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

INTRODUCTION

     Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is provided as a supplement to the accompanying consolidated financial statements and footnotes 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 businesses, as well as recent developments that the Company believes are important in understanding the results of operations and financial condition or to anticipate future trends.
	•		Results of operations. This section provides an analysis of the Company’s results of operations for the three months ended March 31, 2004 compared to the same period in 2003. This analysis is presented on both 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 as of March 31, 2004 and cash flows for the three months ended March 31, 2004.
	•		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 MD&A and the consolidated financial statements, are based on management’s current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances.

Use of Operating Income before Depreciation and Amortization and Free Cash Flow

     The Company utilizes Operating Income before Depreciation and Amortization, among other measures, to evaluate the performance of its businesses. Operating Income before Depreciation and Amortization is considered an important indicator of the operational strength of the Company’s businesses. Operating Income 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, the impact of related impairments, as well as asset sales through other financial measures, such as capital expenditures, investment spending and return on capital.

     The Company also utilizes Free Cash Flow to evaluate the performance of its businesses. Free Cash Flow is cash provided by operations (as defined by accounting principles generally accepted in the United States) less cash provided by discontinued operations, 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.

     Both Operating Income before Depreciation and Amortization and Free Cash Flow should be considered in addition to, not as a substitute for, the Company’s Operating Income, Net Income 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.

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

OVERVIEW

     Time Warner is a leading media and entertainment company whose major businesses encompass an array of the most respected and successful media brands. Among the Company’s brands are HBO, CNN, AOL, Time, People, Sports Illustrated, Friends, ER and Time Warner Cable, and the Company has made such films as The Lord of the Rings trilogy and the Harry Potter series. During the three months ended March 31, 2004, the Company generated revenues of $10.090 billion (up 9% from $9.236 billion in 2003), Operating Income before Depreciation and Amortization of $2.413 billion (up 27% from $1.898 billion in 2003), Operating Income of $1.626 billion (up 40% from $1.165 billion in 2003), Net Income of $961 million (up 143% from $396 million), Cash Provided by Operations of $1.819 billion (up 18% from $1.545 billion in 2003) and Free Cash Flow of $1.073 billion (up 43% from $750 million in 2003).

Time Warner Businesses

     Time Warner classifies its businesses into five fundamental areas: AOL, Cable, Filmed Entertainment, Networks and Publishing.

     AOL. AOL is the world’s leader in interactive services with 30.4 million subscribers in the U.S. and Europe at March 31, 2004. AOL reported total revenues of $2.191 billion (22% of the Company’s overall revenues), $489 million in Operating Income before Depreciation and Amortization and $277 million in Operating Income for the three months ended March 31, 2004. AOL generates its revenues primarily from subscription fees charged to subscribers and advertising services rendered.

     AOL’s subscription trends have been in transition. The AOL narrowband (or dial-up) service has experienced significant declines in U.S. subscribers, which is expected to continue. Driving this decrease was the continued industry-wide maturing of the premium narrowband business, which is expected to continue, as consumers migrate to high-speed broadband or lower-cost dial-up services. In response, AOL put a new strategy in place, aiming to expand its offerings to reduce its reliance on its traditional narrowband service. It introduced a Bring-Your-Own-Access (“BYOA”) broadband service (AOL FOR BROADBAND) in 2003 and a new, lower-cost dial-up ISP (Netscape Internet Service) in early 2004. In addition, AOL has launched a number of specialized premium services, including a McAfee VirusScan Online product.

     Over the past few years, AOL’s advertising revenues have been in a period of decline as the dynamics of the business have changed. Over this period, management has shifted its focus away from longer-term agreements and is now focused on more traditional and paid-search forms of advertising. In the first quarter of 2004, traditional and paid-search forms of advertising increased strongly as compared to the first quarter of 2003. However, this growth was more than offset by declines in intercompany sales to other business segments of Time Warner and the runoff of longer-term advertising agreements. However, the Company expects overall advertising revenue to increase during the remainder of 2004 from continued growth in paid search and traditional advertising.

     The Company expects that AOL’s strategic initiatives, as well as its continuing focus on cost management (particularly involving network costs) and continued improvement in its AOL Europe S.A. (“AOL Europe”) operations, will position the business for continued growth through the remainder of 2004.

     Cable. Time Warner’s cable business, Time Warner Cable Inc. (“TWC Inc.”), is the second-largest cable operator in the U.S. (in terms of subscribers served). TWC Inc. managed 10.930 million basic cable subscribers at March 31, 2004, in highly clustered and upgraded systems in 27 states, including New York, Texas, North Carolina and Ohio. TWC Inc. delivered $750 million of Operating Income before Depreciation and Amortization, more than any of the Company’s other business segments, had revenues of $2.043 billion (20% of the Company’s overall revenues) and $386 million in Operating Income for the three months ended March 31, 2004.

