 and is expected to result in an approximately $130 million increase in pension expense for the full year of 2009. Additionally, the strengthening of the U.S. Dollar relative to significant foreign currencies to which the Company is exposed has negatively affected the Company’s revenues and Operating Income by approximately $240 million and $70 million, respectively, for the three months ended March 31, 2009. If exchange rates remain at levels similar to those in the first quarter of 2009, the Company expects a continued negative impact on revenues and Operating Income during the remainder of 2009.

     The Company continues to have strong liquidity to meet its needs for the foreseeable future. At March 31, 2009, the Company had $13.955 billion of unused committed capacity, including cash and equivalents and a credit facility containing commitments from a geographically diverse group of major financial institutions. See “Financial Condition and Liquidity” for further details regarding the Company’s total committed capacity.

Time Warner Businesses

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

     Time Warner evaluates the performance and operational strength of its business segments based on several factors, of which the primary financial measure is operating income before depreciation of tangible assets and amortization of intangible assets (“Operating Income before Depreciation and Amortization”). Operating Income before Depreciation and Amortization eliminates the uneven effects across all business segments of noncash depreciation of tangible assets and amortization of certain intangible assets, primarily intangible assets recognized in business combinations. Operating Income before Depreciation and Amortization should be considered in addition to Operating Income, as well as other measures of financial performance. Accordingly, the discussion of the results of operations for each of Time Warner’s business segments includes both Operating Income before Depreciation and Amortization and Operating Income. For additional information regarding Time Warner’s business segments, refer to Note 11, “Segment Information.”

      Networks. Time Warner’s Networks segment is comprised of Turner Broadcasting System, Inc. (“Turner”) and Home Box Office, Inc. (“HBO”). For the three months ended March 31, 2009, the Networks segment generated revenues of $2.808 billion (40% of the Company’s overall revenues), $1.064 billion in Operating Income before Depreciation and Amortization and $960 million in Operating Income.

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

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

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

     The Company’s Networks segment recently has focused on international expansion, including Turner’s fourth quarter 2007 acquisition of seven pay networks operating principally in Latin America and HBO’s acquisitions of additional equity interests in HBO Asia and HBO South Asia during the fourth quarter of 2007 and first quarter of 2008, as well as the acquisition of an additional equity interest in the HBO Latin America Group, consisting of HBO Brasil, HBO Olé and HBO Latin America Production Services (collectively, “HBO LAG”), during the fourth quarter of 2008. These acquired businesses contributed revenues and Operating Income before Depreciation and Amortization of $119 million and $35 million, respectively, for the three months ended March 31, 2009 compared to $36 million and $3 million, respectively, for the three months ended March 31, 2008. In addition, during the first quarter of 2009, Turner launched two new networks in India. The Company anticipates that international expansion will continue to be an area of focus at the Networks segment for the foreseeable future.

      Filmed Entertainment. Time Warner’s Filmed Entertainment segment is comprised of Warner Bros. Entertainment Group (“Warner Bros.”), one of the world’s leading studios, and New Line Cinema Corporation (“New Line”). For the three months ended March 31, 2009, the Filmed Entertainment segment generated revenues of $2.633 billion (36% of the Company’s overall revenues), $308 million in Operating Income before Depreciation and Amortization and $214 million in Operating Income.

     The Filmed Entertainment segment has diversified sources of revenues within its film and television businesses, including an extensive film library and a global distribution infrastructure, which have helped it to deliver consistent long-term operating performance. To increase operational efficiencies and maximize performance within the Filmed Entertainment segment, in 2008 the Company reorganized the New Line business to be operated as a unit of Warner Bros. while maintaining separate development, production and other operations, and the Company incurred restructuring charges primarily related to involuntary employee terminations in connection with the reorganization. Beginning in the first quarter of 2009, Warner Bros. commenced a significant restructuring, primarily consisting of headcount reductions and the outsourcing of certain functions to an external service provider. As a result, the Company incurred restructuring charges of $37 million during the three months ended March 31, 2009 and expects to incur additional restructuring charges ranging from $40 million to $60 million during the remainder of 2009.

     Warner Bros. continues to be an industry leader in the television business. For the 2008-2009 broadcast season, Warner Bros. produced more than 20 primetime series, with at least one series airing on each of the five broadcast networks (including Two and a Half Men , The Mentalist , The Big Bang Theory , Gossip Girl , ER and Smallville ), as well as original series for several cable networks (including The Closer and Nip/Tuck ).

     The Screen Actors Guild (“SAG”), which covers performers in feature films and filmed television programs, and the producers of such content, including the Company’s Filmed Entertainment and Networks segments, have been working under contracts that expired on June 30, 2008. The producers and SAG have reached a tentative agreement, which, as of April 28, 2009, has not been ratified by SAG’s membership. In the event the agreement is not ratified or SAG goes on strike, it could cause delays in the production of feature films and television programs, as well as higher costs resulting either from the strike or less favorable terms contained in a future agreement.

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

     The sale of DVDs has been one of the largest drivers of the segment’s profit over the last several years. The industry and the Company experienced a decline in DVD sales in 2008 and the first quarter of 2009 as growing consumer interest in high definition Blu-ray DVDs only partially offset softening consumer demand for standard definition DVDs. Also contributing to the overall decline in DVD sales are several factors, including the general economic downturn in the U.S. and many regions around the world, increasing competition for consumer discretionary time and spending, piracy and the maturation of the standard definition DVD format.

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

     The Company enters into co-financing arrangements with other companies as a way of securing funding for its films and mitigating risk. During 2008, one of the Company’s largest co-financing partners informed the Company that difficulties in the credit markets had led to a delay in securing the financing necessary to fund the partner’s 50% share (approximately $120 million) of the production costs on four films released during the second half of 2008. As a result, the Company has accounted for these four films in the accompanying consolidated financial statements as if they were wholly owned. The Company is unsure whether this co-financing partner will ultimately secure the funding for amounts due on these four 2008 productions or the funding it had committed for films slated for release in 2009, and the difficulties in the credit market may also reduce the Company’s ability to attract other financial partners to co-finance its films. These or similar difficulties relating to co-financing arrangements may continue for the remainder of 2009 and in future periods. As a result, the Company may have to provide more funding for film production costs than it has in the past and may have to take on additional risk that it would have otherwise sought to mitigate with a co-financing arrangement.

      Publishing. Time Warner’s Publishing segment consists principally of magazine publishing and related websites as well as a number of direct-marketing and direct-selling businesses. For the three months ended March 31, 2009, the Publishing segment generated revenues of $806 million (12% of the Company’s overall revenues) and had $12 million in Operating Income before Depreciation and Amortization and an Operating Loss of $32 million.

     As of March 31, 2009, Time Inc. published 23 magazines in the U.S., including People , Sports Illustrated , Time , InStyle , Real Simple , Southern Living and Fortune , and over 90 magazines outside the U.S., primarily through IPC Media (“IPC”) in the U.K. and Grupo Editorial Expansión (“GEE”) in Mexico. The Publishing segment generates revenues primarily from advertising (including advertising on digital properties), magazine subscriptions and newsstand sales. Time Inc. also owns the magazine subscription marketer, Synapse Group, Inc. (“Synapse”), and the school and youth group fundraising company QSP, Inc. and its Canadian affiliate, Quality Service Programs Inc. (collectively, “QSP”). Advertising sales at the Publishing segment, particularly print advertising sales, continue to be significantly adversely affected by the current economic environment as evidenced by their continuing decline during the first quarter of 2009. Online advertising sales at the Publishing segment have also been adversely affected by the current economic environment, although, on a percentage basis, to a lesser degree than print advertising sales. Time Inc. continues to develop digital content, including the relaunch of RealSimple.com and the expansion of Time.com , as well as the expansion of digital properties owned by IPC and GEE. For the three months ended March 31, 2009, online Advertising revenues were 12% of Time Inc.’s total Advertising revenues, compared to 10% for the three months ended March 31, 2008. Time Inc.’s direct-selling division, Southern Living At Home, which is held for sale, sells home decor products through independent consultants at parties hosted in people’s homes throughout the U.S.

