UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the quarterly period ended September 30, 2004 or

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the transition period from                     to                     .

Commission File Number 1-15062

TIME WARNER INC.

Delaware		13-4099534
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

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 [x] No [   ]

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

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

TIME WARNER INC.
INDEX TO FORM 10-Q

TIME WARNER INC.

INTRODUCTION

     Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is provided as a supplement to the accompanying consolidated financial statements and 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:

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.

     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 liquidity, including its ability to reduce net 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 and liquidity reported in accordance with accounting principles generally accepted in the United States.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
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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, and Time Warner Cable. The Company has made films such as The Lord of the Rings trilogy, the Harry Potter series and Troy and television programs such as ER and The West Wing. During the nine months ended September 30, 2004, the Company generated revenues of $30.979 billion (up 8% from $28.661 billion in 2003), Operating Income before Depreciation and Amortization of $6.947 billion (up 15% from $6.064 billion in 2003), Operating Income of $4.562 billion (up 21% from $3.764 billion in 2003), Net Income of $2.237 billion (up 12% from $2.001 billion in 2003), Cash Provided by Operations of $5.388 billion (up 4% from $5.195 billion in 2003) and Free Cash Flow of $3.089 billion (up 10% from $2.806 billion in 2003).

Time Warner Businesses

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

     AOL. America Online, Inc. (“AOL” or “America Online”) is the world’s leader in interactive services with 29.0 million AOL brand subscribers in the U.S. and Europe at September 30, 2004. AOL reported total revenues of $6.509 billion (21% of the Company’s overall revenues), $1.439 billion in Operating Income before Depreciation and Amortization and $814 million in Operating Income for the nine months ended September 30, 2004. AOL generates its revenues primarily from subscription fees charged to subscribers and advertising services rendered.

     AOL’s business has 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 is the continued industry-wide maturing of the premium narrowband business, as consumers migrate to high-speed broadband and lower-cost dial-up services. AOL’s strategy aims to expand its offerings to reduce its reliance on its traditional narrowband service. It began actively marketing 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 such as AOL Call Alert. AOL continues to develop, change, test and implement marketing strategies to attract and retain subscribers. For example, AOL has recently announced that the McAfee VirusScan Online product, previously sold as a premium service, will be included in the AOL 9.0 Security Edition.

     In response to changing dynamics of the online advertising business, AOL has shifted its focus away from longer-term agreements and is now focused on more traditional and paid-search forms of advertising. For the first nine months of 2004, paid-search and traditional forms of advertising increased strongly as compared to the prior-year comparable period. The acquisition of Advertising.com in the third quarter of 2004, as discussed later, provides incremental growth in Advertising revenues and improves revenues on certain AOL inventory through Advertising.com’s advertising inventory yield management technology. The growth in AOL’s Advertising revenues was partially offset by declines in intercompany sales to other business segments of Time Warner and the runoff of longer-term advertising agreements. AOL expects overall Advertising revenue to increase as compared to the prior year during the remainder of 2004 as a result of continued growth in traditional, paid-search and performance-based advertising.

     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 subscribers served). TWC Inc. managed 10.898 million basic cable subscribers (including 1.574 million subscribers of unconsolidated investees) at September 30, 2004, in highly clustered and upgraded systems in 27 states. TWC Inc. delivered $2.391 billion of Operating Income before Depreciation and Amortization, more than any of the Company’s other business segments, had revenues of $6.280 billion (20% of the Company’s overall revenues) and $1.267 billion in Operating Income for the nine months ended September 30, 2004.

     TWC Inc. offers three product lines — video, high-speed data and its newest service, Digital Phone. Video is TWC Inc.’s largest product line. The growth of its customer base for video cable service is limited, however, 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 revenue through its offerings of advanced digital video services. Digital video, high-definition television (HDTV), Video-on-Demand (VOD), Subscription-Video-on-Demand (SVOD) and Digital Video Recorders (DVR) are available in all of its 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 continue to rise across the industry, especially for sports programming.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
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     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. However, its rate of subscriber growth has begun to slow, reflecting increasing penetration rates and increased competition from digital subscriber lines (DSL).

     TWC Inc.’s new voice product, Digital Phone, is expected to be available in each of TWC Inc.’s divisions by the end of 2004. At September 30, 2004, Digital Phone service was available commercially or on a test basis in all but one of TWC Inc.’s divisions. 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. Included in Operating Income before Depreciation and Amortization for the first nine months of the year are start-up costs associated with the rollout of Digital Phone services, which are expected to increase during the remainder of 2004.

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

     Filmed Entertainment. Time Warner’s Filmed Entertainment businesses, Warner Bros. Entertainment Group (“Warner Bros.”) and New Line Cinema (“New Line”), generated revenues of $8.581 billion (26% of the Company’s overall revenues), $1.190 billion in Operating Income before Depreciation and Amortization and $956 million in Operating Income for the nine months ended September 30, 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 film library and global distribution infrastructure. This diversification helps Warner Bros. deliver consistent growth and performance. The vast majority of New Line’s revenues come from theatrical films and related video revenues and, therefore, are generally more variable.

     The sale of DVDs has been the largest driver of the segment’s profit growth over the last few years. Warner Bros.’ library, consisting of more than 6,600 theatrical titles and 53,000 live-action and animated television titles, positions it to benefit from 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 sales growth remains.

     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 production 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, ER, Third Watch, 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 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 composed of Turner Broadcasting System, Inc. (“Turner”), Home Box Office (“HBO”) and The WB Television Network (“The WB Network”). The segment delivered revenues of $6.761 billion (20% of the Company’s overall revenues), $2.031 billion in Operating Income before Depreciation and Amortization and $1.859 billion in Operating Income for the nine months ended September 30, 2004.

     The Turner networks — including TBS, TNT, CNN, Cartoon Network and CNN Headline News — are among the leaders in advertising-supported cable TV networks. More prime-time viewers now watch advertising-supported cable TV networks than the national broadcast networks and, in 2004, that share has increased further. For the first nine months of 2004, TNT and TBS ranked first and third, respectively, among cable networks in total day delivery 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 strong advertising market. Keys to Turner’s success are its continued investments in high-quality programming focused on originals, sports, network premieres,

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series, news and animation, as well as brand awareness and operating efficiency. In the second quarter of 2004, Turner launched a rebranding of TBS under the “tbs very funny” slogan following an earlier successful rebranding of TNT as “We Know Drama.”

     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 is 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 2003/2004 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 to not only reach the younger end of the 12-34 age group demographic, but also to reach the higher end of that same demographic group with a strong focus on adults 18-34.

     Publishing. Time Warner’s Publishing segment consists principally of magazine publishing through Time Inc. and book publishing through the Time Warner Book Group and a number of direct marketing and direct selling businesses. The segment generated revenues of $3.926 billion (12% of the Company’s overall revenues), $791 million in Operating Income before Depreciation and Amortization and $593 million in Operating Income for the nine months ended September 30, 2004.

     Time Inc. publishes more than 130 magazines globally including Cooking Light, Entertainment Weekly, Fortune, Golf, In Style, People, Real Simple, Southern Living, Sports Illustrated and Time. It generates revenues primarily from advertising, magazine circulation and newsstand sales, and drives growth through higher circulation and advertising on existing magazines, acquisitions and new magazine launches. Time Inc. also owns IPC Media (the U.K.’s largest magazine company) and the magazine subscription marketer Synapse Group, Inc. In addition, Time Inc. is continuing to invest in new magazine launches, including All You, Cottage Living and Nuts, and has recently re-launched Life as a weekend magazine distributed in leading newspapers nationwide. Its 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 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 nine months of 2004, Time Warner Book Group had 42 titles on The New York Times bestseller list, including 32 new releases and 10 continuing bestsellers from prior years. Significant new additions to The New York Times bestseller list include James Patterson’s Sam’s Letters to Jennifer, Nicholas Sparks’ trade paperback edition of The Wedding, and David Baldacci’s mass market edition of Split Second.

     The Publishing segment’s Operating Income before Depreciation and Amortization increased in the first nine months of 2004, due primarily to the absence of losses at Time Inc.’s former Time Life direct-marketing business and a $99 million impairment charge at Time Warner Book Group recorded in 2003. Time Inc. has recently enjoyed strength in advertising revenues, with third quarter Advertising revenues growing 14%. As a result of the loss of revenues resulting from the sale of Time Life on December 31, 2003, revenue growth at the Publishing segment for the full year of 2004 will be negatively impacted by $352 million when compared to 2003. 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 $72 million for the full year of 2004, when compared to 2003. In addition, Operating Income before Depreciation and Amortization in 2003 was also impacted by a $29 million loss resulting from the sale of Time Life in the fourth quarter.

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

Other Key 2004 Developments

Update on SEC and DOJ Investigations

     The Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) continue to conduct investigations into accounting and disclosure practices of the Company. Those investigations have focused on transactions principally involving the Company’s America Online segment that were entered into after July 1, 1999, including advertising arrangements, the methods used by the America Online segment to report its subscriber numbers and the accounting related to the consolidation of, and equity accounting for, America Online’s interest in AOL Europe prior to January 2002.

     The Company 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, except as discussed below, 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, the Company disclosed that the staff of the SEC had 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. Pursuant to a March 2000 agreement between the parties (the “Put/Call Agreement”), Bertelsmann had the right at two separate times to put a portion of its interest in AOL Europe to the Company (80% in January 2002 and the remaining 20% in July 2002) at a price established by the Put/Call Agreement. In separate agreements executed in March and December of 2001, the Company agreed to settle the put transactions under the Put/Call Agreement in cash rather than in stock, without any change to the put price previously established in the Put/Call Agreement. Contemporaneous with the agreements to pay in cash, Bertelsmann agreed to purchase additional advertising from the Company of $125 million and $275 million, respectively. For more details on the transactions, see Note 11, “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.