     TWC Inc. offers three product lines — video, high-speed data and its newest service, digital phone. Video remains its largest business, but high-speed data has been the fastest growing. The growth of its customer base for basic video cable service is limited, as the customer base has matured industry-wide and competition from satellite services has increased. In addition, video programming costs, especially for sports, continue to rise across the

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

industry at double-digit rates. In advanced video services, TWC Inc. is one of the industry leaders, with digital video, High-Definition television or HDTV, Video-on-Demand, Subscription-Video-on-Demand and Digital Video Recorders. Significant digital video penetration provides TWC Inc. with a broad universe of potential customers for these advanced services.

     High-speed data remains TWC Inc.’s fastest-growing business, even though its rate of growth has begun to slow, reflecting increasing penetration rates and increased competition from other distribution technologies.

     The new voice business, Digital Phone, is expected to become available across essentially the entire TWC Inc. footprint by the end of 2004. At the end of the first quarter of 2004, Digital Phone was available in seven of TWC Inc.’s cable systems. Digital Phone will enable TWC Inc. to offer its customers for the first time a combined, easy-to-use package of video, high-speed data and voice services and to compete effectively against similarly bundled offerings expected to be made available by its competitors. Included in Operating Income before Depreciation and Amortization for the quarter are start-up losses associated with the roll-out of digital phone services, which are expected to increase throughout 2004.

     While TWC Inc. generates its revenues primarily from subscription fees, it also earns revenue by selling advertising time to national and local businesses.

     Filmed Entertainment. Time Warner’s Filmed Entertainment businesses, Warner Bros. Entertainment Group (“Warner Bros.”) and New Line Cinema (“New Line”), generated revenues of $2.951 billion (27% of the Company’s overall revenues), $427 million in Operating Income before Depreciation and Amortization and $352 million in Operating Income for the three months ended March 31, 2004.

     One of the world’s leading studios, Warner Bros., has diversified sources of revenue with its film, TV production and video businesses, combined with an extensive global distribution infrastructure. This diversification helps Warner Bros. to deliver more consistent growth in Operating Income before Depreciation and Amortization. The vast majority of New Line’s revenues come from theatrical films and related video revenues and therefore are generally more variable. In the first quarter of 2004, New Line has continued its recent high level of Operating Income before Depreciation and Amortization, benefiting from the success of DVD sales of lower cost films, such as Freddy vs. Jason, The Texas Chainsaw Massacre and Secondhand Lions.

     The sale of DVDs has been the largest driver of the segment’s profit growth over the last few years. Warner Bros.’ industry-leading library, consisting of more than 6,600 theatrical titles and 53,000 live-action and animated television titles, positions it to capitalize on continuing growth in DVD hardware penetration. Specifically, DVDs continue to generate a growing share of home video revenues, with higher unit margins than VHS. With DVD hardware penetration levels worldwide relatively low compared to the penetration of VHS hardware, the Company believes that a significant opportunity for DVD growth remains.

     Warner Bros.’ industry-leading television business has experienced growing revenues, including the success of releasing television series into the home video market. For the 2003/2004 television season, it has more current production shows on the air than any other studio, with prime-time series on all six broadcast networks (including such hits as Friends, ER, Smallville and The West Wing). Even though this record number of shows requires significant investment in production, the Company believes the cost is warranted due to the potential associated revenue from future syndication opportunities.

     Piracy continues to be a significant issue for the filmed entertainment industry, especially from online file-sharing, which has expanded from music to movies and television programming due to changes in technology. The Company has taken a variety of actions to combat piracy over the last several years and will continue to do so, both individually and together with industry associations.

     Networks. Time Warner’s Networks group is comprised of Turner Broadcasting System, Inc. (“Turner”), Home Box Office (“HBO”) and The WB Television Network (“The WB Network”). The segment delivered revenues of $2.195 billion (20% of the Company’s overall revenues), $735 million in Operating Income before Depreciation and Amortization and $683 million in Operating Income for the three months ended March 31, 2004.

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

     The Turner networks — including TBS, TNT, CNN, Cartoon Network and CNN Headline News — are among the leaders in advertising-supported cable TV networks. In a shift that has been underway for years, prime-time viewing of all advertising-supported cable television networks surpassed, for the first time in 2003, the aggregate share for the major broadcast networks. For the first quarter of 2004, TNT and TBS ranked first and second in ratings in their key demographic, adults 18-49.

     The Turner networks generate revenue principally from the sale of advertising time and monthly subscriber fees paid by cable system operators, satellite companies and other affiliates. Turner has benefited from strong ratings and a growing advertising opportunity in the latter months of 2003 and early 2004. Keys to Turner’s success are its continued investments in high-quality programming focused on kids, sports, series, movies and news, as well as brand awareness and operating efficiency.

     HBO operates the HBO and Cinemax multichannel pay television programming services, with the HBO service being 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 revenues is from the ancillary sales of its original programming including The Sopranos, Sex and the City, Six Feet Under and Band of Brothers.

