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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number 1-15062

TIME WARNER INC.

75 Rockefeller Plaza
New York, New York 10019
(212) 484-8000

(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)

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    X       No   ___

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes    X       No   ___

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

TIME WARNER INC.
INDEX TO FORM 10-Q

2

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

INTRODUCTION

      In September 2003, the Board of Directors of AOL Time Warner Inc. approved changing the name of the company from AOL Time Warner Inc. to Time Warner Inc. The name change became effective on October 16, 2003. Time Warner Inc. (“Time Warner” or the “Company”) classifies its business interests into six fundamental areas: AOL, consisting principally of interactive services; Cable, consisting principally of interests in cable systems; Filmed Entertainment, consisting principally of interests in filmed entertainment and television production; Networks, consisting principally of interests in cable television and broadcast network programming; Music, consisting principally of interests in recorded music and music publishing; and Publishing, consisting principally of interests in magazine publishing, book publishing and direct marketing.

      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 footnotes to help provide an understanding of Time Warner’s financial condition, changes in financial condition and results of operations. The MD&A is organized as follows:

•

Executive summary. This section provides a brief summary of Time Warner’s results of operations for the three and nine months ended September 30, 2003 and the Company’s financial condition and liquidity as of and for the nine months ended September 30, 2003.

•

Business developments. This section provides a description of business developments that the Company believes are important to understand the results of operations, as well as to anticipate future trends in those operations.

•

Results of operations. This section provides an analysis of the Company’s results of operations for the three and nine months ended September 30, 2003 compared to the comparable periods in 2002. This analysis is presented on a consolidated and a 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 and cash flows as of and for the nine months ended September 30, 2003.

•

Risk factors and caution concerning forward-looking statements. This section provides a description of risk factors that could adversely affect the operations, business or financial results of the Company or its business segments and how certain forward-looking statements made by the Company in this report, including throughout MD&A and in the consolidated financial statements, are based on management’s current expectations about future events and are inherently susceptible to uncertainty and changes in circumstances.

Use of Operating Income (Loss) before Depreciation and Amortization and Free Cash Flow

      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 non-cash 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 costs of such tangible and intangible assets through other financial measures, such as capital expenditures and investment spending.

      The Company also utilizes Free Cash Flow to evaluate the performance of its businesses. Free Cash Flow is cash provided by continuing operations (as defined by accounting principles generally accepted in the United States) less capital expenditures and product development costs, principal payments on capital leases, dividends paid and partnership distributions, if any. Free Cash Flow is considered to be an important indicator of the Company’s ability to reduce debt and make strategic investments.

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

      Both Operating Income (Loss) before Depreciation and Amortization and Free Cash Flow should be considered in addition to, not as a substitute for, the Company’s Operating Income (Loss), Net Income (Loss) and various cash flow measures (e.g., Cash Provided by Operations), as well as other measures of financial performance reported in accordance with accounting principles generally accepted in the United States.

EXECUTIVE SUMMARY

Results of Operations

      Revenues for the three months ended September 30, 2003 increased 4% over the same period in 2002 to $10.334 billion. Revenues for the nine months ended September 30, 2003 increased 5% to $31.150 billion. The three month period reflects improvements at the Cable and Networks segments which more than offset declines at the other segments. For the nine month period, revenues increased at all divisions except AOL. For the three month period, such revenue gains were evidenced through increased Subscription, Advertising and Content revenues, which more than offset declines in Other revenues primarily at the AOL and Filmed Entertainment segments. For the nine month period, such revenue improvements were evidenced through increased Subscriptions and Content revenues, that more than offset declines in Advertising revenues due to declines at the AOL and Cable segments and Other revenues at the AOL segment. The declines in advertising revenues at AOL and Cable are expected to continue during the remainder of the year.

