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Time Warner Inc. – ‘10-K’ for 12/31/04

On:  Friday, 3/11/05, at 8:46am ET   ·   For:  12/31/04   ·   Accession #:  950144-5-2361   ·   File #:  1-15062

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 3/11/05  Time Warner Inc.                  10-K       12/31/04    9:3.0M                                   Bowne of Atlanta Inc/FA

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 1: 10-K        Time Warner Inc.                                    HTML   2.85M 
 2: EX-10.27    EX-10.27 Non-Employee Directors' Deferred              5     20K 
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 3: EX-10.39    EX-10.39 Employment Agreement                         16     72K 
 4: EX-10.58    EX-10.58 Amendment No. 1 to the Tolling and            4     15K 
                          Optional Redemption Agreement                          
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                          Officer                                                
 8: EX-31.2     EX-31.2 Certification of Principal Financial           2±    12K 
                          Officer                                                
 9: EX-32       EX-32 Certification of Principal Executive Officer     1      8K 
                          and Principal Financial Officer                        

Table of Contents

UNITED STATES

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

For the fiscal year ended December 31, 2004

Commission file number 001-15062

TIME WARNER INC.

(212) 484-8000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

     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, and (2) has been subject to such filing requirements for the past 90 days. Yes þ         No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

     Indicate by check mark if the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ

     As of the close of business on February 28, 2005, there were 4,499,568,010 shares of the registrant’s Common Stock and 96,315,431 shares of the registrant’s Series LMCN-V Common Stock outstanding. The aggregate market value of the registrant’s voting and non-voting common equity securities held by non-affiliates of the registrant (based upon the closing price of such shares on the New York Stock Exchange on June 30, 2004) was approximately $79.80 billion.

Documents Incorporated by Reference:

Table of Contents

PART I

      Time Warner Inc. (the “Company” or “Time Warner”) is a leading media and entertainment company. The Company was formed in connection with the merger of America Online, Inc. (“America Online”) and Time Warner Inc., now known as Historic TW Inc. (“Historic TW”), which was consummated on January 11, 2001 (the “Merger” or the “America Online-Historic TW Merger”). The Company classifies its businesses into the following fundamental areas:

      At February 1, 2005, the Company had a total of approximately 84,900 active employees.

      For convenience, the terms the “Company,” “Time Warner” and the “Registrant” are used in this report to refer to both the parent company and collectively to the parent company and the subsidiaries through which its various businesses are conducted, unless the context otherwise requires.

      On December 15, 2004, the Company announced that it and its subsidiary America Online reached a definitive agreement with the Department of Justice (“DOJ”) that resolves the DOJ’s investigation of the Company. The Company also announced that it has proposed a settlement to the staff of the Securities and Exchange Commission (“SEC”) that the staff has agreed to recommend to the SEC Commissioners. For further information, see “Legal Proceedings — Update on Status of Government Investigations” herein.

      In conjunction with the Company’s debt reduction program announced in January 2003, on March 1, 2004 the Company completed the sale of its recorded music and music publishing business to a private investor group. For further information with respect to this and other sales and dispositions by the Company during 2004, see “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Other Recent Developments,” in the financial pages herein.

      This Annual Report on Form 10-K includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained herein due to changes in economic, business, competitive, technological and/or regulatory factors. More detailed information about those factors is set forth in “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” in the financial pages herein. Time Warner is under no obligation to (and expressly disclaims any obligation to) update or alter its forward-looking statements, whether as a result of new information, subsequent events or otherwise.

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      The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed with or furnished to the SEC pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act are available free of charge on the Company’s website at www.timewarner.com as soon as reasonably practicable after such reports are electronically filed with the SEC.

AMERICA ONLINE

      America Online, Inc., a wholly owned subsidiary of the Company based in Dulles, Virginia, is a leader in interactive services.

      During the fourth quarter of 2004, America Online reorganized its operations into four business units — Access, Audience, Digital Services and International — to streamline management and more closely align these business units to the consumers that America Online serves. The Access business concentrates on attracting and retaining subscribers (also referred to as members) across America Online’s domestic Internet service provider (“ISP”) businesses, which include the AOL service, the CompuServe service and the Netscape Internet service. The Audience business develops America Online’s audience on the Internet by offering a variety of interactive content and services and earns revenue from that audience through various forms of online advertising as well as online commerce. Brands include America Online’s network of portals and Websites, including AOL.com, AOL Instant Messenger, ICQ, Moviefone and MapQuest. The Digital Services business works to develop next-generation digital services, including MusicNet@AOL and AOL Call Alert, for the dial-up, high-speed and mobile Internet audience that appeal to AOL members and Internet users generally. AOL Europe, the principal component of the International business, has subscribers in France, Germany and the U.K. and offers local language content and online communities.

Access

AOL Service

      The core AOL service, a subscription-based service with over 22.2 million members in the U.S. and 28.5 million members in the U.S. and Europe, combined, at December 31, 2004, provides members with access to the Internet and a global, interactive community offering a wide variety of content, features and tools. The AOL service provides safety and security features and tools, specialized content, online communities, customization and control features, commerce and search opportunities.

      Subscribers to the AOL service are charged based on the level of service selected. The primary price plans for U.S. members are a $23.90 per month plan that provides unlimited dial-up telephone access to the Internet and use of the AOL service and a $14.95 per month plan that typically offers unlimited use of the AOL service through an Internet connection not provided by America Online, as well as a limited number of hours of dial-up telephone access to the Internet and the AOL service. Members also may select from other pricing plans with lower rates, including limited usage plans and plans that allow members to pay for multiple months of the AOL service in advance at a reduced rate. AOL members may cancel their membership at any time in accordance with the terms of service. America Online employs a wide range of marketing campaigns and promotions to attract new members, and continues to test new price plans and payment methods. America Online utilizes a number of incentives and retention programs to encourage members to continue as members, as well as to bring back former members.

      America Online recognizes that consumers wish to have the flexibility of connecting to the AOL service and the Internet via different connection methods, whether high-speed or telephone dial-up, and from different types of equipment, such as a desktop computer, handheld device or cellular telephone, and continues to develop new marketing strategies to address this desire for flexibility. For example, in January 2005 America Online announced an agreement with Time Warner Cable to develop and market a special edition of the AOL service in combination with high-speed connectivity and a limited number of hours

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Other Internet Service Providers

      The CompuServe and Netscape Internet services target value-oriented Internet service consumers in the U.S. Subscriber fees are charged to members based on the level of service selected. America Online also operates the Wal-Mart Connect dial-up service offered by Wal-Mart Stores, Inc.

Audience

      America Online offers a variety of interactive content and services which together form an online network of America Online portals and Websites on the Internet. The America Online network includes Websites, content and services that are AOL-branded, such as AOL.com, AOL Instant Messenger, and Moviefone, and other sites and services that are owned and operated by America Online, such as MapQuest, ICQ and Netscape.com, the Netscape portal. The America Online network also includes Websites that are owned or operated by third parties or affiliated companies, such as the Time Inc. Websites, for which America Online sells advertising and earns advertising revenue. America Online’s audience includes AOL members as well as Internet users visiting America Online’s network. The mission of the Audience business is to increase the activity and maintain or expand the audience of unique visitors to the America Online network which, in turn, drives AOL’s advertising revenues. America Online is planning to launch a new version of the AOL.com Website as a portal, making expanded features and content available to the entire Internet community, in mid-2005.

      America Online earns revenue by offering advertisers a range of online marketing and promotional opportunities on its network. Online advertising arrangements generally take the form of payments by advertisers on either a fixed-fee basis or on a pay-for-performance basis, where the advertiser pays based on the “click” or customer transaction resulting from the advertisement. In its network, America Online offers its advertisers banner advertising, search and other performance-based advertising, as well as a variety of customized programs, including premier placement, rich media advertising, sponsorship of content offerings for designated time periods, local and classified advertising, and the opportunity to target groups.

      America Online also generates advertising revenue through Advertising.com. Acquired by America Online in August 2004, Advertising.com develops and sells marketing programs to advertisers, primarily on a pay-for-performance basis, using advertising inventory that Advertising.com purchases from, or obtains by entering into revenue-sharing arrangements with, interactive publishers and Websites. In addition, as part of America Online’s new arrangement with Time Warner Cable, America Online will manage and sell advertising and search inventory for Time Warner Cable’s Road Runner portal and will share with Time Warner Cable a portion of the advertising revenues it generates.

Digital Services

      America Online’s Digital Services business is responsible for creating products and services to appeal to the dial-up, high-speed and mobile Internet audience. By creating products and services that appeal to both AOL members and Internet users, Digital Services aims to extend the tenure of AOL memberships and to increase revenues earned from its audience.

      America Online offers a variety of premium and subscription services to its members, including MusicNet@AOL, an online music subscription service, AOL PassCode, which provides members a second level of AOL account protection, and voice services, including AOL by Phone, AOL Call Alert and AOL

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      The Digital Services business expects to offer premium and subscription mobile services that deliver features and content to users of wireless devices, such as mobile phones, PDAs and other handheld devices. America Online also provides text entry solutions for wireless devices through its subsidiary, Tegic Communications, Inc. Tegic’s T9 Text Input software enables individuals to efficiently send e-mail and instant messages using the standard telephone keypad to enter words or sentences.

AOL Europe and Other International Operations

      AOL Europe, a division of America Online, has its principal operations in France, Germany, the U.K. and Luxembourg, which is the location from which the AOL service is supplied in Europe. AOL Europe had approximately 6.3 million members in Europe as of December 31, 2004. Due to regulation of the telecommunications industry, AOL Europe is able to offer a competitive bundled broadband access product, which includes the AOL service and high-speed Internet access, as well as a dial-up access product, to consumers in the U.K., France and Germany. In addition, the online service provided to members in each of these countries is produced in the local language and includes online communities. AOL Europe also supplies the CompuServe service in Europe, targeting professional business-oriented consumers. The AOL service is also offered through a joint venture in Canada.

      America Online Latin America, Inc. (“AOLA”), a consolidated joint venture and publicly traded company, operates services in Brazil, Mexico and Argentina, and serves members of the AOL-branded service in Puerto Rico.

Technologies

      America Online employs a multiple vendor strategy in designing, structuring and operating the network services utilized in its interactive online services. AOLnet, a transfer control protocol/Internet protocol (TCP/IP) network of third-party network service providers, is used for the AOL service, the Netscape service, certain versions of the CompuServe service in North America, and other subscriber services in addition to being used by outside parties. America Online expects it will continue to review its network services arrangements in order to align its network capacity with market conditions, provide members of its online services with higher speed access and manage data network costs.

      America Online enters into multi-year data communications agreements to support AOLnet. In connection with those agreements, America Online may commit to purchase certain minimum levels of data communications services or to pay a fixed cost for the network services.

      America Online also utilizes the AOL Transit Data Network (“ATDN”), the domestic and international network that connects AOL, CompuServe 2000 and Time Warner Cable high-speed data customers to the Internet. The ATDN functions as the conduit between all of Time Warner’s content and the Internet, linking together facilities on four continents, with its greatest capacity in the U.S. and Europe. The ATDN Internet backbone is built from high-end routers and high-bandwidth circuits purchased under long-term agreements from third party carriers.

      Improving and maintaining AOLnet and ATDN requires a substantial investment in telecommunications equipment. In addition to making cash purchases of telecommunications equipment, America Online also finances purchases of this equipment by entering into capital leases.

Marketing

      To support its goals of attracting and retaining members, growing the audience to its America Online network, and developing and differentiating its family of brands, America Online markets its brands, products and services through a broad array of programs and media, including broadcast television and radio advertising

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Competition

      America Online’s Access business competes for subscription revenues with multiple companies providing dial-up Internet service, including EarthLink and discount ISPs such as NetZero. America Online also competes with companies that provide Internet access via broadband technologies, such as cable companies and telephone companies. America Online also competes more broadly for subscription revenues and members’ time with cable, information, entertainment and media companies.

      America Online’s Audience business competes for advertising, search and commerce revenues with a wide range of companies, including ISPs, Web-based portals, and individual Websites providing content, commerce, search, community and similar features as well as media companies. Competitors for audience include Yahoo, MSN and Google.

      America Online faces challenges in gaining access to high-speed networks for distribution of the AOL service or other America Online services both from network providers and from competition from other interactive services providers. America Online also competes with other interactive services providers to secure relationships with providers of personal communications devices. America Online’s Digital Services business also faces competition from a diverse group of providers in developing and offering premium and subscription services. Although this is an emerging area, these services may include educational services, safety and security services, mobile messaging, online games, digital rights management and entertainment services.

      AOL Europe operates in a competitive environment involving ISPs as well as telecommunications companies and cable providers. Its main competitors are British Telecom and Wanadoo in the U.K., Wanadoo and Free in France and T-Online and Freenet in Germany.

CABLE

      The Company’s Cable business, consisting of Time Warner Cable Inc. and its subsidiaries (“Time Warner Cable” or “TWC Inc.”), is the second largest operator of cable systems in the U.S. in terms of subscribers served. As of December 31, 2004, Time Warner Cable managed cable systems serving nearly 10.9 million basic cable subscribers, of which approximately 9.3 million were in cable systems owned by consolidated entities. All of TWC Inc.’s cable business is conducted under the Time Warner Cable brand name.

      The Company holds an effective aggregate 79% interest in Time Warner Cable. Comcast Corporation (“Comcast”) holds the remaining interest in Time Warner Cable. See “Description of Certain Provisions of Agreements related to Time Warner Cable” herein for additional information with respect to the Company’s and Comcast’s ownership in Time Warner Cable.

      The Company has determined that it would like to expand its cable business through acquisitions if it is able to do so on terms it considers appropriate. In furtherance of that interest, Time Warner Cable has submitted a joint bid, along with Comcast, to acquire the assets of Adelphia Communications Corporation (“Adelphia”) in connection with the auction process initiated by Adelphia. It is unknown at this time whether the bid will be successful and, if so, on what terms.

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Systems Operations

      Time Warner Cable offers three product lines: video programming, high-speed data and its newest service, Digital Phone, an Internet protocol-based voice service. As of December 31, 2004, cable systems owned or managed by Time Warner Cable passed approximately 19 million homes, provided basic video service to nearly 10.9 million subscribers, over 4.8 million of whom also subscribe to Time Warner Cable digital video service, and provided high-speed data services to 4.1 million residential subscribers and commercial accounts. By year-end 2004, Time Warner Cable had launched Digital Phone service in all 31 of its regional operating divisions.

      Time Warner Cable operates large, clustered and technologically upgraded cable systems in 27 states. As of December 31, 2004, over 75% of its subscribers were in 19 geographic clusters, each serving more than 300,000 subscribers, and nearly all of its cable systems were capable of carrying two-way broadband services and had been upgraded to 750MHz or higher. Approximately 89% of Time Warner Cable’s subscribers are located in eight states and all but two of its 31 regional operating divisions are focused on discrete geographic areas.

      Time Warner Cable is an industry leader in developing and rolling-out innovative new products and services, including on demand services, IP-based telephony, high-definition television and set-top boxes with integrated digital video recorders (DVRs). Time Warner Cable is increasingly focused on marketing convenient, easy-to-understand bundles of these and other products and services to consumers. Time Warner Cable believes that it can attract and retain customers by providing these multiple-product bundles and supporting them with quality customer care.

      Cable operators are subject to regulation at the federal, state and local level. At the local level, cable operators are generally required to have a franchise with the local government. Franchise requirements and the rights and responsibilities of cable operators and local franchise authorities are themselves subject to provisions of federal and state law. See “Regulation and Legislation” below.

      Time Warner Cable’s video subscribers are typically charged monthly subscription fees based on the level of service selected and, in some cases, equipment usage fees. Movies on demand, pay-per-view movies and special events are charged on a per use basis.

      Time Warner Cable offers subscribers different packages of video services, including basic, standard and digital packages, for a flat monthly fee. Basic and standard service together provide, on average, approximately 80 channels, including local broadcast signals. Subscribers to digital video service receive all the channels included in the basic and standard tiers plus up to 60 additional digital cable networks and up to 45 CD-quality audio music services. Digital subscribers also have access to “mini tiers” of specialized and niche programming (e.g., sports tiers, Spanish language tiers). As of December 31, 2004, over 44% of Time Warner Cable’s basic video subscribers also purchased digital services.

      Regardless of service level, subscribers may purchase premium channels for an additional monthly fee, with discounts generally available for the purchase of packages of more than one premium service. Increasingly, a digital set-top box or comparable device, such as a CableCARD®, is required in order to receive these services. Premium subscribers utilizing such a device typically receive multiplex versions of these premium services and, in some cases, digital set-top box users may receive subscription video on demand access to programming from such services as part of their monthly package. The digital set-top boxes that these subscribers receive also provide interactive program guides and access to other on demand offerings.

      The rates Time Warner Cable can charge for its basic tier, as well as for equipment rentals and installation services, are generally subject to regulation under federal law. For more information, see “Regulation and Legislation” below.

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      Time Warner Cable offers on demand content to customers with digital set-top boxes in all of its divisions. Time Warner Cable’s on demand services enable subscribers to instantaneously view programming stored on servers at the system’s headend, and to utilize functions such as pause, rewind and fast forward while watching this programming. Free on demand content provides subscribers with access to selected programming from a variety of sources, both local and national, with no incremental charges. Subscribers are charged for movies on demand on a per use basis. Subscription video on demand provides digital customers with the ability to view an array of content associated with a particular content provider for a separate monthly fee or as part of their monthly fee for the relevant service. Subscription video on demand is currently offered in connection with premium channels such as HBO and it is expected that other programming will be available over time.

      Traditional pay per view, with fixed start times and no pause or rewind functionality, has been largely eclipsed by the availability of video on demand in most Time Warner Cable divisions. However, in some areas, subscribers with older, analog set-top boxes can still order pay per view programming.

      Time Warner Cable offers set-top boxes with integrated DVRs in all 31 of its divisions. DVR users can record programming on a hard drive built into the set-top box through the interactive program guide and view the recorded programming using functions such as pause, rewind and fast-forward. DVR users can also record one show while watching another or record two shows simultaneously. DVR users have the ability to pause “live” television. During 2004, Time Warner Cable introduced HDTV-capable DVRs. In 2005, Time Warner Cable expects to introduce a multi-room DVR, which will allow programming to be captured on a DVR set-top box in one room and watched on other television sets around the house without the need for additional DVRs.

      Time Warner Cable carries HDTV offerings of HBO, Showtime, ESPN, Discovery, HDNet and iN DEMAND, as well as high-definition sports programming from Fox’s Regional Sports Networks and NBA-TV. Time Warner Cable also carries the high definition television signals and other digital signals broadcast by numerous local television stations, including all stations owned and operated by the ABC, CBS, NBC and Fox networks and nearly all public television stations in Time Warner Cable’s operating areas.

      Video programming rights represent a major cost component for Time Warner Cable. Time Warner Cable generally obtains the right to carry video programming services through negotiation of affiliation agreements with programmers. Most programming services impose a monthly license fee per subscriber upon the cable operator and these fees typically increase over time. Time Warner Cable’s programming costs continue to rise, especially for sports programming (See “Management’s Discussion and Analysis of Results of Operations and Financial Condition, Business Segment Results — Cable” in the financial pages herein). Time Warner Cable obtains the right to carry local broadcast television stations either through the stations’ exercise of their so-called “must carry” rights, or through negotiated retransmission consent agreements. See “Regulation and Legislation — Communications Act and FCC Regulation — Carriage of Broadcast Television Stations and Other Programming Regulation” below. Time Warner Cable’s existing programming and retransmission consent agreements expire at various times. Time Warner Cable cannot ensure that it will be able to renew any or all of its existing agreements upon expiration or obtain the rights to any other programming services or broadcast television stations on reasonable terms. It is not known whether the loss of any one popular programming supplier would have a material adverse effect on Time Warner Cable’s operations.