     The WB Network is a broadcast television network whose target audience are persons in the 12-34 age group demographic. The WB Network generates revenues almost exclusively from the sale of advertising time. Like its broadcast network competitors, The WB Network experienced a decline in its audience of young adults in the current television season. Because this is The WB Network’s target demographic, the loss had a proportionally larger effect on its overall audience delivery. Among other measures, The WB Network now is developing new programming aimed at expanding its appeal to younger viewers.

     Publishing. Time Warner’s Publishing segment consists principally of interests in magazine publishing (Time Inc.) and book publishing (Time Warner Book Group). The segment generated revenues of $1.088 billion (11% of the Company’s overall revenues), $170 million in Operating Income before Depreciation and Amortization and $102 million in Operating Income for the three months ended March 31, 2004.

     Time Inc. publishes more than 130 magazines including Time, People, Sports Illustrated, Entertainment Weekly, Southern Living, In Style, Fortune, Money, Real Simple and Cooking Light. It generates revenues primarily from magazine circulation, newsstand sales and advertising, and drives growth through higher circulation and advertising on existing magazines, acquisitions and the launch of new magazines. In recent years, Time Inc. has acquired IPC Media (the U.K.’s largest magazine company), magazine subscription marketer Synapse Group Inc. and Time4Media (previously Times Mirror Magazines), a leading publisher of leisure-time magazines. In addition, Time Inc. is continuing to invest in new magazine launches, including several launches in 2004. Its direct-selling division, Southern Living At Home, sells home decor products through approximately 34,000 independent consultants at parties hosted in people’s homes throughout the United States.

     Time Warner Book Group’s Warner Books and Little, Brown and Company offer a full range of titles spanning entertainment, literature and informative non-fiction. In the first quarter of 2004, Time Warner Book Group had 14 titles on The New York Times bestseller list, including 7 new releases and 7 continuing bestsellers from 2003. Significant new additions to The New York Times bestseller list include James Patterson’s 3rd Degree, John le Carre’s Absolute Friends and Brad Meltzer’s The Zero Game.

     The Publishing segment’s Operating Income before Depreciation and Amortization increased in the first quarter of 2004, due primarily to the absence of losses at Time Inc.’s former Time Life direct-marketing business. However, Time Inc. continued to experience softness in its print advertising business. Despite this softness, Time Inc.’s core magazine business has maintained its industry-leading domestic advertising share of almost 24%. As a result of the loss of revenue resulting from the sale of Time Life on December 31, 2003, revenue growth at the Publishing segment in 2004 will be negatively impacted by $86 million. Conversely, with the absence of losses from Time Life in 2004, the Operating Income before Depreciation and Amortization growth at the Publishing segment will be positively impacted by $17 million.

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

Other Key 2004 Developments

Discontinued Operations Presentation of Music Segment

     On March 1, 2004, the Company closed on its previously announced agreement to sell the Warner Music Group’s (“WMG”) recorded music and music publishing operations to a private investment group for approximately $2.6 billion in cash and an option to re-acquire a minority interest in the operations sold. In addition, on October 24, 2003, the Company completed the sale of WMG’s CD and DVD manufacturing, printing, packaging and physical distribution operations (together, “Warner Manufacturing”) to Cinram International Inc. (“Cinram”) for approximately $1.05 billion in cash (Note 4).

     With the completion of these transactions, the Company disposed of its entire Music segment. Accordingly, the Company has presented the financial condition and results of operations of the Music segment as discontinued operations for all periods presented.

Debt Reduction Program

     In January 2003, the Company announced its intention to reduce its overall level of indebtedness. Specifically, the Company indicated its intention was to reduce consolidated net debt (defined as total debt less cash and cash equivalents) to approximately $20 billion by the end of 2004.

     As of March 31, 2004, the Company’s net debt totaled $18.8 billion, down from $22.7 billion at December 31, 2003, as described in more detail under “Financial Condition and Liquidity.” With the receipt of the $2.6 billion in cash proceeds upon the closing of the sale of the Company’s recorded music and music publishing businesses, as well as the generation of significant Free Cash Flow, the Company achieved its previously announced net debt reduction target almost a full year ahead of schedule.

     The Company employs a disciplined approach to pursuing investment opportunities. Depending upon the timing and magnitude of future incremental investments, the Company’s net debt may continue to decline due to the prospective generation of free cash flow.

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 have focused on transactions principally involving the Company’s America Online segment that were entered into after July 1, 1999, including advertising arrangements and the methods used by the America Online segment to report its subscriber numbers.

     The Company itself had commenced an internal review under the direction of the Company’s Chief Financial Officer into advertising transactions at the America Online segment (“CFO review”) during 2002. As a result of the CFO review, the Company announced on October 23, 2002 that it intended to adjust the accounting for certain transactions. The adjustment had an aggregate impact of reducing the advertising and commerce revenues of the Company during the period from the third quarter of 2000 through the second quarter of 2002 by $190 million. On January 28, 2003, the Company filed amendments to its Annual Report on Form 10-K/A for the year ended December 31, 2001 and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002 that included restated financial statements reflecting the adjustments announced on October 23, 2002. Although the Company has continued its CFO review process, the Company has not, to date, determined that any further restatement is necessary.

