Exhibit 10.1

                  STOCK  OPTION  AGREEMENT,  dated as of January  10,  2000 (the
"Agreement"),  between America Online, Inc., a Delaware corporation ("Grantee"),
and Time Warner Inc., a Delaware corporation ("Issuer").

                              W I T N E S S E T H:

                  WHEREAS,   Grantee  and  Issuer  are,  concurrently  with  the
execution and delivery of this Agreement, entering into an Agreement and Plan of
Merger,  dated as of the date hereof (the "Merger Agreement;"  capitalized terms
used  without  definition  herein  having the  meanings  assigned to them in the
Merger  Agreement),  pursuant  to which the  parties  will  engage in a business
combination in a merger of equals (the "Merger"); and

                  WHEREAS, as a condition to their willingness to enter into the
Merger Agreement, Grantee has required that Issuer agree, and believing it to be
in the best interests of Issuer, Issuer has agreed, among other things, to grant
to Grantee the Option (as  hereinafter  defined)  to  purchase  shares of common
stock,  par value $.01 per share,  of Issuer  ("Issuer Common Stock") at a price
per share equal to the Exercise Price (as hereinafter defined).

                  NOW  THEREFORE,  in  consideration  of the  foregoing  and the
mutual representations,  warranties,  covenants and agreements herein contained,
and intending to be legally bound hereby, the parties hereto agree as follows:

ARTICLE I

                            OPTION TO PURCHASE SHARES

1.1      Grant of Option.

(a) Issuer hereby grants to Grantee an irrevocable option to purchase,  in whole
or in part, an aggregate of up to 233,263,204 duly  authorized,  validly issued,
fully paid and nonassessable  shares of Issuer Common Stock  (representing 19.9%
of the outstanding shares of Issuer Common Stock as of November 30, 1999) on the
terms and subject to the conditions set forth herein (the  "Option");  provided,
however,  that in no event shall the number of shares of Issuer Common Stock for
which this  Option is  exercisable  exceed  19.9% of the issued and  outstanding
shares of Issuer Common Stock at the time of exercise  without  giving effect to
the issuance of any Option Shares (as hereinafter defined). The number of shares
of Issuer  Common Stock that may be received upon the exercise of the Option and
the Exercise Price are subject to adjustment as herein set forth.

(b) In the event that any additional shares of Issuer Common Stock are issued or
otherwise  become  outstanding  after  the date of this  Agreement  (other  than
pursuant to this  Agreement  and other than  pursuant to an event  described  in
Section 3.1 hereof),  the number of shares of Issuer Common Stock subject to the
Option shall be increased so that,  after such  issuance,  such number  together
with any shares of Issuer Common Stock previously issued pursuant hereto, equals
19.9% of the number of shares of Issuer Common Stock then issued and outstanding
without  giving effect to any shares  subject or issued  pursuant to the Option.
Nothing contained in this Section 1.1(b) or elsewhere in this Agreement shall be
deemed to authorize Issuer to breach or fail to comply with any provision of the
Merger Agreement.  As used herein,  the term "Option Shares" means the shares of
Issuer  Common  Stock  issuable  pursuant to the  Option,  as the number of such
shares shall be adjusted pursuant to the terms hereof.

1.2      Exercise of Option.

(a) The Option may be exercised by Grantee, in whole or in part, at any time, or
from time to time, commencing upon the Exercise Date and prior to the Expiration
Date. As used herein,  the term "Exercise  Date" means the date on which Grantee
becomes  unconditionally  entitled to receive the Time  Warner  Termination  Fee
pursuant to Section  8.2(b) of the Merger  Agreement.  As used herein,  the term
"Expiration  Date" means the first to occur prior to  Grantee's  exercise of the
Option pursuant to Section 1.2(b) of:

                                    (i)     the Effective Time;

                                    (ii) written  notice of  termination of this
Agreement by Grantee to Issuer;

                                    (iii) 12 months  after the first  occurrence
of an Exercise Date; or

                                    (iv) the date of  termination  of the Merger
Agreement, unless, in the case

         of this clause  (iv),  Grantee has the right to receive the Time Warner
         Termination Fee either (x) upon or (y) following such  termination upon
         the  occurrence  of certain  events,  in which case the Option will not
         terminate  until the later of (x) 15 business  days  following the time
         the Time Warner Termination Fee becomes unconditionally payable and (y)
         the expiration of the period in which Grantee has such right to receive
         the Time Warner Termination Fee.