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      As of December 31, 2004, Time Warner Cable had 4.1 million high-speed data subscribers, consisting of over 3.9 million residential subscribers and approximately 173,000 commercial accounts, across its 31 divisions. Subscribers pay a flat monthly fee for high-speed data service based upon the level of service received. Generally, each Time Warner Cable division offers multiple levels of service, each with different maximum upstream and downstream data transfer rates. Due to their nature, commercial and bulk subscribers are charged at different rates than residential subscribers.

      Time Warner Cable’s residential customers can choose from a variety of ISPs, including the Company’s branded, high-speed Road Runner service. High-speed data customers connect their personal computers (PCs) to Time Warner Cable’s two-way hybrid fiber optic/coaxial plant using a cable modem. Time Warner Cable also offers networking options that allow customers to connect multiple PCs to a single cable modem.

      Time Warner Cable’s provision of ISP services is subject to compliance with the terms of the FTC Consent Decree and the FCC Order entered in connection with the regulatory clearance of the America Online-Historic TW Merger. (See “Regulation and Legislation” below, for a description of these terms).

      Time Warner Cable and AOL recently announced a strategic agreement under which Time Warner Cable will offer Road Runner customers the opportunity to receive both the Road Runner service and access to all of the AOL on-line offerings for a single price. Among other things, under the agreement, AOL is expected to actively encourage its existing dial-up customers located in Time Warner Cable service areas to convert to the offering. (See also, “America Online — AOL Service” above).

      By the end of 2004, Time Warner Cable’s new voice service, Digital Phone, had been launched in all 31 of Time Warner Cable’s divisions and was available to over two-thirds of Time Warner Cable’s homes passed. Digital Phone provides unlimited local, in-state and domestic long distance calling, as well as call waiting, caller ID, voice mail and enhanced “911” services, for a fixed monthly fee. Digital Phone subscribers can make and receive calls using virtually any commercially available telephone handset (including a cordless phone) connected to their normal in-home telephone wiring. Subscribers switching to Digital Phone can keep their existing landline phone numbers and retain their directory listings. Digital Phone enables Time Warner Cable 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 offered by competitors.

      Time Warner Cable has multi-year agreements with MCI and Sprint pursuant to which these companies assist Time Warner Cable in providing Digital Phone service to customers by routing voice traffic to the public switched network, delivering enhanced “911” service, and assisting in local number portability and long distance traffic carriage. In February 2005, MCI announced that it had agreed to be acquired by Verizon, a regional phone company that competes with Time Warner Cable in some areas. It is not known what impact, if any, the proposed acquisition will have on Time Warner Cable’s Digital Phone offering.

      Time Warner Cable also generates revenue by selling advertising time to a variety of national, regional and local businesses.

      Cable operators generally receive an allocation of scheduled advertising time on cable programming services into which the operator can insert commercials. The clustering of Time Warner Cable’s systems expands the share of viewers that Time Warner Cable reaches within a local DMA (Designated Market Area), which helps local advertising sales personnel to compete more effectively with broadcast and other media. In addition, in many locations, contiguous cable system operators have formed advertising interconnects to deliver locally inserted commercials across wider geographic areas, replicating the reach of broadcast stations as much as possible. As of December 31, 2004, 15 of Time Warner Cable’s 31 divisions participated in local cable advertising interconnects.

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      Time Warner Cable operates 24-hour local news channels in New York City (NY1 News and NY1 Noticias), Albany, NY (Capital News 9), Rochester, NY (R/ News), Syracuse, NY (News 10 Now), Charlotte and Raleigh, NC (Carolina News 14) and Austin, TX (News 8 Austin). During 2004, Time Warner Cable agreed to dissolve certain joint ventures with Belo Corp. which resulted in the closing of news channels in Houston and San Antonio, TX.

Cable Joint Ventures

      On May 1, 2004, Time Warner Cable completed the restructuring of two managed joint ventures, Kansas City Cable Partners (“KCCP”), previously a 50-50 joint venture between Comcast and Time Warner Entertainment Company, L.P. (“TWE”), serving approximately 295,000 basic video subscribers as of December 31, 2004, and Texas Cable Partners, L.P. (“TCP”), previously a 50-50 joint venture between Comcast and the TWE-A/ N partnership, serving over 1.2 million basic video subscribers as of December 31, 2004. As a result of the restructuring, KCCP was merged into TCP and renamed “Texas and Kansas City Cable Partners, L.P.” Following the restructuring, the combined partnership was owned 50% by Comcast and 50% by TWE and TWE-A/ N, collectively. In February 2005, TWE’s interest in the partnership was contributed to TWE-A/N in exchange for preferred equity in TWE-A/N. The Company continues to account for its investment in the restructured venture using the equity method. Beginning any time after June 1, 2006, either Time Warner Cable or Comcast can trigger the dissolution of the partnership. If a dissolution is triggered, the non-triggering party has the right to choose and take full ownership of one of two pools of the combined partnership’s systems — one pool consisting of the Houston systems and the other consisting of the Kansas City and southwest Texas systems — with an arrangement to distribute the partnership’s debt between the two pools. The party triggering the restructuring would own the remaining pool of systems and any debt associated with that pool.

Competition

      Time Warner Cable faces intense competition from a variety of alternative information and entertainment delivery sources, principally from direct-to-home satellite video providers and regional telephone companies offering phone and DSL services. Competition with regional telephone companies has intensified as Time Warner Cable has introduced its Digital Phone service, with a number of regional telephone companies having entered into cross-marketing arrangements with direct-to-home satellite service providers and a number indicating that they intend to begin to offer video services to consumers by installing video-capable fiber lines, sometimes directly to consumer’s homes. In the future, technological advances will most likely increase the number of alternatives available to Time Warner Cable’s customers.

      Direct Broadcast Satellite (DBS). Time Warner Cable’s video services face competition from satellite services, such as the Dish Network and DirecTV, which is controlled by News Corporation, a major Time Warner Cable programming supplier. DirecTV and Dish Network offer satellite-delivered pre-packaged programming services that can be received by relatively small and inexpensive receiving dishes. The video services provided by these satellite providers are comparable, in many respects, to Time Warner Cable’s analog and digital video services. DBS subscribers can obtain satellite receivers with integrated DVRs and, in nearly all areas in which Time Warner Cable operates, DBS subscribers also receive local broadcast signals, which were previously available from DBS only in limited areas. Both major DBS providers have entered into co-marketing arrangements with regional telephone companies in an effort to provide customers with both video and DSL service from what appears to the customer as a single source.

      “Online” Competition. Time Warner Cable’s high-speed data service faces competition from a variety of companies that offer other forms of online services, including DSL high-speed data service provided by regional telephone companies and dial-up services over ordinary telephone lines. DSL providers have engaged in aggressive price competition in some of Time Warner Cable’s operating areas and some DSL providers

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      Digital Phone Competition. Time Warner Cable introduced its new Digital Phone service in all 31 of its regional divisions by the end of 2004. Digital Phone competes directly with the local and long distance offerings of the regional telephone companies which provide service in these areas, as well as with wireless phone providers and national providers of voice over Internet products such as Vonage. This has heightened the competitive environment in which Time Warner Cable operates. As noted above, the regional telephone companies, with whom Time Warner Cable is competing for phone customers, also offer online services that compete with Time Warner Cable’s high-speed data service. In addition, a number of regional telephone companies have entered into cross-marketing arrangements with DBS providers and a number have indicated that they intend to begin to offer video services to consumers.

      Overbuilds. Under the Cable Television Consumer Protection and Competition Act of 1992, franchising authorities are prohibited from unreasonably refusing to award additional franchises. As a result, from time to time, Time Warner Cable faces competition from overlapping cable systems operating in its franchise areas, including municipally-owned systems.

      SMATV (Satellite master antenna television). Additional competition comes from private cable television systems servicing condominiums, apartment complexes and certain other multiple dwelling units, often on an exclusive basis, with local broadcast signals and many of the same satellite-delivered program services offered by franchised cable systems. Some SMATV operators now offer voice and high-speed data services.

      MMDS/ Wireless Cable (Multichannel microwave distribution services). Time Warner Cable faces competition from wireless cable operators, including digital wireless operators, who use terrestrial microwave technology to distribute video programming. Some MMDS operators now offer voice and high-speed Internet services.

      Consumer Electronics Manufacturers. To the extent that Time Warner Cable’s products and services converge with theirs, Time Warner Cable competes with the manufacturers of consumer electronics products. For instance, Time Warner Cable’s DVRs compete with similar devices manufactured by consumer electronics companies. However, consumer electronics manufacturers have the potential to benefit Time Warner Cable as well. For instance, if consumer electronics manufacturers produce devices capable of attaching to Time Warner Cable’s network and providing authorized customers with access to Time Warner Cable’s products and services, Time Warner Cable could reduce the amount it spends on consumer premises equipment such as set-top boxes.

      Additional Competition. In addition to multichannel video providers, cable systems compete with all other sources of news, information and entertainment, including over-the-air television broadcast reception, live events, movie theaters, home video products and the Internet. In general, Time Warner Cable also faces competition from other media for advertising dollars.

FILMED ENTERTAINMENT

      The Company’s Filmed Entertainment businesses produce and distribute theatrical motion pictures, television shows, animation and other programming, distribute home video product and license rights to the Company’s feature films, television programming and characters. All of the foregoing businesses are principally conducted by various subsidiaries and affiliates of Warner Bros. Entertainment Inc., known collectively as the Warner Bros. Entertainment Group (“Warner Bros.”), and New Line Cinema Corporation (“New Line”).

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Feature Films

Warner Bros. Pictures

      Warner Bros. produces feature films both wholly on its own and under co-financing arrangements with others, and also distributes completed films produced and financed by others. The terms of Warner Bros.’ agreements with independent producers and other entities are separately negotiated and vary depending upon the production, the amount and type of financing by Warner Bros., the media and territories covered, the distribution term and other factors. Warner Bros.’ feature films are produced under both the Warner Bros. Pictures and Castle Rock banners and, commencing in 2004, also by Warner Independent Pictures.

      Warner Bros.’ strategy focuses on offering a diverse slate of films with a mix of genres, talent and budgets that includes four to six “event” movies per year. In response to the high cost of producing theatrical films, Warner Bros. has entered into certain film co-financing arrangements with other companies, decreasing its financial risk while in most cases retaining substantially all worldwide distribution rights. During 2004, Warner Bros. released a total of 22 original motion pictures for theatrical exhibition, including Harry Potter and the Prisoner of Azkaban, The Polar Express, Ocean’s Twelve and the Academy Award-winning Million Dollar Baby. Of Warner Bros.’ total 2004 releases, 6 were wholly financed by Warner Bros. and 16 were financed with or by others.

      Warner Bros.’ joint venture arrangements include a joint venture with Village Roadshow Pictures to co-finance the production of motion pictures. Additionally, Warner Bros. has an exclusive distribution arrangement with Alcon Entertainment (“Alcon”) for distribution of all of Alcon’s motion pictures in domestic and certain international territories.

      The newly-established Warner Independent Pictures (“WIP”) produces or acquires smaller budget and alternative films for domestic and/or worldwide release. In 2004, its first year, WIP released Before Sunset, We Don’t Live Here Anymore and A Very Long Engagement, among others.

      Warner Bros. distributes feature films to more than 125 international territories. In 2004, Warner Bros. released internationally 18 English-language motion pictures and 23 local language films that it either produced or acquired.

New Line

      Theatrical films are also produced and distributed by New Line, a leading independent producer and distributor of theatrical motion pictures with two film divisions, New Line Cinema and Fine Line Features. Included in its 14 films released during 2004 were The Notebook and The Butterfly Effect. New Line also continued to derive revenues during 2004 from theatrical and home video distribution of the popular titles Elf and The Lord of the Rings: The Return of the King, the third and final installment in the Lord of the Rings trilogy and the winner of eleven Academy Awards, including Best Picture. Like Warner Bros., New Line releases a diversified slate of films with an emphasis on building and leveraging franchises. As part of its strategy for reducing financial risk and dealing with the rising cost of film production, New Line typically pre-sells the international rights to its releases on a territory by territory basis, while still retaining a share of each film’s potential profitability in those foreign territories.

Home Video

      Warner Home Video Inc. (“WHV”) distributes for home video use DVDs and videocassettes containing filmed entertainment product produced or otherwise acquired by the Company’s various content-producing subsidiaries and divisions, including Warner Bros. Pictures, Warner Bros. Television, Castle Rock, New Line, Home Box Office and Turner Broadcasting System. In addition to the creation of DVDs from new content generated by the Company, WHV produces and distributes DVDs from the Company’s extensive filmed entertainment library. The library, which is owned or managed by Warner Bros., currently has more than 6,600 feature films, 40,000 television titles, and 14,000 animated titles (including 1,500 animated shorts). WHV also distributes other companies’ product, including DVDs and videocassettes for BBC and National

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      WHV sells and/or licenses its product in the U.S. and in major international territories to retailers and/or wholesalers through its own sales force, with warehousing and fulfillment handled by third parties. In some countries, WHV’s product is distributed through licensees. DVD product is replicated under long term contracts with third parties. Videocassette product is manufactured under contracts with independent duplicators. Among WHV’s 2004 DVD and videocassette releases, 16 film titles generated U.S. sales of more than one million units each.

      Since inception of the DVD format, WHV has released over 3,000 DVD titles in the U.S. and international markets, led by sales of Warner Bros.’ three Harry Potter films, which have had total net worldwide sales of over 68 million DVD units sold through to the consumer. DVD is the fastest selling consumer electronics product of all time, with an installed base at December 31, 2004 of over 70 million households in the U.S. and over 171 million households internationally (including approximately 42 million households in China).

Television

      Warner Bros. is one of the world’s leading suppliers of television programming, distributing programming in more than 175 countries and in more than 40 languages. Warner Bros. both develops and produces new television series, made-for-television movies, mini-series, reality-based entertainment shows and animation programs and also licenses programming from the Warner Bros. library for exhibition on media all over the world.

      Warner Bros.’ television programming is primarily produced by Warner Bros. Television Production Inc. (“WBTV”), which produces primetime dramatic and comedy programming for the major networks and for cable, and Telepictures Productions Inc. (“Telepictures”), which specializes in reality-based and talk/variety series for the syndication and primetime markets. For the 2004-05 season, WBTV is producing hits such as Gilmore Girls, Smallville and One Tree Hill for The WB Television Network (“The WB Network”) and ER, The West Wing, Two and a Half Men, Without a Trace, Cold Case, The O.C., The George Lopez Show and Nip/ Tuck for third party networks and cable distributors. Telepictures produces primetime reality series The Bachelor and The Bachelorette as well as first-run syndication staples, such as Extra, and the talk show, The Ellen DeGeneres Show.

      Warner Bros. Animation Inc. is responsible for the creation, development and production of contemporary television, made for DVD, and feature film animation, as well as for the creative use and production of classic animated characters from Warner Bros.’ and DC Comics’ libraries, including Looney Tunes and the Hanna-Barbera libraries.

Backlog

      Backlog represents the future revenue not yet recorded from cash contracts for the licensing of theatrical and television programming for pay cable, network (excluding certain license fees), basic cable and syndicated television exhibition. Backlog for all of Time Warner’s filmed entertainment companies amounted to $3.7 billion at December 31, 2004, compared to $3.9 billion at December 31, 2003 (including amounts relating to the intercompany licensing of film product to the Company’s cable television networks (including HBO and the Turner Networks) of $514 million and $740 million as of December 31, 2004 and December 31, 2003, respectively). The backlog excludes advertising barter contracts.

Other Entertainment Assets

      Warner Bros. Interactive Entertainment Inc. (“WBIE”), formed in January 2004, licenses and produces interactive games for a variety of platforms based on Warner Bros.’ and DC Comics’ properties, as well as original game properties. As part of its strategy to become more involved in game production, WBIE

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      Warner Bros. Consumer Products Inc. licenses rights in both domestic and international markets to the names, likenesses, images, logos and other representations of characters and copyrighted material from the films and television series produced or distributed by Warner Bros., including the superhero characters of DC Comics, Hanna-Barbera characters, classic films and Harry Potter.

      Through joint ventures, Warner Bros. International Cinemas Inc. (“WBIC”) owns interests in 81 multi-screen cinema complexes with over 700 screens in Japan, China, Italy and Spain. In early 2004, WBIC entered into agreements with local partners in China to acquire a majority interest in a multiplex in Nanjing and to manage certain others. WBIC also entered into an agreement in 2004 to sell its interest in its cinema circuit in Taiwan, completion of which is subject to certain regulatory approvals in Taiwan.

      DC Comics, wholly owned by the Company, publishes more than 50 regularly issued comics magazines featuring such popular characters as Superman, Batman, Wonder Woman and The Sandman. DC Comics also derives revenues from motion pictures, television, product licensing and books. The Company also owns E.C. Publications, Inc., the publisher of MAD magazine.

Competition

      The production and distribution of theatrical motion pictures, television and animation product and videocassettes/ DVDs are highly competitive businesses, as each vies with the other, as well as with other forms of entertainment and leisure time activities, including video games, the Internet and other computer-related activities for consumers’ attention. Furthermore, there is increased competition in the television industry evidenced by the increasing number and variety of broadcast networks and basic cable and pay television services now available. Despite this increasing variety of networks and services, access to primetime and syndicated television slots has actually tightened as networks and owned and operated stations increasingly source programming from content producers aligned with or owned by their parent companies. There is active competition among all production companies in these industries for the services of producers, directors, writers, actors and others and for the acquisition of literary properties. With respect to the distribution of television product, there is significant competition from independent distributors as well as major studios.

      Piracy and unauthorized recording, transmission and distribution of digital content and physical products are increasing challenges due to advances in compression technologies and proliferation of broadband access which make it easier to copy and distribute large files as well as to transfer such files to physical media. Additionally, the increase in usage of DVRs that allow consumers to skip commercials could significantly impact the advertising markets that drive the commercial television business. Revenues for filmed entertainment product depend in part upon general economic conditions, but the competitive position of a producer or distributor is still greatly affected by the quality of, and public response to, the entertainment product it makes available to the marketplace.

      Warner Bros. also competes in its character merchandising and other licensing activities with other licensors of character, brand and celebrity names.

NETWORKS

      The Company’s Networks business consists principally of domestic and international basic cable networks, pay television programming services and a broadcast television network. The basic cable networks (collectively, the “Turner Networks”) owned by Turner Broadcasting System, Inc. (“Turner”) constitute the principal component of the Company’s basic cable networks. Pay television programming consists of the multichannel HBO and Cinemax pay television programming services (collectively, the “Home Box Office Services”) operated by Home Box Office, Inc. The WB Network, a broadcast television network, is operated

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      The programming of the Turner Networks and the Home Box Office Services (collectively, the “Cable Networks”) is distributed via cable, satellite and other distribution technologies.