      AOL. AOL LLC (together with its subsidiaries, “AOL”) operates a Global Web Services business, which is comprised of its Platform-A, MediaGlow and People Networks business units. Platform-A sells advertising services worldwide on both the AOL Network and third-party Internet sites, referred to as the “Third Party Network.” MediaGlow and People Networks develop and operate the AOL Network, which includes a leading network of web brands, free client software and services and a social media network for Internet consumers. In addition, through its Access Services business, AOL operates one of the largest Internet access subscription services in the United States. As of March 31, 2009, AOL had 6.3 million AOL brand subscribers in the U.S., which does not include registrations for free AOL services. For the three months ended March 31, 2009, AOL generated revenues of $867 million (12% of the Company’s overall revenues) and had $255 million in Operating Income before Depreciation and Amortization and $150 million in Operating Income.

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

     AOL’s business is focused on attracting and engaging Internet consumers and providing advertising services on both the AOL Network and the Third Party Network. In addition to growing its Global Web Services business, AOL is focused on managing costs in this business, as well as managing its declining subscriber base and related cost structure in its Access Services business. In the first quarter of 2009, in an effort to better position its Global Web Services business, AOL undertook a significant restructuring. As a result, for the three months ended March 31, 2009, the Company incurred restructuring charges of $58 million primarily related to involuntary employee terminations and facility closures, and currently expects to incur up to an additional $90 million in restructuring charges during the remainder of 2009.

     During 2008, the Company announced that it had begun separating the AOL Access Services and Global Web Services businesses, as a means of enhancing the operational focus and strategic options available for each of these businesses. The Company continues to review its strategic alternatives with respect to AOL. Although the Company’s Board of Directors has not made any decision, the Company currently anticipates that it would initiate a process to spin off one or more parts of the businesses of AOL to Time Warner’s stockholders, in one or a series of transactions. Based on the results of the Company’s review, future market conditions or the availability of more favorable strategic opportunities that may arise before a transaction is completed, the Company may decide to pursue an alternative other than a spin-off with respect to either or both of AOL’s businesses.

     The Platform-A business unit sells advertising services worldwide on both the AOL Network and the Third Party Network and licenses ad-serving technology to third-party websites. Platform-A offers to advertisers a range of capabilities and solutions, including optimization and targeting technologies, to deliver more effective advertising and reach specific audiences across the AOL Network and the Third Party Network.

     The MediaGlow and People Networks business units develop and operate websites, applications and services that are part of the AOL Network. In addition, AOL’s Products and Technologies group develops and operates components of the AOL Network, such as e-mail, toolbar and search. The AOL Network consists of a variety of websites, related applications and services that can be accessed generally via the Internet or via AOL’s Access Services business. Specifically, the AOL Network includes owned and operated websites, applications and services such as AOL.com , e-mail, MapQuest, Moviefone, Engadget, Asylum, international versions of the AOL portal and social media properties such as AIM, ICQ and Bebo. The AOL Network also includes TMZ.com , a joint venture with Telepictures Productions, Inc. (a subsidiary of Warner Bros. Entertainment Inc.), 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.

     During the first quarter of 2009, AOL’s Advertising revenues were negatively affected by weakening global economic conditions, which contributed to lower demand from a number of advertiser categories, a deterioration in the financial position of certain significant customers and downward pricing pressure on advertising inventory, as well as an overall increase in marketplace competition, an increased volume of inventory monetized through lower-priced sales channels and other sales execution issues. During the remainder of 2009, the Company anticipates that these factors and trends may continue to negatively affect AOL’s Advertising revenues. Additionally, in the first quarter of 2009, AOL made a number of organizational and personnel changes, including hiring a new chief executive officer and changing the leadership within its Platform-A business unit.

     The AOL Network and Third Party Network components of the Global Web Services business have differing cost structures. Third Party Network advertising has historically had higher traffic acquisition costs (“TAC”) and, therefore, lower incremental margins than display advertising. As a result, a period-over-period increase or decrease in aggregate Advertising revenues will not necessarily translate into a similar increase or decrease in Operating Income before Depreciation and Amortization attributable to AOL’s advertising activities.

     Paid-search advertising activities on the AOL Network are conducted primarily through AOL’s strategic relationship with Google Inc. (“Google”). In connection with the expansion of this strategic relationship in April 2006, Google acquired a 5% interest in AOL, and, as a result, 95% of the equity interests in AOL are indirectly held by the Company and 5% are indirectly held by Google. As part of the April 2006 transaction, Google received certain registration rights relating to its equity interest in AOL. In late January 2009, Google exercised its right to request that AOL register Google’s 5% equity interest for sale in an initial public offering. Time Warner has the right, but not the obligation, to purchase Google’s equity interest for cash or shares of Time Warner common stock based on the appraised fair market value of the equity interest in

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

lieu of conducting an initial public offering. The Company is in discussions with Google and has notified Google of its intention to purchase the 5% equity interest.

     AOL’s Access Services business offers an online subscription service to consumers that includes dial-up Internet access. AOL continued to experience declines during the first quarter of 2009 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 to support the advertising business, AOL’s significant reduction of subscriber acquisition and retention efforts, and the industry-wide decline of the dial-up ISP business and growth in the broadband Internet access business. U.S. subscribers declined 0.6 million in each of the three-month periods ended March 31, 2009 and 2008. The decline in subscribers has had an adverse impact on AOL’s Subscription revenues, and the Company expects the total number of subscribers to continue to decline. AOL’s Advertising revenues associated with the AOL Network, in large part, are generated from the activity of current and former AOL subscribers. Therefore, the decline in subscribers also could have an adverse impact on AOL’s Advertising revenues generated on the AOL Network to the extent that subscribers canceling their subscriptions do not maintain their relationship with and usage of the AOL Network.

Recent Developments

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

     On March 12, 2009 (the “Distribution Record Date”), the Company disposed of all of its shares of TWC common stock. The disposition was made pursuant to a separation agreement entered into on May 20, 2008, among Time Warner, TWC and certain of their subsidiaries (the “Separation Agreement”) for the purpose of achieving the legal and structural separation of TWC from Time Warner (the “TWC Separation”). The TWC Separation was effected as a pro rata dividend of all shares of TWC common stock held by Time Warner in a spin-off (the “Distribution”) to Time Warner stockholders.

     Prior to the Distribution Record Date, on March 12, 2009, TWC, in accordance with the terms of the Separation Agreement, paid a special cash dividend of $10.27 per share to all holders of TWC Class A Common Stock and TWC Class B Common Stock as of the close of business on March 11, 2009 (aggregating $10.856 billion) (the “Special Dividend”) that resulted in the receipt by Time Warner of $9.253 billion.

     With the completion of the TWC Separation, the Company disposed of the Cable segment in its entirety. Accordingly, the Company has presented the financial condition and results of operations of the Cable segment as discontinued operations in the accompanying consolidated financial statements for all periods presented.

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

     In addition, in connection with the TWC Separation, and as provided for in the Company’s equity plans, the number of stock options, restricted stock units (“RSUs”) and target performance stock units (“PSUs”) outstanding at the Distribution Record Date and the exercise prices of such stock options were adjusted to maintain the fair value of those awards. The changes in the number of equity awards and the exercise prices were determined by comparing the fair value of such awards immediately prior to the TWC Separation to the fair value of such awards immediately after the TWC Separation. Accordingly, each equity award outstanding as of the Distribution Record Date was increased by multiplying the size of such award by 1.35, while the per share exercise price of each stock option was decreased by dividing by 1.35. This adjustment resulted in an increase of approximately 50 million equity awards (comprised of 46 million stock options and 4 million RSUs). The modifications to the outstanding equity awards were made pursuant to existing antidilution provisions in the Company’s equity plans, and did not result in any additional compensation expense. In addition, all such awards were further adjusted for the effect of the Company’s reverse stock split.

     Under the terms of Time Warner’s equity plans and related award agreements, as a result of the TWC Separation, TWC employees who held Time Warner equity awards were treated at the time of the TWC Separation as if their employment with Time Warner was terminated without cause at the time of the separation. For most TWC employees, this treatment resulted in the forfeiture of unvested stock options and shortened exercise periods for vested stock options and pro rata vesting of the next installment of (and forfeiture of the remainder of) the RSU awards.