Notwithstanding  the  termination  of the Option,  Grantee  shall be entitled to
purchase  those Option  Shares with respect to which it may have  exercised  the
Option  by  delivery  of an  Option  Notice  (as  defined  below)  prior  to the
Expiration  Date,  and the  termination of the Option will not affect any rights
hereunder  which by their terms do not  terminate  or expire  prior to or at the
Expiration Date. (b) In the event Grantee wishes to exercise the Option, Grantee
shall send a written notice to Issuer of its intention to so exercise the Option
(an "Option  Notice"),  specifying  the number of Option  Shares to be purchased
(and the  denominations  of the  certificates,  if more than one),  whether  the
aggregate  Exercise  Price will be paid in cash or by  surrendering a portion of
the Option in accordance with Section 1.3(b) or a combination  thereof,  and the
place in the United  States,  time and date of the closing of such purchase (the
"Option Closing" and the date of such Closing, the "Option Closing Date"), which
date shall not be less than two Business  Days nor more than ten  Business  Days
from the date on which an Option Notice is  delivered;  provided that the Option
Closing shall be held only if (i) such purchase  would not otherwise  violate or
cause the violation of, any applicable material law, statute, ordinance, rule or
regulation (collectively,  "Laws") (including the HSR Act and the Communications
Act), and (ii) no material judgment,  order, writ, injunction,  ruling or decree
of any Governmental Entity (collectively, "Orders") shall have been promulgated,
enacted,  entered into, or enforced by any  Governmental  Entity which prohibits
delivery of the Option  Shares,  whether  temporary,  preliminary  or permanent;
provided,  however,  that the parties  hereto  shall use their  reasonable  best
efforts to (x) promptly make and process all necessary  filings and applications
and obtain all consents,  approvals, Orders,  authorizations,  registrations and
declarations  or  expiration  or  termination  of any required  waiting  periods
(collectively,  "Approvals") and to comply with any such applicable Laws and (y)
have any such Order  vacated  or  reversed.  In the event the Option  Closing is
delayed pursuant to clause (i) or (ii) above, the Option Closing shall be within
ten Business Days following the cessation of such restriction, violation, Law or
Order or the receipt of any necessary  Approval,  as the case may be (so long as
the Option Notice was delivered prior to the Expiration Date);  provided further
that,  notwithstanding  any prior Option  Notice,  Grantee  shall be entitled to
rescind  such Option  Notice and shall not be  obligated  to purchase any Option
Shares in connection  with such  exercise upon written  notice to such effect to
Issuer.

(c) At any Option Closing, (i) Issuer shall deliver to Grantee all of the Option
Shares to be purchased by delivery of a certificate or  certificates  evidencing
such  Option  Shares in the  denominations  designated  by Grantee in the Option
Notice,  and (ii) if the Option is exercised in part and/or  surrendered in part
to pay the  aggregate  Exercise  Price  pursuant to Section  1.3(b),  Issuer and
Grantee shall execute and deliver an amendment to this Agreement  reflecting the
Option Shares for which the Option has not been exercised and/or surrendered. If
at the time of issuance of any Option  Shares  pursuant to an exercise of all or
part of the  Option  hereunder,  Issuer  shall  have  issued any rights or other
securities which are attached to or otherwise  associated with the Issuer Common
Stock,  then each  Option  Share  issued  pursuant to such  exercise  shall also
represent such rights or other securities with terms  substantially  the same as
and at least as  favorable  to Grantee  as are  provided  under any  shareholder
rights  agreement or similar  agreement of Issuer then in effect.  At the Option
Closing,  Grantee shall pay to Issuer by wire transfer of immediately  available
funds to an  account  specified  by Issuer to  Grantee  in  writing at least two
Business Days prior to the Option  Closing an amount equal to the Exercise Price
multiplied  by the number of Option  Shares to be purchased for cash pursuant to
this  Article I;  provided  that the  failure or refusal of Issuer to specify an
account shall not affect Issuer's obligation to issue the Option Shares.

(d) Upon the  delivery by Grantee to Issuer of the Option  Notice and the tender
of the applicable aggregate Exercise Price in immediately available funds or the
requisite portion of the Option in accordance with Section 1.3, Grantee shall be
deemed  to be the  holder  of record of the  Option  Shares  issuable  upon such
exercise,  notwithstanding  that the stock  transfer books of Issuer may then be
closed, that certificates representing such Option Shares may not then have been
actually delivered to Grantee,  or Issuer may have failed or refused to take any
action  required of it  hereunder.  Issuer  shall pay all  expenses  that may be
payable in  connection  with the  preparation,  issuance  and  delivery of stock
certificates  or an amendment to this  Agreement  under this Section 1.2 and any
filing fees and other expenses  arising from the performance of the transactions
contemplated hereby.

1.3      Payments.

(a) The purchase and sale of the Option  Shares  pursuant to Section 1.2 of this
Agreement  shall be at a  purchase  price  equal to  $110.63  per Share (as such
amount may be adjusted  pursuant to the terms  hereof,  the  "Exercise  Price"),
payable at Grantee's  option in cash, by surrender of a portion of the Option in
accordance with Section 1.3(b), or a combination thereof.

(b) Grantee may elect to purchase Option Shares issuable, and pay some or all of
the  aggregate  Exercise  Price  payable,  upon an  exercise  of the  Option  by
surrendering  a portion of the  Option  with  respect  to such  number of Option
Shares as is determined by dividing (i) the aggregate  Exercise Price payable in
respect of the number of Option  Shares  being  purchased in such manner by (ii)
the  excess of the Fair  Market  Value (as  defined  below)  per share of Issuer
Common Stock as of the last trading day preceding the date Grantee  delivers its
Option  Notice  (such  date,  the  "Option  Exercise  Date")  over the per share
Exercise  Price.  The "Fair Market Value" per share of Issuer Common Stock shall
be (i) if the Issuer Common Stock is listed on the New York Stock Exchange, Inc.
(the "NYSE") or any other nationally recognized exchange or trading system as of
the Option  Exercise Date, the average of last reported sale prices per share of
Issuer  Common  Stock  thereon for the 10 trading  days  commencing  on the 12th
trading day  immediately  preceding  the Option  Exercise  Date,  or (ii) if the
Issuer Common Stock is not listed on the NYSE or any other nationally recognized
exchange or trading system as of the Option Exercise Date, the amount determined
by a mutually  acceptable  independent  investment banking firm as the value per
share the Issuer  Common  Stock  would have if publicly  traded on a  nationally
recognized  exchange  or trading  system  (assuming  no  discount  for  minority
interest,  illiquidity or restrictions on transfer).  That portion of the Option
so surrendered  under this Section 1.3(b) shall be canceled and shall thereafter
be of no further force and effect.