      The Turner Networks generate their revenue principally from the sale of advertising (other than Turner Classic Movies, which sells advertising only in certain European markets) and from receipt of monthly subscriber fees paid by cable system operators, satellite distribution services, hotels and other customers (known as affiliates) that have contracted to receive and distribute such networks. Turner Classic Movies is commercial-free in most of its distribution area and generates most of its revenue from the monthly fees paid by affiliates, which are generally charged on a per subscriber basis. The Home Box Office Services generate revenue principally from fees paid by affiliates for the delivery of the Home Box Office Services to subscribers who are generally free to cancel their subscriptions at any time. Home Box Office’s agreements with its affiliates are typically long-term arrangements that provide for annual service fee increases and retail promotion activities and have fee arrangements that are generally related to the number of subscribers served by the affiliate. The Home Box Office Services and their affiliates engage in ongoing marketing and promotional activities to retain existing subscribers and acquire new subscribers. Home Box Office also derives revenues from its original films and series through the sale of DVDs, as well as, in recent years, from its licensing of successful original programming in syndication and to basic cable channels.

      Although the Cable Networks believe prospects of continued carriage and marketing of their respective networks by the larger affiliates are good, the loss of one or more of them as distributors of any individual network or service could have a material adverse effect on their respective businesses. In addition, further consolidation of multiple-system cable operators could adversely impact the Cable Networks’ prospects for securing future carriage agreements on favorable terms.

      Advertising revenue on the basic cable networks and The WB Network consists of consumer advertising, which is sold primarily on a national basis (The WB Network sells time exclusively on a national basis, with local affiliates of The WB Network selling local advertising). Advertising contracts generally have terms of one year or less. Advertising revenue is generated from a wide variety of categories, including food and beverage, financial and business services, entertainment, drugs/health and medical and automotive. Advertising revenue is a function of the size and demographics of the audience delivered, the “CPM,” which is the cost per thousand viewers delivered, and the number of units of time sold. Units sold and CPMs are influenced by the quantitative and qualitative characteristics of the audience of each network as well as overall advertiser demand in the marketplace.

Turner Networks

      Turner’s entertainment networks include two general entertainment networks, TBS, with approximately 88.5 million U.S. households as of December 31, 2004, reported by Nielsen Media Research (“households”); and TNT, with approximately 88.7 million households in the U.S. as of December 31, 2004; as well as Cartoon Network, with approximately 87.1 million households in the U.S. as of December 31, 2004; and Turner Classic Movies, a commercial-free network presenting classic films from the Company’s MGM, RKO and pre-1950 Warner Bros. film libraries, among others, which had approximately 70.2 million households in the U.S. as of December 31, 2004. Programming for these entertainment networks is derived, in part, from the Company’s film, made-for-television and animation libraries as to which Turner or other divisions of the Company own the copyrights, plus licensed programming, including sports, and original films and series. Other networks include Turner South, a regional entertainment network featuring movies and sitcoms from the Company’s library and regional sports events and original programming targeted to viewers in the Southeast, and Boomerang, a network featuring classic cartoons.

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      Turner has licensed programming rights from the National Basketball Association (the “NBA”) to televise a certain number of regular season and playoff games on TNT through the 2007-08 season. TBS and Turner South televise Atlanta Braves baseball games, for which rights fee payments are made to Major League Baseball’s central fund for distribution to all Major League Baseball clubs. Through a joint venture with NBC, Turner also has rights to televise certain NASCAR Nextel Cup and Busch Series races through 2006.

      Turner’s CNN network, a 24-hour per day cable television news service, had more than 88.8 million households in the U.S. as of December 31, 2004. Together with CNN International (“CNNI”), CNN reached more than 200 countries and territories as of December 31, 2004. CNN operates 37 news bureaus, of which 11 are located in the U.S. and 26 are located around the world. In addition, Headline News provides updated half-hour newscasts throughout each day.

      CNNI is distributed to multiple distribution platforms for delivery to cable systems, satellite platforms, broadcasters, hotels and other viewers around the world on a network of 11 regional satellites. CNN Headline News, which used to be broadcast only in the United States, was launched in the Asia Pacific region in November 2004. CNN en Español is a separate Spanish language all-news network in Latin America and CNNj is an all-news network in Japan. Turner also distributes region-specific and local-language feeds such as Pogo(an entertainment network for children) in India and versions of TNT, Cartoon Network, Turner Classic Movies and Boomerang on either a single channel or combined channel basis in over 125 countries around the world. In the U.K. and Ireland, Turner distributes Toonami, an all-action animation network.

      In a number of regions, Turner has launched international versions of its channels through joint ventures with local partners. These include CNN+, a Spanish language 24-hour news network distributed in Spain and Andorra; CNN Turk, a Turkish language 24-hour news network; CETV, a general entertainment network in China in which Turner has retained a minority interest; and Cartoon Network Japan. Turner has recently increased its shareholding in Japan Entertainment Network K.K., the joint venture company that operates Cartoon Network Japan, from 50% to 70%. Turner holds a significant interest in n-tv, a German language news network currently reaching over 48 million homes in Germany and contiguous countries in Europe, primarily via cable and satellite. In November 2004, Turner launched Boing, a new children’s/family channel under a joint venture with Mediaset in Italy. The channel offers animation and live action content and is carried on the new digital terrestrial (free to air) platform, currently reaching approximately one million households.

      In addition to its cable networks, Turner manages various Internet sites that generate revenue from commercial advertising and consumer subscription fees. The CNN News Group has multiple sites, such as CNN.com and allpolitics.com, which are operated by CNN Interactive. Several localized editions of CNN.com operate in Turner’s international markets. The CNN News Group also produces CNNMoney.com in collaboration with Time Inc.’s Money Magazine. Turner also operates the NASCAR Website, NASCAR.com, pursuant to an agreement with NASCAR through 2006, and the PGA’s Website, PGA.com, pursuant to an agreement with PGA through 2011. Turner operates CartoonNetwork.com, a popular advertiser-supported site in the United States, as well as 15 international sites affiliated with the regional Cartoon Network feeds, Boing and Pogo.

Home Box Office

      HBO, operated by the wholly owned subsidiary Home Box Office, Inc., is the nation’s most widely distributed pay television service. Together with its sister service, Cinemax, HBO had approximately 39.4 million subscriptions as of December 31, 2004. Both HBO and Cinemax are made available on a number of multiplex channels and in high definition. Home Box Office also offers subscription video on demand

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      A major portion of the programming on HBO and Cinemax consists of recently released, uncut and uncensored theatrical motion pictures. Home Box Office’s practice has been to negotiate licensing agreements of varying duration with major motion picture studios and independent producers and distributors in order to ensure continued access to such films. These agreements typically grant pay television exhibition rights to recently released and certain older films owned by the particular studio, producer or distributor in exchange for negotiated fees, which may be a function of, among other things, the box office performances of the films.

      HBO is also defined by its award-winning original dramatic and comedy series, movies and mini-series such as The Sopranos, Six Feet Under, Deadwood and Angels in America, and boxing matches, sports documentaries and sports news programs, as well as concerts, comedy specials, family programming and documentaries. HBO won four Golden Globe Awards in January 2005 and also, in 2004, won 32 Primetime Emmys® — the most of any network, and the most in HBO history.

      Home Box Office produces Everybody Loves Raymond, now in its ninth and final season on CBS and its first syndication cycle. Home Box Office also licenses its successful original programming in syndication and to basic cable channels. HBO Sports operates HBO Pay-Per-View, an entity that distributes pay-per-view prizefights. HBO Video markets DVDs of a variety of HBO’s original programming, including movies, miniseries and dramatic and comedy series. Through various joint ventures, HBO-branded services are also distributed in more than 50 countries in Latin America, Asia and Central Europe.

The WB Television Network

      The WB Network provides a national group of affiliated television stations with 13 hours of prime time plus two additional hours of Sunday access programming during six days of the week (Sunday through Friday). The WB Network’s programming is primarily aimed at teenagers and adults, ages 12-34. The network’s line-up of programs includes series such as 7th Heaven, Everwood, One Tree Hill, Charmed, Reba, Smallville, Gilmore Girls and Summerland. As of December 31, 2004, Kids’ WB!, a programming service for young viewers, presented 14 hours of animated programming per week, including Mucha Lucha, Yu-Gi-Oh!, The Batman, Xiaolin Showdown and Pokemon.

      As of December 31, 2004, 88 primary and 10 secondary affiliates provide coverage for The WB Network in the top 100 television markets. Additional coverage reaching approximately 9 million homes in smaller markets is provided by The WB 100+ Station Group, a venture between The WB Network and local broadcasters under which WB programming is disseminated over the facilities of local cable operators.

      Tribune Broadcasting owns a 22.25% interest in The WB Network and the balance is held by WB Communications Inc., a wholly owned subsidiary of the Company. The WB Network is managed by the Warner Bros. Entertainment Group.

Other Network Interests

      The Company and Liberty Media (“Liberty”) each have a 50% interest in Court TV, which was available in approximately 83 million households as of December 31, 2004. Court TV is an advertiser-supported basic cable television service whose programming aims to provide an informative and entertaining view of the American system of justice. Focusing on “investigative television,” Court TV broadcasts trials by day and original programs such as Forensic Files and popular off-network series such as NYPD Blue in the evening. Under the Court TV Operating Agreement, beginning January 2006, Liberty may give written notice to the Company requiring the Company to purchase all of Liberty’s interest in Court TV (the “Liberty Put”). The agreement further provides that as of the same date, the Company may, by notice to Liberty, require Liberty to sell all of its interest in Court TV to the Company (the “Time Warner Call”). The price to be paid upon exercise of either the Liberty Put or the Time Warner Call will be an amount equal to one half of the fair market value of Court TV, determined by appraisal.

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      Through a wholly owned subsidiary, Turner owns the Atlanta Braves of Major League Baseball. The Braves derive revenue from ticket receipts, advertising and related sales, premium seating sales, concessions, local sponsorships and the sale of local broadcasting rights, and share pro rata in proceeds from national media contracts and licensing activities of Major League Baseball.

Competition

      Each of the Networks competes with other television programming services for marketing and distribution by cable and other distribution systems. All of the Networks compete for viewers’ attention and audience share with all other forms of programming provided to viewers, including broadcast networks, local over-the-air television stations, other pay and basic cable television services, home video, pay-per-view and video on demand services, online activities and other forms of news, information and entertainment. In addition, the Networks face competition for programming with those same commercial television networks, independent stations, and pay and basic cable television services, some of which have exclusive contracts with motion picture studios and independent motion picture distributors. The Turner Networks, The WB Network and Turner’s Internet sites compete for advertising with numerous direct competitors and other media.

      The Cable Networks’ production divisions compete with other producers and distributors of programs for air time on broadcast networks, independent commercial television stations, and pay and basic cable television networks.

PUBLISHING

      The Company’s magazine and book publishing businesses are conducted primarily by Time Inc., a wholly owned subsidiary of the Company, either directly or through its subsidiaries. Time Warner Book Group Inc., a Time Inc. subsidiary, conducts most of Publishing’s book publishing operations. In addition, Time Inc. operates certain direct marketing businesses.

Magazines

      As of February 1, 2005, Time Inc. published over 130 magazines worldwide, comprised of over 40 in the U.S. and over 90 in other countries. These magazines generally appeal to the broad consumer market and include People, Sports Illustrated, In Style, Southern Living, Time, Entertainment Weekly, Fortune, Real Simple, What’s On TV and Cooking Light.

      Time Inc. expands its core magazine businesses generally through the development of product extensions and international editions. Product extensions are generally managed by the individual magazines and involve, among other things, new magazines, specialized editions aimed at particular audiences, and distribution of editorial content through different media, such as the Internet, books and television.

      In 2004, Time Inc. launched more magazines in one year than ever before, including All You, a monthly U.S. women’s magazine distributed exclusively, at this time, in Wal-Mart stores, Cottage Living, a monthly U.S. women’s lifestyle magazine, and Nuts, a weekly U.K. mass-market, general lifestyle men’s magazine. Time Inc. also re-launched Life as a weekend magazine distributed in U.S. newspapers nationwide.

      Generally, each magazine published by Time Inc. in the U.S. has an editorial staff under the supervision of a managing editor and a business staff under the management of a president or publisher. Magazine production and distribution activities are generally centralized. Fulfillment activities for Time Inc.’s U.S. magazines are generally administered from a centralized facility in Tampa, Florida.

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      Time Inc.’s major magazines and their areas of editorial focus are summarized below:

      People is a weekly magazine that reports on celebrities and other notable personalities. People generated approximately 13% of Publishing’s revenues in 2004. People has expanded its franchise in recent years to include People en Español, a Spanish-language magazine aimed primarily at Hispanic readers in the U.S., and Teen People, aimed at teenage readers. Who Weekly is an Australian version of People managed by IPC Media, Time Inc.’s consumer magazine publisher in the U.K.

      Sports Illustrated is a weekly magazine that covers sports. Sports Illustrated for Kids is a sports magazine intended primarily for pre-teenagers. Sports Illustrated on Campus is a sports supplement inserted into major college newspapers weekly during the school year.

      In Style is a monthly magazine that focuses on celebrity, lifestyle, beauty and fashion. In recent years, In Style has expanded internationally by launching in Australia and the U.K. under the management of IPC Media; it is also published in Germany, Brazil, South Korea, Greece and Spain under licensing agreements.

      Time is a weekly newsmagazine that summarizes the news and interprets the week’s events, both national and international. Time also has 4 weekly English-language editions that circulate outside the United States. Time for Kids is a current events newsmagazine for children, ages 5 to 13.

      Entertainment Weekly is a weekly magazine that includes reviews and reports on movies, DVDs, video, television, music and books.

      Fortune is a bi-weekly magazine that reports on worldwide economic and business developments and compiles the annual Fortune 500 list of the largest U.S. corporations. Other business and financial magazines include Money, a monthly magazine that reports primarily on personal finance, FSB: Fortune Small Business, which covers small business, and Business 2.0, a magazine that reports on innovation in the worlds of business and technology.

      Real Simple is a monthly magazine that focuses on life, home, body and soul and provides practical solutions for simplifying various aspects of busy lives.

      IPC Media, the U.K.’s leading consumer magazine publisher, publishes over 80 magazines and numerous special issues and guides in the U.K. and Australia. These publications are largely focused in the television, women’s lifestyle, home and garden, leisure and men’s lifestyle categories. Its magazines include What’s on TV, TV Times, Woman, Marie Claire, Homes & Gardens, Country Life, Loaded, Horse & Hound and the new Nuts.

      Southern Progress Corporation publishes 8 magazines, including the regional lifestyle magazines Southern Living and Sunset and the specialty magazines Cooking Light and Health.

      Time4 Media publishes 17 sport and outdoor activity enthusiast magazines such as Golf, Field & Stream, Outdoor Life, Ski, Yachting, Salt Water Sportsman, Transworld Skateboarding and Transworld Snowboarding, as well as Popular Science. In addition, Time4 Media oversees the publication and production of This Old House magazine and several television series, including This Old House and Ask This Old House.

      The Parenting Group publishes Parenting and Babytalk magazines.

      Time Inc. also has management responsibility under a management contract for the American Express Publishing Corporation’s publishing operations, including its lifestyle magazines Travel & Leisure, Food & Wine and Departures.

      Time Inc. has a 49% equity stake in Essence Communications Partners, a partnership which publishes Essence, the premier magazine for African-American women. Time Inc. has signed an agreement in principle to acquire the remaining 51% of the partnership that it does not already own. This transaction is expected to close in the first quarter of 2005.

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      Advertising carried in Time Inc.’s U.S. magazines is predominantly consumer advertising, including domestic and foreign automobiles, toiletries and cosmetics, food, media and entertainment, pharmaceuticals, retail and department stores, computers and technology, and financial services. In 2004, Time Inc. magazines accounted for approximately 24.2% of the total U.S. advertising revenue in consumer magazines, as measured by the Publishers Information Bureau (PIB). People, Sports Illustrated and Time were ranked 1, 2 and 4, respectively, by PIB, and Time Inc. had 8 of the 30 leading magazines in terms of advertising dollars.

      Through the sale of magazines to consumers, circulation generates significant revenues for Time Inc. In addition, circulation is an important component in determining Time Inc.’s advertising revenues because advertising page rates are based on circulation and readership. Most of Time Inc.’s U.S. magazines are sold primarily by subscription and delivered to subscribers through the mail. Most of Time Inc.’s international magazines are sold primarily at newsstand. Subscriptions are sold primarily through direct mail and online solicitation, subscription sales agents, marketing agreements with other companies and insert cards in Time Inc. magazines and other publications.

      Time Inc. owns approximately 92% of Synapse Group, Inc. (“Synapse”), a leading magazine subscription agent in the U.S. Synapse sells magazine subscriptions principally through marketing relationships with credit card issuers, consumer catalog companies, commercial airlines with frequent flier programs and Internet businesses. Under the relevant agreements, in April 2006 the other Synapse shareholders may require Time Inc. to purchase their entire remaining interest in Synapse (the “Synapse Put”), and in May 2006 Time Inc. may require the Synapse shareholders to sell their entire interest in Synapse to Time Inc. (the “Time Inc. Call”). The price to be paid upon exercise of either the Synapse Put or the Time Inc. Call would be based upon Synapse’s earnings for 2005.

      Newsstand sales of magazines, which are reported as a component of Subscription revenues, are sold through traditional newsstands as well as other retail outlets such as Wal-Mart, supermarkets and convenience and drug stores, and may or may not result in repeat purchases and revenues. Magazines are supplied by wholesalers or directly through a Time Inc. subsidiary. Time/ Warner Retail Sales & Marketing Inc. is responsible for distributing and marketing newsstand copies of Time Inc. magazines and books and certain other publishers’ magazines and books sold through wholesalers primarily in the U.S. and Canada.

      Paper constitutes a significant component of physical costs in the production of magazines. During 2004, Time Inc. purchased over half a million tons of paper principally from four independent manufacturers.

      Printing and binding for Time Inc. magazines are performed primarily by major domestic and international independent printing concerns in multiple locations in the U.S. and in locations in approximately seven other countries. Magazine printing contracts are either fixed-term or open-ended at fixed prices with, in some cases, adjustments based on certain criteria.

Books

      Time Inc.’s trade book publishing operations are conducted primarily by the Time Warner Book Group Inc. through its three major publishing houses, Warner Books, Little, Brown and Company and Time Warner Book Group UK. During 2004, the Time Warner Book Group placed a record 58 books on The New York Times bestseller lists, including Publishers Weekly Book of the Year America (The Book) by Jon Stewart, Your Best Life Now by Joel Osteen and A Salty Piece of Land by Jimmy Buffett, and new releases from many of its major recurring bestselling authors, including David Baldacci, Nelson DeMille, James Patterson and Nicholas Sparks.

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      The Time Warner Book Group handles book distribution for Little, Brown and Warner Books, as well as Disney, Microsoft and other publishers, through its distribution center in Indiana. The marketing of trade books is primarily to retail stores, online outlets and wholesalers throughout the U.S., Canada and the U.K. Through their combined U.S. and U.K. operations, the Time Warner Book Group companies have the ability to acquire English-language publishing rights for the distribution of hard and soft-cover books throughout the world.

      Oxmoor House, Inc., Leisure Arts, Inc. and Sunset Books publish and distribute a variety of how-to and lifestyle books covering the areas of cooking, entertaining, health, home improvement, gardening, general crafts, needlecrafts, decorating and organizing. Time Inc. Home Entertainment publishes branded book specials and commemorative editions using Time Inc. magazine editorial content and content from third-party publishers.

Direct Marketing

      Through subsidiaries, Time Inc. conducts direct marketing businesses. In addition to selling magazine subscriptions, Synapse is a direct marketer of consumer products, including software, DVDs and other merchandise.

      Southern Living At Home, the direct selling division of Southern Progress Corporation, specializes in home décor products which are sold through approximately 35,000 independent consultants at parties hosted in people’s homes in the U.S.