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

Repayment and Termination of $2.0 Billion Term Facility

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

Termination of Supplemental Credit Agreement

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

CME Investment

     On March 23, 2009, the Company announced that it had entered into an agreement to acquire an approximately 31% interest in Central European Media Enterprises Ltd. (“CME”), a broadcasting company operating leading networks in seven Central and Eastern European countries, for an investment of $242 million in cash. In connection with this investment, Time Warner has agreed to allow CME founder and Non-Executive Chairman Ronald S. Lauder to vote Time Warner’s shares of CME for at least four years, subject to certain exceptions. Also, Mr. Lauder has agreed to support Time Warner’s appointment of two designees to CME’s board of directors. In addition to being subject to customary closing conditions, the closing of the investment is subject to a vote of CME’s shareholders and certain regulatory approvals, and Mr. Lauder has committed to vote the shares he controls in favor of the transaction. The transaction is expected to close in the second quarter of 2009. See Note 2 to the accompanying consolidated financial statements.

RESULTS OF OPERATIONS

Changes in Basis of Presentation

     As discussed more fully in Note 1 to the accompanying consolidated financial statements, the 2008 financial information has been recast so that the basis of presentation is consistent with that of the 2009 financial information. This recast reflects (i) the financial condition and results of operations of TWC as discontinued operations for all periods presented, (ii) the adoption of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“Statement”) No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (“FAS 160”), (iii) the adoption of FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) Issue No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP No. EITF 03-6-1”), and (iv) the 1-for-3 reverse stock split of the Company’s common stock that became effective on March 27, 2009.

Recent Accounting Standards

     See Note 1 to the accompanying consolidated financial statements for a discussion of accounting standards adopted during the three months ended March 31, 2009 and recent accounting standards not yet adopted.

     In addition to the items affecting comparability above, the Company incurred restructuring costs of $94 million and $142 million during the three months ended March 31, 2009 and 2008, respectively. For further discussions of restructuring costs, refer to the “Consolidated Results” and “Business Segment Results” discussions.

Amounts Related to Securities Litigation

     The Company recognized legal and other professional fees related to the defense of various shareholder lawsuits totaling $7 million and $4 million for the three months ended March 31, 2009 and 2008, respectively.

Investment Losses, Net

     For the three months ended March 31, 2009, the Company recognized $13 million of miscellaneous investment losses.

     For the three months ended March 31, 2008, the Company recognized a $26 million impairment on the Company’s investment in Eidos plc (formerly SCi Entertainment Group plc) and $10 million of losses resulting from market fluctuations in equity derivative instruments.

Costs Related to the Separation of TWC

     For the three months ended March 31, 2009 and 2008, the Company incurred pretax direct transaction costs (e.g., legal and professional fees) related to the separation of TWC of $5 million and $1 million, respectively, which have been reflected in other income (loss), net in the accompanying consolidated statement of operations.

Income Tax Impact and Tax Items Related to TWC

     The income tax impact reflects the estimated tax or tax benefit associated with each item affecting comparability. Such estimated taxes or tax benefits vary based on certain factors, including the taxability or deductibility of the items and foreign tax on certain gains. For the three months ended March 31, 2009, the Company also recognized approximately $24 million of tax benefits attributable to the impact of certain state tax law changes on TWC net deferred tax liabilities.

Noncontrolling Interest Impact

     For the three months ended March 31, 2009, the $5 million noncontrolling interest item affecting comparability reflects the minority owner’s share of the tax provision related to changes in certain state tax laws.

     The decrease in Subscription revenues for the three months ended March 31, 2009 was primarily related to declines at the AOL and Publishing segments, offset partially by an increase at the Networks segment. The decline at the AOL segment resulted primarily from a decrease in the number of domestic AOL brand subscribers. The decline at the Publishing segment was due to decreases at IPC resulting principally from the effect of foreign exchange rates as well as lower revenues from domestic subscription renewals due to the effect of the current economic environment and lower revenues as a result of softening domestic newsstand sales due to the effect of the current economic environment and wholesaler disruptions. The increase in Subscription revenues at the Networks segment was due primarily to higher subscription rates at both Turner and HBO and the effect of the consolidation of HBO LAG.

     The decrease in Advertising revenues for the three months ended March 31, 2009 was primarily due to declines at the Publishing and AOL segments and to a lesser degree declines at the Networks segment. The decrease at the Publishing segment was due to declines in domestic print Advertising revenues, international print Advertising revenues, including the effect of foreign exchange rates at IPC, custom publishing revenues and online revenues, primarily reflecting the current weak economic conditions and increased competition for advertising dollars. The decrease at the AOL segment was due to declines in Advertising revenues on the Third Party Network and display advertising on the AOL Network, primarily as a result of weakening global economic conditions, which contributed to lower demand from a number of advertiser categories and downward pricing pressure on advertising inventory, as well as declines in paid search advertising primarily due to decreases in search query volume on certain AOL Network properties.

     The decrease in Content revenues for the three months ended March 31, 2009 was principally related to a decline at the Filmed Entertainment segment, mainly due to a decrease in theatrical product revenues, partially offset by an increase in television product revenues.

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

      Costs of Revenues. For the three months ended March 31, 2009 and 2008, costs of revenues totaled $3.880 billion and $4.167 billion, respectively, and, as a percentage of revenues, were 56% for each period. The segment variations are discussed in detail in “Business Segment Results.”

      Selling, General and Administrative Expenses. For the three months ended March 31, 2009 and 2008, selling, general and administrative expenses decreased 5% to $1.652 billion in 2009 from $1.732 billion in 2008, primarily related to decreases at the Filmed Entertainment and AOL segments, partially offset by increases at the Networks segment. The segment variations are discussed in detail in “Business Segment Results.”

     Included in costs of revenues and selling, general and administrative expenses is depreciation expense, which decreased to $236 million for the three months ended March 31, 2009 from $247 million for the three months ended March 31, 2008, primarily reflecting a decline at the AOL segment due to a reduction in network assets due to subscriber declines.

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

      Amortization Expense. Amortization expense increased 3% to $121 million for the three months ended March 31, 2009 from $118 million for the three months ended March 31, 2008.

      Restructuring Costs. For the three months ended March 31, 2009, the Company incurred restructuring costs of $94 million, primarily related to various employee terminations and other exit activities, including $58 million at the AOL segment, $37 million at the Filmed Entertainment segment and a $1 million reversal at the Publishing segment.

     The Company incurred restructuring costs for the three months ended March 31, 2008 of $142 million, primarily related to various employee terminations and other exit activities, including $116 million at the Filmed Entertainment segment, $10 million at the Publishing segment, $9 million at the AOL segment and $7 million at the Corporate segment.

      Operating Income. Operating Income decreased to $1.198 billion for the three months ended March 31, 2009 from $1.311 billion for the three months ended March 31, 2008. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $7 million and $4 million of expense for the three months ended March 31, 2009 and 2008, respectively, Operating Income decreased $110 million, primarily reflecting declines at the AOL and Publishing segments, partially offset by increases at the Networks and Filmed Entertainment segments. The segment variations are discussed under “Business Segment Results.”

      Interest Expense, Net. Interest expense, net, decreased to $312 million for the three months ended March 31, 2009 from $347 million for the three months ended March 31, 2008. The decrease in interest expense, net for the three months ended March 31, 2009 is due to lower average interest rates and lower average net debt.

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

     The changes in investment losses, net are discussed under “Significant Transactions and Other Items Affecting Comparability.” Excluding the impact of investment losses, net, the change in other loss, net was primarily due to an increase in losses from equity-method investees, partly offset by lower securitization expenses.

      Income Tax Provision. Income tax expense from continuing operations was $288 million for the three months ended March 31, 2009 compared to $345 million for the three months ended March 31, 2008. The Company’s effective tax rate for continuing operations was 34% for the three months ended March 31, 2009 compared to 38% for the three months ended March 31, 2008. The change was primarily due to changes in certain state tax laws in the first quarter of 2009 principally related to TWC.