     The SEC staff has continued to review the Company’s accounting for the Bertelsmann transactions, as well as other transactions primarily at the America Online unit. In July 2003, the SEC’s Office of the Chief Accountant informed the Company that it had concluded that the accounting for the Bertelsmann 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. The Office of the Chief Accountant concluded that such portion of the $400 million advertising payment should have been reflected as a reduction in the purchase price for Bertelsmann’s interest in AOL Europe, rather than as advertising revenue. The SEC’s Division of Enforcement continues to investigate the Bertelsmann transactions, including the related advertising arrangements, and has reiterated its conclusion that the Company’s accounting for the Bertelsmann transactions is incorrect.

     In its Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, the Company reported that it had begun a review of the accounting related to the consolidation of, and equity accounting for, its interest in AOL Europe prior to January 2002. Prior to the execution of the Put/Call Agreement in March 2000, AOL Europe was a 50/50 joint venture between America Online and Bertelsmann in which each venture partner held 50% of the voting rights. Accordingly, the Company accounted for its interest in AOL Europe using the equity method of accounting and did not consolidate the financial results of AOL Europe. In

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MANAGEMENT’S DISCUSSION AND ANALYSIS
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March 2000, as part of the Put/Call Agreement, Bertelsmann agreed, among other things, to terminate certain of its voting and other rights and agreed to have its members of the AOL Europe board of directors vote in the manner directed by America Online. The Company concluded in March of 2000 that the Put/Call Agreement did not alter the accounting treatment of its interest in AOL Europe because, among other things, Bertelsmann retained sufficient economic interests and substantive rights to preclude consolidation. Accordingly, the Company continued to account for the interest using the equity method of accounting until January 2002, when it acquired 80% of Bertelsmann’s interest and began consolidating the financial results of AOL Europe.

      In connection with its continuing review of these issues related to AOL Europe, including discussions with the staff of the SEC, the Company has determined that the financial results of AOL Europe should have been consolidated, beginning March 2000, upon execution of the Put/Call Agreement given the governance rights surrendered by Bertelsmann. Accordingly, for this reason, the Company’s consolidated financial results for the years ended December 31, 2000 and 2001 will be restated. Pending that restatement, the Company has determined that investors should not rely on the Company’s consolidated financial statements for the years ended December 31, 2000 and 2001 with respect to this matter.

     The impact of consolidating AOL Europe on the Company’s reported revenue, operating income (loss), net income (loss), cash flow provided (used) by operations, investing activities and financing activities and free cash flow for the years ended December 31, 2001 and 2000 would be as follows:

TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
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reported revenue, operating income (loss), net income (loss), cash flow provided (used) by operations, investing activities and financing activities and free cash flow for the years ended December 31, 2001 and 2000 would be as follows:

     As previously noted, the table above assumes that, upon consolidation, the losses of AOL Europe would be fully allocated to the Company given the execution of the Put/Call Agreement. In contrast, if it were assumed that the Company should have recognized its proportionate share of AOL Europe’s losses (based on its voting percentage of ownership), the impact on the Company would be the same as presented above, except net income (loss) would only be reduced by the portion of AOL Europe’s losses absorbed by the Company. Specifically, the impact on the Company’s net income (loss) of consolidating AOL Europe, in this instance, would have been a net loss of approximately $422 million and approximately $154 million in 2001 and 2000, respectively.

     If the Company were to adjust the allocation of AOL Europe losses during 2001 and 2000 from the HLBV method to some other basis as described above, it would decrease the goodwill recognized upon acquisition of Bertelsmann’s interest in AOL Europe in 2002 by an equal amount, resulting in a corresponding reduction in the goodwill impairment charge recognized by the Company in the fourth quarter of 2002. Consequently, pending the outcome of this matter, investors also should not rely on the Company’s financial statements for the year ended December 31, 2002.

     Neither the conclusion that the Company should have begun consolidating its interest in AOL Europe upon execution of the Put/Call Agreement, nor any ultimate determination that the Company should have applied the equity method in a different manner, would have any impact on the consolidated financial statements as of and for the three and nine months ended September 30, 2004 and 2003 included in this report.

     The staff of the SEC continues to investigate, and the Company continues to discuss with the SEC staff, these and other transactions principally involving the America Online unit. It is possible that the Company may learn information as a result of its discussions with the SEC, the Company’s ongoing review, 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 and other 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 and the Company’s conclusion to consolidate AOL Europe, it is likely that the SEC would not declare effective any registration statement of the Company or its affiliates. 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.

     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 unresolved issues associated with the Company’s financial statements, the effectiveness of any registration statement of the Company or its affiliates may be delayed. In addition, the Company has established reserves of $500 million in connection with the pending SEC and DOJ investigations. This amount represents the Company’s current best estimate of the amounts that would be involved ultimately to resolve these investigations. The Company believes that some portion of the amount reserved will be available for related shareholder litigation. The Company has not established any reserves associated with shareholder and civil litigation due to their preliminary status and because it is unable to reasonably estimate a range of possible loss.

Comcast Tolling and Optional Redemption Agreement

     On September 24, 2004, TWC Inc. entered into a Tolling and Optional Redemption Agreement (the “Agreement”), with Comcast Corporation (“Comcast”) and certain affiliates of Comcast, including the trust that holds shares of TWC Inc. on behalf of Comcast. Pursuant to the Agreement, Comcast has been granted an option (the “Option”), which can be exercised between December 1, 2004 and April 1, 2005, to require TWC Inc. to redeem a portion of the TWC Inc. stock held by Comcast in exchange for a TWC Inc. subsidiary with cable systems serving approximately 90,000 basic subscribers as of September 30, 2004, plus approximately $750 million in cash. Closing of the transactions contemplated by the Agreement is subject to the exercise of the Option, required governmental and regulatory approvals and other customary closing conditions.

     Comcast currently owns an effective interest of approximately 21% in TWC Inc.’s business — held through a 17.9% common stock interest in TWC Inc. and a 4.7% limited partnership interest in Time Warner Entertainment Company, L.P. (“TWE”). If the Option is exercised, Comcast will reduce its effective interest in TWC Inc.’s business to approximately 17% — consisting of a 13.7% common stock interest in TWC Inc. and a 4.7% limited partnership interest in TWE. Other than as provided in the Agreement, Comcast cannot require TWC Inc. to purchase its interest in TWC Inc.

     In connection with the restructuring of TWE completed in 2003 (the “TWE Restructuring”), Comcast received (1) customary registration rights relating to its 17.9% interest in the common stock of TWC Inc. and (2) the right, at any time following March 31, 2005, to require TWC Inc. or Time Warner to purchase all or a portion of Comcast’s 4.7% limited partnership interest in TWE at an appraised fair market value. The purchase price payable by TWC Inc. or Time Warner as consideration for Comcast’s limited partnership interest may be paid in cash, Time Warner or TWC Inc. common stock (if TWC Inc. common stock is then publicly

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traded) or a combination of cash and stock. Following March 31, 2005, Comcast also has the right to sell all or a portion of its interest in TWE to a third party, subject to rights of first refusal by the Company and TWC Inc.

     The Agreement entered into on September 24, 2004 also provides that Comcast will not exercise or pursue registration rights with respect to the TWC Inc. stock owned by it until April 1, 2005, or earlier if the Agreement is terminated under certain limited circumstances. This provision of the Agreement supersedes Comcast’s request to TWC Inc. in December 2003 to register its TWC Inc. stock. For details related to the accounting for this transaction, see Note 4, “Time Warner Entertainment Company, L.P.”

Google Inc.

     As previously reported in the quarterly report on Form 10-Q for the second quarter of 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. in May 2004. 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 2,355,559 shares of its Google Class B Common Stock into an equal number 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, which is included in “Other Income, net” in the accompanying consolidated statement of operations. Following this transaction, America Online holds 5,081,893 shares of Google’s Class B Common Stock. These shares are subject to restrictions on transfer pursuant to lock-up arrangements in connection with Google’s offering. In addition, future transfers will be subject to applicable securities laws requiring that sales be made either pursuant to a registration statement or under exemptions from registration.

     The Company does not consider its remaining interest in Google to be a strategic investment. As of September 30, 2004, the shares are recorded on the Company’s consolidated balance sheet (classified as available-for-sale securities) at their fair value of approximately $659 million. There is a corresponding unrealized gain of approximately $386 million, net of deferred taxes of approximately $257 million, reflected in shareholders equity. The fair value of the investment is calculated based on Google’s stock price ($129.60 at September 30, 2004) times the number of Google shares owned by the Company. A 5% appreciation in the stock price of Google would result in an increase in the Company’s unrealized gain on this investment of approximately $20 million, net of tax. Conversely, a 5% depreciation in the stock price of Google would result in a decrease in the Company’s unrealized gain on this investment of approximately $20 million, net of tax. As of October 28, 2004, Google stock closed at $193.30 per share, which increased the fair value of the Company’s position to approximately $982 million.

Advertising.com

     On August 2, 2004, America Online completed the previously announced acquisition of Advertising.com, Inc. (“Advertising.com”) for $445 million (net of cash acquired). Advertising.com purchases online advertising inventory from third-party web sites and principally sells this inventory using performance-based advertising arrangements. For the three and nine months ended September 30, 2004, Advertising.com contributed Advertising revenue from sales of advertising run on third-party websites of $35 million.