      Time Warner had net income before the cumulative effect of an accounting change of $553 million (or diluted net income per share of $0.12) for the three months ended September 30, 2003 compared to net income of $57 million (or diluted net income per share of $0.01) in 2002. For the nine months ended September 30, 2003, net income before the cumulative effect of an accounting change was $2.013 billion (or diluted net income per share of $0.44) compared to net income from continuing operations before discontinued operations and cumulative effect of an accounting change of $331 million (or diluted net income per share of $0.07 in 2002).

      The improvement in net income for the three months ended September 30, 2003 over the comparable prior year period reflects an increase in Operating Income, higher investment and other gains and lower investment impairments in 2003. The improvement in net income for the nine months ended September 30, 2003 reflects a decrease in Operating Income and higher interest expense offset by higher investment and other gains as well as lower investment impairments in 2003. In particular, the three month period includes investment gains of approximately $127 million, which includes an approximate $52 million gain on the sale of the Company’s interest in chinadotcom. The nine month period ended September 30, 2003 reflects an approximate $760 million gain on a legal settlement with Microsoft and investment gains of approximately $778 million primarily consisting of the $513 million gain on the sale of the Company’s interest in Comedy Partners L.P. (“Comedy Central”). This compares to investment gains of $0 and $90 million for the three and nine months ended September 30, 2002, respectively. Additionally, both the three and nine months ended September 30, 2003, respectively, reflect lower non-cash investment impairment charges than in 2002. Specifically, the three and nine months ended September 30, 2003 included investment impairment charges of $10 million and $184 million, respectively, as compared to approximately $733 million and $1.678 billion, for the three and nine months ended September 30, 2002. The writedowns in the 2002 period are primarily associated with non-cash charges to reduce the carrying amount of the Company’s investments in Time Warner Telecom Inc. (“Time Warner Telecom”), Gateway Inc., Hughes Electronics Corp. (“Hughes”) and America Online Latin America, Inc. (“AOL Latin America”).

      The Company had Operating Income of $1.401 billion for the three months ended September 30, 2003 compared to $1.315 billion in 2002. For the nine months ended September 30, 2003, Operating Income was $3.837 billion compared to Operating Income of $3.892 billion for the nine months ended September 30, 2002. The increase for the three month period is a result of higher business segment Operating Income before Depreciation and Amortization offset, in part, by an increase in depreciation and amortization expense. The decline for the nine month period is a result of higher depreciation and amortization expense, which more than offset the increase in business segment Operating Income before Depreciation and Amortization.

4

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

      Operating Income before Depreciation and Amortization increased $186 million (from $2.092 billion to $2.278 billion) for the three months ended September 30, 2003 and increased $330 million (from $6.098 billion to $6.428 billion) for the nine months ended September 30, 2003 over the comparable periods in 2002. Included in these results are several items affecting comparability, including impairments of goodwill and intangible assets, a gain on the disposition of certain assets and merger and restructuring costs, which are discussed below. Excluding these items, Operating Income before Depreciation and Amortization for the three months ended September 30, 2003 increased due to increases at the Cable, Filmed Entertainment and Networks segments offset in part by declines at the AOL, Music, Publishing and Corporate segments. Similarly, excluding these items for the nine months ended September 30, 2003, Operating Income before Depreciation and Amortization increased as a result of increases at the Cable, Filmed Entertainment and Networks segments offset in part by declines at the AOL, Publishing, Music and Corporate segments.

      Excluding impairment charges and gains and losses on the disposition of assets, the year-over-year rate of growth in both Operating Income before Depreciation and Amortization and Operating Income is expected to slow in the fourth quarter of 2003, as the Company faces difficult prior year comparisons in the Filmed Entertainment and Networks segments, higher marketing costs at AOL related to the launch of AOL 9.0 and potential additional restructuring charges at AOL and the Publishing unit’s Time Life business.

      For the three and nine month periods ended September 30, 2003, depreciation expense increased principally due to increases at the Cable and AOL segments. The increase in Cable depreciation expense is due to higher cumulative spending associated with cable system upgrades and customer premise equipment. For the AOL segment, the higher expense was due to an increase in network assets acquired under capital leases.

