Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-34419

AOL INC.

(Exact name of registrant as specified in its charter)

Delaware 20-4268793 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 770 Broadway New York, NY 10003 (Address of principal executive offices) (Zip Code)

Registrants telephone number, including area code: 212-652-6400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨ (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of October 29, 2010, the number of shares of the Registrants common stock, par value $0.01 per share, outstanding was 106,744,035.

AOL INC.

TABLE OF CONTENTS

AOL INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AOL INC.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (Quarterly Report) contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding business strategies, market potential, future financial performance and other matters. Words such as anticipates, estimates, expects, projects, forecasts, intends, plans, will, believes and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. These forward-looking statements are based on managements current expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances. Except as required by law, we are under no obligation to, and expressly disclaim any obligation to, update or alter any forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise.

Various factors could adversely affect our operations, business or financial results in the future and cause our actual results to differ materially from those contained in the forward-looking statements, including those factors discussed in detail in Item 1ARisk Factors herein and in our Annual Report on Form 10-K for the year ended December 31, 2009 (Annual Report). In addition, we operate a web services company in a highly competitive, rapidly changing and consumer and technology-driven industry. This industry is affected by government regulation, economic, strategic, political and social conditions, consumer response to new and existing products and services, technological developments and, particularly in view of new technologies, the continued ability to protect intellectual property rights. Our actual results could differ materially from managements expectations because of changes in such factors.

Further, lower than expected market valuations associated with our cash flows and revenues may result in our inability to realize the value of recorded intangibles and goodwill. In addition, achieving our business and financial objectives, including growth in operations and maintenance of a strong balance sheet and liquidity position, could be adversely affected by the factors discussed or referenced in Item 1ARisk Factors herein and in our Annual Report as well as, among other things:

 changes in our plans, strategies and intentions;

 our ability to attract and retain key employees;

 the success of any cost reductions, restructuring actions or similar efforts, including with respect to any associated savings, charges or other amounts;

 the impact of significant acquisitions, dispositions and other similar transactions;

 the failure to meet earnings expectations;

 asset impairments;

 decreased liquidity in the capital markets;

 our ability to access the capital markets for debt securities or bank financings; and

 the impact of terrorist acts and hostilities.

References in this Quarterly Report to we, us, Company, and AOL refer to AOL Inc., a Delaware corporation.

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PART I - ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition together with our consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report as well as the discussion in the Item 1Business section of our Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in Item 1ARisk Factors herein and in our Annual Report and Cautionary Statement Concerning Forward-Looking Statements herein.

Introduction

Managements discussion and analysis of financial condition and results of operations (MD&A) is a supplement to the accompanying consolidated financial statements and provides additional information on our business, recent developments, results of operations, liquidity and capital resources and critical accounting policies. MD&A is organized as follows:

 Overview. This section provides a general description of our business, as well as recent developments we believe are important in understanding our results of operations and financial condition or in understanding anticipated future trends.

 Results of operations. This section provides an analysis of our results of operations for the three and nine months ended September 30, 2010 and 2009.

 Liquidity and capital resources. This section provides a discussion of our current financial condition and an analysis of our cash flows for the nine months ended September 30, 2010 and 2009. This section also provides a discussion of our principal debt obligations and an update to the discussion in our Annual Report of our customer credit risk that existed at December 31, 2009.

 Critical accounting policies. This section identifies and summarizes those accounting policies that are considered important to our results of operations and financial condition and require significant judgment and estimates on the part of management.

Overview

The Spin-Off

On December 9, 2009, we completed our legal and structural separation from Time Warner Inc. (Time Warner) via a spin-off (the spin-off). Prior to the spin-off, we were a subsidiary of Time Warner. The financial information prior to the spin-off may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been an independent, publicly-traded company during all of the periods presented. We are incurring additional costs to be able to function as an independent, publicly-traded company, including incremental costs related to corporate finance, governance and public reporting.

In connection with the spin-off, we entered into transactions with Time Warner that either have not existed historically or that are on terms different from the terms of arrangements or agreements that existed prior to the spin-off. Our historical financial information does not reflect changes that we have experienced since the spin-off or expect to experience in the future as a result of our separation from Time Warner, including changes in the financing, operations, cost structure and personnel needs of our business. Further, the financial statements for the

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three and nine months ended September 30, 2009 include allocations of certain Time Warner corporate expenses. We believe the assumptions and methodologies underlying the allocation of general corporate expenses are reasonable. However, such expenses may not be indicative of the actual level of expense that would have been incurred by us if we had operated as an independent, publicly-traded company or of the costs we have incurred since the spin-off or that are expected to be incurred in the future. These allocated expenses relate to various services that historically were provided to us by Time Warner, including cash management and other treasury services, administrative services (such as government relations, tax, employee benefit administration, internal audit, accounting and human resources), equity-based compensation plan administration, aviation services, insurance coverage and the licensing of certain third-party patents.

Our Business

We are a leading global web services company with an extensive suite of brands and offerings and a substantial worldwide audience. Our business spans online content, products and services that we offer to consumers, publishers and advertisers. We are focused on attracting and engaging consumers and providing valuable online advertising services. We market our offerings to advertisers on both AOL Properties and the Third Party Network under the brand AOL Advertising. We have the second largest advertising network in terms of online consumer reach in the United States for September 2010.

Current Economic Environment

The global economic recession adversely impacted our advertising revenues for the year ended December 31, 2009. We do not believe that the global economic environment had a material impact on our advertising revenues for the three and nine months ended September 30, 2010. Further, we do not believe the global economic recession had a material impact on our subscription revenues.

AOL Properties

AOL Properties include our owned and operated content, products and services in the Content, Local, Paid Services and Consumer Applications strategy areas, in addition to our AOL Ventures offerings. AOL Properties also include co-branded websites owned by third parties for which certain criteria have been met, including that the Internet traffic has been assigned to us. We generate advertising revenues from AOL Properties through the sale of display advertising and search and contextual advertising. Display advertising revenue is generated by the display of graphical advertisements and other performance-based advertising. Search and contextual advertising revenue is generated when a user clicks on or views a text-based advertisement on the users screen. These text-based advertisements are either generated from a user-initiated search query or generated based on the content of the webpage the user is viewing.

We seek to be a leading online provider of engaging consumer products and services, as well as a publisher of relevant and engaging online content by utilizing open and highly scalable publishing platforms and content management systems. In addition, we are extending the reach of our offerings to a consumer audience on multiple platforms and digital devices. We offer advertisers a wide range of capabilities and solutions to effectively deliver advertising and reach targeted audiences across AOL Properties through our dedicated advertising sales force. We seek to provide effective and efficient advertising solutions utilizing data-driven insights that help advertisers decide how best to engage consumers. We offer advertisers marketing and promotional opportunities to purchase specific placements of advertising directly on AOL Properties (i.e., in particular locations and on specific dates). In addition, we offer advertisers the opportunity to bid on unsold advertising inventory on AOL Properties utilizing our proprietary scheduling, optimization and delivery

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technology. Finally, advertising inventory on AOL Properties not sold directly to advertisers, as described above, may be included for sale to advertisers with inventory purchased from third party publishers in the Third Party Network.

Growth of our advertising revenues depends on our ability to attract consumers and increase engagement on AOL Properties by offering compelling content, products and services, as well as on our ability to monetize such engagement by offering effective advertising solutions. In order to attract consumers and generate increased engagement, we have developed and acquired, and in the future will continue to develop and acquire, content, products and services designed to meet these goals. Google Inc. (Google) is, except in certain limited circumstances, the exclusive web search provider for AOL Properties. In connection with these search services, Google provides us with a share of the revenue generated through paid text-based search and contextual advertising on AOL Properties. For the three and nine months ended September 30, 2010, advertising revenues associated with the Google relationship (substantially all of which were search and contextual revenues generated on AOL Properties) were $90.9 million and $299.9 million, respectively. We have extended the search partnership with Google for an additional five-year period until December 31, 2015. The majority of the revised terms in this agreement take effect on January 1, 2011. Additionally, on September 1, 2010, AOL and Google entered into a binding Memorandum of Understanding pursuant to which the parties will work together to expand the alliance to include the provision of mobile search and mobile search advertising services to AOL as well as extend the term of and expand the existing search advertising international agreements. AOL and Google also entered into a video partnership that will feature AOLs video content on YouTube, which became effective on August 27, 2010.