     In its Annual Report on Form 10-K for the year ended December 31, 2002, 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 (“Bertelsmann”) should be adjusted. For more details on the transactions, see Note 10 “Commitments and Contingencies — Update on SEC and DOJ Investigations.” At the time, the Company further disclosed that it had provided the SEC a written explanation of the basis for the Company’s accounting for the transactions and the reasons why both the Company and its auditors continued to believe that the transactions had been accounted for correctly.

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

     The SEC staff 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 SEC’s Office of the Chief Accountant 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 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, such portion of the payment should have been reflected as a reduction in the purchase price for Bertelsmann’s interest in AOL Europe, rather than as advertising revenue. In addition, the SEC’s Division of Enforcement 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 TWC 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 segment, including advertising arrangements and the methods used by the America Online segment to report its subscriber numbers. The DOJ 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 DOJ 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.

Sale of Winter Sports Teams

     On March 31, 2004, the Company closed the previously announced agreement to sell an 85% interest in the Turner winter sports teams (the Atlanta Thrashers, an NHL team, and the Atlanta Hawks, an NBA team) and operating rights to Philips Arena, an Atlanta sports and entertainment venue. In addition to the $219 million impairment charge recognized in the second and third quarters of 2003, the Company recorded a $7 million loss on the finalization of the sale in the first quarter of 2004.

Comcast Registration Rights

     On December 29, 2003, TWC Inc. received a notice from Comcast requesting that TWC Inc. start the registration process under the Securities Act of 1933 for the sale in a firm underwritten offering of Comcast’s 17.9% common interest in TWC Inc. The notice was delivered pursuant to a registration rights agreement related to the TWC Inc. securities. The Company cannot predict the timing of an effective registration in response to the notice. The Company is not required to purchase Comcast’s shares in TWC Inc.

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

RESULTS OF OPERATIONS

Transactions Affecting Comparability of Results of Operations

     The comparability of the Company’s results of operations, financial position and cash flows has been affected by certain new accounting principles adopted by the Company and certain significant transactions occurring during each period as discussed further below.

New Accounting Principles

     The Company adopted new accounting guidance that impacted comparability as follows:

Consolidation of Variable Interest Entities

     In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51” (“FIN 46”), which requires variable interest entities (“VIEs”), 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 VIEs created after January 31, 2003, and effective July 1, 2003, for VIEs that existed prior to February 1, 2003. During 2003, the FASB delayed the required implementation date of FIN 46 for certain VIEs until March 31, 2004.

     The Company adopted the provisions of FIN 46, effective July 1, 2003, for those VIEs representing lease-financing arrangements with SPEs. In December 2003, The FASB issued a revision of FIN 46 (“FIN 46R”) to replace FIN 46. The Company adopted FIN 46R, effective March 31, 2004, for its equity investments and joint venture arrangements that are considered VIEs. The application of FIN 46R to the Company’s equity investments and joint venture arrangements as of March 31, 2004, resulted in the consolidation of the Company’s investment in America Online Latin America, Inc. (“AOLA”).

     AOLA is a publicly traded entity whose significant shareholders include the Company, the Cisneros Group (a private investment company) and Banco Itau (a leading Brazilian bank). AOLA provides online services principally to customers in Brazil, Mexico and Argentina. The Company holds common and preferred equities of AOLA and has also loaned $160 million to AOLA in the form of convertible subordinated notes due in 2007. Upon the adoption of FIN 46R, the Company has consolidated AOLA as AOLA was determined to be a variable interest entity and the Company its primary beneficiary. Prior to the adoption of FIN 46R, the Company accounted for its investment in AOLA under the equity method of accounting.

     The Company has no obligation to provide additional funding for AOLA’s operations and the creditors of AOLA have no recourse to the Company.

     In accordance with the transition provisions of FIN 46R, the assets and liabilities of AOLA were recorded in the Company’s consolidated balance sheet as of March 31, 2004 in the amounts at which they would have been carried if FIN 46R had been effective when the Company first met the conditions to be the primary beneficiary of AOLA. Upon consolidating the balance sheet of AOLA, the Company recorded incremental assets of approximately $85 million and liabilities of $29 million, with the difference of $56 million recognized as the pre-tax cumulative effect of an accounting change ($34 million on an after-tax basis). Prior periods have not been restated. The Company will consolidate the operating results of AOLA’s operations commencing April 1, 2004. In order to provide the time necessary to consolidate and evaluate the AOLA financial information, the AOLA financial statements will be consolidated by the Company on a one-quarter time lag. The Company does not believe that the consolidated results of AOLA will have a material impact on its results of operations.