      Income from Continuing Operations. Income from continuing operations was $559 million for the three months ended March 31, 2009 compared to $560 million for the three months ended March 31, 2008. Basic and diluted income per common share from continuing operations were both $0.46 in 2009 and 2008. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $10 million of income and $34 million of expense, net in 2009 and 2008, respectively, income from continuing operations decreased by $45 million, primarily reflecting lower Operating Income, partially offset by lower interest expense and lower tax expense, all as noted above.

      Discontinued Operations, Net of Tax . The financial results for the three months ended March 31, 2009 and 2008 included the impact of treating the results of operations and financial condition of TWC as discontinued operations. Discontinued operations, net of tax decreased to $131 million for the three months ended March 31, 2009 from $262 million for the three months ended March 31, 2008. The current year included results for the period from January 1, 2009 through March 12, 2009, the Distribution Record Date, as compared to a full three-month period in 2008. In addition, discontinued operations, net of tax for the three months ended March 31, 2009 and 2008 included direct transaction costs (e.g., legal and professional fees) related to the separation of TWC of $75 million and $2 million, respectively. For additional information, see Note 2 to the accompanying consolidated financial statements.

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

      Net Income Attributable to Noncontrolling Interests. Net income attributable to noncontrolling interests was $29 million and $51 million, respectively, for the three months ended March 31, 2009 and 2008.

      Net Income Attributable to Time Warner Inc. shareholders and Net Income Per Common Share Attributable to Time Warner Inc. common shareholders. Net income attributable to Time Warner Inc. shareholders was $661 million for the three months ended March 31, 2009 compared to $771 million for the three months ended March 31, 2008. Basic and diluted net income per common share attributable to Time Warner Inc. common shareholders were both $0.55 in 2009 compared to $0.65 and $0.64, respectively, in 2008.

Business Segment Results

      Networks. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Networks segment for the three months ended March 31, 2009 and 2008 are as follows (millions):

     The increase in Subscription revenues was due primarily to higher subscription rates at both Turner and HBO and the impact of the consolidation of HBO LAG.

     The decrease in Advertising revenues was driven mainly by Turner’s international networks, including the negative effect of foreign exchange rates, and, to a lesser extent, a decline in Turner’s domestic entertainment networks, reflecting weakened demand. The Company anticipates that achieving Advertising revenue growth for the remainder of 2009 at the Networks segment will continue to be challenging due to the difficult economic environment.

     Costs of revenues were essentially flat as an increase in programming costs was offset by lower newsgathering costs, primarily reflecting the absence in the first quarter of 2009 of the prior year quarter’s election-related costs. Programming costs increased 2% to $925 million for the three months ended March 31, 2009 from $907 million for the three months ended March 31, 2008 due primarily to higher original programming costs at Turner and the impact of the consolidation of HBO LAG, partly offset by lower sports programming costs at Turner, particularly related to NBA programming. In addition, programming costs for the three months ended March 31, 2009 and 2008 included $5 million and $21 million, respectively, of charges related to decisions to not proceed with certain original programming. Costs of revenues as a percentage of revenues were 45% and 47% for the three months ended March 31, 2009 and 2008, respectively.

     The increase in selling, general and administrative expenses was due primarily to increased costs related to the consolidation of HBO LAG and higher marketing expenses.

     Operating Income before Depreciation and Amortization increased primarily due to an increase in revenues, partially offset by an increase in selling, general and administrative expenses. Operating Income increased primarily due to the increase in Operating Income before Depreciation and Amortization, partly offset by higher amortization primarily related to the consolidation of HBO LAG.

     Content revenues primarily include theatrical product (which is content made available for initial exhibition in theaters) and television product (which is content made available for initial airing on television). The components of Content revenues for the three months ended March 31, 2009 and 2008 are as follows (millions):

     The decrease in theatrical film revenues for the three months ended March 31, 2009 was due to difficult comparisons to the three months ended March 31, 2008. Revenues in the first quarter of 2009 included the releases of Watchmen and He’s Just Not That Into You as well as carryover revenues from Gran Torino , The Curious Case of Benjamin Button and Yes Man . Revenues in the first quarter of 2008 included the releases of 10,000 B.C. and Fool’s Gold , as well as carryover revenues from I Am Legend and The Bucket List . Theatrical product revenues from home video and electronic delivery decreased for the three months ended March 31, 2009 primarily due to fewer significant titles in the first quarter of 2009, including Body of Lies and Nights in Rodanthe , compared to the first quarter of 2008, which included I Am Legend , Michael Clayton and The Brave One . Theatrical product revenues from television licensing decreased for the three months ended March 31, 2009 due primarily to the timing and quantity of availabilities.

     Television product licensing fees increased primarily due to fewer network deliveries in the first quarter of 2008 as a result of the Writers Guild of America (East and West) strike, which was settled in February 2008, partially offset by a difficult comparison to the first quarter 2008 off-network license fees from Seinfeld .

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

     The increase in other Content revenues was due primarily to revenues from the interactive video game release of F.E.A.R. 2: Project Origin as well as the expansion of the distribution of interactive video games.

     The decrease in costs of revenues resulted primarily from lower theatrical advertising and print costs due primarily to the timing, quantity and mix of films released and lower merchandise and related costs associated with a decline in home video and electronic delivery revenues, partially offset by higher film costs ($1.267 billion in 2009 compared to $1.152 billion in 2008). Included in film costs are net pre-release theatrical film valuation adjustments, which increased to $31 million for the three months ended March 31, 2009 from $9 million for the three months ended March 31, 2008. In addition, in the first quarter of 2008, the Company recognized approximately $50 million in participation expense related to current claims on films released in prior periods. Costs of revenues as a percentage of revenues were 71% and 70% in the first quarter of 2009 and 2008, respectively, reflecting the quantity and mix of products released.

     The decrease in selling, general and administrative expenses was primarily the result of lower employee costs resulting from the operational reorganization of the New Line business as well as lower distribution expenses primarily associated with the decline in home video and electronic delivery revenues.

     Beginning in the first quarter of 2009, Warner Bros. commenced a significant restructuring, primarily consisting of headcount reductions and the outsourcing of certain functions to an external service provider. As a result, the Company incurred restructuring charges of $37 million during the three months ended March 31, 2009 and expects to incur additional restructuring charges ranging from $40 million to $60 million during the remainder of 2009. The three months ended March 31, 2008 included restructuring charges of $116 million primarily related to involuntary employee terminations in connection with the operational reorganization of the New Line business.

     Operating Income before Depreciation and Amortization and Operating Income increased primarily due to lower costs of revenues, restructuring costs and selling, general and administrative expenses, partly offset by a decrease in revenues and the negative effect of foreign exchange rates.

      Publishing. Revenues, Operating Income before Depreciation and Amortization and Operating Income (Loss) of the Publishing segment for the three months ended March 31, 2009 and 2008 are as follows (millions):

     Subscription revenues declined primarily due to decreases at IPC resulting principally from the effect of foreign exchange rates as well as lower revenues from domestic subscription renewals due to the effect of the current economic environment and lower revenues as a result of softening domestic newsstand sales due to the effect of the current economic environment and wholesaler disruptions. The Company anticipates that foreign exchange rates and the economic environment will continue to adversely affect Subscription revenues during the remainder of 2009.

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

     Advertising revenues decreased due to declines in domestic print Advertising revenues, international print Advertising revenues, including the effect of foreign exchange rates at IPC, custom publishing revenues and online revenues primarily reflecting the current weak economic conditions and increased competition for advertising dollars. The Company currently anticipates that Advertising revenues at the Publishing segment for the remainder of 2009 will decline compared to the similar period in 2008, reflecting primarily the effect of the current economic environment.

     Other revenues decreased due primarily to decreases at the non-magazine businesses, including Synapse and Southern Living At Home, partially offset by the effect of the acquisition of QSP.

     Costs of revenues decreased 22% and, as a percentage of revenues, were 41% for both the three months ended March 31, 2009 and 2008. Costs of revenues for the magazine and online businesses include manufacturing costs (paper, printing and distribution) and editorial-related costs, which together decreased 22% to $305 million for the three months ended March 31, 2009 from $389 million for the three months ended March 31, 2008, primarily due to cost savings initiatives, lower printing and paper costs related to a decline in volume and lower costs at IPC due primarily to the effect of foreign exchange rates. In addition, costs of revenues at the non-magazine businesses declined as a result of lower revenues.