(c)  Certificates for the Option Shares delivered at an Option Closing will have
typed or printed thereon a restrictive  legend which will read  substantially as
follows:

         "THE  SECURITIES   REPRESENTED  BY  THIS   CERTIFICATE  HAVE  NOT  BEEN
         REGISTERED  UNDER THE  SECURITIES  ACT OF 1933, AS AMENDED,  AND MAY BE
         REOFFERED OR SOLD ONLY IF SO  REGISTERED  OR IF AN EXEMPTION  FROM SUCH
         REGISTRATION  IS  AVAILABLE.   SUCH  SECURITIES  ARE  ALSO  SUBJECT  TO
         ADDITIONAL  RESTRICTIONS  ON TRANSFER AS SET FORTH IN THE STOCK  OPTION
         AGREEMENT DATED AS OF JANUARY 10, 2000, A COPY OF WHICH MAY BE OBTAINED
         FROM THE  SECRETARY  OF TIME  WARNER INC.  AT ITS  PRINCIPAL  EXECUTIVE
         OFFICES."

It is understood and agreed that (i) the reference to restrictions arising under
the Securities Act in the above legend will be removed by delivery of substitute
certificate(s) without such reference if such Option Shares have been registered
pursuant to the Securities Act, such Option Shares have been sold in reliance on
and in  accordance  with  Rule 144  under  the  Securities  Act or  Grantee  has
delivered  to Issuer a copy of a letter from the staff of the SEC, or an opinion
of  counsel  in form and  substance  reasonably  satisfactory  to Issuer and its
counsel,  to the effect that such  legend is not  required  for  purposes of the
Securities Act and (ii) the reference to restrictions pursuant to this Agreement
in the above  legend will be removed by delivery  of  substitute  certificate(s)
without  such  reference  if  the  Option  Shares  evidenced  by  certificate(s)
containing  such reference have been sold or transferred in compliance  with the
provisions  of  this  Agreement  under  circumstances  that do not  require  the
retention of such reference.

ARTICLE II

                         REPRESENTATIONS AND WARRANTIES

2.1  Representations  and Warranties of Grantee.  Grantee hereby  represents and
warrants  to Issuer  that any  Option  Shares or other  securities  acquired  by
Grantee upon  exercise of the Option will not be taken with a view to the public
distribution thereof and will not be transferred or otherwise disposed of except
in a transaction  registered or exempt from  registration  under the  Securities
Act.

2.2  Representations  and  Warranties of Issuer.  Issuer hereby  represents  and
warrants to Grantee as follows:

(a) Option Shares.  Issuer has taken all necessary corporate and other action to
authorize and reserve for issuance, and, subject to receipt of any Approvals, to
permit  it to  issue,  the  Option  Shares  and all  additional  shares or other
securities  which may be issued  pursuant  to Section  3.1 upon  exercise of the
Option, and, at all times from the date hereof until such time as the obligation
to deliver Option Shares hereunder  terminates,  will have reserved for issuance
upon exercise of the Option the Option Shares and such other  additional  shares
or  securities,  if any. All of the Option Shares and all  additional  shares or
other securities or property which may be issuable pursuant to Section 3.1, upon
exercise of the Option and issuance  pursuant hereto,  shall be duly authorized,
validly issued, fully paid and nonassessable,  shall be delivered free and clear
of all  Liens  of any  nature  whatsoever,  and  shall  not  be  subject  to any
preemptive or similar right of any Person.

(b) No  Restrictions.  No Delaware law or other takeover  statute or similar Law
and no provision  of the  Restated  Certificate  of  Incorporation  or Bylaws of
Issuer or any agreement to which Issuer is a party (a) would or would purport to
impose  restrictions  which might adversely  affect or delay the consummation of
the  transactions  contemplated  by this  Agreement,  or (b) as a result  of the
consummation of the  transactions  contemplated by this Agreement,  (i) would or
would  purport to restrict or impair the ability of Grantee to vote or otherwise
exercise the rights of a shareholder with respect to securities of Issuer or any
of its Subsidiaries  that may be acquired or controlled by Grantee or (ii) would
or would purport to entitle any Person to acquire securities of Issuer.

