Walt Disney Company (DIS)

Costs and Expenses

Costs and expenses, which consist primarily of video game and internet content development costs, product costs, distribution and marketing expenses, general and administrative costs, and technology infrastructure costs, increased 25%, or $193 million, to $974 million driven by increases at Disney Interactive Studios and Disney Online, partially offset by lower costs related to mobile phone services as a result of the shut down of the domestic business in the first quarter of fiscal 2008. The increase at Disney Interactive Studios reflected higher product, distribution and marketing costs associated with volume growth and increased investment in video game development. At Disney Online the increase was driven by higher development and marketing costs related to the Disney.com website and virtual worlds, including the impact of a full year of Club Penguin, and the Family.com website.

Costs and Expenses

Costs and expenses at Media Networks, which consist primarily of programming rights costs, production costs, participation costs, distribution and marketing expenses, labor costs, and general and administrative costs, increased 2%, or $78 million, reflecting a 6% increase, or $119 million, at the Cable Networks, and a 3% decrease, or $41 million, at Broadcasting. The increase at Cable Networks was driven by an increase at ESPN primarily due to higher NFL programming costs and higher general and administrative costs. The decrease at Broadcasting was primarily due to lower programming costs at the ABC Television Network due to a lower cost mix of programming including a shift of hours from primetime to news, partially offset by a bad debt charge in connection with the bankruptcy of a syndication customer.

Costs and Expenses

Costs and expenses, which consist primarily of labor, depreciation, costs of merchandise, food and beverage sold, marketing and sales expense, repairs and maintenance and entertainment, increased 1%, or $16 million. The increase in costs and expenses was due to an increase at our domestic operations, partially offset by a decrease at Disneyland Resort Paris. Higher costs at our domestic operations reflected mark to market adjustments on fuel hedge contracts, labor and other cost inflation and higher cost of ownership sales at Disney Vacation Club, partially offset by cost mitigation activities. The decrease at Disneyland Resort Paris was primarily due to the favorable impact of foreign currency translation as a result of the strengthening of the U.S. dollar against the Euro and lower real estate cost of sales, partially offset by labor cost inflation and higher marketing and sales costs.

Costs and Expenses

Costs and expenses, which consist primarily of production cost amortization, distribution and marketing expenses, product costs and participation costs decreased 17%, or $369 million, primarily due

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

to a decrease in worldwide home entertainment driven by lower amortization, distribution expenses, and participation costs as a result of decreased unit sales.

Costs and Expenses

Costs and expenses, which consist primarily of cost of sales, salaries and benefits, marketing, and occupancy, increased 38%, or $141 million, to $508 million, primarily due to an increase at our retail business driven by the acquisition of the Disney Stores North America as well as higher selling and administrative costs.

Costs and Expenses

Costs and expenses, which consist primarily of video game and internet content development costs, product costs, distribution and marketing expenses, general and administrative costs, and technology infrastructure costs, increased 36%, or $95 million, to $358 million. The increase was primarily due to an increase in unit cost of sales and increased distribution and marketing costs at Disney Interactive Studios.

Costs and Expenses

FACE="Times New Roman" SIZE="2">Costs and expenses increased 9%, or $130 million, primarily due to an increase at Disney Interactive Studios due to higher cost of sales, video game development costs and marketing costs and higher salaries and
benefits at Merchandise Licensing.

Costs and Expenses

Costs and expenses, which consist primarily of cost of sales, salaries and benefits, marketing, and video game development, increased 25%, or $109 million, to $548 million, due to higher cost of sales and video game development costs at Disney Interactive Studios.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—(continued)

Costs and Expenses

Costs and expenses increased 10%, or $111 million, primarily due to an increase at Disney Interactive Studios due to higher cost of sales, video game development costs and marketing costs.

Costs and Expenses

Costs and expenses decreased 2%, or $10 million, to $457 million, driven by a decrease at Buena Vista Games due to lower marketing expenditures and a decline in costs of goods sold driven by lower volumes.