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

Significant Transactions and Other Items Affecting Comparability

     As more fully described herein and in the related footnotes 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:

Restructuring Costs

     Restructuring costs consist of charges related to employee terminations and exit activities, which are expensed in accordance with accounting principles generally accepted in the United States. During the three months ended March 31, 2004, the Company did not incur any restructuring costs. During the three months ended March 31, 2003, the Company incurred restructuring costs of $24 million, including $4 million at AOL, $8 million at Networks and $12 million at Publishing. The 2003 costs related to workforce reductions. These costs are included in “Restructuring Costs” in the accompanying consolidated statement of operations and are discussed in more detail in Note 2 to the accompanying consolidated financial statements.

Gain (Loss) on Disposal of Assets

     For the three months ended March 31, 2004, the Company recognized an $8 million pretax gain related to the sale of a building occupied by the Time Life business that was sold at the end of 2003 at the Publishing segment, partially offset by a $7 million pretax loss on the finalization of the sale of the winter sports teams at the Networks segment. These amounts are reflected as components of Operating Income in the accompanying consolidated financial statements.

Investment Gains

     For the three months ended March 31, 2004, the Company recognized $39 million of gains from the sale of investments. For the three months ended March 31, 2003, the Company recognized $109 million of gains from the sale of investments, including a $50 million gain from the sale of the Company’s interest in Hughes Electronics Corp. (“Hughes”) and gains of $35 million on the sale of the Company’s equity interests in international cinema chains not previously consolidated.

     These gains are included as a component of “Other Income, net” in the accompanying consolidated statement of operations.

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

Loss on Investments, net

     For the three months ended March 31, 2004, non-cash pretax charges to reflect other-than-temporary declines in the Company’s investments were $3 million. These amounts consisted of $1 million to reduce the carrying value of certain investments that experienced other-than-temporary declines in market value and $2 million of losses to reflect market fluctuations in equity derivative instruments.

     For the three months ended March 31, 2003, non-cash pretax charges to reflect other-than-temporary declines in the Company’s investment were $6 million. These amounts were comprised of $10 million to reduce the carrying value of certain investments that experienced other-than-temporary declines in market value and income of $4 million to reflect market fluctuations in equity derivative instruments.

     These writedowns are included as a component of “Other Income, net” in the accompanying consolidated statement of operations.

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

Consolidated Results

     Revenues. Consolidated revenues increased 9% to $10.090 billion. As shown below, this increase was led by growth in Subscription, Advertising and Content revenues, offset, in part, by declines in Other revenues:

     The 6% increase in Subscription revenues was principally due to the continued penetration of new services (primarily high-speed data and digital video and other advanced video services) and higher basic cable rates at the Cable segment and higher subscription rates at both Turner and HBO. AOL Subscription revenues also increased due to growth and foreign currency exchange gains at AOL Europe and the consolidation of AOL Japan, partially offset by a decrease in domestic revenues.

     The 8% increase in Advertising revenues was primarily due to the Networks segment, driven by higher CPMs and sellouts at Turner’s entertainment networks, higher sellouts and the effects of preemptions in 2003 due to war coverage at Turner’s news networks, and at The WB Network due to higher CPMs, partially offset by lower ratings.

     The 21% increase in Content revenues was principally due to improved results at the Filmed Entertainment segment related to both television and theatrical products, partially offset by declines at the Networks segment related primarily to difficult comparisons to prior year, which included the home video release of My Big Fat Greek Wedding at HBO.

     The 29% decline in Other revenues was attributable to the sale of Time Life, a direct-marketing business in the Publishing segment, which was sold at the end of 2003, and the sale of Warner Bros.’ interest in a U.K. cinema chain, which was sold in the second quarter of 2003, at the Filmed Entertainment segment. Time Life and the U.K. cinema chain contributed $76 million and $29 million, respectively, of Other revenues for the first quarter of 2003.

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

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

     Costs of Revenues. For the three months ended March 31, 2004 and 2003, costs of revenues totaled $5.935 billion and $5.626 billion, respectively, and as a percentage of revenues was 59% and 61%, respectively. The improvement in costs of revenue as a percentage of revenues related primarily to improved contributions from theatrical and television products at the Filmed Entertainment segment, and lower network expenses, lower merchandise expenses and lower product development costs at the AOL segment.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses increased from $2.289 billion in 2003 to $2.375 billion in 2004 as a result of higher costs at Filmed Entertainment, due primarily to distribution fees associated with the off-network television syndication of Seinfeld; at Cable, due to a reserve established for an outstanding legal matter and higher marketing costs; at AOL due to higher marketing costs; and at Corporate due to costs associated with the relocation from the Company’s former corporate headquarters. These items were partially offset by improvements at Publishing, resulting from the absence of Time Life in 2004, and at Networks, due to the reversal of certain accounts receivable reserves.

     Reconciliation of Operating Income before Depreciation and Amortization to Operating Income and Net Income.