     Selling, general and administrative expenses were flat as cost savings initiatives, lower marketing expenses and a decrease at IPC due primarily to the effect of foreign exchange rates were offset by costs associated with the acquisition of QSP, an $18 million increase in bad debt reserves related to a newsstand wholesaler and higher pension expense.

     The results for the three months ended March 31, 2009 and 2008 included a $1 million reversal and $10 million of restructuring costs, respectively, primarily related to severance costs associated with continuing efforts to streamline operations.

     Operating Income before Depreciation and Amortization and Operating Income (Loss) decreased due primarily to lower revenues, partially offset by a decrease in costs of revenues.

     The Company anticipates that, excluding the 2008 asset impairments, Operating Income before Depreciation and Amortization and Operating Income (Loss) at the Publishing segment for 2009 will be less than that achieved during 2008, primarily resulting from the expected declines in Advertising revenues.

      AOL. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the AOL segment for the three months ended March 31, 2009 and 2008 are as follows (millions):

     The decline in Subscription revenues was primarily due to a decrease in the number of domestic AOL brand subscribers.

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

     The number of domestic AOL brand subscribers was 6.3 million, 6.9 million and 8.7 million as of March 31, 2009, December 31, 2008 and March 31, 2008, respectively. The average revenue per domestic AOL brand subscriber (“ARPU”) was $18.48 and $18.29 for the three months ended March 31, 2009 and 2008, respectively. AOL includes in its subscriber numbers individuals, households and entities that have provided billing information and completed the registration process sufficiently to allow for an initial log-on to the AOL service. Individuals who have registered for the free AOL service, including subscribers who have migrated from paid subscription plans, are not included in the AOL brand subscriber numbers presented above.

     The continued decline in domestic subscribers is 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 services, declining registrations for the paid service in response to AOL’s significantly reduced marketing efforts and increased competition from broadband access providers. The increase in ARPU for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 was due primarily to price increases for lower-priced plans, partially offset by a shift in the subscriber mix to lower-priced plans.

     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 the Third Party Network. The components of Advertising revenues for the three months ended March 31, 2009 and 2008 are as follows (millions):

     The decrease in display Advertising revenues generated on the AOL Network was primarily due to weakening global economic conditions, which contributed to lower demand from a number of advertiser categories and downward pricing pressure on advertising inventory. The decrease in paid-search Advertising revenues on the AOL Network, which are generated primarily through AOL’s strategic relationship with Google, was attributable primarily to decreases in search query volume on certain AOL Network properties.

     The decrease in Advertising revenues on the Third Party Network was primarily due to weakening global economic conditions, which contributed to lower demand from a number of advertiser categories and downward pricing pressure on advertising inventory. In addition, the decline in Advertising revenues on the Third Party Network included a decrease of $16 million due to a change in the relationship with a major customer of Platform-A Inc. Revenues associated with this relationship were $1 million for the three months ended March 31, 2009 compared to $17 million for the three months ended March 31, 2008. Total revenues from this customer for the year ended December 31, 2008 were $26 million.

     Total Advertising revenues for the three months ended March 31, 2009 decreased $64 million from the three months ended December 31, 2008, reflecting decreases in display and paid-search Advertising revenues on the AOL Network as well as a decrease in Advertising revenues on the Third Party Network. The decline in both display Advertising revenues on the AOL Network and Advertising revenues on the Third Party Network reflected weak economic conditions resulting in lower demand from a number of advertiser categories, seasonality and a loss of Advertising revenues from certain customers, while the decline in paid-search Advertising revenues was primarily due to lower revenues per search query on certain AOL Network properties.

     The Company expects Advertising revenues at the AOL segment for the remainder of 2009 to be less than those generated during the similar period of 2008, primarily reflecting weak economic conditions.

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

     Costs of revenues decreased 22%, and, as a percentage of revenues, were 49% and 48% for the three months ended March 31, 2009 and 2008, respectively. Costs of revenues decreased primarily due to declines in TAC, and to a lesser extent declines in personnel-related costs primarily associated with reduced headcount. TAC consists of the costs of acquiring third-party online advertising inventory and costs incurred in connection with distributing AOL’s free products or services or otherwise directing traffic to the AOL Network. For the three months ended March 31, 2009, TAC decreased 30% to $133 million in 2009 from $191 million in 2008, due primarily to the decrease in Advertising revenues on the Third Party Network and to a lesser extent declines in new product distribution costs.

     Selling, general and administrative expenses decreased 25% to $128 million for the three months ended March 31, 2009, reflecting a reduction in direct marketing costs primarily due to reduced subscriber acquisition marketing and lower consulting costs.

     In the first quarter of 2009, in an effort to better position its Global Web Services business, AOL undertook a significant restructuring. As a result, for the three months ended March 31, 2009, the Company incurred restructuring charges of $58 million primarily related to involuntary employee terminations and facility closures, and currently expects to incur up to an additional $90 million in restructuring charges during the remainder of 2009. The results for the three months ended March 31, 2008 also included net restructuring charges of $9 million primarily related to involuntary employee terminations and facility closures.

     Operating Income before Depreciation and Amortization decreased due primarily to a decline in revenues, partially offset by lower costs of revenues and selling, general and administrative expenses. Operating Income decreased due primarily to the decrease in Operating Income before Depreciation and Amortization, as discussed above, partially offset by a decrease in depreciation expense as a result of a reduction in network assets due to subscriber declines.

     Excluding the fourth quarter 2008 asset impairments, the Company anticipates that Operating Income before Depreciation and Amortization and Operating Income at the AOL segment during the remainder of 2009 will be less than that generated during the similar period of 2008, primarily resulting from continuing declines in Subscription and Advertising revenues as well as the effect of the current year restructuring activities.

      Corporate. Operating Loss before Depreciation and Amortization and Operating Loss of the Corporate segment for the three months ended March 31, 2009 and 2008 are as follows (millions):

     The results for the three months ended March 31, 2008 included $7 million of restructuring costs, due primarily to involuntary employee terminations as a result of the Company’s cost savings initiatives at the Corporate segment.

     Excluding the restructuring costs noted above, Operating Loss before Depreciation and Amortization and Operating Loss decreased due primarily to lower corporate costs, related primarily to the cost savings initiatives, partially offset by an increase in legal and other professional fees related to the defense of various shareholder lawsuits.

FINANCIAL CONDITION AND LIQUIDITY

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

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

access to capital markets. Time Warner’s unused committed capacity at March 31, 2009 was $13.955 billion, including $7.115 billion of cash and equivalents.

     As discussed in “Recent Developments,” as part of the TWC Separation, the Company received $9.253 billion as its portion of the Special Dividend paid by TWC.

     In late January 2009, Google exercised its right to request that AOL register Google’s 5% equity interest for sale in an initial public offering. Time Warner has the right, but not the obligation, to purchase Google’s equity interest for cash or shares of Time Warner common stock based on the appraised fair market value of the equity interest in lieu of conducting an initial public offering. The Company is in discussions with Google and has notified Google of its intention to purchase the 5% equity interest.

Current Financial Condition

     At March 31, 2009, Time Warner had $17.482 billion of debt, $7.115 billion of cash and equivalents (net debt of $10.367 billion, defined as total debt less cash and equivalents) and $35.786 billion of shareholders’ equity, compared to $21.955 billion of debt, $1.233 billion of cash and equivalents (net debt of $20.722 billion, defined as total debt less cash and equivalents) and $42.288 billion of shareholders’ equity at December 31, 2008.