We view our subscription access service, which we offer to consumers in the United States for a monthly fee, as a valuable distribution channel for AOL Properties. In general, subscribers to our subscription access service are among the most engaged consumers on AOL Properties. However, our access service subscriber base has declined and is expected to continue to decline. This decline is the result of several factors, including the increased availability of high-speed broadband Internet connections, the optimization of a significant amount of online content, products and services for use with broadband Internet connections, the effects of our strategic focus on advertising, which has led to significantly reduced marketing efforts for our subscription access service, and the free availability of the vast majority of our content, products and services. See Item 1ARisk FactorsRisks Relating to Our BusinessOur strategic shift to an online advertising-supported business model involves significant risks in our Annual Report. As our subscriber base declines, we need to maintain the engagement of former subscribers and increase the number and engagement of other consumers on AOL Properties. We seek to do this by developing and offering engaging content, products and services. Further, we have transitioned and will continue to seek to transition a substantial percentage of those access subscribers who are terminating their paid access subscriptions to free AOL Properties offerings. The primary metrics we monitor for subscription access service are monthly average churn and average paid tenure. Monthly average churn represents on average the number of AOL-brand access subscribers that terminate or cancel our services each month, factoring in new and reactivated subscribers. The domestic AOL-brand access subscriber monthly average churn declined to 2.6% for the three months ended September 30, 2010, as compared to 3.3% for the three months ended September 30, 2009. Average paid tenure represents the average period of time subscribers have paid for domestic AOL-brand internet access. The average paid tenure of the remaining domestic AOL-brand access subscribers has been increasing, and was approximately 9.4 years and 8.5 years for the three months ended September 30, 2010 and 2009, respectively.

Historically, our primary subscription service has been our subscription access service. Moving forward, we seek to market new products and services that are either co-branded, third party or AOL-developed products. To facilitate this goal, in 2010 we launched the initial phase of a single consumer-facing platform that allows us to

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manage and distribute these additional products as well as our subscription access service. We offer those products to our access subscribers as well as other Internet consumers. Revenue related to these new product and service offerings was not material for the three and nine months ended September 30, 2010.

For the three and nine months ended September 30, 2010, our subscription revenues were $244.8 million and $787.7 million, respectively, as compared to $332.2 million and $1,081.4 million for the three and nine months ended September 30, 2009, respectively. Our subscription revenues have relatively low direct costs, and accordingly, our subscription access service represents the source of the vast majority of our operating income. Although our subscription revenues have declined and are expected to continue to decline, we believe that our subscription access service will continue to provide us with an important source of revenue and cash flow for the foreseeable future. The revenue and cash flow generated from our subscription access service will help us to pursue our strategic initiatives and continue the transition of our business toward attracting and engaging Internet consumers and generating advertising revenues. We expect our total revenues and operating income (excluding the goodwill impairment charge recorded in 2010) to decline in the near term and foreseeable future, even if our strategy is successful and we are able to grow our advertising revenues, primarily due to the continuing decline in our subscriber base.

Third Party Network

We also generate advertising revenues through the sale of advertising on third party websites and on digital devices, which we collectively refer to as the Third Party Network. Our advertising offerings on the Third Party Network consist primarily of the sale of display advertising. In order to generate advertising revenues on the Third Party Network, we have historically had to incur higher traffic acquisition costs (TAC) as compared to advertising on AOL Properties. We currently market our offerings to publishers under the brand Advertising.com.

A significant portion of our revenues on the Third Party Network is generated from the advertising inventory acquired from a limited number of publishers. We plan to expand the Third Party Network in order to allow us to serve many more publishers and advertisers than at present.

In the fourth quarter of 2009, we began proactively de-emphasizing the search engine campaign management and lead generation affiliate products on the Third Party Network in order to focus and strengthen our efforts in display advertising solutions. Given the relatively high level of direct costs associated with these products, this change did not have a significant adverse impact on operating income through September 30, 2010 and is not expected to have a significant adverse impact for the remainder of the year.

Trends, Challenges and Uncertainties Impacting Our Business

The web services industry is highly competitive and rapidly changing. Trends, challenges and uncertainties that may have a significant impact on our business, our opportunities and our ability to execute our strategy include the following:

 Commerce, information and advertising continue to migrate to the Internet and away from traditional media outlets at both the national and local levels. Additionally, traditional media outlets are facing significant economic challenges. We believe these continuing trends will create strategic growth opportunities for us to attract new consumers and develop new and effective advertising solutions. As part of our restructuring initiative that began late in 2009, we announced a plan to reduce operating costs and reinvest up to $100 million of those savings in existing strategic areas. As part of this plan and to expand our local strategic initiatives, we began executing on our previously announced plans to

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invest up to $50 million in Patch, our community-specific news and information platform, during 2010. We expect to shift a portion of the remainder of our $100 million reinvestment from other areas to Patch, such that we currently anticipate that we will increase our investment in Patch during the remainder of 2010 in order to accelerate the launch of Patch sites.

 As a part of the restructuring efforts that we began in 2009, we restructured our advertising organization. This resulted in the reassignment of a majority of our advertising accounts. We believe that these restructuring improvements to our advertising organization will continue to have a negative impact on our advertising revenues during the remainder of 2010.

 Beginning in the first quarter of 2010, we made changes to our content, products and services to enhance the consumer experience (e.g., fewer advertisements on certain AOL Properties). These changes have involved and may continue to involve eliminating or modifying advertising practices that historically have been a source of revenues. While difficult to quantify, we believe that these changes will have a negative impact on our advertising revenues in the near term. We intend to ultimately increase our revenues by increasing the attractiveness of our content, product and service offerings to consumers and therefore their value to advertisers through these enhancements to the consumer experience. Specifically, we have undertaken efforts on certain AOL Properties to reduce the number of display advertising units, reduce monetization of search results and reduce the number of contextual advertising links. Additionally, we are shifting our focus from the number of sites that we offer to fewer, bigger sites that better address the needs of users and advertisers.

 As the amount of content that is available online continues to expand, consumers are increasingly fragmenting across the Internet. To address this fragmentation, we own and we partner with third parties to offer a variety of niche sites (e.g. Engadget and Cambio) that we expect to continue to drive consumer engagement. Additionally, we have organized our content around a variety of super networks, with each super network aligning under the broad categories of either News, Entertainment, Life or Marketplace. Furthermore, the Third Party Network, which reaches thousands of websites, will allow us to continue to provide advertising solutions across a fragmenting Internet environment.

 There has been a significant shift in the method of Internet access away from dial-up access. This is due to a number of factors, including the increased availability of high-speed broadband Internet connections and the fact that a significant amount of online content, products and services has been optimized for use with broadband Internet connections. This trend has contributed to, and we expect it will continue to contribute to, the decline in the number of our access subscribers. As a result of these factors, we expect subscription revenues to continue to decline in the future.

Audience Metrics

We utilize unique visitor numbers to evaluate the performance of AOL Properties as well as AOL Media, a subset of AOL Properties that excludes Mail, Instant Messaging, Search, Ventures and Local and Mapping. In addition, we utilize unique visitor numbers to evaluate the reach of our total advertising network, which includes both AOL Properties and the Third Party Network. Unique visitor numbers provide an indication of our consumer reach. Although our consumer reach does not correlate directly to advertising revenue, we believe that our ability to broadly reach diverse demographic and geographic audiences is attractive to brand advertisers seeking to promote their brands to a variety of consumers without having to partner with multiple content providers. AOLs unique visitor numbers also include unique visitors attributable to co-branded websites owned by third parties for which certain criteria have been met, including that the Internet traffic has been assigned to us.

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The source for our unique visitor information is a third party (comScore Media Metrix, or Media Metrix). Media Metrix has historically estimated unique visitors based on a sample of Internet users in various countries (referred to as the panel-only methodology). While we are familiar with the general methodologies and processes that Media Metrix uses in estimating unique visitors, we have not performed independent testing or validation of Media Metrixs data collection systems or proprietary statistical models, and therefore we can provide no assurance as to the accuracy of the information that Media Metrix provides.

In 2009, Media Metrix announced the availability of an alternate methodology (currently referred to as panel-centric unified or Media Metrix 360) to estimate unique visitors, in order to provide a more accurate count of a websites audience, and has continued to refine this methodology. We adopted this alternate methodology for our average monthly unique visitors to AOL Properties and AOL Media starting in December 2009 and going forward. As a result, our average monthly unique visitors to AOL Properties and AOL Media based on Media Metrix 360 will not be comparable to the data under the previous panel-only methodology. For comparison purposes, domestic average monthly unique visitors to AOL Properties and AOL Media are reported under both the Media Metrix 360 and panel-only methodology for the three and nine months ended September 30, 2010.

The following table presents our unique visitor metrics for the periods presented (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30, 2010 2009 2010 2009 Domestic average monthly unique visitors to AOL Properties (Media Metrix 360) 106 NA 110 NA Domestic average monthly unique visitors to AOL Properties (Panel-only methodology) 99 102 101 105 Domestic average monthly unique visitors to AOL Media (Media Metrix 360) 81 NA 83 NA Domestic average monthly unique visitors to AOL Media (Panel-only methodology) 72 74 73 73 Domestic average monthly unique visitors to AOL Advertising Network 183 180 184 177

Recent Developments

Acquisitions

We completed the following three acquisitions during the third quarter of 2010:

 On September 28, 2010, we completed the acquisition of 5 Minutes Ltd. (5min Media), a company that provides a syndication platform for web-based videos. The acquisition offers AOL and partners significant web distribution.

