UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

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

Commission File Number 1-15062

TIME WARNER INC.

One Time Warner Center
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 þ No o

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

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 CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION

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 notes to help provide an understanding of Time Warner Inc.’s (“Time Warner” or the “Company”) financial condition, changes in financial condition and results of operations. MD&A is organized as follows:

	•	Overview. This section provides a general description of Time Warner’s business segments, as well as recent developments the Company believes are important in understanding the results of operations and financial condition or in understanding anticipated future trends.
	•	Results of operations. This section provides an analysis of the Company’s results of operations for the three months ended March 31, 2005 compared to the same period in 2004. This analysis is presented on both a consolidated and a business segment basis. In addition, a brief description is provided of significant transactions and events that impact the comparability of the results being analyzed.
	•	Financial condition and liquidity. This section provides an analysis of the Company’s financial condition as of March 31, 2005 and cash flows for the three months ended March 31, 2005.
	•	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 the use of forward-looking information appearing in this report, including in MD&A and the consolidated financial statements. Such information is based on management’s current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances.

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 noncash depreciation of tangible assets and amortization of certain intangible assets that were recognized in business combinations. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in the Company’s businesses. Management evaluates the 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.

     Free Cash Flow is cash provided by operations (as defined by U.S. generally accepted accounting principles) less cash provided by discontinued operations, capital expenditures and product development costs, principal payments on capital leases, and partnership distributions, if any. Free Cash Flow is considered to be an important indicator of the Company’s liquidity, including its ability to reduce net debt, make strategic investments, pay dividends to common shareholders and repurchase stock.

     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 and liquidity reported in accordance with U.S. generally accepted accounting principles.

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

OVERVIEW

     Time Warner is a leading media and entertainment company whose major businesses encompass an array of the most respected and successful media brands. Among the Company’s brands are HBO, CNN, AOL, People, Sports Illustrated, Time and Time Warner Cable. The Company has produced and distributed films including The Lord of the Rings trilogy, the Harry Potter series, Million Dollar Baby and The Polar Express and television programs including ER, Two and a Half Men and The West Wing. During the three months ended March 31, 2005, the Company generated revenues of $10.483 billion (up 3% from $10.185 billion in 2004), Operating Income before Depreciation and Amortization of $2.581 billion (up 7% from $2.405 billion in 2004), Operating Income of $1.779 billion (up 10% from $1.616 billion in 2004), Net Income of $963 million (flat from $961 million in 2004), Cash Provided by Operations of $1.854 billion (up slightly from $1.819 billion in 2004) and Free Cash Flow of $1.173 billion (up 9% from $1.073 billion in 2004).

Time Warner Businesses

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

     AOL. America Online, Inc. (“AOL” or “America Online”) is a leader in interactive services, web brands, Internet technologies and e-commerce services, with 28.0 million total AOL brand subscribers in the U.S. and Europe at March 31, 2005. AOL reported total revenues of $2.133 billion (20% of the Company’s overall revenues), $518 million in Operating Income before Depreciation and Amortization and $324 million in Operating Income for the three months ended March 31, 2005. AOL generates its revenues primarily from subscription fees charged to subscribers and from providing advertising services.

     America Online is organized into four business units: Access, Audience, Digital Services and International. This structure reflects AOL’s increased emphasis on generating higher advertising and search revenues, which the Company believes will continue to grow for the foreseeable future.

     Over the past several years, the AOL Access business has experienced significant declines in U.S. subscribers and related Subscription revenues, and these declines are expected to continue. Driving this decrease is the continued industry-wide maturing of the premium dial-up services business, as consumers migrate to high-speed broadband and lower-cost dial-up services. AOL continues to develop, change, test and implement marketing and new product strategies to attract and retain subscribers. For example, AOL recently launched a new AOL brand marketing campaign and Voice Over Internet Protocol service for AOL subscribers.

     AOL’s Audience business strategy focuses on generating Advertising revenue by expanding its audience and increasing usage across all of its properties, including properties such as AOL.com, MapQuest, Moviefone and AOL Instant Messenger. A key component of the Audience business strategy is the planned re-launch in the second half of 2005 of the publicly available version of the AOL.com web portal that will include a portion of AOL’s content that today is typically only available to AOL subscribers. AOL seeks to generate Advertising revenue from this increased traffic through the use of branded advertising and performance-based advertising, including paid-search advertising, as well as from increased utilization and optimization of AOL advertising inventory. The acquisition of Advertising.com Inc. (“Advertising.com”) in the third quarter of 2004 also provides incremental growth in Advertising revenues, primarily through third-party performance-based advertising.