     The following table shows the significant items contributing to the decrease in consolidated net debt from December 31, 2008 to March 31, 2009 (millions):

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

     The Company has historically invested a portion of its cash on hand in money market funds, including The Reserve Fund’s Primary Fund (“The Reserve Fund”). On the morning of September 15, 2008, the Company requested a full redemption of its approximately $330 million investment in The Reserve Fund, but the redemption request was not honored. On September 22, 2008, The Reserve Fund announced that redemptions of shares were suspended pursuant to an SEC order requested by The Reserve Fund so that an orderly liquidation could be effected. Through April 28, 2009, the Company has received $297 million from The Reserve Fund representing its pro rata share of partial distributions made by The Reserve Fund. The Company has not been informed as to when the remaining amount will be returned. In February 2009, The Reserve Fund announced that it would set aside an initial amount of $3.5 billion to defend against certain legal actions. The Company has filed a claim against The Reserve Fund demanding repayment of the remaining amount of its

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

full investment. As a result of the status of The Reserve Fund, the Company has classified its receivable from The Reserve Fund at March 31, 2009 as other current assets on the Company’s consolidated balance sheet.

     On July 26, 2007, Time Warner’s Board of Directors authorized a common stock repurchase program that allows the Company to purchase up to an aggregate of $5 billion of common stock. Purchases under this stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including price and business and market conditions. From the program’s inception through April 28, 2009, the Company has repurchased approximately 51 million shares of common stock for approximately $2.8 billion, pursuant to trading programs under Rule 10b5-1 of the Exchange Act (Note 6).

     On November 13, 2009, Time Warner’s floating rate notes due November 13, 2009 (aggregate principal amount of $2.000 billion) will mature.

Cash Flows

     Cash and equivalents increased by $5.882 billion, including $2 million of cash used by discontinued operations, and $92 million, including $3 million of cash used by discontinued operations, for the three months ended March 31, 2009 and 2008, respectively. Components of these changes are discussed below in more detail.

Operating Activities from Continuing Operations

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

     Cash provided by operations from continuing operations decreased to $1.425 billion in 2009 from $1.616 billion in 2008. The decrease in cash provided by operations from continuing operations was related primarily to a decrease in operating income and a decline in cash provided by working capital, partially offset by a decline in net interest payments and domestic pension plan contributions. The components of working capital are subject to wide fluctuations based on the timing of cash transactions related to production schedules, the acquisition of programming, collection of accounts receivable and similar items. The change in working capital between periods primarily reflects lower cash collections on receivables and the timing of payments for production spending, accounts payable and accrued liabilities.

     As of March 31, 2009, certain of the Company’s domestic defined benefit pension plans were funded by assets in a pension trust totaling $1.556 billion compared to $1.702 billion as of December 31, 2008. Between January 1, 2009 and March 31, 2009, the Company’s plan assets have experienced market losses of approximately 7%. The Company did not make any discretionary cash contributions to its defined benefit plans during the three months ended March 31, 2009. Subject to market conditions and other considerations, the Company may make discretionary cash contributions during the remainder of the year.

     Cash provided by investing activities from continuing operations was $9.184 billion for the three months ended March 31, 2009 compared to cash used by investing activities from continuing operations of $369 million for the three months ended March 31, 2008. The change in cash provided (used) by investing activities from continuing operations was primarily due to the receipt of the Special Dividend and a decline in investments and acquisitions.

Financing Activities from Continuing Operations

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

     Cash used by financing activities from continuing operations increased to $4.725 billion for the three months ended March 31, 2009 from $1.152 billion for the three months ended March 31, 2008. The change in cash used by financing activities from continuing operations was primarily due to an increase in debt repayments. The Company used a portion of the $9.253 billion Special Dividend to repay in full the $2.0 billion three-year unsecured term loan facility (plus accrued interest) and repay all amounts outstanding under the TW Revolving Facility (defined below).

     Cash used by discontinued operations reflects cash activity of discontinued operations for the period from January 1, 2009 through March 12, 2009, the Distribution Record Date, and for the full three-month period ended March 31, 2008. Cash provided by operations from discontinued operations decreased to $582 million for the three months ended March 31, 2009 from $1.180 billion for the three months ended March 31, 2008, primarily reflecting a change in working capital resulting from the timing of programming payments and cash collections and a decrease in income from discontinued operations, net of tax. Cash used by investing activities from discontinued operations decreased to $622 million for the three months ended March 31, 2009 from $841 million for the three months ended March 31, 2008 due primarily to a decrease in capital expenditures. Cash used by financing activities from discontinued operations increased to $5.224 billion for the three months ended March 31, 2009 from $348 million for the three months ended March 31, 2008 primarily due to the payment of the Special Dividend, partially offset by an increase in borrowings.

Outstanding Debt and Other Financing Arrangements

Outstanding Debt and Committed Financial Capacity

     At March 31, 2009, Time Warner had total committed capacity, defined as maximum available borrowings under various existing debt arrangements and cash and short-term investments, of $31.497 billion. Of this committed capacity, $13.955 billion was unused and $17.482 billion was outstanding as debt. At March 31, 2009, total committed capacity, outstanding letters of credit, unamortized discount on commercial paper, outstanding debt and total unused committed capacity were as follows (millions):

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

Repayment and Termination of $2.0 Billion Term Facility

     As discussed in “Recent Developments,” on March 17, 2009, the Company used a portion of the proceeds it received from the Special Dividend to repay in full the $2.0 billion outstanding (plus accrued interest) under the Term Facility and terminated the Term Facility. Time Warner did not incur any early termination or prepayment penalties in connection with the termination of the Term Facility.

Termination of Supplemental Credit Agreement

     As discussed in “Recent Developments,” on March 12, 2009, TWC borrowed the full committed amount of $1.932 billion under the TWC Bridge Facility, all of which was used to pay a portion of the Special Dividend. On March 26, 2009, TWC completed an offering of $3.0 billion in aggregate principal amount of debt securities and used a portion of the net proceeds from the offering to prepay in full the outstanding loans and all other amounts due under the TWC Bridge Facility, and the TWC Bridge Facility was terminated in accordance with its terms. Concurrently with the termination of the TWC Bridge Facility and pursuant to the terms of the Supplemental Credit Agreement, on March 26, 2009, TWC terminated the commitments of Time Warner under the Supplemental Credit Facility, and the Supplemental Credit Agreement was terminated in accordance with its terms.

Amendments to Revolving Facility

     On March 11, 2009, the Company entered into the first and second amendments to the amended and restated credit agreement (the “Revolving Credit Agreement”) for its senior unsecured five-year revolving credit facility (the “Revolving Facility”). The first amendment terminated the $100 million commitment of Lehman Commercial Paper Inc. (“LCPI”), a subsidiary of Lehman Brothers Holdings Inc., which filed a petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in September 2008, reducing the committed amount of the Revolving Facility from $7.0 billion to $6.9 billion. The second amendment, among other things, amended the Revolving Credit Agreement to (i) expand the circumstances under which any other lender under the Revolving Facility would become a Defaulting Lender (as defined in the Revolving Credit Agreement, as amended) and (ii) permit Time Warner to terminate the commitment of any such lender on terms substantially similar to those applicable to LCPI under the first amendment to the Revolving Credit Agreement.

Consent Solicitation

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

Programming Licensing Backlog

     Programming licensing backlog represents the amount of future revenues not yet recorded from cash contracts for the licensing of theatrical and television product for pay cable, basic cable, network and syndicated television exhibition. Backlog was approximately $4.1 billion at both March 31, 2009 and December 31, 2008. Included in these amounts is licensing of film product from the Filmed Entertainment segment to the Networks segment in the amount of $875 million and $967 million at March 31, 2009 and December 31, 2008, respectively.

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

Customer Credit Risk

     Credit risk in the Company’s businesses originates from sales of various products and services and is dispersed among many different counterparties. At March 31, 2009, no single customer of the Company had a receivable balance that was greater than 5% of the Company’s total net receivables. As a result of the current economic environment, a number of customers that purchase products and services from the Company are experiencing financial challenges (including bankruptcy in some cases). It is possible that some of these customers may not pay amounts owed or expected. It is also possible that these customers or others may not have the financial means to purchase the Company’s products or services in the future. If these events occur, they could have an adverse impact on the Company’s operating results and cash flows.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

     This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future trends in revenues, Operating Income before Depreciation and Amortization, Operating Income and cash from operations. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. These forward-looking statements are based on management’s current expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the Company is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise.

