In an assessment that could lead to a substantial charge against its future profits, Google Inc. believes its $1 billion investment in advertising partner AOL is souring.

The Mountain View-based company disclosed in a quarterly report filed late Thursday with the Securities and Exchange Commission that the 5 percent AOL stake that it bought in 2005 "may be impaired." Impairment is an accounting term used to describe an acquisition or investment that has eroded.

Unless there is an about-face, the acquiring company eventually must absorb a charge on its books to account for the diminished value of its holdings.

Google acknowledged for the first time that it might have to recognize a loss on its 5 percent stake in AOL, whose struggles have made it a financial albatross for its owner, Time Warner Inc.

"There can be no assurance that impairment charges will not be required in the future, and any such amounts may be material," Google said of its AOL investment.

A Google spokesman declined further comment Thursday.

As the Internet's most profitable company, Google could absorb a fairly large charge without too much pain. In the first half of this year, Google earned $2.55 billion.

Google bought its stake in AOL largely to prevent one of its largest advertising partners - AOL - from defecting to Microsoft Corp. (nasdaq: MSFT - news - people ) The bidding war helped drive up AOL's implied market value to $20 billion, based on Google's investment.

Some analysts have suggested AOL may be worth less than $10 billion now. Google didn't estimate in its SEC filing what it believes its stake to be currently worth.

Gearing up for a possible sale, Time Warner is splitting up AOL's Internet access business from its online operations. EarthLink Inc. (nasdaq: ELNK - news - people ) is seen as a leading candidate to buy AOL's dial-up access division while Microsoft and Yahoo Inc. (nasdaq: YHOO - news - people ) could vie for online operations that include an array of advertising tools and services that still attract millions of Web surfers.

Microsoft wanted to buy Yahoo, but when the two sides couldn't agree on a price they separately began exploring a possible combination with AOL.

As part of its investment, Google has the right to demand that Time Warner spin off AOL in an initial public offering of stock or buy back its stake. But Google so far hasn't indicated any interest in going down that path.

Source:AP News