 On September 28, 2010, we completed the acquisition of Thing Labs, Inc. (Thing Labs), a company that produces software to simplify the creation and sharing of web content. This acquisition will allow us to continue our initiative to provide consumers with the best venues to discover and share content.

 On September 29, 2010, we completed the acquisition of TechCrunch, Inc. (TechCrunch), a company that owns and operates a network of websites dedicated to technology news, information and analysis. The business was acquired to enhance AOLs offerings of high-quality, technology-oriented content.

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The aggregate purchase price of these acquisitions was $97.1 million, net of cash acquired. In addition, we agreed to pay up to $23.1 million in aggregate to certain employees of the acquired companies over the next three years contingent on their future service to AOL. The payments of up to $23.1 million will be recognized as compensation expense on an accelerated basis over the requisite service periods of up to three years. The results of operations for the three acquired companies from the respective acquisition dates through September 30, 2010 were not material to our financial statements. See Note 4 in our accompanying consolidated financial statements for additional information on these acquisitions.

Disposition-Related Activities

On June 16, 2010, we sold substantially all the assets of Bebo, Inc. (Bebo), resulting in a pre-tax loss of $1.8 million for the nine months ended September 30, 2010. We expect to treat the common stock of Bebo as worthless for U.S. income tax reporting purposes in our 2010 consolidated U.S. federal income tax return. Our current estimated U.S. income tax basis in Bebo is $756.8 million. As a result of the worthless stock deduction for the common stock of Bebo under U.S. income tax law, and in order to recognize the book and tax basis differences associated with our investment in Bebo, we recorded a deferred tax asset and corresponding income tax benefit of $299.5 million as of and for the nine months ended September 30, 2010. See Note 6 in our accompanying consolidated financial statements for additional information on the impact of the worthless stock deduction. Following this transaction, we expect to continue to generate advertising revenues on AOL Properties from customers who previously purchased advertising on Bebo properties and accordingly, under the accounting guidance for presentation of financial statements, the financial condition, results of operations and cash flows of Bebo have not been reflected as discontinued operations in the accompanying consolidated financial statements.

On July 8, 2010, we completed the sale of our ICQ operations (ICQ) for $187.5 million in cash (subject to working capital adjustments). ICQ provides online instant messaging services and products, as well as software related to such services and products, primarily to international online consumers. We recorded a pre-tax gain on this sale of $119.6 million within discontinued operations in the third quarter of 2010. We believe that any working capital adjustments to the sales price will be finalized no later than the first quarter of 2011 and could result in an adjustment to the recorded gain which we do not expect to be material. Sales proceeds included $5.4 million which was allocated to our obligation to provide certain network infrastructure services to the buyer. This amount has been deferred and will be recognized as other income when we have fulfilled this obligation. If we are unable to fulfill our obligation to provide certain network infrastructure within twelve months of the date of sale, the buyer potentially has the right to claim losses under the agreement with us, which would be subject to a cap of $28.1 million. We do not expect any claims associated with this right as we expect to fulfill our obligations within the allotted time frame.

From a tax perspective, $40.5 million of the gain related to the sale of ICQ qualifies as a capital gain. As a result, in the third quarter of 2010, we utilized a portion of the capital loss deferred tax asset recorded in connection with the sale of buy.at to offset this capital gain. See Note 6 to our accompanying consolidated financial statements for more information on our capital loss deferred tax asset. The financial condition, results of operations and cash flows of ICQ have been reflected as discontinued operations for all periods presented. The results of operations of ICQ were not material to our consolidated financial statements.

During the third quarter of 2010, we completed the sale of our investment in Kayak Software Corporation (Kayak) for $18.9 million in net cash proceeds, which resulted in a pre-tax gain of $17.5 million on this sale recorded in Other income, net in the consolidated financial statements.

During the third quarter of 2010, we committed to a plan to sell a portion of our campus in Dulles, Virginia referred to as Pacific Corporate Park for a sales price of $144.5 million in cash. Accordingly, the carrying

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value of the assets associated with Pacific Corporate Park is presented as Assets held for sale on our consolidated balance sheet as of September 30, 2010. Based on the estimated sale proceeds, we determined that the carrying value of Pacific Corporate Park exceeded the fair value less costs to sell. As a result, an impairment charge of $6.2 million was recorded within costs of revenues during the third quarter of 2010. The agreement for the sale was signed on October 29, 2010. We do not expect to record a significant gain or loss upon completion of this sale.

Restructuring Actions

We are in the midst of a significant restructuring initiative, which began late in 2009, and we expect to complete in the fourth quarter of 2010. We have reduced our total workforce by nearly one-third in connection with this restructuring initiative, prior to hiring new employees in areas of strategic focus. As part of this initiative, we have reduced our cost base in the United Kingdom and have ceased or reduced operations in a number of other countries. In the first half of 2010, we reduced operations in France and Germany. We are continuing to operate certain French and German web properties and sell display advertising, leveraging our centralized European infrastructure; however, we expect advertising revenues generated in those countries to continue to decline in the near term.

In connection with this restructuring initiative, we recorded adjustments to previous estimates which reduced restructuring expense by $0.4 million during the three months ended September 30, 2010 and incurred $34.1 million of restructuring expense during the nine months ended September 30, 2010. We do not expect to incur significant additional restructuring costs during the remainder of 2010. The potential impact of ceasing operations in certain international locations and shutting down legal entities may result in significant non-cash losses related to the recognition in our statement of operations of our cumulative foreign currency translation adjustments previously recognized in other comprehensive income related to those locations and entities. As we continue to refine and optimize our assets and operations, we may identify additional restructuring actions separate and apart from the restructuring initiative which began in late 2009. If additional restructuring actions are identified, we would incur additional restructuring costs.

Other Financing Arrangements

On September 30, 2010 (the Termination Date), we terminated our 364-day, $250.0 million senior secured revolving credit facility (the Revolving Credit Facility) dated December 9, 2009 with an original maturity date of December 8, 2010. We terminated this facility based on an analysis of our current cash position and projected cash flows from operations. There were no amounts outstanding under the Revolving Credit Facility from December 9, 2009 through the Termination Date. No penalties were incurred as a result of the early termination.

Results of Operations

The results of operations for the three and nine months ended September 30, 2009 have been recast so that the basis of presentation is consistent with that of the results of operations for the three and nine months ended September 30, 2010. This recast reflects the financial condition, results of operations and cash flows of buy.at and ICQ as discontinued operations for all periods presented.

Recent Accounting Standards

See Note 1 in our accompanying consolidated financial statements for a discussion of recent accounting standards.

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Consolidated Results

The following table presents our revenues, by revenue type, for the periods presented (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30, 2010 2009 % Change 2010 2009 % Change Revenues: Advertising $ 292.8 $ 402.3 (27 )% $ 935.5 $ 1,241.2 (25 )% Subscription 244.8 332.2 (26 )% 787.7 1,081.4 (27 )% Other 25.9 29.4 (12 )% 79.6 88.1 (10 )% Total revenues $ 563.5 $ 763.9 (26 )% $ 1,802.8 $ 2,410.7 (25 )%

The following table presents our revenues, by revenue type, as a percentage of total revenues for the periods

presented:

Three Months Ended

September 30, Nine Months Ended

September 30, 2010 2009 2010 2009 Revenues: Advertising 52 % 53 % 52 % 51 % Subscription 43 43 44 45 Other 5 4 4 4 Total revenues 100 % 100 % 100 % 100 %

Advertising Revenues

Advertising revenues are generated on AOL Properties through display advertising and search and contextual advertising, as described in OverviewOur Business. Agreements for advertising on AOL Properties typically take the form of impression-based contracts in which we provide impressions in exchange for a fixed fee (generally stated as cost-per-thousand impressions), time-based contracts in which we provide a minimum number of impressions over a specified time period for a fixed fee or performance-based contracts in which performance is measured in terms of either click-throughs when a user clicks on a companys advertisement or other user actions such as product/customer registrations, survey participation, sales leads or product purchases. In addition, agreements with advertisers can include other advertising-related elements such as content sponsorships, exclusivities or advertising effectiveness research.

In addition to advertising revenues generated on AOL Properties, we also generate revenues from our advertising offerings on the Third Party Network. To generate revenues on the Third Party Network, we purchase advertising inventory from publishers (both large and small) in the Third Party Network using proprietary optimization, targeting and delivery technology to best match advertisers with available advertising inventory. We plan to expand the Third Party Network in order to allow us to serve many more publishers and advertisers than at present. Advertising arrangements for the sale of Third Party Network inventory typically take the form of impression-based contracts or performance-based contracts.