ARTICLE III

                    ADJUSTMENT UPON CHANGES IN CAPITALIZATION

3.1 Adjustment Upon Changes in Capitalization.  In addition to the adjustment in
the number of shares of Issuer Common Stock that may be purchased  upon exercise
of the Option pursuant to Section 1.1 of this Agreement, the number of shares of
Issuer  Common Stock that may be  purchased  upon the exercise of the Option and
the Exercise Price shall be subject to adjustment  from time to time as provided
in this  Section  3.1.  In the event of any  change in the  number of issued and
outstanding  shares of  Issuer  Common  Stock by  reason of any stock  dividend,
split-up, merger, recapitalization, combination, conversion, exchange of shares,
spin-off or other change in the  corporate or capital  structure of Issuer which
would have the effect of  diluting or  otherwise  diminishing  Grantee's  rights
hereunder,  the number and kind of Option Shares or other securities  subject to
the Option and the Exercise Price therefor  shall be  appropriately  adjusted so
that Grantee  shall  receive  upon  exercise of the Option (or, if such a change
occurs between  exercise and the Option  Closing,  upon the Option  Closing) the
number and kind of shares or other  securities  or property  that Grantee  would
have  received  in respect of the Option  Shares  that  Grantee is  entitled  to
purchase  upon  exercise of the Option if the Option had been  exercised (or the
purchase thereunder had been consummated,  as the case may be) immediately prior
to such event or the record date for such event,  as  applicable.  The rights of
Grantee  under this Section  shall be in addition to, and shall in no way limit,
its rights  against Issuer for breach of or the failure to perform any provision
of the Merger Agreement.

ARTICLE IV

                               REGISTRATION RIGHTS

4.1      Registration of Option Shares Under the Securities Act.

(a) If  requested  by Grantee at any time and from time to time within two years
after receipt by Grantee of Option Shares (the  "Registration  Period"),  Issuer
shall use its reasonable best efforts, as promptly as practicable, to effect the
registration  under the Securities  Act and any applicable  state law (a "Demand
Registration")  of such number of Option Shares or such other Issuer  securities
owned by or issuable to Grantee in  accordance  with the method of sale or other
disposition contemplated by Grantee,  including a "shelf" registration statement
under Rule 415 of the Securities Act or any successor  provision,  and to obtain
all consents or waivers of other  parties that are  required  therefor.  Grantee
agrees to use  reasonable  best  efforts to cause,  and to use  reasonable  best
efforts to cause any underwriters of any sale or other disposition to cause, any
sale or other disposition pursuant to such registration statement to be effected
on a widely distributed basis so that upon consummation  thereof no purchaser or
transferee will own  beneficially  more than 3% of the  then-outstanding  voting
power of Issuer.  Except  with  respect to such a "shelf"  registration,  Issuer
shall keep such Demand Registration  effective for a period of not less than 150
days,  unless, in the written opinion of counsel to Issuer,  which opinion shall
be delivered to Grantee and which shall be satisfactory in form and substance to
Grantee and its  counsel,  such  registration  under the  Securities  Act is not
required in order to lawfully  sell and  distribute  such Option Shares or other
Issuer securities in the manner contemplated by Grantee.  Issuer shall only have
the  obligation  to effect three Demand  Registrations  pursuant to this Section
4.1; provided that only requests  relating to a registration  statement that has
become  effective  under the  Securities  Act shall be counted  for  purposes of
determining the number of Demand Registrations made. Issuer shall be entitled to
postpone  for up to 150 days from  receipt  of  Grantee's  request  for a Demand
Registration the filing of any registration statement in connection therewith if
the  Board of  Directors  of  Issuer  determines  in its good  faith  reasonable
judgment  that such  registration  would  materially  interfere  with or require
premature disclosure of, any material  acquisition,  reorganization,  pending or
proposed offering of Issuer Securities or other transaction  involving Issuer or
any other  material  contract under active  negotiation by Issuer;  and provided
further that Issuer shall not have postponed any Demand Registration pursuant to
this sentence during the twelve month period  immediately  preceding the date of
delivery of Grantee's request for a Demand Registration.

(b) If Issuer effects a  registration  under the Securities Act of Issuer Common
Stock for its own account or for any other stockholders of Issuer (other than on
Form S-4 or Form S-8, or any  successor  form),  Grantee shall have the right to
participate in such  registration and include in such registration the number of
shares of Issuer  Common Stock or such other Issuer  securities as Grantee shall
designate by notice to Issuer (an "Incidental Registration" and, together with a
Demand Registration, a "Registration"); provided, however, that, if the managing
underwriters of such offering advise Issuer in writing that in their opinion the
number of shares of Issuer  Common  Stock or other  securities  requested  to be
included in such Incidental Registration exceeds the number which can be sold in
such offering, Issuer shall include therein (i) first, all shares proposed to be
included  therein by  Issuer,  (ii)  second,  subject to the rights of any other
holders  of  registration  rights in effect as of the date  hereof,  the  shares
requested to be included therein by Grantee and (iii) third,  shares proposed to
be included therein by any other stockholder of Issuer. Participation by Grantee
in any  Incidental  Registration  shall not affect the  obligation  of Issuer to
effect  Demand  Registrations  under this Section  4.1.  Issuer may withdraw any
registration  under  the  Securities  Act  that  gives  rise  to  an  Incidental
Registration without the consent of Grantee.