Agreement Regarding Investment in Gateway

       AOL owns both preferred and common stock in Gateway, Inc. (“Gateway”). Specifically, AOL owns Gateway Series A and Series C preferred stock and 2.7 million shares of Gateway common stock. The Series A preferred stock automatically converts into approximately 22.2 million shares of Gateway common stock (based on a minimum conversion price of $8.99 per share) in December 2004. The Series C preferred stock is redeemable, at AOL’s option, also in December 2004 for $200 million. Gateway has the option to pay the $200 million redemption price in Gateway common stock (based on the average price of Gateway’s common stock during a pricing period prior to the redemption date), cash or a combination thereof. AOL’s ability to resell these shares is limited by both contractual restrictions and applicable securities laws and regulations.

       On November 1, 2004, AOL entered into an agreement with Gateway covering the sale of the AOL-owned Gateway securities to Gateway. Under the terms of the agreement, AOL will receive total consideration of approximately $316 million consisting of: (1) approximately $186 million in cash at the closing; (2) the right to use approximately $33 million worth of Gateway securities to make payments to Gateway under certain existing customer acquisition agreements between the parties; and (3) approximately $97 million, which accretes at a specified rate, that can be (a) used to offset future performance-based payments that AOL would otherwise be required to make in cash under certain existing customer acquisition agreements between the parties; (b) paid in cash; or (c) a combination thereof, at Gateway’s option. Notwithstanding the use of any amounts to offset amounts owed to Gateway by AOL, AOL will continue to recognize marketing expense under its existing customer acquisition agreements with Gateway.

       The $316 million purchase price is based on a negotiated discount to Gateway’s closing price of $5.54 on October 18, 2004, which, after considering the aggregate impairment losses recognized by the Company on its investment in Gateway, will result in a net gain recognized on the sale of approximately $44 million. This transaction is expected to close on December 22, 2004 and is subject to customary conditions. Additionally, AOL and Gateway have agreed to settle existing commercial disputes resulting in AOL paying Gateway $2.5 million for the settlement.

8

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

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 50,000 basic subscribers at September 30, 2004, 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. TWC Inc. and Inner City settled certain disputes regarding the joint venture for $34 million during the second quarter.

     TWC Inc. has also agreed to purchase, subject to receipt of applicable regulatory approvals, all of Inner City’s interests in the venture for approximately $53 million in cash. In addition, upon closing, TWC Inc. will eliminate in consolidation debt and interest owed to it by Urban Cable of $66 million and will assume $55 million of Urban Cable’s third-party debt. This transaction is expected to close before the end of the year. For the nine months ended September 30, 2004, Urban Cable’s revenues, Operating Income before Depreciation and Amortization and Operating Income were $35 million, $11 million, and $3 million, respectively.

VIVA Media AG and VIVA Plus

     In August 2004, Turner completed the previously announced sale of its 30.6% ownership stake in VIVA Media AG (“VIVA”) and its 49% stake in VIVA Plus to Viacom Inc. for approximately 109 million Euros (approximately $134 million). VIVA primarily owns a music television channel in Germany and also operates a portfolio of music channels in other European countries, as well as Brainpool TV GmbH, a major independent television producer in Germany. VIVA Plus is a smaller music television channel that operates in Germany. The Company accounted for these assets as equity investments prior to the sale. For the three and nine months ended September 30, 2004, the Company recorded a gain of approximately $113 million as a component of “Other Income, net” in the accompanying consolidated statement of operations.

Warner Village Cinemas S.P.A.

     Warner Village Cinemas S.P.A. (“Warner Village”) is a joint venture arrangement that operates cinemas in Italy and is owned 45% by Warner Bros., 45% by Village Cinemas International Pty. Ltd. (“Village Cinemas”) and 10% by a third-party investor. As previously announced, in April 2004, Warner Bros. and Village Cinemas agreed that: (i) Warner Bros. would control the voting rights associated with Village Cinemas’ 45% interest and (ii) beginning in March 2007 and continuing for one year, Village Cinemas can request that Warner Bros. buy Village Cinemas’ interest at fair value. In the event Warner Bros. does not agree to buy such interests, both Warner Bros. and Village Cinemas would place their collective interests for sale. If such right is not exercised by Village Cinemas, the voting rights associated with its 45% interest will revert to Village Cinemas in March 2008.

     As a result of controlling Village Cinemas’ voting interest, Warner Bros. began consolidating the results of Warner Village in the second quarter of 2004. As permitted by accounting principles generally accepted in the United States, Warner Village results have been consolidated retroactive to the beginning of the year. For the three and nine months ended September 30, 2004, Warner Village revenues were $14 million and $73 million, respectively, its Operating Income (Loss) before Depreciation and Amortization was ($3) million and $9 million, respectively, and its Operating Income (Loss) was ($5) million and $3 million, respectively.

Discontinued Operations Presentation of Music Segment

     On March 1, 2004, the Company completed the sale of 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 to Cinram International Inc. for approximately $1.05 billion in cash (Note 3).

     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.

9

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

Sale of Winter Sports Teams

     On March 31, 2004, the Company completed the sale of the Turner winter sports teams (the Atlanta Thrashers, an NHL team, and the Atlanta Hawks, an NBA team) and the entity holding the operating rights to Philips Arena, an Atlanta sports and entertainment venue, to Atlanta Spirit LLC (“Atlanta Spirit”). In addition to the $178 million impairment charge recognized in the second quarter of 2003 and the $41 million charge recognized in the third quarter of 2003, the Company recorded a $7 million loss on the closing of the sale in the first quarter of 2004. As of September 30, 2004, Turner owns a 10% interest in Atlanta Spirit and accounts for its interest under the equity method of accounting.

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

     Pursuant to the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51” (“FIN 46”) and the revision of FIN 46 (“FIN 46R”) issued in December 2003 to replace FIN 46, the Company began consolidating the operations of America Online Latin America, Inc. (“AOLA”) as of March 31, 2004. AOLA is a publicly traded entity whose significant shareholders include the Company, AOL, the Cisneros Group (a private investment company) and Banco Itau (a leading Brazilian bank). AOLA provides online services principally to customers in Brazil, Mexico, Puerto Rico and Argentina. 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 considered 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 pretax cumulative effect of an accounting change ($34 million on an after-tax basis). Prior periods have not been restated. The Company consolidated 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 are consolidated by the Company on a one-quarter time lag. For the three and nine months ended September 30, 2004, the Company recognized revenues of $13 million and $27 million, an Operating Loss before Depreciation and Amortization of $9 million and $12 million and an Operating Loss of $10 million and $16 million, respectively, associated with AOLA.

Reclassifications

     Certain reclassifications have been made to the prior year’s financial information to conform to the current year presentation, including a reclassification impacting the Company and the Filmed Entertainment segment’s operating results to reflect a change in how the Company classifies the accretion of discounts on long-term film licensing arrangements. Previously, the Company classified the accretion of discounts on long-term film licensing arrangements within Operating Income. To become more consistent with what the Company believes to be film industry practice, such accretion is now being classified as a reduction of Interest expense, net. The accretion for the three and nine months ended September 30, 2003 was $25 million and $82 million, respectively. Such reclassifications did not affect Net Income, Cash Provided by Operations or Free Cash Flow.

10

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, which are expensed in accordance with accounting principles generally accepted in the United States. The Company did not incur any restructuring charges during the three months ended September 30, 2004. During the nine months ended September 30, 2004, the Company recorded a $2 million reduction in restructuring costs at AOL, reflecting changes in estimates of previously established restructuring accruals. During the three months ended September 30, 2003, the Company incurred restructuring costs of $42 million, including $26 million at AOL, $13 million at Networks and $3 million at the Publishing segment. During the nine months ended September 30, 2003, the Company incurred restructuring costs totaling $72 million, including $30 million at AOL, $21 million at Networks and $21 million at Publishing. The 2003 costs related to various employee and contractual terminations. 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.

Legal Reserves Related to the Government Investigations

     The Company has established $500 million in legal reserves related to the government investigations. This amount represents the Company’s current best estimate of the amounts that would be involved ultimately to resolve these investigations. The Company believes that some portion of the amount reserved will be available for related shareholder litigation. The Company has not established any reserves associated with shareholder and civil litigation due to their preliminary status and because it is unable to reasonably estimate a range of possible loss.

Asset Impairments

     For the nine months ended September 30, 2004, the Company recognized a $10 million impairment charge related to the pending sale of a building at the AOL segment. For the three and nine months ended September 30, 2003, Operating Income before Depreciation and Amortization included $41 million and $219 million of impairment charges, respectively, at the Networks segment, related to the writedown of the intangible assets of the winter sports teams, and the nine months also included a $99 million impairment charge at the Publishing segment related to the writedown of goodwill and intangible assets of the Time Warner Book

11

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

Group. These impairments were recognized as a result of fair value information obtained during the periods through negotiations with third parties about the potential disposition of these businesses.

Net Gain on Disposal of Assets

     For the three and nine months ended September 30, 2004, the Company recognized a $13 million gain at AOL related to the previously announced sale of AOL Japan, which closed on July 1, 2004. In addition, for the nine months ended September 30, 2004, the Company recognized an $8 million gain at the Publishing segment related to the sale of a building and a $7 million loss (after taking into consideration the $219 million of impairment charges described above) on the closing 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 statement of operations.