     In the first quarter of 2005, AOL and Time Warner Cable Inc. announced a strategic agreement to develop a customized broadband offering for their current AOL and Road Runner subscribers, as well as other prospects across the Time Warner Cable Inc. coverage area. The Road Runner service will continue to be available on a stand-alone basis for those subscribers who elect not to take the new offering. This agreement allows AOL to proactively migrate its subscribers to the customized broadband offering and also to share in a portion of future subscriber revenues generated. AOL anticipates some decline in near-term revenues from this migration, but expects to experience an increase in the overall subscriber life of its revenue stream. Under the agreement, AOL will manage the advertising and search opportunities for both the new offering and the Road Runner portal, providing an increase

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

in its audience size and the potential to earn revenues from online advertising, search, commerce and premium services. Time Warner Cable will share in a portion of the Advertising revenues generated. The agreement should benefit Time Warner Cable in accelerating its acquisition of high-speed data subscribers and provide its high-speed data customers additional value through access to AOL’s programming and features. The arrangement is in the early stages of implementation and the impact on Time Warner’s consolidated financial results is not expected to be significant during 2005. AOL is pursuing similar agreements with third parties that offer broadband services.

     AOL has taken steps over the past several years to align costs with the declining dial-up subscriber base. These efforts have resulted in reductions in the cost of operating AOL’s network through improved pricing and decreased levels of fixed commitments. These factors are expected to result in continued declines in operating costs throughout the remainder of 2005, although at a rate less than experienced in the first quarter of 2005.

     AOL’s International business unit, which primarily includes AOL Europe S.A. (“AOL Europe”), has focused on balancing its subscription and advertising businesses. In late 2004, the International business unit entered into a new, multi-year search arrangement that provides incremental Advertising revenues.

     Cable. Time Warner’s cable business, Time Warner Cable Inc. and its subsidiaries (“TWC Inc.”), is the second-largest cable operator in the U.S. (in terms of basic cable subscribers served). TWC Inc. managed approximately 10.9 million basic cable subscribers (including approximately 1.6 million subscribers of unconsolidated investees) at March 31, 2005, in highly clustered and upgraded systems in 27 states. TWC Inc. delivered $822 million of Operating Income before Depreciation and Amortization, more than any of the Company’s other reporting segments, and had revenues of $2.246 billion (21% of the Company’s overall revenues) and $426 million in Operating Income for the three months ended March 31, 2005. As part of the strategy to expand TWC Inc.’s cable footprint, on April 20, 2005, the Company entered into an agreement to acquire, in conjunction with Comcast Corporation, substantially all of the assets of Adelphia Communications Corporation (“Adelphia”) (Please refer to “Other Recent Developments” for further details).

     TWC Inc. offers three products — video, high-speed data and its newest service, Digital Phone. Video is TWC Inc.’s largest product in terms of revenues generated; however, the growth of its customer base for video cable service is limited as the customer base has matured and industry-wide competition from direct-to-home satellite services has increased. Nevertheless, TWC Inc. is continuing to increase its video revenues through its offerings of advanced digital video services such as Digital Video, Video-on-Demand (VOD), Subscription-Video-on-Demand (SVOD) and Digital Video Recorders (DVR) that are available in all of TWC Inc.’s 31 divisions. TWC Inc.’s digital video penetration provides a broad base of potential customers for these advanced services. Video programming costs represent a major component of TWC Inc.’s expenses and are expected to continue to increase reflecting an expansion of service offerings and contractual rate increases across TWC Inc.’s programming lineup.

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

     TWC Inc.’s new voice product, Digital Phone, has been launched in all of its divisions and is available to over two-thirds of TWC Inc.’s homes passed. Digital Phone customers receive unlimited local, in-state and domestic long distance calling, as well as call waiting, caller ID, voicemail and enhanced “911” services for a monthly fixed fee. In the future, TWC Inc. intends to offer additional plans, including one that will provide unlimited local calling with separate long distance charges. Digital Phone enables TWC Inc. to offer its customers a combined, easy-to-use package of video, high-speed data and voice services, and to compete effectively against similar bundled products that are available from its competitors.

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

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

     As previously noted, TWC Inc. and AOL recently announced a strategic agreement to develop a customized broadband offering. This arrangement should benefit TWC Inc. in accelerating its acquisition of high-speed data subscribers and provide its high-speed data customers additional value through access to AOL’s programming and features. TWC Inc. will also share with AOL in a portion of the Advertising revenues generated on both the new offering and Road Runner portal.

     Filmed Entertainment. Time Warner’s Filmed Entertainment businesses, Warner Bros. Entertainment Group (“Warner Bros.”) and New Line Cinema Corporation (“New Line”), generated revenues of $3.014 billion (26% of the Company’s overall revenues), $410 million in Operating Income before Depreciation and Amortization and $328 million in Operating Income for the three months ended March 31, 2005.

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

     The sale of DVDs has been one of the largest drivers of the segment’s profit growth over the last few years. Warner Bros.’ library, consisting of more than 6,600 theatrical titles and 54,000 live-action and animated television titles, positions it to benefit from continuing growth in DVD sales.