(c) In connection with any Registration pursuant to this Section 4.1, (i) Issuer
and Grantee  shall provide each other and any  underwriter  of the offering with
customary   representations,    warranties,   covenants,   indemnification   and
contribution  obligations in connection with such Registration,  and (ii) Issuer
shall use  reasonable  best efforts to cause any Option Shares  included in such
Registration  to be  approved  for  listing on the NYSE or any other  nationally
recognized  exchange or trading system upon which  Issuer's  securities are then
listed,  subject to official notice of issuance,  which notice shall be given by
Issuer upon issuance.  Grantee will provide all information reasonably requested
by Issuer for inclusion in any registration statement to be filed hereunder. The
costs  and  expenses  incurred  by Issuer in  connection  with any  Registration
pursuant to this Section 4.1 (including any fees related to qualifications under
Blue Sky Laws and SEC filing fees) (the "Registration  Expenses") shall be borne
by Issuer,  excluding legal fees of Grantee's counsel and underwriting discounts
or commissions with respect to Option Shares to be sold by Grantee included in a
Registration.

4.2 Transfers of Option  Shares.  The Option  Shares may not be sold,  assigned,
transferred,  or  otherwise  disposed  of except (i) in an  underwritten  public
offering as provided in Section 4.1 or (ii) to any purchaser of  transferee  who
would not, to the knowledge of the Grantee after reasonable inquiry, immediately
following such sale, assignment, transfer or disposal beneficially own more than
3% of the then-outstanding voting power of the Issuer;  provided,  however, that
Grantee  shall be  permitted  to sell any  Option  Shares  if such  sale is made
pursuant to a tender or exchange  offer that has been approved or recommended by
a majority of the members of the Board of  Directors of Issuer  (which  majority
shall include a majority of directors who were directors as of the date hereof).

ARTICLE V

                      REPURCHASE RIGHTS; SUBSTITUTE OPTIONS

5.1      Repurchase Rights.

(a) Subject to Section 6.1, at any time on or after the Exercise  Date and prior
to the Expiration Date, Grantee shall have the right (the "Repurchase Right") to
require Issuer to repurchase  from Grantee (i) the Option or any part thereof as
Grantee shall designate at a price (the "Option  Repurchase Price") equal to the
amount,  subject to  reduction  at the sole  discretion  of Grantee  pursuant to
clause (iii) of Section 6.1(a), by which (A) the Market/Offer  Price (as defined
below) exceeds (B) the Exercise Price, multiplied by the number of Option Shares
as to which the  Option  is to be  repurchased  and (ii)  such  number of Option
Shares as Grantee  shall  designate  at a price (the  "Option  Share  Repurchase
Price")  equal to the  Market/Offer  Price  multiplied  by the  number of Option
Shares so designated.  The term  "Market/Offer  Price" shall mean the highest of
(i) the highest  price per share of Issuer  Common Stock  offered or paid in any
Acquisition  Proposal,  or (ii) the highest  closing  price for shares of Issuer
Common Stock during the six-month period immediately  preceding the date Grantee
gives the  Repurchase  Notice  (as  hereinafter  defined).  In  determining  the
Market/Offer  Price,  the  value  of  consideration  other  than  cash  shall be
determined  by a  nationally  recognized  investment  banking  firm  selected by
Grantee  and  reasonably  acceptable  to  Issuer,  which  determination,  absent
manifest error, shall be conclusive for all purposes of this Agreement.

(b) Grantee shall exercise its Repurchase  Right by delivering to Issuer written
notice (a "Repurchase  Notice") stating that Grantee elects to require Issuer to
repurchase  all or a portion of the Option and/or the Option Shares as specified
therein.  The closing of the Repurchase Right (the  "Repurchase  Closing") shall
take place in the United  States at the place,  time and date  specified  in the
Repurchase Notice,  which date shall not be less than two Business Days nor more
than  ten  Business  Days  from  the  date on which  the  Repurchase  Notice  is
delivered.  At the  Repurchase  Closing,  subject  to the  receipt  of a writing
evidencing the surrender of the Option and/or  certificates  representing Option
Shares,  as the  case  may be,  Issuer  shall  deliver  to  Grantee  the  Option
Repurchase Price therefor or the Option Share Repurchase Price therefor,  as the
case may be, or the portion  thereof  that Issuer is not then  prohibited  under
applicable Law from so delivering.  At the Repurchase Closing,  (i) Issuer shall
pay to Grantee the Option  Repurchase  Price for the portion of the Option which
is to be  repurchased  or the Option Shares  Repurchase  Price for the number of
Option  Shares  to be  repurchased,  as the case  may be,  by wire  transfer  of
immediately available funds to an account specified by Grantee at least 24 hours
prior to the Repurchase  Closing and (ii) if the Option is  repurchased  only in
part,  Issuer  and  Grantee  shall  execute  and  deliver an  amendment  to this
Agreement  reflecting  the  Option  Shares  for  which  the  Option is not being
repurchased.

(c)  To  the  extent  that  Issuer  is  prohibited  under  applicable  Law  from
repurchasing  the portion of the Option or the Option Shares  designated in such
Repurchase  Notice,  Issuer shall  immediately  so notify Grantee and thereafter
deliver,  from time to time,  to Grantee  the  portion of the Option  Repurchase
Price and the Option Share Repurchase Price, respectively,  that it is no longer
prohibited  from  delivering,  within five Business Days after the date on which
Issuer is no longer so prohibited; provided, however, that if Issuer at any time
after delivery of a Repurchase  Notice is prohibited  under  applicable Law from
delivering  to Grantee  the full amount of the Option  Repurchase  Price and the
Option Share Repurchase Price for the Option or Option Shares to be repurchased,
respectively,  Grantee may rescind the exercise of the Repurchase Right, whether
in  whole,  in part or to the  extent of the  prohibition,  and,  to the  extent
rescinded,  no part of the  amounts,  terms or the  rights  with  respect to the
Option or  Repurchase  Right shall be changed or affected as if such  Repurchase
Right were not exercised. Issuer shall use its reasonable best efforts to obtain
all required  regulatory and legal approvals and to file any required notices to
permit  Grantee to exercise its  Repurchase  Right and shall use its  reasonable
best  efforts to avoid or cause to be  rescinded  or rendered  inapplicable  any
prohibition on Issuer's repurchase of the Option or the Option Shares.