     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 for purposes of the discussions that follow:

     Operating Income before Depreciation and Amortization. Time Warner’s Operating Income before Depreciation and Amortization increased 27% to $2.413 billion for the three months ended March 31, 2004 from $1.898 billion for the three months ended March 31, 2003 principally as a result of increases at all business segments, with significant growth at Networks, Filmed Entertainment and AOL. The segment variations are discussed in detail under “Business Segment Results” below. The increases in business segment Operating Income before Depreciation and Amortization was offset, in part, by an increase in Corporate Operating Loss before Depreciation and Amortization.

10

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

     The Company expects the rate of growth in Operating Income before Depreciation and Amortization for the full year to slow relative to the growth rate in the first three months of 2004 due to a decrease in growth rates at the AOL, Filmed Entertainment and Networks segments, which are discussed further below. Partially offsetting this for the remainder of the year will be a reduction in pension expense due to the effects of considerable Company contributions in 2003 and a strong return on plan assets.

     Corporate Operating Loss before Depreciation and Amortization. Time Warner’s Corporate Operating Loss before Depreciation and Amortization increased to $164 million for the three months ended March 31, 2004 from $101 million for the three months ended March 31, 2003. The increase was primarily attributable to $53 million of costs associated with the relocation from the Company’s former corporate headquarters and higher severance costs. The Company expects to incur additional costs associated with the relocation from the Company’s former corporate headquarters of approximately $10 million in the second quarter of 2004. Of the $53 million first quarter charge, approximately $21 million relates to a non-cash write-off of the fair value lease adjustment for the former corporate headquarters, which was established in purchase accounting at the time of the merger of America Online Inc. (“America Online”) and Time Warner Inc., now known as Historic TW Inc. (“Historic TW”).

     Also included in Corporate Operating Loss before Depreciation and Amortization 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 ($8 million incurred in 2004 compared to $15 million in 2003). It is not yet possible to predict the outcome of these investigations, and costs are expected to continue to be incurred in future periods.

     Depreciation Expense. Depreciation expense increased to $633 million for the three months ended March 31, 2004 from $601 million for the three months ended March 31, 2003, principally due to increases at the Cable segment ($346 million in 2004 compared to $330 million in 2003). The increase at Cable reflects higher levels of spending related to the rollout of digital services over the past three years and increased spending on customer premise equipment that is depreciated over a shorter useful life compared to the mix of assets previously purchased.

     Amortization Expense. Amortization expense increased to $154 million for the three months ended March 31, 2004 from $132 million for the three months ended March 31, 2003. The increase relates principally to an increase in the amortization associated with customer related intangible assets at the Cable segment as a result of the 2003 restructuring of Time Warner Entertainment Company, L.P. (the “TWE Restructuring”).

     Operating Income. Time Warner’s Operating Income increased from $1.165 billion for the three months ended March 31, 2003 to $1.626 billion for the three months ended March 31, 2004. This reflects the increase in business segment Operating Income before Depreciation and Amortization, partially offset by an increase in depreciation and amortization expense.

     Interest Expense, Net. Interest expense, net, decreased to $422 million for the three months ended March 31, 2004 from $460 million for the three months ended March 31, 2003, due primarily to lower average net debt levels.

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

11

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

     The changes in investment-related gains and loss on writedown of investments are discussed above in detail under “Significant Transactions and Other Items Affecting Comparability.” Excluding the impact of the items discussed above, Other Income, net, improved in 2004 as compared to the prior year primarily from an increase in income from equity method investees.

     Minority Interest Expense. Time Warner had $51 million of minority interest expense for the three months ended March 31, 2004 compared to $56 million for the three months ended March 31, 2003. The decrease in minority interest expense was primarily related to the elimination of minority interest in AOL Europe as a result of the Company’s purchase of the remaining preferred securities and payment of accrued dividends in April 2003 and the elimination of minority interest in a U.K. cinema chain, which was sold in the second quarter of 2003. This was partially offset by additional minority interest expense for Comcast’s interest in TWC Inc.

     Income Tax Provision. Income tax expense from continuing operations was $475 million for the three months ended March 31, 2004, compared to $313 million for the three months ended March 31, 2003. The Company’s pre-tax income before discontinued operations and cumulative effect of accounting change was $1.187 billion for the three months ended March 31, 2004, compared to pre-tax income before discontinued operations of $743 million for the three months ended March 31, 2003. Applying the 35% U.S. Federal statutory rate to pre-tax income before discontinued operations and cumulative effect of accounting change would result in income tax expense of $415 million in 2004 and $260 million in 2003. The Company’s actual income tax expense differs from these amounts as a result of several factors, including non-temporary differences (i.e., certain financial statement expenses that are not deductible for income tax purposes), foreign income taxed at different rates and state and local income taxes.

     In addition, the Company recorded an income tax benefit on discontinued operations of $138 million in the first quarter of 2004. The actual tax recorded in the discontinued operations differed from the statutory rate due primarily to a favorable tax treatment resulting from the disposition of some of the foreign music assets.