      Book-of-the-Month Club, Inc. (“BOMC”) has a 50-50 joint venture with Bertelsmann’s Doubleday Direct, Inc. to operate the U.S. book clubs of BOMC and Doubleday jointly. The joint venture, named Bookspan, acquires the rights to manufacture and sell books to consumers through clubs. Bookspan operates its own fulfillment and warehousing operations in Pennsylvania. Under the relevant agreements, beginning in June 2005, either Bertelsmann or the Company may elect to terminate the venture by giving notice during specified termination periods. If such an election is made by either party, a confidential bid process will take place pursuant to which the highest bidder will purchase the other party’s entire venture interest. The Company is unable to predict whether this bid process will occur or the amount that may be paid out or received under it.

      On December 31, 2003, Time Inc. sold its Time Life Inc. business, a direct marketer of entertainment products such as music and videos.

Postal Rates

      Postal costs represent a significant operating expense for the Company’s magazine publishing and direct marketing activities. In 2004, the Company spent over $350 million for services provided by the U.S. Postal Service. Time Inc. strives to minimize postal expense through the use of certain cost-saving activities, including activities with respect to address quality, mail preparation and delivery of products to postal facilities. It has been the Company’s practice, generally, in selling books and other non-magazine products by mail to include a separate charge for postage and handling, which is adjusted from time to time to partially offset any increased postage or handling costs.

Competition

      Time Inc.’s magazine operations compete for circulation, audience and advertising with numerous other publishers, as well as other media. These magazine operations compete for advertising directed at the general public and also advertising directed at more focused demographic groups. The Time Warner Book Group faces competition from other major consumer publishers for top-selling authors and for third party distribution business.

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      Time Inc.’s direct marketing operations compete with other direct marketers through all media for the consumer’s attention. In addition to the traditional media sources for product sales, the Internet has become a strong vehicle in the direct marketing business and for subscription sales.

OTHER ASSETS

      The Company also has an aggregate equity interest in Time Warner Telecom Inc. (“Time Warner Telecom”) of approximately 44% and an aggregate voting interest (consisting of high-voting common stock) of approximately 71%. Time Warner Telecom is a provider of managed network solutions to business customers and organizations in 44 metropolitan markets across the United States. Time Warner Telecom integrates data, dedicated Internet access, and local and long distance voice services for long distance carriers, wireless communications companies, incumbent local exchange carriers and various organizations in the public and private sector. The Company’s nominees to the Board of Directors of Time Warner Telecom are limited to less than a majority by the terms of a stockholder agreement and Time Warner Telecom is a separately-managed public company whose stock is traded through Nasdaq. Its financial results are not consolidated with those of the Company. The Company has determined that it does not consider its interest in Time Warner Telecom to be strategic and has so advised Time Warner Telecom.

INTELLECTUAL PROPERTY

      Time Warner Inc. is one of the world’s leading creators, owners and distributors of intellectual property. The Company’s vast intellectual property assets include copyrights in motion pictures, television programs, books, magazines and software; trademarks in names, logos and characters; patents or patent applications for inventions related to its products and services; and licenses of intellectual property rights of various kinds. These intellectual property assets, both in the U.S. and in other countries around the world, are among the Company’s most valuable assets. The Company derives value from these assets through a range of business models, including the theatrical release of films, the licensing of its films and television programming to multiple domestic and international television and cable networks and pay television services, and the sale of products such as DVDs, videocassettes, books and magazines. It also derives revenues related to its intellectual property through advertising in its magazines, networks, cable systems and online services and from various types of licensing activities, including licensing of its trademarks and characters. To protect these assets, the Company relies upon a combination of copyright, trademark, unfair competition, patent and trade secret laws and contract provisions. The duration of the protection afforded to the Company’s intellectual property depends on the type of property in question and the laws and regulations of the relevant jurisdiction; in the case of licenses, it also depends on contractual and/or statutory provisions.

      The Company vigorously pursues all appropriate avenues of protection for its intellectual property. However, there can be no assurance of the degree to which these measures will be successful in any given case. Policing unauthorized use of the Company’s products and services is often difficult and the steps taken may not in every case prevent the misappropriation of the Company’s intellectual property. Piracy, particularly in the digital environment, continues to present a threat to revenues from products and services based on intellectual property. The Company seeks to limit that threat through a combination of approaches, including offering legitimate market alternatives, applying digital rights management technologies, pursuing legal sanctions for infringement, promoting appropriate legislative initiatives, and enhancing public awareness of the meaning and value of intellectual property. The Company works with various cross-industry groups and trade associations, as well as with strategic partners to develop and implement technological solutions to control digital piracy.

      Third parties may challenge the validity or scope of the Company’s intellectual property from time to time, and such challenges could result in the limitation or loss of intellectual property rights. In addition, domestic and international laws, statutes and regulations are constantly changing, and the Company’s assets may be either adversely or beneficially affected by such changes. Moreover, effective intellectual property protection may be either unavailable or limited in certain foreign territories. The Company therefore engages

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REGULATION AND LEGISLATION

      The Company’s cable system, cable and broadcast television network and original programming businesses are subject, in part, to regulation by the Federal Communications Commission (“FCC”), and the cable system business is also subject to regulation by most local and some state governments where the Company has cable systems. The Company’s magazine, book and other direct marketing activities are also subject to regulation. In addition, in connection with regulatory clearance of the America Online-Historic TW Merger, the Company’s cable system and Internet businesses are subject to the terms of the Consent Decree (the “Consent Decree”) issued by the Federal Trade Commission (“FTC”), the Memorandum Opinion and Order (“Order”) issued by the FCC, as well as other conditions that have been fully satisfied and are no longer relevant. The Company is also subject to an FTC consent decree (the “Turner Consent Decree”) as a result of the FTC’s approval of the acquisition of Turner Broadcasting System, Inc. in 1996.

      The following is a summary of the terms of these orders as well as current significant federal, state and local laws and regulations affecting the growth and operation of these businesses. In addition, various legislative and regulatory proposals under consideration from time to time by Congress and various federal agencies have in the past materially affected, and may in the future materially affect, the Company.

FTC Consent Decree

      On December 14, 2000, the FTC issued a Consent Decree in connection with the America Online-Historic TW Merger. The consent decree provided that, with the exception of Road Runner, Time Warner Cable was not permitted to launch an affiliated ISP, like the AOL for Broadband service, in its 20 largest divisions, until it launched the EarthLink service, an unaffiliated ISP, on those systems. The Consent Decree also provided that for those systems, Time Warner Cable had to enter into agreements with two additional unaffiliated ISPs within 90 days after launching an affiliated ISP. In addition, the Consent Decree required that, in its remaining divisions, Time Warner Cable had to enter into agreements with three unaffiliated providers within 90 days after launching an affiliated ISP.

      Time Warner Cable has now entered into, and received FTC approval for, agreements with the required number of unaffiliated ISPs in all covered divisions. If any of the required agreements expires or is terminated during the term of the Consent Decree, Time Warner Cable will be required to replace it with another approved agreement.

      The Consent Decree also requires that Time Warner Cable’s FTC-approved agreements contain a provision that requires Time Warner Cable to give notice to the unaffiliated ISPs if Time Warner enters into an agreement for AOL to provide ISP Service, as defined under the Decree, with any one of six specified cable operators. In that event, the Company is required to give each unaffiliated ISP the option to adopt all terms and conditions of the relevant AOL ISP Service agreement. In addition, the Consent Decree requires that Time Warner continue to offer and promote DSL service in areas served by Time Warner Cable to the same extent and on terms comparable to the terms offered in areas not served by Time Warner Cable. America Online is also prohibited from entering into agreements with cable MSOs that restrict the ability of that MSO to enter into agreements with other ISPs or interactive television providers. The Company’s obligations under the Consent Decree expire on April 17, 2006.

FCC Memorandum Opinion and Order

      On January 11, 2001, the FCC issued an Order imposing certain requirements regarding Time Warner Cable’s provision of multiple ISPs. Specifically, the Order requires Time Warner Cable to provide consumers with a list of available ISPs upon request, to allow ISPs to determine the content on their first screen, and to allow ISPs to have direct billing arrangements with the subscribers they obtain. The Order prohibits Time

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      In addition, the FCC’s Order prohibits the Company from entering into any agreement with Comcast that gives any ISP affiliated with the Company exclusive carriage rights on any former AT&T cable system for broadband ISP services or that affects Comcast’s ability to offer rates or other carriage terms to ISPs that are not affiliated with the Company.

Turner FTC Consent Decree

      The Company is also subject to the terms of a consent decree (the “Turner Consent Decree”) entered in connection with the FTC’s approval of the acquisition of Turner by Historic TW in 1996. Certain requirements imposed by the Turner Consent Decree, such as carriage commitments for Time Warner Cable for the rollout of at least one independent national news video programming service, have been fully satisfied by the Company. Various other conditions remain in effect, including certain restrictions which prohibit the Company from offering programming upon terms that (1) condition the availability of, or the carriage terms for, the HBO service upon whether a multichannel video programming distributor carries a video programming service affiliated with Turner; and (2) condition the availability of, or the carriage terms for, CNN, TBS and TNT upon whether a multichannel video programming distributor carries any video programming service affiliated with TWE. The Turner Consent Decree also imposes certain restrictions on the terms by which a Turner video programming service may be offered to an unaffiliated programming distributor that competes in areas served by Time Warner Cable.

      Other conditions of the Turner Consent Decree prohibit Time Warner Cable from requiring, as a condition of carriage, that any national video programming vendor provide a financial interest in its programming service or that such programming vendor provide exclusive rights against any other multichannel programming distributor. In addition, Time Warner Cable may not discriminate on the basis of affiliation in the selection, terms or conditions of carriage for national video programming vendors.

      The Turner Consent Decree also requires that any Time Warner stock held by Liberty Media Corporation (“Liberty Media”), its former corporate parent, Tele-Communications, Inc. (“TCI”), which was merged with AT&T in 1999 and was subsequently acquired by Comcast in 2002, as well as by the late Bob Magness and John C. Malone as individuals, be non-voting except that such securities are entitled to a vote of one-one hundredth (1/100) of a vote per share owned when voting with the outstanding common stock on the election of directors and a vote equal to the vote of the common stock with respect to corporate matters that would adversely change the rights or terms of these non-voting securities. Upon the sale of these non-voting securities to any independent third party, the securities may be converted into voting stock of Time Warner. The Turner Consent Decree also prohibits Liberty Media, TCI (now Comcast), the late Bob Magness and John C. Malone as individuals, from holding ownership interests, collectively, of more than 9.2% of the fully diluted equity of Time Warner. In 2002, Liberty Media sought to eliminate these restrictions from the Turner Consent Decree; the petition was denied by the FTC without prejudice.

      The Turner Consent Decree was modified by the FTC on December 21, 2004, upon application by Liberty Media, to permit Liberty Media to lend to a third party the Company common stock into which the non-voting stock held by it is convertible, provided that Liberty has no right to vote or to direct the voting of the loaned common stock and will not directly or indirectly influence or attempt to influence the voting of such stock. The Turner Consent Decree will expire in February 2007.

Cable System Regulation

      The Communications Act of 1934, as amended (the “Communications Act”) and the regulations and policies of the FCC affect significant aspects of Time Warner Cable’s cable system operations, including

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      Subscriber Rates. The Communications Act and the FCC’s rules regulate rates for basic cable service and equipment in communities that are not subject to “effective competition,” as defined by federal law. Where there is no effective competition, federal law authorizes franchising authorities to regulate the monthly rates charged by the operator for the minimum level of video programming service, referred to as basic service, which generally includes local broadcast channels and public access or governmental channels required by the franchise. This kind of regulation also applies to the installation, sale and lease of equipment used by subscribers to receive basic service, such as set-top boxes and remote control units. In many localities, Time Warner Cable is no longer subject to this rate regulation, either because the local franchising authority has not asked the FCC for permission to regulate or because the FCC has found that there is effective competition.

      Carriage of Broadcast Television Stations and Other Programming Regulation. The Communications Act and the FCC’s regulations contain broadcast signal carriage requirements that allow local commercial television broadcast stations to elect once every three years to require a cable system to carry their stations, subject to some exceptions, or to negotiate with cable systems the terms by which the cable systems may carry their stations, commonly called “retransmission consent.” The most recent election by broadcasters became effective on January 1, 2003.

      The Communications Act and the FCC’s regulations require a cable operator to devote up to one-third of its activated channel capacity for the mandatory carriage of local commercial television stations. The Communications Act and the FCC’s regulations give local non-commercial television stations mandatory carriage rights, but non-commercial stations do not have the option to negotiate retransmission consent for the carriage of their signals by cable systems. Additionally, cable systems must obtain retransmission consent for all “distant” commercial television stations except for commercial satellite-delivered independent “superstations,” commercial radio stations, and some low-power television stations.

      FCC regulations require Time Warner Cable to carry the signals of both commercial and non-commercial local digital-only broadcast stations and the digital signals of local broadcast stations that return their analog spectrum to the government and convert to a digital broadcast format. The FCC’s rules give digital-only broadcast stations discretion to elect whether the operator will carry the station’s primary signal in a digital or converted analog format, and the rules also permit broadcasters with both analog and digital signals to tie the carriage of their digital signals to the carriage of their analog signals as a retransmission consent condition.

      The Communications Act also permits franchising authorities to negotiate with cable operators for channels for public, educational and governmental access programming. Moreover, it requires a cable system with 36 or more activated channels to designate a significant portion of its channel capacity for commercial leased access by third parties to provide programming that may compete with services offered by the cable operator. The FCC regulates various aspects of such third-party commercial use of channel capacity on our cable systems, including the rates and some terms and conditions of the commercial use.

      High-Speed Internet Access. From time to time, industry groups, telephone companies and ISPs have sought local, state and federal regulations that would require cable operators to sell capacity on their systems to ISPs under a common carrier regulatory scheme. Cable operators have successfully challenged regulations requiring this “forced access,” although courts that have considered these cases have employed varying legal rationales in rejecting these regulations.

      In 2002, the FCC released an order in which it determined that cable-modem service constitutes an “information service” rather than a “cable service” or a “telecommunications service,” as those terms are used in the Communications Act. According to the FCC, this conclusion may permit but does not require it to impose “multiple ISP” requirements. In 2002, the FCC also initiated a rulemaking proceeding to consider whether it may and should do so and whether local franchising authorities should be permitted to do so. This rulemaking proceeding remains pending.

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      Several ISPs appealed the FCC’s order in federal court, arguing that cable modem service is a “telecommunications service.” If the ISPs prevail, cable operators may become subject to a requirement that they carry any ISP desiring carriage. In addition, several local franchising authorities also appealed the order in federal court, arguing that the FCC should have held that cable-modem service is a “cable service.” If the local franchising authorities prevail, cable operators may be required to collect and pay franchise fees on cable modem service. In October 2003, the U.S. Court of Appeals for the 9th Circuit vacated in part, and remanded in part for further proceedings, the FCC’s 2002 order. The FCC and various cable-industry parties then filed a petition with the Supreme Court asking it to review the 9th Circuit decision, which, on December 3, 2004, was granted. Local franchising authorities also filed a petition for review, which, on December 6, 2004, was denied. A decision on the merits is expected by June 2005.

      Ownership Limitations. There are various rules prohibiting joint ownership of cable systems and other kinds of communications facilities. Local telephone companies generally may not acquire more than a small equity interest in an existing cable system in the telephone company’s service area, and cable operators generally may not acquire more than a small equity interest in a local telephone company providing service within the cable operator’s franchise area. In addition, cable operators may not have more than a small interest in “multichannel multipoint distribution services” facilities or “satellite master antenna television” systems in their service areas. Finally, the FCC has been exploring whether it should prohibit cable operators from holding ownership interests in satellite operators.

      The Communications Act also required the FCC to adopt “reasonable limits” on the number of subscribers a cable operator may reach through systems in which it holds an ownership interest. In September 1993, the FCC adopted a rule that was later amended to prohibit any cable operator from serving more than 30% of all cable, satellite and other multi-channel subscribers nationwide. The Communications Act also required the FCC to adopt “reasonable limits” on the number of channels that cable operators may fill with programming services in which they hold an ownership interest. In September 1993, the FCC imposed a limit of 40% of a cable operator’s first 75 activated channels. In March 2001, a federal appeals court struck down both limits. The FCC is currently exploring whether it should re-impose any limits. The Company believes that it is unlikely that the FCC will adopt limits more stringent than those struck down.

      Local telephone companies may provide service as traditional cable operators with local franchises or they may opt to provide their programming over unfranchised “open video systems.” Open video systems are subject to specified requirements, including, but not limited to, a requirement that they set aside a portion of their channel capacity for use by unaffiliated program distributors on a non-discriminatory basis. A federal appellate court overturned various parts of the FCC’s open video rules, including the FCC’s preemption of local franchising requirements for open video operators. The FCC has modified its open video rules to comply with the federal court’s decision.

      Pole Attachment Regulation. The Communications Act requires that utilities provide cable systems and telecommunications carriers with nondiscriminatory access to any pole, conduit or right-of-way controlled by the utility. The Communications Act also requires the FCC to regulate the rates, terms and conditions imposed by public utilities for cable systems’ use of utility pole and conduit space unless state authorities demonstrate to the FCC that they adequately regulate pole attachment rates, as is the case in some states in which Time Warner Cable operates. In the absence of state regulation, the FCC administers pole attachment rates on a formula basis. The FCC’s original rate formula governs the maximum rate utilities may charge for attachments to their poles and conduit by cable operators providing cable services. The FCC also adopted a second rate formula that became effective in February 2001 and governs the maximum rate utilities may charge for attachments to their poles and conduit by companies providing telecommunications services. Any increase in attachment rates resulting from the FCC’s new rate formula is being phased in (in equal annual installments) over a five-year period that began in February 2001. The U.S. Supreme Court has upheld the FCC’s jurisdiction to regulate the rates, terms and conditions of cable operators’ pole attachments that are being used to provide both cable service and high-speed data service.

      Other Regulatory Requirements of the Communications Act and the FCC. The Communications Act also includes provisions regulating customer service, subscriber privacy, marketing practices, equal employ-

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      Certain regulatory requirements are also applicable to set-top boxes. Currently, many cable subscribers rent from their cable operator a set-top box that performs both signal-reception functions and conditional-access security functions. The lease rates cable operators charge for this equipment are subject to rate regulation to the same extent as basic cable service. In 1996, Congress enacted a statute seeking to allow subscribers to use set-top boxes obtained from third-party retailers. The most important of the FCC’s implementing regulations requires cable operators to offer separate equipment providing only the conditional-access security function (so that subscribers can purchase set-top boxes or other navigational devices from other sources) and to cease placing into service new set-top boxes that have integrated conditional-access security. The regulations requiring cable operators to cease distributing set-top boxes with integrated conditional-access security are currently scheduled to go into effect on July 1, 2006. Some cable operators have asked the FCC to reconsider these regulations or, in the alternative, to extend the deadline. Those requests are pending as of March 1, 2005.

      In December 2002, cable operators and consumer-electronics companies entered into a standard-setting agreement relating to interoperability between cable systems and reception equipment. Among other things, the agreement envisions consumer electronics devices with a slot for a conditional-access security card — a CableCARD® — provided by the cable operator. To implement the agreement, the FCC promulgated regulations that require cable systems with activated spectrum of 750 MHz or greater to support unidirectional digital devices; establish a voluntary labeling system for unidirectional devices; prohibit so-called “selectable output controls”; and adopt content-encoding rules. The FCC has issued a further notice of proposed rulemaking to consider additional changes. Cable operators, consumer-electronics companies and other market participants are holding discussions that are expected to lead to a similar set of interoperability agreements covering digital devices capable of carrying cable operators’ two-way and interactive products and services.