5.2      Substitute Option.

(a) In the event that Issuer enters into an agreement (i) to consolidate with or
merge into any Person,  other than Grantee or any Subsidiary of Grantee (each an
"Excluded Person"), and Issuer is not the continuing or surviving corporation of
such consolidation or merger, (ii) to permit any Person,  other than an Excluded
Person,  to merge into Issuer and Issuer shall be the continuing or surviving or
acquiring corporation, but, in connection with such merger, the then outstanding
shares of Issuer  Common Stock shall be changed  into or exchanged  for stock or
other  securities of any other Person or cash or any other  property or the then
outstanding shares of Issuer Common Stock shall after such merger represent less
than  50% of the  outstanding  voting  securities  of the  merged  or  acquiring
company,  or (iii) to sell or otherwise transfer all or substantially all of its
assets to any Person,  other than an  Excluded  Person,  then,  and in each such
case, the agreement  governing such  transaction  shall make proper provision so
that,  unless  earlier  exercised  by  Grantee,   the  Option  shall,  upon  the
consummation of any such transaction and upon the terms and conditions set forth
herein,  be converted  into, or exchanged  for, an option with  identical  terms
appropriately  adjusted  to  acquire  the  number  and  class of shares or other
securities  or property  that Grantee  would have  received in respect of Issuer
Common  Stock  if the  Option  had  been  exercised  immediately  prior  to such
consolidation,  merger,  sale,  or  transfer,  or the record date  therefor,  as
applicable and make any other necessary adjustments;  provided, however, that if
such a conversion or exchange  cannot,  because of applicable Law be the same as
the  Option,  such terms  shall be as similar as  possible  and in no event less
advantageous to Grantee than the Option.

(b) In addition to any other  restrictions  or covenants,  Issuer agrees that it
shall not enter or agree to enter  into any  transaction  described  in  Section
5.2(a) unless the Acquiring  Corporation (as hereinafter defined) and any Person
that controls the Acquiring Corporation assume in writing all the obligations of
Issuer  hereunder  and agree for the  benefit  of  Grantee  to comply  with this
Article V.

(c) For purposes of this Section 5.2,  the term  "Acquiring  Corporation"  shall
mean (i) the continuing or surviving  Person of a  consolidation  or merger with
Issuer (if other than Issuer), (ii) Issuer in a consolidation or merger in which
Issuer  is the  continuing  or  surviving  or  acquiring  Person,  and (iii) the
transferee of all or substantially all of Issuer's assets.

ARTICLE VI

                                  MISCELLANEOUS

6.1      Total Profit.

(a)  Notwithstanding  any other provision of this  Agreement,  in no event shall
Grantee's Total Profit (as hereinafter defined) plus any Time Warner Termination
Fee paid  pursuant  to Section  8.2(b) and any fees paid by Issuer  pursuant  to
Section 8.2(d) of the Merger  Agreement  (such Time Warner  Termination  Fee and
such fees paid pursuant to Section 8.2(d) of the Merger Agreement, collectively,
the "Total  Issuer  Fees")  exceed in the  aggregate an amount (the  "Limitation
Amount")  equal to 2.75% of the  product  of (x) the  number of shares of Issuer
Common Stock  outstanding  as of the date hereof  (assuming  the exercise of all
outstanding  options  (other  than the Option)  and the  conversion  into Issuer
Common Stock of all  securities  of the Issuer  convertible  into Issuer  Common
Stock)  multiplied  by (y) the Exchange  Ratio  multiplied  by (z) the last sale
price of the common stock,  par value $0.01 per share, of Grantee on the NYSE on
January 7, 2000,  and, if the total  amount that would  otherwise be received by
Grantee otherwise would exceed such amount, Grantee, at its sole election, shall
either (i) reduce the number of shares of Issuer  Common  Stock  subject to this
Option,  (ii)  deliver  to Issuer  for  cancellation  Option  Shares  previously
purchased by Grantee,  (iii) reduce the amount of the Option Repurchase Price or
the  Option  Share  Repurchase  Price,  (iv)  pay  cash  to  Issuer,  or (v) any
combination  thereof,  so that Grantee's  actually  realized Total Profit,  when
aggregated  with the Total Issuer Fees so paid to Grantee,  shall not exceed the
Limitation Amount after taking into account the foregoing actions.

(b) Notwithstanding any other provision of this Agreement, the Option may not be
exercised  for a number of Option  Shares as would,  as of the date of exercise,
result in a Notional  Total Profit (as defined  below) which,  together with the
Total  Issuer Fees  theretofore  paid to Grantee,  would  exceed the  Limitation
Amount;  provided,  that nothing in this sentence shall restrict any exercise of
the Option permitted hereby on any subsequent date.