     Income before Discontinued Operations and Cumulative Effect of Accounting Change. Income before discontinued operations and cumulative effect of accounting change was $712 million for the three months ended March 31, 2004 compared to $430 million for the three months ended March 31, 2003. Basic and diluted net income per share before discontinued operations and cumulative effect of accounting change were $0.16 and $0.15, respectively, in 2004 compared to $0.10 for basic and diluted net income before discontinued operations in 2003. In addition, excluding the items previously discussed under “Significant Transactions and Other Items Affecting Comparability” of $22 million of income in 2004 and $47 million of income in 2003, Income before Discontinued Operations and Cumulative Effect of Accounting Change increased by $307 million. The increase reflects primarily an increase in Operating Income offset by an increase in income tax provision.

     Discontinued Operations, Net of Tax. The 2004 and 2003 results include the impact of the treatment of the Music segment as discontinued operations. Included in the 2004 results are $77 million of pre-tax income from the operations of the Music business and $138 million of income tax benefits that were realized in connection with the close of the music transaction in 2004. Included in the 2003 results are a $50 million pre-tax loss from the Music business and $16 million of income tax benefits.

     Cumulative Effect of Accounting Change. As previously discussed, the Company recorded an approximate $34 million benefit, net of tax, as a cumulative effect of accounting change upon the consolidation of AOLA in 2004 in accordance with FIN 46R.

     Net Income and Net Income Per Common Share. Net income was $961 million for the three months ended March 31, 2004 compared to $396 million for the three months ended March 31, 2003. Basic and diluted net income per common share were $0.21 and $0.20 in 2004, respectively, compared to $0.09 for both basic and diluted net income per common share in 2003. Net Income includes the items discussed above under “Significant Transactions and Other Items Affecting Comparability,” discontinued operations, net of tax and cumulative effect of accounting change.

12

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 months ended March 31, 2004 and 2003 are as follows:

     The growth in Subscription revenues at AOL is primarily attributable to an increase in Subscription revenues at AOL Europe (from $356 million to $429 million), offset in part by a decline in domestic subscription revenues (from $1.542 billion to $1.471 billion). The growth in AOL Europe’s Subscription revenues primarily resulted from a $64 million favorable impact of foreign currency exchange rates and growth in broadband subscribers. These increases more than offset an increase in value-added taxes (which is netted against revenue) due to a change in European tax law that took effect July 1, 2003. AOL’s domestic Subscription revenues declined in 2004 due to decreases in AOL narrowband subscribers and related revenues, partially offset by the expansion of domestic broadband subscription revenue and increased premium service revenue. The remaining increase in Subscription revenues is the result of the acquisition of AOL Japan, which was consolidated effective January 1, 2004, and contributed $19 million of Subscription revenues.

     The number of AOL brand domestic subscribers was as follows at March 31, 2004, December 31, 2003, and March 31, 2003:

     The Company classifies domestic AOL brand subscribers as narrowband or broadband subscribers based on the price plan selected by the subscriber, rather than the speed (e.g., high-speed or dial-up) of a subscriber’s connection, member usage patterns, or some other possible measure. It is important to note that these price plan classifications do not necessarily reflect subscriber access patterns. The Company believes that a significant number of its subscribers who have selected broadband price plans actually access the AOL service via narrowband connections for a majority of their sessions. Likewise, a significant number of its subscribers on narrowband price plans actually access the AOL service via broadband connections for a majority of their sessions.

13

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

     Subscribers classified as narrowband include subscribers selecting the AOL service with dial-up Internet access provided by AOL under unlimited usage price plans, limited usage price plans, Original Equipment Manufacturers (“OEMs”) bundled plans, and bulk subscriptions sold at a discount rate to AOL’s selected strategic partners. Broadband subscribers include subscribers selecting the AOL service under bring your own access (“BYOA”) price plans and bundled broadband price plans. Both narrowband and broadband plans include members receiving the AOL service during introductory free trial periods and members who are receiving the AOL service at no or reduced costs through member service and retention programs.

     The sequential quarterly decline in domestic AOL brand subscribers resulted from a number of factors, including continued subscriber cancellations and terminations, the continued maturing of narrowband services, and subscribers adopting other narrowband and broadband services, partially offset by growth in broadband subscribers. The Company anticipates that the decline in its narrowband subscriber base will likely continue because of these factors. In addition, the movement toward AOL broadband services could negatively impact future results of operations due to lower average pricing on broadband services than for narrowband services.

     The year-over-year decline in subscribers also reflects a reduction in direct marketing response rates and the Company’s identification of and removal from the subscriber base of members failing to complete appropriately the registration and payment authorization process and members who were prevented from using the service due to online conduct violations (e.g., spamming, inappropriate language) and who did not properly address the violation.