      Separately, the FCC has adopted cable inside wiring rules to provide specific procedures for the disposition of residential home wiring and internal building wiring where a subscriber terminates service or where an incumbent cable operator is forced by a building owner to terminate service in a multiple dwelling unit building. The FCC has also adopted rules providing that, in the event that an incumbent cable operator sells the inside wiring, it must make the wiring available to the multiple dwelling unit owner or the alternative cable service provider during the 24-hour period prior to the actual service termination by the incumbent, in order to avoid service interruption.

      Compulsory Copyright Licenses for Carriage of Broadcast Stations, Music Performance Licenses. Time Warner Cable’s cable systems provide subscribers with, among other things, local and distant television broadcast stations. Time Warner Cable generally does not obtain a license to use this programming directly from program owners. Instead, it obtains this programming pursuant to a compulsory license provided by federal law, which requires it to make payments to a copyright pool. The elimination or substantial modification of the cable compulsory license could adversely affect Time Warner Cable’s ability to obtain suitable programming and could substantially increase the cost of programming that remains available for distribution to its subscribers.

      When Time Warner Cable obtains programming from third parties, it generally obtains licenses that include any necessary authorizations to transmit the music included in it. When Time Warner Cable creates its own programming and provides various other programming or related content, including local origination programming and advertising that it inserts into cable-programming networks, it is required to obtain any necessary music performance licenses directly from the rights holders. These rights are generally controlled by three music performance rights organizations, each with rights to the music of various artists. Time Warner Cable generally has obtained the necessary licenses, either through negotiated licenses or through procedures established by consent decrees entered into by some of the music performance rights organizations.

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      Cable operators operate their systems under non-exclusive franchises. Franchises are awarded, and cable operators are regulated, by municipal or other local franchising authorities. In some states, cable regulation is imposed at the state level as well. The Company believes it generally has good relations with state and local cable regulators.

      Franchise agreements typically require payment of franchise fees and contain regulatory provisions addressing, among other things, upgrades, service quality, cable service to schools and other public institutions, insurance and indemnity bonds. The terms and conditions of cable franchises vary from jurisdiction to jurisdiction. The Communications Act provides protections against many unreasonable terms. In particular, the Communications Act imposes a ceiling on franchise fees of five percent of revenues derived from cable service. Time Warner Cable generally passes the franchise fee on to its subscribers, listing it as a separate item on the bill.

      Franchise agreements usually have a term of ten to 15 years from the date of grant, although some renewals may be for shorter terms. Franchises usually are terminable only if the cable operator fails to comply with material provisions. Time Warner Cable has not had a franchise terminated due to breach. After a franchise agreement expires, a franchising authority may seek to impose new and more onerous requirements, including requirements to upgrade facilities, to increase channel capacity and to provide various new services. Federal law, however, provides significant substantive and procedural protections for cable operators seeking renewal of their franchises. In addition, although Time Warner Cable occasionally reaches the expiration date of a franchise agreement without having a written renewal or extension, it generally has the right to continue to operate, either by agreement with the franchising authority or by law, while continuing to negotiate a renewal. In the past, substantially all of the material franchises relating to its systems have been renewed by the relevant local franchising authority, though sometimes only after significant time and effort. Despite its efforts and the protections of federal law, it is possible that some Time Warner Cable franchises may not be renewed, and Time Warner Cable may be required to make significant additional investments in its cable systems in response to requirements imposed in the course of the franchise renewal process.

      Franchises usually require the consent of franchising authorities prior to the sale, assignment, transfer or change of control of a cable system. Federal law imposes various limitations on the conditions local authorities may impose and requires localities to act on such requests within 120 days.

      As of December 31, 2004, it was unclear whether and to what extent regulators will subject Voice over Internet Protocol (“VoIP”) service provided by cable operators to the regulations that apply to traditional circuit switch telephone service provided by incumbent telephone companies. In February 2004, the FCC opened a rulemaking proceeding to consider these and other issues. This proceeding remains pending. In November 2004, the FCC issued an order preempting certain kinds of state regulation of VoIP services, including state requirements to obtain a certificate and to file a tariff. The order did not decide, however, what federal rules should apply. In particular, there is uncertainty as to whether and to what extent the “access charge” and “universal service” rules that apply to traditional circuit switch telephone service will also apply to VoIP service. It is also possible that regulators will allow utility pole owners to charge cable operators offering VoIP service higher rates for pole rental than for traditional cable service and cable-modem service.

Network Regulation

      Under the Communications Act and its implementing regulations, vertically integrated cable programmers like the Turner Networks and the Home Box Office Services, are generally prohibited from offering different prices, terms, or conditions to competing unaffiliated multichannel video programming distributors unless the differential is justified by certain permissible factors set forth in the regulations. The rules also place certain restrictions on the ability of vertically integrated programmers to enter into exclusive distribution arrangements with cable operators. Certain other federal laws also contain provisions relating to violent and

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Marketing Regulation

      Time Inc.’s magazine and book marketing activities, as well as other marketing and billing activities by America Online and other divisions of the Company, are subject to regulation by the FTC and each of the state Attorneys General under general consumer protection statutes prohibiting unfair or deceptive acts or practices. Certain areas of marketing activity are also subject to specific federal statutes and rules, such as the Telephone Consumer Protection Act, the Children’s Online Privacy Protection Act, the Gramm-Leach-Bliley Act (relating to financial privacy), the FTC Mail or Telephone Order Merchandise Rule and the FTC Telemarketing Sales Rule. There are also certain specific state statutes and rules that regulate conduct in areas such as privacy, data security and telemarketing. In addition, Time Inc. regularly receives and resolves routine inquiries from state Attorneys General and is subject to standing agreements with state Attorneys General addressing some of Time Inc.’s marketing activities. Certain of Time Inc.’s specific marketing methods, such as automatic subscription renewal and free trial, are being examined by the Attorneys General of several states. America Online is also subject to a 2004 FTC Consent Decree, a 1998 FTC Consent Decree and Assurances of Voluntary Compliance with state governments regarding America Online’s marketing and billing activities, including its cancel/save processes, billing practices, rebates and other marketing promotions.

DESCRIPTION OF CERTAIN PROVISIONS OF AGREEMENTS

Background

      Time Warner Cable Inc., referred to herein as TWC Inc., was created in connection with the March 31, 2003 restructuring (the “TWE Restructuring”) of Time Warner Entertainment Company, L.P. (“TWE”), a limited partnership which formerly held a substantial portion of the Company’s filmed entertainment and cable television assets.

      Among other things, as a result of the TWE Restructuring, all of Time Warner’s interests in cable, including those that were wholly owned and those that were held through TWE, became controlled by TWC Inc. As part of the TWE Restructuring, Time Warner received a 79% economic interest in TWC Inc.’s cable systems and TWE, which continues to own the interests in the cable systems that it held prior to the TWE Restructuring, became a subsidiary of TWC Inc. In exchange for the 27.64% stake in TWE previously held by Comcast, TWC Inc. issued to Comcast, among other things, a 21% effective interest in TWC Inc.’s business, consisting of a 17.9% stock interest in TWC Inc and a 4.7% limited partnership interest in TWE. Under the arrangements entered into by Comcast as part of the process of obtaining FCC approval of Comcast’s acquisition of AT&T Broadband, Comcast (and/or the Comcast trust referred to below) are obligated to take steps to dispose of their entire interest in TWC Inc. and TWE held by Comcast or such Comcast trust in an orderly process by November 2007, and in any event by May 2008.

      In connection with the TWE Restructuring, Comcast also received Series A Mandatorily Convertible Preferred Stock of Time Warner that will convert automatically on March 31, 2005 into shares of Time Warner Common Stock having a value equal to $1.5 billion at the time of conversion, up to a maximum of 225,056,264 shares. For additional information with respect to the TWE Restructuring, see “Description of Certain Provisions of the TWE Partnership Agreement” below.

Recent Developments

      On September 24, 2004, TWC Inc. entered into a Tolling and Optional Redemption Agreement with Comcast and certain of its affiliates, including the trust that holds shares of TWC Inc. on behalf of Comcast (the “Redemption Agreement”). Pursuant to the Redemption Agreement, Comcast was granted an option

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      If the Option is exercised, Comcast’s current 21% effective interest in TWC Inc.’s business will be reduced to approximately 17% — consisting of a 13.7% common stock interest in TWC Inc. and a 4.7% limited partnership interest in TWE. The closing of the transaction will be subject to required governmental and regulatory approvals and other customary closing conditions. For details related to the accounting of this transaction, see Note 6, “TWE and TWC Inc. Related Transactions,” to the Company’s financial statements.

Management and Operation of TWC Inc.

      The following description summarizes certain provisions of agreements related to, and constituent documents of, TWC Inc. that affect and govern the ongoing operations of TWC Inc. Such description does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of such agreements and constituent documents.

      Stockholders of TWC Inc. As a result of the TWE Restructuring, Time Warner and its subsidiaries received shares of TWC Inc. Class A common stock, which generally has one vote per share, and shares of TWC Inc. Class B common stock, which generally has ten votes per share, which together represent 89.3% of the voting power of TWC Inc. and 82.1% of the equity of TWC Inc. A Comcast trust (the “Comcast Trust”) received shares of Class A common stock of TWC Inc. representing the remaining 10.7% of the voting power and 17.9% of the equity of TWC Inc. The Class B common stock is not convertible into Class A common stock upon transfer or otherwise. The Class A common stock and the Class B common stock vote together as a single class on all matters, except with respect to the election of directors and certain matters described below.

      Board of Directors of TWC Inc. The Class A common stock votes, as a separate class, with respect to the election of the Class A directors of TWC Inc. (the “Class A Directors”), and the Class B common stock votes, as a separate class, with respect to the election of the Class B directors of TWC Inc. (the “Class B Directors”). Pursuant to the restated certificate of incorporation of TWC Inc. (the “Certificate of Incorporation”), the Class A Directors must represent not less than one-sixth and not more than one-fifth of the directors of TWC Inc., and the Class B Directors must represent not less than four-fifths of the directors of TWC Inc. As a result of its shareholdings, Time Warner has the ability to cause the election of all Class A Directors and Class B Directors, subject to certain restrictions on the identity of these directors discussed below.

      The TWC Inc. Certificate of Incorporation requires that there be at least two independent directors on the board of directors of TWC Inc. In addition, a parent agreement (the “Parent Agreement”) among Time Warner, TWC Inc. and Comcast provides that until such time that an initial public offering of TWC Inc. common stock is effected, at least 50% of the independent directors must be reasonably satisfactory to the Comcast Trust. To the extent possible, all such independent directors will be Class A Directors. If an initial public offering of TWC Inc. is effected, the Certificate of Incorporation requires that at least 50% of the board of directors of TWC Inc. consist of independent directors for three years.

      Protections of Minority Class A Common Stockholders. The approval of the holders of a majority of the voting power of the outstanding shares of Class A common stock held by persons other than Time Warner is necessary in connection with:

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Matters Affecting the Relationship between Time Warner and TWC Inc.

      Indebtedness Approval Right. For so long as the indebtedness of TWC Inc. is attributable to Time Warner, in Time Warner’s reasonable judgment, TWC Inc., its subsidiaries and entities that it manages will not, without the consent of Time Warner, create, incur or guarantee any indebtedness, including preferred equity, or rental obligations if its ratio of indebtedness plus six times its annual rental expense to EBITDA (as EBITDA is defined in the applicable agreement and which is comparable to operating income (loss) before depreciation and amortization) plus rental expense, or “EBITDAR,” then exceeds or would exceed 3:1.

      Other Time Warner Rights. Under the Parent Agreement, as long as Time Warner has the right to elect more than a majority of the directors of TWC Inc., TWC Inc. must obtain Time Warner’s consent before it enters into any agreement that binds or purports to bind Time Warner or its affiliates or that would subject TWC Inc. to significant penalties or restrictions as a result of any action or omission of Time Warner; or adopts a stockholder rights plan, becomes subject to Section 203 of the Delaware General Corporation Law, adopts a “fair price” provision or takes any similar action.

      Time Warner Standstill. Under the Parent Agreement, Time Warner has agreed that for a period of three years following the completion of an initial public offering of TWC Inc., Time Warner will not make or announce a tender offer or exchange offer for the Class A common stock of TWC Inc. without the approval of a majority of the independent directors of TWC Inc.; and for a period of ten years following an initial public offering of TWC Inc., Time Warner will not enter into any business combination with TWC Inc., including a short-form merger, without the approval of a majority of the independent directors of TWC Inc.

      Transactions between Time Warner and TWC Inc. The by-laws of TWC Inc. provide that Time Warner may only enter into transactions with TWC Inc. and its subsidiaries, including TWE, that are on terms that, at the time of entering into such transaction, are substantially as favorable to TWC Inc. or its subsidiaries as they would be able to receive in a comparable arm’s-length transaction with a third party. Any such transaction involving reasonably anticipated payments or other consideration of $50 million or greater also requires the prior approval of a majority of the independent directors of TWC Inc.

TWC Inc. Registration Rights Agreements

      TWC Inc. Registration Rights Agreement with Comcast Trust. At the closing of the TWE Restructuring, a Comcast Trust entered into a registration rights agreement with TWC Inc. relating to its shares of Class A common stock, as well as any common stock of TWC Inc. that it or another Comcast trust may receive in connection with a sale of a partnership interest in TWE under the Partnership Interest Sale Agreement (see “Description of Certain Provisions of the TWE Partnership Agreement — Exit Rights,” below).

      Subject to several exceptions, including TWC Inc.’s right to defer a demand registration under some circumstances, the Comcast Trust has the right to require that TWC Inc. take commercially reasonable steps to register for public resale under the Securities Act of 1933 all shares of Class A common stock owned by it that it requests be registered. On December 29, 2003, TWC Inc. received a notice from the Comcast Trust

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      In addition, the Comcast Trust has “piggyback” registration rights subject to customary restrictions on any registration for TWC Inc.’s account or the account of another stockholder, and TWC Inc. and Time Warner are permitted to piggyback on the Comcast Trust’s demand registrations.

      If any registration requested by the Comcast Trust or Time Warner is in the form of a firm underwritten offering, and if the managing underwriter of the offering determines that the number of securities to be offered would jeopardize the success of the offering, the number of shares included in the offering shall be determined as follows:

      Registration Rights Agreement between TWC Inc. and Time Warner. At the closing of the TWE Restructuring, Time Warner and TWC Inc. entered into a registration rights agreement relating to Time Warner’s shares of TWC Inc. common stock. Subject to several exceptions, including TWC Inc.’s right to defer a demand registration under some circumstances, Time Warner may, under that agreement, require that TWC Inc. take commercially reasonable steps to register for public resale under the Securities Act of 1933 all shares of common stock that Time Warner requests be registered. Time Warner may demand an unlimited number of registrations. In addition, Time Warner has been granted “piggyback” registration rights subject to customary restrictions, and TWC Inc. is permitted to piggyback on Time Warner’s registrations. Any registration statement filed under the agreement is subject to the cut-back priority discussed above. Time Warner has agreed that it will not, until the fifth anniversary of the closing of the TWE Restructuring, dispose of its shares of TWC Inc. common stock other than in registered offerings.

      In connection with the registrations described above under both registration rights agreements, TWC Inc. will indemnify the selling stockholders and bear all fees, costs and expenses, except underwriting discounts and selling commissions.

DESCRIPTION OF CERTAIN PROVISIONS OF THE

      The TWE Partnership Agreement was amended in connection with the closing of the TWE Restructuring (as amended, the “New TWE Partnership Agreement”) on March 31, 2003. The following description summarizes certain provisions of the New TWE Partnership Agreement relating to the ongoing operations of TWE. Such description does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the New TWE Partnership Agreement.

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Management and Operations of TWE

      Partners. Following the TWE Restructuring, the partnership interests in TWE were recapitalized with one of the Comcast Trusts holding a partnership interest representing a 4.7% residual equity interest in TWE, with a subsidiary of the Company holding a partnership interest consisting of a $2.4 billion preferred component and a 1% residual equity interest in TWE and with TWC Inc. holding a partnership interest representing a 94.3% residual equity interest in TWE.

      Upon the completion of the TWE Restructuring, TWC Inc. became the general partner of TWE and a subsidiary of Time Warner and one of the Comcast Trusts became the limited partners of TWE. Since then, there have been further restructurings such that, as of March 1, 2005, the general partnership interests in TWE were held collectively by three wholly owned subsidiaries of TWC Inc.

      Following the completion of these restructurings, TWC Inc., through its subsidiaries, has assumed the exclusive authority to manage the business and affairs of TWE, subject to certain protections over extraordinary actions afforded the Comcast Trust under the New TWE Partnership Agreement. These protections consist of consent rights over the dissolution or liquidation of TWE and the transfer of control of TWE to a third party, in each case, prior to March 31, 2006, and the right to approve of certain amendments to the New TWE Partnership Agreement.

Certain Covenants

      Transactions with Affiliates. The New TWE Partnership Agreement requires that transactions between TWC Inc. and its subsidiaries, on the one hand, and TWE and its subsidiaries on the other hand, be conducted on an arm’s-length basis, with management, corporate or similar services being provided by TWC Inc. on a “no mark-up” basis with fair allocations of administrative costs and general overhead.

Exit Rights

      Sale and Appraisal Rights of Trust. Under a partnership interest sale agreement (the “Partnership Interest Sale Agreement”) entered in connection with the closing of the TWE Restructuring, at any time following March 31, 2005, the Comcast Trust has the right to require TWC Inc. to purchase all or a portion of the Comcast Trust’s 4.7% residual limited partnership interest in TWE at an appraised fair market value. If Comcast exercises this right, Time Warner can elect to purchase Comcast’s interest in TWE instead of TWC Inc. The fair market value of the interest will be determined separately by two investment banks, one appointed by the Comcast Trust and one appointed by TWC Inc. If the higher of the two valuations presented by the investment banks is within 110% of the lower valuation, then the fair market value of the offered partnership interest will be the average of the two valuations. If the higher valuation is not within 110% of the lower valuation, a third investment bank selected by the other two investment banks, or, if they are unable to agree on a third investment bank, an investment bank selected by the American Arbitration Association will choose one of the two valuations to be the fair market value of the offered partnership interest, and that determination will be final and binding.

      Following March 31, 2005, the Comcast Trust also has the right, at any time, to sell all or a portion of its interest in TWE to a third party in a bona fide transaction, subject to a right of first refusal, first, in favor of Time Warner and, second, in favor of TWC Inc. If TWC Inc. and Time Warner do not collectively elect to purchase all of the Comcast Trust’s offered partnership interest, the Comcast Trust may proceed with the sale of the offered partnership interest to that third party on terms no more favorable than those offered to TWC Inc. and Time Warner, if that third party agrees to be bound by the same terms and conditions applicable to the Comcast Trust as a limited partner in TWE and under the Partnership Interest Sale Agreement.

      In all cases, the purchase price payable by TWC Inc. or Time Warner as consideration for the Comcast Trust’s partnership interest may be cash; common stock, if the common stock of the purchaser is then publicly traded, or a combination of both, at the purchaser’s election. Any Time Warner or TWC Inc. common stock issued to purchase the Comcast Trust’s partnership interests will be valued based on the average of the

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      Redemption of Preferred Component. The preferred component of Time Warner’s partnership interest must be redeemed by TWE on April 1, 2023.