      For both the three and nine months ended September 30, 2003, amortization expense increased principally due to increases at the Music, Publishing and Filmed Entertainment segments. The increase at the Music segment is principally related to the reduction in the amortization period of recorded music catalog and music publishing copyrights from 20 to 15 years. For the Publishing segment, the increase related to the acquisition of Synapse, a subscription marketing company, for which the purchase price accounting was finalized in the fourth quarter of 2002. For the Filmed Entertainment segment, the increase in amortization expense relates to an increase in the carrying amount of the film library assets due to the purchase price allocation in the restructuring of Time Warner Entertainment Company, L.P. (“TWE Restructuring”), which closed on March 31, 2003.

Cash Flows and Debt Reduction Program

      For the first nine months of 2003, the Company generated $5.2 billion in Cash Flows from Operations and $3.2 billion in Free Cash Flow. As detailed in the tables in the Financial Condition and Liquidity Section, Cash Flows from Operations and Free Cash Flow reflect increased Operating Income before Depreciation and Amortization, and approximately $359 million of net cash received through certain litigation settlements offset by higher interest and taxes.

      As of September 30, 2003, the Company’s consolidated net debt (defined as total debt less cash and cash equivalents) totaled $24.1 billion, compared to $25.8 billion at December 31, 2002. The reduction in net debt reflected more than $2 billion of proceeds from the sale of certain non-strategic investments, including the sale of the Company’s investment in Hughes and its 50% ownership stake in Comedy Central, as well as the generation of $3.2 billion of Free Cash Flow, including the aforementioned net benefit from certain litigation settlements. These sources of debt reduction were offset partially by $813 million of cash used during the second quarter for the repurchase of all non-voting preferred shares in AOL Europe, the incurrence of $2.1 billion of debt by Time Warner Cable Inc. (“TWC Inc.”) as part of the TWE Restructuring and approximately $700 million of debt recorded upon the Company’s adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), in the third quarter of 2003 (Note 1).

      In addition, the debt reduction program will also be positively impacted in the fourth quarter as a result of the sale of Music’s CD and DVD manufacturing and distribution business for approximately $1.05 billion in cash on October 24, 2003.

5

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

BUSINESS DEVELOPMENTS

Sale of Music Manufacturing

      On October 24, 2003, the Company closed the sale of Warner Music Group’s DVD and CD manufacturing, printing, packaging, physical distribution and merchandising businesses (“WMG Manufacturing”) to Cinram International Inc. (“Cinram”) for $1.05 billion in cash. In connection with this transaction, the Company will record an approximate $600 million gain on sale in the fourth quarter, which will be recorded in Operating Income in the consolidated statement of operations.

      In addition, the Company has entered into long-term manufacturing arrangements under which Cinram will provide manufacturing, printing, packaging and physical distribution for the Company’s DVDs and CDs in North America and Europe. The costs incurred under the manufacturing arrangements will be recognized as inventory as the costs are incurred and as a cost of sale when the related product is sold. The Company believes that the terms of the manufacturing arrangements are at market rates and, accordingly, none of the sale proceeds will be allocated to the manufacturing arrangements.

      Had the previously described sale and manufacturing agreements occurred at the beginning of 2003, excluding the gain, the Company’s Operating Income before Depreciation and Amortization for the nine months ended September 30, 2003 would have been reduced by approximately $165 million. Similarly, depreciation and amortization would have been reduced by approximately $45 million resulting in a reduction in Operating Income of approximately $120 million.