     For the nine months ended September 30, 2003, the Company recorded a $43 million gain on the sale of its interest in U.K. cinemas, which previously had been consolidated by the Filmed Entertainment segment.

Microsoft Settlement

     As more fully described in Note 8 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, in the second quarter of 2003, the Company recognized a gain of approximately $760 million as a result of the settlement with Microsoft Corporation of then-pending litigation between Microsoft and Netscape Communications Corporation (the “Microsoft Settlement”). The gain is included in “Other Income, net”, in the accompanying 2003 consolidated statement of operations for nine months ended September 30, 2003.

Investment Gains

     For the three and nine months ended September 30, 2004, the Company recognized $311 million and $366 million of gains, respectively, from the sale of investments, including a $188 million gain related to the sale of a portion of the Company’s interest in Google and a $113 million gain related the sale of the Company’s interest in VIVA and VIVA Plus. For the three months ended September 30, 2003, the Company recognized $127 million of gains from the sale of investments, including a $52 million gain from the sale of the Company’s interest in chinadotcom and $17 million from the sale of the Company’s equity interests in certain international cinemas. For the nine months ended September 30, 2003, the Company recognized gains from the sale of certain investments of $778 million, including a $513 million gain on the sale of the Company’s interest in Comedy Central, a $50 million gain from the sale of the Company’s interest in Hughes Electronics Corp. (“Hughes”), a $52 million gain from sale of the Company’s interest in chinadotcom and $66 million in gains from the sale of the Company’s equity interest in certain international cinemas.

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

Loss on Investments, net

     For the three and nine months ended September 30, 2004, non-cash charges to reflect other-than-temporary declines in the Company’s investments were $15 million and $24 million, respectively. This amount reflects $10 million and $12 million, respectively, to reduce the carrying value of certain investments that experienced other-than-temporary declines in market value and $5 million and $12 million of losses, respectively, related to market fluctuations in equity derivative instruments.

     For the three months ended September 30, 2003, non-cash charges to reflect other-than-temporary declines in the Company’s investments were $10 million. These amounts consisted of $14 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. For the nine months ended September 30, 2003, non-cash charges to reflect other-than-temporary declines in the Company’s investments were $167 million. These amounts consisted of $184 million to reduce the carrying value of certain investments that experienced other-than-temporary declines in market value and income of $17 million to reflect market fluctuations in equity derivative instruments. Included in these charges were a $71 million loss associated with the writedown of the Company’s then equity interest in n-tv KG (“NTV-Germany”), a German news broadcaster, and a $77 million loss associated with the Company’s equity interest in AOL Japan.

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

12

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

Three and Nine Months Ended September 30, 2004 Compared to Three and Nine Months Ended September 30, 2003

Consolidated Results

     Revenues. For the three months ended September 30, 2004, consolidated revenues increased 5% to $9.965 billion. For the nine months ended September 30, 2004, consolidated revenues increased 8% to $30.979 billion. As shown below, these increases were led by growth in Subscription, Advertising and Content revenues, offset, in part, by declines in Other revenues:

     The increase in Subscription revenues for the three and nine months ended September 30, 2004 primarily related to the Cable and Networks segments, and, to a lesser extent, the Publishing segment. This increase was offset partially by a decline at AOL. The increase at Cable was principally due to the continued penetration of new services (primarily high-speed data and advanced digital video services) and higher basic cable rates. The increase at the Networks segment for the three and the nine months ended September 30, 2004 was due to higher subscription rates and an increase in the number of subscribers at both Turner and HBO, which was offset partially by the absence of a benefit from the favorable resolution of certain contractual agreements in the prior year third quarter. The nine months ended September 30, 2004 also benefited from the resolution of certain contractual agreements. The Publishing segment increased due to a decrease in subscription allowances (which are netted against revenue) and the favorable effects of foreign currency exchange rates. The AOL segment declined primarily as a result of lower domestic narrowband subscription revenues, partially offset by the expansion of broadband subscription revenues in the U.S. and the favorable effects of foreign currency exchange rates.

     The increase in Advertising revenues for the three and nine months ended September 30, 2004 was due primarily to growth at the AOL, Publishing and Networks segments. The increase at AOL for the three and nine months was due primarily to growth in paid-search advertising and revenues associated with the acquisition of Advertising.com. The increase at the Publishing segment for the three and nine months was due to the strength of magazine advertising and the favorable effects of foreign currency exchange rates. The increase at the Networks segment for the three and nine months was driven by higher CPMs and sellouts at Turner’s entertainment networks.

     The increase in Content revenues for the three months was primarily a result of the Networks segment, due mainly to higher ancillary sales of HBO’s original programming and, to a lesser extent, growth at the Filmed Entertainment and Publishing segments. The increase for the nine months was principally due to improved results at the Filmed Entertainment segment related to both television and theatrical product.

     The decline in Other revenues for the three and nine months ended September 30, 2004 was attributable to the sale of Time Life, a direct-marketing business formerly a part of the Publishing segment. Time Life contributed Other revenues of $74 million in the third quarter of 2003 and $227 million in the first nine months of 2003.

     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 September 30, 2004 and 2003, costs of revenues totaled $5.639 billion and $5.467 billion, respectively, and as a percentage of revenues was 57% and 58%, respectively. For the nine months ended September 30, 2004 and 2003, costs of revenues totaled $17.960 billion and $16.970 billion, respectively, and as a percentage of revenues, was 58% and 59%, respectively. The improvement in costs of revenues as a percentage of revenues related primarily to improved margins at the AOL and Filmed Entertainment segments as discussed in detail under “Business Segment Results.”

13

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

     Selling, General and Administrative Expenses. For the three months ended September 30, 2004 and 2003, selling, general and administrative expenses increased 6% to $2.575 billion in 2004 from $2.428 billion in 2003 primarily as a result of increases at the Networks and Filmed Entertainment segments. For the nine months, selling, general and administrative costs increased 5% to $7.496 billion in 2004 from $7.150 billion in 2003 primarily as a result of increases at the Filmed Entertainment and AOL segments. The segment variations are discussed in detail under “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 decreased 12% to $1.905 billion for the three months ended September 30, 2004 from $2.163 billion for the three months ended September 30, 2003 as a result of increased losses at Corporate, as discussed below, partially offset by growth at the AOL, Cable, Networks and Publishing segments. For the nine months ended September 30, 2004, Operating Income before Depreciation and Amortization increased 15% to $6.947 billion in 2004 from $6.064 billion in 2003 principally as a result of solid growth at all business segments, partially offset by increased expenses at Corporate. The segment variations are discussed in detail under “Business Segment Results.”

     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 nine months of 2004 due to a decrease in growth rates at the Filmed Entertainment, AOL and Networks segments, which are discussed under “Business Segment Results.”

     Corporate Operating Loss before Depreciation and Amortization. Time Warner’s Corporate Operating Loss before Depreciation and Amortization was $615 million and $891 million for the three and nine months ended September 30, 2004 compared to $109 million and $322 million for the three and nine months ended September 30, 2003, respectively.

     During the three and nine months ended September 30, 2004, the Company has established $500 million in legal reserves related to the government investigations. This amount represents the Company’s current best estimate of the amounts that would be involved ultimately to resolve these investigations. The Company believes that some portion of the amount reserved will be available for related shareholder litigation. The Company has not established any reserves associated with shareholder and civil litigation due to their preliminary status and because it is unable to reasonably estimate a range of possible loss.

14

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

     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 ($9 million and $23 million for the three and nine months ended September 30, 2004, respectively, compared to $14 million and $49 million for the three and nine months ended September 30, 2003, respectively). It is not yet possible to predict the outcome of these investigations and lawsuits, and costs are expected to continue to be incurred in future periods.

     Included in the 2004 amounts are costs associated with the relocation from the Company’s former corporate headquarters. During the first six months of 2004, the Company recorded a $67 million charge, of which $14 million was reversed in the third quarter of 2004 as a result of an agreement having been finalized to lease a portion of the space to the AOL business unit. Of the $53 million net charge, approximately $26 million relates to a non-cash write-off of the fair value lease adjustment, which was established in purchase accounting at the time of the merger of America Online and Time Warner Inc., now known as Historic TW Inc. (“Historic TW”).

     Excluding the items previously discussed, Corporate Operating Loss before Depreciation and Amortization increased for the three and nine months primarily as a result of higher severance costs and insurance premiums and a $20 million adjustment partially related to prior periods to increase self insurance liabilities.

     Depreciation Expense. Depreciation expense increased to $641 million and $1.918 billion for the three and nine months ended September 30, 2004 from $638 million and $1.870 billion for the three and nine months ended September 30, 2003, respectively. The increase in depreciation expense for the three months was the result of slight increases in depreciation at the Cable, Filmed Entertainment and Networks segments, partially offset by a decline at AOL. The decline at AOL was primarily the result of a $13 million adjustment taken in the third quarter of 2004 to reduce excess depreciation inadvertently recorded at AOL over several years. The increase in depreciation for the nine months primarily related to the Cable segment and, to a lesser extent, growth at all other segments except AOL. The growth 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 significantly shorter useful life compared to the mix of assets previously purchased.

     Amortization Expense. Amortization expense increased to $156 million and $467 million for the three and nine months ended September 30, 2004 from $148 million and $430 million for the three and nine months ended September 30, 2003, respectively. The increase relates principally to an increase in the amortization associated with customer-related intangible assets at the Cable segment, which were established with the purchase price allocation associated with the TWE Restructuring. The purchase price allocation was finalized on March 31, 2004.