(c) As used herein,  the term "Total  Profit"  shall mean the  aggregate  amount
(before taxes) of the following:  (i) the amount received by Grantee pursuant to
Issuer's  repurchase of the Option (or any portion thereof)  pursuant to Section
5.1, (ii) (x) the amount  received by Grantee  pursuant to Issues  repurchase of
Option Shares  pursuant to Section 5.1, less (y)  Grantee's  purchase  price for
such Option  Shares,  (iii) (x) the net cash amounts or the fair market value of
any property received by Grantee pursuant to any consummated  arm's-length sales
of Option  Shares (or any other  securities  into which such  Option  Shares are
converted or exchanged) to any unaffiliated  party, less (y) Grantee's  purchase
price of such Option Shares.

(d) As used herein,  the term "Notional Total Profit" with respect to any number
of Option Shares as to which Grantee may propose to exercise the Option shall be
the Total Profit  determined as of the date of such  proposal  assuming that the
Option was  exercised on such date for such number of Option Shares and assuming
that such Option  Shares,  together with all other Option Shares held by Grantee
and its  affiliates  as of such date,  were sold for cash at the closing  market
price (less customary  brokerage  commissions) for shares of Issuer Common Stock
on the preceding trading day on the NYSE (or on any other nationally  recognized
exchange or trading  system on which  shares of Issuer  Common Stock are then so
listed or traded).

6.2      Further Assurances; Listing.

(a) From  time to  time,  at the  other  party's  request  and  without  further
consideration,  each party  hereto  shall  execute and deliver  such  additional
documents  and take all such further  action as may be necessary or desirable to
consummate the transactions contemplated by this Agreement,  including,  without
limitation,  to vest in Grantee good and marketable title, free and clear of all
Liens, to any Option Shares purchased  hereunder.  Issuer agrees not to avoid or
seek  to  avoid  (whether  by  charter  amendment  or  through   reorganization,
consolidation,  merger, issuance of rights or securities, the Time Warner Rights
Agreement or similar  agreement,  dissolution or sale of assets, or by any other
voluntary act) the observance or performance of any of the covenants, agreements
or conditions to be observed or performed hereunder by it.

(b) If the Issuer  Common  Stock or any other  securities  to be  acquired  upon
exercise  of the  Option  are then  listed  on the NYSE (or any  other  national
securities  exchange or trading  system),  Issuer,  upon the request of Grantee,
will promptly file an  application  to list the shares of Issuer Common Stock or
such other  securities  to be acquired  upon  exercise of the Option on the NYSE
(and any other  national  securities  exchange  or trading  system) and will use
reasonable  best  efforts to obtain  approval  of such  listing as  promptly  as
practicable.

6.3 Division of Option;  Lost  Options.  The Agreement  (and the Option  granted
hereby)  are  exchangeable,  without  expense,  at the option of  Grantee,  upon
presentation  and surrender of this Agreement at the principal office of Issuer,
for other agreements providing for Options of different  denominations entitling
Grantee to purchase, on the same terms and subject to the same conditions as are
set forth herein, in the aggregate the same number of Option Shares  purchasable
hereunder.  Upon receipt by Issuer of evidence reasonably  satisfactory to it of
the loss, theft or destruction or mutilation of this Agreement, and (in the case
of loss, theft or destruction) of reasonably satisfactory  indemnification,  and
upon surrender and  cancellation  of this Agreement,  if mutilated,  Issuer will
execute and deliver a new agreement of like tenor and date.

6.4  Amendment.  This  Agreement  may not be amended  except by an instrument in
writing signed on behalf of each of the parties hereto.

6.5 Notices. All notices and other communications  hereunder shall be in writing
and  shall be  deemed  duly  given  (a) on the  date of  delivery  if  delivered
personally,  or by telecopy or telefacsimile,  upon confirmation of receipt, (b)
on the first  Business  Day  following  the date of dispatch if  delivered  by a
recognized  next-day courier service, or (c) on the tenth Business Day following
the date of mailing if delivered by registered or certified mail, return receipt
requested,  postage  prepaid.  All notices  hereunder  shall be delivered as set
forth below,  or pursuant to such other  instructions  as may be  designated  in
writing by the party to receive such notice:

                           (a)      if to Grantee to:

                                    America Online, Inc.
                                    22000 AOL Way
                                    Dulles, Virginia

                                    Attention:  Paul T. Cappuccio, Esq.

                                    with a copy to:

                                    Simpson Thacher & Bartlett
                                    425 Lexington Avenue
                                    New York, New York  10017

                                    Attention:  Richard I. Beattie, Esq.

                           (b)      if to Issuer to:

                                    Time Warner Inc.
                                    75 Rockefeller Plaza
                                    New York, NY 10019

                                    Attention: Christopher P. Bogart, Esq.

                                    with a copy to:

                                    Cravath, Swaine & Moore
                                    Worldwide Plaza
                                    825 Eighth Avenue
                                    New York, New York 10019

                                    Attention:  Robert A. Kindler, Esq.