Consolidation of Variable Interest Entities

      In January 2003, the FASB issued FIN 46, which requires variable interest entities (often referred to as special purpose entities or SPEs) to be consolidated if certain criteria are met. FIN 46 was effective upon issuance for all variable interest entities created after January 31, 2003 and effective July 1, 2003 for variable interest entities that existed prior to February 1, 2003. In October 2003, the FASB issued FASB Staff Position No. FIN 46-6, “Effective Date of FASB Interpretation No. 46” (“FSP FIN 46-6”), which defers the effective date of FIN 46 until December 31, 2003 for variable interest entities that existed prior to February 1, 2003. FSP FIN 46-6, however, also provided that companies could adopt the provisions of FIN 46 effective July 1, 2003 for some or all of the variable interest entities in which it holds an interest.

      The Company has adopted the provisions of FIN 46 effective July 1, 2003 for those variable interest entities representing lease-financing arrangements with SPEs. Specifically, the Company has utilized variable interest entities on a limited basis, primarily to finance the cost of certain aircraft and property, including the Company’s future corporate headquarters at Columbus Circle in New York City (the “Time Warner Center”) and a new production and operations support center for the Turner cable networks in Atlanta (the “Turner Project”). As a result of initially applying the provisions of FIN 46 to its lease-financing arrangements with SPEs as of July 1, 2003, the Company consolidated net assets and associated debt of approximately $700 million. A majority of the $700 million in debt assumed was subsequently paid off. Additionally, the Company recognized approximately a $12 million charge, net of tax, as the cumulative effect of adopting this new standard.

      The Company has elected to defer the adoption of FIN 46 until December 31, 2003 for its equity investments and joint venture arrangements that may require consolidation pursuant to FIN 46. The Company currently does not believe the impact of adopting FIN 46 for such investment interests will have a material impact on its consolidated financial statements.

6

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

Microsoft Settlement

      On January 22, 2002, Netscape Communications Corporation (“Netscape”) sued Microsoft Corporation (“Microsoft”) in the U. S. District Court for the District of Columbia for antitrust violations under Sections 1 and 2 of the Sherman Act, as well as for other common law violations.

      On May 29, 2003, Microsoft and Time Warner announced an agreement to settle the pending litigation between Microsoft and Netscape and to collaborate on long-term digital media initiatives that will accelerate the adoption of digital content (the “Microsoft Settlement”). As part of the settlement, Microsoft agreed to pay $750 million to Time Warner and Time Warner agreed to release Microsoft from the Netscape action and related antitrust claims. In addition, Microsoft agreed to a variety of steps designed to ensure that Microsoft and AOL products work better with each other, including giving AOL the same access to early builds of the Microsoft Windows operating system as Microsoft affords to other third parties as well as providing AOL with seven years of dedicated support by Microsoft engineers who have access to Windows source code, to help AOL with compatibility and other engineering efforts. The digital media initiative also established a long-term, nonexclusive license agreement allowing Time Warner the right but not obligation to use Microsoft’s entire Windows Media 9 Series digital media platform, as well as successor Microsoft digital rights management software. Microsoft also agreed to provide AOL with a new distribution channel for its software to certain PC users worldwide. Finally, as part of this settlement, Microsoft agreed to release Time Warner from the obligation to reimburse Microsoft’s attorneys fees in connection with an arbitration ruling under a 1996 distribution agreement.

      In determining the gain recognized in connection with the Microsoft Settlement, the Company evaluated the fair value of all elements received in addition to the cash payment of $750 million. The Company has estimated the value of the non-cash elements received in connection with the Microsoft Settlement aggregated approximately $10 million. Accordingly, the total gain recognized by Time Warner as a result of the Microsoft Settlement is approximately $760 million, which is included in “Other income (expense), net,” in the Company’s consolidated statement of operations for the nine months ended September 30, 2003.

Update on SEC and DOJ Investigations

      The Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) continue to conduct investigations into accounting and disclosure practices of the Company. Those investigations are focused on transactions principally involving the Company’s America Online unit that were entered into after July 1, 1999, including advertising arrangements and the methods used by the America Online unit to report its subscriber numbers.