Restrictions on Transfer

      The New TWE Partnership Agreement provides that TWC Inc. and Time Warner may generally transfer their partnership interests in TWE at any time, except that TWC Inc. may not transfer control of TWE prior to March 31, 2006. However, the Comcast Trust may not transfer its partnership interest in TWE prior to March 31, 2005 and, after that, the Comcast Trust may only transfer its partnership interest pursuant to the Partnership Interest Sale Agreement, described above.

      No transfer of partnership interests may be made by any partner through securities markets, and no transfer may be made by any partner if the transfer causes TWE to have more than 100 partners or would result in, or have a material risk of, TWE being treated as a corporation for federal income tax purposes.

DESCRIPTION OF CERTAIN PROVISIONS OF THE

      The following description summarizes certain provisions of the TWE-A/N Partnership Agreement relating to the ongoing operations of the TWE-Advance/Newhouse Partnership (“TWE-A/N”). Such description does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the TWE-A/N Partnership Agreement.

Partners of TWE-A/N

      The general partnership interests in TWE-A/N are held by TWE, TWC Inc. (TWE and TWC Inc. are together, the “TW Partners”), and Advance/Newhouse Partnership, a partnership owned by wholly owned subsidiaries of Advance Publications Inc. and Newhouse Broadcasting Corporation (“A/N”). The TW Partners also hold preferred partnership interests.

2002 Restructuring of TWE-A/N

      The TWE-A/N cable television joint venture was formed by TWE and Advance/Newhouse in December 1995. A restructuring of the partnership was completed during 2002. As a result of this restructuring, cable systems and their related assets and liabilities serving 2.1 million subscribers as of December 31, 2002 located primarily in Florida (the “A/N Systems”), were transferred to a subsidiary of TWE-A/N (the “A/N Subsidiary”). As part of the restructuring, effective August 1, 2002, A/N’s interest in TWE-A/N was converted into an interest that tracks the economic performance of the A/N Systems, while the Company and TWE retain the economic interests and associated liabilities in the remaining TWE-A/N cable systems. Also, in connection with the restructuring, Time Warner effectively acquired A/N’s interest in Road Runner. All of the systems owned by TWE-A/N and the A/N Subsidiary continue to support multiple ISPs, including AOL for Broadband, Road Runner and EarthLink. TWE-A/N’s financial results, other than the results of the A/N Systems, are consolidated with the Company’s.

Management and Operations of TWE-A/N

      Management Powers and Services Agreement. Subject to the requirement to act by unanimous consent with respect to some actions as described below, TWE is the managing partner, with exclusive management rights of TWE-A/N, other than with respect to the A/N Systems. As managing partner, TWE manages TWE-A/N, other than the A/N Systems, on a day-to-day basis. Also, subject to the requirement to act by unanimous consent with respect to some actions as described below, A/N has authority for the supervision of the day-to-day operations of the A/N Subsidiary and the A/N Systems. TWE entered into a services agreement with A/N and the A/N Subsidiary under which TWE agreed to exercise various management

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      Actions Requiring Unanimous Consent. Some actions cannot be taken by TWE-A/N, TWE or A/N without the unanimous consent of the TW Partners and A/N or the unanimous consent of an executive committee consisting of members designated by the TW Partners and A/N. These actions include, among other things:

Restrictions on Transfer

      TW Partners. Each TW Partner is generally permitted to directly or indirectly dispose of its entire partnership interest at any time to a wholly owned affiliate of TWE (in the case of transfers by TWE) or to TWE, the Company or a wholly owned affiliate of TWE or the Company (in the case of transfers by TWC Inc.). In addition, the TW Partners are also permitted to transfer their partnership interests through a pledge to secure a loan, or a liquidation of TWE in which the Company, or its affiliates, receives a majority of the interests of TWE-A/N held by the TW Partners. TWE is allowed to issue additional partnership interests in TWE so long as the Company continues to own, directly or indirectly, either 35% or 43.75% of the residual equity capital of TWE, depending on when the issuance occurs.

      A/N Partner. A/N is generally permitted to directly or indirectly transfer its entire partnership interest at any time to certain members of the Newhouse family or specified affiliates of A/N. A/N is also permitted to dispose of its partnership interest through a pledge to secure a loan and in connection with specified restructurings of A/N.

Restructuring Rights of the Partners

      TWE and A/N each have the right to cause TWE-A/N to be restructured at any time. Upon a restructuring, TWE-A/N would be required to distribute the A/N Subsidiary with all of the A/N Systems to A/N in complete redemption of A/N’s interests in TWE-A/N, and A/N would be required to assume all liabilities of the A/N Subsidiary and the A/N Systems. Following such a restructuring, TWE’s obligations to provide management services to A/N and the A/N Subsidiary would terminate. As of the date of this annual report, neither TWE nor A/N has delivered notice of the intent to cause a restructuring of TWE-A/N.

Rights of First Offer

      TWE’s Regular Right of First Offer. Subject to exceptions, A/N and its affiliates are obligated to grant TWE a right of first offer with respect to any sale of assets of the A/N Systems.

      TWE’s Special Right of First Offer. Within a specified time period following the first, seventh, thirteenth and nineteenth anniversaries of the deaths of two specified members of the Newhouse family (those deaths have not yet occurred), A/N has the right to deliver notice to TWE stating that it wishes to transfer some or all of the assets of the A/N Systems, thereby granting TWE the right of first offer to purchase the specified assets. Following delivery of this notice, an appraiser will determine the value of the assets proposed to be transferred. Once the value of the assets has been determined, A/N has the right to terminate its offer to sell the specified assets. If A/N does not terminate its offer, TWE will have the right to purchase the specified assets at a price equal to the value of the specified assets determined by the appraiser. If TWE does not exercise its right to purchase the specified assets, A/N has the right to sell the specified assets to an unrelated third party within 180 days on substantially the same terms as were available to TWE.

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DESCRIPTION OF AGREEMENT WITH LIBERTY MEDIA CORPORATION

      The following description summarizes certain provisions of the Company’s agreement with Liberty Media and certain of its subsidiaries (collectively, “LMC”) that was entered into in connection with the merger of Turner Broadcasting System, Inc. in 1996 (the “Turner Transaction”) and the Turner Consent Decree. Such description does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the Second Amended and Restated LMC Agreement dated as of September 22, 1995 among Historic TW, Time Warner Companies, Inc. and LMC (the “LMC Agreement”).

Ownership of Time Warner Common Stock

      Pursuant to the LMC Agreement, immediately following consummation of the Turner Transaction, LMC exchanged the 50.6 million shares of Historic TW common stock, par value $.01 per share received by LMC in the Turner Transaction on a one-for-one basis for 50.6 million shares of Series LMCN-V Common Stock of Historic TW. In June 1997, LMC and its affiliates received 6.4 million additional shares of Series LMCN-V Common Stock pursuant to the provisions of an option agreement between Historic TW and LMC and its affiliates. In May 1999, the terms of the Series LMCN-V Common Stock were amended, which effectively resulted in a two-for-one stock split. At the time of the America Online-Historic TW Merger, each share of Series LMCN-V Common Stock was exchanged for one and one half shares of a substantially identical Series LMCN-V Common Stock of the Company. Each share of Series LMCN-V Common Stock receives the same dividends and otherwise has the same rights as a share of Time Warner Common Stock except that (a) holders of Series LMCN-V Common Stock are entitled to 1/100th of a vote per share on the election of directors and do not have any other voting rights, except as required by law or with respect to limited matters, including amendments to the terms of the Series LMCN-V Common Stock adverse to such holders, and (b) unlike shares of Time Warner Common Stock, shares of Series LMCN-V Common Stock are not subject to redemption by the Company if necessary to prevent the loss by the Company of any governmental license or franchise. The Series LMCN-V Common Stock is not transferable, except in limited circumstances, and is not listed on any securities exchange.

      LMC exchanged its shares of Historic TW common stock for Series LMCN-V Common Stock in order to comply with the Turner Consent Decree, which effectively prohibits LMC and its affiliates (including TCI) from owning voting securities of the Company other than securities that have limited voting rights. In 2002, LMC sought to eliminate these restrictions from the Turner Consent Decree; the petition was denied by the FTC without prejudice. See “Regulation and Legislation — Turner FTC Consent Decree,” above. The Turner Consent Decree will expire in February 2007.

      Each share of Series LMCN-V Common Stock is convertible into one share of Time Warner Common Stock at any time when such conversion would no longer violate the Turner Consent Decree or have a Prohibited Effect (as defined below), including following a transfer to a third party. Following application by LMC, the Turner Consent Decree was modified by the FTC on December 21, 2004 to permit LMC, in connection with a hedging transaction, to lend the Time Warner Common Stock into which its Series LMCN-V Common Stock is convertible. As a result, approximately 74,870,395 of the 171,185,826 shares of Series LMCN-V Common Stock owned by LMC have been converted into Time Warner Common Stock as of February 28, 2005 but are still deemed beneficially owned by LMC. Under the terms of the modification, LMC has no right to vote or to direct the voting of the loaned Common Stock and may not directly or indirectly influence or attempt to influence its voting.

Other Agreements

      Under the LMC Agreement, if the Company takes certain actions that have the effect of (a) making the continued ownership by LMC of the Company’s equity securities illegal under any federal or state law, (b) imposing damages or penalties on LMC under any federal or state law as a result of such continued ownership, (c) requiring LMC to divest any such Company equity securities, or (d) requiring LMC to discontinue or divest any business or assets or lose or significantly modify any license under any communications law (each a “Prohibited Effect”), then the Company will be required to compensate LMC for income

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      The agreements described in the preceding paragraph may have the effect of requiring the Company to pay amounts to LMC in order to engage in (or requiring the Company to refrain from engaging in) activities that LMC would be prohibited under the federal communications laws from engaging in. Based on the current businesses of the Company and LMC and based upon the Company’s understanding of applicable law, the Company does not expect these requirements to have a material effect on its business.

CURRENCY RATES AND REGULATIONS

      Time Warner’s foreign operations are subject to the risk of fluctuation in currency exchange rates and to exchange controls. Time Warner cannot predict the extent to which such controls and fluctuations in currency exchange rates may affect its operations in the future or its ability to remit dollars from abroad. See Note 16, “Derivative Instruments — Foreign Currency Risk Management” to the consolidated financial statements set forth in the financial pages herein. For a discussion of revenues of international operations, see Note 17, “Segment Information” to the consolidated financial statements set forth in the financial pages herein.

      The following table sets forth certain information as of December 31, 2004 with respect to the Company’s principal properties (over 250,000 square feet in area) that are occupied for corporate offices or used primarily by the Company’s divisions, all of which the Company considers adequate for its present needs, and all of which were substantially used by the Company or were leased to outside tenants:

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Item 3.     Legal Proceedings.

Securities Matters

      As of March 1, 2005, 30 shareholder class action lawsuits have been filed naming as defendants the Company, certain current and former executives of the Company and, in several instances, America Online, Inc. (“America Online”). These lawsuits were filed in U.S. District Courts for the Southern District of New York, the Eastern District of Virginia and the Eastern District of Texas. The complaints purport to be made on behalf of certain shareholders of the Company and allege that the Company made material misrepresentations and/or omissions of material fact in violation of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. Plaintiffs claim that the Company failed to disclose America Online’s declining advertising revenues and that the Company and America Online inappropriately inflated advertising revenues in a series of transactions. Certain of the lawsuits also allege that certain of the individual defendants and other insiders at the Company improperly sold their personal holdings of Time Warner stock, that the Company failed to disclose that the America Online-Historic TW Merger was not generating the synergies anticipated at the time of the announcement of the merger and, further, that the Company inappropriately delayed writing down more than $50 billion of goodwill. The lawsuits seek an unspecified amount in compensatory damages. All of these lawsuits have been centralized in the U.S. District Court for the Southern District of New York for coordinated or consolidated pretrial proceedings (along with the federal derivative lawsuits and certain lawsuits brought under the Employee Retirement Income Security Act (“ERISA”) described below) under the caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation. Additional lawsuits filed by individual shareholders have also been consolidated for pretrial proceedings. The Minnesota State Board of Investment (“MSBI”) has been designated lead plaintiff for the consolidated securities actions and filed a consolidated amended complaint on April 15, 2003, adding additional defendants including additional officers and directors of the Company, Morgan Stanley & Co., Salomon Smith Barney Inc., Citigroup Inc., Banc of America Securities LLC and JP Morgan Chase & Co. Plaintiffs also added additional allegations, including that the Company made material misrepresentations in its Registration Statements and Joint Proxy Statement-Prospectus related to the America Online-Historic TW Merger and in its registration statements pursuant to which debt securities were issued in April 2001 and April 2002, allegedly in violation of Section 11 and Section 12 of the Securities Act of 1933. On July 14, 2003, the defendants filed a motion to dismiss the consolidated amended complaint. On May 5, 2004, the district court granted in part the defendants’ motion, dismissing all claims with respect to the registration statements pursuant to which debt securities were issued in April 2001 and April 2002 and certain other claims against other defendants, but otherwise allowing the remaining claims against the Company and certain other defendants to proceed. On August 11, 2004, the court granted MSBI’s motion to file a second amended complaint. On July 30, 2004, defendants filed a motion for summary judgment on the basis that plaintiffs cannot establish loss causation for any of their claims, and thus plaintiffs do not have any recoverable damages. That motion is pending. The Company intends to defend against these lawsuits vigorously. The Company is unable to predict the outcome of these suits or reasonably estimate a range of possible loss.

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      As of March 1, 2005, three putative class action lawsuits have been filed alleging violations of ERISA in the U.S. District Court for the Southern District of New York on behalf of current and former participants in the Time Warner Savings Plan, the Time Warner Thrift Plan and/or the TWC Savings Plan (the “Plans”). Collectively, these lawsuits name as defendants the Company, certain current and former directors and officers of the Company and members of the Administrative Committees of the Plans. The lawsuits allege that the Company and other defendants breached certain fiduciary duties to plan participants by, inter alia, continuing to offer Time Warner stock as an investment under the Plans, and by failing to disclose, among other things, that the Company was experiencing declining advertising revenues and that the Company was inappropriately inflating advertising revenues through various transactions. The complaints seek unspecified damages and unspecified equitable relief. The ERISA actions have been consolidated as part of the In re AOL Time Warner Inc. Securities and “ERISA” Litigation described above. On July 3, 2003, plaintiffs filed a consolidated amended complaint naming additional defendants, including Time Warner Entertainment Company, L.P. (“TWE”), certain current and former officers, directors and employees of the Company and Fidelity Management Trust Company. On September 12, 2003, the Company filed a motion to dismiss the consolidated ERISA complaint. On March 9, 2005, the Court granted in part, and denied in part, the Company’s motion to dismiss. The Court dismissed two individual defendants and TWE for all purposes, dismissed other individuals with respect to claims plaintiffs had asserted involving the TWC Savings Plan, and dismissed all individuals who were named in a claim asserting that their stock sales had constituted a breach of fiduciary duty to the Plans. The Company intends to defend against these lawsuits vigorously. The Company is unable to predict the outcome of these cases or reasonably estimate a range of possible loss.

      As of March 1, 2005, 11 shareholder derivative lawsuits have been filed naming as defendants certain current and former directors and officers of the Company, as well as the Company as a nominal defendant. Three have been filed in New York State Supreme Court for the County of New York, four have been filed in the U.S. District Court for the Southern District of New York and four have been filed in the Court of Chancery of the State of Delaware for New Castle County. The complaints allege that defendants breached their fiduciary duties by causing the Company to issue corporate statements that did not accurately represent that America Online had declining advertising revenues, that the America Online-Historic TW Merger was not generating the synergies anticipated at the time of the announcement of the merger, and that the Company inappropriately delayed writing down more than $50 billion of goodwill, thereby exposing the Company to potential liability for alleged violations of federal securities laws. The lawsuits further allege that certain of the defendants improperly sold their personal holdings of Time Warner securities. The lawsuits request that (i) all proceeds from defendants’ sales of Time Warner common stock, (ii) all expenses incurred by the Company as a result of the defense of the shareholder class actions discussed above and (iii) any improper salaries or payments, be returned to the Company. The four lawsuits filed in the Court of Chancery for the State of Delaware for New Castle County have been consolidated under the caption, In re AOL Time Warner Inc. Derivative Litigation. A consolidated complaint was filed on March 7, 2003 in that action, and on June 9, 2003, the Company filed a notice of motion to dismiss the consolidated complaint. On May 2, 2003, the three lawsuits filed in New York State Supreme Court for the County of New York were dismissed on forum non conveniens grounds and plaintiffs’ time to appeal has expired. The four lawsuits pending in the U.S. District Court for the Southern District of New York have been centralized for coordinated or consolidated pre-trial proceedings with the securities and ERISA lawsuits described above under the caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation. On October 6, 2004, plaintiffs filed an amended consolidated complaint in the three of these four cases. The Company intends to defend against these lawsuits vigorously. The Company is unable to predict the outcome of these suits or reasonably estimate a range of possible loss.

      On July 1, 2003, Stichting Pensioenfonds ABP v. AOL Time Warner Inc. et al. was filed in the U.S. District Court for the Southern District of New York against the Company, current and former officers, directors and employees of the Company and Ernst & Young LLP. Plaintiff alleges that the Company made material misrepresentations and/or omissions of material fact in violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, Section 11, Section 12, Section 14(a) and Rule 14a-9 promulgated thereunder, Section 18 and Section 20(a) of the Exchange Act. The complaint also alleges common law fraud and negligent misrepresentation. The plaintiff seeks an unspecified amount of compensa-

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      On November 11, 2002, Staro Asset Management, LLC filed a putative class action complaint in the U.S. District Court for the Southern District of New York on behalf of certain purchasers of Reliant 2.0% Zero-Premium Exchangeable Subordinated Notes for alleged violations of the federal securities laws. Plaintiff is a purchaser of subordinated notes, the price of which was purportedly tied to the market value of Time Warner stock. Plaintiff alleges that the Company made misstatements and/or omissions of material fact that artificially inflated the value of Time Warner stock and directly affected the price of the notes. Plaintiff seeks compensatory damages and/or rescission. This lawsuit has been consolidated for coordinated pretrial proceedings under the caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation described above. The Company intends to defend against this lawsuit vigorously. The Company is unable to predict the outcome of this suit or reasonably estimate a range of possible loss.

      On April 14, 2003, Regents of the University of California et al. v. Parsons et al., was filed in California Superior Court, County of Los Angeles, naming as defendants the Company, certain current and former officers, directors and employees of the Company, Ernst & Young LLP, Citigroup Inc., Salomon Smith Barney Inc. and Morgan Stanley & Co. Plaintiffs allege that the Company made material misrepresentations in its registration statements related to the America Online — Historic TW Merger and stock option plans in violation of Sections 11 and 12 of the Securities Act of 1933. The complaint also alleges common law fraud and breach of fiduciary duties under California state law. Plaintiffs seek disgorgement of alleged insider trading proceeds and restitution for their stock losses. Three related cases have been filed in California Supreme Court and have been coordinated in the County of Los Angeles (the “California Actions”). On January 26, 2004, certain individuals filed motions to dismiss for lack of personal jurisdiction. On September 10, 2004, the Company filed a motion to dismiss plaintiffs’ complaints and certain individual defendants (who had not previously moved to dismiss plaintiffs’ complaints for lack of personal jurisdiction) filed a motion to dismiss plaintiffs’ complaints. The Company intends to defend against these lawsuits vigorously. The Company is unable to predict the outcome of these suits or reasonably estimate a range of possible loss.