6.6  Interpretation.  When a reference  is made in this  Agreement  to Articles,
Sections,  Exhibits  or  Schedules,  such  reference  shall be to an  Article or
Section of or Exhibit or Schedule to this Agreement unless otherwise  indicated.
The headings  contained in this  Agreement are for  reference  purposes only and
shall not affect in any way the  meaning or  interpretation  of this  Agreement.
Whenever  the  words  "include,"  "includes"  or  "including"  are  used in this
Agreement,   they  shall  be  deemed  to  be  followed  by  the  words  "without
limitation."

6.7  Counterparts.  This Agreement may be executed in one or more  counterparts,
all of which shall be  considered  one and the same  agreement  and shall become
effective when one or more  counterparts have been signed by each of the parties
and delivered to the other party, it being understood that both parties need not
sign the same counterpart.

6.8      Entire Agreement; No Third Party Beneficiaries.

(a) This  Agreement and the other  agreements of the parties  referred to herein
constitute  the  entire   agreement  and  supersede  all  prior  agreements  and
understandings,  both  written and oral,  among the parties  with respect to the
subject matter hereof.

(b) This Agreement shall be binding upon and inure solely to the benefit of each
party hereto, and nothing in this Agreement,  express or implied, is intended to
or shall confer upon any other Person any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement.

6.9 Governing Law. This Agreement  shall be governed and construed in accordance
with the laws of the State of Delaware  (without  giving effect to choice of law
principles thereof).

6.10 Severability.  If any term or other provision of this Agreement is invalid,
illegal or incapable of being  enforced by any law or public  policy,  all other
terms and provisions of this Agreement shall  nevertheless  remain in full force
and  effect  so long as the  economic  or legal  substance  of the  transactions
contemplated  hereby is not  affected  in any manner  materially  adverse to any
party.  Upon such  determination  that any term or other  provision  is invalid,
illegal or incapable of being  enforced,  the parties hereto shall  negotiate in
good faith to modify this  Agreement so as to effect the original  intent of the
parties  as  closely  as  possible  in an  acceptable  manner in order  that the
transactions  contemplated hereby are consummated as originally  contemplated to
the greatest extent possible.

6.11  Assignment.  Neither this  Agreement  nor any of the rights,  interests or
obligations  hereunder shall be assigned by any of the parties hereto,  in whole
or in part (whether by operation of law or otherwise), without the prior written
consent of the other party, and any attempt to make any such assignment  without
such consent  shall be null and void.  Subject to the preceding  sentence,  this
Agreement  will be binding upon,  inure to the benefit of and be  enforceable by
the parties and their respective successors and assigns.

6.12 Submission to Jurisdiction; Waivers. Each of Grantee and Issuer irrevocably
agrees that any legal action or proceeding with respect to this Agreement or for
recognition  and  enforcement  of any judgment in respect  hereof brought by the
other party hereto or its successors or assigns may be brought and determined in
the Chancery or other  Courts of the State of Delaware,  and each of Grantee and
Issuer hereby  irrevocably  submits with regard to any such action or proceeding
for itself and in respect to its property, generally and unconditionally, to the
nonexclusive  jurisdiction of the aforesaid  courts.  Each of Grantee and Issuer
hereby  irrevocably  waives,  and agrees not to assert,  by way of motion,  as a
defense,  counterclaim or otherwise, in any action or proceeding with respect to
this  Agreement,  (a)  any  claim  that  it is  not  personally  subject  to the
jurisdiction of the above-named  courts for any reason other than the failure to
lawfully  serve  process  (b) that it or its  property  is exempt or immune from
jurisdiction  of any such  court or from any  legal  process  commenced  in such
courts  (whether  through  service  of  notice,  attachment  prior to  judgment,
attachment in aid of execution of judgment, execution of judgment or otherwise),
(c) to the fullest extent permitted by applicable law, that (i) the suit, action
or proceeding in any such court is brought in an  inconvenient  forum,  (ii) the
venue of such suit,  action or proceeding is improper and (iii) this  Agreement,
or the subject matter  hereof,  may not be enforced in or by such courts and (d)
any right to a trial by jury.

6.13 Enforcement.  The parties agree that irreparable  damage would occur in the
event  that  any of the  provisions  of this  Agreement  were not  performed  in
accordance with their specific terms. It is accordingly  agreed that the parties
shall be entitled to specific  performance  of the terms  hereof,  this being in
addition to any other remedy to which they are entitled at law or in equity.

6.14 Failure or Indulgence Not Waiver; Remedies Cumulative.  No failure or delay
on the part of any party  hereto in the  exercise  of any right  hereunder  will
impair such right or be  construed  to be a waiver of, or  acquiescence  in, any
breach of any representation,  warranty or agreement herein, nor will any single
or partial exercise of any such right preclude other or further exercise thereof
or of any other right. All rights and remedies existing under this Agreement are
cumulative  to,  and not  exclusive  to,  and not  exclusive  of,  any rights or
remedies otherwise available.

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                  IN WITNESS  WHEREOF,  Grantee  and  Issuer  have  caused  this
Agreement to be duly executed as of the date first above written.


                            AMERICA ONLINE, INC.


                            By:    /s/ Stephen M. Case
                            Name:  Stephen M. Case
                            Title: Chairman & Chief Executive Officer


                            TIME WARNER INC.


                            By:    /s/ Gerald M. Levin
                            Name:  Gerald M. Levin
                            Title: Chairman & Chief Executive Officer