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Advertising revenues on AOL Properties and the Third Party Network for the three and nine months ended September 30, 2010 and 2009 are as follows (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30, 2010 2009 % Change 2010 2009 % Change AOL Properties: Display $ 120.8 $ 139.9 (14 )% $ 364.5 $ 420.2 (13 )% Search and Contextual 99.2 138.4 (28 )% 319.5 444.8 (28 )% Total AOL Properties 220.0 278.3 (21 )% 684.0 865.0 (21 )% Third Party Network 72.8 124.0 (41 )% 251.5 376.2 (33 )% Total advertising revenues $ 292.8 $ 402.3 (27 )% $ 935.5 $ 1,241.2 (25 )%

Advertising revenue declined $109.5 million and $305.7 million for the three and nine months ended September 30, 2010, respectively, as compared to the same periods in 2009. Of this decline, $62.3 million and $178.1 million, respectively, for the three and nine months ended September 30, 2010 related to AOL-implemented initiatives to wind down or shut down certain products and shut down or reduce operations internationally. The most significant impact from these initiatives drove declines in Third Party Network revenue of $46.9 million and $124.1 million for the three and nine months ended September 30, 2010, respectively, associated with European shutdowns and de-emphasis of the typically low margin search engine campaign management and lead generation affiliate products. In addition, we experienced declines in search and contextual revenue of $8.1 million and $33.0 million for the three and nine months ended September 30, 2010, respectively, primarily due to the de-emphasis of our contextual products and fewer queries in Germany and France where we have reduced operations. International display revenues declined by $7.3 million and $21.0 million for the three and nine months ended September 30, 2010, respectively, related to our reduced operations in Germany and France and declines from Bebo.

Apart from the impacts of the AOL-implemented initiatives, advertising revenue reflects further declines primarily in search and contextual and display revenue. Search and contextual revenue for the three and nine months ended September 30, 2010 declined $31.1 million and $92.3 million, respectively, as compared to the same periods in 2009. Of this decline, $20.2 million and $68.6 million for the three and nine months ended September 30, 2010, respectively, reflect the impact of fewer domestic search queries on AOL Properties, related primarily to a 24% year-over-year decrease in domestic AOL-brand access subscribers as well as lower traffic on AOL Properties. The search and contextual revenue declines also include international declines of $10.9 million and $23.7 million for the three and nine months ended September 30, 2010, respectively, due to fewer queries primarily in the United Kingdom. Domestic display revenue declines of $9.3 million and $29.0 million for the three and nine months ended September 30, 2010, respectively, were due to the impact of less inventory from AOL Properties being monetized through the Third Party Network, resulting primarily from our efforts to improve the user experience.

For all periods presented in this Quarterly Report, we have had a contractual relationship with Google whereby we generate revenues through paid text-based search and contextual advertising on AOL Properties provided by Google, which represent a significant percentage of the advertising revenues generated by AOL Properties. For the three and nine months ended September 30, 2010, the revenues associated with the Google relationship (substantially all of which were search and contextual revenues generated on AOL Properties) were $90.9 million and $299.9 million, respectively, as compared to the three and nine months ended September 30, 2009, where such revenues were $126.8 million and $401.7 million, respectively.

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We expect that our advertising revenues on both AOL Properties and the Third Party Network will continue to decline significantly for the remainder of 2010 as compared to the same periods in 2009. We believe that advertising revenues generated on AOL Properties will be negatively impacted by the decline in our domestic AOL-brand access subscribers, particularly as it relates to search and contextual revenues, the decline in international operations due to ceasing or reducing operations in a number of countries and the remaining impact in 2010 of restructuring of our advertising organization. Visibility into advertising revenue for the remainder of 2010 is limited due to the fact that many advertising agreements are executed during the quarter that the advertising is displayed, as well as the remaining impact of the restructuring of our advertising organization, mentioned above. Finally, we expect our Third Party Network revenues will be negatively impacted for the remainder of 2010 by the international reductions and closures previously discussed as well as the de-emphasis of our search engine campaign management and lead generation affiliate products, which are discussed in OverviewOur BusinessThird Party Network above.

Subscription Revenues

Subscription revenues declined 26% and 27% for the three and nine months ended September 30, 2010, respectively, as compared to the same periods in 2009. The decline was due to an approximate 24% decrease in the number of domestic AOL-brand access subscribers between September 30, 2009 and September 30, 2010 (which is discussed further in OverviewOur BusinessAOL Properties).

The number of domestic AOL-brand access subscribers was 4.1 million and 5.4 million at September 30, 2010 and September 30, 2009, respectively. The domestic average monthly revenue per AOL-brand access subscriber (which we refer to in this Quarterly Report as ARPU) was $18.10 and $18.17 for the three and nine months ended September 30, 2010, respectively, compared to $18.54 and $18.43 for the three and nine months ended September 30, 2009, respectively. We include in our subscriber numbers individuals, households and entities that have provided billing information and completed the registration process sufficiently to allow for an initial log-on to the AOL access service. Individuals who have registered for our free offerings, including subscribers who have migrated from paid subscription plans, are not included in the AOL-brand access subscriber numbers presented above. Subscribers to our subscription access service contribute to our ability to generate advertising revenues.

Other Revenues

Other revenues consist primarily of fees associated with our mobile e-mail and instant messaging functionality from mobile carriers, licensing revenues from third-party customers from MapQuests business-to-business services and licensing revenues from licensing our proprietary ad serving technology to third parties through our subsidiary, ADTECH AG. In addition, other revenues include amounts associated with hosting certain Time Warner websites on our servers as part of the transition services provided to Time Warner.

Other revenues decreased 12% for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009 due to lower revenues from our mobile messaging services of $7.5 million. This decline was partially offset by increases in third party web hosting revenues of $2.4 million and increases in transition services revenue of $1.2 million associated with recent dispositions.

Other revenues decreased 10% for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009 due to lower revenues from our mobile messaging services of $14.4 million and a decline in licensing revenues from MapQuests business-to-business services of $4.5 million. These declines were partially offset by increases in third party web hosting revenues of $6.6 million and increases in licensing revenues of $4.0 million.

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PART I - ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Geographical Concentration of Revenues

For the periods presented herein, a significant majority of our revenues have been generated in the United States. Substantially all of the non-United States revenues for these periods were generated by our European operations (primarily in the United Kingdom, France and Germany). We expect the significant majority of our revenues to continue to be generated in the United States for the foreseeable future. See Note 1 in our accompanying consolidated financial statements for further discussion of our geographical concentrations.

Operating Costs and Expenses

The following table presents our operating costs and expenses for the periods presented (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30, 2010 2009 % Change 2010 2009 % Change Costs of revenues $ 342.9 $ 449.2 (24 )% $ 1,038.7 $ 1,391.8 (25 )% Selling, general and administrative 117.3 144.1 (19 )% 374.7 402.5 (7 )% Amortization of intangible assets 22.8 31.6 (28 )% 120.7 99.7 21 % Amounts related to securities litigation and government investigations, net of recoveries - 6.8 (100 )% - 21.0 (100 )% Restructuring costs (0.4 ) 10.2 NM 34.1 82.9 (59 )% Goodwill impairment charge - - NM 1,414.4 - NM

NM = not meaningful

The following table represents our operating costs and expenses as a percentage of revenues for the periods presented:

Three Months Ended

September 30, Nine Months Ended

September 30, 2010 2009 2010 2009 Operating costs and expenses: Costs of revenues 61 % 59 % 58 % 58 % Selling, general and administrative 21 19 20 17 Amortization of intangible assets 4 4 7 4 Amounts related to securities litigation and government investigations, net of recoveries - 1 - 1 Restructuring costs - 1 2 3 Subtotal of operating costs and expenses before goodwill impairment charge 86 % 84 % 87 % 83 % Goodwill impairment charge - - 78 - Total operating costs and expenses 86 % 84 % 165 % 83 %

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PART I - ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Costs of Revenues

The following categories of costs are generally included in costs of revenues: network-related costs, TAC, product development costs and other costs of revenues. The largest component of our costs of revenues is generally TAC, which consists of costs incurred through arrangements in which we acquire third-party online advertising inventory for resale and arrangements whereby partners distribute our free products or services or otherwise direct traffic to AOL Properties. TAC arrangements have a number of different economic structures, the most common of which are: payments based on a cost-per-thousand impressions or based on a percentage of the ultimate advertising revenues generated from the advertising inventory acquired for resale, payments for direct traffic delivered to AOL Properties priced on a per click basis (e.g., search engine marketing fees) and payments to partners in exchange for distributing our products to their users (e.g., agreements with computer manufacturers to distribute our toolbar or a co-branded web portal on computers shipped to end users). These arrangements can be on a fixed-fee basis (which often carry reciprocal performance guarantees by the counterparty), on a variable basis or, in some cases, a combination of the two.