     Various factors could adversely affect the operations, business or financial results of Time Warner or its business segments in the future and cause Time Warner’s actual results to differ materially from those contained in the forward-looking statements, including those factors discussed in detail in Item 1A, “Risk Factors,” in the 2008 Form 10-K and in Time Warner’s other filings made from time to time with the SEC after the date of this report. In addition, Time Warner operates in highly competitive, consumer and technology-driven and rapidly changing media, entertainment and interactive services. These businesses are affected by government regulation, economic, strategic, political and social conditions, consumer response to new and existing products and services, technological developments and, particularly in view of new technologies, the continued ability to protect intellectual property rights. Time Warner’s actual results could differ materially from management’s expectations because of changes in such factors.

     Further, for Time Warner generally, lower than expected valuations associated with the cash flows and revenues at Time Warner’s segments may result in Time Warner’s inability to realize the value of recorded intangibles and goodwill at those segments. In addition, achieving the Company’s financial objectives, including growth in operations, maintaining financial ratios and a strong balance sheet, could be adversely affected by the factors discussed in detail in Item 1A, “Risk Factors,” in the 2008 Form 10-K, as well as:

	•		a longer than anticipated continuation of the current economic slowdown or further deterioration in the economy;
	•		decreased liquidity in the capital markets, including any reduction in the ability to access the capital markets for debt securities or bank financings;
	•		the impact of terrorist acts and hostilities;
	•		changes in the Company’s plans, strategies and intentions;
	•		the impacts of significant acquisitions, dispositions and other similar transactions; and
	•		the failure to meet earnings expectations.

TIME WARNER INC.
Item 4. CONTROLS AND PROCEDURES

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

     The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in reports filed or submitted by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by the Company is accumulated and communicated to the Company’s management to allow timely decisions regarding the required disclosure.

Changes in Internal Control Over Financial Reporting

     There have not been any changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

See accompanying notes.

See accompanying notes.

See accompanying notes.

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.

DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

     Time Warner Inc. (“Time Warner” or the “Company”) is a leading media and entertainment company, whose businesses include television networks, filmed entertainment, publishing and interactive services. Time Warner classifies its operations into four reportable segments: Networks: consisting principally of cable television networks that provide programming; Filmed Entertainment: consisting principally of feature film, television and home video production and distribution; Publishing: consisting principally of magazine publishing; and AOL: consisting principally of interactive consumer and advertising services. Financial information for Time Warner’s various reportable segments is presented in Note 11.

Changes in Basis of Presentation

     The 2008 financial information has been recast so that the basis of presentation is consistent with that of the 2009 financial information. This recast reflects (i) the financial condition and results of operations of Time Warner Cable Inc. (“TWC”) as discontinued operations for all periods presented, (ii) the adoption of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“Statement”) No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (“FAS 160”), (iii) the adoption of FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) Issue No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP No. EITF 03-6-1”), and (iv) the 1-for-3 reverse stock split of the Company’s common stock that became effective on March 27, 2009.

TWC Separation from Time Warner

     On March 12, 2009 (the “Distribution Record Date”), the Company disposed of all of its shares of TWC common stock. The disposition was made pursuant to a separation agreement entered into on May 20, 2008, among Time Warner, TWC and certain of their subsidiaries (the “Separation Agreement”) for the purpose of achieving the legal and structural separation of TWC from Time Warner (the “TWC Separation”). The TWC Separation was effected as a pro rata dividend of all shares of TWC common stock held by Time Warner in a spin-off (the “Distribution”) to Time Warner stockholders.

     Prior to the Distribution Record Date, on March 12, 2009, TWC, in accordance with the terms of the Separation Agreement, paid a special cash dividend of $10.27 per share to all holders of TWC Class A Common Stock and TWC Class B Common Stock as of the close of business on March 11, 2009 (aggregating $10.856 billion) (the “Special Dividend”) that resulted in the receipt by Time Warner of $9.253 billion.

     With the completion of the TWC Separation, the Company disposed of the Cable segment in its entirety. Accordingly, the Company has presented the financial condition and results of operations of the Cable segment as discontinued operations in the consolidated financial statements for all periods presented. For a summary of discontinued operations see Note 2.

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Noncontrolling Interests

     On January 1, 2009, the Company adopted the provisions of FAS 160. The provisions of FAS 160 establish accounting and reporting standards for the noncontrolling interest in a consolidated subsidiary, including the accounting treatment upon the deconsolidation of a subsidiary. FAS 160 is being applied prospectively, except for the provisions related to the presentation of noncontrolling interests. As of March 31, 2009 and December 31, 2008, noncontrolling interests of $642 million and $3.382 billion, respectively, have been classified as a component of equity in the consolidated balance sheet. For the three months ended March 31, 2009 and 2008, net income attributable to noncontrolling interests of $29 million and $51 million, respectively, is included in net income. Earnings per share has not been affected as a result of the adoption of the provisions of FAS 160.

Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities

     On January 1, 2009, the Company adopted the provisions of FSP No. EITF 03-6-1. The provisions of FSP No. EITF 03-6-1 require that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends or dividend equivalents (such as restricted stock units granted by the Company) be considered participating securities. Because the awards are participating securities, the Company is required to apply the two-class method of computing basic and diluted earnings per share (the “Two-Class Method”). The retrospective application of the provisions of FSP No. EITF 03-6-1 did not change any prior-period earnings per share amounts.

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 voting interest entities in which Time Warner has a controlling voting interest (“subsidiaries”). In addition, FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46R”), applies to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties (a “VIE”). The primary beneficiary of a VIE is the party that absorbs the majority of the entity’s expected losses, receives the majority of its expected residual returns, or both, as a result of holding variable interests. In accordance with FIN 46R, the Company consolidates those VIEs of which it is the primary beneficiary. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation.

     The Company’s investments in entities determined to be VIEs principally consisted of certain investments in its Networks segment, primarily HBO Asia and HBO South Asia (collectively “HBO Asia”) and HBO Latin America Group (“HBO LAG”). For the three months ended March 31, 2009, HBO Asia and HBO LAG collectively had revenues and operating income of $109 million and $24 million, respectively. As of March 31, 2009, total assets, liabilities and noncontrolling interest attributable to HBO Asia and HBO LAG were $875 million (including goodwill and intangible assets of $683 million), $128 million and $394 million, respectively. Such amounts are included in the consolidated statement of operations and consolidated balance sheet.

     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. Translation gains or losses of assets and liabilities 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 U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and footnotes thereto. Actual results could differ from those estimates.

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

     Significant estimates inherent in the preparation of the consolidated financial statements include reserves established for accounting for asset impairments, allowances for doubtful accounts, depreciation and amortization, film ultimate revenues, home video and magazine returns, business combinations, pension and other postretirement benefits, equity-based compensation, income taxes, contingencies, litigation matters 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, 2008 (the “2008 Form 10-K”).

Recent Accounting Standards Adopted in 2009

     In addition to the adoption of FAS 160 and FSP No. EITF 03-6-1 as discussed in “Changes in Basis of Presentation,” the Company has also adopted the following accounting standards in 2009:

Fair Value Measurements

     On January 1, 2009, the Company adopted the provisions of FASB Statement No. 157, Fair Value Measurements (“FAS 157”) related to nonfinancial assets and liabilities on a prospective basis. FAS 157 establishes the authoritative definition of fair value, sets out a framework for measuring fair value and expands the required disclosures about fair value measurement. On January 1, 2008, the Company adopted the provisions of FAS 157 related to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis. The adoption of the provisions of FAS 157 did not affect the Company’s historical consolidated financial statements. For more information, see Note 4.

Business Combinations

     On January 1, 2009, the Company adopted the provisions of FASB Statement No. 141 (revised 2007), Business Combinations (“FAS 141R”) and is applying such provisions prospectively to business combinations that have an acquisition date on or after January 1, 2009. FAS 141R establishes principles and requirements for how an acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and measures goodwill acquired in a business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. In addition, FAS 141R requires that changes in the amount of acquired tax attributes be included in the Company’s results of operations. While FAS 141R applies only to business combinations with an acquisition date after its effective date, the amendments to FASB Statement No. 109, Accounting for Income Taxes (“FAS 109”), with respect to deferred tax valuation allowances and liabilities for income tax uncertainties have been applied to all deferred tax valuation allowances and liabilities for income tax uncertainties recognized in prior business combinations. The adoption of the provisions of FAS 141R did not affect the Company’s historical consolidated financial statements.

