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, 2006

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

for the transition period from                                          to                                         

TIME WARNER INC.

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

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

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

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

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

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

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

		Shares Outstanding
Description of Class		as of July 28, 2006
Common Stock – $.01 par value Series LMCN-V Common Stock – $.01 par value		3,974,314,335 92,645,036

 

 

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			37
Consolidated Balance Sheet at June 30, 2006 and December 31, 2005			38
Consolidated Statement of Operations for the Three and Six Months Ended June 30, 2006 and 2005			39
Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2006 and 2005			40
Consolidated Statement of Shareholders’ Equity			41
Notes to Consolidated Financial Statements			42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			73
Item 1A. Risk Factors			74
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			76
Item 4. Submission of Matters to a Vote of Security Holders			77
Item 5. Other Information			78
Item 6. Exhibits			78
EX-10.2 AMENDMENT NO.2 TO ASSET PURCHASE AGREEMENT
EX-10.3 AMENDMENT NO.3 TO ASSET PURCHASE AGREEMENT
EX-10.4 LETTER AGREEMENT DATED AS OF JUNE 21, 2006
EX-10.5 LETTER AGREEMENT DATED AS OF JUNE 21, 2006
EX-10.6 AMENDMENT NO.4 TO ASSET PURCHASE AGREEMENT
EX-31.1 SECTION 302 CERTIFICATION OF PEO
EX-31.2 SECTION 302 CERTIFICATION OF PFO
EX-32 SECTION 906 CERTIFICATION OF PEO/PFO

TIME WARNER INC.

INTRODUCTION

     Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of Time Warner Inc.’s (“Time Warner” or the “Company”) financial condition, changes in financial condition 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, 2006. This analysis is presented on both a consolidated and a business segment basis. In addition, a brief description is provided of significant transactions and events that impact the comparability of the results being analyzed.
	•		Financial condition and liquidity. This section provides an analysis of the Company’s financial condition as of June 30, 2006 and cash flows for the six months ended June 30, 2006.
	•		Caution concerning forward-looking statements. This section provides a description of the use of forward-looking information appearing in this report, including in MD&A and the consolidated financial statements. Such information is based on management’s current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”) and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (the “March 2006 Form 10-Q”) for a discussion of the risk factors applicable to the Company and to Item 1A of this report for an update to such risk factors.

     As discussed more fully in Note 1 to the accompanying consolidated financial statements, the 2005 financial information has been recast so that the basis of presentation is consistent with that of 2006. Specifically, the amounts have been recast for the adoption of Financial Accounting Standards Board (“FASB”) Statement No. 123 (revised 2004), Share-Based Payment (“FAS 123R”), a change in accounting principle for recognizing programming inventory costs at HBO and certain discontinued operations.

Use of Operating Income (Loss) before Depreciation and Amortization

     The Company utilizes Operating Income (Loss) before Depreciation and Amortization, among other measures, to evaluate the performance of its businesses. Operating Income (Loss) before Depreciation and Amortization is considered an important indicator of the operational strength of the Company’s businesses. Operating Income (Loss) before Depreciation and Amortization eliminates the uneven effect across all business segments of considerable amounts of noncash depreciation of tangible assets and amortization of certain intangible assets that were recognized in business combinations. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in the Company’s businesses. Management evaluates the investments in such tangible and intangible assets through other financial measures, such as capital expenditure budgets, investment spending levels and return on capital.

     Operating Income (Loss) before Depreciation and Amortization should be considered in addition to, not as a substitute for, the Company’s Operating Income (Loss) and Net Income (Loss), as well as other measures of financial performance reported in accordance with U.S. generally accepted accounting principles (“GAAP”). A reconciliation of Operating Income (Loss) before Depreciation and Amortization to both Operating Income (Loss) and Net Income (Loss) is presented under “Results of Operations.”

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

OVERVIEW

     Time Warner is a leading media and entertainment company, whose major businesses encompass an array of the most respected and successful media brands. Among the Company’s brands are HBO, CNN, AOL, People, Sports Illustrated, Time and Time Warner Cable. The Company produces and distributes films, including the Harry Potter series, The Lord of the Rings trilogy, Superman Returns and Wedding Crashers, as well as television programs, including ER, Two and a Half Men, Cold Case and Without a Trace. During the six months ended June 30, 2006, the Company generated revenues of $21.219 billion (up 1% from $20.948 billion in 2005), Operating Income before Depreciation and Amortization of $5.323 billion (up 170% from $1.974 billion in 2005), Operating Income of $3.670 billion (up 895% from $369 million in 2005), Net Income of $2.462 billion (up 387% from $506 million in 2005) and Cash Provided by Operations of $4.157 billion (up 21% from $3.432 billion in 2005). The 2005 results reflect the effects of a $3 billion pretax charge related to securities litigation as discussed further in “Recent Developments.”

Time Warner Businesses

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

     AOL. AOL LLC (together with its subsidiaries, “AOL”) operates a leading network of web brands and the largest Internet access subscription service in the United States. At June 30, 2006, AOL had 23.3 million total AOL brand subscribers in the U.S. and Europe. AOL reported total revenues of $4.027 billion (19% of the Company’s overall revenues), $949 million in Operating Income before Depreciation and Amortization and $597 million in Operating Income for the six months ended June 30, 2006.

     Historically, AOL’s primary product offering has been an online subscription service that includes dial-up Internet access, and this product generates the substantial majority of AOL’s revenues. AOL has experienced significant declines in the number of its U.S. subscribers, due primarily to the industry-wide decline of the premium dial-up ISP business and growth in the broadband Internet access business. The decline in subscribers has had an adverse impact on AOL’s Subscription revenues. AOL’s Advertising revenues, in large part, are generated from the traffic to and usage of the AOL service by AOL’s subscribers and, therefore, the decline in subscribers could also have an adverse impact on AOL’s Advertising revenues.

     Over the past few years, AOL has adopted a strategy designed to address these trends and navigate a transition from a business that relied heavily on subscription revenue from dial-up customers to one that could attract more Internet users and take advantage of the growth in online advertising. A key part of AOL’s strategy was to make much of its content available for free as part of the 2005 re-launch of the publicly available version of the AOL.com web portal. With the increasing growth in the broadband Internet access market, AOL is implementing the next phase of its strategy, as approved by Time Warner’s Board of Directors on July 27, 2006, which is designed to accelerate AOL’s transition to a global web services business, which is primarily an advertising-supported business. Pursuant to this phase, AOL plans to emphasize growing its global web services business and managing its access services business, as announced by the Company on August 2, 2006. A goal of AOL’s strategy is to maintain and expand relationships with current and former AOL subscribers, whether they continue to purchase the dial-up Internet access subscription service or not. Another component of the strategy is to permit access to most of the AOL services, including use of the AOL client software and an AOL e-mail account, without charge. Therefore, as long as an individual has a means to connect to the Internet, that person will be able to access and use most of the AOL services for free.

     Some of the other components of this strategy in connection with the global web services business, several of which are in place today in AOL’s existing Audience business, include the following:

•

providing advertising services, including display advertising (primarily on AOL’s network of interactive properties and services), paid-search advertising (primarily through AOL’s strategic alliance with Google), and other advertising run on third-party networks of web publishers (primarily through Advertising.com);

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

	•		providing premium services, including a variety of online safety and security products, digital media (music and video), educational content and services, and related Internet services on a free or subscription basis, to be determined on a case-by-case basis;
	•		providing software for mobile devices that will further the distribution of AOL products and services; and
	•		attracting new, highly-engaged users to AOL’s interactive properties, including AIM, AOL.com, Netscape.com, MapQuest and Moviefone, by
			o		entering into distribution arrangements with third-party high-speed Internet access providers, such as telephone and cable companies; and
			o		offering compelling content, features and tools, including the AOL client software, which will generally be made available to all Internet users for free.

     Consistent with its strategy, AOL is pursuing alternatives with respect to its AOL Europe businesses, including the potential sale of its European access services businesses and the expansion of its global web services business in Europe. Divestiture plans are currently being developed, and it is anticipated that such transactions would be entered into beginning in the second half of 2006 and close within one year thereafter.

     The access services business will continue to serve the market for dial-up Internet access, which AOL believes will continue to exist for the foreseeable future, by providing dial-up connectivity to the Internet and customer service for those subscribers. The access services business will also, to a lesser extent, continue to serve the market for broadband Internet access through agreements with high-speed Internet access providers. AOL will continue to provide customer service for these subscribers and charge monthly subscription fees; however, AOL will substantially reduce its marketing and customer service efforts previously aimed at attracting and retaining dial-up subscribers to the AOL service.

     In connection with its strategy, AOL expects to reduce costs, beginning in the third quarter of 2006, from marketing activities in support of the access services business and customer service activities, as well as by restructuring and streamlining certain general and administrative functions. With the proactive reduction in subscriber acquisition costs, AOL expects acceleration in the rate of the decline in its subscribers and related Subscription revenues. In addition, dial-up network costs are anticipated to continue to decrease as subscribers decline.

     Cable. Time Warner’s cable business, Time Warner Cable Inc. and its subsidiaries (“TWC”), is the second-largest cable operator in the U.S. (in terms of basic cable subscribers). At June 30, 2006, TWC managed approximately 11.057 million basic cable subscribers (including approximately 1.579 million subscribers of unconsolidated investees), in highly clustered and technologically upgraded systems in 27 states. TWC delivered revenues of $5.301 billion (25% of the Company’s overall revenues), $1.965 billion of Operating Income before Depreciation and Amortization and $1.096 billion in Operating Income for the six months ended June 30, 2006. As part of the strategy to expand TWC’s cable footprint and improve the clustering of its cable systems, on July 31, 2006, TWC acquired, in conjunction with Comcast Corporation (“Comcast”), substantially all of the assets of Adelphia Communications Corporation (“Adelphia”) and exchanged certain cable systems with Comcast. Refer to “Recent Developments” for further details.

     TWC principally offers three products — video, high-speed data and voice. Video is TWC’s largest product in terms of revenues generated; however, the potential growth of its customer base within TWC’s existing footprint for video cable service is limited, as the customer base has matured and industry-wide competition has increased. Nevertheless, TWC is continuing to increase its video revenues through its offerings of advanced digital video services such as Video-on-Demand (VOD), Subscription-Video-on-Demand (SVOD) and Digital Video Recorders (DVRs), which are available throughout TWC’s footprint, as well as through rate increases and subscriber growth. TWC’s digital video subscribers provide a broad base of potential customers for these advanced services. Video programming costs represent a major component of TWC’s expenses and are expected to continue to increase reflecting contractual rate increases, subscriber growth and the expansion of service offerings.

     High-speed data service has been one of TWC’s fastest-growing products over the past several years and is a key driver of its results. TWC expects continued strong growth in residential high-speed data subscribers and revenues for the foreseeable future; however, the rate of growth of both subscribers and revenue could be impacted by intensified competition from other service providers and by the continued increase in penetration of the high-speed data market.

     TWC’s voice product, Digital Phone, is available to nearly 90% of TWC’s homes passed, and approximately 1.6 million subscribers (including 203,000 subscribers of unconsolidated investees) received the service as of June 30, 2006. For a monthly

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

fixed fee, Digital Phone customers typically receive unlimited local, in-state and U.S., Canada and Puerto Rico long-distance calling, as well as call waiting, caller ID and enhanced “911” services. TWC is currently deploying an unlimited in-state calling plan throughout its footprint and, in the future, intends to offer additional plans with a variety of local and long-distance options. Digital Phone enables TWC to offer its customers a convenient package of video, high-speed data and voice services and to compete effectively against similar bundled products available from its competitors. TWC expects strong increases in Digital Phone subscribers and revenues for the foreseeable future.

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

     Filmed Entertainment. Time Warner’s Filmed Entertainment businesses, Warner Bros. Entertainment Group (“Warner Bros.”) and New Line Cinema Corporation (“New Line”), generated revenues of $5.142 billion (22% of the Company’s overall revenues), $686 million in Operating Income before Depreciation and Amortization and $509 million in Operating Income for the six months ended June 30, 2006.

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

     Warner Bros. continues to develop its industry-leading television business, including the successful releases of television series into the home video market. For the 2005-2006 television season, Warner Bros. had more current prime-time productions on the air than any other studio, with prime-time series on all six broadcast networks (including Two and a Half Men, ER, Without a Trace, The O.C., Cold Case and Smallville). For the 2006-2007 television season, Warner Bros. anticipates having approximately 25 prime-time series on the fall schedule, more than any other studio.

     The sale of DVDs has been one of the largest drivers of the segment’s profit growth over the last few years and Warner Bros.’ extensive library of theatrical and television titles positions it to continue to benefit from DVD sales; however, the Company has begun to see slowing DVD sales due to several factors, including increasing competition for consumer discretionary spending, piracy, the maturation of the DVD format and the fragmentation of consumer time.

     Piracy, including physical piracy as well as illegal online file-sharing, continues to be a significant issue for the filmed entertainment industry. Due to technological advances, piracy has expanded from music to movies and television programming. The Company has taken a variety of actions to combat piracy over the last several years, including a program to release low-cost DVDs and VCDs in China and to coordinate worldwide release dates for franchise films, and will continue to do so, both individually and together with cross-industry groups, trade associations and strategic partners.

     Networks. Time Warner’s Networks group comprises Turner Broadcasting System, Inc. (“Turner”), Home Box Office, Inc. (“HBO”) and The WB Television Network (“The WB Network”). The Networks segment delivered revenues of $5.106 billion (23% of the Company’s overall revenues), $1.565 billion in Operating Income before Depreciation and Amortization and $1.419 billion in Operating Income for the six months ended June 30, 2006.