     Operating Income. Time Warner’s Operating Income decreased to $1.108 billion for the three months ended September 30, 2004 from $1.377 billion for the three months ended September 30, 2003 and increased to $4.562 billion for the nine months ended September 30, 2004 from $3.764 billion for the nine months ended September 30, 2003. This reflects the changes in business segment Operating Income before Depreciation and Amortization discussed above, and an increase in depreciation and amortization expense.

     Interest Expense, Net. Interest expense, net, decreased to $372 million and $1.159 billion for the three and nine months ended September 30, 2004 from $438 million and $1.319 billion for the three and nine months ended September 30, 2003, respectively, due primarily to lower average net debt levels.

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

15

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

     The Microsoft Settlement, changes in investment-related gains and the declines in the losses on writedown 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 2004 as compared to the prior year primarily from an increase in income from equity method investees principally due to the absence of losses related to AOLA as a result of AOLA’s consolidation in 2004.

     Minority Interest Expense. Time Warner had $54 million and $172 million of minority interest expense for the three and nine months ended September 30, 2004 compared to $59 million and $175 million for the three and nine months ended September 30, 2003, respectively.

     Income Tax Provision. Income tax expense from continuing operations was $492 million for the three months ended September 30, 2004, compared to $373 million for the three months ended September 30, 2003 and was $1.511 billion for the nine months ended September 30, 2004, compared to $1.478 billion for the nine months ended September 30, 2003. The Company’s actual income tax expense differs from the amounts derived by applying the 35% U.S. Federal statutory rate to pretax income 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. The Company’s effective tax rate for continuing operations was 50% and 42% for the three and nine months ended September 30, 2004, respectively, as compared to 40% and 42%, respectively, for the same periods in the prior year. The increase in the effective tax rate for the three months ended September 30, 2004 as compared to the same period in the prior year results primarily from the legal reserves related to the government investigations (as discussed under “Significant Transactions and Other Items Affecting Comparability”), most of which may not be ultimately deductible for income tax purposes, partially offset by the non-taxability of certain gains on the sale of assets. The comparative effective tax rate for the nine months also reflects additional benefits related to certain foreign source income and increased foreign tax credit utilization in 2004.

     Income before Discontinued Operations and Cumulative Effect of Accounting Change. Income before discontinued operations and cumulative effect of accounting change was $494 million for the three months ended September 30, 2004 compared to $551 million for the three months ended September 30, 2003. Basic and diluted net income per share before discontinued operations and cumulative effect of accounting change were $0.11 and $0.10, respectively, in 2004 compared to $0.12 for both 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 $223 million of expenses and $20 million of income in 2004 and 2003, respectively, income before discontinued operations and cumulative effect of accounting change increased by $186 million. The increase reflects primarily an increase in Operating Income and lower interest expense.

     Income before discontinued operations and cumulative effect of accounting change was $2.088 billion for the nine months ended September 30, 2004 compared to $2.042 billion for the nine months ended September 30, 2003. Basic and diluted net income per share before discontinued operations and cumulative effect of accounting change were $0.46 and $0.44, respectively, in 2004 compared to $0.45 and $0.44 in 2003, respectively. In addition, excluding the items previously discussed under “Significant Transactions and Other Items Affecting Comparability” of $200 million of expense and $595 million of income in 2004 and 2003, respectively, income before discontinued operations and cumulative effect of accounting change increased by $841 million. The increase reflects primarily the after-tax effect of the increase in Operating Income and lower interest expense.

     Discontinued Operations, Net of Tax. The 2004 and 2003 results include the impact of the treatment of the Music segment as a discontinued operation. Included in the results for the three and nine months ended September 30, 2004 are pretax income of $7 million and a loss of $9 million, respectively, and a related tax provision of $2 million and tax benefit of $124 million, respectively. The income or loss and the corresponding taxes relate primarily to adjustments to the initial estimates of the assets sold to, and liabilities assumed by, the acquirers in such transactions and to the resolution of various tax matters surrounding the music business dispositions.

     Included in the results for the three and nine months ended September 30, 2003 are $5 million and $52 million of pretax losses, respectively, from the music operations and $7 million and $23 million of income tax benefits, respectively.

     Cumulative Effect of Accounting Change, Net of Tax. 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 the first quarter of 2004 in accordance with FIN 46R. In addition, the three and nine months ended September 30, 2003 included an approximate $12 million charge, net of tax, as the cumulative effect of the adoption of FIN 46.

16

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

     Net Income and Net Income Per Common Share. Net income was $499 million for the three months ended September 30, 2004 compared to $541 million for the three months ended September 30, 2003. Basic and diluted net income per common share were both $0.11 in 2004 compared to $0.12 for both basic and diluted net income per common share in 2003. Net income was $2.237 billion for the nine months ended September 30, 2004 compared to $2.001 billion for the nine months ended September 30, 2003. Basic and diluted net income per share were $0.49 and $0.48 in 2004 compared to $0.45 and $0.43 in 2003, respectively. 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.

Business Segment Results

     AOL. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the AOL segment for the three and nine months ended September 30, 2004 and 2003 are as follows:

     Subscription revenues declined at AOL for the three and nine months ended September 30, 2004 as compared to the same periods in 2003. This resulted from a decline in domestic Subscription revenues (from $1.526 billion to $1.418 billion for the three months and from $4.593 billion to $4.352 billion for the nine months), offset in part by an increase in Subscription revenues at AOL Europe (from $366 million to $410 million for the three months and from $1.098 billion to $1.246 billion for the nine months). 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 revenues and increased premium service revenue. The growth in AOL Europe’s Subscription revenues primarily resulted from a favorable impact of foreign currency exchange rates ($30 million and $122 million for the three and nine months, respectively) and growth in broadband subscribers. These increases for the nine months 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. In addition, Subscription revenues benefited as the result of the consolidation of AOLA effective on March 31, 2004, which has contributed $12 million and $25 million of Subscription revenues for the three and nine months, respectively. In addition, the acquisition of AOL Japan, which was consolidated effective January 1, 2004 and subsequently sold on July 1, 2004, contributed $37 million of Subscription revenues during the first half of the year.

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

     The number of AOL brand domestic subscribers was as follows at September 30, 2004, June 30, 2004 and September 30, 2003:

     AOL includes in its subscriber count individuals, households or entities that have provided billing information and completed the registration process sufficiently to allow for an initial log-on to the AOL service. AOL classifies domestic AOL brand subscribers as narrowband or broadband subscribers based on the price plan marketed by AOL and 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. For example, a subscriber who, in response to a promotional offer, agrees to sign-up for the AOL for Broadband service would be considered a broadband subscriber even if the subscriber predominantly accesses the AOL service via a dial-up connection. AOL continues to develop, test, change, and implement price plans, service offerings and payment methods to attract and retain members.

     The primary narrowband price plan for U.S. subscribers is an unlimited usage plan for $23.90 per month that includes unlimited access to the AOL service using AOL’s dial-up network and unlimited usage of the AOL service through any Internet connection. Narrowband subscribers may also select from other pricing plans with lower rates, including limited usage plans and an annual payment plan that allows members to pay for a year of the AOL service in advance at a reduced rate. Narrowband subscribers also include subscriptions sold at a discount to employees and customers of selected AOL strategic partners.

     AOL offers multiple “bring your own access” (BYOA) price plans, all of which allow unlimited usage of the AOL service through an Internet connection not provided by AOL (“BYOA access”), such as a high-speed broadband Internet connection via cable or DSL not provided by America Online. These BYOA price plans also allow for multiple simultaneous log-ins (MSL) for one account and, depending on the particular price plan, include varying amounts of dial-up telephone access in the U.S. from America Online. The primary BYOA price plan is $14.95 per month, which, in addition to unlimited BYOA access and MSL, provides for a limited number of hours of AOL-provided dial-up access each month. Another significant BYOA price plan is $24.95 per month, which allows unlimited BYOA access and MSL, and includes unlimited access to the AOL service using AOL’s dial-up network. AOL does not expect to offer this price plan in the future. AOL considers all BYOA price plan subscribers to be broadband subscribers. Although not currently actively marketed, AOL also provides bundled broadband services to existing subscribers through a number of DSL and cable partners.

     Both narrowband and broadband plans include subscribers to the AOL service during introductory free trial periods and subscribers to the AOL service at no or reduced costs through member service and retention programs.

     During the first nine months of 2004, most of the net additions to broadband subscribers were in the $24.95 BYOA price plan, having migrated from AOL’s narrowband price plans. As of September 30, 2004, there were approximately 1.8 million $24.95 BYOA subscribers classified as broadband subscribers.

     As noted above, these price plan classifications do not necessarily reflect subscriber access patterns. AOL believes that a significant number of its subscribers who have selected a broadband price plan 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 a broadband connection for a majority of their sessions. In addition, many of AOL’s subscribers continue to switch from narrowband to broadband price plans and from broadband to narrowband price plans. Accordingly, the distinction between narrowband and broadband members is becoming less relevant as individual AOL subscribers are accessing the service in multiple ways (e.g., dial-up and high speed). As the marketplace and business continue to evolve, AOL continues to explore new pricing and marketing programs and is reviewing the current narrowband and broadband subscriber classifications.

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

     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. In addition to the above, the year-over-year decline in subscribers also reflects a reduction in direct marketing response rates. AOL anticipates that the decline in its narrowband subscriber base will likely continue because of these factors.