      On May 23, 2003, Treasurer of New Jersey v. AOL Time Warner Inc. et al., was filed in the Superior Court of New Jersey, Mercer County, naming as defendants the Company, certain current and former officers, directors and employees of the Company, Ernst & Young LLP, Citigroup Inc., Salomon Smith Barney, Morgan Stanley, JP Morgan Chase and Banc of America Securities. The complaint is brought by the Treasurer of New Jersey and purports to be made on behalf of the State of New Jersey, Department of Treasury, Division of Investments (the “Division”) and certain funds administered by the Division. Plaintiff alleges that the Company made material misrepresentations in its registration statements in violation of Sections 11 and 12 of the Securities Act of 1933. Plaintiff also alleges violations of New Jersey state law for fraud and negligent misrepresentation. Plaintiffs seek an unspecified amount of damages. On October 29, 2003, the Company moved to stay the proceedings or, in the alternative, dismiss the complaint. Also on October 29, 2003, all named individual defendants moved to dismiss the complaint for lack of personal jurisdiction. The parties have agreed to stay this action and to coordinate discovery proceedings with the securities and ERISA lawsuits described above under the caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation. The Company intends to defend against this lawsuit vigorously. The Company is unable to predict the outcome of this suit or reasonably estimate a range of possible loss.

      On July 18, 2003, Ohio Public Employees Retirement System et al. v. Parsons et al. was filed in Ohio, Court of Common Pleas, Franklin County, naming as defendants the Company, certain current and former officers, directors and employees of the Company, Citigroup Inc., Salomon Smith Barney Inc., Morgan Stanley & Co. and Ernst & Young LLP. Plaintiffs allege that the Company made material misrepresentations in its registration statements in violation of Sections 11 and 12 of the Securities Act of 1933. Plaintiffs also allege violations of Ohio law, breach of fiduciary duty and common law fraud. Plaintiffs seek disgorgement of

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      On July 18, 2003, West Virginia Investment Management Board v. Parsons et al. was filed in West Virginia, Circuit Court, Kanawha County naming as defendants the Company, certain current and former officers, directors and employees of the Company, Citigroup Inc., Salomon Smith Barney Inc., Morgan Stanley & Co., and Ernst & Young LLP. Plaintiff alleges the Company made material misrepresentations in its registration statements in violation of Sections 11 and 12 of the Securities Act of 1933. Plaintiff also alleges violations of West Virginia law, breach of fiduciary duty and common law fraud. Plaintiff seeks disgorgement of alleged insider trading proceeds, restitution and unspecified compensatory damages. On May 27, 2004, the Company filed a motion to dismiss the complaint. Also on May 27, 2004, all named individual defendants moved to dismiss the complaint for lack of personal jurisdiction. The Company intends to defend against this lawsuit vigorously. The Company is unable to predict the outcome of this suit or reasonably estimate a range of possible loss.

      On January 28, 2004, McClure et al. v. AOL Time Warner Inc. et al. was filed in the District Court of Cass County, Texas (purportedly on behalf of several purchasers of Company stock) naming as defendants the Company and certain current and former officers, directors and employees of the Company. Plaintiffs allege that the Company made material misrepresentations in its registration statements in violation of Sections 11 and 12 of the Securities Act of 1933. Plaintiffs also allege breach of fiduciary duty and common law fraud. Plaintiffs seek unspecified compensatory damages. On May 8, 2004, the Company filed a general denial and a motion to dismiss for improper venue. Also on May 8, 2004, all named individual defendants moved to dismiss the complaint for lack of personal jurisdiction. The Company intends to defend against this lawsuit vigorously. The Company is unable to predict the outcome of this suit or reasonably estimate a range of possible loss.

      On February 24, 2004, Commonwealth of Pennsylvania Public School Employees’ Retirement System et al. v. Time Warner Inc. et al. was filed in the Court of Common Pleas of Philadelphia County naming as defendants the Company, certain current and former officers, directors and employees of the Company, America Online, Historic TW, Morgan Stanley & Co., Inc., Citigroup Global Markets Inc., Banc of America Securities LLC, J.P. Morgan Chase & Co and Ernst & Young LLP. Plaintiffs had previously filed a request for a writ of summons notifying defendants of commencement of an action. Plaintiffs allege that the Company made material misrepresentations in its registration statements in violation of Sections 11 and 12 of the Securities Act of 1933. Plaintiffs also allege violations of Pennsylvania Law, breach of fiduciary duty and common law fraud. The plaintiffs seek unspecified compensatory and punitive damages. The parties have agreed to stay this action and to coordinate discovery proceedings with the securities and ERISA lawsuits described above under the caption In re AOL Time Warner Inc. Securities and “ERISA” Litigation. The Company intends to defend against this lawsuit vigorously. The Company is unable to predict the outcome of this suit or reasonably estimate a range of possible loss.

      On April 1, 2004, Alaska State Department of Revenue et al. v. America Online, Inc. et al. was filed in Superior Court in Juneau County, Alaska naming as defendants the Company, certain current and former officers, directors and employees of the Company, America Online, Historic TW, Morgan Stanley & Co., Inc., and Ernst & Young LLP. Plaintiffs allege that the Company made material misrepresentations in its registration statements in violation of Alaska law and common law fraud. The plaintiffs seek unspecified compensatory and punitive damages. On July 26, 2004, all named individual defendants moved to dismiss the complaint for lack of personal jurisdiction. On August 13, 2004, the Company filed a motion to dismiss plaintiffs’ complaint. The Company intends to defend against this lawsuit vigorously. The Company is unable to predict the outcome of this suit or reasonably estimate a range of possible loss.

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      On November 15, 2002, the California State Teachers’ Retirement System filed an amended consolidated complaint in the U.S. District Court for the Central District of California on behalf of a putative class of purchasers of stock in Homestore.com, Inc. (“Homestore”). Plaintiff alleges that Homestore engaged in a scheme to defraud its shareholders in violation of Section 10(b) of the Exchange Act. The Company and two former employees of its America Online division were named as defendants in the amended consolidated complaint because of their alleged participation in the scheme through certain advertising transactions entered into with Homestore. Motions to dismiss filed by the Company and the two former employees were granted on March 7, 2003, and a final judgment of dismissal was entered on March 8, 2004. On April 7, 2004, plaintiff filed a notice of appeal in the Ninth Circuit Court of Appeals; that appeal was fully briefed as of January 10, 2005. The Company intends to defend against this lawsuit vigorously. The Company is unable to predict the outcome of this suit or reasonably estimate a range of possible loss.

      On April 30, 2004, a second amended complaint was filed in the U.S. District Court for the District of Nevada on behalf of a putative class of purchasers of stock in PurchasePro.com, Inc. (“PurchasePro”). Plaintiffs allege that PurchasePro engaged in a scheme to defraud its shareholders in violation of Section 10(b) of the Exchange Act. The Company and four former officers and employees were added as defendants in the second amended complaint and are alleged to have participated in the scheme through certain advertising transactions entered into with PurchasePro. Three similar putative class actions had previously been filed against the Company, America Online and certain former officers and employees, and have been consolidated with the Nevada action. On February 17, 2005, the Judge in the consolidated action granted the Company’s motion to dismiss the second amended complaint with prejudice. On September 13, 2004, in a related matter, PurchasePro filed an adversary proceeding against the Company in the U.S. Bankruptcy Court for the District of Nevada alleging fraudulent conveyance and unjust enrichment in connection with PurchasePro warrants issued to the Company. On December 15, 2004, the Bankruptcy Court granted the Company’s motion to dismiss the complaint without prejudice. On January 26, 2005, PurchasePro filed an amended complaint. The Company intends to defend against these lawsuits vigorously. The Company is unable to predict the outcome of these suits or reasonably estimate a range of possible loss.

Update on Status of Government Investigations

      As previously disclosed by the Company, the Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) have been conducting investigations into the accounting and disclosure practices of the Company. Those investigations 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 Company’s interest in AOL Europe prior to January 2002.

      As announced on December 15, 2004, the Company and its subsidiary, America Online, have reached a definitive agreement with the DOJ that resolves the DOJ’s investigation of the Company. The Company also announced that it has proposed a settlement to the staff of the SEC that the staff has agreed to recommend to the SEC Commissioners.

      Under the terms of the settlement in connection with the investigation of the DOJ, the DOJ filed a criminal complaint against AOL for the conduct of certain employees in connection with securities fraud by PurchasePro.com, but the DOJ will defer prosecution of AOL. After two years, provided the Company fulfills its obligations under the agreement, the DOJ will dismiss the criminal complaint filed against AOL. In addition, the DOJ will not prosecute the Company or AOL for conduct relating to certain other transactions entered into by AOL or the Company from July 1, 1999, including transactions that were the subject of the DOJ or SEC investigations. In connection with the settlement with the DOJ, in December 2004, the Company paid a penalty of $60 million and established a $150 million fund, which the Company may use to settle related securities litigation. The fund is reflected as restricted cash on the Company’s consolidated balance sheet as of December 31, 2004. The Company’s other obligations under the settlement agreement are to (a) accept responsibility for the conduct of certain AOL employees with respect to PurchasePro.com transactions; (b) cooperate fully with the DOJ or any other federal criminal law enforcement agency regarding the transactions covered by the settlement; and (c) retain and cooperate with an independent monitor, who

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      Under the settlement the SEC staff will recommend to the SEC Commissioners, Time Warner will agree, without admitting or denying the Commission’s allegations, to be enjoined from future violations of certain provisions of the securities laws. Under the proposed settlement:

      Final settlement is subject to both agreement on final documentation and approval by the SEC Commissioners. The Company will not be able to deduct the $300 million penalty to be paid under the proposed settlement for income tax purposes, be reimbursed or indemnified for such payment through insurance or any other source, or use such payment to setoff or reduce any award of compensatory damages to plaintiffs in related securities litigation pending against the Company. In connection with the proposed settlement with the SEC, the Company’s financial results for each of the years ended December 31, 2000 through December 31, 2003 have been restated to adjust the accounting. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition” in the accompanying financial pages.

Other Matters

      On August 18, 2004, The Saul Zaentz Company filed a complaint in California Superior Court, County of Los Angeles, against New Line Cinema Corporation, a wholly owned subsidiary of the Company (“New Line”), for alleged breach of contract, declaratory relief and other claims. New Line and plaintiff are parties to a license agreement concerning rights in and to literary works written by J.R.R. Tolkien titled The Hobbit and The Lord of the Rings. The complaint alleges, among other things, that New Line owes royalties to plaintiff based on a percentage of gross receipts received by New Line’s international third party distributors from its motion picture “The Lord of the Rings: The Fellowship of the Rings.” On September 27, 2004, New Line filed an answer and cross-complaint for breach of contract and declaratory relief against plaintiff. A trial date has been set for July 19, 2005. The Company intends to defend against this lawsuit vigorously, but is unable to predict the outcome of this suit.

      Warner Bros. (South) Inc. (“WBS”), a wholly owned subsidiary of the Company, is litigating numerous tax cases in Brazil. WBS currently is the theatrical distribution licensee for Warner Bros. in Brazil and acts as a service provider to the Warner Bros. home video licensee. All of the ongoing tax litigation involves WBS’ distribution activities prior to January 2004, when WBS conducted both theatrical and home video distribution. Much of the tax litigation stems from WBS’ position that in distributing videos to rental retailers, it was conducting a distribution service, subject to a municipal service tax, and not the “industrialization” or

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      As of March 1, 2005, 22 putative consumer class action suits have been filed in various state and federal courts naming as defendants the Company or America Online. Plaintiffs allege that America Online violated various consumer protection laws by charging members for services or goods without authorization, including unauthorized secondary accounts offered in connection with America Online’s “Spin-Off a Second Account” (“SOSA”) program, and/or by continuing to charge members for services after receiving requests for cancellation. Motions to dismiss have been denied in O’Leary v. America Online, Inc., which was filed in the Circuit Court for St. Clair County, Illinois, and White v. America Online, Inc., which was filed in the Circuit Court for Madison County, Illinois. Eleven class actions involving SOSA accounts have been transferred by the Judicial Panel on Multidistrict Litigation to the U.S. District Court for the Central District of California for consolidated or coordinated pretrial proceedings (In re America Online Spin-Off Accounts Litigation), and the Company’s motion to dismiss that complaint has been denied. On January 5, 2004, the SOSA case pending in the Superior Court of Washington, Spokane County, titled Dix v. ICT Group and America Online, was dismissed without prejudice based on the forum selection clause set forth in the plaintiffs’ Member Agreement with AOL. On February 17, 2005, the Washington Court of Appeals reversed the lower court’s dismissal; the Company intends to file a motion for reconsideration of the Court of Appeals’ decision. On October 12, 2004, the SOSA case pending in the Court of Common Pleas of Hamilton County, Ohio, titled Robert Schwartz v. America Online, Inc., was dismissed based on the forum selection clause and that dismissal is now final. McCall v America Online, Inc., the SOSA case which was pending in the Superior Court of Cape May County, New Jersey, has been voluntarily dismissed. America Online has filed or will file motions to dismiss in the remaining cases. The Company intends to defend against these lawsuits vigorously, but is unable to predict the outcome of these suits.

      On May 24, 1999, two former AOL Community Leader volunteers filed Hallissey et al. v. America Online, Inc. in the U.S. District Court for the Southern District of New York. This lawsuit was brought as a collective action under the Fair Labor Standards Act (“FLSA”) and as a class action under New York state law against America Online and AOL Community, Inc. The plaintiffs allege that, in serving as Community Leader volunteers, they were acting as employees rather than volunteers for purposes of the FLSA and New York state law and are entitled to minimum wages. On December 8, 2000, defendants filed a motion to dismiss on the ground that the plaintiffs were volunteers and not employees covered by the FLSA. The motion to dismiss is pending. A related case was filed by several of the Hallissey plaintiffs in the U.S. District Court for the Southern District of New York alleging violations of the retaliation provisions of the FLSA. This case has been stayed pending the outcome of the Hallissey motion to dismiss. Three related class actions have been filed in state courts in New Jersey, California and Ohio, alleging violations of the FLSA and/or the respective state laws. The New Jersey and Ohio cases were removed to federal court and subsequently transferred to the U.S. District Court for the Southern District of New York for consolidated pretrial proceedings with Hallissey. The California action was remanded to California state court and on January 6, 2004, the court denied plaintiffs’ motion for class certification. Plaintiffs in that case have filed an appeal of the order denying class certification, and the trial court has stayed proceedings pending that appeal. The Company intends to defend against these lawsuits vigorously. The Company is unable to predict the outcome of these suits or reasonably estimate a range of possible loss.

      On January 17, 2002, Community Leader volunteers filed a class action lawsuit in the U.S. District Court for the Southern District of New York against the Company, America Online and AOL Community, Inc. under ERISA. Plaintiffs allege that they are entitled to pension and/or welfare benefits and/or other employee benefits subject to ERISA. In March 2003, plaintiffs filed and served a second amended complaint, adding as defendants the Company’s Administrative Committee and the AOL Administrative Committee. On May 19, 2003, the Company, America Online and AOL Community, Inc. filed a motion to dismiss and the Administrative Committees filed a motion for judgment on the pleadings. Both of these motions are pending.

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      On October 7, 2003, Kim Sevier and Eric M. Payne vs. Time Warner Inc. and Time Warner Cable Inc., a putative nationwide consumer class action, was filed in the U.S. District Court for the Southern District of New York, and on October 23, 2003, Heidi D. Knight v. Time Warner Inc. and Time Warner Cable Inc., also a putative nationwide consumer class action, was filed in the same court. In each case, the plaintiffs allege that defendants unlawfully tie the provision of high-speed cable Internet service to leases of cable modem equipment, because they do not provide a discount to customers who provide their own cable modems, in violation of Section 1 of the Sherman Act and the New York Donnelly Act, and, further, that defendants’ conduct resulted in unjust enrichment. On November 19, 2003, the court ordered plaintiffs’ complaints to be consolidated. Plaintiffs filed their amended consolidated class action complaint on December 17, 2003, seeking compensatory damages, disgorgement, attorneys’ fees and injunctive and declaratory relief. On February 6, 2004, the Company moved to compel arbitration and to stay the matter pending arbitration or, alternatively, to dismiss the case; the court denied this motion on April 19, 2004, and the Company filed a notice to appeal the decision on arbitration to the U.S. Court of Appeals for the Second Circuit. On March 7, 2005, the Second Circuit remanded the case to the district court so that the parties may seek approval of a proposed classwide settlement. The proposed settlement is immaterial to the Company.

      On June 16, 1998, plaintiffs in Andrew Parker and Eric DeBrauwere, et al. v. Time Warner Entertainment Company, L.P. and Time Warner Cable filed a purported nationwide class action in U.S. District Court for the Eastern District of New York claiming that TWE sold its subscribers’ personally identifiable information and failed to inform subscribers of their privacy rights in violation of the Cable Communications Policy Act of 1984 and common law. The plaintiffs are seeking damages and declaratory and injunctive relief. On August 6, 1998, TWE filed a motion to dismiss, which was denied on September 7, 1999. On December 8, 1999, TWE filed a motion to deny class certification, which was granted on January 9, 2001 with respect to monetary damages, but denied with respect to injunctive relief. On June 2, 2003, the U.S. Court of Appeals for the Second Circuit vacated the District Court’s decision denying class certification as a matter of law and remanded the case for further proceedings on class certification and other matters. On May 4, 2004, plaintiffs filed a motion for class certification, which the Company has opposed. The Company intends to defend against this lawsuit vigorously, but is unable to predict the outcome of this suit.

      In the normal course of business, the Company’s tax returns are subject to examination by various domestic and foreign taxing authorities. Such examinations may result in future tax and interest assessments on the Company. In instances where the Company believes that it is probable that it will be assessed, it has accrued a liability. The Company does not believe that these liabilities are material, individually or in the aggregate, to its financial condition or liquidity. Similarly, the Company does not expect the final resolution of tax examinations to have a material impact on the Company’s financial results.

      The costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments and investigations, claims and changes in those matters (including those matters described above), and developments or assertions by or against the Company relating to intellectual property rights and intellectual property licenses, could have a material adverse effect on the Company’s business, financial condition and operating results.

      Not applicable.

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EXECUTIVE OFFICERS OF THE COMPANY

      Pursuant to General Instruction G(3), the information regarding the Company’s executive officers required by Item 401(b) of Regulation S-K is hereby included in Part I of this report.

      The following table sets forth the name of each executive officer of the Company, the office held by such officer and the age of such officer as of March 1, 2005.

      Set forth below are the principal positions held by each of the executive officers named above:

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PART II

      The principal market for the Company’s Common Stock is the New York Stock Exchange. For quarterly price information with respect to the Company’s Common Stock for the two years ended December 31, 2004, see “Quarterly Financial Information” at pages 215 through 216 herein, which information is incorporated herein by reference. The number of holders of record of the Company’s Common Stock as of February 28, 2005 was approximately 60,000.

      The Company has not paid any dividends since its formation.

      There is no established public trading market for the Company’s Series LMCN-V Common Stock, which as of February 28, 2005 was held of record by eight holders.

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      The following table provides information about purchases by the Company during the quarter ended December 31, 2004 of equity securities registered by the Company pursuant to Section 12 of the Exchange Act.

Issuer Purchases of Equity Securities

      The selected financial information of the Company for the five years ended December 31, 2004 is set forth at pages 213 through 214 herein and is incorporated herein by reference.