     The Turner networks — including such recognized brands as TNT, TBS, CNN, Cartoon Network and CNN Headline News — are among the leaders in advertising-supported cable TV networks. As discussed in more detail in “Recent Developments,” in May 2006 the Company acquired the remaining 50% interest in Courtroom Television Network LLC (“Court TV”) that it did not already own from Liberty Media Corporation (“Liberty”). For over four consecutive years, more prime-time viewers have watched advertising-supported cable TV networks than the national broadcast networks. For the six months ended June 30, 2006, TNT ranked second among advertising-supported cable networks in prime-time delivery of its key demographics, adults 18-49 and adults 25-54, and first in total day delivery of adults 18-49 and adults 25-54. TBS ranked third among advertising-supported cable networks in prime-time delivery of its key demographic, adults 18-34.

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

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

     HBO operates the HBO and Cinemax multichannel pay television programming services, with the HBO service ranking as the nation’s most widely distributed pay television network. HBO generates revenues principally from monthly subscriber fees from cable system operators, satellite companies and other affiliates. An additional source of revenue is the ancillary sales of its original programming, including such programs as The Sopranos, Sex and the City, Six Feet Under, Band of Brothers and Deadwood.

     On January 24, 2006, Warner Bros. and CBS Corp. (“CBS”) announced an agreement to form a new fully-distributed national broadcast network, to be called The CW, as discussed in more detail in “Recent Developments.” At the same time, Warner Bros. and CBS are preparing to cease the stand-alone operations of The WB Network and UPN, respectively, at the end of the 2005/2006 television season (September 2006).

     Publishing. Time Warner’s Publishing segment consists principally of magazine publishing and a number of direct-marketing and direct-selling businesses. The segment generated revenues of $2.448 billion (11% of the Company’s overall revenues), $388 million in Operating Income before Depreciation and Amortization and $301 million in Operating Income for the six months ended June 30, 2006.

     Time Inc. publishes over 145 magazines globally, including People, Sports Illustrated, Southern Living, In Style, Real Simple, Entertainment Weekly, Time, Fortune, Cooking Light and What’s on TV. It generates revenues primarily from advertising, magazine subscriptions and newsstand sales, and its growth is derived from higher circulation and advertising on existing magazines, new magazine launches and acquisitions. Time Inc. owns IPC Media, the U.K.’s largest magazine company (“IPC”), and the magazine subscription marketer Synapse Group, Inc. In addition, Time Inc. continues to invest in developing digital content, including the redesign of CNNmoney.com, the expansion of Sports Illustrated’s digital properties, and the acquisition of Golf.com. Time Inc.’s direct-selling division, Southern Living At Home, sells home decor products through independent consultants at parties hosted in people’s homes throughout the U.S.

Recent Developments

Adelphia Acquisition

     On April 20, 2005, a subsidiary of TWC, Time Warner NY Cable LLC (“TW NY”), and Comcast each entered into separate definitive agreements (the “TW Purchase Agreement” and the “Comcast Purchase Agreement,” respectively) with Adelphia to, collectively, acquire substantially all the assets of Adelphia (the “Adelphia Acquisition”). On June 21, 2006, Adelphia and TW NY entered into Amendment No. 2 to the TW Purchase Agreement (the “TW Amendment”). Concurrently, Adelphia and Comcast entered into Amendment No. 2 to the Comcast Purchase Agreement, the terms of which are similar to those of the TW Amendment. Under the terms of the TW Amendment, the assets TW NY acquired from Adelphia and the consideration it paid remained unchanged. However, the TW Amendment provided that the Adelphia Acquisition would be effected pursuant to sections 105, 363 and 365 of Title 11 of the United States Bankruptcy Code (the “363 Sale”) and the creditors of Adelphia would not be required to approve a plan of reorganization under Chapter 11 of the Bankruptcy Code prior to the consummation of the Adelphia Acquisition. The Adelphia Acquisition closed on July 31, 2006. In connection with the closing of the Adelphia Acquisition, TW NY paid approximately $8.9 billion in cash, after giving effect to certain purchase price adjustments, and shares representing 16% of TWC’s common stock for the Adelphia assets it acquired.

     At the closing of the Adelphia Acquisition, Adelphia and TWC entered into a registration rights and sale agreement (the “RRA”). Under the RRA, Adelphia is required to sell, in a registered underwritten public offering (the “Offering”), at least one-third of the shares of TWC Class A common stock it received in the Adelphia Acquisition within three months following the effectiveness of a registration statement filed by TWC to effect such sale, subject to customary rights to delay for a limited period of time under certain circumstances. TWC is required to use its commercially reasonable efforts to file a registration statement covering these shares as promptly as practicable and to cause the registration statement to be declared effective as promptly as practicable after filing, but in any event not later than January 31, 2007. Any remaining shares received by Adelphia in the Adelphia Acquisition are expected to be distributed to Adelphia’s creditors pursuant to a subsequent plan of reorganization under Chapter 11 of the Bankruptcy Code (the “Remainder Plan”) to be filed by Adelphia with the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). If a Remainder Plan meeting specified requirements is consummated prior to the closing of the Offering, the shares of TWC Class A common stock received by Adelphia in the Adelphia Acquisition would be distributed to Adelphia’s creditors under Section 1145 of the Bankruptcy Code

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

in accordance with the terms of such plan and the Offering would not occur. The shares distributed to Adelphia’s creditors under the Remainder Plan would be freely transferable, subject to certain exceptions.

     At the same time that Comcast and TW NY entered into the agreements relating to the Adelphia Acquisition in April 2005, Comcast, TWC and/or their respective affiliates entered into separate agreements providing for the redemption of Comcast’s interests in TWC and Time Warner Entertainment Company, L.P. (“TWE”), a subsidiary of TWC (the “TWC Redemption Agreement” and the “TWE Redemption Agreement,” respectively, and, collectively, the “TWC and TWE Redemption Agreements”). These redemptions also occurred on July 31, 2006, immediately before the closing of the Adelphia Acquisition. Specifically, Comcast’s 17.9% interest in TWC was redeemed in exchange for 100% of the capital stock of a subsidiary of TWC holding both cable systems serving approximately 589,000 subscribers (based on June 30, 2006 information) and approximately $1.9 billion in cash. In addition, Comcast’s 4.7% interest in TWE was redeemed in exchange for 100% of the equity interests in a subsidiary of TWE holding both cable systems serving approximately 162,000 subscribers (based on June 30, 2006 information) and approximately $147 million in cash. As a result, in the third quarter of 2006, the systems transferred in connection with the TWC and TWE redemptions will be reflected as discontinued operations. The book value as of June 30, 2006 of the net assets that were disposed of was primarily comprised of $2.433 billion in franchise intangibles, $135 million in goodwill and $740 million in fixed assets.

     Following these redemptions and the Adelphia Acquisition, on July 31, 2006, TWC, Comcast and their respective subsidiaries also swapped certain cable systems to enhance their respective geographic clusters of subscribers (the “Cable Swaps”) and TW NY paid Comcast approximately $67 million for certain adjustments related to the Cable Swaps.

     As a result of the closing of the Adelphia Acquisition, the TWC and TWE redemptions and the Cable Swaps, TWC gained systems with approximately 3.3 million basic subscribers. As of July 31, 2006, Time Warner owns 84% of TWC’s common stock (including 83% of the outstanding TWC Class A common stock and all outstanding shares of TWC Class B common stock), as well as an indirect approximately 12% non-voting interest in TW NY, a subsidiary of TWC. As of July 31, 2006, the remaining 16% of TWC’s common stock is held by Adelphia, and Comcast has no interest in TWC or TWE (Note 4).

FCC Order Approving the Transactions with Adelphia and Comcast

     In its order approving the Adelphia Acquisition, the Federal Communications Commission (“FCC”) imposed conditions related to regional sports networks (“RSNs”), as defined in the order, and the resolution of disputes pursuant to the FCC’s leased access regulations. In particular, TWC or its affiliates may not offer an affiliated RSN on an exclusive basis to any multichannel video programming distributors (“MVPD”). Moreover, TWC may not unduly or improperly influence: (i) the decision of any affiliated RSN to sell programming to an unaffiliated MVPD; or (ii) the prices, terms, and conditions of sale of programming by an affiliated RSN to an unaffiliated MVPD. If an MVPD and an affiliated RSN cannot reach an agreement on the terms and conditions of carriage, the MVPD may elect commercial arbitration of the dispute. In addition, if an unaffiliated RSN is denied carriage by TWC, it may elect commercial arbitration of the dispute. With respect to leased access, if an unaffiliated programmer is unable to reach an agreement with TWC, that programmer may elect commercial arbitration of the dispute, with the arbitrator being required to resolve the dispute using the FCC’s existing rate formula relating to pricing terms. The application and scope of these conditions, which will expire in six years, have not yet been tested. TWC retains the right to obtain FCC and judicial review of any arbitration awards made pursuant to these conditions.

Dissolution of Texas/Kansas City Cable Joint Venture

     As previously reported, following restructurings in 2004 and 2005, Texas and Kansas City Cable Partners, L.P. (“TKCCP”) is a 50-50 joint venture between Time Warner Entertainment-Advance/Newhouse Partnership (“TWE-A/N”) (a partnership of TWE and the Advance/Newhouse Partnership) and Comcast serving approximately 1.579 million basic video subscribers as of June 30, 2006. Since June 1, 2006, each of TWC and Comcast could trigger a dissolution of the partnership. If a dissolution is triggered, the non-triggering party has the right to choose and take full ownership of one of two pools of the partnership’s systems – one pool consisting of the Houston systems (which included approximately 790,000 subscribers as of June 30, 2006) and the other consisting of the Kansas City, Southwest Texas and New Mexico systems (which included approximately 789,000 subscribers as of June 30, 2006). The party triggering the dissolution would own the remaining pool of systems and any debt allocated to that pool. The party triggering the dissolution also determines the allocation of the partnership’s debt between the two pools in connection with triggering the dissolution.

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

     On July 3, 2006, Comcast notified TWC of its election to dissolve TKCCP and its allocation of all of TKCCP’s debt, totaling approximately $2 billion, to the Houston cable systems. On August 1, 2006, TWC notified Comcast that it had selected the pool consisting of the Kansas City, Southwest Texas and New Mexico systems. As a result, Comcast will be required to refinance the debt allocated to the Houston pool, which includes approximately $600 million of debt owed to each of TWE-A/N and Comcast (for an aggregate of $1.2 billion of debt owed to the partners), within 60 days after the date that TWC exercised its selection right. The consummation of the dissolution of TKCCP is subject to customary closing conditions, including regulatory and franchise review and approvals. Time Warner expects the transaction to close during the first quarter of 2007. Effective July 1, 2006, the economic return to TWC on its interest in TKCCP will track the performance of the Kansas City, Southwest Texas and New Mexico pool, and TWC will no longer reflect any benefits of ownership from the Houston pool (Note 4).

Court TV

     On May 12, 2006, the Company acquired the remaining 50% interest in Court TV that it did not already own from Liberty for $697 million in cash, net of cash acquired. As permitted by GAAP, Court TV results have been consolidated retroactive to the beginning of 2006. Previously, the Company had accounted for its investment using the equity method of accounting. For the three and six months ended June 30, 2006, Court TV revenues were $65 million and $127 million, respectively, and Operating Income was $12 million and $22 million, respectively (Note 3).

     In addition, the Company is in discussions with Liberty regarding its ownership interest in Time Warner, including a possible exchange of a significant portion of that interest for a subsidiary of the Company that contains a mix of non-strategic assets and cash.

Warner Village Theme Parks

     On July 3, 2006, the Company sold its 50% interest in Warner Village Theme Parks (the “Theme Parks”), a joint venture operating theme parks in Australia, to Village Roadshow Limited (“Village”) for approximately $195 million in cash, which will result in a pretax gain of approximately $150 million in the third quarter of 2006 (approximately $97 million, net of tax) (Note 3).

Turner FTC Consent Decree

     As previously reported, Time Warner is subject to the terms of a consent decree (the “Turner Consent Decree”) entered into in connection with the FTC’s approval of the acquisition of Turner by Historic TW Inc. (“Historic TW”) in 1996. The Turner Consent Decree required, among other things, that any Time Warner stock held by Liberty be non-voting stock, except that it would be entitled to a vote of 1/100 of a vote per share when voting with the outstanding common stock on the election of directors and a vote equal to the vote of the common stock with respect to corporate matters that would adversely change the rights or terms of the stock. On February 16, 2006, Liberty filed a petition with the FTC seeking to terminate the Turner Consent Decree as it applies to Liberty, including all voting restrictions on its Time Warner stock holdings. On June 14, 2006, the FTC issued an order granting Liberty’s petition. As a result, Liberty now has the ability to request that the shares of Series LMCN-V common stock it holds be converted into shares of common stock of Time Warner. On July 31, 2006, Time Warner received notices from Liberty requesting that the Company convert 49,115,656 shares of Series LMCN-V common stock into shares of common stock. Time Warner is in the process of taking the actions to complete the conversion.

AOL-Google Alliance

     During December 2005, the Company announced that AOL was expanding its strategic alliance with Google Inc. (“Google”) to enhance its global online advertising partnership and make more of AOL’s content available to Google users. In addition, Google agreed to invest $1 billion to acquire a 5% equity interest in a limited liability company that owns all of the outstanding equity interest in AOL. On March 24, 2006, the Company and Google signed definitive agreements governing the investment and the commercial arrangements. Under the alliance, Google will continue to provide search technology to AOL’s network of Internet properties worldwide and provide AOL with an improved share in revenues generated through searches conducted on the AOL network, which AOL will continue to recognize as advertising revenue when such amounts are earned. Additionally, AOL will continue to pay Google a license fee for the use of its search technology, which AOL will continue to recognize as expense when such amounts have been incurred. Other key aspects of the alliance, and the related accounting, include:

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

	•		AOL Marketplace. Creating an AOL Marketplace through white labeling of Google’s advertising technology, which enables AOL to sell search advertising directly to advertisers on AOL-owned properties. AOL will record as advertising revenue the sponsored-links advertising sold and delivered to third parties. Amounts paid to Google for Google’s share in the sponsored-links advertising sold on the AOL Marketplace will be accounted for by AOL as an expense in the period the advertising is delivered.
	•		Distribution and Promotion. Providing AOL $300 million of marketing credits for promotion of AOL’s content on Google-owned Internet properties as well as $100 million of AOL/Google co-sponsored promotion of AOL properties. The Company believes that this is an advertising barter transaction in which distribution and promotion is being provided in exchange for AOL agreeing to dedicate its search business to Google on an exclusive basis. Because the criteria in Emerging Issues Task Force (“EITF”) Issue No. 99-17, Accounting for Advertising Barter Transactions for recognizing revenue have not been met, no revenue or expense will be recognized by AOL on this portion of the arrangement.
	•		Google AIM Development. Enabling Google Talk and AIM instant messaging users to communicate with each other provided certain conditions are met. Because this agreement does not provide for any revenue share or other fees, there will be no accounting resulting from this arrangement.

