UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

		for the quarterly period ended June 30, 2010 or

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

		for the transition period from                                         to

Commission file number 001-15062

 

TIME WARNER INC.

(Exact name of Registrant as specified in its charter)

Delaware		13-4099534
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

		Shares Outstanding
Description of Class		as of July 27, 2010
Common Stock – $.01 par value		1,124,215,824

 

 

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		20
Consolidated Balance Sheet at June 30, 2010 and December 31, 2009		21
Consolidated Statement of Operations for the Three and Six Months Ended June 30, 2010 and 2009		22
Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2010 and 2009		23
Consolidated Statement of Equity for the Six Months Ended June 30, 2010 and 2009		24
Notes to Consolidated Financial Statements		25
Supplementary Information		42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		51
Item 1A. Risk Factors		51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		51
Item 5. Other Information		52
Item 6. Exhibits		52
EX-10.2
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

TIME WARNER INC.

INTRODUCTION

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

	•		Overview. This section provides a general description of Time Warner’s business segments, as well as recent developments the Company believes are important in understanding the results of operations and financial condition or in understanding anticipated future trends.
	•		Results of operations. This section provides an analysis of the Company’s results of operations for the three and six months ended June 30, 2010. This analysis is presented on both a consolidated and a business segment basis. In addition, a brief description of significant transactions and events that affect the comparability of the results being analyzed is included.
	•		Financial condition and liquidity. This section provides an analysis of the Company’s financial condition as of June 30, 2010 and cash flows for the six months ended June 30, 2010.
	•		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.

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, TBS, CNN, Warner Bros., New Line Cinema, People, Sports Illustrated and Time. During the six months ended June 30, 2010, the Company generated revenues of $12.699 billion (up 7% from $11.916 billion in 2009), Operating Income of $2.657 billion (up 31% from $2.025 billion in 2009), Net Income attributable to Time Warner shareholders of $1.287 billion (up 9% from $1.184 billion in 2009) and Cash Provided by Operations from Continuing Operations of $1.388 billion (down 14% from $1.611 billion in 2009).

Time Warner Businesses

     Time Warner classifies its operations into three reportable segments: Networks, Filmed Entertainment and Publishing. For additional information regarding Time Warner’s business segments, refer to Note 12, “Segment Information,” in the accompanying consolidated financial statements.

     Networks. Time Warner’s Networks segment consists of Turner Broadcasting System, Inc. (“Turner”) and Home Box Office, Inc. (“HBO”). During the six months ended June 30, 2010, the Networks segment generated revenues of $6.128 billion (48% of the Company’s overall revenues) and $2.182 billion in Operating Income.

     Turner operates domestic and international networks, including such recognized brands as TNT, TBS, CNN, Cartoon Network, truTV and HLN, which are among the leaders in advertising-supported cable television networks. The Turner networks generate revenues principally from providing programming to cable system operators, satellite distribution services, telephone companies and other distributors (known as affiliates) that have contracted to receive and distribute this programming and from the sale of advertising. Key contributors to Turner’s success are its strong brands and continued investments in high-quality, popular programming focused on sports, original and syndicated series, news, network movie premieres and animation to drive audience delivery and revenue growth. During the first half of 2010, Advertising revenue at Turner benefited from an improved advertising environment both domestically and internationally.

     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 providing programming to affiliates that have contracted to receive and distribute such programming to subscribers who choose to receive the HBO or Cinemax services. An additional source of revenues for HBO is the sale and licensing of its original programming, including Entourage, True Blood, The Pacific, The Sopranos and Rome.

     The Company’s Networks segment has been pursuing international expansion in select areas. For example, in the first quarter of 2010, HBO acquired the remainder of its partners’ interests in HBO Central Europe (“HBO CE”) and purchased an additional 21% equity interest in HBO Latin America Group, consisting of HBO Brasil, HBO Olé and HBO Latin America Production Services (collectively, “HBO LAG”), and Turner acquired a majority stake in NDTV Imagine Limited, which owns a Hindi general entertainment channel in India. In recent years, Turner has also expanded its presence in Germany, Japan, Korea, Latin America, Turkey and the United Arab Emirates, and HBO has acquired additional equity interests in HBO Asia, HBO South Asia and HBO LAG. 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 consists of businesses managed by the Warner Bros. Entertainment Group (“Warner Bros.”) that principally produce and distribute theatrical motion pictures, including Inception, Clash of the Titans, Sex and the City 2, The Blind Side, Sherlock Holmes and the Harry Potter films, as well as television shows and videogames. During the six months ended June 30, 2010, the Filmed Entertainment segment generated revenues of $5.210 billion (39% of the Company’s overall revenues) and $480 million in Operating Income.

     The Filmed Entertainment segment’s diversified sources of revenues within its film and television businesses, including its extensive film library and global distribution infrastructure, have helped it to deliver consistent long-term operating performance. Theatrical product revenues principally are generated domestically and internationally through rentals from theatrical exhibition and subsequently through licensing fees received for the distribution of films on television networks

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

and pay television programming services. Television product revenues principally are generated domestically and internationally from the licensing of the Filmed Entertainment segment’s programs on television networks and pay television programming services. The Filmed Entertainment segment also generates revenues for both its theatrical and television product through home video distribution on DVD and Blu-ray Discs and in various digital formats.

     Warner Bros. continues to be an industry leader in the television content business. During the 2009-2010 broadcast season, Warner Bros. produced more than 25 scripted 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, Fringe and Chuck) and original series for several cable networks (including The Closer and Southland).

     Home video distribution, in particular revenues from the distribution of DVDs, has been one of the largest drivers of the segment’s profits over the last several years. The industry and the Company experienced a decline in home video sales over the past two years as a result of 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. Beginning in 2009, the decline in home video revenues was also affected by consumers shifting to subscription rental services and discount rental kiosks, which generate significantly less revenue per transaction than DVD sales. Partially offsetting the softening consumer demand for standard definition DVDs and the shift to subscription services and kiosks were growing sales of high definition Blu-ray Discs and increased electronic delivery, which have higher gross margins than standard definition DVDs.

     To increase operational efficiencies, over the past several years the Filmed Entertainment segment has undertaken restructuring activities to reduce its cost structure and streamline operations, including combining certain operations of its studios and outsourcing certain functions.

     Publishing. Time Warner’s Publishing segment consists principally of magazine publishing and related websites as well as direct-marketing businesses. During the six months ended June 30, 2010, the Publishing segment generated revenues of $1.718 billion (13% of the Company’s overall revenues) and $203 million in Operating Income.

     As of June 30, 2010, Time Inc. published 22 magazines in the U.S., including People, Sports Illustrated, Time, InStyle, Real Simple, Southern Living, Entertainment Weekly 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. Time Inc. develops digital content for its magazine websites and also publishes magazine content on digital devices. 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 business, QSP. Advertising sales at the Publishing segment, particularly print advertising sales, were significantly adversely affected by the economic environment during 2009. However, during the first half of 2010, the Publishing segment experienced an improvement in Advertising revenues driven by increases in domestic print advertising pages sold and digital advertising. Digital Advertising revenues were 14% of Time Inc.’s total Advertising revenues for both the three and six months ended June 30, 2010 compared to 12% for both the three and six months ended June 30, 2009.

     In its ongoing effort to improve efficiency and reduce its cost structure, the Publishing segment executed restructuring initiatives, primarily relating to headcount reductions, in the fourth quarters of 2009 and 2008, which have benefitted the segment’s performance in 2010 and are expected to continue to benefit the segment’s performance during the remainder of 2010.

Recent Developments

July 2010 Debt Offering and Tender Offer

     As discussed more fully in “Financial Condition and Liquidity – Outstanding Debt and Other Financing Arrangements,” on July 14, 2010, Time Warner issued $3.0 billion aggregate principal amount of debt securities from a shelf registration statement. The Company used the net proceeds from the debt offering to repurchase $780 million aggregate principal amount of the outstanding 5.50% Notes due 2011 of Time Warner, $1.362 billion aggregate principal

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

amount of the outstanding 6.875% Notes due 2012 of Time Warner and $568 million aggregate principal amount of the outstanding 9.125% Debentures due 2013 of Historic TW Inc. (“Historic TW”) (as successor by merger to Time Warner Companies, Inc.) pursuant to a tender offer.

March 2010 Debt Offering and Tender Offer and April 2010 Redemption

     As discussed more fully in “Financial Condition and Liquidity – Outstanding Debt and Other Financing Arrangements,” on March 11, 2010, Time Warner issued $2.0 billion aggregate principal amount of debt securities from a shelf registration statement. The Company used a portion of the net proceeds from this debt offering to repurchase $773 million aggregate principal amount of the Company’s outstanding 6.75% Notes due 2011 pursuant to a tender offer. On April 22, 2010, the Company redeemed the remaining $227 million aggregate principal amount of the 6.75% Notes due 2011.