      The information set forth under the caption “Management’s Discussion and Analysis” at pages 56 through 132 herein is incorporated herein by reference.

      The information set forth under the caption “Market Risk Management” at pages 115 through 117 herein is incorporated herein by reference.

      The consolidated financial statements and supplementary data of the Company and the report of the independent auditors thereon set forth at pages 133 through 208, 217 through 224 and 210 herein are incorporated herein by reference.

      Quarterly Financial Information set forth at pages 215 through 216 herein is incorporated herein by reference.

      Not applicable.

Evaluation of Disclosure Controls and Procedures

      The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and

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Management’s Report on Internal Control Over Financial Reporting

      Management’s report and the report of the independent auditors thereon set forth at pages 209 and 211 through 212 are incorporated herein by reference.

Changes in Internal Control Over Financial Reporting

      There have not been any changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

      Not applicable.

PART III

      Information called for by Items 10, 11, 12, 13 and 14 of Part III is incorporated by reference from the Company’s definitive Proxy Statement to be filed in connection with its 2005 Annual Meeting of Stockholders pursuant to Regulation 14A, except that (i) the information regarding the Company’s executive officers called for by Item 401(b) of Regulation S-K has been included in Part I of this report; (ii) the information called for by Items 402(k) and 402(l) of Regulation S-K is not incorporated by reference; and (iii) the information regarding certain Company equity compensation plans called for by Item 201(d) of Regulation S-K is set forth below.

      The Company has adopted a Code of Ethics for its Senior Executive and Senior Financial Officers. A copy of the Code is publicly available on the Company’s website at www.timewarner.com/corporate-information. Amendments to the Code or any grant of a waiver from a provision of the Code requiring disclosure under applicable SEC rules will also be disclosed on the Company’s website.

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Equity Compensation Plan Information

      The following table summarizes information as of December 31, 2004, about the Company’s outstanding stock options and shares of Common Stock reserved for future issuance under the Company’s equity compensation plans.

    The Time Warner Inc. 1999 Stock Plan (the “1999 Stock Plan”) was approved by the stockholders of America Online in October 1999 and was assumed by the Company in connection with the America Online-Historic TW Merger in 2001. Under the 1999 Stock Plan, stock options (non-qualified and incentive), stock purchase rights, i.e., restricted stock, and restricted stock units can be granted to employees, directors and consultants of the Company and its consolidated subsidiaries. No incentive stock options have been awarded under the 1999 Stock Plan. The exercise price of a stock option under the 1999 Stock Plan cannot be less than the fair market value of the Common Stock on the date of grant. The stock options generally become exercisable, or vest, in installments of 25% over a four-year period, subject to acceleration upon the occurrence of certain events such as death or disability, and expire ten years from the grant date. No more than 5 million of the total 100 million shares of Common Stock that can be issued pursuant to the 1999 Stock Plan can be issued for awards of restricted stock and restricted stock units. Awards of restricted stock and restricted stock units vest in amounts and at times designated at the time of award, and generally have vested over a four- or five-year period. Awards of restricted stock and restricted stock units are subject to restrictions on transfer and forfeiture prior to vesting. The awards of stock options made to non-employee directors of the Company are made pursuant to the 1999 Stock Plan, which provides for an award of 8,000 stock options when a non-employee director is first elected to the Board of Directors and then annual awards of 8,000 stock options following the annual meeting of stockholders. Stock options awarded to non-employee directors vest in

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      The AOL Time Warner Inc. 1994 Stock Option Plan (the “1994 Plan”) was assumed by the Company in connection with the America Online-Historic TW Merger. The 1994 Plan expired on November 18, 2003 and stock options may no longer be awarded under the 1994 Plan. Under the 1994 Plan, nonqualified stock options and related stock appreciation rights could be granted to employees (other than executive officers) of and consultants and advisors to the Company and certain of its subsidiaries. No stock appreciation rights are currently outstanding under the 1994 Plan. The exercise price of a stock option under the 1994 Plan could not be less than the fair market value of the Common Stock on the date of grant. The outstanding options under the 1994 Plan generally become exercisable in installments of one-third or one-quarter on each of the first three or four anniversaries, respectively, of the date of grant, subject to acceleration upon the occurrence of certain events, and expire ten years from the grant date.

      The Time Warner Inc. 1999 Restricted Stock and Restricted Stock Unit Plan (the “1999 Restricted Stock Plan”) was approved by the stockholders of Historic TW in May 1999 and was assumed by the Company in connection with the America Online-Historic TW Merger. The 1999 Restricted Stock Plan will terminate on May 19, 2009. Under the 1999 Restricted Stock Plan, awards of restricted stock and restricted stock units can be made to employees of the Company and its consolidated subsidiaries. Awards of restricted stock and restricted stock units vest in amounts and at times designated at the time of award, but at least 95% of the awards must vest at least three years after the date of award. Since 2004, most awards of restricted stock and restricted stock units have vested 50% on the third anniversary of the grant date and 50% on the fourth anniversary of the grant date. Awards of restricted stock and restricted stock units are subject to restrictions on transfer and forfeiture prior to vesting. As of December 31, 2004, 152,341 shares were available for issuance under the 1999 Restricted Stock Plan.

      The Time Warner Inc. 1988 Restricted Stock and Restricted Stock Unit Plan for Non-Employee Directors (the “Directors’ Restricted Stock Plan”) was approved most recently in May 1999 by the stockholders of Historic TW and was assumed by the Company in connection with the America Online-Historic TW Merger. The Directors’ Restricted Stock Plan will terminate on May 19, 2009. The Directors’ Restricted Stock Plan provides for the award each year on the date of the annual stockholders meeting of either restricted stock or restricted stock units, as determined by the Board of Directors, to non-employee directors of the Company with value established by the Board of Directors. The awards of restricted stock and restricted stock units vest in equal annual installments on the first four anniversaries of the first day of the month in which the restricted stock or restricted stock units were awarded and in full if the director ends his or her service as a director due to (a) mandatory retirement, (b) failure to be re-elected after being nominated, (c) death or disability, (d) the occurrence of certain transactions involving a change in control of the Company and (e) with the approval of the Board of Directors on a case-by-case basis, under certain other designated circumstances. Restricted stock units also vest in full if a director retires from the Board of Directors after serving as a director for five years. If a non-employee director leaves the Board for any other reason, then his or her unvested restricted stock and restricted stock units are forfeited to the Company. The Board of Directors has determined that restricted stock units will be awarded in 2005.

      The Time Warner Inc. Employee Stock Purchase Plan (the “ESPP”) was approved most recently in October 1998 by the stockholders of America Online and was assumed by the Company in connection with the America Online-Historic TW Merger. Under the ESPP, employees of America Online and certain subsidiaries of America Online may purchase shares of the Company’s Common Stock at a 15% discount from the closing price of the Common Stock at the beginning or end of a six-month participation period, whichever is lower. The purchases are made through payroll deductions during the participation period and are subject to annual limits.

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PART IV

      (a)(1)-(2) Financial Statements and Schedules:

      (3) Exhibits:

      The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this report and such Exhibit Index is incorporated herein by reference. Exhibits 10.1 through 10.42 listed on the accompanying Exhibit Index identify management contracts or compensatory plans or arrangements required to be filed as exhibits to this report, and such listing is incorporated herein by reference.

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SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 11, 2005

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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TIME WARNER INC.

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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 (Loss) before Depreciation and Amortization and Free Cash Flow

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

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

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

OVERVIEW

      Time Warner is a leading media and entertainment company whose major businesses encompass an array of the most respected and successful media brands. Among the Company’s brands are HBO, CNN, AOL, People, Sports Illustrated, Time and Time Warner Cable. The Company has produced and distributed films including The Lord of the Rings trilogy, the Harry Potter series, Million Dollar Baby and The Polar Express and television programs including ER, Two and a Half Men and The West Wing. As of February 1, 2005, the Company had approximately 85,000 employees worldwide. During 2004, the Company generated revenues of $42.089 billion (up 6% from $39.563 billion in 2003), Operating Income before Depreciation and Amortization of $9.372 billion (up 12% from $8.393 billion in 2003), Operating Income of $6.165 billion (up 17% from $5.254 billion in 2003), Net Income of $3.364 billion (up 27% from $2.639 billion in 2003), Cash Provided by Operations of $6.618 billion (up slightly from $6.601 billion in 2003) and Free Cash Flow of $3.280 billion (down 1% from $3.312 billion in 2003).

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

      AOL. America Online, Inc. (“AOL” or “America Online”) is a leader in interactive services, web brands, Internet technologies and e-commerce services, with 28.5 million total AOL brand subscribers in the U.S. and Europe at the end of 2004. In 2004, AOL had total revenues of $8.692 billion (21% of the Company’s overall revenues), $1.772 billion in Operating Income before Depreciation and Amortization and $934 million in Operating Income. AOL generates its revenues primarily from subscription fees charged to subscribers and advertising services.

      During the fourth quarter of 2004, America Online reorganized its operations into four business units: Access, Audience, Digital Services and International (refer to Part I, Business), to streamline management and more closely align these business units to the users that America Online serves. In connection with this reorganization, AOL effected a restructuring, which eliminated approximately 860 positions, to align the workforce with the current business outlook. The reorganization is intended to position AOL to implement its strategy of better balancing the subscription and advertising businesses. In other words, AOL plans to place more emphasis on generating higher margin advertising and search revenues, which the Company believes will continue to grow for the foreseeable future.

      Over the past several years, the AOL Access business has experienced significant declines in U.S. subscribers and subscriber revenues, and these declines are expected to continue. Driving this decrease is the continued industry-wide maturing of premium dial-up services business, as consumers migrate to high-speed broadband and lower-cost dial-up services. AOL continues to develop, change, test and implement marketing strategies to attract and retain subscribers. For example, AOL recently launched AOL 9.0 Security

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Edition, which includes enhanced security features and includes the McAfee VirusScan Online product, previously sold as a premium service, at no additional charge.

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

      In the first quarter of 2005, AOL and Time Warner Cable Inc. announced a strategic agreement to develop a customized broadband offering for their current AOL and Road Runner subscribers as well as prospects across the Time Warner Cable coverage area. The Road Runner service will continue to be available on a stand-alone basis for those subscribers who elect not to take the new offering. This agreement will allow AOL to proactively migrate its subscribers to the customized broadband offering and also to share in future subscriber revenues generated. AOL anticipates some decline in near-term profits from this migration, but expects to experience an increase in the life of its revenue stream. Under the agreement, AOL will manage the advertising and search opportunities for both the new offering and the Road Runner portal, providing an increase in its audience size and the potential to earn from online advertising, search, commerce and premium services. Time Warner Cable will share in a portion of the Advertising revenues generated. The agreement should benefit Time Warner Cable in accelerating its acquisition of high-speed data subscribers and provide its high-speed data customers additional value through access to AOL’s programming and features. The impact on Time Warner’s consolidated financial results is not expected to be significant in 2005. AOL anticipates pursuing similar agreements with other entities offering broadband services.

      AOL has taken steps over the past several years to align costs with the declining dial-up subscriber base. These efforts have resulted in reductions in the cost of operating AOL’s network through improved pricing and decreased levels of service commitments. These factors are expected to result in continued declines in operating costs during 2005.

      Consistent with AOL’s domestic strategy, AOL’s International business unit has focused on balancing its subscription and advertising businesses. Recently, the International business unit entered into a new, multi-year search arrangement that is expected to provide incremental Advertising revenues.

      Cable. Time Warner’s cable business, Time Warner Cable Inc. and its subsidiaries (“TWC Inc.”), is the second-largest cable operator in the U.S. (in terms of subscribers served). TWC Inc. managed approximately 10.9 million basic cable subscribers (including approximately 1.6 million subscribers of unconsolidated investees) at the end of 2004, in highly clustered and upgraded systems in 27 states. TWC Inc. delivered $3.278 billion of Operating Income before Depreciation and Amortization, more than any of the Company’s other reporting segments, and had revenues of $8.484 billion (20% of the Company’s overall revenues) and $1.764 billion in Operating Income during 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 in terms of revenues generated; however, the growth of its customer base for video cable service is limited because the customer base has matured and industry-wide competition from direct-to-home satellite services has increased. Nevertheless, TWC Inc. is continuing to increase its video revenues through its offerings of advanced digital video services. Digital video, Video-on-Demand (VOD), Subscription-Video-on-Demand (SVOD) and Digital Video Recorders (DVR) are available in all of TWC Inc.’s 31 divisions. TWC Inc.’s digital video penetration provides a broad base of potential customers for

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these advanced services. Video programming costs represent a major component of TWC Inc.’s expenses and continue to rise across the sector, especially for sports programming.

      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, was launched in all of its divisions at December 31, 2004. 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 during 2004 are approximately $45 million of losses associated with the roll-out of the Digital Phone service.

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

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

      Filmed Entertainment. Time Warner’s Filmed Entertainment businesses, Warner Bros. Entertainment Group (“Warner Bros.”) and New Line Cinema Corporation (“New Line”), generated revenues of $11.853 billion (26% of the Company’s overall revenues), $1.474 billion in Operating Income before Depreciation and Amortization and $1.157 billion in Operating Income during 2004.

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

      The sale of DVDs has been one of the largest drivers of the segment’s profit growth over the last few years. Warner Bros.’ library, consisting of more than 6,600 theatrical titles and 54,000 live-action and animated television titles, positions it to benefit from continuing growth in DVD hardware penetration. With DVD hardware penetration levels relatively low on a worldwide basis, 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 productions on the air than any other studio, with prime-time series on all six broadcast networks (including such hits as Two and a Half Men, 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 advances in technology. The Company has taken a variety of actions to combat piracy over the last several years and will continue to do so, both individually and together with industry associations.

      Networks. Time Warner’s Networks group is composed of Turner Broadcasting System, Inc. (“Turner”), Home Box Office (“HBO”) and The WB Television Network (“The WB Network”). The segment delivered revenues of $9.054 billion (20% of the Company’s overall revenues), $2.694 billion in Operating Income before Depreciation and Amortization and $2.461 billion in Operating Income during 2004.

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      The Turner networks — including such recognized brands as TBS, TNT, CNN, Cartoon Network and CNN Headline News — are among the leaders in advertising-supported cable TV networks. For the third straight year, more prime-time viewers watched advertising-supported cable TV networks than the national broadcast networks. For 2004, TNT and TBS ranked first and second, respectively, among ad-supported cable networks in total day delivery of their key demographic, adults 18-49 and adults 25-54.

      The Turner networks generate revenues principally from the sale of advertising time and monthly subscriber fees paid by cable system operators, satellite companies and other affiliates. Turner has benefited from strong ratings and a strong advertising market. Key contributors to Turner’s success are its continued investments in high-quality programming focused on original movies, sports, network premieres, licensed and original series, news and animation, as well as brand awareness and operating efficiency. In 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 revenue is from the ancillary sales of its original programming, including such programs as 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 many of its broadcast network competitors, The WB Network experienced a decline in its audience of young adults in the 2003-2004 television season and continues to be down in the 2004-2005 television season. Because this is The WB Network’s target demographic, the loss had a proportionally larger effect on its overall audience delivery. Among other measures, The WB Network is now developing new programming to reach the higher end of its target demographic with shows that will increase viewership among adults 18-34.

      Publishing. Time Warner’s Publishing segment consists principally of magazine publishing through Time Inc. and book publishing through Time Warner Book Group Inc. and a number of direct-marketing and direct-selling businesses. The segment generated revenues of $5.565 billion (13% of the Company’s overall revenues), $1.196 billion in Operating Income before Depreciation and Amortization and $934 million in Operating Income during 2004.

      Time Inc. publishes over 130 magazines globally, including People, Sports Illustrated, In Style, Southern Living, Time, Entertainment Weekly, Fortune, Real Simple, What’s on TV and Cooking Light. It generates revenues primarily from advertising, magazine subscription and newsstand sales, and drives growth through higher circulation and advertising on existing magazines, acquisitions and new magazine launches. Time Inc. owns IPC Media (the U.K.’s largest magazine company) and is the majority shareholder of magazine subscription marketer Synapse Group, Inc. In addition, Time Inc. 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 the U.S. in newspapers nationwide. In 2005, Time Inc. signed an agreement to acquire the remaining 51% stake it does not already own in Essence Communications Partners, the publisher of Essence. This transaction is expected to close in the first quarter of 2005. Time Inc.’s direct-selling division, Southern Living At Home, sells home decor products through approximately 35,000 independent consultants at parties hosted in people’s homes throughout the United States.

      Time Inc.’s book publishing operations are conducted primarily by Time Warner Book Group through its three major publishing houses, Warner Books, Little, Brown and Company, and Time Warner Book Group UK. During 2004, Time Warner Book Group placed a record 58 books on the New York Times bestseller lists, including the Publishers Weekly Book of the Year America (The Book) by Jon Stewart, Your Best Life Now by Joel Osteen, and A Salty Piece of Land by Jimmy Buffett, and new releases from many of its major

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recurring bestselling authors, including David Baldacci, Nelson DeMille, James Patterson and Nicholas Sparks.

      As previously disclosed by the Company, the Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) have been conducting investigations into the accounting and disclosure practices of the Company. Those investigations 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 Company’s interest in AOL Europe prior to January 2002.

      As announced on December 15, 2004, the Company and its subsidiary, AOL, have reached a definitive agreement with the DOJ that resolves the DOJ’s investigation of the Company. The Company also announced that it has proposed a settlement to the staff of the SEC that the staff has agreed to recommend to the SEC Commissioners.

      Under the terms of the settlement in connection with the DOJ investigation, the DOJ filed a criminal complaint against AOL for the conduct of certain employees in connection with securities fraud by PurchasePro.com, but the DOJ will defer prosecution of AOL. After two years, provided the Company fulfills its obligations under the agreement, the DOJ will dismiss the criminal complaint filed against AOL. In addition, the DOJ will not prosecute the Company or AOL for conduct relating to certain other transactions entered into by AOL or the Company from July 1, 1999, including transactions that were the subject of the DOJ or SEC investigations.

      In connection with the settlement with the DOJ, in December 2004, the Company paid a penalty of $60 million and established a $150 million fund, which the Company may use to settle related securities litigation. The fund is reflected as restricted cash on the Company’s accompanying consolidated balance sheet as of December 31, 2004. The Company’s other obligations under the settlement agreement are to (a) accept responsibility for the conduct of certain AOL employees with respect to PurchasePro.com transactions; (b) cooperate fully with the DOJ or any other federal criminal law enforcement agency regarding the transactions covered by the settlement; and (c) retain and cooperate with an independent monitor, who will review the effectiveness of AOL’s internal controls, including those related to the accounting for advertising and related transactions.

      Under the settlement the SEC staff will recommend to the SEC Commissioners, Time Warner will agree, without admitting or denying the Commission’s allegations, to be enjoined from future violations of certain provisions of the securities laws. Under the proposed settlement:

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      Final settlement is subject to both agreement on final documentation and approval by the SEC Commissioners. The Company will not be able to deduct the $300 million penalty to be paid under the proposed settlement for income tax purposes, be reimbursed or indemnified for such payment through insurance or any other source, or use such payment to setoff or reduce any award of compensatory damages to plaintiffs in related securities litigation pending against the Company.

      In connection with the proposed settlement with the SEC, the financial results for each of the years ended December 31, 2000 through December 31, 2003 have been restated for the following:

      The accompanying financial information reflects the impact of the adjustments that were made in the restatement of the Company’s consolidated financial statements.

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      The following tables reflect the impact of the restatement on the Company’s consolidated financial statements for the years ended December 31, 2002, 2001 and 2000:

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