Costs of revenues decreased $106.3 million and $353.1 million, respectively, for the three and nine months ended September 30, 2010, as compared to the same periods in 2009. The primary drivers of the decrease in costs of revenues were decreases in TAC, personnel costs and network-related costs. TAC decreased by $69.0 million and $178.0 million, respectively, for the three and nine months ended September 30, 2010, as compared to the same periods in 2009. TAC was impacted by the decrease in advertising revenues, which drove a decline of $48.5 million and $110.3 million, respectively, primarily due to variable revenue share payments to our publishing partners for the three and nine months ended September 30, 2010, as compared to the same periods in 2009. In addition, there were declines from a significant product distribution agreement, whereby payments previously were based on the number of personal computers shipped. Under the agreement, which was amended in the first quarter of 2010, new distributions have ceased and payments are now based on a percentage of the advertising revenue we earn on the associated co-branded website. As a result, TAC associated with this agreement declined by $17.9 million and $60.5 million, respectively, for the three and nine months ended September 30, 2010, as compared to the same periods in 2009. Personnel costs, including salaries and bonuses, declined by $24.9 million and $106.9 million, respectively, for the three and nine months ended September 30, 2010, as compared to the same periods in 2009, due to reduced headcount as a result of our 2009 restructuring initiatives, which is net of $10.2 million and $15.5 million, respectively, related to the impact of hiring new employees in areas of strategic focus. Network-related costs declined by $18.5 million and $63.6 million, respectively, for the three and nine months ended September 30, 2010, as compared to the same periods in 2009, due to declines in depreciation expense on network equipment due to a higher percentage of in-service assets being fully depreciated and declines in narrowband network and other network-related costs, partially due to the decline in domestic AOL-brand access subscribers. Costs of revenues also included a decrease in non-network depreciation and amortization of $4.7 million and $15.8 million, respectively, for the three and nine months ended September 30, 2010, as compared to the same periods in 2009, offset by an impairment charge of $6.2 million recorded in the third quarter of 2010 related to the plan to sell our Pacific Corporate Park assets.

Selling, General and Administrative

Selling, general and administrative expenses decreased $26.8 million for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. The decrease was due to a $14.7 million decline related to the resolution of a French value-added tax matter in 2009, declines in external legal costs and other legal matters of $10.0 million, declines in bad debt expense of $5.2 million due to the decline in subscribers and improved collections on aged balances and declines in personnel costs of $5.2 million. Personnel cost declines were due to reduced headcount of $15.5 million as a result of our 2009 restructuring initiatives, partially offset by an increase in equity-based compensation expense of $3.7 million and an increase

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in recruiting expenses of $3.4 million. These decreases were partially offset by an increase in marketing costs of $7.8 million primarily associated with our rebranding efforts and an increase in consulting costs of $2.0 million.

Selling, general and administrative expenses decreased $27.8 million for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. The decrease was due to declines in personnel costs of $18.2 million, declines in external legal costs and other legal matters of $15.6 million, a $14.7 million decline related to the resolution of a French value-added tax matter in 2009, declines in bad debt expense of $7.1 million due to the decline in subscribers and improved collections on aged balances. The decline in personnel costs was due to reduced headcount of $39.4 million as a result of our 2009 restructuring initiatives, partially offset by an increase in equity-based compensation expense of $13.1 million and an increase in recruiting expenses of $6.6 million. These decreases were partially offset by an increase in marketing costs of $13.3 million primarily associated with our rebranding efforts, an increase in consulting costs of $7.5 million and an increase in other corporate costs of $4.0 million.

Amortization of Intangible Assets

Amortization of intangible assets results primarily from acquired intangible assets including technology, customer relationships and trade names. Amortization of intangible assets declined $8.8 million for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, due to our reevaluation of the useful lives of certain intangible assets in the fourth quarter of 2009 in connection with our restructuring initiatives. The majority of these assets became fully amortized on an accelerated basis in periods prior to the three months ended September 30, 2010 resulting in a decline in amortization expense for these assets of $4.2 million for the three months ended September 30, 2010. Amortization of intangible assets increased $21.0 million for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, due to the aforementioned reevaluation, which resulted in incremental amortization expense of $35.8 million for the nine months ended September 30, 2010 (substantially all of which was incurred during the first two quarters of 2010). The increase for the nine months ended September 30, 2010 was partially offset by a decline of $8.7 million due to certain intangible assets becoming fully amortized in 2009.

Amounts Related to Securities Litigation and Government Investigations, Net of Recoveries

Amounts related to securities litigation and government investigations, net of recoveries consist of legal settlement costs and legal and other professional fees incurred by Time Warner prior to the spin-off related to the defense of various securities lawsuits involving us or our or Time Warners present or former officers and employees. While these amounts were historically incurred by Time Warner and reflected in Time Warners financial results, they have been reflected as an expense and a corresponding additional capital contribution by Time Warner in our consolidated financial statements for the periods when we were a wholly-owned subsidiary of Time Warner because they involve us. We recognized $6.8 million and $21.0 million of expense related to these matters, respectively, for the three and nine months ended September 30, 2009. Following the spin-off, these costs continue to be incurred by Time Warner to the extent that proceeds from a settlement with insurers are available to pay those costs, and thereafter AOL has an obligation to indemnify Time Warner for such costs to the extent they are associated with present or former officers and employees of AOL. We do not view our remaining potential obligation related to this matter to be material.

Restructuring Costs

In connection with our restructuring initiatives, we recorded adjustments to previous estimates which reduced restructuring expense by $0.4 million during the three months ended September 30, 2010 and incurred

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$34.1 million of restructuring expense during the nine months ended September 30, 2010. In addition, we incurred $10.2 million and $82.9 million of restructuring expense for the three and nine months ended September 30, 2009, respectively. These costs related to voluntary and involuntary employee terminations, facility closures and contract termination costs. We do not expect to incur significant additional restructuring costs during the remainder of 2010 related to these initiatives.

Goodwill Impairment Charge

During the three months ended June 30, 2010, we entered into an agreement to sell our ICQ operations and we completed the sale of substantially all of our assets of Bebo. In addition, subsequent to our announcement on April 28, 2010 of our financial results for the three months ended March 31, 2010, we experienced a significant decline in our stock price, and our stock price continued to trend lower through June 30, 2010. Our net assets also increased significantly during the three months ended June 30, 2010 due to cash generated from operations and the deferred tax asset associated with the Bebo worthless stock deduction. Based on these events, we concluded that it was more likely than not that the fair value of our single reporting unit was less than its carrying amount. As such, we performed an interim goodwill impairment test as of June 30, 2010.

Based on our interim impairment analysis, we recorded a goodwill impairment charge of $1,414.4 million in the second quarter of 2010 to write goodwill down to its implied fair value. See Note 3 in our accompanying consolidated financial statements for additional information.

Operating Income (Loss)

Operating income was $80.9 million for the three months ended September 30, 2010, as compared to operating income of $122.0 million during the three months ended September 30, 2009. This decline was due to the decline in revenues, partially offset by decreases in costs of revenues and selling, general and administrative costs.

Operating loss was $1,179.8 million for the nine months ended September 30, 2010, as compared to operating income of $412.8 million for the nine months ended September 30, 2009. This decline was due to the goodwill impairment charge recorded in the second quarter of 2010 and the decline in revenues, partially offset by decreases in costs of revenues, selling, general and administrative costs and restructuring costs.

Other Income Statement Amounts

The following table presents our other income statement amounts for the periods presented (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30, 2010 2009 2010 2009 Other income (loss), net $ 13.5 $ (3.6 ) $ 6.5 $ (1.4 ) Income tax provision (benefit) (5.4 ) 47.9 (239.4 ) 172.2 Discontinued operations, net of tax 71.8 3.4 85.2 7.9

Other Income (Loss), Net

Other income, net was $13.5 million for the three months ended September 30, 2010, as compared to other loss, net of $3.6 million for the three months ended September 30, 2009. This increase was primarily due to the $17.5 million gain from the sale of our investment in Kayak and transaction costs incurred in 2009 related to the spin-off, partially offset by credit facility fees incurred in 2010.

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Other income, net was $6.5 million for the nine months ended September 30, 2010, as compared to other loss, net of $1.4 million for the nine months ended September 30, 2009. This increase was primarily due to the $17.5 million gain from the sale of our investment in Kayak and transaction costs incurred in 2009 related to the spin-off, partially offset by foreign currency translation losses and credit facility fees incurred in 2010.

Income Tax Provision (Benefit)

We reported income from continuing operations before income taxes of $94.4 million for the three months ended September 30, 2010. During the three months ended September 30, 2010, we recognized $7.1 million of benefit related to the recognition of tax credits and a release of a valuation allowance as a result of a tax planning strategy completed during the quarter. We also recognized a benefit of $3.8 million related to return-to-provision adjustments. As a result of these discrete items and the effect of the goodwill impairment charge (which was recorded in the second quarter of 2010 and the majority of which is non-deductible for income tax purposes) on our annual effective tax rate, the effective tax rate for the three months ended September 30, 2010 is significantly lower than the statutory U.S. federal income tax rate of 35.0%.

Our effective tax rate for income from continuing operations was a benefit of 5.7% for the three months ended September 30, 2010, as compared to an effective tax rate of 40.5% for the three months ended September 30, 2009. The effective tax rate for the three months ended September 30, 2010 differed from the statutory U.S. federal income tax rate of 35.0% and the effective tax rates for the three months ended September 30, 2009 primarily due to the effect of the goodwill impairment charge and the impact of foreign losses on the annual effective tax rate, as well as the impact of the discrete items in the quarter discussed above.

We recorded a loss from continuing operations before income taxes of $1,173.3 million for the nine months ended September 30, 2010. Included in the loss for the nine months ended September 30, 2010 was a goodwill impairment charge of $1,414.4 million. In addition, we recorded an income tax benefit for the nine months ended September 30, 2010 of $239.4 million, of which $299.5 million for the nine months ended September 30, 2010 is related to a deferred tax asset associated with the Bebo worthless stock deduction. This deferred tax asset is expected to be used to offset our future ordinary income and capital gains, which is expected to ultimately result in cash tax savings by offsetting future U.S. federal and state income tax obligations through the worthless stock deduction. As a result of the Bebo worthless stock deduction and the discrete items during the three months ended September 30, 2010 discussed above, the effective tax rate for the nine months ended September 30, 2010 is significantly lower than the statutory U.S. federal income tax rate of 35.0%.

Our effective tax rate for income from continuing operations for the nine months ended September 30, 2010, including the effect of the deferred tax asset related to the worthless stock deduction and the goodwill impairment charge, was 20.4% as compared to 41.9% for the nine months ended September 30, 2009. The effective tax rate for the nine months ended September 30, 2010 differed from the statutory U.S. federal income tax rate of 35.0% and the effective tax rates for the nine months ended September 30, 2009 primarily due to the worthless stock deduction and the discrete items during the three months ended September 30, 2010 discussed above, partially offset by the effect of the goodwill impairment charge.

For the three and nine months ended September 30, 2010, we recorded an income tax expense on discontinued operations of $48.6 million and $25.3 million, respectively. Included in the income tax expense for the three and nine months ended September 30, 2010 is an income tax expense of $47.2 million related to the gain on the sale of ICQ. Also, included in the income tax expense for the nine months ended September 30, 2010 is a benefit of $25.5 million recorded in connection with the sale of buy.at, primarily related to the $18.8 million utilization of the capital loss deferred tax asset . See Note 4 for additional information on the sale of buy.at and related capital loss deferred tax assets.

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Discontinued Operations, Net of Tax

The financial results for the three and nine months ended September 30, 2010 and 2009 include the impact of reflecting the results of operations, financial condition and cash flows of buy.at and ICQ as discontinued operations. We completed the sale of buy.at on February 26, 2010 and accordingly, the nine months ended September 30, 2010 included the gain on the sale as well as the results of buy.at for the period from January 1, 2010 through February 26, 2010. We also completed the sale of ICQ on July 8, 2010 and accordingly, the three and nine months ended September 30, 2010 included the gain on the sale as well as the results of ICQ for the beginning of the respective period through July 8, 2010. See Note 4 in our accompanying consolidated financial statements for more information regarding these divestitures.

Adjusted OIBDA

We use Adjusted OIBDA as a supplemental measure of our performance. We define Adjusted OIBDA as operating income before depreciation and amortization excluding the impact of gains and losses on all disposals of assets (including those recorded in costs of revenues) and non-cash asset impairments. We consider Adjusted OIBDA to be a useful metric for management and investors to evaluate and compare the ongoing operating performance of our business on a consistent basis across reporting periods, as it eliminates the effect of non-cash items such as depreciation of tangible assets, amortization of intangible assets that were primarily recognized in business combinations and asset impairments, as well as the effect of gains and losses on asset sales, which we do not believe are indicative of our core operating performance. 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 our business. Moreover, the Adjusted OIBDA measures do not reflect gains and losses on asset sales or impairment charges related to goodwill, intangible assets and fixed assets. We evaluate the investments in such tangible and intangible assets through other financial measures, such as capital expenditure budgets, investment spending levels and return on capital.

Adjusted OIBDA is defined as a non-GAAP financial measure by the SEC and may be different than similarly-titled non-GAAP financial measures used by other companies. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with generally accepted accounting principles (GAAP).

The following table presents our reconciliation of Adjusted OIBDA to operating income (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30, 2010 2009 % Change 2010 2009 % Change Operating income (loss) $ 80.9 $ 122.0 (34 )% $ (1,179.8 ) $ 412.8 NM Add: Depreciation 46.9 65.0 (28 )% 152.1 205.0 (26 )% Add: Amortization of intangible assets 22.8 31.6 (28 )% 120.7 99.7 21 % Add: Asset impairments 7.8 7.3 7 % 1,425.1 13.9 NM Add: Losses/(gains) on asset sales (0.7 ) (0.1 ) NM (1.2 ) (0.7 ) 71 % Adjusted OIBDA $ 157.7 $ 225.8 (30 )% $ 516.9 $ 730.7 (29 )%

Adjusted OIBDA declined for the three and nine months ended September 30, 2010 as compared to the same periods in 2009 due to the declines in advertising and subscription revenues discussed above, partially offset by lower costs of revenues, selling, general and administrative and restructuring costs.

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Liquidity and Capital Resources

Current Financial Condition

Historically, the cash we generate has been sufficient to fund our working capital, capital expenditure and financing requirements. While our ability to forecast future cash flows is limited, we expect to fund our ongoing working capital, capital expenditure and financing requirements through our existing cash balance and cash flows from operations. While we expect to continue to generate positive cash flows from operations, we expect our cash flows from operations to decline over the next several years principally due to the continued decline in the number of domestic AOL-brand access subscribers as well as a projected decline in search and contextual advertising revenues. Growth in cash flows from operations will only be achieved when, and if, the growth in earnings from our online advertising services more than offsets the continued decline in domestic AOL-brand access subscribers. In order for us to achieve such increase in earnings from advertising services, we believe it will be important to increase our overall volume of display advertising sold, including through our higher-priced channels, and to maintain or increase pricing for advertising. Advertising revenues, however, are more unpredictable and variable than our subscription revenues, and are more likely to be adversely affected during economic downturns, as spending by advertisers tends to be cyclical in line with general economic conditions. If we are unable to successfully implement our strategic plan and grow the earnings generated by our online advertising services, we may need to reassess our cost structure or seek other financing alternatives to fund our business. If it is necessary to seek other financing alternatives, our ability to obtain future financing will depend on, among other things, our financial condition and results of operations as well as the condition of the capital markets or other credit markets at the time we seek financing. We currently do not have any ratings from the credit rating agencies, so our access to the capital markets may be limited. As part of our ongoing assessment of our business and availability of capital and to enhance our liquidity position, we have divested of certain assets and product lines and may consider divesting of additional assets or product lines.

On September 30, 2010 we terminated our secured credit agreement, dated December 9, 2009 (the Credit Agreement) for a 364-day $250.0 million senior secured revolving credit facility. We terminated the Revolving Credit Facility given our cash balance at that date and projected cash flows from operations. From December 9, 2009 through the Termination Date, we did not borrow under the terms of the Revolving Credit Facility. The Revolving Credit Facility was set to expire on December 8, 2010 and we did not pay any penalties as a result of the early termination. See Principal Debt Obligations for additional information on the Revolving Credit Facility.

At September 30, 2010, our cash and equivalents totaled $623.3 million, as compared to $143.3 million at December 31, 2009.

Summary Cash Flow Information

Our cash flows from operations are driven by net income adjusted for non-cash items such as depreciation, amortization, goodwill impairment, equity-based compensation expense and other activities impacting net income such as the gains and losses on the sale of assets or operating subsidiaries. Cash flows from investing activities consist primarily of the cash used in the acquisitions of various businesses as part of our strategy, proceeds received from the sale of assets or operating subsidiaries and cash used for capital expenditures. Cash flows from financing activities prior to the spin-off relate primarily to our distributions of cash to Time Warner as part of our historical cash management and treasury operations and for all periods, payments made on capital lease obligations.

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Operating Activities

The following table presents cash provided by continuing operations for the periods presented (in millions):

Nine Months Ended

September 30, 2010 2009 Net income (loss) $ (848.7 ) $ 247.1 Less: Discontinued operations, net of tax 85.2 7.9 Net income (loss) from continuing operations (933.9 ) 239.2 Adjustments for non-cash and non-operating items: Depreciation and amortization 272.8 304.7 Non-cash asset impairments 1,425.1 13.9 Gain on sale of investments (17.5 ) - Non-cash equity-based compensation 27.1 10.5 Amounts related to securities litigation and government investigations, net of recoveries - 21.0 Deferred income taxes (390.8 ) (16.0 ) All other, net, including working capital changes 92.8 180.3 Cash provided by continuing operations $ 475.6 $ 753.6

Cash provided by continuing operations decreased $278.0 million for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. Our operating loss was $1,179.8 million for the nine months ended September 30, 2010, a decrease of $1,592.6 million as compared to the nine months ended September 30, 2009. Excluding the decline in operating income related to the $1,414.4 million non-cash goodwill impairment charge in 2010, operating income decreased by $178.2 million. This decrease in operating income along with the decrease in cash provided by changes in working capital drove the decline in cash provided by continuing operations. The decrease in cash provided by working capital was due primarily to restructuring costs, employee bonus costs and TAC incurred in 2009 and paid in 2010.

Investing Activities

The following table presents cash provided (used) by investing activities for the periods presented (in millions):

Nine Months Ended

September 30, 2010 2009 Investments and acquisitions, net of cash acquired $ (116.3 ) $ (16.3 ) Capital expenditures and product development costs (67.7 ) (101.8 ) Investment activities from discontinued operations 185.6 (2.5 ) Other investment proceeds 25.6 1.0 Cash provided (used) by investing activities $ 27.2 $ (119.6 )

Cash provided by investing activities was $27.2 million for the nine months ended September 30, 2010, as compared to cash used by investing activities of $119.6 million for the nine months ended September 30, 2009. The increase in cash provided by investing activities was due to the proceeds received in the nine months ended

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PART I - ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

September 30, 2010 from the sale of ICQ of $173.1 million and buy.at of $14.8 million as well as a decrease in capital expenditures and product development costs, partially offset by an increase in cash used for acquisitions. The increase in cash used for acquisitions is due to the acquisition of 5min Media, Thing Labs, TechCrunch and StudioNow during 2010.

Capital expenditures and product development costs are mainly for the purchase of computer hardware, software, network equipment, furniture, fixtures and other office equipment.

Financing Activities

The following table presents cash used by financing activities for the periods presented (in millions):

Nine Months Ended

September 30, 2010 2009 Principal payments on capital leases $ (26.9 ) $ (22.9 ) Net distribution to Time Warner - (683.5 ) Tax withholdings related to net share settlements of restricted stock units (4.3 ) - Other - (9.8 ) Cash used by financing activities $ (31.2 ) $ (716.2 )

Cash used by financing activities was $31.2 million for the nine months ended September 30, 2010, compared to $716.2 million for the nine months ended September 30, 2009. This change was due to the $683.5 million of net cash distributed to Time Warner in the nine months ended September 30, 2009, as we swept the majority of our domestic cash to Time Warner prior to the spin-off.

Free Cash Flow

We use Free Cash Flow as a supplemental measure of our performance. We define Free Cash Flow as cash provided by continuing operations, less capital expenditures, product development costs and principal payments on capital leases. We consider Free Cash Flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that, after capital expenditures, capitalized product development costs and principal payments on capital leases, can be used for strategic opportunities, including investing in our business, making strategic acquisitions, and strengthening the balance sheet. Analysis of Free Cash Flow also facilitates managements comparisons of our operating results to competitors operating results. A limitation on the use of this metric is that Free Cash Flow does not represent the total increase or decrease in cash for the period because it excludes certain non-operating cash flows.

Free Cash Flow is defined as a non-GAAP financial measure by the SEC and may be different than similarly-titled non-GAAP financial measures used by other companies. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

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PART I - ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents our reconciliation of Free Cash Flow to cash provided by continuing operations (in millions):

Nine Months Ended

September 30, 2010 2009 Cash provided by continuing operations $ 475.6 $ 753.6 Less: Capital expenditures and product development costs 67.7 101.8 Less: Principal payments on capital leases 26.9 22.9 Free Cash Flow $ 381.0 $ 628.9

Free Cash Flow decreased for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009. This decrease is due to the decline in cash provided by continuing operations, discussed in Summary Cash Flow InformationOperating Activities above, partially offset by reduced capital expenditures and product development costs.

Principal Debt Obligations

On December 9, 2009, in connection with the spin-off, we entered into a Revolving Credit Facility, for use, as necessary, for general corporate purposes. On the Termination Date, we terminated our Revolving Credit Facility given our cash balance at that date and projected cash flows from operations. From December 9, 2009 through the Termination Date, we did not borrow under the terms of the Revolving Credit Facility. The Revolving Credit Facility was set to expire on December 8, 2010, and we did not pay any penalties as a result of the early termination.

Time Warner guaranteed all of our obligations under the Revolving Credit Facility, pursuant to a guarantee dated as of December 9, 2009 (the Time Warner Guarantee). In connection with the termination of the Revolving Credit Facility, the Time Warner Guarantee also terminated. We continue to engage in certain lease guarantees and other transactions with Time Warner. See Note 13 to our audited consolidated financial statements in our Annual Report.

See Note 5 to our audited consolidated financial statements in our Annual Report and Part II. Other InformationItem 1ARisk FactorsWe may need to raise additional capital, and we cannot be sure that additional financing will be available herein for additional information.

Customer Credit Risk

Customer credit risk represents the potential for financial loss if a customer is unwilling or unable to meet its agreed-upon contractual payment obligations. Credit risk originates from sales of advertising and subscription access service and is dispersed among many different counterparties. No single customer had a receivable balance at September 30, 2010 greater than 10% of total net receivables. While such uncollectible amounts have historically been within our expectations and related reserve balances, if there is a significant change in uncollectible amounts in the future or the financial condition of our counterparties across various industries or geographies deteriorates, these events could have an adverse impact on our operating results and cash flows.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with GAAP, which require management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial

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PART I - ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

statements and the accompanying notes. Management considers an accounting policy to be critical if it is important to our financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. The development and selection of these critical accounting policies have been determined by our management. Due to the significant judgment involved in selecting certain of the assumptions used in these areas, it is possible that different parties could choose different assumptions and reach different conclusions. Our critical accounting policies relate to: (a) gross versus net revenue recognition; (b) impairment of goodwill; and (c) income taxes. The following discussion is an update to the discussion in our Annual Report regarding our critical accounting policies related to the impairment of goodwill. For additional information about our other critical accounting policies and our significant accounting policies, see Item 7MD&ACritical Accounting Policies and Note 1 to our audited consolidated financial statements in our Annual Report.

Impairment of Goodwill

Goodwill is tested annually for impairment during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances that indicate goodwill is more likely than not impaired. Such indicators may include a sustained, significant decline in our stock price; a decline in our expected future cash flows; significant disposition activity; a significant adverse change in the economic or business environment; the testing for recoverability of a significant asset group, among others. The occurrence of these indicators could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.

For purposes of our goodwill impairment test, we operate as a single reporting unit. Different judgments relating to the determination of reporting units could significantly affect the testing of goodwill for impairment and the amount of any impairment recognized.

Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value of our reporting unit to its carrying amount, including goodwill. If the estimated fair value of our reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying amount of our reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. To measure the amount of impairment loss, if any, we determine the implied fair value of goodwill in the same manner as if our reporting unit were being acquired in a business combination. Specifically, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

During the second quarter of 2010, we entered into an agreement to sell our ICQ operations and we completed the sale of substantially all of our assets of Bebo. In addition, subsequent to our announcement on April 28, 2010 of our financial results for the three months ended March 31, 2010, we experienced a significant decline in our stock price, and our stock price continued to trend lower through June 30, 2010. Based on these events, we determined that it was more likely than not that the fair value of our single reporting unit was less than its carrying amount and accordingly, we performed an interim goodwill impairment test as of June 30, 2010.

The estimated fair value of our reporting unit was determined utilizing a market-based approach, as the primary input in this approach was a quoted market price in an active market. To determine the estimated fair value of our reporting unit, we calculated our market capitalization based on our stock price and adjusted it by a

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PART I - ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

control premium of 25%. The premium used to arrive at a controlling interest equity value was determined based on values observed in recent market transactions. Determining fair value of our reporting unit requires the exercise of significant judgment, primarily related to the premium used to arrive at a controlling interest equity value used in the market-based approach. Significant changes in the estimates and assumptions used in deriving our control premium could materially affect the determination of fair value for our reporting unit which could impact the magnitude of an impairment loss recognized or trigger future impairment. Due to the significant judgments used in deriving our control premium, the fair value of our single reporting unit determined in connection with the goodwill impairment test may not necessarily be indicative of the actual value that would be recognized in any future transaction.