Disclosures about Derivative Instruments and Hedging Activities

     On January 1, 2009, the Company adopted the provisions of FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 (“FAS 161”). The provisions of FAS 161 amend and expand the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under FAS 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The adoption of the provisions of FAS 161 requires prospective disclosures and accordingly did not affect the Company’s historical consolidated financial statements. For more information, see Note 10.

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Accounting for Collaborative Arrangements

     On January 1, 2009, the Company adopted the provisions of EITF Issue No. 07-1, Accounting for Collaborative Arrangements (“EITF 07-1”). EITF 07-1 defines collaborative arrangements and establishes accounting and reporting requirements for transactions between participants in the arrangement and third parties. The Company’s collaborative arrangements primarily relate to arrangements entered into with third parties to jointly finance and distribute theatrical productions. These arrangements, which are referred to as co-financing arrangements, take various forms. In most cases, the form of the arrangement is the sale of an economic interest in a film to an investor. The Filmed Entertainment segment generally records the amounts received for the sale of an economic interest as a reduction of the cost of the film, as the investor assumes full risk for that portion of the film asset acquired in these transactions. The substance of these arrangements is that the third-party investors own an interest in the film and, therefore, in each period the Company reflects in the statement of operations either a charge or benefit to costs of revenues to reflect the estimate of the third-party investor’s interest in the profits or losses incurred on the film. Consistent with the requirements of Statement of Position 00-2, Accounting by Producers or Distributors of Films (“SOP 00-2”), the estimate of the third-party investor’s interest in profits or losses incurred on the film is determined by reference to the ratio of actual revenue earned to date in relation to total estimated ultimate revenues. For the three months ended March 31, 2009 and 2008, participation costs of $68 million and $124 million, respectively, were recorded in costs of revenues and net amounts received from collaborators for which capitalized film costs were reduced was $38 million and $58 million, respectively. As of March 31, 2009 and December 31, 2008, the net amount due to collaborators for their share of participations was $280 million and $276 million, respectively, and were recorded in participations payable in the consolidated balance sheet. The provisions of EITF 07-1 did not affect the Company’s historical consolidated financial statements.

Recent Accounting Standards Not Yet Adopted

Interim Disclosures about Fair Value of Financial Instruments

     In April 2009, the FASB staff issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP No. FAS 107-1 and APB 28-1”). This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments , to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. This FSP also amends Accounting Principles Board Opinion No. 28 , Interim Financial Reporting , to require these disclosures in all interim financial statements. The provisions of FSP No. FAS 107-1 and APB 28-1 became effective for Time Warner on April 1, 2009, will be applied prospectively beginning in the second quarter of 2009 and are not expected to have a material impact on the Company’s consolidated financial statements.

Recognition and Presentation of Other-Than-Temporary-Impairments

     In April 2009, the FASB staff issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary-Impairments (“FSP No. FAS 115-2 and FAS 124-2”). This FSP incorporates impairment guidance for debt securities from various sources of authoritative literature and clarifies the interaction of the factors that should be considered when determining whether a debt security is other than temporarily impaired. The provisions of FSP No. FAS 115-2 and FAS 124-2 became effective for Time Warner on April 1, 2009, will be applied prospectively beginning in the second quarter of 2009 and are not expected to have a material impact on the Company’s consolidated financial statements.

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

     In April 2009, the FASB staff issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP No. FAS 157-4”). This FSP provides additional guidance for estimating fair value in accordance with FAS 157 when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly (i.e., a forced liquidation or distressed sale). The provisions of FSP No. FAS 157-4 became effective for Time Warner on April 1, 2009, are being applied prospectively beginning in the second quarter of 2009 and are not expected to have a material impact on the Company’s consolidated financial statements.

Income Per Common Share

     Basic income per common share is determined using the Two-Class Method and is computed by dividing net income attributable to Time Warner Inc. common shareholders by the weighted-average common shares outstanding during the period. The Two-Class Method is an earnings allocation formula that determines income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Diluted income per common share reflects the more dilutive earnings per share amount calculated using the treasury stock method or the Two-Class Method. For the three months ended March 31, 2009 and 2008, both the Two-Class Method and the treasury stock method calculation for diluted income per common share attributable to Time Warner Inc. common shareholders yielded the same result.

     Set forth below is a reconciliation of basic and diluted income per common share from continuing operations (millions, except per share amounts):

     Diluted income per common share for the three months ended March 31, 2009 and 2008, excludes approximately 184 million and 133 million, respectively, common shares that may be issued under the Company’s stock compensation plans because they do not have a dilutive effect.

Interim Impairment Testing of Goodwill at AOL

     As discussed in more detail in Note 1 to the Company’s consolidated financial statements in the 2008 Form 10-K, goodwill and indefinite-lived intangible assets are tested annually for impairment during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. Although the Board of Directors has not made any decisions related to AOL, management anticipates that it would initiate a process to spin off one or more parts of the business of AOL to Time Warner stockholders, in one or a series of transactions. As a result, the Company was required

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

under FASB Statement No. 142, Goodwill and Other Intangible Assets (“FAS 142”) to test goodwill at AOL as of March 31, 2009 (the “interim testing date”).

     In determining the fair value of AOL for the interim impairment analysis, the Company used a market based approach. The market based approach to determine fair value involves the exercise of judgment in identifying the relevant comparable company market multiples. The market multiples identified by the Company were multiplied by AOL’s 2009 earnings forecast in determining the estimated fair value of AOL. Such fair value exceeded AOL’s net book value and therefore did not result in an impairment charge.

     If the fair value of the AOL reporting unit had been hypothetically lower by 20% at March 31, 2009, the fair value of the AOL reporting unit would have exceeded its book value. In addition, if the fair value of the AOL reporting unit had been hypothetically lower by 30% at March 31, 2009, the book value of the AOL reporting unit would have exceeded its fair value by approximately $100 million. If the book value of the AOL reporting unit had been greater than its fair value, the second step of the goodwill impairment test would have been required to be performed to determine the ultimate amount of impairment loss to recognize.

2.

BUSINESS ACQUISITIONS, DISPOSITIONS AND RELATED TRANSACTIONS

CME Investment

     On March 23, 2009, the Company announced that it had entered into an agreement to acquire an approximately 31% interest in Central European Media Enterprises Ltd. (“CME”), a broadcasting company operating leading networks in seven Central and Eastern European countries, for an investment of $242 million in cash. In connection with this investment, Time Warner has agreed to allow CME founder and Non-Executive Chairman Ronald S. Lauder to vote Time Warner’s shares of CME for at least four years, subject to certain exceptions. Also, Mr. Lauder has agreed to support Time Warner’s appointment of two designees to CME’s board of directors. In addition to being subject to customary closing conditions, the closing of the investment is subject to a vote of CME’s shareholders and certain regulatory approvals, and Mr. Lauder has committed to vote the shares he controls in favor of the transaction. The transaction is expected to close in the second quarter of 2009.

Summary of Discontinued Operations

     Discontinued operations for the three months ended March 31, 2009 and 2008 reflect the financial condition and results of operations of TWC. Financial data for discontinued operations for the three months ended March 31, 2009 and 2008 is as follows (millions, except per share amounts):

     Discontinued operations for the three months ended March 31, 2009 and 2008 included direct transaction costs (e.g., legal and professional fees) related to the separation of TWC of $75 million and $2 million, respectively. The Networks segment of Time Warner recognized approximately $170 million of Subscription revenues from TWC in 2009 through the Distribution Record Date and $210 million for the full three-month period ended March 31, 2008.

4.

FAIR VALUE MEASUREMENTS

     In accordance with FAS 157, a fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. FAS 157 also established a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). The following table presents information about assets and liabilities required to be carried at fair value on a recurring basis as of March 31, 2009 (millions):