     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, increased 1% to $19.47 and 3% to $19.43 for the three and nine months ended September 30, 2004, respectively, as compared to $19.28 and $18.81 for the three and nine months ended September 30, 2003, respectively. The change in domestic subscription ARPU primarily related to an increase in the portion of AOL narrowband subscribers who generate revenue (i.e., not receiving free service) and increased premium services revenues. In addition, ARPU was impacted by changes in the mix of narrowband and broadband subscribers, changes in customer pricing plans, the level of service provided (full connectivity versus BYOA) and by changes in the terms of AOL’s relationship with its broadband cable and DSL partners. In general, AOL does not expect ARPU to sustain this increase in the foreseeable future as AOL revises its product offerings and subscribers continue to migrate from unlimited plans to lower-priced plans.

     The number of AOL brand subscribers in Europe was 6.3 million at September 30, 2004, and the average monthly Subscription revenue per European subscriber for the three and nine months ended September 30, 2004 was $21.46 and $21.63, respectively. This compares to AOL brand subscribers in Europe of 6.3 million at both June 30, 2004 and September 30, 2003, and average monthly Subscription revenue per European subscriber of $18.91 for the three months ended September 30, 2003 and $18.63 for the nine months ended September 30, 2003. The average monthly Subscription revenue per European subscriber increased primarily because of 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 as well as a change in the mix of price plans, with bundled broadband subscribers growing as a percentage of total subscribers. The number of AOL brand subscribers reflected a sequential increase in subscribers in the U.K., offset by declines in France and Germany.

     For the three and nine months ended September 30, 2004 the increases in Advertising revenues reflect primarily an increase in domestic paid-search advertising contracts (from $43 million to $73 million for the three months and from $131 million to $219 million for the nine months) and Advertising revenue generated from Advertising.com of $35 million from sales of advertising run on third-party websites. For the nine months ended September 30, 2004, these increases were partially offset by 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 $36 million to $8 million). AOL expects advertising revenue to continue to increase during the remainder of 2004 due to expected growth in both traditional online and paid-search advertising, as well as Advertising.com’s performance-based advertising.

     Other revenues primarily include merchandising revenue, software licensing revenue and revenue from providing the Cable segment access to the AOL Transit Data Network for high-speed access to the Internet. Other revenues for the three months ended September 30, 2004 were flat. The decrease in Other revenues for the nine months ended September 30, 2004 was due primarily to AOL’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, partially offset by higher licensing revenues.

     For the three months ended September 30, 2004, costs of revenues decreased 4% and, as a percentage of revenues, decreased to 49% in 2004 from 51% in 2003. For the nine months ended September 30, 2004, costs of revenues decreased 7% and, as a percentage of revenues, decreased to 49% in 2004 from 53% in 2003. For the three and nine months, the declines related primarily to lower network-related expenses. Network-related expenses decreased 31% to $401 million and 24% to $1.424 billion for the three and nine months, respectively, principally attributable to improved pricing and decreased levels of service commitments 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. These declines were offset partially for the three and nine months by an increase in other costs of service, which included higher domestic salary and consulting costs as well as higher broadband and member service costs at AOL Europe. In addition, there were incremental costs associated with the consolidation of AOLA during 2004 and the acquisition of Advertising.com. The nine months also had higher costs associated with the consolidation of AOL Japan for the first half of 2004, which was sold effective July 1, 2004.

     The increase in selling, general and administrative expenses for the three and nine months ended September 30, 2004 primarily related to an increase in marketing costs and additional costs resulting from the acquisition of Advertising.com and the consolidation

19

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

of AOLA. The nine months also had higher costs associated with the consolidation of AOL Japan for the first half of 2004. The increase in marketing costs resulted from higher spending on member acquisition activities, partially offset by a decline in brand advertising. In addition, for the nine months the increase in marketing expense was partially offset by an approximate $25 million adjustment to reduce excess marketing accruals made in prior years, primarily related to AOL’s European operations. Management does not believe that the understatement of prior-years’ results was material to any of the year’s financial statements. Similarly, management does not believe that the adjustment made is material to the current period results. The overall increase in marketing costs for the nine months was also partially offset by the previously discussed change in the treatment of intercompany advertising barter transactions (refer to page 73 of the Company’s 2003 Form 10-K). Also, included in the nine month results for 2004 and 2003 are $15 million and $20 million, respectively, of benefits related to favorable rulings on certain state sales tax matters. In addition, AOL’s three and nine month results for 2004 were impacted by the provision of certain state sales tax reserves related to the November 2003 expiration of the federal moratorium on Internet sales taxes. Both the U.S. Senate and U.S. House of Representatives have passed legislation that would retroactively reinstate the federal moratorium on Internet sales taxes. As of September 30, 2004, AOL has accrued a $56 million liability for such sales taxes. Depending upon the legislation ultimately passed, if any, all or some portion of this accrued liability may be reversed, positively impacting AOL’s future results of operations. However, until such legislation is passed, AOL continues to accrue for such sales taxes.

     As previously discussed under “Significant Transactions and Other Items Affecting Comparability,” the three and nine months ended September 30, 2004 included a $13 million gain on sale of AOL Japan and the nine months ended September 30, 2004 includes a $10 million impairment charge related to the pending sale of a building, and a $2 million reversal of previously established restructuring accruals, reflecting changes in estimates. The three and nine months ended September 30, 2003 included $26 million and $30 million, respectively, of restructuring charges.

     The increases in Operating Income before Depreciation and Amortization and Operating Income for the three and nine months are due primarily to a modest increase in overall revenues and lower costs of revenues, offset in part by higher selling, general and administrative expenses. In addition, Operating Income benefited from a decrease in depreciation expense partially as a result of a $13 million adjustment taken in the third quarter of 2004 to reduce excess depreciation inadvertently recorded at AOL over several years.

     In response to the changing dynamics of AOL’s business, it continues to refine its business strategy to meet the evolving needs of consumers. As part of this transition, AOL is undertaking efforts to realign its resources more efficiently and it is reasonably likely that this will result in AOL incurring restructuring charges in the fourth quarter of 2004 and/or first half of 2005. Although preliminary, the Company’s current best estimate of restructuring charges is approximately $50 million.

     The Company anticipates the rate of growth in both Operating Income before Depreciation and Amortization and Operating Income will be slower during the fourth quarter of 2004 in comparison to that experienced for the first nine months of 2004 due primarily to expected declines in subscription revenues and an expected increase in seasonal marketing activities. The rate of growth would be further impacted if the restructuring charge described above were to be taken in the period.

20

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 and nine months ended September 30, 2004 and 2003 are as follows:

     For the three and nine months ended September 30, 2004, Subscription revenues increased due to the continued penetration of new services (primarily high-speed data and advanced digital video services) and higher basic cable rates. High-speed data subscription revenues increased to $442 million for the three months ended September 30, 2004 from $362 million for the three months ended September 30, 2003 and to $1.289 billion for the nine months ended September 30, 2004 from $1.023 billion for the nine months ended September 30, 2003.

     Basic cable subscribers include all subscribers receiving basic cable service. Digital video subscribers reflect subscribers on any level of service received via digital technology. High-speed data subscribers include subscribers to TWC Inc.’s Road Runner Internet service, as well as other Internet services offered by TWC Inc. At September 30, 2004, as compared to September 30, 2003, basic cable subscribers declined by 0.3% and totaled 10.898 million (including 1.574 million subscribers of unconsolidated investees, which are managed by TWC Inc.), digital video subscribers increased by 11% to 4.682 million (including 741,000 subscribers of unconsolidated investees, which are managed by TWC Inc.), residential high-speed data subscribers increased by 22% to 3.716 million (including 525,000 subscribers of unconsolidated investees, which are managed by TWC Inc.) and commercial high-speed data subscribers increased by 41% to 162,000 (including 20,000 subscribers of unconsolidated investees, which are managed by TWC Inc.).

     The increase in Advertising revenues for the three and nine months ended September 30, 2004 was attributable to an increase in the volume of advertising spots sold and, to a lesser extent, higher rates.

     For the three and nine months ended September 30, 2004, costs of revenues increased 12% and 11%, respectively, and, as a percentage of revenues, were 44% for the three and nine months ended September 30, 2004 compared to 43% and 44% for the three and nine months ended September 30, 2003, respectively. The increase in costs of revenues is primarily related to increases in video programming costs and higher employee costs. Video programming cost increases of 13% to $469 million and 12% to $1.388 billion for the three and nine months ended September 30, 2004, respectively, were attributable to contractual rate increases across TWC Inc.’s programming line-up (including sports programming). Video programming costs in the fourth quarter of 2004 are expected to increase at a rate in line with the rate of increase experienced during the first nine months, reflecting the expansion of service offerings and timing of programming cost increases (including sports programming) related to both inflation-indexed and negotiated license fee increases. Employee costs increased for the three and nine months ended September 30, 2004 primarily due to merit increases and higher headcount resulting from the rollout of new services.

21

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

     The increase in selling, general and administrative expenses for the three and nine months ended September 30, 2004 is the result of higher marketing and general operating costs, due in part to the rollout of new services. The increase for the nine months also includes costs of $34 million incurred in connection with a previously noted Urban Cable dispute settled in the second quarter of 2004.

     Operating Income before Depreciation and Amortization increased for the three and nine months ended September 30, 2004, principally as a result of revenue gains, offset in part by higher costs of revenues and higher selling, general and administrative expenses.

     Included in Operating Income before Depreciation and Amortization for the three and nine months ended September 30, 2004 are costs associated with the rollout of Digital Phone service, which are expected to increase as the service is deployed in each of TWC Inc.’s divisions prior to the 2004 year end. At September 30, 2004, Digital Phone service was available commercially or on a test basis in all but one of TWC Inc.’s divisions.