Asset Securitization Arrangements

     During the first quarter of 2010, the Company repaid the $805 million outstanding under the Company’s two accounts receivable securitization facilities. The Company terminated the two accounts receivable securitization facilities on March 19, 2010 and March 24, 2010, respectively.

HBO LAG

     On March 9, 2010, HBO purchased additional interests in HBO LAG for $217 million in cash, which resulted in HBO owning 80% of the equity interests of HBO LAG. HBO accounts for this investment under the equity method of accounting. See Notes 1 and 2 to the accompanying consolidated financial statements.

HBO Central Europe Acquisition

     On January 27, 2010, HBO purchased the remainder of its partners’ interests in HBO CE for $136 million in cash, net of cash acquired. HBO CE operates the HBO and Cinemax premium pay television programming services serving 11 territories in Central Europe. The Company has consolidated the results of operations and financial condition of HBO CE effective January 27, 2010. Upon the acquisition of the controlling interest in HBO CE, a gain of $59 million was recognized reflecting the excess of the fair value over the Company’s carrying cost of its original investment in HBO CE. See Note 2 to the accompanying consolidated financial statements.

Benefit Plan Amendments

     In March 2010, the Company’s Board of Directors approved amendments to its domestic defined benefit pension plans, which generally provide that (i) effective June 30, 2010, benefits provided under the plans will stop accruing for additional years of service and the plans will be closed to new hires and employees with less than one year of service and (ii) after December 31, 2013, pay increases will no longer be taken into consideration when determining a participating employee’s benefits under the plans.

     In addition, effective July 1, 2010, the Company will increase its matching contributions for eligible participants in the Time Warner Savings Plan. Effective January 1, 2011, the Company will also implement a supplemental savings plan that will provide for similar Company matching for eligible participant deferrals above the Internal Revenue Service compensation limits that apply to the Time Warner Savings Plan up to $500,000 of eligible compensation.

     The net effect of these changes is expected to result in a net annual decrease to employee benefit plan expense of approximately $50 million.

NCAA Basketball Programming Agreement

     On April 22, 2010, Turner, together with CBS Broadcasting, Inc. (“CBS”), entered into a 14-year agreement with The National Collegiate Athletic Association (the “NCAA”), which provides Turner and CBS with exclusive television,

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

Internet, and wireless rights to the NCAA Division I Men’s Basketball Championship events (the “NCAA Tournament Games”) in the United States and its territories and possessions.

     Under the terms of the arrangement, Turner and CBS will work together to produce and distribute the NCAA Tournament Games and related programming commencing in 2011. The games will be televised on Turner’s TNT, TBS and truTV networks and on the CBS network and advertising will be sold on a joint basis.

     The aggregate programming rights fee of approximately $10.8 billion, which will be shared by Turner and CBS, will be paid by Turner to the NCAA over the 14-year term of the agreement. Further, Turner and CBS have agreed to share advertising and sponsorship revenues and production costs. In the event, however, that the programming rights fee and production costs exceed advertising and sponsorship revenues, CBS’s share of such shortfall is limited to specified annual amounts (the “Loss Cap Amounts”), ranging from approximately $90 million to $30 million (totaling approximately $670 million over the term of the agreement). Beginning in 2011, Turner’s share of the programming rights fee will be amortized based on the ratio of current period advertising revenue to total estimated advertising revenue over the term of the agreement. Any costs recognized and payable by Turner due to the Loss Cap Amounts will be expensed by the Company as incurred.

RESULTS OF OPERATIONS

Recent Accounting Guidance

     As discussed more fully in Note 1 to the accompanying consolidated financial statements, on January 1, 2010, the Company adopted on a retrospective basis amendments to accounting guidance pertaining to the accounting for transfers of financial assets and variable interest entities.

Significant Transactions and Other Items Affecting Comparability

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

		Three Months Ended								Six Months Ended
		6/30/10				6/30/09				6/30/10				6/30/09
Amounts related to securities litigation and government investigations, net		$	(8	)		$	(7	)		$	(19	)		$	(14	)
Gain (loss) on operating assets			-				(33	)			59				(33	)
Impact on Operating Income			(8	)			(40	)			40				(47	)
Investment gains, net			3				37				-				24
Amounts related to the separation of Time Warner Cable Inc.			(4	)			7				(7	)			2
Costs related to the separation of AOL			-				(15	)			-				(15	)
Premium paid and transaction costs incurred on debt redemption			(14	)			-				(69	)			-
Pretax impact			(23	)			(11	)			(36	)			(36	)
Income tax impact of above items			5				(3	)			28				3
Tax items related to Time Warner Cable Inc.			-				-				-				24
After-tax impact			(18	)			(14	)			(8	)			(9	)
Noncontrolling interest impact			-				-				-				5
Impact of items on income from continuing operations attributable to Time Warner Inc. shareholders		$	(18	)		$	(14	)		$	(8	)		$	(4	)

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

     In addition to the items affecting comparability described above, the Company incurred restructuring costs of $6 million and $15 million for the three and six months ended June 30, 2010, respectively, and $27 million and $63 million for the three and six months ended June 30, 2009, respectively. For further discussion of these restructuring costs, refer to “Consolidated Results” and “Business Segment Results.”

Amounts Related to Securities Litigation

     The Company recognized legal reserves as well as legal and other professional fees related to the defense of securities litigation matters by former employees totaling $8 million and $19 million for the three and six months ended June 30, 2010, respectively, and $7 million and $14 million for the three and six months ended June 30, 2009, respectively.

Gain (Loss) on Operating Assets

     For the six months ended June 30, 2010, the Company, upon the acquisition of the controlling interest in HBO CE, recognized a $59 million gain reflecting the recognition of the excess of the fair value over the Company’s carrying costs of its original investment in HBO CE.

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

Investment Gains, Net

     For the three and six months ended June 30, 2010, the Company recognized $3 million and $0, respectively, of miscellaneous investment gains, net.

     For the three and six months ended June 30, 2009, the Company recognized a $28 million gain on the sale of the Company’s investment in TiVo Inc. and a $17 million gain on the sale of the Company’s investment in Eidos plc. In addition, for the three and six months ended June 30, 2009, the Company recognized $8 million and $21 million, respectively, of miscellaneous investment losses.

Amounts Related to the Separation of TWC

     For the three and six months ended June 30, 2010, the Company recognized $4 million and $7 million, respectively, of other loss related to the expiration, exercise and net change in the estimated fair value of Time Warner equity awards held by Time Warner Cable Inc. (“TWC”) employees.

     For the three and six months ended June 30, 2009, the Company incurred pretax direct transaction costs, primarily legal and professional fees related to the separation of TWC, of $1 million and $6 million, respectively, which have been reflected in other income (loss), net in the accompanying consolidated statement of operations. In addition, for the three and six months ended June 30, 2009, the Company recognized $8 million of other income related to the increase in the estimated fair value of Time Warner equity awards held by TWC employees.

Costs Related to the Separation of AOL

     During the three and six months ended June 30, 2009, the Company incurred costs related to the separation of AOL of $15 million, which have been recorded in other income (loss), net in the accompanying consolidated statement of operations. These costs were related to the solicitation of consents from debt holders to amend the indentures governing certain of the Company’s debt securities.

Premium Paid and Transaction Costs Incurred on Debt Redemption

     For the three and six months ended June 30, 2010, the Company recognized $14 million and $69 million, respectively, of premium paid and transaction costs incurred on the repurchase and redemption of the Company’s 6.75% Notes due 2011, which were recorded in other income (loss), net in the accompanying consolidated statement of operations.

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

Income Tax Impact and Tax Items Related to TWC

     The income tax impact reflects the estimated tax provision or tax benefit associated with each item affecting comparability. Such estimated tax provisions or tax benefits vary based on certain factors, including the taxability or deductibility of the items and foreign tax on certain transactions. For the six months ended June 30, 2009, the Company also recognized approximately $24 million of tax benefits attributable to the impact of certain state tax law changes on TWC net deferred liabilities.

Noncontrolling Interest Impact

     For the six months ended June 30, 2009, the noncontrolling interest impact of $5 million reflects the minority owner’s share of the tax provision related to changes in certain state tax laws on TWC net deferred liabilities.