      In its Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (the “2002 Form 10-K”), which was filed with the SEC on March 28, 2003, the Company disclosed that the staff of the SEC had recently informed the Company that, based on information provided to the SEC by the Company, it was the preliminary view of the SEC staff that the Company’s accounting for two related transactions between America Online and Bertelsmann AG should be adjusted. For a description of those transactions, see Management’s Discussion and Analysis of Results of Operations and Financial Condition and Note 17 to the financial statements in the Company’s 2002 Form 10-K. At that time, the Company further disclosed that it had provided the SEC a written explanation of the basis for the Company’s accounting for these transactions and the reasons why both the Company and its auditors continued to believe that these transactions had been accounted for correctly.

      The staff of the SEC has continued to review the Company’s accounting for these transactions, including the Company’s written and oral submissions to the SEC. In July 2003, the Office of the Chief Accountant of the SEC informed the Company that it has concluded that the accounting for these transactions is incorrect. Specifically, in the view of the Office of the Chief Accountant, the Company should have allocated some portion of the $400 million paid by Bertelsmann AG to America Online for advertising, which was run by the Company and recognized as revenue, as consideration for the Company’s decision to relinquish its option to pay Bertelsmann in stock for its interests in AOL Europe, and therefore should have been reflected as a reduction in the purchase price for

7

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

Bertelsmann’s interest in AOL Europe, rather than as advertising revenue. In addition, the Division of Enforcement of the SEC continues to investigate the facts and circumstances of the negotiation and performance of these agreements with Bertelsmann, including the value of advertising provided thereunder.

      Based upon its knowledge and understanding of the facts of these transactions, the Company and its auditors continue to believe its accounting for these transactions is appropriate. It is possible, however, that the Company may learn information as a result of its ongoing review, discussions with the SEC, and/or the SEC’s ongoing investigation that would lead the Company to reconsider its views of the accounting for these transactions. It is also possible that restatement of the Company’s financial statements with respect to these transactions may be necessary. In light of the conclusion of the Office of the Chief Accountant that the accounting for the Bertelsmann transactions is incorrect, it is likely that the SEC would not declare effective any registration statement of the Company or its affiliates, such as the potential initial public offering of Time Warner Cable Inc., until this matter is resolved.

      The SEC staff also continues to investigate a range of other transactions principally involving the Company’s America Online unit, including advertising arrangements and the methods used by the America Online unit to report its subscriber numbers. The Department of Justice also continues to investigate matters relating to these transactions and transactions involving certain third parties with whom America Online had commercial relationships. The Company intends to continue its efforts to cooperate with both the SEC and the Department of Justice investigations to resolve these matters. The Company may not currently have access to all relevant information that may come to light in these investigations, including but not limited to information in the possession of third parties who entered into agreements with America Online during the relevant time period. It is not yet possible to predict the outcome of these investigations, but it is possible that further restatement of the Company’s financial statements may be necessary. It is also possible that, so long as there are other unresolved issues associated with the Company’s financial statements, the effectiveness of any registration statement of the Company or its affiliates may be delayed.

TWE Restructuring

      Prior to the restructuring discussed below, a majority of Time Warner’s interests in the Filmed Entertainment and Cable segments, and a portion of its interests in the Networks segment, were held through Time Warner Entertainment Company, L.P. (“TWE”). Time Warner owned general and limited partnership interests in TWE consisting of 72.36% of the pro rata priority capital and residual equity capital, and 100% of the junior priority capital. The remaining 27.64% limited partnership interests in TWE were held by subsidiaries of Comcast Corporation (“Comcast”).

      On March 31, 2003, Time Warner and Comcast completed the TWE Restructuring. As a result of the TWE Restructuring, Time Warner acquired complete ownership of TWE’s content businesses, including Warner Bros., Home Box Office and TWE’s interests in The WB Network, Comedy Central (which was subsequently sold) and the Courtroom Television Network (“Court TV”). Additionally, all of Time Warner’s interests in cable, including those that were wholly-owned and those that were held through TWE, are now controlled by a new subsidiary of Time Warner called Time Warner Cable Inc. (“TWC Inc.”) As part of the restructuring, Time Warner received a 79% economic interest in TWC Inc.’s cable systems. TWE is now a subsidiary of TWC Inc.