     For the three and nine months ended September 30, 2004, Operating Income increased due primarily to the increase in Operating Income before Depreciation and Amortization described above, offset in part by an increase in depreciation and amortization expense. Depreciation expense increased due to the increased investment in customer premise equipment in recent years, which generally has a significantly shorter useful life compared to the mix of assets previously purchased. Amortization expense increased $16 million and $49 million for the three and nine months ended September 30, 2004, respectively, primarily as a result of amortization of customer relationship intangibles that were established in connection with the TWE Restructuring in 2003, the valuation of which was finalized in the fourth quarter of 2003.

     Filmed Entertainment. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Filmed Entertainment segment for the three and nine months ended September 30, 2004 and 2003 are as follows:

     For the three months ended September 30, 2004, Content revenues increased primarily as a result of a $96 million improvement in revenues from theatrical product, which was partially offset by a $75 million decline in revenues from television product. For the nine months ended September 30, 2004, Content revenues increased primarily due to a $612 million and $354 million improvement in revenues from television and theatrical product, respectively.

     During the three months, revenues from theatrical product included $190 million of increased worldwide theatrical film revenues and a $78 million increase in television license fees of theatrical product, partially offset by a $172 million decline in worldwide home video sales. During the three months, the decrease in revenues from television product is attributable to an $88 million decrease in worldwide license fees, partially offset by a $13 million increase in home video sales. During the nine months, the increase in television product revenues was attributable to a $435 million increase in worldwide license fees and a $177 million increase in home

22

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

video sales. During the nine months, revenue from theatrical product included $251 million of higher worldwide theatrical film revenues and a $110 million increase in made for theatrical television license fees, partially offset by a $7 million decline in home video sales.

     For the three and nine months ended September 30, 2004, the increase in worldwide theatrical film revenues was attributable primarily to the success of Harry Potter and the Prisoner of Azkaban and Troy, with international markets driving the three month period. For the nine months, the increase also resulted from international overages associated with The Lord of the Rings: The Return of the King. Theatrical revenues also increased for the three and nine months due to the network television availability of The Lord of the Rings: The Fellowship of the Ring to Turner and The WB Network and the nine months also benefited from the network television availability of Harry Potter and the Sorcerer’s Stone. For the three months, the decrease in theatrical home video sales is primarily attributable to timing of the release of The Lord of the Rings: The Return of the King in the second quarter of 2004, whereas The Lord of the Rings: The Two Towers was released in the third quarter of 2003. This was offset partially by strong growth in other new releases and catalog titles, including Scooby Doo 2: Monsters Unleashed, Starsky and Hutch and The Butterfly Effect.

     For the three months ended September 30, 2004, television license fees declined due to difficult comparisons to prior year, which had higher syndication sales, including the initial availability of The West Wing, and higher syndication revenue from Friends. The increase in television worldwide license fees for the nine months ended September 30, 2004 was primarily attributable to the third cycle syndication continuance license arrangements for Seinfeld. For the three months ended September 30, 2004, television home video sales increased primarily as a result of higher revenues from Friends. For the nine months ended September 30, 2004, the increase in home video sales of television product was attributable to an increased number of new titles released and now sold in this format, including such television properties as Friends and Smallville.

     Other revenues increased primarily due to the consolidation of the results of Warner Village in 2004 as previously discussed, which contributed $13 million and $68 million of Other revenues during the three and nine months ended September 30, 2004, respectively. The Company’s U.K. cinema interests, which were sold in the second quarter of 2003, contributed Other revenues of $46 million during 2003.

     The slight decrease in costs of revenues for the three months ended September 30, 2004 primarily related to a decrease in film costs ($1.180 billion for the three months ended September 30, 2004 compared to $1.295 billion for the three months ended September 30, 2003), partially offset by an increase in marketing and distribution costs. The decrease in film costs for the three months resulted primarily from the quantity and mix of films and home videos released in the quarter, and lower television production costs due to the timing of delivery of new episodic television shows. These decreases were partially offset by a $70 million increase in net theatrical valuation adjustments (from $18 million in 2003 to $88 million in 2004). The increase in costs of revenues for the nine months ended September 30, 2004 resulted from higher film costs ($4.232 billion for the nine months ended September 30, 2004 compared to $3.791 billion for the nine months ended September 30, 2003), primarily resulting from the quantity and mix of released and increased production of new episodic television series (new series are generally produced at a cost in excess of their network license fees, with such excess costs expensed as incurred). Marketing and distribution costs increased for the three and nine months ended September 30, 2004 due to the quantity and mix of films released during the periods. Costs of revenues as a percentage of revenues decreased to 72% for the three months ended September 30, 2004 from 74% for the three months ended September 30, 2003, and to 74% for the nine months ended September 30, 2004 compared to 76% for the nine months ended September 30, 2003.

     For the three and nine months ended September 30, 2004, selling, general and administrative costs increased due to additional headcount and merit increases and increased rent expense. In addition, there were additional costs resulting from the consolidation of Warner Village in 2004. For the nine months ended September 30, 2004, the increase in selling, general and administrative expenses also reflects additional distribution fees associated with the off-network television syndication of Seinfeld.

     As previously discussed under “Significant Transactions and Other Items Affecting Comparability,” the Company recorded a $43 million gain on the sale of its interest in U.K. cinemas, which previously had been consolidated, during the second quarter of 2003.

     Operating Income before Depreciation and Amortization for the three months ended September 30, 2004 declined as a result of higher selling, general and administrative costs, partially offset by increased total revenues and lower costs of revenues. For the nine months ended September 30, 2004, Operating Income before Depreciation and Amortization increased due to an increase in revenues, which was partially offset by increases in costs of revenue, selling, general and administrative expenses and the absence of the gain on disposal of a consolidated business as discussed above. Included in Operating Income before Depreciation and Amortization for the

23

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

three and nine months of 2004 is a loss of $3 million and income of $9 million, respectively, resulting from the consolidation of Warner Village.

     The change in Operating Income was due primarily to the aforementioned changes in Operating Income before Depreciation and Amortization described above.

     The Company anticipates the rate of growth in both Operating Income before Depreciation and Amortization and Operating Income will be slower during the fourth quarter of 2004 in comparison to that experienced for the first nine months of 2004 due primarily to difficult comparisons to 2003’s fourth quarter theatrical results, which included The Lord of the Rings: The Return of the King and Elf.

     Networks. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Networks segment for the three and nine months ended September 30, 2004 and 2003 are as follows:

     The increase in Subscription revenues for the three and nine months ended September 30, 2004 was due primarily to higher subscription rates and an increase in the number of subscribers at both Turner and HBO. For the three months, this increase was partially offset by the absence of a prior year benefit related to the favorable resolution of certain contractual agreements, which resulted in approximately $45 million of deferred revenue being recognized when the fees became fixed and determinable in the third quarter of 2003. In addition, the nine months ended September 30, 2004 benefited from the favorable resolution of certain contractual agreements which resulted in approximately $50 million of previously deferred revenues being recognized when the fees became fixed and determinable in the second quarter of 2004.

     The increase in Advertising revenues for the three and nine months ended September 30, 2004 was driven primarily by higher CPMs and sellouts at Turner’s entertainment networks, partially offset by a slight decline at The WB Network.

     The increase in Content revenues for the three months ended September 30, 2004 was primarily due to higher ancillary sales of HBO’s original programming. For the nine months ended September 30, 2004, the decrease in Content revenues was primarily due to the success of HBO’s first quarter 2003 home video release of My Big Fat Greek Wedding and the absence of Content revenues from the winter sports teams, partially offset by higher 2004 ancillary sales of HBO’s original programming and higher license fees and syndication revenues from Everybody Loves Raymond.

24

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

     Other revenues declined for the three and nine months ended September 30, 2004 due primarily to the sale of the winter sports teams in the first quarter of 2004.

     Costs of revenues increased 8% and as a percentage of revenues was 49% for both the three months ended September 30, 2004 and 2003. Costs of revenues increased 3% and as a percentage of revenues was 52% and 54% for the nine months ended September 30, 2004 and 2003, respectively. Programming costs increased to $770 million for the three months ended September 30, 2004 as compared to $691 million for the three months ended September 30, 2003 and to $2.478 billion for the nine months ended September 30, 2004 from $2.322 billion for the nine months ended September 30, 2003. The increase in programming expenses for the three and nine months is primarily due to an increase in the number of network premieres and original series at Turner and higher theatrical film and original series costs at HBO. The increase in programming expenses for the nine months also resulted from higher NBA rights costs at Turner. Costs of revenues for the three months ended September 30, 2004 also included higher newsgathering costs at Turner’s news networks due to increased political coverage. In addition, costs of revenues for the three and nine months ended September 30, 2004 benefited from a $14 million reduction of prior periods’ distribution costs at HBO, the sale of the winter sports teams in March 2004 and a reduction in player payroll at the Atlanta Braves.

     Selling, general and administrative costs increased for the three months ended September 30, 2004, primarily due to higher marketing and promotion expenses to support new programming initiatives and network branding at Turner’s domestic entertainment networks and the timing of marketing expenses at HBO. In addition, selling, general and administrative expenses for the three months ended September 30, 2004 included approximately $14 million of lease termination costs at HBO and higher general and administrative costs across the networks. For the nine months ended September 30, 2004, the increase in selling, general and administrative expenses primarily related to higher marketing and promotion costs at Turner, approximately $14 million of lease termination costs at HBO and higher general and administrative costs across the networks. These increases were partially offset by a $106 million decrease in bad debt expense that was primarily related to first and second quarter 2004 reversals of approximately $75 million of bad debt reserves at Turner and HBO on receivables from Adelphia Communications (“Adelphia”), a major cable operator that declared bankruptcy in 2002, and higher second quarter 2003 bad debt charges incurred at Turner related to certain cable operators. During the second quarter of 2004, the Company sold a portion of its Adelphia receivables to a third-party investor and also collected a portion of its remaining receivables from Adelphia.