Consolidated Results

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

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

		Three Months Ended										Six Months Ended
		6/30/10				6/30/09				% Change		6/30/10				6/30/09				% Change
Subscription		$	2,250			$	2,092			8%		$	4,462			$	4,165			7%
Advertising			1,505				1,360			11%			2,697				2,465			9%
Content			2,485				2,305			8%			5,278				4,953			7%
Other			137				163			(16%)			262				333			(21%)
Total revenues		$	6,377			$	5,920			8%		$	12,699			$	11,916			7%

     The increase in Subscription revenues for the three and six months ended June 30, 2010 was primarily related to an increase at the Networks segment. Advertising revenues increased for the three and six months ended June 30, 2010, primarily reflecting growth at the Networks and Publishing segments. The increase in Content revenues for the three and six months ended June 30, 2010 was due primarily to increases at the Filmed Entertainment and Networks segments.

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

     Costs of Revenues. For the three months ended June 30, 2010 and 2009, costs of revenues totaled $3.599 billion and $3.334 billion, respectively, and, as a percentage of revenues, were 56% for both periods. For the six months ended June 30, 2010 and 2009, costs of revenues totaled $6.952 billion and $6.692 billion, respectively, and, as a percentage of revenues, were 55% and 56%, respectively. The segment variations are discussed in detail in “Business Segment Results.”

     Selling, General and Administrative Expenses. For the three months ended June 30, 2010 and 2009, selling, general and administrative expenses increased 4% to $1.512 billion in 2010 from $1.459 billion in 2009, due to increases at the Filmed Entertainment and Networks segments, partially offset by a decrease at the Publishing segment. For the six months ended June 30, 2010 and 2009, selling, general and administrative expenses increased 1% to $3.000 billion in 2010 from $2.960 billion in 2009, due to increases at the Networks, Filmed Entertainment and Corporate segments, partially offset by a decrease at the Publishing 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 increased to $170 million and $334 million for the three and six months ended June 30, 2010, respectively, compared to $165 million and $330 million for the three and six months ended June 30, 2009, respectively.

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

     Amortization Expense. Amortization expense was flat at $66 million for both the three months ended June 30, 2010 and 2009 and decreased to $134 million for the six months ended June 30, 2010 from $143 million for the six months ended June 30, 2009.

     Restructuring Costs. For the three and six months ended June 30, 2010, the Company incurred restructuring costs of $6 million and $15 million, respectively, primarily related to various employee terminations and other exit activities, consisting of $3 million and $7 million, respectively, at the Filmed Entertainment segment and $3 million and $8 million, respectively, at the Publishing segment.

     For the three and six months ended June 30, 2009, the Company incurred restructuring costs of $27 million and $63 million, respectively, primarily related to various employee terminations and other exit activities, consisting of $31 million and $68 million, respectively, at the Filmed Entertainment segment for the three and six months ended June 30, 2009 and reversals of $4 million and $5 million, respectively, at the Publishing segment for the three and six months ended June 30, 2009.

     Operating Income. Operating Income increased to $1.194 billion for the three months ended June 30, 2010 from $1.001 billion for the three months ended June 30, 2009. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $8 million and $40 million of expense for the three months ended June 30, 2010 and 2009, respectively, Operating Income increased $161 million, primarily reflecting increases at the Networks and Publishing segments.

     Operating Income increased to $2.657 billion for the six months ended June 30, 2010 from $2.025 billion for the six months ended June 30, 2009. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $40 million of income and $47 million of expense for the six months ended June 30, 2010 and 2009, respectively, Operating Income increased $545 million, primarily reflecting increases at the Networks, Publishing and Filmed Entertainment segments.

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

     Interest Expense, Net. For the three months ended June 30, 2010, interest expense, net, was essentially flat at $300 million compared to $297 million for the three months ended June 30, 2009 as higher average net debt was offset by lower rates. For the six months ended June 30, 2010, interest expense, net decreased to $596 million from $610 million for the six months ended June 30, 2009, primarily due to lower rates.

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

		Three Months Ended								Six Months Ended
		6/30/10				6/30/09				6/30/10				6/30/09
Investment gains, net		$	3			$	37			$	-			$	24
Amounts related to the separation of TWC			(4	)			7				(7	)			2
Costs related to the separation of AOL			-				(15	)			-				(15	)
Premium paid and transaction costs incurred on debt redemption			(14	)			-				(69	)			-
Loss from equity method investees			(3	)			(2	)			(3	)			(12	)
Other			1				(3	)			9				3
Other income (loss), net		$	(17	)		$	24			$	(70	)		$	2

     The changes in investment gains, net, amounts related to the separation of TWC, costs related to the separation of AOL and premium paid and transaction costs incurred on debt repurchase and redemption are discussed under “Significant Transactions and Other Items Affecting Comparability.”

     Income Tax Provision. Income tax expense from continuing operations increased to $317 million and $706 million for the three and six months ended June 30, 2010, respectively, from $299 million and $526 million for the three and six months ended June 30, 2009, respectively. The Company’s effective tax rate for continuing operations was 36% and 35%

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

for the three and six months ended June 30, 2010, respectively, compared to 41% and 37% for the three and six months ended June 30, 2009, respectively. The decrease for the three months ended June 30, 2010 was primarily due to lower interest on uncertain tax positions during the three months ended June 30, 2010 and the loss on the sale of the Warner Bros. Italian cinema assets for which no benefit was recognized during the three months ended June 30, 2009. The decrease for the six months ended June 30, 2010 also reflected the tax benefits related to TWC, as previously discussed, during the six months ended June 30, 2009, partially offset by the benefit of valuation allowance releases during the six months ended June 30, 2010.

     Income from Continuing Operations. Income from continuing operations increased to $560 million for the three months ended June 30, 2010 from $429 million for the three months ended June 30, 2009. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $18 million and $14 million of expense, net for the three months ended June 30, 2010 and 2009, respectively, income from continuing operations increased by $135 million, primarily reflecting higher Operating Income. Basic and diluted income per common share from continuing operations attributable to Time Warner Inc. common shareholders were both $0.49 for the three months ended June 30, 2010 compared to $0.36 for both for the three months ended June 30, 2009.

     Income from continuing operations increased to $1.285 billion for the six months ended June 30, 2010 from $891 million for the six months ended June 30, 2009. Excluding the items previously noted under “Significant Transactions and Other Items Affecting Comparability” totaling $8 million and $9 million of expense, net for the six months ended June 30, 2010 and 2009, respectively, income from continuing operations increased by $393 million, primarily reflecting higher Operating Income, partially offset by higher income tax expense. Basic and diluted income per common share from continuing operations attributable to Time Warner Inc. common shareholders were $1.12 and $1.11, respectively, for the six months ended June 30, 2010 compared to $0.75 for both for the six months ended June 30, 2009.

     Discontinued Operations, Net of Tax. The financial results for the three and six months ended June 30, 2009 included the impact of treating the results of operations and financial condition of AOL Inc. (“AOL”) as discontinued operations, and for the six months ended June 30, 2009 included the impact of treating the results of operations and financial condition of TWC as discontinued operations. Discontinued operations, net of tax was income of $100 million and $326 million for the three and six months ended June 30, 2009, respectively. Discontinued operations, net of tax for the three and six months ended June 30, 2009 included AOL’s results for the period January 1, 2009 through June 30, 2009 and for the six months ended June 30, 2009 included TWC’s results for the period from January 1, 2009 through March 12, 2009. For additional information, see Note 2 to the accompanying consolidated financial statements.

     Net Income (Loss) Attributable to Noncontrolling Interests. For both the three and six months ended June 30, 2010, net loss attributable to noncontrolling interests was $2 million. For the three and six months ended June 30, 2009, net income attributable to noncontrolling interests was $5 million and $33 million, respectively.

     Net Income Attributable to Time Warner Inc. Shareholders. Net income attributable to Time Warner Inc. shareholders was $562 million and $524 million for the three months ended June 30, 2010 and 2009, respectively. Basic and diluted net income per common share attributable to Time Warner Inc. common shareholders were both $0.49 for the three months ended June 30, 2010 compared to $0.44 and $0.43, respectively, for the three months ended June 30, 2009.

     Net income attributable to Time Warner Inc. shareholders was $1.287 billion and $1.184 billion for the six months ended June 30, 2010 and 2009, respectively. Basic and diluted net income per common share attributable to Time Warner Inc. common shareholders were $1.12 and $1.11, respectively, for the six months ended June 30, 2010 compared to $0.99 and $0.98, respectively, for the six months ended June 30, 2009.

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

Business Segment Results

     Networks. Revenues and Operating Income of the Networks segment for the three and six months ended June 30, 2010 and 2009 are as follows (millions):

		Three Months Ended										Six Months Ended
		6/30/10				6/30/09				% Change		6/30/10				6/30/09				% Change
Revenues:
Subscription		$	1,916			$	1,763			9%		$	3,804			$	3,520			8%
Advertising			1,002				876			14%			1,792				1,599			12%
Content			218				198			10%			470				404			16%
Other			34				18			89%			62				38			63%
Total revenues			3,170				2,855			11%			6,128				5,561			10%
Costs of revenues(a)			(1,534	)			(1,425	)		8%			(2,768	)			(2,638	)		5%
Selling, general and administrative(a)			(556	)			(480	)		16%			(1,047	)			(943	)		11%
Gain on operating assets			-				-			-			59				-			NM
Depreciation			(88	)			(83	)		6%			(172	)			(167	)		3%
Amortization			(11	)			(9	)		22%			(18	)			(19	)		(5%)
Operating Income		$	981			$	858			14%		$	2,182			$	1,794			22%

     The increase in Subscription revenues for the three and six months ended June 30, 2010 was comprised of an increase in domestic subscription revenues of $107 million and $191 million, respectively, mainly due to higher domestic subscription rates and an increase in international subscription revenues of $46 million and $93 million, respectively, primarily due to international growth, including the consolidation of HBO CE and the favorable impact of foreign exchange rates.

     The increase in Advertising revenues for the three and six months ended June 30, 2010 was due to growth at Turner’s domestic networks of $67 million and $104 million, respectively, mainly as a result of strong scatter demand and yield management, which was partially offset by audience declines as well as growth at its international networks of $59 million and $89 million, respectively, mainly due to increased demand and expansion.

     The increase in Content revenues for the three and six months ended June 30, 2010 was due primarily to higher sales of HBO’s original programming of $15 million and $35 million, respectively, which for the six months ended June 30, 2010 included the domestic basic cable television sale of Entourage as well as higher international licensing revenues.

     For the three and six months ended June 30, 2010, Costs of revenues increased 8% and 5%, respectively, and as a percentage of revenues were 48% and 45% for the three and six months ended June 30, 2010, respectively, compared to 50% and 47% for the three and six months ended June 30, 2009, respectively. For the three months ended June 30, 2010, programming costs increased 8% to $1.200 billion from $1.115 billion for the three months ended June 30, 2009, and, for the six months ended June 30, 2010, increased 3% to $2.080 billion from $2.015 billion for the six months ended June 30, 2009. The increase in programming costs for the three and six months ended June 30, 2010 was due primarily to higher original programming costs, and, for the three months ended June 30, 2010, higher licensed programming costs. The increases in Costs of revenues for the three and six months ended June 30, 2010 also reflected higher operating costs of $24 million and $65 million, respectively, primarily related to international expansion.

     For the three and six months ended June 30, 2010, selling, general and administrative expenses increased due primarily to an increase in marketing expenses, merit-based increases in compensation, higher overhead expenses and the unfavorable effect of foreign exchange rates.

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

     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the six months ended June 30, 2010 included a $59 million gain that was recognized upon the acquisition of the controlling interest in HBO CE, reflecting the excess of the fair value over the Company’s carrying costs of its original investment in HBO CE.

     Operating Income for the three and six months ended June 30, 2010 increased primarily due to the increase in revenues, partially offset by higher costs of revenues and selling, general and administrative expenses. Operating Income for the six months ended June 30, 2010 also benefited from the $59 million gain relating to HBO CE.

     Filmed Entertainment. Revenues and Operating Income of the Filmed Entertainment segment for the three and six months ended June 30, 2010 and 2009 are as follows (millions):

		Three Months Ended										Six Months Ended
		6/30/10				6/30/09				% Change		6/30/10				6/30/09				% Change
Revenues:
Subscription		$	13			$	10			30%		$	25			$	19			32%
Advertising			17				20			(15%)			30				34			(12%)
Content			2,459				2,257			9%			5,100				4,810			6%
Other			27				46			(41%)			55				103			(47%)
Total revenues			2,516				2,333			8%			5,210				4,966			5%
Costs of revenues(a)			(1,839	)			(1,638	)		12%			(3,708	)			(3,517	)		5%
Selling, general and administrative(a)			(411	)			(401	)		2%			(834	)			(810	)		3%
Loss on operating assets			-				(33	)		(100%)			-				(33	)		(100%)
Restructuring costs			(3	)			(31	)		(90%)			(7	)			(68	)		(90%)
Depreciation			(45	)			(41	)		10%			(87	)			(81	)		7%
Amortization			(45	)			(46	)		(2%)			(94	)			(100	)		(6%)
Operating Income		$	173			$	143			21%		$	480			$	357			34%

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

     Content revenues primarily relate to theatrical product (which is content made available for initial exhibition in theaters) and television product (which is content made available for initial airing on television). The components of Content revenues for the three and six months ended June 30, 2010 and 2009 are as follows (millions):

		Three Months Ended										Six Months Ended
		6/30/10				6/30/09				% Change		6/30/10				6/30/09				% Change
Theatrical product:
Theatrical film		$	470			$	385			22%		$	967			$	871			11%
Home video and electronic delivery			550				581			(5%)			1,246				1,058			18%
Television licensing			389				349			11%			799				731			9%
Consumer products and other			31				16			94%			48				47			2%
Total theatrical product			1,440				1,331			8%			3,060				2,707			13%
Television product:
Television licensing			691				588			18%			1,367				1,411			(3%)
Home video and electronic delivery			130				161			(19%)			286				318			(10%)
Consumer products and other			47				50			(6%)			103				111			(7%)
Total television product			868				799			9%			1,756				1,840			(5%)
Other			151				127			19%			284				263			8%
Total Content revenues		$	2,459			$	2,257			9%		$	5,100			$	4,810			6%

     The increase in Content revenues for the three and six months ended June 30, 2010 included the positive impact of foreign exchange rates on many of the segment’s international operations.

     The increase in theatrical film revenues for the three and six months ended June 30, 2010 was due primarily to the success of key films released in the second quarter of 2010, which included Clash of the Titans, Sex and the City 2 and A Nightmare on Elm Street, compared to the similar period in 2009, which included The Hangover and Terminator Salvation. Theatrical film revenues for the six months ended June 30, 2010 also included revenues from Valentine’s Day and The Book of Eli and carryover revenues from Sherlock Holmes and The Blind Side, and for the six months ended June 30, 2009 included revenues from Watchmen and He’s Just Not That Into You and carryover revenues from Gran Torino and The Curious Case of Benjamin Button. Theatrical product revenues from home video and electronic delivery decreased for the three months ended June 30, 2010 primarily due to the effect of improved home video catalog returns in the prior year period. Theatrical product revenues from home video and electronic delivery increased for the six months ended June 30, 2010 primarily due to the quantity and performance of first quarter 2010 releases. Significant titles in 2010 included The Blind Side, Sherlock Holmes, The Book of Eli and Where the Wild Things Are compared to 2009, which included Gran Torino, Body of Lies, Yes Man and Nights in Rodanthe. Theatrical product revenues from television licensing increased for the three and six months ended June 30, 2010 due primarily to the quantity and mix of availabilities.

     The increase in television product licensing fees for the three months ended June 30, 2010 was primarily due to a higher number of new series, the timing of network deliveries and the initial off-network availability of The Closer. The decrease in television product licensing fees for the six months ended June 30, 2010 was primarily due to the 2009 conclusion of several series with high licensing fees, including Without a Trace and ER. The decrease in television product revenues from home video and electronic delivery for the three and six months ended June 30, 2010 primarily resulted from lower sales of older series.

     The increase in other Content revenues for the three and six months ended June 30, 2010 was due primarily to the second-quarter 2010 interactive video game release of LEGO Harry Potter: Years 1-4.

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

     The increase in costs of revenues for the three and six months ended June 30, 2010 resulted primarily from higher film costs and higher advertising and print costs due mainly to the quantity and mix of films released, including a higher number of films released internationally. Film costs increased to $1.171 billion and $2.304 billion for the three and six months ended June 30, 2010, respectively, from $1.014 billion and $2.281 billion for the three and six months ended June 30, 2009, respectively. Included in film costs are net pre-release theatrical film valuation adjustments, which were $0 for both the three and six months ended June 30, 2010 compared to $20 million and $51 million for the three and six months ended June 30, 2009, respectively. Costs of revenues as a percentage of revenues were 73% and 71% for the three and six months ended June 30, 2010, respectively, compared to 70% and 71% for the three and six months ended June 30, 2009, respectively. This percentage varies from period to period based on the quantity, mix and timing of theatrical releases.

     The increase in selling, general and administrative expenses for the three and six months ended June 30, 2010 was primarily the result of merit-based increases in compensation.

     As previously noted under “Significant Transactions and Other Items Affecting Comparability,” the results for the three and six months ended June 30, 2009 included a $33 million loss on the sale of Warner Bros.’ Italian cinema assets. In addition, the results for the three and six months ended June 30, 2010 included $3 million and $7 million of restructuring costs, respectively, primarily relating to headcount reductions and the outsourcing of certain functions. The results for the three and six months ended June 30, 2009 included $31 million and $68 million, respectively, of restructuring charges, primarily relating to headcount reductions and the outsourcing of certain functions.

     The increase in Operating Income for the three and six months ended June 30, 2010 was primarily due to the changes discussed above, including the effect of improved home video catalog returns in 2009 of approximately $30 million.

     Publishing. Revenues and Operating Income of the Publishing segment for the three and six months ended June 30, 2010 and 2009 are as follows (millions):

		Three Months Ended										Six Months Ended
		6/30/10				6/30/09				% Change		6/30/10				6/30/09				% Change
Revenues:
Subscription		$	321			$	319			1%		$	633			$	626			1%
Advertising			503				482			4%			904				865			5%
Content			16				12			33%			30				31			(3%)
Other			79				102			(23%)			151				199			(24%)
Total revenues			919				915			-			1,718				1,721			-
Costs of revenues(a)			(343	)			(353	)		(3%)			(650	)			(682	)		(5%)
Selling, general and administrative(a)			(383	)			(422	)		(9%)			(779	)			(888	)		(12%)
Restructuring costs			(3	)			4			(175%)			(8	)			5			NM
Depreciation			(27	)			(31	)		(13%)			(56	)			(62	)		(10%)
Amortization			(10	)			(11	)		(9%)			(22	)			(24	)		(8%)
Operating Income		$	153			$	102			50%		$	203			$	70			190%

     Advertising revenues increased for the three and six months ended June 30, 2010 primarily due to increases in domestic print advertising revenues of $18 million and $26 million, respectively, due to improvements in domestic print advertising pages sold and increases in digital advertising revenues of $11 million and $21 million, respectively.

     The decrease in Other revenues for the three and six months ended June 30, 2010 is due primarily to the sale of Southern Living At Home in the third quarter of 2009 and declines at other non-magazine businesses, including Synapse and QSP.

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

     Costs of revenues decreased 3% and 5% for the three and six months ended June 30, 2010, respectively, and as a percentage of revenues, were 37% and 38% for the three and six months ended June 30, 2010 compared to 39% and 40% for the three and six months ended June 30, 2009, respectively. Costs of revenues for the magazine and digital businesses include manufacturing costs (paper, printing and distribution) and editorial-related costs, which together decreased slightly to $307 million for the three months ended June 30, 2010 from $308 million for the three months ended June 30, 2009 and decreased 2% to $581 million for the six months ended June 30, 2010 from $595 million for the six months ended June 30, 2009, primarily due to cost savings initiatives and lower paper costs associated with a decline in paper prices.

     Selling, general and administrative expenses for the three and six months ended June 30, 2010 decreased due primarily to lower marketing expenses, lower pension expenses and cost savings resulting from Time Inc.’s fourth quarter 2009 restructuring activities. In addition, for the six months ended June 30, 2010, selling, general and administrative expenses decreased due to the absence of an $18 million prior year bad debt reserve related to a newsstand wholesaler.

     Operating Income for the three and six months ended June 30, 2010 increased due primarily to decreases in selling, general and administrative expenses and costs of revenues.

     Corporate. Operating Loss of the Corporate segment for the three and six months ended June 30, 2010 and 2009 is as follows (millions):

		Three Months Ended										Six Months Ended
		6/30/10				6/30/09				% Change		6/30/10				6/30/09				% Change
Selling, general and administrative(a)		$	(80	)		$	(78	)		3%		$	(179	)		$	(162	)		10%
Depreciation			(10	)			(10	)		-			(19	)			(20	)		(5%)
Operating Loss		$	(90	)		$	(88	)		2%		$	(198	)		$	(182	)		9%

     For the three months ended June 30, 2010, Operating Loss increased compared to the prior year, reflecting merit-based increases in compensation, partially offset by lower pension expenses. For the six months ended June 30, 2010, Operating Loss increased compared to the prior year, reflecting merit-based increases in compensation, severance charges and an increase in legal and other professional fees related to the defense of former employees in various lawsuits, partially offset by lower pension expenses.

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, the remainder of the $3 billion common stock repurchase program and scheduled debt repayments. Time Warner’s sources of cash include cash provided by operations, cash and equivalents on hand, available borrowing capacity under its committed credit facilities and commercial paper program and access to capital markets. Time Warner’s unused committed capacity at June 30, 2010 was $11.179 billion, including $4.238 billion of cash and equivalents.

Current Financial Condition

     At June 30, 2010, Time Warner had $16.520 billion of debt, $4.238 billion of cash and equivalents (net debt, defined as total debt less cash and equivalents, of $12.282 billion) and $33.105 billion of shareholders’ equity, compared to $16.208 billion of debt, $4.733 billion of cash and equivalents (net debt of $11.475 billion) and $33.396 billion of shareholders’ equity at December 31, 2009.

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

     The following table shows the significant items contributing to the increase in consolidated net debt from December 31, 2009 to June 30, 2010 (millions):

Balance at December 31, 2009		$	11,475
Cash provided by operations from continuing operations			(1,388	)
Cash used by discontinued operations			23
Capital expenditures			206
Dividends paid to common stockholders			492
Investments and acquisitions, net(a)			542
Proceeds from the sale of investments(a)			(102	)
Repurchases of common stock(b)			1,016
All other, net			18
Balance at June 30, 2010(c)		$	12,282

     On January 28, 2010, Time Warner’s Board of Directors increased the amount remaining on its common stock repurchase program to $3.0 billion for purchases beginning January 1, 2010. Purchases under the 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 January 1, 2010 through July 30, 2010, the Company repurchased approximately 38 million shares of common stock for approximately $1.2 billion pursuant to trading programs under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.

Cash Flows

     Cash and equivalents decreased by $495 million, including $23 million of cash used by discontinued operations, for the six months ended June 30, 2010 and increased by $5.776 billion, including $494 million of cash provided by discontinued operations, for the six months ended June 30, 2009. 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):

		Six Months Ended
		6/30/10				6/30/09
Operating Income		$	2,657			$	2,025
Depreciation and amortization			468				473
(Gain) loss on operating assets			(59	)			33
Net interest payments(a)			(533	)			(547	)
Net income taxes paid(b)			(724	)			(408	)
Noncash equity-based compensation			128				102
Restructuring payments, net of accruals			(80	)			(80	)
All other, net, including working capital changes			(469	)			13
Cash provided by operations from continuing operations		$	1,388			$	1,611

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

     Cash provided by operations from continuing operations decreased to $1.388 billion for the six months ended June 30, 2010 from $1.611 billion for the six months ended June 30, 2009. The decrease in cash provided by operations from continuing operations was related primarily to cash used by working capital and higher income taxes paid, partially offset by an increase in Operating Income. Working capital is 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.

Investing Activities from Continuing Operations

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

		Six Months Ended
		6/30/10				6/30/09
Investments in available-for-sale securities		$	(6	)		$	(2	)
Investments and acquisitions, net of cash acquired:
HBO LAG			(217	)			-
HBO CE			(136	)			-
Central European Media Enterprises Ltd.			-				(244	)
All other			(183	)			(94	)
Capital expenditures			(206	)			(230	)
Proceeds from the TWC Special Dividend			-				9,253
Proceeds from the sale of available-for-sale securities			-				49
All other investment and sale proceeds			102				160
Cash provided (used) by investing activities from continuing operations		$	(646	)		$	8,892

     Cash used by investing activities from continuing operations was $646 million for the six months ended June 30, 2010 compared to cash provided by investing activities from continuing operations of $8.892 billion for the six months ended June 30, 2009. The change in cash provided (used) by investing activities from continuing operations was primarily due to the Company’s receipt of $9.253 billion on March 12, 2009 as its portion of the payment by TWC of the special cash dividend of $10.27 per share to all holders of TWC Class A Common Stock and TWC Class B Common Stock as of the close of business on March 11, 2009 (the “Special Dividend”) in connection with the separation of TWC from the Company, as well as an increase in investments and acquisitions.

Financing Activities from Continuing Operations

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

		Six Months Ended
		6/30/10				6/30/09
Borrowings(a)		$	2,204			$	3,520
Debt repayments(a)			(1,908	)			(8,054	)
Proceeds from the exercise of stock options			68				6
Excess tax benefit on stock options			4				-
Principal payments on capital leases			(8	)			(9	)
Repurchases of common stock			(1,016	)			(170	)
Dividends paid			(492	)			(453	)
Other financing activities			(66	)			(61	)
Cash used by financing activities from continuing operations		$	(1,214	)		$	(5,221	)

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

     Cash used by financing activities from continuing operations decreased to $1.214 billion for the six months ended June 30, 2010 from $5.221 billion for the six months ended June 30, 2009. The decrease in cash used by financing activities from continuing operations was primarily due to a decrease in debt repayments, partially offset by an increase in repurchases of common stock made in connection with the Company’s common stock repurchase program.

Cash Flows from Discontinued Operations

     Cash used by discontinued operations was $23 million for the six months ended June 30, 2010 as compared to cash provided by discontinued operations of $494 million for the six months ended June 30, 2009, which primarily reflected the cash activity of AOL.

Outstanding Debt and Other Financing Arrangements

Outstanding Debt and Committed Financial Capacity

     At June 30, 2010, Time Warner had total committed capacity, defined as maximum available borrowings under various existing debt arrangements and cash and short-term investments, of $27.794 billion. Of this committed capacity, $11.179 billion was unused and $16.520 billion was outstanding as debt. At June 30, 2010, total committed capacity, outstanding letters of credit, outstanding debt and total unused committed capacity were as follows (millions):

														Unused
		Committed				Letters of				Outstanding				committed
		Capacity (a)				Credit (b)				Debt (c)				capacity
Cash and equivalents		$	4,238			$	-			$	-			$	4,238
Revolving bank credit agreement and commercial paper program			6,900				78				-				6,822
Fixed-rate public debt			16,223				-				16,223				-
Other obligations(d)(e)			433				17				297				119
Total		$	27,794			$	95			$	16,520			$	11,179

2010 Debt Transactions

     On March 3, 2010, Time Warner filed a shelf registration statement with the Securities and Exchange Commission that allows it to offer and sell from time to time debt securities, preferred stock, common stock and warrants to purchase debt and equity securities. During 2010, the Company entered into a series of transactions to capitalize on the historically low interest rate environment and extend the maturities of its public debt. Specifically, Time Warner issued $5.0 billion aggregate principal amount of debt securities and used a portion of the net proceeds to repurchase or redeem approximately $3.710 billion of aggregate principal amount of debt securities as well as repay $805 million outstanding under the Company’s two accounts receivable securitization facilities. Each of these transactions is more fully described below.

March 2010 Debt Offering and Tender Offer and April 2010 Redemption

     On March 11, 2010, Time Warner issued $2.0 billion aggregate principal amount of debt securities from the shelf registration statement, consisting of $1.4 billion aggregate principal amount of 4.875% Notes due 2020 and $600 million

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

aggregate principal amount of 6.200% Debentures due 2040 (the “March 2010 Debt Offering”). The securities issued pursuant to the March 2010 Debt Offering are guaranteed, on an unsecured basis, by Historic TW. In addition, Turner and HBO have guaranteed, on an unsecured basis, Historic TW’s guarantee of the securities.

     The net proceeds to the Company from the March 2010 Debt Offering were $1.984 billion, after deducting underwriting discounts. The Company used a portion of the net proceeds from this debt offering to repurchase $773 million of the Company’s outstanding 6.75% Notes due 2011 pursuant to a tender offer. The premium paid and transaction costs incurred for the repurchase of $773 million aggregate principal amount of the 6.75% Notes due 2011 were $55 million and were reflected in other income (loss), net in the accompanying consolidated statement of operations for the six months ended June 30, 2010. On April 22, 2010, the Company redeemed the remaining $227 million aggregate principal amount of the 6.75% Notes due 2011 pursuant to a notice of redemption dated March 23, 2010. The premium paid and transaction costs incurred on the repurchase of the remaining $227 million of the 6.75% Notes due 2011 were $14 million, and were reflected in other income (loss), net in the accompanying consolidated statement of operations for the three and six months ended June 30, 2010. The premiums paid and transaction costs incurred discussed above are included in significant transactions and other items affecting comparability.

July 2010 Debt Offering and Tender Offer

     On July 14, 2010, Time Warner issued $3.0 billion aggregate principal amount of debt securities from the shelf registration statement, consisting of $1.0 billion aggregate principal amount of 3.15% Notes due 2015, $1.0 billion aggregate principal amount of 4.70% Notes due 2021 and $1.0 billion aggregate principal amount of 6.10% Debentures due 2040 (the “July 2010 Debt Offering”). The securities issued pursuant to the July 2010 Debt Offering are guaranteed, on an unsecured basis, by Historic TW. In addition, Turner and HBO have guaranteed, on an unsecured basis, Historic TW’s guarantee of the securities.

     The net proceeds to the Company from the July 2010 Debt Offering were $2.979 billion, after deducting underwriting discounts. The Company used the net proceeds from this debt offering to repurchase $780 million of the aggregate principal amount of the outstanding 5.50% Notes due 2011 of Time Warner, $1.362 billion aggregate principal amount of the outstanding 6.875% Notes due 2012 of Time Warner and $568 million aggregate principal amount of the outstanding 9.125% Debentures due 2013 of Historic TW (as successor by merger to Time Warner Companies, Inc.) pursuant to a tender offer. The premium paid and transaction costs incurred on the repurchase of these debt securities are expected to be approximately $290 million, and will be recorded in other income (loss), net in the third quarter of 2010 in the Company’s consolidated statement of operations and will be included in significant transactions and other items affecting comparability.

Asset Securitization Arrangements

     During the first quarter of 2010, the Company repaid the $805 million outstanding under the Company’s two accounts receivable securitization facilities. The Company terminated the two accounts receivable securitization facilities on March 19, 2010 and March 24, 2010, respectively.

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 $4.5 billion at both June 30, 2010 and December 31, 2009, respectively. Included in these amounts is licensing of film product from the Filmed Entertainment segment to the Networks segment in the amount of $1.2 billion and $1.1 billion at June 30, 2010 and December 31, 2009, respectively.

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

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

     This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. Examples of forward-looking statements in this document include, but are not limited to, statements regarding the adequacy of the Company’s liquidity to meet its needs for the foreseeable future, the incurrence of additional restructuring charges in 2010, the impact of plan amendments on employee benefit plan expenses, the timing of programming expenditures, the impact of restructuring activities in 2010 and the Company’s international expansion plans.

     The Company’s forward-looking statements are based on management’s current expectations and assumptions regarding the Company’s business and performance, the economy and other future conditions and forecasts of future events, circumstances and results. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. The Company’s actual results may differ materially from those set forth in its forward-looking statements. Important factors that could cause the Company’s actual results to differ materially from those in its forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors:

	•		recent and future changes in technology, services and standards, including, but not limited to, alternative methods for the delivery and storage of digital media and the maturation of the standard definition DVD format;
	•		changes in consumer behavior, including changes in spending or saving behavior and changes in when, where and how digital media is consumed;
	•		changes in the Company’s plans, initiatives and strategies, and consumer acceptance thereof;
	•		changes in advertising expenditures due to, among other things, the shift of advertising expenditures from traditional to digital media, pressure from public interest groups, changes in laws and regulations and other societal, political, technological and regulatory developments;
	•		competitive pressures, including as a result of audience fragmentation;
	•		the popularity of the Company’s content;
	•		piracy and the Company’s ability to protect its content and intellectual property rights;
	•		lower than expected valuations associated with the cash flows and revenues at Time Warner’s segments, which could result in Time Warner’s inability to realize the value of recorded intangible assets and goodwill at those segments;
	•		the Company’s ability to deal effectively with an economic slowdown or other economic or market difficulty;
	•		decreased liquidity in the capital markets, including any reduction in the Company’s ability to access the capital markets for debt securities or obtain bank financings on acceptable terms;
	•		the effects of any significant acquisitions, dispositions and other similar transactions by the Company;
	•		the failure to meet earnings expectations;
	•		the adequacy of the Company’s risk management framework;
	•		changes in applicable accounting policies;
	•		the impact of terrorist acts, hostilities, natural disasters and pandemic viruses;
	•		changes in tax laws; and
	•		the other risks and uncertainties detailed in Part I, Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

     Any forward-looking statements made by the Company in this document speak only as of the date on which they are made. 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 new information, subsequent events or otherwise.

TIME WARNER INC.

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 Securities Exchange Act of 1934, as amended) 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 June 30, 2010 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

TIME WARNER INC.

		June 30,				December 31,
		2010				2009
ASSETS
Current assets
Cash and equivalents		$	4,238			$	4,733
Receivables, less allowances of $1,738 and $2,247			5,328				5,070
Securitized receivables			-				805
Inventories			1,860				1,769
Deferred income taxes			635				670
Prepaid expenses and other current assets			570				645
Total current assets			12,631				13,692
Noncurrent inventories and film costs			5,583				5,754
Investments, including available-for-sale securities			1,679				1,542
Property, plant and equipment, net			3,784				3,922
Intangible assets subject to amortization, net			2,604				2,676
Intangible assets not subject to amortization			7,767				7,734
Goodwill			29,697				29,639
Other assets			1,285				1,100
Total assets		$	65,030			$	66,059
LIABILITIES AND EQUITY
Current liabilities
Accounts payable and accrued liabilities		$	6,778			$	7,807
Deferred revenue			807				781
Debt due within one year			34				57
Non-recourse debt			-				805
Current liabilities of discontinued operations			-				23
Total current liabilities			7,619				9,473
Long-term debt			16,486				15,346
Deferred income taxes			1,621				1,607
Deferred revenue			270				269
Other noncurrent liabilities			5,923				5,967
Commitments and Contingencies (Note 13)
Equity
Common stock, $0.01 par value, 1.639 billion and 1.634 billion shares issued and 1.129 billion and 1.157 billion shares outstanding			16				16
Paid-in-capital			157,703				158,129
Treasury stock, at cost (510 million and 477 million shares)			(28,034	)			(27,034	)
Accumulated other comprehensive loss, net			(732	)			(580	)
Accumulated deficit			(95,848	)			(97,135	)
Total Time Warner Inc. shareholders’ equity			33,105				33,396
Noncontrolling interests			6				1
Total equity			33,111				33,397
Total liabilities and equity		$	65,030			$	66,059

See accompanying notes.

TIME WARNER INC.

		Three Months Ended								Six Months Ended
		6/30/10				6/30/09				6/30/10				6/30/09
Revenues		$	6,377			$	5,920			$	12,699			$	11,916
Costs of revenues			(3,599	)			(3,334	)			(6,952	)			(6,692	)
Selling, general and administrative			(1,512	)			(1,459	)			(3,000	)			(2,960	)
Amortization of intangible assets			(66	)			(66	)			(134	)			(143	)
Restructuring costs			(6	)			(27	)			(15	)			(63	)
Gain (loss) on operating assets			-				(33	)			59				(33	)
Operating income			1,194				1,001				2,657				2,025
Interest expense, net			(300	)			(297	)			(596	)			(610	)
Other income (loss), net			(17	)			24				(70	)			2
Income from continuing operations before
income taxes			877				728				1,991				1,417
Income tax provision			(317	)			(299	)			(706	)			(526	)
Income from continuing operations			560				429				1,285				891
Discontinued operations, net of tax			-				100				-				326
Net income			560				529				1,285				1,217
Less Net (income) loss attributable to noncontrolling interests			2				(5	)			2				(33	)
Net income attributable to Time Warner Inc. shareholders		$	562			$	524			$	1,287			$	1,184
Amounts attributable to Time Warner Inc. shareholders:
Income from continuing operations		$	562			$	430			$	1,287			$	897
Discontinued operations, net of tax			-				94				-				287
Net income		$	562			$	524			$	1,287			$	1,184
Per share information attributable to Time Warner Inc. common shareholders:
Basic income per common share from continuing operations		$	0.49			$	0.36			$	1.12			$	0.75
Discontinued operations			-				0.08				-				0.24
Basic net income per common share		$	0.49			$	0.44			$	1.12			$	0.99
Average basic common shares outstanding			1,136.5				1,195.2				1,143.1				1,195.6
Diluted income per common share from continuing operations		$	0.49			$	0.36			$	1.11			$	0.75
Discontinued operations			-				0.07				-				0.23
Diluted net income per common share		$	0.49			$	0.43			$	1.11			$	0.98
Average diluted common shares outstanding			1,153.8				1,205.4				1,159.5				1,202.8
Cash dividends declared per share of common stock		$	0.2125				0.1875			$	0.4250				0.3750

See accompanying notes.

TIME WARNER INC.

		2010				2009
OPERATIONS
Net income		$	1,285			$	1,217
Less Discontinued operations, net of tax			-				326
Net income from continuing operations			1,285				891
Adjustments for noncash and nonoperating items:
Depreciation and amortization			468				473
Amortization of film and television costs			3,111				3,143
Gain on investments and other assets, net			(1	)			(2	)
Equity in losses of investee companies, net of cash distributions			22				31
Equity-based compensation			128				102
Deferred income taxes			(85	)			(36	)
Changes in operating assets and liabilities, net of acquisitions			(3,540	)			(2,991	)
Cash provided by operations from continuing operations			1,388				1,611
INVESTING ACTIVITIES
Investments in available-for-sale securities			(6	)			(2	)
Investments and acquisitions, net of cash acquired			(536	)			(338	)
Capital expenditures			(206	)			(230	)
Investment proceeds from available-for-sale securities			-				49
Proceeds from the Special Dividend paid by Time Warner Cable Inc.			-				9,253
Other investment proceeds			102				160
Cash provided (used) by investing activities from continuing operations			(646	)			8,892
FINANCING ACTIVITIES
Borrowings			2,204				3,520
Debt repayments			(1,908	)			(8,054	)
Proceeds from exercise of stock options			68				6
Excess tax benefit on stock options			4				-
Principal payments on capital leases			(8	)			(9	)
Repurchases of common stock			(1,016	)			(170	)
Dividends paid			(492	)			(453	)
Other financing activities			(66	)			(61	)
Cash used by financing activities from continuing operations			(1,214	)			(5,221	)
Cash provided (used) by continuing operations			(472	)			5,282
Cash provided (used) by operations from discontinued operations			(23	)			1,116
Cash used by investing activities from discontinued operations			-				(705	)
Cash used by financing activities from discontinued operations			-				(5,239	)
Effect of change in cash and equivalents of discontinued operations			-				5,322
Cash provided (used) by discontinued operations			(23	)			494
INCREASE (DECREASE) IN CASH AND EQUIVALENTS			(495	)			5,776
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD			4,733				1,082
CASH AND EQUIVALENTS AT END OF PERIOD		$	4,238			$	6,858

See accompanying notes.

TIME WARNER INC.

		2010												2009
		Time Warner				Noncontrolling								Time Warner				Noncontrolling
		Shareholders				Interests				Total Equity				Shareholders				Interests				Total Equity
BALANCE AT BEGINNING OF PERIOD		$	33,396			$	1			$	33,397			$	42,292			$	3,035			$	45,327
Net income			1,287				(2	)			1,285				1,184				33				1,217
Other comprehensive income			(152	)			-				(152	)			184				-				184
Comprehensive income			1,135				(2	)			1,133				1,368				33				1,401
Cash dividends			(492	)			-				(492	)			(453	)			-				(453	)
Common stock repurchases			(1,000	)			-				(1,000	)			(200	)			-				(200	)
Time Warner Cable Inc. Special Dividend			-				-				-				-				(1,603	)			(1,603	)
Time Warner Cable Inc. Spin-off			-				-				-				(6,822	)			(1,167	)			(7,989	)
Repurchase of Google’s interest in AOL			-				-				-				9				(292	)			(283	)
Other			66				7				73				(1	)			5				4
BALANCE AT END OF PERIOD		$	33,105			$	6			$	33,111			$	36,193			$	11			$	36,204

See accompanying notes.

TIME WARNER INC.

1.  DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND RECENT ACCOUNTING GUIDANCE

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 and publishing. Time Warner classifies its operations into three 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; and Publishing: consisting principally of magazine publishing. Financial information for Time Warner’s various reportable segments is presented in Note 12.

Basis of Presentation

Interim Financial Statements

     The consolidated financial statements are unaudited; however, in the opinion of management, they contain all of 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 U.S. generally accepted accounting principles (“GAAP”) applicable to interim periods. The consolidated financial statements should be read in conjunction with the audited recast consolidated financial statements of Time Warner as of December 31, 2009 and 2008 and for each year in the three-year period ended December 31, 2009, including the accompanying supplementary information and schedule, and the related Management’s Discussion and Analysis of Results of Operations and Financial Condition filed as an exhibit to the Company’s Current Report on Form 8-K dated May 14, 2010 and filed with the Securities and Exchange Commission on July 7, 2010 (the “July 2010 8-K”). The recast financial information included in the July 2010 8-K reflects the retrospective adoption of amendments to accounting guidance pertaining to the accounting for transfers of financial assets and variable interest entities (“VIEs”) as described below.

Basis of Consolidation

     The consolidated financial statements include all of the assets, liabilities, revenues, expenses and cash flows of Time Warner, all voting interest entities in which Time Warner has a controlling voting interest (“subsidiaries”) and VIEs of which the Company is the primary beneficiary. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation.

     The financial position and operating results of substantially all foreign operations are consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period. 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.

Reclassifications

     Certain reclassifications have been made to the prior year information to conform to the June 30, 2010 presentation of the components of inventory.

Use of Estimates

     The preparation of financial statements in conformity with 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.

     Significant estimates and judgments inherent in the preparation of the consolidated financial statements include accounting for asset impairments, allowances for doubtful accounts, depreciation and amortization, film ultimate revenues and related costs, home video and magazine returns, business combinations, pension and other postretirement benefits,

equity-based compensation, income taxes, contingencies, litigation matters, certain programming arrangements and the determination of whether the Company is the primary beneficiary of entities in which it holds variable interests.

Accounting Guidance Adopted in 2010

Amendments to Accounting for Transfers of Financial Assets and VIEs

     On January 1, 2010, the Company adopted guidance on a retrospective basis that (i) eliminated the concept of a qualifying special-purpose entity (“SPE”), (ii) eliminated the exception from applying existing accounting guidance related to VIEs that were previously considered qualifying SPEs, (iii) changed the approach for determining the primary beneficiary of a VIE from a quantitative risk and reward model to a qualitative model based on control and (iv) requires the Company to assess each reporting period whether any of the Company’s variable interests give it a controlling financial interest in the applicable VIE.

     The Company’s investments in entities determined to be VIEs principally consist of certain investments at its Networks segment, primarily HBO Asia, HBO South Asia and HBO Latin America Group (“HBO LAG”), which operate multi-channel pay-television programming services. As of June 30, 2010, the Company held an 80% economic interest in HBO Asia, a 75% economic interest in HBO South Asia and an approximate 80% economic interest in HBO LAG. The Company previously consolidated these entities; however, as a result of adopting this guidance, because voting control is shared with the other partners in each of the three entities, the Company determined that it is no longer the primary beneficiary of these entities and effective January 1, 2010 accounts for these investments using the equity method. As of June 30, 2010 and December 31, 2009, the Company’s aggregate investment in these three entities was $602 million and $362 million, respectively, and recorded in investments, including available-for-sale securities, in the consolidated balance sheet.

     The Company provides programming as well as certain services, including distribution, licensing, technological and administrative support, to HBO Asia, HBO South Asia and HBO LAG. These investments are intended to enable the Company to more broadly leverage its programming and digital strategy in the territories served and to capitalize on the growing multi-channel television market in such territories. These entities are financed substantially through cash flows from their operations, and the Company is not obligated to provide them with any additional financial support. In addition, the assets of these entities are not available to settle obligations of the Company.

     The adoption of this guidance with respect to these entities resulted in an increase (decrease) to revenues, operating income and net income attributable to Time Warner Inc. shareholders of $(93) million, $(17) million and $5 million, respectively, for the three months ended June 30, 2009 and $(183) million, $(41) million and $4 million, respectively, for the six months ended June 30, 2009. The impact on the consolidated balance sheet as of December 31, 2009 and consolidated statement of cash flows for the six months ended June 30, 2009 was not material.

     The Company also held variable interests in two wholly owned SPEs through which the activities of its accounts receivable securitization facilities were conducted. The Company determined it was the primary beneficiary of these entities because of its ability to direct the key activities of the SPEs that most significantly impact their economic performance. Accordingly, as a result of adopting this guidance, the Company consolidated these SPEs, which resulted in an increase to securitized receivables and non-recourse debt of $805 million as of December 31, 2009. In addition, for the six months ended June 30, 2009, cash provided by operations increased by $61 million, with an offsetting decrease to cash used by financing activities. The impact on the consolidated statement of operations was not material. During the first quarter of 2010, the Company repaid the $805 million outstanding under these facilities and terminated the two facilities on March 19, 2010 and on March 24, 2010, respectively.

Accounting for Collaborative Arrangements

     The Company’s collaborative arrangements primarily relate to arrangements entered into with third parties to jointly finance and distribute theatrical productions. For the three months ended June 30, 2010 and 2009, net participation costs of $123 million and $109 million, respectively, were recorded in costs of revenues and net amounts received from collaborators for which capitalized film costs were reduced was $157 million and $104 million, respectively. For the six months ended June 30, 2010 and 2009, net participation costs of $210 million and $177 million, respectively, were

recorded in costs of revenues, and net amounts received from collaborators for which capitalized film costs were reduced were $228 million and $142 million, respectively. As of June 30, 2010 and December 31, 2009, the net amounts due to collaborators for their respective share of participations was $251 million and $332 million, respectively, and were recorded in participations payable in the consolidated balance sheet.

2.  BUSINESS ACQUISITIONS AND DISPOSITIONS

HBO LAG

     On March 9, 2010, HBO purchased additional interests in HBO LAG for $217 million in cash, which resulted in HBO owning 80% of the equity interests of HBO LAG. HBO LAG is considered a VIE and, because voting control of the entity is shared equally with another investor, the Company has determined it is not the primary beneficiary of this entity. Accordingly, HBO accounts for this investment under the equity method of accounting.

HBO Central Europe Acquisition

     On January 27, 2010, HBO purchased the remainder of its partners’ interests in HBO Central Europe (“HBO CE”) for $136 million in cash, net of cash acquired. HBO CE operates the HBO and Cinemax premium pay television programming services serving various territories in Central Europe. This transaction resulted in HBO owning all of HBO CE, and the Company has consolidated the results of operations and financial condition of HBO CE effective January 27, 2010. Prior to this transaction, HBO held a 33% interest in HBO CE, which was accounted for under the equity method of accounting. Upon the acquisition of the controlling interest in HBO CE, a gain of $59 million was recognized reflecting the excess of the fair value over the Company’s carrying cost of its original investment in HBO CE. The fair value of HBO’s original investment in HBO CE of $78 million was determined using the consideration paid in the January 27, 2010 purchase, which was primarily derived using a combination of market and income valuation techniques.

Summary of Discontinued Operations

     During 2009, the Company completed the legal and structural separations of Time Warner Cable Inc. (“TWC”) and AOL Inc. (“AOL”). With the completion of these separations, the Company disposed of its Cable and AOL segments in their entirety and ceased to consolidate their financial condition and results of operations in its consolidated financial statements. Discontinued operations include TWC’s results for the period from January 1, 2009 through March 12, 2009 and AOL’s results for the period from January 1, 2009 through June 30, 2009.

     Financial data for the discontinued operations is as follows (millions, except per share amounts):

		Three Months
		Ended				Six Months Ended
		6/30/09				6/30/09
Total revenues		$	804			$	5,114
Pretax income			168				577
Income tax provision			(68	)			(251	)
Net income		$	100			$	326
Net income attributable to Time Warner Inc. shareholders		$	94			$	287
Per share information attributable to Time Warner Inc. common shareholders:
Basic net income per common share		$	0.08			$	0.24
Diluted net income per common share		$	0.07			$	0.23

3.   INVENTORIES AND FILM COSTS

     Inventories and film costs consist of (millions):

						December 31,
		June 30, 2010				2009
Inventories:
Programming costs, less amortization		$	3,340			$	3,269
DVDs, books, paper and other merchandise			324				332
Total inventories			3,664				3,601
Less: current portion of inventory			(1,860	)			(1,769	)
Total noncurrent inventories			1,804				1,832
Film costs — Theatrical:(a)
Released, less amortization			496				575
Completed and not released			471				282
In production			1,183				1,228
Development and pre-production			123				157
Film costs — Television:(a)
Released, less amortization			1,008				779
Completed and not released			233				482
In production			260				413
Development and pre-production			5				6
Total film costs			3,779				3,922
Total noncurrent inventories and film costs		$	5,583			$	5,754

4.  FAIR VALUE MEASUREMENTS

     A fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions 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 June 30, 2010 (millions):

		Fair Value Measurements as of June 30, 2010 Using
						Quoted Market
						Prices in Active								Significant
						Markets for				Significant Other				Unobservable
						Identical Assets				Observable Inputs				Inputs
Description		Fair Value				(Level 1)				(Level 2)				(Level 3)
Assets:
Trading securities:
Diversified Equity securities		$	235			$	231			$	4			$	-
Available-for-sale securities:
Equity securities			10				10				-				-
Debt securities			25				-				25				-
Derivatives:
Foreign Exchange Contracts			58				-				58				-
Other			22				5				-				17
Liabilities:
Derivatives:
Foreign Exchange Contracts			(33	)			-				(33	)			-
Other			(61	)			-				-				(61	)
Total		$	256			$	246			$	54			$	(44	)