     Warner Bros.’ industry-leading television business has experienced growing revenues, including the successful releases of television series into the home video market. For the 2004-2005 television season, Warner Bros. has more current productions on the air than any other studio, with prime-time series on all six broadcast networks (including such hits as Two and a Half Men, Joey, ER, Without a Trace, The O.C., Cold Case, Smallville and The West Wing).

     Piracy, including physical piracy as well as illegal online file-sharing, continues to be a significant issue for the filmed entertainment industry. Piracy has expanded from music to movies and television programming due to advances 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 Networks segment delivered revenues of $2.285 billion (20% of the Company’s overall revenues), $787 million in Operating Income before Depreciation and Amortization and $728 million in Operating Income for the three months ended March 31, 2005.

     The Turner networks — including such recognized brands as TBS, TNT, CNN, Cartoon Network and CNN Headline News — are among the leaders in advertising-supported cable TV networks. For the third straight year, more prime-time viewers watched advertising-supported cable TV networks than the national broadcast networks. For the first quarter of 2005, TNT ranked first among ad-supported cable networks in total day delivery of its key demographics, adults 18-49 and adults 25-54. TBS ranked first among ad-supported cable networks in prime time delivery of its key demographic, adults 18-34.

     The Turner networks generate revenues principally from the sale of advertising time and monthly subscriber fees paid by cable system operators, satellite companies and other affiliates. Turner has benefited from strong ratings and a strong advertising market. Key contributors to Turner’s success are its continued investments in high-quality programming focused on original movies, sports, network premieres, licensed and original series, news and animation, 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 revenue is from the ancillary sales of its original programming, including such programs as The Sopranos, Sex and the City, Six Feet Under, Band of Brothers and Deadwood.

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

     The WB Network is a broadcast television network whose target audience is the 12-34 age group demographic. The WB Network generates revenues almost exclusively from the sale of advertising time. Like many of its broadcast network competitors, The WB Network has experienced a decline in its audience of young adults during the 2004-2005 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 is now developing new programming designed to increase viewership among adults 18-34.

     Publishing. Time Warner’s Publishing segment consists principally of magazine publishing, book publishing and a number of direct-marketing and direct-selling businesses. The segment generated revenues of $1.240 billion (12% of the Company’s overall revenues), $175 million in Operating Income before Depreciation and Amortization and $113 million in Operating Income for the three months ended March 31, 2005.

     Time Inc. publishes over 130 magazines globally, including People, Sports Illustrated, In Style, Southern Living, Time, Entertainment Weekly, Fortune, Real Simple, What’s on TV and Cooking Light. It generates revenues primarily from advertising, magazine subscription and newsstand sales, and drives growth through higher circulation and advertising on existing magazines, new magazine launches and acquisitions. Time Inc. owns IPC Media (the U.K.’s largest magazine company) and is the majority shareholder of magazine subscription marketer Synapse Group, Inc. In addition, Time Inc. continues to invest in new magazine launches, including Pick Me Up, a weekly women’s magazine, which IPC Media launched in the U.K. in January 2005. In the first quarter of 2005, Time Inc. acquired the remaining 51% stake it did not already own in Essence Communications Partners (“Essence”), the publisher of Essence. Time Inc.’s book publishing operations are conducted primarily by Time Warner Book Group, which had 28 books on the New York Times bestseller list during the first quarter of 2005. Time Inc.’s direct-selling division, Southern Living At Home, sells home decor products through approximately 35,000 independent consultants at parties hosted in people’s homes throughout the U.S.

Other Recent Developments

Adelphia/Comcast

Adelphia Acquisition Agreement

     On April 20, 2005, a subsidiary of the Company, Time Warner NY Cable LLC (“TW NY”), and Comcast Corporation (“Comcast”) reached definitive agreements to acquire substantially all the assets of Adelphia Communications Corporation (“Adelphia”) for a total of $12.7 billion in cash (of which TW NY will pay $9.2 billion and Comcast will pay the remaining $3.5 billion) and 16% of the Common Stock of Time Warner’s cable subsidiary, TWC Inc.

     Comcast’s effective 21% interest in TWC Inc. will be redeemed on or after the acquisition of Adelphia for approximately $2.0 billion in cash and cable systems serving approximately 755,000 subscribers (“TWC and TWE Redemption Agreements”). Specifically, Comcast’s 17.9% interest in TWC Inc. will be redeemed in exchange for stock of a subsidiary of TWC Inc. holding cable systems serving approximately 587,000 subscribers, as well as approximately $1.856 billion in cash. In addition, Comcast’s 4.7% interest in TWE will be redeemed in exchange for interests in a subsidiary of TWE holding cable systems serving approximately 168,000 subscribers, as well as approximately $133 million in cash. TWC Inc., Comcast and their respective subsidiaries will also swap certain cable systems to enhance their respective geographic clusters of subscribers (“Cable Swaps”).