     AOL offers multiple broadband BYOA price plans, all of which allow unlimited use of the AOL service via an Internet connection not provided by America Online and include a limited or unlimited amount of hours of dial-up Internet access provided by AOL at no additional charge. In an effort to gauge consumer needs and interest, AOL regularly offers different promotional and pricing plans. During the most recent quarter, most of the net additions to broadband subscribers were in a $24.95 premium BYOA price plan that includes unlimited access to the AOL service via a broadband connection not provided by AOL, and unlimited Internet access via a dial-up connection provided by AOL. In addition to the flexibility of unlimited access to the AOL service via a broadband or dial-up connection, the $24.95 price plan offers simultaneous usage of the broadband service under multiple screen names, which is also offered in the other broadband BYOA price plans.

     This premium BYOA price plan was introduced in early 2003 and has only been actively marketed since late 2003. During this quarter, most of the additional subscribers to this premium BYOA price plan have migrated from AOL’s narrowband service. As compared to AOL’s $14.95 BYOA price plan, a higher degree of the subscribers to the $24.95 premium plan have migrated back to other AOL plans, principally narrowband.

     The average monthly Subscription revenue per domestic subscriber (“ARPU”), defined as total AOL brand domestic Subscription revenue divided by the average subscribers for the period, for 2004 increased 4% to $19.24 as compared to $18.52 in 2003. The change in domestic subscription ARPU primarily related to the termination of non-paying members, increased premium services revenues and a change in the mix of narrowband and broadband product. In addition, ARPU was impacted by changes in customer pricing plans, the level of service provided (full connectivity versus BYOA) and by changes in the terms of AOL’s relationships with its broadband cable and DSL partners. In general, the Company does not expect ARPU to sustain this increase in the foreseeable future as the Company continues to introduce new products, such as lower-priced narrowband services, and subscribers continue to migrate from unlimited plans to lower-priced plans.

     The number of AOL brand subscribers in Europe was 6.4 million at March 31, 2004, and the average monthly Subscription revenue per European subscriber for the three months ended March 31, 2004 was $22.06. This compares to AOL brand subscribers in Europe of 6.4 million and 6.3 million at December 31, 2003, and March 31, 2003, respectively, and average monthly Subscription revenue per European subscriber of $20.62 for the three months ended December 31, 2003 and $17.84 for the three months ended March 31, 2003. The average monthly Subscription revenue per European subscriber was impacted primarily by the positive effect of changes in foreign currency exchange rates related to the strengthening of the Euro and British Pound relative to the U.S. Dollar and price increases implemented in the second quarter of 2003. The sequential number of AOL brand subscribers reflected net growth in subscribers in the U.K. and Germany and was partially offset by a net subscriber decline in France.

14

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

     The decline in Advertising revenues reflects a decrease in intercompany sales of advertising to other business segments of Time Warner in 2004 as compared to the comparable period in 2003 (from $33 million to $2 million), offset in part by an increase in third party advertising. The decrease in intercompany advertising reflects a change in the treatment of intercompany barter advertising that occurred in the second quarter of 2003. The increase in third party advertising reflects increased revenue from domestic paid-search advertising contracts (from $47 million to $74 million) as well as increases in current period traditional online advertising partially offset by a decline in revenues from domestic contractual commitments received in prior periods. The Company expects advertising revenue to increase during the remainder of 2004 as expected growth in paid-search and traditional online advertising more than offsets an expected decline in revenues from domestic contractual commitments received in prior periods.

     Other revenues primarily include merchandising revenue and revenue from providing the Cable segment access to the AOL Transit Data Network for high-speed access to the Internet. The decrease in Other revenues for the first three months of 2004 was due primarily to the Company’s decision in the first quarter of 2003 to reduce the promotion of its merchandise business (i.e., reducing pop-up advertisements) to improve the member experience.

     Cost of revenues decreased 10% and, as a percentage of revenues, decreased to 49% in 2004 from 54% in 2003. This decline related primarily to lower network expenses, lower merchandise expenses, and lower product development costs. Network-related expenses decreased 20% to $527 million in 2004, principally attributable to improved pricing and decreased levels of service commitments entered into in the second half of 2003 as well as increased amounts of network assets under capital leases versus operating leases. These factors are expected to result in continued declines in network expenses for the remainder of 2004.

     The 4% increase in selling, general and administrative expenses primarily related to a $29 million increase in marketing costs. The increase in marketing costs resulted from higher spending on member acquisition activities and on promotional advertising, partially offset by the previously discussed change in the treatment of intercompany advertising barter transactions. Included in 2004 and 2003 are $15 million and $20 million, respectively, of benefits related to favorable rulings on certain state sales tax matters. The 2004 results were also impacted by the provision of certain state sales tax reserves related to the November 2003 expiration of the federal moratorium on Internet sales taxes.

     The increases in Operating Income before Depreciation and Amortization and Operating Income are due primarily to lower costs of revenues, offset in part by higher selling, general and administrative expenses and a slight decrease in revenues. The Company does not expect the rate of growth of AOL’s Operating Income before Depreciation and Amortization to continue due to an expected increase in AOL’s spending on product development and marketing.

15

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

Cable. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Cable segment for the three months ended March 31, 2004 and 2003 are as follows: