FEBRUARY 1, 2006 TIME WARNER INC. The Lazard Report THE LAZARD REPORT Disclaimer These materials were prepared at the request and on behalf of Icahn Partners LP, Icahn Partners Master Fund LP, American Real Estate Partners, L.P., Carl C. Icahn, Franklin Mutual Advisers, LLC, JANA Partners LLC, JANA Master Fund, Ltd., S.A.C. Capital Advisors, LLC, S.A.C. Capital Associates, LLC and certain of their respective affiliates (collectively the “Icahn Parties”). Lazard has been retained as independent contractor to the Icahn Parties and has no fiduciary, agency or other relationship to the Icahn Parties or to any other party, all of which are hereby disclaimed. Therefore, no obligation or responsibility is assumed to any person with respect to these materials. These materials do not purport to be a complete description of the views of or analyses performed by the Icahn Parties or Lazard. Nothing contained herein should be construed as providing any legal, tax or accounting advice, and you are encouraged to consult with your legal, tax, accounting and investment advisors. You should consider these materials as only one of many factors to be considered in making any investment or other decisions. Given Lazard’s past, current or future relationships with companies mentioned in these materials, investors should be aware that the firm could be viewed as having a conflict of interest affecting the objectivity of these materials. See the “Important Disclosures” section at the conclusion of these materials for important required disclosures, including potential conflicts of interest. © Lazard 2006 i THE LAZARD REPORT MANAGING “I’m desperately in need of a strategy.”(a) --Richard Parsons, CEO of Time Warner Inc., April 2002 MANAGEMENT LAYERS AND CORPORATE STAFF “First, we took out management layers. Layers hide weaknesses. Layers mask mediocrity. When you take out layers, you change the exposure of the managers who remain. They sit right in the sun. We also reduced the corporate staff. Headquarters can be the bane of corporate America. It can strangle, choke, delay and create insecurity. If you’re going to have simplicity in the field, you can’t have a big staff at home.”(b) --Jack Welch, Former Chairman and CEO of The General Electric Company, October 1989 EXECUTION “If you don’t know how to execute, the whole of your effort as a leader will always be less than the sum of its parts.”(c) --Larry Bossidy, Former Chairman and CEO of Honeywell International Inc., June 2002 COST CUTTING The restructuring process was intended to “delayer” the company’s management structure and reduce costs. “Too many layers make you very averse to risk. You’ve got to be able to make fast decisions. We were like middle-aged people. We needed to slim down.” The process was “long overdue” and not a “one-day fix.”(d) --Ann Moore, Chairman and CEO of Time Inc., December 2005 (a) Nina Munk, Fools Rush In 261 (HarperCollins Publishers Inc. 2004). (b) John F. Welch, Jr., Speed, Simplicity, Self-Confidence: An Interview with Jack Welch, Harvard Business Review, October 1, 1989. (c) Larry Bossidy, Execution: The Discipline of Getting Things Done (2002). (d) Seth Sutel, Time Inc. Fires Senior Execs in Shakeup, Muskogee Daily Phoenix and Times-Democrat, December 19, 2005. Stephanie D. Smith, House of Luce Gets a Renovation, Mediaweek, December 19, 2005. Joe Hagan, Time Inc. Thins Managerial Ranks in Restructuring, Wall St. Journal, December 14, 2005. ii THE LAZARD REPORT BACKGROUND TO THE LAZARD REPORT Lazard Frères & Co. LLC (“Lazard”) was retained by certain shareholders(a) of Time Warner Inc. (“TWX”, the “Company” or “Parent”) to review the business and operations of the Company and propose various alternatives to maximize the value of all TWX shareholders’ interests. Lazard’s engagement is structured to align its interests with those of TWX shareholders, as the incentive fee to be received for the assignment is directly tied to the stock price performance of TWX over the eighteen-month term of Lazard’s engagement. Lazard, in analyzing the financial condition, statements and forecasts of TWX, has relied only on publicly available information, including statements and filings by the Company and its affiliates, presentations to shareholders, press articles and research reports published on the Company. Lazard recognizes that there may be confidential information in the possession of TWX that could have a material impact on the assumptions and conclusions of this analysis. TABLE OF CONTENTS (1) The Context 1 (2) Overview and Analysis of the Divisions of TWX A. AOL 12 B. Content (Networks + Filmed Entertainment) 55 C. Publishing 105 D. Time Warner Cable 142 (3) Financial Strategy and Debt Capacity 177 (4) Valuation 238 (5) Summary and Recommendation 315 (a) Lazard was engaged by Icahn Partners LP, Icahn Partners Master Fund LP, American Real Estate Partners, L.P., Carl C. Icahn, Franklin Mutual Advisers, LLC, JANA Partners LLC, JANA Master Fund Ltd., S.A.C. Capital Advisors, LLC, S.A.C. Associates, LLC (the “Icahn Parties”). iii THE LAZARD REPORT OVERVIEW OF TIME WARNER INC. TWX is the world’s largest diversified media company with a current market capitalization of approximately $81 billion. Consensus Wall Street research estimates (pro forma for the currently pending Adelphia/Comcast transactions(a)) project fiscal 2005 revenues and OIBDA of $46 billion and $11.4 billion, respectively. The Company is currently composed of five main operating units: SUMMARY OF TWX ORGANIZATION Filmed AOL Networks Publishing Cable Entertainment Turner Warner Consumer Book HBO WB New Line Networks Bros. Magazines Publishing Information Source: Company filings. Q AOL: AOL provides TWX with a new media and Internet platform that serves approximately 20 million US subscribers. AOL owns leading web sites such as Moviefone and MapQuest and attracts 114 million unique visitors per month.(b) Q Networks: Networks include established, highly regarded and profitable channels, including HBO, Cinemax, CNN, TBS, TNT, Cartoon Network and Court TV. Q Filmed Entertainment: The film segment includes two of the world’s leading and most profitable film studios (Warner Bros. and New Line Cinema) that have produced 16 of the top 50 grossing films in the last five years and have a library of over 6,600 theatrical releases and 54,000 television titles. Q Publishing: Publishing assets include 7 of the top 30 consumer magazines in the US (based on 2004 gross revenue), including People, Sports Illustrated, Time, Fortune, In Style, Entertainment Weekly and Southern Living, as well as IPC, the leading consumer magazine company in the UK, and well- respected book publishing units including Warner Books and Little Brown & Co. Q Cable (“TWC”): TWC manages over 14 million subscribers in tightly clustered and attractive markets (85% of TWC’s subscribers are in its top five markets, including attractive, large market shares in New York, California, Ohio, Texas and the Carolinas).(a) The entire TWC network (excluding Adelphia) has been 100% upgraded to offer digital video, high speed Internet and IP telephony. (a) On April 20, 2005, TWC and Comcast announced an agreement to purchase substantially all of the US cable assets of Adelphia Communications Corporation (“Adelphia”). As part of this agreement, TWC will enter into certain transactions with Comcast which involve systems swaps and the redemption of Comcast’s interests in TWC (together, the “Adelphia/Comcast transactions”). (b) comScore Media Metrix, November 2005. Includes all TWX properties. iv FEBRUARY 1, 2006 CHAPTER 1 The Context CHAPTER 1: THE CONTEXT Table of Contents I. PREFACE 1 II. THE ISSUE: PERFORMANCE 1 III. HISTORY AND STRUCTURE 4 IV. STRATEGY 11 CHAPTER 1: THE CONTEXT I. PREFACE TWX is at the center of the storm that has and will continue to jolt American industry. Technology, regulation and competition are changing at an accelerated pace. The markets are increasingly rewarding companies – across all industries – with a well-defined vision, as shareholder expectations on transparency, capital returns, appreciation and corporate governance increase. Against this backdrop, anticipating and harnessing change is critical for success. This is the TWX story. It is a difficult story to tell because the history and performance of the Company has been skillfully enshrouded in the fog of one of the largest public relations efforts in American industry. The spin is generated by scores of divisional people, over 30 corporate image executives and a series of outside public relations firms. Success is heralded as triumph; failures are trumpeted as success. A corporate mythology is spun and is largely accepted, unchallenged by the media. Some facts are simply obscured. The story is not about evil or hubris. But even benign intentions may not suffice in leading a company in this challenging environment. It is now time to begin to lift the fog, examine the record and undertake a careful evaluation of TWX. II. THE ISSUE: PERFORMANCE TWX’s stock has underperformed by all relevant measures since Mr. Parsons became CEO.(a) When benchmarked against an overall index representing AOL, Networks, Filmed Entertainment, Publishing and Cable, TWX’s stock has underperformed by 51%.(b)(c) TWX has also underperformed all major indices – S&P 500, NASDAQ and DJIA. On an absolute basis, TWX’s stock has declined 8%.(b) Even as compared to an index of traditional diversified media stocks, which does not include an Internet component, TWX has underperformed. But, TWX does indeed have an Internet business, as Mr. Parsons acknowledged when he commented, “we have a different profile than any of the big diversified media companies because we do have some of the Internet superspice in our portfolio – namely AOL.”(d) (a) Mr. Parsons became CEO effective at the Annual Meeting on May 16, 2002. Mr. Parsons’ appointment to CEO was made on December 5, 2001 as part of a senior management succession plan.