     Upon closing of these proposed transactions, TWC Inc. will gain systems passing approximately 7.5 million homes, with approximately 3.5 million basic subscribers. TWC Inc. will then manage a total of approximately 14.4 million basic subscribers. Time Warner will own 84% of TWC Inc.’s Common Stock, a $2.9 billion economic interest in a subsidiary of TWC Inc. and TWC Inc. will become a publicly traded company at the time of closing.

     These transactions are subject to customary regulatory review and approvals, including Hart-Scott-Rodino antitrust approval, FCC and local franchise approvals, as well as, in the case of the Adelphia acquisition, the Adelphia bankruptcy process, which involves approvals by the

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

bankruptcy court having jurisdiction over Adelphia’s Chapter 11 case and Adelphia’s creditors. Closing is expected in about 9 to 12 months.

     The purchase of Adelphia’s assets is not dependent on the occurrence of the Cable Swaps and redemption transactions between Time Warner and Comcast. Furthermore, if Comcast fails to obtain certain necessary governmental authorizations, TW NY has agreed that it will also acquire the cable operations of Adelphia that would have been acquired by Comcast, with the purchase price payable in cash or TWC Inc. stock at the Company’s discretion.

Amendments to Existing Arrangements

     In addition to agreeing to the purchase of Adelphia’s assets, the TWC and TWE Redemption Agreements and Cable Swaps described above, the Company and Comcast amended certain existing agreements they had previously entered into. The objective of these amendments is to cancel these agreements contingent upon the completion of the TWC and TWE Redemption Transaction described above. Here is a brief description of these amendments:

     Registration Rights Agreement. In conjunction with the restructuring of TWE completed in 2003 (the “TWE Restructuring”), TWC Inc. granted Comcast and certain affiliates registration rights related to the shares of TWC Inc. Class A Common Stock acquired by Comcast in the TWE Restructuring. As part of the agreements described above, Comcast generally has agreed not to exercise or pursue registration rights with respect to the TWC Inc. Class A Common Stock owned until the date upon which the TWC Redemption Agreement described above is terminated in accordance with its terms (e.g. the TWC Redemption Agreement is cancelled).

     Tolling and Optional Redemption Agreement. On April 20, 2005, a subsidiary of TWC Inc., Comcast and certain of its affiliates entered into an amendment (the “Second Tolling Amendment”) to the Tolling and Optional Redemption Agreement, dated as of September 24, 2004, and previously amended on February 17, 2005. Pursuant to the Second Tolling Amendment, the parties agreed that if the TWC Redemption Agreement terminates, TWC Inc. will redeem 23.8% of Comcast’s 17.9% ownership of TWC Inc. Class A Common Stock in exchange for 100% of the common stock of a TWC Inc. subsidiary which will own certain cable systems serving approximately 148,000 basic subscribers plus approximately $422 million in cash.

     A more complete description of the transactions described above may be found in the Company’s Current Reports on Form 8-K, each dated April 20, 2005 and filed with the Securities and Exchange Commission (“SEC”) on April 21, 2005 and April 27, 2005.

Update on Government Investigations

     As previously disclosed by the Company, the SEC and the U.S. Department of Justice (“DOJ”) had been conducting investigations into the accounting and disclosure practices of the Company. Those investigations focused on advertising transactions, principally involving the Company’s America Online segment, the methods used by the America Online segment to report its subscriber numbers and the accounting related to the Company’s interest in AOL Europe prior to January 2002.

     The Company and its subsidiary, AOL, entered into a settlement with the DOJ in December 2004 that provided for a deferred prosecution arrangement for a two-year period. In addition, on March 21, 2005, the Company announced that the SEC has approved the Company’s proposed settlement, which resolves the SEC’s investigation of the Company.

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

     Under the terms of the settlement with the SEC, the Company agreed, without admitting or denying the SEC’s allegations, to be enjoined from future violations of certain provisions of the securities laws and to comply with the cease-and-desist order issued by the SEC to AOL in May 2000. The settlement also requires the Company to:

	•	Pay a $300 million penalty, which will be used for a Fair Fund, as authorized under the Sarbanes-Oxley Act;
	•	Adjust its historical accounting for Advertising revenues in certain transactions with Bertelsmann, A.G. that were improperly recognized or prematurely recognized primarily in the second half of 2000, during 2001 and during 2002; as well as adjust its historical accounting for transactions involving three other AOL customers where there were Advertising revenues recognized in the second half of 2000 and during 2001;
	•	Adjust its historical accounting for its investment in and consolidation of AOL Europe; and
	•	Agree to the appointment of an independent examiner, who will either be or hire a certified public accountant. The independent examiner would review whether the Company’s historical accounting for transactions with 17 counterparties identified by the SEC staff, principally involving online advertising revenues and including three cable programming affiliation agreements with related advertising elements, was in conformity with generally accepted accounting principles, and provide a report to the Company’s audit and finance committee of its conclusions within 180 days of being engaged. The transactions that would be reviewed were entered into between June 1, 2000 and December 31, 2001, including subsequent amendments thereto, and involved online advertising and related transactions for which revenue was principally recognized before January 1, 2002.

     The Company paid the $300 million penalty in March 2005; however, it will not be able to deduct the penalty for income tax purposes, be reimbursed or indemnified for such payment through insurance or any other source, or use such payment to setoff or reduce any award of compensatory damages to plaintiffs in related securities litigation pending against the Company.

     The historical accounting adjustments were reflected in the restatement of the Company’s financial results for each of the years ended December 31, 2000 through December 31, 2003, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004 Form 10-K”) filed on March 11, 2005.

     As previously discussed, as part of the settlement with the SEC, the Company agreed to appoint an independent examiner. Depending on the independent examiner’s conclusions, a further restatement might be necessary. It is also possible that, so long as there are unresolved issues associated with the Company’s financial statements, the effectiveness of any registration statement of the Company or its affiliates may be delayed.

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

Investment in Google Inc.

     In May 2004, America Online exercised a warrant for approximately $22 million and received approximately 7.4 million shares of Series D Preferred Stock of Google Inc. (“Google”). Each of these shares converted automatically into shares of Google’s Class B Common Stock immediately prior to the closing of Google’s initial public offering on August 24, 2004. In connection with this offering, America Online converted approximately 2.4 million shares of its Google Class B Common Stock into an equal number of shares of Google’s Class A Common Stock. Such Class A shares were sold in the offering for $195 million, net of the underwriters’ discounts and commissions, and the Company recorded a gain of approximately $188 million in the third quarter of 2004. Following this transaction, America Online continued to hold approximately 5.1 million shares of Google’s Class B Common Stock. Transfers of these shares are subject to applicable securities laws requiring that sales be made either pursuant to a registration statement or under exemptions from registration.

     The Company has entered into agreements to sell its remaining 5.1 million shares at an average share price of approximately $185. The sales under the agreements settled on May 3, 2005, and the Company received total cash consideration of approximately $940 million, resulting in a gain of approximately $925 million that will be recognized in the second quarter of 2005. Accordingly, as of March 31, 2005, the shares are classified as a current asset on the Company’s accompanying consolidated balance sheet at their fair value of approximately $918 million. There is a corresponding unrealized gain of approximately $542 million, net of deferred taxes of approximately $361 million, reflected in other comprehensive income, a component of consolidated shareholders’ equity.

Mandatorily Convertible Preferred Stock

     At December 31, 2004, the Company had outstanding one share of its Series A mandatorily convertible preferred stock, par value $0.10 per share, face value of $1.5 billion (the “Series A Preferred Stock”), held by a trust for the benefit of Comcast, that was issued on March 31, 2003, as part of the TWE Restructuring. The Series A Preferred Stock was not entitled to receive a dividend, had a liquidation preference of $0.10 per share and, after payment of the liquidation preference, would have participated on a pro rata basis with the common shareholders in the event of a liquidation of the Company. The holder of the Series A Preferred Stock was entitled to vote on all matters submitted to shareholders of the Company and voted with the common shareholders as a class, with the Series A Preferred Stock having a number of votes equal to 134,245,006 shares of Common Stock. In accordance with the terms of the stock, on March 31, 2005, the Series A Preferred Stock was automatically converted into 83,835,883 shares of Common Stock of the Company, valued at $1.5 billion, and such amount was reclassified to equity in the accompanying consolidated balance sheet. Prior to the conversion, an estimate of the number of shares of Common Stock issuable upon the conversion of the Series A Preferred Stock based on the fair market value of the Common Stock at the end of the applicable period was included in the calculation of the Company’s diluted earnings per share, but not its basic earnings per share. Following the issuance of the Common Stock upon the conversion of the Series A Preferred Stock, the shares issued are included in the calculation of both the basic and diluted earnings per share.

Urban Cable Works of Philadelphia, L.P.

     Urban Cable Works of Philadelphia, L.P. (“Urban Cable”) is an unconsolidated joint venture of TWC Inc., with approximately 49,000 basic subscribers at March 31, 2005, that operates cable television systems in Philadelphia, Pennsylvania. Urban Cable is 40% owned by TWC Inc. and 60% owned by an investment group led by Inner City Broadcasting (“Inner City”). Under a management agreement, TWC Inc. is responsible for the day-to-day management of Urban Cable. During 2004, TWC Inc. and Inner City settled certain disputes regarding the joint venture for $34 million in cash.

     TWC Inc. has also agreed to purchase, subject to receipt of applicable regulatory approvals, all of Inner City’s interests in Urban Cable for approximately $53 million in cash. In addition, upon closing, TWC Inc. will eliminate in consolidation $67 million of debt and interest owed to it by Urban Cable and will assume $49 million of Urban Cable’s third-party debt. On March 3, 2005, the City Council of Philadelphia denied TWC Inc.’s request for

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)

approval of this transaction. TWC Inc. believes the denial was invalid, but is unable to predict when the transaction may be completed. In conjunction with the agreement to acquire Adelphia, Urban Cable would be transferred to Comcast as part of the Cable Swaps. For additional details, please refer to the Adelphia/Comcast discussion above. For the three months ended March 31, 2005, Urban Cable’s revenues and Operating Income were $12 million and $1 million, respectively.

RESULTS OF OPERATIONS

New Accounting Principles To Be Adopted

Stock-Based Compensation

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement of Financial Accounting Standards No. 123 (Revised), “Share-Based Payment” (“FAS 123R”). FAS 123R requires all companies to measure compensation costs for all share-based payments (including employee stock options) at fair value and recognize such costs in the statement of operations. As a result, the application of the provisions of FAS 123R will have a significant impact on Operating Income before Depreciation and Amortization, Operating Income, net income and earnings per share. In April 2005, the SEC amended the compliance dates for FAS 123R from fiscal periods beginning after June 15, 2005 to fiscal years beginning after June 15, 2005. The Company will continue to account for share-based compensation using the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), until adoption of FAS 123R on January 1, 2006.

     In accordance with APB 25 and related interpretations, compensation expense for stock options is generally recognized in income based on the excess, if any, of the quoted market price of the stock at the grant date of the award or other measurement date over the amount an employee must pay to acquire the stock. The compensation costs related to stock options recognized by the Company pursuant to APB 25 were minimal. If a company measures share-based compensation using APB 25, it must also disclose what the impact would have been if it had measured share-based compensation using the fair value of the equity award on the date it is granted as provided in FAS 123, predecessor of FAS 123R. See Note 1 for the pro forma impact if compensation costs for the Company’s stock option plans had been determined based on the fair value method set forth in FAS 123.

Reclassifications

     Certain reclassifications have been made to the prior year’s financial information to conform to the March 31, 2005 presentation.

9

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

Significant Transactions and Other Items Affecting Comparability

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

Restructuring Costs

     Restructuring costs consist of charges related to employee terminations and exit activities. During the three months ended March 31, 2005, the Company incurred restructuring costs of $17 million at the Cable segment and changes in estimates of previously established restructuring accruals, which included an additional $3 million and the reversal of $8 million of restructuring costs that were no longer required at the AOL segment (Note 9). During the three months ended March 31, 2004, the Company did not incur any restructuring costs.

Asset Impairments

     For the three months ended March 31, 2005, the Company recorded a $24 million noncash impairment charge related to goodwill associated with America Online Latin America, Inc. (“AOLA”) following AOLA’s March 2005 announcement that it intends to liquidate its operations.

Gains on Disposal of Assets, Net

     For the three months ended March 31, 2005, the Company recorded a $2 million gain at the AOL segment from the resolution of a contingent gain related to the 2004 sale of Netscape Security Solutions and an $8 million gain at the Publishing segment related to the collection of a loan made in conjunction with the Company’s 2003 sale of Time Life Inc. (“Time Life”), which was previously fully reserved due to concerns about recoverability.

     For the three months ended March 31, 2004, the Company recognized an $8 million gain at the Publishing segment related to the sale of a building, partially offset by an approximate $7 million loss at the Networks segment related to the sale of the winter sports teams.

Investment Gains

     For the three months ended March 31, 2005, the Company recognized $25 million of gains from the sale of investments. For the three months ended March 31, 2004, the Company recognized $39 million of gains from the sale of investments.

10

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

Gain on WMG Option

     For the three months ended March 31, 2005, the Company recorded an $80 million gain reflecting a fair value adjustment related to the Company’s option in Warner Music Group (“WMG”). In April 2005, the Company entered into an agreement with WMG pursuant to which WMG has agreed to a cash purchase of the Company’s warrant at the time of the WMG public offering (Note 2).

Loss on Investments, Net

     For the three months ended March 31, 2005, noncash charges impacting the Company’s investments were $2 million. These amounts consisted of $3 million to reduce the carrying value of certain investments that experienced other-than-temporary declines in market value, offset in part by $1 million of gains to reflect market fluctuations in equity derivative instruments.

     For the three months ended March 31, 2004, noncash charges impacting 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.

Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004

Consolidated Results

     Revenues. Consolidated revenues increased 3% to $10.483 billion for the three months ended March 31, 2005 from $10.185 billion for the three months ended March 31, 2004. As shown below, these increases were led by growth in Subscription and Advertising revenues, offset, in part, by declines in Content and Other revenues:

     The increase in Subscription revenues was primarily related to the Cable, Networks and Publishing segments, offset partially by a decline at the AOL segment. The increase at the Cable segment was principally due to the continued penetration of services (primarily high-speed data, advanced digital video services and Digital Phone) and video rate increases. The increase at the Networks segment was due to higher subscription rates and an increase in the number of subscribers at both Turner and HBO. The increase at the Publishing segment was primarily due to a decrease in subscription allowances (which are netted against revenue), due in part to timing, and increased newsstand sales. The AOL segment declined primarily as a result of lower domestic subscribers partially offset by international growth due primarily to the favorable effects of foreign currency exchange rates.

     The increase in Advertising revenues was primarily due to growth at the AOL, Networks and Publishing segments. The increase at the AOL segment was due primarily to revenues associated with the acquisition of Advertising.com and growth in paid-search and traditional advertising. The increase at the Networks segment was driven by higher CPMs (advertising cost per one thousand viewers) and sellouts at Turner’s entertainment networks, partly offset by a decline at The WB Network as a result of lower ratings. The increase at the Publishing segment was due to solid growth at People, In Style and Real Simple, and contributions from new magazine launches.

     The slight decrease in Content revenues was principally due to a decline at the Networks segment due primarily to the absence of Content revenues from the winter sports teams after their sale in the first quarter of 2004 and favorable home video returns experience during 2004, partially offset by higher ancillary sales of HBO’s original programming.

11

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

     The decline in Other revenues was primarily due to the sale of the winter sports teams at the end of the first quarter of 2004 at the Networks segment.

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

     Costs of Revenues. For the three months ended March 31, 2005 and 2004, costs of revenues totaled $6.000 billion and $5.971 billion, respectively, and as a percentage of revenues were 57% and 59%, respectively. The improvement in costs of revenues as a percentage of revenues related primarily to improved margins at the AOL and Networks segments, as discussed in detail in the “Business Segment Results.”

     Selling, General and Administrative Expenses. For the three months ended March 31, 2005 and 2004, selling, general and administrative expenses increased 3% to $2.528 billion in 2005 from $2.445 billion in 2004, primarily reflecting increases at all segments, except AOL. The segment variations are discussed in detail in the “Business Segment Results.”

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 7% to $2.581 billion for the three months ended March 31, 2005 from $2.405 billion for the three months ended March 31, 2004, principally as a result of solid growth at the Cable, Networks and AOL segments and a decline in costs at Corporate. The segment variations are discussed in detail under “Business Segment Results.”

     Depreciation Expense. Depreciation expense increased to $652 million for the three months ended March 31, 2005 from $635 million for the three months ended March 31, 2004. The increase in depreciation primarily related to the Cable segment and, to a lesser extent, increases at all other segments, except AOL and Corporate. The increase in depreciation expense at Cable reflects increased spending on customer premise equipment that is depreciated over a significantly shorter useful life compared to the mix of assets previously purchased. The decrease in depreciation expense at AOL relates primarily to a decline in network assets as a result of membership declines.

12

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

     Amortization Expense. Amortization expense decreased to $150 million for the three months ended March 31, 2005 from $154 million for the three months ended March 31, 2004. The decrease relates primarily to a decline in amortization at the Publishing segment as a result of certain intangibles with short useful lives, such as customer lists, becoming fully amortized beginning in the latter part of 2004.

     Operating Income. Time Warner’s Operating Income increased to $1.779 billion for the three months ended March 31, 2005 from $1.616 billion for the three months ended March 31, 2004, reflecting the changes in business segment Operating Income before Depreciation and Amortization, partially offset by the increase in depreciation expense, as discussed above.

     Interest Expense, Net. Interest expense, net, decreased to $346 million for the three months ended March 31, 2005 from $404 million for the three months ended March 31, 2004 due primarily to lower average net debt levels and higher interest rates on cash investments.

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

     The changes in investment gains, the gain on the WMG option and the decline in the losses on writedowns of investments are discussed above in detail under “Significant Transactions and Other Items Affecting Comparability.” Excluding the impact of these items, Other income, net, improved in 2005 as compared to the prior period, primarily from an increase in income from equity method investees.

     Minority Interest Expense, net. Time Warner had $59 million of minority interest expense for the three months ended March 31, 2005 compared to $56 million for the three months ended March 31, 2004. The increase relates primarily to larger profits recorded by TWC Inc., in which Comcast has a minority interest.

     Income Tax Provision. Income tax expense from continuing operations was $522 million for the three months ended March 31, 2005, compared to $475 million for the three months ended March 31, 2004. The Company’s effective tax rate for continuing operations was 35% and 40% for the three months ended March 31, 2005 and 2004, respectively. The decrease in the effective tax rate results primarily from $51 million of capital loss carryforwards recognized during the period.