     AOL and Google also agreed to collaborate in the future to expand on the alliance, including the possible sale by AOL of display advertising on the Google network.

     On April 13, 2006, the Company completed its issuance of a 5% equity interest in AOL to Google for $1 billion in cash. In accordance with Staff Accounting Bulletin No. 51, Accounting for the Sales of Stock of a Subsidiary, Time Warner recognized a gain of approximately $801 million, reflected in shareholders’ equity, as an adjustment to paid-in capital in the second quarter of 2006.

The WB Network

     On January 24, 2006, Warner Bros. and CBS announced an agreement to form a new fully-distributed national broadcast network, to be called The CW. At the same time, Warner Bros. and CBS are preparing to cease the standalone operations of The WB Network and UPN, respectively, at the end of the 2005/2006 television season (September 2006). Warner Bros. and CBS will each own 50% of the new network and will have joint and equal control. In addition, Warner Bros. has reached an agreement with Tribune Corp. (“Tribune”), currently a subordinated 22.25% limited partner in The WB Network, under which Tribune will surrender its ownership interest in The WB Network and will be relieved of funding obligations. In addition, Tribune will become one of the principal affiliate groups for the new network.

     The WB Network results for the three and six months ended June 30, 2006 include shutdown costs of $81 million, including $8 million related to employee terminations, $19 million related to contractual settlements and $54 million related to the termination of certain programming arrangements (primarily licensed movie rights). Included in the $54 million of costs to terminate programming arrangements is $29 million of costs related to terminating intercompany programming arrangements with other Time Warner divisions (e.g., New Line) that have been eliminated in consolidation, resulting in a net charge related to programming arrangements of $25 million.

     In addition to the $54 million of costs to terminate programming arrangements, The WB Network has approximately $40 million primarily related to programming commitments, including $20 million of intercompany programming commitments, that are not expected to be contributed to The CW. In the event that such programming is unable to be sold or utilized in another manner, there will be additional restructuring charges associated with such programming incurred by The WB Network, offset by amounts recognized by other Time Warner divisions related to any intercompany programming, resulting in the potential for a net charge of approximately $20 million (Note 3).

Common Stock Repurchase Program

     Time Warner’s Board of Directors has authorized a common stock repurchase program that allows the Company to purchase up to an aggregate of $20 billion of common stock during the period from July 29, 2005 through December 31, 2007. Purchases under the stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. Size and timing of these purchases will be based on a number of factors, including price and business and market conditions. At existing price levels, the Company intends to continue purchases under its stock repurchase program within its stated objective of maintaining a net debt-to-Operating Income before Depreciation and Amortization ratio, as defined, of

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

approximately 3-to-1, and expects it will have purchased approximately $15 billion of its common stock under the program by the end of 2006, and the remainder in 2007. From the program’s inception through August 1, 2006, the Company repurchased approximately 675 million shares of common stock for approximately $11.7 billion pursuant to trading programs under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, including approximately 206 million shares of common stock for approximately $3.5 billion purchased under the prepaid stock repurchase contracts (Note 8).

Sale of Turner South

     On May 1, 2006, the Company sold the Turner South network (“Turner South”), a subsidiary of Turner, to Fox Cable Networks, Inc. for approximately $371 million in cash, resulting in a pretax gain of approximately $129 million. Turner South has been reflected as discontinued operations for all periods presented (Note 3).

Sale of Time Warner Book Group

     On March 31, 2006, the Company sold Time Warner Book Group (“TWBG”) to Hachette Livre SA (“Hachette”), a wholly-owned subsidiary of Lagardère SCA (“Lagardère”), for $524 million in cash, resulting in a pretax gain of approximately $194 million after taking into account selling costs and estimated working capital adjustments. TWBG has been reflected as discontinued operations for all periods presented (Note 3).

Time Warner Telecom

     As of December 31, 2005, wholly-owned subsidiaries of the Company owned a total of 50.4 million shares of Class B common stock of Time Warner Telecom Inc. (“TWT”), a publicly traded telecommunications company. The Company accounts for this investment using the equity method of accounting, and, as a result of the Company’s share in losses of TWT and impairment losses recognized in previous years, the carrying value of the investment is zero. In the first quarter of 2006, the Company’s subsidiaries participated as selling shareholders in a TWT secondary offering and converted approximately 17 million shares of Class B common stock into Class A common stock of TWT and sold the Class A common stock for approximately $239 million, net of underwriter commissions. This sale resulted in a pretax gain of approximately $239 million, which is included as a component of Other income, net, in the accompanying consolidated statement of operations for the six months ended June 30, 2006. The Company does not consider its remaining investment in TWT to be strategic and, therefore, additional sales or other dispositions may occur in the future, subject to customary restrictions on transfer agreed to in connection with the offering and as provided in a stockholders agreement among the holders of the Class B common stock of TWT.

Amounts Related to Securities Litigation

     As previously disclosed, in July 2005, the Company reached an agreement in principle for the settlement of the securities class action lawsuits included in the matters consolidated under the caption In re: AOL Time Warner Inc. Securities & “ERISA” Litigation described in Note 12 to the accompanying consolidated financial statements. In connection with reaching the agreement in principle on the securities class action, the Company established a reserve of $2.4 billion during the second quarter of 2005. Ernst & Young LLP also has agreed to a settlement in this litigation matter and will pay $100 million. Pursuant to the settlement, in October 2005, Time Warner paid $2.4 billion into a settlement fund (the “MSBI Settlement Fund”) for the members of the class represented in the action. The court issued an order dated April 6, 2006 granting final approval of the settlement, and the time to appeal that decision has expired. In connection with the settlement, the $150 million previously paid by Time Warner into a fund in connection with the settlement of the investigation by the U.S. Department of Justice (“DOJ”) was transferred to the MSBI Settlement Fund. In addition, the $300 million the Company previously paid in connection with the settlement of its Securities and Exchange Commission (“SEC”) investigation will be distributed to investors through the settlement pursuant to an order issued by the U.S. District Court for the District of Columbia on July 11, 2006.

     During the second quarter of 2005, the Company established an additional reserve totaling $600 million in connection with the other related securities litigation matters (including suits brought by individual shareholders) described in Note 12 to the accompanying consolidated financial statements that are pending against the Company. As of July 31, 2006, the Company has reached agreements to resolve the actions alleging violations of the Employee Retirement Income Security Act (“ERISA”) and the derivative actions, both of which have received preliminary court approval, but which remain subject to final court approval, as well as certain of the individual suits. Of the $600 million reserve, through July 31, 2006, the Company has paid, or has agreed to pay, approximately $358 million, after considering probable insurance recoveries, to settle certain of these

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

claims. The Company also has engaged in, or may in the future engage in, mediation in an attempt to resolve the remaining cases brought by shareholders who elected to “opt out” of the settlement in the consolidated securities class action. The mediation efforts conducted to date have not been fruitful in certain of these matters. Accordingly, trials are possible in these matters, for which plaintiffs have claimed several billion dollars in aggregated damages. The Company intends to defend these lawsuits vigorously, including through trial. It is possible, however, that the ultimate amount paid to resolve all unsettled litigation in these matters could be materially greater than the remaining reserve (Note 12).

     The Company recognizes insurance recoveries when it becomes probable that such amounts will be received. The Company recognized insurance recoveries of $3 million and $53 million for the three and six months ended June 30, 2006, respectively, and $10 million and $16 million for the three and six months ended June 30, 2005, respectively. In 2005, the Company reached an agreement with the carriers on its directors and officers insurance policies in connection with the securities and derivative action matters described above (other than the actions alleging violations of ERISA). As a result of this agreement, in the fourth quarter, the Company recorded a recovery of approximately $185 million (bringing the total 2005 recoveries to $206 million), which was collected in the first quarter of 2006.

Government Investigations

     As previously disclosed by the Company, the DOJ and the SEC have resolved their investigations into the accounting and disclosure practices of the Company, the former through a deferred prosecution agreement entered into in December 2004 for a two-year period, and the latter through a settlement agreement that was approved by the SEC in March 2005. These resolutions are described in more detail in “Management’s Discussion and Analysis – Other Recent Developments – Government Investigations” in the 2005 Form 10-K. The historical accounting adjustments related thereto were reflected in the restatement of the Company’s financial results for each of the years ended December 31, 2000 through December 31, 2003, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004 Form 10-K”).

     With respect to the $300 million that was placed into an SEC Fair Fund as a condition of the SEC settlement, the district court judge presiding over that fund has approved the SEC’s plan to distribute those monies to investors through the consolidated class action settlement, as provided in its order.

     Under the terms of the Company’s settlement with the SEC, the Company agreed to the appointment of an independent examiner to review whether the Company’s historical accounting for transactions with 17 counterparties, which were identified by the SEC staff, was in conformity with GAAP. The transactions subject to review were entered into between June 1, 2000 and December 31, 2001 (but including subsequent amendments thereto), and principally involve online advertising revenues, as well as three cable programming affiliation agreements with related advertising elements. Revenue related to the 17 transactions principally was recognized prior to January 1, 2002. The independent examiner has been engaged in his review, and, under the terms of the SEC settlement, is required to provide a report to the Company’s audit and finance committee of his conclusions, which is expected to occur during the third quarter of 2006. At present, the Company is not aware of any conclusions yet reached by the independent examiner. Depending on the independent examiner’s conclusions, a further restatement might be necessary. It is also possible that, so long as there are unresolved issues associated with the Company’s financial statements, the effectiveness of any registration statement of the Company or its affiliates may be delayed.

RESULTS OF OPERATIONS

Recent Accounting Standards

Stock-Based Compensation

     The Company has adopted the provisions of FAS 123R, as of January 1, 2006. The provisions of FAS 123R require a company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in the statement of operations over the period during which an employee is required to provide service in exchange for the award. FAS 123R also amends FASB Statement No. 95, Statement of Cash Flows, to require that excess tax benefits, as defined, realized from the exercise of stock options be reported as a financing cash inflow rather than as a reduction of taxes paid in cash flow from operations.

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

     Prior to the adoption of FAS 123R, the Company had followed the provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation (“FAS 123”), which allowed the Company to follow the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and disclose the pro forma effects on net income (loss) had the fair value of the equity awards been expensed. In connection with adopting FAS 123R, the Company elected to adopt the modified retrospective application method provided by FAS 123R and, accordingly, financial statement amounts for all prior periods presented herein reflect results as if the fair value method of expensing had been applied from the original effective date of FAS 123 (Note 1).

     Prior to the adoption of FAS 123R, the Company recognized stock-based compensation expense for awards with graded vesting by treating each vesting tranche as a separate award and recognizing compensation expense ratably for each tranche. For equity awards granted subsequent to the adoption of FAS 123R, the Company treats such awards as a single award and recognizes stock-based compensation expense on a straight-line basis (net of estimated forfeitures) over the employee service period. Stock-based compensation expense is recorded in costs of revenues or selling, general and administrative expense depending on the employee’s job function.

     Additionally, when recording compensation cost for equity awards, FAS 123R requires companies to estimate the number of equity awards granted that are expected to be forfeited. Prior to the adoption of FAS 123R, the Company recognized forfeitures when they occurred, rather than using an estimate at the grant date and subsequently adjusting the estimated forfeitures to reflect actual forfeitures. Accordingly, a pretax cumulative effect adjustment totaling $40 million ($25 million, net of tax) has been recorded for the six months ended June 30, 2006 to adjust for awards granted prior to January 1, 2006 that are not expected to vest. The total impact of the adoption of FAS 123R and total equity-based compensation expense recognized for the three and six months ended June 30, 2006 and 2005 is as follows:

										Total Equity-Based																Total Equity-Based
		Stock Option Expense								Compensation(a)								Stock Option Expense								Compensation(a)
		Three Months Ended								Three Months Ended								Six Months Ended								Six Months Ended
		6/30/06				6/30/05				6/30/06				6/30/05				6/30/06				6/30/05				6/30/06				6/30/05
		(millions)								(millions)								(millions)								(millions)
AOL		$	9			$	22			$	10			$	22			$	22			$	32			$	24			$	33
Cable			6				9				7				9				18				35				21				35
Filmed Entertainment			7				10				10				15				26				37				41				44
Networks			8				11				9				12				21				38				24				40
Publishing			7				11				8				11				18				31				21				31
Corporate			4				6				9				10				16				23				30				30
Total		$	41			$	69			$	53			$	79			$	121			$	196			$	161			$	213

Change in Accounting Principle for Recognizing Programming Inventory Costs at HBO

     Effective January 1, 2006, the Company changed its methodology for recognizing programming inventory costs (for both theatrical and original programming) at its HBO division. Previously, the Company recognized HBO’s programming costs on a straight-line basis in the calendar year in which the related programming first aired on the HBO and Cinemax pay television services. Now the Company recognizes programming costs on a straight-line basis over the license periods or estimated period of use of the related shows, beginning with the month of initial exhibition. The Company concluded that this change in accounting for programming inventory costs was preferable after giving consideration to the cumulative impact that marketplace and technological changes have had in broadening the variety of viewing options and period over which consumers are now experiencing HBO’s programming.

     Since this change involves a revision to an inventory costing principle, the change is reflected retrospectively for all prior periods presented, including the impact that such a change has on retained earnings for the earliest year presented (Note 1).

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

Accounting For Sabbatical Leave and Other Similar Benefits

     In June 2006, the EITF reached a consensus on EITF Issue No. 06-02, Accounting for Sabbatical Leave and Other Similar Benefits (“EITF 06-02”). EITF 06-02 requires that an employee’s right to a compensated absence under a sabbatical leave or similar benefit arrangement in which the employee is not required to perform any duties during the absence is an accumulating benefit. Therefore, such arrangements should be accounted for as a liability with the cost recognized over the service period during which the employee earns the benefit. The provisions of EITF 06-02 will be effective for Time Warner as of January 1, 2007 and will impact the accounting for certain of the Company’s employment arrangements. The cumulative impact of this guidance, which will be applied retrospectively to all prior periods, is expected to result in a reduction to retained earnings on January 1, 2007 of approximately $69 million ($43 million, net of tax). The retrospective impact on Operating Income for calendar years 2006, 2005 and 2004 is expected to be approximately $7 million, $6 million and $9 million, respectively.

Accounting for Uncertainty in Income Taxes

     In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. This Interpretation requires that the Company recognize in the consolidated financial statements the impact of a tax position that is more likely than not to be sustained upon examination based on the technical merits of the position. The provisions of FIN 48 will be effective for Time Warner as of the beginning of the Company’s 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on the consolidated financial statements.

Income Statement Classification of Taxes Collected from Customers

     In June 2006, the EITF reached a consensus on EITF Issue No. 06-03, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (“EITF 06-03”). EITF 06-03 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The provisions of EITF 06-03 will be effective for Time Warner as of January 1, 2007. The Company is currently evaluating the impact of adopting EITF 06-03 on the consolidated financial statements.

Discontinued Operations

     As previously noted under “Recent Developments,” the Company has reflected the operations of TWBG and Turner South as discontinued operations for all periods presented.

Reclassifications

     Certain reclassifications have been made to the prior year’s financial information to conform to the June 30, 2006 presentation.

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

Significant Transactions and Other Items Affecting Comparability

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

		Three Months Ended								Six Months Ended
		6/30/06				6/30/05				6/30/06				6/30/05
		(millions)								(millions)
Amounts related to securities litigation and government investigations		$	(32	)		$	(3,003	)		$	(61	)		$	(3,009	)
Merger-related, restructuring and shutdown costs			(103	)			(11	)			(133	)			(23	)
Asset impairments			—				—				—				(24	)
Gain on disposal of assets, net			—				8				22				18
Impact on Operating Income (Loss)			(135	)			(3,006	)			(172	)			(3,038	)
Investment gains, net			20				982				315				1,005
Gain (loss) on WMG option			—				(27	)			—				53
Impact on Other income, net			20				955				315				1,058
Pretax impact			(115	)			(2,051	)			143				(1,980	)
Income tax impact			44				574				(49	)			539
After-tax impact		$	(71	)		$	(1,477	)		$	94			$	(1,441	)

Amounts Related to Securities Litigation and Government Investigations

     The Company recognized legal and other professional fees related to the SEC and DOJ investigations into certain of the Company’s historical accounting and disclosure practices and the defense of various shareholder lawsuits, as well as legal reserves, totaling $35 million and $114 million, respectively, for the three and six months ended June 30, 2006 and $3.013 billion and $3.025 billion, respectively, for the three and six months ended June 30, 2005. In addition, the Company recognized insurance recoveries of $3 million and $53 million for the three and six months ended June 30, 2006, respectively, and $10 million and $16 million, respectively, for the three and six months ended June 30, 2005.

Merger-related, Restructuring and Shutdown Costs

     During the three and six months ended June 30, 2006, the Company incurred restructuring costs, primarily related to various employee terminations of approximately $41 million and $64 million, respectively, including $15 million at the AOL segment for both the three and six months ended June 30, 2006, $4 million and $10 million, respectively, at the Cable segment for the three and six months ended June 30, 2006, $22 million and $34 million, respectively, at the Publishing segment for the three and six months ended June 30, 2006 and $5 million at the Corporate segment for the six months ended June 30, 2006. The Company also expensed $2 million and $4 million, respectively, at the Filmed Entertainment segment for the three and six months ended June 30, 2006 and $1 million at the AOL segment for the six months ended June 30, 2006 as a result of changes in estimates of previously established restructuring accruals. In addition, during the three and six months ended June 30, 2006, the Cable segment expensed approximately $8 million and $12 million, respectively, of non-capitalizable merger-related costs associated with the Adelphia Acquisition. The results for the three and six months ended June 30, 2006 include shutdown costs of $81 million at The WB Network in connection with the agreement between Warner Bros. and CBS to form a new fully-distributed national broadcast network, to be called The CW. Included in the shutdown costs are termination charges related to terminating intercompany programming arrangements with other Time Warner divisions, of which $29 million has been eliminated in consolidation, resulting in a net pretax charge of $52 million.

     During the three and six months ended June 30, 2005, the Company incurred restructuring costs of $13 million and $30 million, respectively, at the Cable segment, primarily related to various employee terminations and exit activities. In addition, restructuring charges at the AOL segment reflect a $2 million reduction for the three months ended June 30, 2005 and a net reduction of $7 million for the six months ended June 30, 2005 relating to changes in estimates of previously established restructuring accruals (Note 10).

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

Asset Impairments

     During the six months ended June 30, 2005, the Company recorded a $24 million noncash impairment charge related to goodwill associated with America Online Latin America, Inc. (“AOLA”). As previously disclosed, AOLA has been operating under Chapter 11 of the U.S. Bankruptcy Code and has been in the process of winding up its operations. On June 30, 2006, AOLA emerged from bankruptcy pursuant to a joint plan of reorganization and liquidation. Under the plan, AOLA was reorganized into a liquidating limited liability company jointly owned by Time Warner (60%) and the Cisneros Group (40%). In partial satisfaction of debt and obligations held by Time Warner or AOL, the assets representing the AOL Puerto Rico business were transferred to Time Warner or AOL pursuant to the plan. Included in AOL’s results is a $7 million charge related to AOLA’s bankruptcy resolution.

Gains on Disposal of Assets, Net

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

     For the three and six months ended June 30, 2005, the Company recorded an approximate $5 million gain at the AOL segment related to the sale of a building. The three and six months ended June 30, 2005 also include gains of $3 million and $5 million, respectively, at the AOL segment from the resolution of previously contingent gains related to the 2004 sale of NSS. In addition, the six months ended June 30, 2005 includes an $8 million gain at the Publishing segment related to the collection of a loan made in conjunction with the Company’s 2003 sale of Time Life Inc. (“Time Life”), which was previously fully reserved due to concerns about recoverability.

Investment Gains, Net

     For the three and six months ended June 30, 2006, the Company recognized net gains of $20 million and $315 million, respectively, primarily related to the sale of investments, including for the six months ended June 30, 2006 a $239 million gain on the sale of a portion of the Company’s investment in TWT and a $51 million gain on the sale of the Company’s investment in Canal Satellite Digital. For the three and six months ended June 30, 2006, investment gains, net also include $4 million and $11 million, respectively, of gains to reflect market fluctuations in equity derivative instruments.

     For the three and six months ended June 30, 2005, the Company recognized net gains of $982 million and $1.005 billion, respectively, primarily related to the sale of investments, including a $925 million gain on the sale of the Company’s remaining investment in Google and a $36 million gain, which was previously deferred, related to the Company’s 2002 sale of a portion of its interest in Columbia House Holdings Inc. (“Columbia House”). For the three and six months ended June 30, 2005, investment gains also include $1 million and $2 million, respectively, of gains to reflect market fluctuations in equity derivative instruments.

Gain (Loss) on WMG Option

     For the three and six months ended June 30, 2005, the Company recorded a $27 million loss and a $53 million net gain, reflecting a fair value adjustment related to the Company’s option in Warner Music Group (“WMG”).

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

Three and Six Months Ended June 30, 2006 Compared to Three and Six Months Ended June 30, 2005

Consolidated Results

     Revenues. The components of revenues are as follows:

		Three Months Ended												Six Months Ended
		6/30/06				6/30/05				% Change				6/30/06				6/30/05				% Change
						(recast)												(recast)
						(millions)												(millions)
Subscription		$	5,861			$	5,611				4%			$	11,542			$	11,096				4%
Advertising			2,239				2,016				11%				4,041				3,661				10%
Content			2,306				2,674				(14%	)			5,062				5,650				(10%	)
Other			302				284				6%				574				541				6%
Total revenues		$	10,708			$	10,585				1%			$	21,219			$	20,948				1%

     The increase in Subscription revenues for the three and six months ended June 30, 2006 was primarily related to increases at the Cable and Networks segments, offset partially by a decline at the AOL segment. The increase at the Cable segment was principally due to the continued penetration of advanced services (primarily high-speed data services, advanced digital video services and Digital Phone), video rate increases and growth in subscriber levels. The increase at the Networks segment was due primarily to higher subscription rates and, to a lesser extent, an increase in the number of subscribers at Turner and HBO, as well as the impact of the Court TV acquisition. The AOL segment declined primarily as a result of lower domestic AOL brand subscribers and the unfavorable impact of foreign currency exchange rates at AOL Europe.

     The increase in Advertising revenues for the three and six months ended June 30, 2006 was primarily due to growth at the AOL and Networks segments. The increase at the AOL segment was due to growth in revenues from display advertising, paid-search advertising and sales of advertising run on third-party websites generated by Advertising.com. The increase at the Networks segment was primarily driven by the impact of the Court TV acquisition and higher CPMs (advertising cost per one thousand viewers) and sellouts across Turner’s other networks, partly offset by a decline at The WB Network.

     The decrease in Content revenues for the three and six months ended June 30, 2006 was principally due to decreases at the Filmed Entertainment segment, primarily driven by a decline in theatrical product revenues.

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

     Costs of Revenues. For the three months ended June 30, 2006 and 2005, costs of revenues totaled $6.022 billion and $6.173 billion, respectively, and as a percentage of revenues were 56% and 58%, respectively. For the six months ended June 30, 2006 and 2005, costs of revenues totaled $11.864 billion and $12.087 billion, respectively, and as a percentage of revenues were 56% and 58%, respectively. The improvement in costs of revenues as a percentage of revenues for the three and six months ended June 30, 2006 related primarily to improved margins at the Filmed Entertainment, Networks and Cable segments, partially offset by a decline in margins at the AOL segment. The segment variations are discussed in detail in “Business Segment Results.”

     Selling, General and Administrative Expenses. For the three months ended June 30, 2006 and 2005, selling, general and administrative expenses increased 2% to $2.622 billion in 2006 from $2.568 billion in 2005. For the six months ended June 30, 2006 and 2005, selling, general and administrative expenses increased 2% to $5.245 billion in 2006 from $5.155 billion in 2005. The segment variations are discussed in detail in “Business Segment Results.”

     Amounts Related to Securities Litigation and Government Investigations. As previously discussed in “Recent Developments,” the Company recognized legal and other professional fees related to the SEC and DOJ investigations into certain of the Company’s historical accounting and disclosure practices and the defense of various shareholder lawsuits, as well as legal reserves, totaling $35 million and $114 million for the three and six months ended June 30, 2006, respectively, and $3.013 billion and $3.025 billion for the three and six months ended June 30, 2005, respectively. In addition, the Company recognized insurance recoveries of $3 million and $53 million for the three and six months ended June 30, 2006, respectively, and $10 million and $16 million for the three and six months ended June 30, 2005, respectively (Note 1).

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

     Reconciliation of Operating Income (Loss) before Depreciation and Amortization to Operating Income (Loss) and Net Income (Loss).

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

		Three Months Ended												Six Months Ended
		6/30/06				6/30/05				% Change				6/30/06				6/30/05				% Change
						(recast)												(recast)
						(millions)												(millions)
Operating Income (Loss) before Depreciation and Amortization		$	2,623			$	(506	)			NM			$	5,323			$	1,974				NM
Depreciation			(694	)			(656	)			6%				(1,385	)			(1,306	)			6%
Amortization			(135	)			(151	)			(11%	)			(268	)			(299	)			(10%	)
Operating Income (Loss)			1,794				(1,313	)			NM				3,670				369				NM
Interest expense, net			(337	)			(324	)			4%				(636	)			(670	)			(5%	)
Other income, net			49				989				(95%	)			360				1,100				(67%	)
Minority interest expense, net			(114	)			(69	)			65%				(196	)			(123	)			59%
Income (Loss) before income taxes, discontinued operations and cumulative effect of accounting change			1,392				(717	)			NM				3,198				676				NM
Income tax benefit (provision)			(527	)			292				NM				(1,135	)			(193	)			NM
Income (Loss) before discontinued operations and cumulative effect of accounting change			865				(425	)			NM				2,063				483				NM
Discontinued operations, net of tax			142				16				NM				374				23				NM
Cumulative effect of accounting change, net of tax			—				—				—				25				—				NM
Net income (loss)		$	1,007			$	(409	)			NM			$	2,462			$	506				NM

     Operating Income (Loss) before Depreciation and Amortization. Time Warner’s Operating Income (Loss) before Depreciation and Amortization was income of $2.623 billion for the three months ended June 30, 2006 compared to a loss of $506 million for the three months ended June 30, 2005. Excluding the items previously discussed under “Significant Transactions and Other Items Affecting Comparability” totaling $135 million and $3.006 billion of net expense for 2006 and 2005, respectively, Operating Income before Depreciation and Amortization increased $258 million principally as a result of growth at the Cable, Networks and Filmed Entertainment segments, offset by a decline at the AOL and Publishing segments.

     For the six months ended June 30, 2006, Operating Income before Depreciation and Amortization was $5.323 billion compared to $1.974 billion for the six months ended June 30, 2005. Excluding the items previously discussed under “Significant Transactions and Other Items Affecting Comparability” totaling $172 million and $3.038 billion of net expense for 2006 and 2005, respectively, Operating Income before Depreciation and Amortization increased $483 million principally as a result of growth at the Cable, Networks and Filmed Entertainment segments, offset by a decline at the AOL and Publishing segments.

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

     Depreciation Expense. Depreciation expense increased to $694 million and $1.385 billion for the three and six months ended June 30, 2006 from $656 million and $1.306 billion for the three and six months ended June 30, 2005. The increase in depreciation expense primarily related to an increase at the Cable segment reflecting demand driven increases in customer premise equipment purchases in recent years that is depreciated over a shorter useful life compared to the mix of assets previously purchased.

     Amortization Expense. Amortization expense decreased to $135 million and $268 million for the three and six months ended June 30, 2006 from $151 million and $299 million for the three and six months ended June 30, 2005. The decrease in amortization expense primarily relates to the Publishing segment as a result of certain short-lived intangibles, such as customer

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

lists, becoming fully amortized in the latter part of 2005. This decrease at the Publishing segment was partially offset by amortization from certain indefinite-lived trade name intangibles being assigned a finite life beginning in the first quarter of 2006.

     Operating Income (Loss). Time Warner’s Operating Income (Loss) was income of $1.794 billion for the three months ended June 30, 2006 compared to a loss of $1.313 billion for the three months ended June 30, 2005. Excluding the items previously discussed under “Significant Transactions and Other Items Affecting Comparability” totaling $135 million and $3.006 billion of net expense for 2006 and 2005, respectively, Operating Income increased $236 million.

     Time Warner’s Operating Income increased to $3.670 billion for the six months ended June 30, 2006 from $369 million for the six months ended June 30, 2005. Excluding the items previously discussed under “Significant Transactions and Other Items Affecting Comparability” totaling $172 million and $3.038 billion of net expense for 2006 and 2005, respectively, Operating Income increased $435 million.

     These amounts reflect the changes in Operating Income (Loss) before Depreciation and Amortization and the decline in amortization expense, offset partially by the increase in depreciation expense as discussed above.

     Interest Expense, Net. Interest expense, net, increased to $337 million from $324 million for the three months ended June 30, 2006 and 2005, respectively, reflecting lower interest income on cash investments and higher average outstanding balances of borrowings. Interest expense, net, decreased to $636 million from $670 million for the six months ended June 30, 2006 and 2005, respectively, due primarily to higher interest income on cash investments and lower average interest rates on borrowings, partially offset by higher average outstanding balances of borrowings.

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

		Three Months Ended								Six Months Ended
		6/30/06				6/30/05				6/30/06				6/30/05
		(millions)								(millions)
Investment gains, net		$	20			$	982			$	315			$	1,005
Gain (Loss) on WMG option			—				(27	)			—				53
Income from equity investees			27				36				42				47
Other			2				(2	)			3				(5	)
Other income, net		$	49			$	989			$	360			$	1,100

     The changes in investment gains, net, and the gain (loss) on the WMG option are discussed under “Significant Transactions and Other Items Affecting Comparability.” Excluding the impact of these items, Other income, net, decreased principally from declines in income from equity method investees, primarily due to the consolidation of Court TV retroactive to the beginning of 2006 as a result of the Company acquiring the remaining 50% interest it did not already own in the second quarter of 2006 and losses generated by The CW, partially offset by an increase in income related to TKCCP, a joint venture between TWC and Comcast.

     Minority Interest Expense, Net. Time Warner had $114 million and $196 million of minority interest expense for the three and six months ended June 30, 2006 compared to $69 million and $123 million for the three and six months ended June 30, 2005. The increase relates primarily to the 5% minority interest in AOL issued to Google in the second quarter of 2006 and to larger profits recorded by TWC, in which Comcast has a minority interest.

     Income Tax Benefit (Provision). Income tax from continuing operations was a provision of $527 million for the three months ended June 30, 2006 compared to a $292 million benefit for the three months ended June 30, 2005 and was a provision of $1.135 billion for the six months ended June 30, 2006 compared to a provision of $193 million for the six months ended June 30, 2005. The Company’s effective tax rate for continuing operations were provisions of 38% and 35% for the three and six months ended June 30, 2006, respectively, compared to a benefit of 41% and a provision of 29% for the three and six months ended June 30, 2005, respectively. The increases in effective tax rates are primarily due to unfavorable comparisons to the prior periods which benefited from state law changes in Ohio and New York, partially offset by non-deductible expenses related to a portion of the settlement accrual for the securities litigation.

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

     Income (Loss) before Discontinued Operations and Cumulative Effect of Accounting Change. Income (Loss) before discontinued operations and cumulative effect of accounting change was income of $865 million for the three months ended June 30, 2006 compared to a loss of $425 million for the three months ended June 30, 2005. Basic and diluted net income (loss) per share before discontinued operations and cumulative effect of accounting change were both income of $0.20 in 2006 compared to losses of $0.09 for both basic and diluted net income (loss) per share before discontinued operations and cumulative effect of accounting change in 2005. Excluding the items previously discussed under “Significant Transactions and Other Items Affecting Comparability” totaling $71 million and $1.477 billion of net expense for the three months ended June 30, 2006 and 2005, respectively, income before discontinued operations and cumulative effect of accounting change declined by $116 million primarily due to lower other income, net, higher minority interest expense, net, and increased income tax provision, partially offset by higher Operating Income, as discussed above.

     Income before discontinued operations and cumulative effect of accounting change was $2.063 billion for the six months ended June 30, 2006 compared to $483 million for the six months ended June 30, 2005. Basic and diluted net income per share before discontinued operations and cumulative effect of accounting change were both $0.47 in 2006 compared to $0.10 for both basic and diluted net income per share before discontinued operations and cumulative effect of accounting change in 2005. Excluding the items previously discussed under “Significant Transactions and Other Items Affecting Comparability” totaling $94 million of income and $1.441 billion of net expense for the six months ended June 30, 2006 and 2005, respectively, income before discontinued operations and cumulative effect of accounting change increased by $45 million primarily due to higher Operating Income, partially offset by lower other income, net, higher minority interest expense, net, and increased income tax provision, as discussed above.

     Discontinued Operations. The financial results for the three and six months ended June 30, 2006 and 2005 include the impact of the treatment of TWBG and Turner South as discontinued operations. Included in the results for the three and six months ended June 30, 2006 is a pretax gain of approximately $129 million and a tax benefit of $21 million related to the sale of Turner South. In addition, the results for the six months ended June 30, 2006 include a pretax gain of approximately $194 million and a tax benefit of $28 million related to the sale of TWBG. The tax benefit resulted primarily from the release of a valuation allowance associated with tax attribute carryforwards offsetting the tax gain on these transactions.

     Cumulative Effect of Accounting Change, net of tax. The Company recorded a $40 million pretax benefit ($25 million, net of tax), as the cumulative effect of a change in accounting principle upon the adoption of FAS 123R, in the first quarter of 2006, to recognize the effect of estimating the number of awards granted prior to January 1, 2006 that are not ultimately expected to vest.

     Net Income (Loss) and Net Income (Loss) Per Common Share. Net income (loss) was income of $1.007 billion for the three months ended June 30, 2006 compared to a loss of $409 million for the three months ended June 30, 2005. Basic and diluted net income (loss) per common share were both income of $0.24 in 2006 compared to losses of $0.09 for both basic and diluted net income (loss) per common share in 2005. Net income was $2.462 billion for the six months ended June 30, 2006 compared to $506 million for the six months ended June 30, 2005. Basic and diluted net income per common share were both $0.56 in 2006 compared to $0.11 for both basic and diluted net income per common share in 2005.

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

Business Segment Results

     AOL. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the AOL segment for the three and six months ended June 30, 2006 and 2005 are as follows:

		Three Months Ended												Six Months Ended
		6/30/06				6/30/05				% Change				6/30/06				6/30/05				% Change
						(recast)												(recast)
						(millions)												(millions)
Revenues:
Subscription		$	1,546			$	1,734				(11%	)		$	3,084			$	3,508				(12%	)
Advertising			449				320				40%				841				631				33%
Other			51				43				19%				102				91				12%
Total revenues			2,046				2,097				(2%	)			4,027				4,230				(5%	)
Costs of revenues(a)			(953	)			(973	)			(2%	)			(1,899	)			(1,955	)			(3%	)
Selling, general and administrative(a)			(573	)			(598	)			(4%	)			(1,165	)			(1,224	)			(5%	)
Gain on disposal of consolidated businesses			—				8			NM					2				10				(80%	)
Asset impairments			—				—				—				—				(24	)		NM
Restructuring costs			(15	)			2			NM					(16	)			7			NM
Operating Income before Depreciation and Amortization			505				536				(6%	)			949				1,044				(9%	)
Depreciation			(135	)			(143	)			(6%	)			(270	)			(290	)			(7%	)
Amortization			(42	)			(47	)			(11%	)			(82	)			(94	)			(13%	)
Operating Income		$	328			$	346				(5%	)		$	597			$	660				(10%	)

     The reduction in Subscription revenues for the three and six months ended June 30, 2006, as compared to the similar periods in the prior year, primarily reflects a decline in domestic Subscription revenues (from $1.278 billion to $1.102 billion for the three months and from $2.591 billion to $2.211 billion for the six months) and a decline in Subscription revenues at AOL Europe (from $430 million to $420 million for the three months and from $879 million to $827 million for the six months). AOL’s domestic Subscription revenues declined due primarily to a decrease in the number of domestic AOL brand subscribers and related revenues. The decrease in AOL Europe’s Subscription revenues was driven by the unfavorable impact of foreign currency exchange rates ($16 million and $57 million for the three and six months, respectively). AOL Europe’s dial-up Subscription revenues declined; however, this decline was more than offset by an increase in broadband and telephony revenues.

     The number of AOL brand domestic and European subscribers is as follows at June 30, 2006, March 31, 2006, and June 30, 2005 (millions):

		June 30,				March 31,				June 30,
		2006				2006				2005
Subscriber category:
AOL brand domestic(a)
$15 and over			11.5				12.8				15.6
Under $15			6.2				5.8				5.2
Total AOL brand domestic			17.7				18.6				20.8
AOL Europe			5.6				5.9				6.2

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

     The average monthly Subscription revenue per subscriber (“ARPU”) for each significant category of subscribers, calculated as average monthly subscription revenue (including premium subscription services revenues) for the category divided by the average monthly subscribers in the category for the applicable period, is as follows:

		Three Months Ended								Six Months Ended
		6/30/06				6/30/05				6/30/06				6/30/05
Subscriber category:
AOL brand domestic
$15 and over		$	23.05			$	20.84			$	21.97			$	20.68
Under $15			12.05				13.31				12.42				13.21
Total AOL brand domestic			19.42				19.05				18.92				18.98
AOL Europe			23.96				22.31				23.21				22.71

     During the second quarter of 2006, AOL improved its methodology for attributing AOL brand domestic Subscription revenues to the $15 and over and under $15 per month price plan categories. This methodology improvement, which resulted from better system data, had no impact on total AOL brand domestic ARPU for the three and six months ended June 30, 2006. The impact of the improved methodology to the $15 and over and under $15 subscriber categories (as reflected in the table above), as compared to the ARPU calculated for these categories under the old methodology, for the three and six months ended June 30, 2006, is as follows:

		Three Months Ended				Six Months Ended
		6/30/06				6/30/06
Subscriber category:
AOL brand domestic
$15 and over		$	0.43			$	0.21
Under $15			(0.87	)			(0.44	)

     Domestic subscribers to the AOL brand service include subscribers during introductory free-trial periods and subscribers at no or reduced monthly fees through member service and retention programs. Total AOL brand domestic subscribers include free-trial and retention members of approximately 8% at June 30, 2006 and 11% at both March 31, 2006 and June 30, 2005.

     AOL has agreements with certain high-speed Internet access providers to offer the AOL service along with high-speed Internet access. The price plan for the AOL service portion of these offers is less than $15 and, therefore, subscribers to these plans are included in the under $15 category price plans. In addition, late in the first quarter of 2006 and continuing into the second quarter, AOL implemented price increases on certain AOL brand service price plans, including increasing the price of the $23.90 plan to $25.90.

     The largest component of the AOL brand domestic $15 and over price plans is the $25.90 price plan, which provides unlimited access to the AOL service using AOL’s dial-up network and unlimited usage of the AOL service through any other Internet connection. The largest component of the AOL brand domestic under $15 price plans is the $14.95 per month price plan, which generally includes a limited number of hours of dial-up access and unlimited usage of the AOL service through an Internet connection not provided by AOL, such as a high-speed broadband Internet connection via cable or digital subscriber lines.

     The decline in AOL brand domestic subscribers on plans priced $15 and over per month resulted from a number of factors, including the effect of the recent price increase, declining registrations in response to AOL’s marketing campaigns, competition from broadband access providers and reduced subscriber acquisition efforts. Further, during the period, subscribers migrated from the premium-priced unlimited dial-up plans, including the $25.90 plan, to lower-priced plans.

     The increase in AOL brand domestic subscribers on plans below $15 per month was driven principally by the migration of subscribers from plans $15 and over per month and, to a lesser extent, by new subscribers. The increase for the three months ended June 30, 2006 compared to March 31, 2006 primarily reflects a migration of subscribers from the $25.90 plan as a result of the recent price increases and recent agreements with high-speed Internet access providers, under which AOL offers the AOL service along with high-speed Internet access. The AOL service component of these offers is less than $15. The under $15 subscriber price plan category as of June 30, 2006 also reflects an increase of approximately 71,000 joint AOL/Road Runner subscribers as a result of an amendment to AOL’s agreement with TWC, which clarified AOL’s rights to revenue sharing for these subscribers under a previous arrangement. In connection with AOL’s strategy, AOL and TWC have agreed to eliminate the revenue sharing to AOL for approximately 400,000 joint AOL/Road Runner subscribers included in the AOL brand

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

domestic membership, which is expected to be effective in the third quarter (the majority which are included in the under $15 subscriber price plan category). Accordingly, such members will no longer be included in the AOL brand domestic subscriber counts beginning in the third quarter. In return, TWC has agreed to further promote the availability of the free AOL service to current and future TWC high-speed data subscribers. This modification is not expected to have a significant impact on the financial results of the AOL or Cable segments or on Time Warner’s consolidated financial results for 2006.

     Excluding the impact of the methodology improvement discussed above, the $15 and over per month subscriber category ARPU increased $1.78 and $1.08 for the three and six months ended June 30, 2006, respectively, as compared to the three and six months ended June 30, 2005. These increases were due primarily to the price increases implemented by AOL late in the first quarter of 2006 and continuing into the second quarter and an increase in the percentage of revenue generating customers, partially offset by a shift in the subscriber mix to lower-priced subscriber price plans. Premium subscription services revenues included in ARPU were $25 million and $45 million for the three and six months ended June 30, 2006, respectively, and $22 million and $42 million for the three and six months ended June 30, 2005, respectively.

     Excluding the impact of the methodology improvement discussed above, the $15 and under per month subscriber category ARPU decreased $0.39 and $0.35 for the three and six months ended June 30, 2006, respectively, as compared to the three and six months ended June 30, 2005. These decreases were due primarily to a decrease in revenues generated by members on limited plans who exceeded their free time and a shift in the subscriber mix to lower-priced subscriber price plans, partially offset by an increase in the percentage of revenue generating customers. Premium subscription services revenues included in ARPU were $7 million and $16 million for the three and six months ended June 30, 2006, respectively, and $8 million and $14 million for the three and six months ended June 30, 2005, respectively.

     The increase in total AOL brand domestic ARPU for the three months ended June 30, 2006, as compared to the similar period in the prior year, was due primarily to the price increases described above and an increase in the percentage of revenue generating customers, partially offset by a shift in the subscriber mix to lower-priced subscriber price plans. The decline in total AOL brand domestic ARPU for the six months ended June 30, 2006, as compared to the similar period in the prior year, was due primarily to the shift in AOL’s membership base to lower-priced subscriber plans, which was partially offset by the price increases and an increase in the percentage of revenue generating customers. AOL brand domestic members on price plans under $15 was 35% of total AOL brand domestic membership as of June 30, 2006 as compared to 25% as of June 30, 2005.

     AOL Europe offers a variety of price plans, including bundled broadband, unlimited access to the AOL service using AOL’s dial-up network and limited access plans, which are generally billed based on actual usage. AOL Europe continues to actively market bundled broadband plans, as AOL Europe’s subscribers have been migrating from dial-up plans to bundled broadband plans, and this trend is expected to continue.

     The ARPU for European subscribers increased for the three and six months ended June 30, 2006 primarily due to a shift in subscriber mix from narrowband to broadband and an increase in telephony revenues, partially offset by the negative effect of changes in foreign currency exchange rates. In addition, although bundled broadband subscribers continue to grow as a percentage of total subscribers at AOL Europe, broadband price reductions in France, Germany and the U.K. due to competition have offset the impact of this migration on ARPU.

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

     Advertising revenues improved due to increased revenues from growth in display advertising, paid-search advertising and sales of advertising run on third-party websites generated by Advertising.com. Paid-search revenues and revenues generated by Advertising.com increased $39 million to $147 million and $42 million to $102 million, respectively, for the three months ended June 30, 2006 as compared to the three months ended June 30, 2005 and increased $66 million to $280 million and $58 million to $178 million, respectively, for the six months ended June 30, 2006 as compared to the six months ended June 30, 2005. AOL expects Advertising revenues to continue to increase during the remainder of 2006 as compared to the similar period in 2005 due to expected growth in paid-search and display advertising and contributions from Advertising.com’s performance-based advertising.

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

     Other revenues primarily include revenue from licensing software for wireless devices, revenue generated by the sale of modems to customers in Europe in order to support high-speed access to the Internet, and revenue generated from mobile messaging via wireless devices utilizing AOL’s services. Other revenues increased slightly for the three and six months ended June 30, 2006 primarily due to higher revenue at AOL Europe from increased modem sales and higher revenue from royalties associated with mobile messaging.

     For the three and six months ended June 30, 2006, costs of revenues decreased 2% and 3%, respectively, and, as a percentage of revenues, increased to 47% for both the three and six months ended June 30, 2006 from 46% for both the three and six months ended June 30, 2005. The decrease in cost of revenues related primarily to lower network-related expenses. Network-related expenses decreased 7% to $315 million and 9% to $633 million for the three and six months ended June 30, 2006, respectively. The decline in network-related expenses was principally attributable to improved pricing and network utilization, decreased levels of long-term fixed commitments and lower usage of AOL’s dial-up network associated with the declining dial-up subscriber base.

     The decrease in selling, general and administrative expenses for the three and six months ended June 30, 2006 primarily related to a decrease in marketing costs, primarily subscriber acquisition marketing, lower employee incentive compensation, including lower current year accruals and the reversal of previously established accruals that are no longer required, and other cost savings initiatives, partially offset by a $7 million charge related to AOLA’s bankruptcy resolution. The six months ended June 30, 2006 also included an approximate $14 million benefit related to the favorable resolution of certain tax matters. The three and six months ended June 30, 2005 included a $15 million benefit related to the favorable resolution of a European valued-added tax matter.

     As previously discussed under “Significant Transactions and Other Items Affecting Comparability,” the results for the three and six months ended June 30, 2006 include a $15 million restructuring charge related to a reduction in headcount. In addition, the results for the six months ended June 30, 2006 include a $1 million restructuring charge primarily related to changes in estimates of previously established restructuring accruals and a $2 million gain from the resolution of a previously contingent gain related to the 2004 sale of NSS. The results for the three and six months ended June 30, 2005 include an approximate $5 million gain on the sale of a building and gains of $3 million and $5 million, respectively, from the resolution of previously contingent gains related to the 2004 sale of NSS. The three months ended June 30, 2005 also reflect a $2 million reduction in restructuring costs and the six months ended June 30, 2005 reflect a net reduction of $7 million relating to changes in estimates of previously established restructuring accruals. The six months ended June 30, 2005 also include a $24 million noncash goodwill impairment charge related to AOLA.

     The decreases in Operating Income before Depreciation and Amortization and Operating Income are due primarily to lower Subscription revenues, partially offset by higher Advertising revenues and lower costs of revenues and selling, general and administrative expenses and the absence of the $24 million noncash goodwill impairment charge. Operating Income before Depreciation and Amortization included a $16 million and $43 million decline at AOL Europe for the three and six months ended June 30, 2006, respectively, as compared to the similar periods in 2005, reflecting a decline in revenues and higher costs. Operating Income also improved due to lower depreciation expense reflecting a decline in network assets as the result of membership declines.

     In connection with AOL’s strategy, beginning in the third quarter of 2006, AOL will reduce marketing costs associated with acquiring and retaining new dial-up subscribers and certain general and administrative functions. With the proactive reduction in subscriber acquisition costs, AOL expects acceleration in the rate of the decline in its subscribers and related Subscription revenues, and a decline in ARPU for each significant category of subscriber. In addition, AOL expects to reduce costs of revenues, such as dial-up network and customer service, and selling, general and administrative costs. This phase of the strategy will result in restructuring plans that will likely be finalized in the second half of 2006 and are expected to result in restructuring and impairment charges in the second half of 2006 and in 2007 ranging from $250 million to $350 million, approximately half of which are expected to be for involuntary employee terminations and the remainder for other costs, including facility exit costs and other contract termination costs, as well as the abandonment and disposal of various long-lived assets. AOL expects that a majority of the restructuring and impairment charges will result in future cash expenditures. It is expected that AOL will incur approximately $150 million to $200 million of such charges in 2006.

     Consistent with its strategy, AOL is pursuing alternatives with respect to its AOL Europe businesses, including the potential sale of its European access businesses and the expansion of its global web services business in Europe. Divestiture plans are

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

currently being developed, and it is anticipated that such transactions would be entered into beginning in the second half of 2006 and close within one year thereafter.

     The Company anticipates that, after considering the impact of the plans associated with the strategy, including the restructuring plans and related charges, the AOL segment’s Operating Income before Depreciation and Amortization and Operating Income for the second half of 2006 will be flat to slightly higher compared to the comparable prior year period.

     Cable. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Cable segment for the three and six months ended June 30, 2006 and 2005 are as follows:

		Three Months Ended												Six Months Ended
		6/30/06				6/30/05				% Change				6/30/06				6/30/05				% Change
						(recast)												(recast)
						(millions)												(millions)
Revenues:
Subscription		$	2,579			$	2,221				16%			$	5,042			$	4,348				16%
Advertising			142				136				4%				259				255				2%
Total revenues			2,721				2,357				15%				5,301				4,603				15%
Costs of revenues(a)			(1,204	)			(1,070	)			13%				(2,379	)			(2,076	)			15%
Selling, general and administrative(a)			(472	)			(383	)			23%				(935	)			(810	)			15%
Merger-related and restructuring costs			(12	)			(13	)			(8%	)			(22	)			(30	)			(27%	)
Operating Income before Depreciation and Amortization			1,033				891				16%				1,965				1,687				16%
Depreciation			(418	)			(386	)			8%				(829	)			(762	)			9%
Amortization			(20	)			(19	)			5%				(40	)			(39	)			3%
Operating Income		$	595			$	486				22%			$	1,096			$	886				24%

     The components of Subscription revenues are as follows:

		Three Months Ended												Six Months Ended
		6/30/06				6/30/05				% Change				6/30/06				6/30/05				% Change
						(millions)												(millions)
Subscription revenues:
Video services		$	1,764			$	1,639				8%			$	3,475			$	3,241				7%
High-speed data			646				525				23%				1,258				1,018				24%
Digital Phone			169				57				196%				309				89				247%
Total Subscription revenues		$	2,579			$	2,221				16%			$	5,042			$	4,348				16%

     For the three and six months ended June 30, 2006, Subscription revenues increased due to the continued penetration of advanced services (primarily high-speed data services, advanced digital video services and Digital Phone), video rate increases and growth in subscriber levels. Aggregate revenues associated with TWC’s advanced digital video services, including Digital Tiers, Pay-Per-View, VOD, SVOD and DVRs, increased 21% for both the three and six months ended June 30, 2006 to $237 million and $454 million, respectively. Strong growth rates for high-speed data services and Digital Phone are expected to continue for the remainder of 2006.

     TWC subscriber counts include all billable subscribers for each level of service received. Basic cable subscribers include all subscribers who receive basic video cable service. Digital video subscribers reflect all subscribers who receive any level of video service received via digital technology. High-speed data subscribers include all subscribers who receive TWC’s Road Runner Internet service or any of the other Internet services offered by TWC. Digital Phone subscribers include all subscribers who receive telephony service. At June 30, 2006, as compared to June 30, 2005, basic cable subscribers increased 1.4% and totaled 11.057 million (including 1.579 million subscribers of unconsolidated investees, which are managed by TWC), digital video subscribers increased by 15% to 5.813 million (including 806,000 subscribers of unconsolidated investees, which are managed by TWC), residential high-speed data subscribers increased by 25% to 5.398 million (including 762,000 subscribers of unconsolidated investees, which are managed by TWC) and commercial high-speed data subscribers increased by 18% to 228,000 (including 28,000 subscribers of unconsolidated investees, which are managed by TWC). Additionally, Digital Phone

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

subscribers increased by 990,000 to 1.604 million (including 203,000 subscribers of unconsolidated investees, which are managed by TWC).

     For the three and six months ended June 30, 2006, costs of revenues increased 13% and 15%, respectively, and, as a percentage of revenues, were 44% and 45% for the three and six months ended June 30, 2006, respectively, compared to 45% for both the three and six months ended June 30, 2005. The increase in costs of revenues is primarily related to increases in video programming costs, telephony service costs and labor costs. For the three and six months ended June 30, 2006, video programming costs increased 9% in each period to $581 million and $1.139 billion, respectively, due primarily to contractual rate increases, the ongoing deployment of new digital video services and higher regional sports network programming costs. Programming costs for the six months ended June 30, 2006 include an $11 million benefit reflecting an adjustment in the amortization of certain launch support payments. In addition, programming costs for the three and six months ended June 30, 2005 included a $14 million charge related to the resolution of contractual terms with a program vendor. Video programming costs are expected to increase during the remainder of 2006 at a rate higher than that experienced during the first half of 2006, reflecting contractual rate increases, subscriber growth and the continued expansion of service offerings. For the three and six months ended June 30, 2006, telephony service costs increased approximately $51 million and $98 million, respectively, due to the growth in Digital Phone subscribers. Labor costs increased primarily due to salary increases and higher headcount resulting from the roll-out of advanced services. For the three and six months ended June 30, 2006, these increases in costs of revenues were partially offset by a $10 million benefit related to third-party maintenance support payment fees, reflecting the resolution of terms with an equipment vendor, and for the six months ended June 30, 2006, the increase was partially offset by an $18 million benefit (with an additional $5 million benefit recorded in selling, general and administrative expenses) due to changes in estimates related to certain medical benefit accruals.

     The increase in selling, general and administrative expenses for the three and six months ended June 30, 2006 is primarily the result of higher labor and administrative costs due to increased headcount resulting from the continued roll-out of advanced services and salary increases and an $11 million charge (with an additional $2 million charge included in costs of revenues) reflecting an adjustment to prior period facility rent expense. The six months ended June 30, 2005 also included a $9 million reserve related to legal matters.

     As previously discussed under “Significant Transactions and Other Items Affecting Comparability,” during the three and six months ended June 30, 2006, the Cable segment expensed approximately $8 million and $12 million, respectively, of non-capitalizable merger-related costs associated with the Adelphia Acquisition, the TWC and TWE redemptions and the Cable Swaps. Such costs are expected to continue into the third quarter of 2006. Closing of these transactions occurred on July 31, 2006. In addition, the results for the three and six months ended June 30, 2006 include approximately $4 million and $10 million, respectively, of restructuring costs, primarily due to a reduction in headcount associated with efforts to reorganize TWC’s operations in a more efficient manner. The results for the three and six months ended June 30, 2005 included $13 million and $30 million, respectively, of restructuring costs, primarily associated with the early retirement of certain senior executives. These actions are part of TWC’s broader plans to simplify its organizational structure and enhance its customer focus. TWC is in the process of executing these initiatives and expects to incur additional costs as these plans are implemented throughout 2006.

     Operating Income before Depreciation and Amortization for the three and six months ended June 30, 2006 increased principally as a result of revenue growth (particularly high margin high-speed data revenues), partially offset by higher costs of revenues and selling, general and administrative expenses as discussed above.

     Operating Income for the three and six months ended June 30, 2006 increased due primarily to the increase in Operating Income before Depreciation and Amortization described above, partially offset by an increase in depreciation expense. Depreciation expense increased primarily due to demand-driven increases in customer premise equipment purchases in recent years, which generally has a significantly shorter useful life compared to the mix of assets previously purchased.

     As a result of the Adelphia Acquisition, the Company anticipates that the Cable segment’s subscriber counts, revenues, expenses, Operating Income before Depreciation and Amortization and Operating Income will increase during the remainder of 2006 compared to the similar prior year periods.

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

     Filmed Entertainment. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Filmed Entertainment segment for the three and six months ended June 30, 2006 and 2005 are as follows:

		Three Months Ended												Six Months Ended
		6/30/06				6/30/05				% Change				6/30/06				6/30/05				% Change
						(recast)												(recast)
						(millions)												(millions)
Revenues:
Advertising		$	1			$	2				(50%)			$	1			$	5				(80%)
Content			2,296				2,585				(11%)				5,005				5,536				(10%)
Other			66				49				35%				136				109				25%
Total revenues			2,363				2,636				(10%)				5,142				5,650				(9%)
Costs of revenues(a)			(1,741	)			(2,033	)			(14%)				(3,685	)			(4,260	)			(13%)
Selling, general and administrative(a)			(391	)			(394	)			(1%)				(767	)			(798	)			(4%)
Restructuring costs			(2	)			—			NM					(4	)			—			NM
Operating Income before Depreciation and Amortization			229				209				10%				686				592				16%
Depreciation			(34	)			(30	)			13%				(68	)			(60	)			13%
Amortization			(54	)			(52	)			4%				(109	)			(104	)			5%
Operating Income		$	141			$	127				11%			$	509			$	428				19%

     Content revenues decreased during the three and six months ended June 30, 2006 primarily as a result of declines from theatrical product, which is content made available for initial airing in theaters. The components of Content revenues are as follows:

		Three Months Ended												Six Months Ended
		6/30/06				6/30/05				% Change				6/30/06				6/30/05				% Change
						(millions)												(millions)
Theatrical product:
Theatrical film		$	263			$	333				(21%)			$	624			$	798				(22%)
Television licensing			406				457				(11%)				738				890				(17%)
Home video			592				770				(23%)				1,558				1,727				(10%)
Total theatrical product			1,261				1,560				(19%)				2,920				3,415				(14%)
Television product:
Television licensing			734				603				22%				1,489				1,350				10%
Home video			179				293				(39%)				357				537				(34%)
Total television product			913				896				2%				1,846				1,887				(2%)
Consumer product and other			122				129				(5%)				239				234				2%
Total Content revenues		$	2,296			$	2,585				(11%)			$	5,005			$	5,536				(10%)

     The decline in theatrical film revenues for the three and six months ended June 30, 2006 was due primarily to difficult comparisons to the 2005 release slate, which included the release of Batman Begins in the three months ended June 30, 2005 and for the six months ended June 30, 2005 included the release of Constantine as well as carryover from Ocean’s Twelve. The 2006 release slate included the June 28, 2006 domestic release of Superman Returns and the international carryover of Harry Potter and the Goblet of Fire for the six months ended June 30, 2006. The decrease in theatrical product revenues from television licensing for the three and six months ended June 30, 2006 primarily related to the timing and quantity of various availabilities, including Harry Potter and other significant titles in 2005. Home video sales of theatrical product declined primarily due to difficult comparisons for the three months ended June 30, 2006 as the similar period in the prior year included the home video releases of Ocean’s Twelve, The Aviator and Blade: Trinity.

     The increase in license fees from television product for the three and six months ended June 30, 2006 was primarily related to the initial off-network availability of the first three seasons of Without a Trace and second-cycle off-network non-continuance license arrangements for Friends. The decline in home video sales of television product for the three and six

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

months ended June 30, 2006 reflects difficult comparisons to the prior year, which included revenue from the releases of additional seasons of Seinfeld.

     The decrease in costs of revenues resulted primarily from lower film costs ($1.036 billion and $2.168 billion for the three and six months ended June 30, 2006, respectively, compared to $1.156 billion and $2.529 billion for the three and six months ended June 30, 2005, respectively) and lower advertising and print costs resulting from the quantity and mix of films released. Included in film costs are theatrical valuation adjustments, which decreased to $36 million from $57 million for the three months ended June 30, 2006 and 2005, respectively, and increased to $105 million from $95 million for the six months ended June 30, 2006 and 2005, respectively. Costs of revenues as a percentage of revenues decreased to 74% for the three months ended June 30, 2006 from 77% for the three months ended June 30, 2005, and to 72% for the six months ended June 30, 2006 from 75% for the six months ended June 30, 2005 due to the quantity and mix of product released.

     Selling, general and administrative expenses for the three and six months ended June 30, 2006 decreased primarily due to lower distribution fees and the impact of cost saving initiatives.

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

     Operating Income before Depreciation and Amortization and Operating Income for the three and six months ended June 30, 2006 increased as a result of lower costs of revenues and selling, general and administrative expenses, partially offset by the decline in revenues as discussed above. Operating Income before Depreciation and Amortization and Operating Income for the six months ended June 30, 2006 also included a benefit of $42 million from the sale of certain international film rights.

     The Company anticipates a decline in Operating Income before Depreciation and Amortization and Operating Income at the Filmed Entertainment segment for the second half of 2006 compared to the comparable prior year period due to difficult comparisons for both theatrical and television product.

     Networks. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Networks segment for the three and six months ended June 30, 2006 and 2005 are as follows:

		Three Months Ended												Six Months Ended
		6/30/06				6/30/05				% Change				6/30/06				6/30/05				% Change
						(recast)								(recast)				(recast)
						(millions)												(millions)
Revenues:
Subscription		$	1,490			$	1,365				9%			$	2,952			$	2,699				9%
Advertising			923				856				8%				1,666				1,537				8%
Content			234				218				7%				429				471				(9%	)
Other			47				40				18%				59				47				26%
Total revenues			2,694				2,479				9%				5,106				4,754				7%
Costs of revenues(a)			(1,416	)			(1,346	)			5%				(2,500	)			(2,401	)			4%
Selling, general and administrative(a)			(501	)			(492	)			2%				(960	)			(918	)			5%
Shutdown costs			(81	)			—				NM				(81	)			—				NM
Operating Income before Depreciation and Amortization			696				641				9%				1,565				1,435				9%
Depreciation			(70	)			(57	)			23%				(138	)			(112	)			23%
Amortization			(5	)			(8	)			(38%	)			(8	)			(12	)			(33%	)
Operating Income		$	621			$	576				8%			$	1,419			$	1,311				8%

     As previously discussed in “Recent Developments,” on May 12, 2006, the Company acquired the remaining 50% interest in Court TV that it did not already own from Liberty for $697 million in cash, net of cash acquired. As permitted by GAAP, Court TV results have been consolidated retroactive to the beginning of 2006. For the three and six months ended June 30, 2006, Court TV revenues were $65 million and $127 million, respectively, and Operating Income was $12 million and $22 million, respectively.

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

     The increase in Subscription revenues for the three and six months ended June 30, 2006 was due primarily to higher subscription rates and, to a lesser extent, an increase in the number of subscribers at Turner and HBO, as well as the impact of the Court TV acquisition. The three and six months ended June 30, 2005 also included a $22 million benefit from the resolution of certain contractual agreements at Turner.

     The increase in Advertising revenues for the three and six months ended June 30, 2006 was driven primarily by the impact of the Court TV acquisition and higher CPMs (advertising cost per thousand viewers) and sellouts across Turner’s other networks, partially offset by a decline at The WB Network.

     The increase in Content revenues for the three months ended June 30, 2006 was primarily due to an increase in ancillary sales of HBO’s original programming. The decrease in Content revenues for the six months ended June 30, 2006 was primarily due to the absence of HBO’s licensing revenues from Everybody Loves Raymond, which ended its broadcast network run in 2005.

     Costs of revenues increased 5% for the three months ended June 30, 2006, and, as a percentage of revenues, were 53% and 54% for the three months ended June 30, 2006 and 2005, respectively. Costs of revenues increased 4% for the six months ended June 30, 2006, and, as a percentage of revenues, were 49% and 51% for the six months ended June 30, 2006 and 2005, respectively. For the three and six months ended June 30, 2006, the increase in costs of revenues was primarily attributable to an increase in programming costs. Programming costs increased to $1.044 billion for the three months ended June 30, 2006 compared to $992 million for the three months ended June 30, 2005 and to $1.819 billion for the six months ended June 30, 2006 compared to $1.709 billion for the six months ended June 30, 2005. The increase in programming expenses for the three and six months ended June 30, 2006 was primarily due to the impact of the Court TV acquisition, higher acquired theatrical and original programming costs at HBO and an increase in sports programming costs, particularly NBA-related, at Turner, partially offset in the three months ended June 30, 2006 by a decline at The WB Network.

     The increase in selling, general and administrative expenses for the three and six months ended June 30, 2006 was primarily due to the impact of the Court TV acquisition, partially offset by decreases at The WB Network.

     As previously discussed in “Significant Transactions and Other Items Affecting Comparability,” the results for the three and six months ended June 30, 2006 include shutdown costs of $81 million, including $8 million related to employee terminations, $19 million related to contractual settlements and $54 million related to the termination of certain programming arrangements (primarily licensed movie rights). Included in the $54 million of costs to terminate programming arrangements is $29 million of costs related to terminating intercompany programming arrangements with other Time Warner divisions (e.g., New Line) that have been eliminated in consolidation, resulting in a net charge related to programming arrangements of $25 million.

     In addition to the $54 million of costs to terminate programming arrangements, The WB Network has approximately $40 million primarily related to programming commitments, including $20 million of intercompany programming commitments, that are not expected to be contributed to The CW. In the event that such programming is unable to be sold or utilized in another manner, there will be additional restructuring charges associated with such programming incurred by The WB Network, offset by amounts recognized by other Time Warner divisions, related to any intercompany programming resulting in the potential for a net charge of approximately $20 million.

     Operating Income before Depreciation and Amortization and Operating Income increased for the three and six months ended June 30, 2006 primarily due to an increase in revenues, partially offset by higher costs of revenues and higher selling, general and administrative expenses, as described above.

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

     Publishing. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Publishing segment for the three and six months ended June 30, 2006 and 2005 are as follows:

		Three Months Ended												Six Months Ended
		6/30/06				6/30/05				% Change				6/30/06				6/30/05				% Change
						(recast)												(recast)
						(millions)												(millions)
Revenues:
Subscription		$	398			$	421				(5%	)		$	770			$	802				(4%	)
Advertising			757				743				2%				1,340				1,314				2%
Content			19				25				(24%	)			39				45				(13%	)
Other			148				162				(9%	)			299				319				(6%	)
Total revenues			1,322				1,351				(2%	)			2,448				2,480				(1%	)
Costs of revenues (a)			(529	)			(533	)			(1%	)			(1,003	)			(1,020	)			(2%	)
Selling, general and administrative (a)			(499	)			(512	)			(3%	)			(1,023	)			(1,022	)			—
Gain on sale of assets			—				—				—				—				8				NM
Restructuring costs			(22	)			—				NM				(34	)			—				NM
Operating Income before Depreciation and Amortization			272				306				(11%	)			388				446				(13%	)
Depreciation			(28	)			(30	)			(7%	)			(58	)			(63	)			(8%	)
Amortization			(14	)			(25	)			(44%	)			(29	)			(50	)			(42%	)
Operating Income		$	230			$	251				(8%	)		$	301			$	333				(10%	)

     For the three and six months ended June 30, 2006, Subscription revenues declined primarily as a result of the unfavorable effects of foreign currency exchange rates at IPC and a decline in Subscription revenues at Southern Living, primarily due to one fewer issue in 2006.

     For the three and six months ended June 30, 2006, Advertising revenues increased slightly due primarily to growth in online Advertising revenues, partially offset by a decline in magazine Advertising revenues. Magazine Advertising revenues declined for the three and six months ended June 30, 2006, reflecting lower Advertising revenues at IPC and certain magazines, including Southern Living, Entertainment Weekly, Sports Illustrated and Money, partly offset by contributions from the August 2005 acquisition of Grupo Editorial Expansión (“GEE”) and contributions from recent magazine launches.

     Other revenues decreased for the three months ended June 30, 2006, primarily due to declines at Synapse, a subscription marketing business, and declines in licensing revenues from AOL, partly offset by gains at Southern Living At Home. For the six months ended June 30, 2006, the decline in Other revenues was primarily due to declines at Southern Living At Home.

     Costs of revenues decreased 1% for the three months ended June 30, 2006 and, as a percentage of revenues, were 40% and 39% for the three months ended June 30, 2006 and 2005, respectively. Costs of revenues decreased 2% for the six months ended June 30, 2006 and, as a percentage of revenues, were 41% for the six months ended both June 30, 2006 and 2005. Costs of revenues for the magazine publishing business include manufacturing costs (paper, printing and distribution) and editorial-related costs, which together decreased 1% in each period to $477 million and to $899 million for the three and six months ended June 30, 2006, respectively, primarily due to print cost savings and the favorable effects of foreign currency exchange rates at IPC.

     Selling, general and administrative expenses decreased 3% for the three months ended June 30, 2006, primarily due to cost savings initiatives, a decline in magazine launch-related costs and the favorable effects of foreign currency exchange rates at IPC, partially offset by the inclusion of GEE. For the six months ended June 30, 2006, selling, general and administrative expenses were essentially flat due to the increase in advertising and marketing costs, primarily related to the inclusion of Essence and GEE, offset by costs savings and the favorable effects of foreign currency exchange rates at IPC.

     As previously discussed in “Significant Transactions and Other Items Affecting Comparability,” the results for the three and six months ended June 30, 2006 include $22 million and $34 million, respectively, of restructuring costs, primarily associated with continuing efforts to streamline operations. The results for the six months ended June 30, 2005 reflect an $8 million gain

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

related to the collection of a loan made in conjunction with the Company’s 2003 sale of Time Life, which was previously fully reserved due to concerns about recoverability.

     For the three and six months ended June 30, 2006, Operating Income before Depreciation and Amortization decreased primarily due to restructuring charges of $22 million and $34 million, respectively, and a decline in revenues, partially offset by cost reductions. In addition, for the six months ended June 30, 2006, Operating Income before Depreciation and Amortization declined due to the absence of the prior year gain related to the collection of a loan. Additionally, Operating Income before Depreciation and Amortization reflects $10 million and $18 million of lower start-up losses on magazine launches for the three and six months ended June 30, 2006, respectively.

     For the three and six months ended June 30, 2006, Operating Income decreased primarily due to the changes in Operating Income before Depreciation and Amortization discussed above, partially offset by the decline in amortization expense as a result of certain short-lived intangibles, such as customer lists, becoming fully amortized in the latter part of 2005. This increase was partially offset by amortization from certain indefinite-lived trade name intangibles being assigned a finite life beginning in the first quarter of 2006.

     As discussed in “Recent Developments,” on March 31, 2006, the Company sold TWBG to Hachette for $524 million in cash, resulting in a pretax gain of approximately $194 million, after taking into account selling costs and estimated working capital adjustments. TWBG has been reflected as discontinued operations for all periods presented.

     Corporate. Operating Loss before Depreciation and Amortization and Operating Loss of the Corporate segment for the three and six months ended June 30, 2006 and 2005 are as follows:

		Three Months Ended												Six Months Ended
		6/30/06				6/30/05				% Change				6/30/06				6/30/05				% Change
						(recast)												(recast)
						(millions)												(millions)
Amounts related to securities litigation and government investigations		$	(32	)		$	(3,003	)			(99%	)		$	(61	)		$	(3,009	)			(98%	)
Selling, general and administrative (a)			(94	)			(107	)			(12%	)			(206	)			(220	)			(6%	)
Gain on sale of assets			—				—				—				20				—			NM
Restructuring costs			—				—				—				(5	)			—			NM
Operating Loss before Depreciation and Amortization			(126	)			(3,110	)			(96%	)			(252	)			(3,229	)			(92%	)
Depreciation			(9	)			(10	)			(10%	)			(22	)			(19	)			16%
Operating Loss		$	(135	)		$	(3,120	)			(96%	)		$	(274	)		$	(3,248	)			(92%	)

     As previously discussed, the Company recognized legal and other professional fees related to the SEC and DOJ investigations into certain of the Company’s historical accounting and disclosure practices and the defense of various shareholder lawsuits, as well as legal reserves, totaling $35 million and $114 million for the three and six months ended June 30, 2006, respectively, and $3.013 billion and $3.025 billion for the three and six months ended June 30, 2005, respectively. In addition, the Company recognized insurance recoveries of $3 million and $53 million for the three and six months ended June 30, 2006, respectively, and $10 million and $16 million for the three and six months ended June 30, 2005, respectively. Legal and other professional fees are expected to continue to be incurred in future periods (Note 1).

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

     Excluding the items discussed above, Operating Loss before Depreciation and Amortization and Operating Loss declined for the three and six months ended June 30, 2006, due primarily to a tax credit and decreases in compensation, insurance and transactional costs, partially offset by higher professional and financial advisory services costs.

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

FINANCIAL CONDITION AND LIQUIDITY

Current Financial Condition

     At June 30, 2006, Time Warner had $23.469 billion of debt, $1.244 billion of cash and equivalents (net debt of $22.225 billion, defined as total debt less cash and equivalents) and $59.307 billion of shareholders’ equity, compared to $20.330 billion of debt, $4.220 billion of cash and equivalents (net debt of $16.110 billion) and $65.141 billion of shareholders’ equity at December 31, 2005.

     The following table shows the significant items contributing to the increase in net debt from December 31, 2005 to June 30, 2006 (millions):

Net debt at December 31, 2005		$	16,110
Cash provided by operations			(4,157	)
Capital expenditures and product development costs			1,736
Dividends paid to common shareholders			435
Common stock repurchases			9,300
Prepaid stock repurchase contracts			340
Acquisition of the remaining interest in Court TV, net of cash acquired			697
Acquisition of the remaining interest in Synapse			140
Proceeds from the issuance of a 5% equity interest by AOL			(1,000	)
Proceeds from the sale of Time Warner Book Group			(524	)
Proceeds from the sale of Turner South			(371	)
Proceeds from the sale of a portion of the Company’s interest in Time Warner Telecom			(239	)
All other, net			(242	)
Net debt at June 30, 2006 (a)		$	22,225

     As noted in “Overview — Recent Developments,” Time Warner’s Board of Directors has authorized a common stock repurchase program that allows the Company to purchase up to an aggregate of $20 billion of common stock during the period from July 29, 2005 through December 31, 2007. Purchases under the stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. Size and timing of these purchases will be based on a number of factors, including price and business and market conditions. At existing price levels, the Company intends to continue purchases under its stock repurchase program within its stated objective of maintaining a net debt-to-Operating Income before Depreciation and Amortization ratio, as defined, of approximately 3-to-1, and expects it will have purchased approximately $15 billion of its common stock under the program by the end of 2006, and the remainder in 2007. From the program’s inception through August 1, 2006, the Company repurchased approximately 675 million shares of common stock for approximately $11.7 billion pursuant to trading programs under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, including approximately 206 million shares of common stock for approximately $3.5 billion purchased under the prepaid stock repurchase contracts discussed in the following paragraph.

     In May 2006, in connection with the Company’s stock repurchase program, the Company entered into prepaid stock repurchase contracts with a number of counterparties that provided for repurchases to be effected over a three-month period, or longer, depending on the share price of the Company’s common stock. In connection with entering into the prepaid stock repurchase contracts, the Company made an aggregate payment of approximately $3.6 billion and receives shares of the Company’s common stock at the end of each repurchase contract term at prices based on a formula that is expected to deliver an effective, average repurchase price per share below the volume weighted-average price of the common stock over the term of the relevant contract. Such contracts may be cancelled by Time Warner at any time, at which point the counterparty is required to refund any unused amount. The majority of the $3.6 billion prepayment was funded through borrowings under the Company’s revolving credit facility and/or commercial paper programs. Through June 30, 2006, the Company has repurchased approximately 187 million shares of common stock for approximately $3.2 billion under the prepaid stock repurchase contracts. As of June 30, 2006, the unused portion of the prepayment was approximately $340 million, which is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet. Through August 1, 2006, the Company has repurchased approximately 206 million shares of common stock for approximately $3.5 billion under the prepaid stock repurchase contracts (Note 8).

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

     On July 31, 2006, TW NY, a subsidiary of TWC, acquired assets of Adelphia for a combination of cash and stock of TWC. TWC also redeemed Comcast’s interests in TWC and TWE and exchanged certain cable systems with Comcast. For additional details, see “Overview — Recent Developments.”

     In connection with the closing of the Adelphia Acquisition, TW NY paid approximately $8.9 billion in cash, after giving effect to certain purchase price adjustments, that was funded by an intercompany loan from TWC and the proceeds of the private placement issuance by TW NY of $300 million of non-voting Series A Preferred Equity Membership Units with a mandatory redemption date of August 1, 2013 and a cash dividend of 8.21% per annum. The intercompany loan was financed by borrowings under TWC’s $6.0 billion senior unsecured five-year revolving credit facility with a maturity date of February 15, 2011 (the “Cable Revolving Facility”) and TWC’s two $4.0 billion term loan facilities (collectively with the Cable Revolving Facility, the “Cable Facilities”), with maturity dates of February 24, 2009 and February 21, 2011, respectively, and the issuance of TWC commercial paper. In connection with the redemption of Comcast’s interest in TWC, Comcast received 100% of the capital stock of a subsidiary of TWC holding both cable systems and approximately $1.9 billion in cash that was funded through the issuance of TWC commercial paper and borrowings under the Cable Revolving Facility. In addition, in connection with the redemption of Comcast’s interest in TWE, Comcast received 100% of the equity interests in a subsidiary of TWE holding both cable systems and approximately $147 million in cash that was funded by cash on hand. Following these transactions, TWC, Comcast and their respective subsidiaries also swapped certain cable systems and TW NY paid Comcast approximately $67 million for certain adjustments related to the Cable Swaps.

     As discussed in more detail below, management believes that cash generated by or available to Time Warner should be sufficient to fund its capital and liquidity needs for the foreseeable future, including the quarterly dividend payments and the common stock repurchase program. Time Warner’s sources of cash include cash provided by operations, cash and equivalents, available borrowing capacity under its committed credit facilities of $2.588 billion at Time Warner Inc. and $13.086 billion at TWC as of June 30, 2006 (including $10.0 billion at TWC that did not become available until the time of the Adelphia Acquisition), and availability under its commercial paper programs. After considering the $10.701 billion that was used for the Adelphia Acquisition, the TWC and TWE redemptions, and the Cable Swaps, the available borrowing capacity under committed credit facilities as of June 30, 2006 would have been approximately $2.588 billion for Time Warner Inc. and approximately $2.385 billion for TWC. The Company may use a portion of its available borrowing capacity to refinance approximately $546 million of debt maturing during the remainder of 2006.

     With the closing of the Adelphia Acquisition, the redemptions of Comcast’s interests in TWC and TWE and the accelerated pace of purchases under the common stock repurchase program, the Company’s outstanding debt has increased substantially. Accordingly, cash paid for interest is expected to negatively impact cash provided by operating activities.

Cash Flows

     Cash and equivalents decreased by $2.976 billion and increased by $1.453 billion for the six months ended June 30, 2006 and 2005, respectively. The decrease in cash and equivalents for the six months ended June 30, 2006 is primarily due to repurchases of common stock totaling $9.3 billion and $340 million of cash advanced under prepaid stock repurchase contracts, for which shares had not been repurchased at June 30, 2006, in connection with the Company’s common stock repurchase program during the first six months of 2006. The increase in cash and equivalents for the six months ended June 30, 2005 is primarily due to proceeds from the sale of the Company’s remaining interest in Google during the first six months of 2005. Components of these changes are discussed in more detail in the pages that follow.

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

Operating Activities

     Details of cash provided by operations are as follows:

		Six Months Ended
		6/30/06				6/30/05
						(recast)
		(millions)
Operating Income before Depreciation and Amortization		$	5,323			$	1,974
Amounts related to securities litigation and government investigations(a):
Legal reserves			—				3,000
Cash payments, net of recoveries			(166	)			(300	)
Noncash asset impairments			—				24
Net interest payments (b)			(690	)			(708	)
Net income taxes paid (c)			(206	)			(261	)
Noncash equity-based compensation			161				213
Adjustments relating to discontinued operations (d)			2				10
Merger and restructuring payments (e)			(112	)			(79	)
All other, net, including working capital changes			(155	)			(441	)
Cash provided by operations		$	4,157			$	3,432

     Cash provided by operations increased to $4.157 billion in 2006 compared to $3.432 billion in 2005. The increase in cash provided by operations is related primarily to a reduction in payments made in connection with the settlements in the securities litigation and the government investigations, an increase in Operating Income before Depreciation and Amortization and a decrease in cash used for working capital. The changes in components of working capital are subject to wide fluctuations based on the timing of cash transactions related to production schedules, the acquisition of programming, collection of accounts receivable and similar items. The change in working capital between periods primarily reflects higher cash collections on receivables, partially offset by the timing of accounts payable and accrual payments.

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

Investing Activities

     Details of cash used by investing activities are as follows:

		Six Months Ended
		6/30/06				6/30/05
		(millions)
Investments and acquisitions, net of cash acquired:
Essence		$	—			$	(128	)
Court TV			(697	)			—
Synapse(a)			(140	)			—
All other, principally funding of joint ventures			(178	)			(130	)
Capital expenditures and product development costs from continuing operations			(1,736	)			(1,446	)
Capital expenditures and product development costs from discontinued operations			—				(2	)
Proceeds from the sale of other available-for-sale securities			23				36
Proceeds from the sale of the Company’s remaining interest in Google			—				940
Proceeds from the issuance of a 5% equity interest by AOL			1,000				—
Proceeds from the sale of Time Warner Book Group			524				—
Proceeds from the sale of Turner South			371				—
Proceeds from the sale of a portion of the Company’s interest in Time Warner Telecom			239				—
Proceeds from the sale of the WMG Option			—				138
All other investment and asset sale proceeds			95				230
Cash used by investing activities		$	(499	)		$	(362	)