Based on our interim impairment analysis as of June 30, 2010, we determined that the carrying value of our reporting unit exceeded its fair value. Accordingly, step two of the goodwill impairment test was performed, where we used an independent valuation specialist to assist us in determining the fair value of our individual assets and liabilities in order to perform a hypothetical purchase price allocation assuming that the estimated fair value of the reporting unit was the purchase price paid. The implied fair value of goodwill in the hypothetical purchase price allocation was calculated by comparing the estimated fair value of the reporting unit to the aggregate fair value of recorded assets and liabilities and unrecognized identifiable intangible assets. Our unrecognized identifiable intangible assets consisted primarily of subscribers to our access service, advertiser relationships and technology related to our advertising operations, and the fair value of such assets had the effect of increasing the magnitude of our goodwill impairment charge. Determining the fair value of these unrecognized intangible assets in the step two evaluation requires significant judgment, including judgments about appropriate discount rates and our estimated future cash flows, which are subject to change. As a result of our step two evaluation, we recorded a goodwill impairment charge of $1,414.4 million during the second quarter of 2010.

While we have not identified any changes in circumstances requiring an interim goodwill impairment test for the three months ended September 30, 2010, we will continue to monitor impairment indicators, such as disposition activity, stock price declines or changes in forecasted cash flows in future periods. If the fair value of our reporting unit declines below the carrying value in the future, we may incur additional goodwill impairment charges.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk from the information provided in Part I, Item 3 Quantitative and Qualitative Disclosures About Market Risk in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010.

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ITEM 4T. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information we are required to disclose in our financial reports is recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms, and that such information is accumulated and communicated to senior management, as appropriate, to allow timely decisions regarding required disclosure. Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2010. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2010, at a reasonable assurance level.

Changes to Internal Control Over Financial Reporting

We have evaluated the changes in our internal control over financial reporting that occurred during the three months ended September 30, 2010 and concluded that there have not been any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; In millions, except per share amounts)

Three Months Ended

September 30, Nine Months Ended

September 30, 2010 2009 2010 2009 (recast) (recast) Revenues: Advertising $ 292.8 $ 402.3 $ 935.5 $ 1,241.2 Subscription 244.8 332.2 787.7 1,081.4 Other 25.9 29.4 79.6 88.1 Total revenues 563.5 763.9 1,802.8 2,410.7 Costs of revenues 342.9 449.2 1,038.7 1,391.8 Selling, general and administrative 117.3 144.1 374.7 402.5 Amortization of intangible assets 22.8 31.6 120.7 99.7 Amounts related to securities litigation and government investigations, net of recoveries - 6.8 - 21.0 Restructuring costs (0.4 ) 10.2 34.1 82.9 Goodwill impairment charge - - 1,414.4 - Operating income (loss) 80.9 122.0 (1,179.8 ) 412.8 Other income (loss), net 13.5 (3.6 ) 6.5 (1.4 ) Income (loss) from continuing operations before income taxes 94.4 118.4 (1,173.3 ) 411.4 Income tax provision (benefit) (5.4 ) 47.9 (239.4 ) 172.2 Income (loss) from continuing operations 99.8 70.5 (933.9 ) 239.2 Discontinued operations, net of tax 71.8 3.4 85.2 7.9 Net income (loss) 171.6 73.9 (848.7 ) 247.1 Less: Net loss attributable to noncontrolling interests - 0.1 - 0.3 Net income (loss) attributable to AOL Inc. $ 171.6 $ 74.0 $ (848.7 ) $ 247.4 Amounts attributable to AOL Inc.: Income (loss) from continuing operations $ 99.8 $ 70.6 $ (933.9 ) $ 239.5 Discontinued operations, net of tax 71.8 3.4 85.2 7.9 Net income (loss) attributable to AOL Inc. $ 171.6 $ 74.0 $ (848.7 ) $ 247.4 Per share information attributable to AOL Inc. common stockholders: Basic income (loss) per common share from continuing operations $ 0.94 $ 0.67 $ (8.76 ) $ 2.27 Discontinued operations, net of tax 0.67 0.03 0.80 0.07 Basic net income (loss) per common share $ 1.61 $ 0.70 $ (7.96 ) $ 2.34 Diluted income (loss) per common share from continuing operations $ 0.93 $ 0.67 $ (8.76 ) $ 2.27 Discontinued operations, net of tax 0.67 0.03 0.80 0.07 Diluted net income (loss) per common share $ 1.60 $ 0.70 $ (7.96 ) $ 2.34 Shares used in computing basic income per common share 106.7 105.8 106.6 105.8 Shares used in computing diluted income per common share 107.3 105.8 106.6 105.8

See accompanying notes.

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ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

September 30,

2010 December 31,

2009 (unaudited) (recast) Assets Current assets: Cash and equivalents $ 623.3 $ 143.3 Accounts receivable, net of allowances of $22.8 and $31.4, respectively 285.8 436.1 Prepaid expenses and other current assets 40.5 33.1 Deferred income taxes 211.4 44.7 Assets held for sale 127.8 - Current assets of discontinued operations - 30.2 Total current assets 1,288.8 687.4 Property and equipment, net 525.7 700.7 Goodwill 787.5 2,119.1 Intangible assets, net 117.0 210.4 Long-term deferred income taxes 330.5 153.9 Long-term assets of discontinued operations - 83.8 Other long-term assets 28.5 24.9 Total assets $ 3,078.0 $ 3,980.2 Liabilities and Equity Current liabilities: Accounts payable $ 79.2 $ 100.1 Accrued compensation and benefits 96.6 89.0 Accrued expenses and other current liabilities 396.0 398.9 Deferred revenue 109.2 112.6 Current portion of obligations under capital leases 34.9 32.4 Current liabilities of discontinued operations - 18.4 Total current liabilities 715.9 751.4 Obligations under capital leases 47.7 41.5 Restructuring liabilities 9.0 28.3 Deferred income taxes 9.4 2.4 Long-term liabilities of discontinued operations - 24.3 Other long-term liabilities 80.7 69.4 Total liabilities 862.7 917.3 Commitments and contingencies (See Note 10) Equity: Common stock, $0.01 par value, 106.7 million and 105.8 million shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively 1.1 1.1 Additional paid-in capital 3,370.2 3,355.5 Accumulated other comprehensive loss, net (286.9 ) (275.1 ) Accumulated deficit for the period subsequent to November 2, 2009 (869.1 ) (20.4 ) Total AOL Inc. stockholders equity 2,215.3 3,061.1 Noncontrolling interest - 1.8 Total equity 2,215.3 3,062.9 Total liabilities and equity $ 3,078.0 $ 3,980.2

See accompanying notes.

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ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; In millions)

Nine Months Ended September 30, 2010 2009 (recast) Operations Net income (loss) $ (848.7 ) $ 247.1 Less: Discontinued operations, net of tax 85.2 7.9 Net income (loss) from continuing operations (933.9 ) 239.2 Adjustments for non-cash and non-operating items: Depreciation and amortization 272.8 304.7 Asset impairments 1,425.1 13.9 Gain on sale of investments (17.5 ) - Equity-based compensation 27.1 10.5 Amounts related to securities litigation and government investigations, net of recoveries - 21.0 Other non-cash adjustments 11.3 9.2 Deferred income taxes (390.8 ) (16.0 ) Changes in operating assets and liabilities, net of acquisitions 81.5 171.1 Cash provided by continuing operations 475.6 753.6 Cash provided by discontinued operations 10.0 20.3 Cash provided by operations 485.6 773.9 Investing Activities Investments and acquisitions, net of cash acquired (116.3 ) (16.3 ) Capital expenditures and product development costs (67.7 ) (101.8 ) Investment activities from discontinued operations 185.6 (2.5 ) Other investment proceeds 25.6 1.0 Cash provided (used) by investing activities 27.2 (119.6 ) Financing Activities Principal payments on capital leases (26.9 ) (22.9 ) Net distribution to Time Warner - (683.5 ) Tax withholdings related to net share settlements of restricted stock units (4.3 ) - Other - (9.8 ) Cash used by financing activities (31.2 ) (716.2 ) Effect of exchange rate changes on cash and equivalents (5.3 ) 3.9 Increase (decrease) in cash and equivalents 476.3 (58.0 ) Cash and equivalents at beginning of period 147.0 134.7 Cash and equivalents at end of period 623.3 76.7 Less: Cash and equivalents of discontinued operations at end of period - 12.8 Cash and equivalents of continuing operations at end of period $ 623.3 $ 63.9 Supplemental disclosures of cash flow information Cash paid for interest $ 7.0 $ 2.9 Cash paid for taxes $ 4.0 $ 204.6

See accompanying notes.

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ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF EQUITY

Nine Months Ended September 30, 2010 and 2009

(Unaudited; In millions)

Common Stock Divisional

Equity Additional

Paid-In

Capital Accumulated

Other

Comprehensive

Income (Loss) Retained

Earnings