     Income before Discontinued Operations and Cumulative Effect of Accounting Change. Income before discontinued operations and cumulative effect of accounting change was $963 million for the three months ended March 31, 2005 compared to $712 million for the three months ended March 31, 2004. Basic and diluted net income per share before discontinued operations and cumulative effect of accounting change were $0.21 and $0.20 in 2005, respectively, compared to $0.16 and $0.15 in 2004, respectively. The increase in Income before discontinued operations and cumulative effect of accounting change resulted primarily from the increase in Operating Income, Other income, net, and lower interest expense, net, partially offset by a higher income tax provision as discussed above.

     Discontinued Operations, Net of Tax. 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 (Note 2).

13

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

     Cumulative Effect of Accounting Change, Net of Tax. The Company recorded a $34 million benefit, net of tax, as a cumulative effect of accounting change upon the consolidation of AOLA in the first quarter of 2004 in accordance with FASB Interpretation No. 46 (Revised), “Consolidation of Variable Interest Entities.”

     Net Income and Net Income Per Common Share. Net income was $963 million for the three months ended March 31, 2005 compared to $961 million for the three months ended March 31, 2004. Basic and diluted net income per common share were both $0.21 and $0.20 in 2005 and 2004, respectively. Net income includes the items previously addressed under “Significant Transactions and Other Items Affecting Comparability,” discontinued operations, net of tax, and the cumulative effect of accounting change, net of tax.

     As previously discussed under “Other Recent Developments,” net income will be positively impacted by a gain of approximately $925 million on the sale of Google stock during the second quarter of 2005.

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, 2005 and 2004 are as follows:

     The reduction in Subscription revenues primarily reflects a decrease in domestic Subscription revenues (from $1.471 billion in 2004 to $1.313 billion in 2005), offset in part by an increase in Subscription revenues at AOL Europe (from $429 million in 2004 to $449 million in 2005). AOL’s domestic Subscription revenues declined due primarily to a decrease in the number of domestic AOL brand subscribers and related revenues. AOL Europe’s Subscription revenues increased from the favorable impact of foreign currency exchange rates ($25 million), partially offset by a decline in subscribers and related revenues.

     In addition, total Subscription revenues in 2005 were positively impacted by the consolidation of AOLA ($12 million) beginning in the second quarter of 2004 and negatively impacted by the sale of AOL Japan ($19 million), which was sold on July 1, 2004. In March 2005, AOL acquired the remaining interest in AOL Canada that it did not already own. The Company began consolidating AOL Canada effective March 31, 2005. For the year ended December 31, 2004, AOL Canada generated $58 million of Subscription revenues and Operating Income of $1 million.

14

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

     The number of AOL brand domestic and European subscribers is as follows at March 31, 2005, December 31, 2004 and March 31, 2004 (millions):

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

     Domestic subscribers to the AOL brand service include subscribers during introductory free-trial periods and subscribers at no or reduced monthly fees through member service and retention programs. Total AOL brand domestic subscribers include free-trial and retention members of approximately 14% at March 31, 2005, 13% at December 31, 2004 and 17% at March 31, 2004. Domestic subscribers to the AOL brand service also include subscriptions sold at a discount to employees and customers of selected America Online strategic partners. Domestic AOL brand subscribers also include subscribers to bundled broadband service, which combines the AOL service with high-speed Internet access provided by third-party broadband Internet access providers such as cable companies and telephone companies.

     The largest component of the AOL brand domestic $15 and over price plans is the $23.90 price plan, which provides unlimited access to the AOL service using America Online’s dial-up network and unlimited usage of the AOL service through any other Internet connection. The largest component of the AOL brand domestic under $15 price plans is the $14.95 per month price plan, which is primarily marketed as a bring your own access (“BYOA”) plan, and includes unlimited usage of the AOL service through an Internet connection not provided by America Online, such as a high-speed broadband Internet connection via cable or DSL. This BYOA price plan also includes a limited number of hours per month of dial-up telephone access in the U.S. to the AOL service using America Online’s dial-up network. America Online continues to develop, test, change and implement price plans, service offerings and payment methods to attract and retain members to its AOL brand interactive service and, therefore, the composition of AOL’s subscriber base is expected to change over time.

     The decline in AOL brand subscribers on plans priced $15 and over per month resulted from a number of factors, principally the continued maturing of dial-up services and subscribers adopting other dial-up and high-speed services. Further, during the period, subscribers migrated from the premium-priced unlimited dial-up plans, including the $23.90 plan, to lower-priced limited dial-up plans, such as the $14.95 plan. The decline in AOL brand subscribers overall, and specifically in the $15 and over per month price plans, is expected to continue into the foreseea