      In exchange for its previous stake in TWE, Comcast: (i) received Time Warner preferred stock, which will be converted into $1.5 billion of Time Warner common stock; (ii) received a 21.0% economic interest in TWC Inc.’s cable systems; and (iii) was relieved of $2.1 billion of pre-existing debt at one of its subsidiaries, which was incurred by TWC Inc. as part of the TWE Restructuring.

      Comcast’s 21.0% economic interest in TWC Inc.’s cable business, is held through a 17.9% direct ownership interest in TWC Inc. (representing a 10.7% voting interest) and a limited partnership interest in TWE representing a 4.7% residual equity interest. Time Warner’s 79% economic interest in TWC Inc.’s cable business is held through an 82.1% ownership interest in TWC Inc. (representing an 89.3% voting interest) and a partnership interest in TWE representing a 1% residual equity interest. Time Warner also holds a $2.4 billion mandatorily redeemable preferred equity interest in TWE. The additional ownership interests acquired by Time Warner in the TWE Restructuring have been accounted for as a step acquisition and are reflected in the accompanying balance sheet as of September 30,

8

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

2003. (Note 4). The purchase price allocation is preliminary, as the Company is in the process of completing a valuation study to identify and value the net assets acquired.

Debt Reduction Plan

      In January 2003, the Company announced its intention to reduce its overall level of indebtedness. Specifically, it is the Company’s intention to reduce consolidated net debt (defined as total debt less cash and cash equivalents) to within a range of 2.25 to 2.75 times annual Operating Income before Depreciation and Amortization, excluding the impairment of intangible assets and gains and losses on asset disposals, by the end of 2003. In addition, the Company announced that it intends to reduce total consolidated net debt to approximately $20 billion by the end of 2004. The Company anticipates that the reduction in net debt will be achieved through the use of Free Cash Flow and other de-leveraging initiatives, including the sale of non-strategic assets. As part of this initiative, the Company reduced its net debt from $25.8 billion as of December 31, 2002 to $24.1 billion as of September 30, 2003. This reduction in net debt reflected more than $2 billion in proceeds from the sale of certain non-strategic investments, including the sale of the Company’s investment in Hughes ($783 million) and its 50% interest in Comedy Central ($1.225 billion). Also contributing to the reduction in net debt is Free Cash Flow of approximately $3.2 billion during the nine month period, including net cash of $359 million received from litigation settlements. These items were partially offset by the incurrence of approximately $2.1 billion of incremental debt as part of the TWE Restructuring, $813 million of incremental net debt incurred to repurchase non-voting preferred shares of AOL Europe and approximately $700 million of debt recorded upon the Company’s adoption of FIN 46 (Note 1).

      As discussed above, on October 24, 2003, the Company closed the sale of WMG Manufacturing for $1.05 billion in cash to Cinram. Additionally, the Company continues to explore the sale of other non-strategic assets.

RESULTS OF OPERATIONS

Transactions Affecting Comparability of Results of Operations

Discontinued Operations

      During June 2002, TWE and the Advance/Newhouse Partnership (“Advance/Newhouse”) restructured the TWE-Advance/Newhouse Partnership (“TWE-A/N”), resulting in Advance/Newhouse assuming responsibility for the day-to-day operations of, and an economic interest in, certain TWE-A/N cable systems. As a result, Time Warner deconsolidated the financial position and operating results of these systems and has reflected the 2002 operating results of these systems as discontinued operations. Revenues and net income from the discontinued operations totaled $715 million and $1 million, respectively, for the six months ended June 30, 2002 (the most recent reported period prior to the deconsolidation). Discontinued operations for the nine months ended September 30, 2002 reflects a $188 million pretax gain.

9

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

Other Items Affecting Comparability

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

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

video release of My Big Fat Greek Wedding, higher ancillary sales of HBO programming and syndication revenue associated with Everybody Loves Raymond at the Networks segment.

      The decline in Other revenues for the three and nine months ended September 30, 2003 was primarily due to the AOL segment’s decision to reduce the promotion of its merchandise business (i.e., reducing pop-up advertisements) to improve the member experience. The declines are expected to continue through the remainder of 2003. Other revenues were also reduced, due to the sale of a consolidated UK theater chain at the Filmed Entertainment segment in the second quarter of 2003.

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

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

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

      Operating Income before Depreciation and Amortization. Operating Income before Depreciation and Amortization increased 9% to $2.278 billion for the three months ended September 30, 2003 from $2.092 billion in 2002. For the nine months ended September 30, 2003, Operating Income before Depreciation and Amortization increased 5% to $6.428 billion from $6.098 billion in 2002.

      Included in these results were several items affecting comparability, including impairments of goodwill and intangible assets, a gain on disposition of certain assets and merger and restructuring costs, which are discussed below. Excluding these items, Operating Income before Depreciation and Amortization for the three and nine months ended September 30, 2003 increased as a result of improvements at the Cable, Filmed Entertainment and Networks segments, offset in part by declines at the AOL, Music, Publishing and Corporate segments. The segment variations are discussed in detail under “Business Segment Results” below.

      Excluding impairment charges and gains and losses on the disposition of assets, the rate of growth for the full year in both Operating Income before Depreciation and Amortization and Operating Income is expected to slow relative to the growth rate in the first nine months of 2003, as the Company faces difficult prior year comparisons in

12

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

the Filmed Entertainment and Networks segments, higher marketing costs at AOL related to the launch of 9.0 and potential additional restructuring charges at AOL and the Publishing unit’s Time Life business.

      Impairments of Goodwill and Intangible Assets. For the three and nine months ended September 30, 2003, Operating Income before Depreciation and Amortization includes $41 million and $219 million of impairment charges, respectively, at the Networks segment, related to the writedown of the intangible assets of the winter sports teams and a $99 million impairment charge for the nine months ended September 30, 2003 related to the writedown of goodwill and intangible assets of the Time Warner Book Group at the Publishing segment. These impairments were recognized as a result of fair value information obtained during the periods through negotiations with third parties about the potential disposition of these businesses.

      Gain on Disposition of Assets. For the nine months ended September 30, 2003, Operating Income before Depreciation and Amortization includes a $43 million gain related to the sale of a UK theater chain, which had been previously consolidated by the Filmed Entertainment segment.

      Merger and Restructuring Costs. For the three months ended September 30, 2003, Operating Income before Depreciation and Amortization includes merger and restructuring costs of $46 million, including $26 million at the AOL segment related to various lease facility terminations, $13 million at the Networks segment related to lease facility terminations, $4 million at the Music segment and $3 million at the Publishing segment related to various employee and contractual terminations (Note 2). For the three months ended September 30, 2002, Operating Income before Depreciation and Amortization included merger and restructuring costs of $77 million, including $67 million at the AOL segment for termination of the AOL segment’s lease obligations for network modems that are no longer being used because network providers have upgraded their networks to a newer technology (Note 2). The remaining $10 million occurred at the Corporate segment, which related to various employee and contractual terminations (Note 2).

      For the nine months ended September 30, Operating Income before Depreciation and Amortization included merger and restructuring costs of $82 million in 2003 and $184 million in 2002. The 2003 costs included $30 million at the AOL segment, $21 million at the Networks segment, $21 million at the Publishing segment and $10 million at the Music segment related to various employee and contractual terminations and various lease facility terminations. The 2002 costs included $142 million at the AOL segment, $5 million at the Music segment and $37 million at Corporate. The 2002 costs included $53 million related to workforce reductions and $131 million for terminations of the AOL segment’s lease obligations for network modems that are no longer being used because network providers have upgraded their networks to a newer technology (Note 2).

      As discussed further below, the Company expects to incur additional restructuring costs at the AOL unit ranging from $30 million to $60 million and at its Publishing unit’s Time Life business ranging from $20 million to $40 million.

      Corporate Operating Loss before Depreciation and Amortization. Time Warner’s Corporate Operating Loss before Depreciation and Amortization increased to $109 million and $322 million for the three and nine months ended September 30, 2003, respectively, from $97 million and $283 million in the comparable prior year periods. Included in these amounts are legal and other professional fees related to the SEC and DOJ investigations into the Company’s accounting and disclosure practices and the defense of various shareholder lawsuits ($13 million and $48 million were incurred in the three and nine month periods ended September 30, 2003, respectively, compared to $10 million for the three and nine months of 2002). It is not yet possible to predict the outcome of these investigations, and costs are expected to continue to be incurred in future periods. In addition, the three and the nine months ended September 30, 2003 include approximately $6 million of costs associated with TWC Inc.’s potential initial public offering, which has been delayed, and $5 million of costs incurred associated with negotiations with third parties regarding possible transactions involving the recorded music business. The three and nine months ended September 30, 2002 also includes $10 million and $37 million, respectively, of restructuring charges, which primarily related to severance costs.

13

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

      The Company expects to incur charges of approximately $50 million over the next three quarters associated with the planned relocation of certain operations from the current corporate headquarters. Approximately half of the expected charge represents a non-cash write-off of the fair value lease adjustment which was established in purchase accounting at the time of the America Online-Historic TW merger.

      Depreciation Expense. For the three months ended September 30, depreciation expense increased to $671 million in 2003 from $596 million in 2002. For the nine months ended September 30, depreciation expense increased to $1.979 billion in 2003 from $1.686 billion in the same period in 2002 principally due to increases at the Cable and AOL segments. For the AOL segment, the higher expense was due to an increase in network assets acquired under capital leases. As a result of an increase in the amount of capital spending on customer premise equipment in recent years, a larger portion of the Cable segment’s property, plant and equipment consisted of assets with shorter useful lives in 2003 than in 2002. Additionally, the Cable division completed the upgrades of its Cable systems in mid-2002. Depreciation expense relating to these shorter-lived assets, coupled with existing depreciation expense relating to the upgraded cable systems, has resulted in the increase in overall depreciation expense.

      Amortization Expense. For the three months ended September 30, amortization expense increased to $206 million in 2003 from $181 million in 2002 and to $612 million for the nine months ended September 30, 2003, from $520 million in the same period in 2002. These increases are principally due to increases at the Music, Publishing and Filmed Entertainment segments. The increase at the Music segment is principally related to the reduction in the amortization period of music publishing copyrights and recorded music catalog from 20 to 15 years. For the Publishing segment, the increase related to the acquisition of Synapse, a subscription marketing company, whose purchase price allocation was finalized in the fourth quarter of 2002. For Filmed Entertainment, the increase relates to an increase in carrying value of the film library assets due to the purchase price allocation in the TWE Restructuring.

      Operating Income. Time Warner’s Operating Income increased 7% for the three months ended September 30, 2003 and declined 1% for the nine month period ended September 30, 2003 as compared to the same periods in 2002. This reflects the change in business segment Operating Income before Depreciation and Amortization noted above, offset by an increase in depreciation and amortization expense as previously discussed.

      Interest Expense, Net. Interest expense, net, decreased to $459 million for the three months ended September 30, 2003, from $489 million in 2002 primarily due to lower average levels of debt and lower average rates in 2003. Interest expense increased to $1.400 billion for the nine months ended September 30, 2003, from $1.306 billion in 2002, primarily due to a change in the mix of debt from lower rate short-term floating rate debt to higher rate long-term fixed rate debt as well as lower interest income resulting from the sale of AOL’s investment in Hughes. This was offset in part by lower average rates in 2003 on floating rate debt.

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