     As previously discussed under “Significant Transactions and Other Items Affecting Comparability,” the nine months ended September 30, 2004 include a $7 million loss on the sale of the winter sports teams, and the three and nine months ended September 30, 2003 included a $41 million and $219 million, respectively, impairment charge related to the writedown of intangible assets of the winter sports teams. The three and nine months ended September 30, 2003 also included $13 million and $21 million, respectively, of restructuring costs at Turner.

     Operating Income before Depreciation and Amortization and Operating Income improved for the three and nine months ended September 30, 2004 due to an increase in revenues and the absence of the 2003 impairment and restructuring charges, partially offset by increases in costs of revenues and selling, general and administrative expenses, as described above.

     The sale of the winter sports teams was completed on March 31, 2004. The winter sports teams had revenues of $66 million, an Operating Loss before Depreciation and Amortization of $8 million and an Operating Loss of $8 million for the nine months ended September 30, 2004. The winter sports teams had $10 million of revenues, an Operating Loss before Depreciation and Amortization of $9 million and an Operating Loss of $9 million for the three months ended September 30, 2003 and $104 million of revenues, an Operating Loss before Depreciation and Amortization of $25 million and an Operating Loss of $27 million for the nine months ended September 30, 2003. For the full year of 2003, the winter sports teams contributed approximately $160 million of revenues, an Operating Loss before Depreciation and Amortization of $35 million and an Operating Loss of $37 million.

     The Company anticipates that for the fourth quarter of 2004, the rate of growth in both Operating Income before Depreciation and Amortization and Operating Income will be lower than that experienced in the first nine months. The lower rate of growth results from the effect of the approximate $75 million reversal of bad debt reserves on receivables from Adelphia and the approximate $50 million benefit from the favorable resolution of certain contractual agreements earlier in 2004, as well as the absence of a $45 million deferral of programming costs in the fourth quarter of 2003.

25

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

     Publishing. Revenues, Operating Income before Depreciation and Amortization and Operating Income of the Publishing segment for the three and nine months ended September 30, 2004 and 2003 are as follows:

     For the three and nine months ended September 30, 2004, Subscription revenues increased primarily due to a decrease in subscription allowances (which are netted against revenue), due in part to timing, and the favorable effects of foreign currency exchange rates.

     For the three and nine months ended September 30, 2004, Advertising revenues benefited from strength in magazine advertising, including growth at Real Simple and several core publications including Entertainment Weekly, In Style, Sports Illustrated, and Time, among others. The favorable effects of foreign currency exchange rates also contributed to growth in Advertising revenues. The Company expects that the rate of growth in its core magazine advertising will slow down during the fourth quarter of 2004, but such reduction will be partially offset by growth at Real Simple and recently launched magazines.

     Content revenues increased for the three and nine months ended September 30, 2004 due to several strong titles at the Time Warner Book Group. This increase was partially offset by the absence of revenues due to the sale of Time Life at the end of 2003. For the three and nine months ended September 30, 2003, Time Life contributed $9 million and $29 million, respectively.

     Other revenues declined primarily due to the sale of Time Life at the end of 2003, which contributed $74 million and $227 million of Other revenues for the three and nine months ended September 30, 2003, respectively. Excluding Time Life, Other revenues were flat for the three months and increased for the nine months due to growth at the other non-magazine businesses.

     The sale of Time Life will continue to negatively impact Content and Other revenues in 2004, as Time Life contributed total Content revenues of $40 million and Other revenues of $312 million for the year ended December 31, 2003.

     Costs of revenues for 2003 included $44 million and $118 million of costs associated with Time Life for the three and nine months ended September 30, 2003, respectively. Excluding Time Life, costs of revenues increased 7% and 5% for the three and nine months, respectively, and as a percentage of revenues, was 40% and 41% for the three months of 2004 and 2003, respectively, and 41% and 42% for the nine months of 2004 and 2003, respectively. Costs of revenues for the magazine publishing business include manufacturing (paper, printing and distribution) and editorial-related costs, which together increased 8% to $422 million and 7% to

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

$1.258 billion for the three and nine months ended September 30, 2004, respectively, due primarily to an increase in ad pages, the effects of foreign currency exchange rates and magazine launch-related costs.

     Selling, general and administrative expenses included $57 million and $185 million of costs associated with Time Life for the three and nine months ended September 30, 2003, respectively. Excluding Time Life, selling, general and administrative expenses increased 15% and 14% for the three and nine months ended September 30, 2004, respectively, primarily due to the timing of consumer promotions, magazine launch-related costs of $10 million and $27 million, respectively, and costs associated with the sponsorship and coverage of the 2004 Summer Olympics. The three months ended September 30, 2003 was impacted by $10 million of additional medical benefits accruals and the first nine months of 2003 benefited from the reversal of a $12 million accrual that was no longer required for an outstanding legal matter.

     As previously discussed under “Significant Transactions and Other Items Affecting Comparability,” the nine-months of 2004 results reflect an $8 million gain on the sale of a building and the nine months ended September 30, 2003 results included a $99 million impairment charge related to goodwill and intangible assets at the Time Warner Book Group, and the three and nine months ended September 30, 2003 included $3 million and $21 million, respectively, of restructuring costs.

     For the three months ended September 30, 2004, excluding the losses at Time Life in 2003, Operating Income before Depreciation and Amortization increased $13 million, and Operating Income increased $21 million reflecting an increase in overall revenues and the effect of the $10 million medical benefits accrual reversal in 2003, partially offset by a $10 million increase in magazine launch-related costs associated with the 2004 launch of several magazines. For the nine months ended September 30, 2004, excluding the 2004 first quarter gain on the sale of a building, the 2003 impairment charges of goodwill and intangible assets, the losses at Time Life and restructuring charges in 2003, Operating Income before Depreciation and Amortization increased $8 million, and Operating Income increased $9 million reflecting an increase in overall revenues. These increases also reflect magazine launch-related costs of $27 million and the effect of the 2003 accrual reversal totaling $12 million described above.

FINANCIAL CONDITION AND LIQUIDITY

Current Financial Condition

     At September 30, 2004, Time Warner had $23.7 billion of debt, $6.9 billion of cash and equivalents (net debt of $16.8 billion, defined as total debt less cash and equivalents) and $59.1 billion of shareholders’ equity, compared to $25.7 billion of debt, $3.0 billion of cash and equivalents (net debt of $22.7 billion) and $56.0 billion of shareholders’ equity at December 31, 2003.

     As discussed in more detail below, management believes that Time Warner’s cash provided by operations, cash and equivalents and borrowing capacity under its committed credit facilities are sufficient to fund its capital and liquidity needs for the foreseeable future.

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 to approximately $20 billion by the end of 2004.

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

     The following table shows the change in net debt from December 31, 2003 to September 30, 2004 (in millions):

     With the receipt of the proceeds upon the closing of the sale of the Company’s recorded music and music publishing businesses in the first quarter of 2004, as well as the generation of significant Free Cash Flow, the Company achieved its previously announced net debt reduction target in the first quarter, 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.

Cash Flows

     Cash and equivalents increased to $6.882 billion as of September 30, 2004 from $3.040 billion as of December 31, 2003. See below for a discussion of the change.

Operating Activities

     Sources of cash provided by operations are as follows:

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

     Cash provided by operations increased to $5.388 billion in 2004 compared to $5.195 billion in 2003. The increase in cash provided by operations is related primarily to an increase in Operating Income before Depreciation and Amortization, lower domestic qualified pension plan payments and lower tax, interest and merger and restructuring payments. These increases were partially offset by a reduction in cash provided by working capital, a reduction in cash relating to discontinued operations and the absence of net cash received from litigation settlements in 2003. The changes in working capital are subject to wide fluctuations based on the timing of cash transactions related to production schedules, the acquisition of programming, collection of sales proceeds and similar items. The change in working capital between the periods included a higher level of receivable collections in 2003, offset in part by lower production spending in 2004.

Investing Activities

     Sources of cash provided by investing activities are as follows:

     Cash provided by investing activities increased to $264 million in 2004 from $72 million in 2003. The increase in cash provided by investing activities is due primarily to the net proceeds received from the sale of WMG in 2004, partially offset by the absence of $783 million of cash proceeds related to the sale of the Company’s investment in Hughes and $1.225 billion of cash proceeds related to the sale of the Company’s investment in Comedy Central during 2003 and an increase in capital expenditures and product development costs during 2004 and an increase in investments and acquisitions during 2004.

     As previously discussed, TWC Inc. has agreed to purchase the 60% of Urban Cable it currently does not own for $53 million plus the assumption of $55 million in third-party debt. This transaction is expected to close by the end of the year.

     As previously discussed under “Other Key 2004 Developments,” Comcast has been granted an option, which can be exercised between December 1, 2004 and April 1, 2005, to require TWC Inc. to redeem a portion of the TWC Inc. stock held by Comcast in exchange for certain cable systems and approximately $750 million in cash.

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

Financing Activities

     Sources of cash used by financing activities are as follows: