Walt Disney Company (DIS)

Income Taxes

The Company accounts for current and deferred income taxes and when appropriate, deferred tax assets and liabilities are recorded with respect to temporary differences in the accounting treatment of items for financial reporting purposes and for income tax purposes. Where, based on the weight of all available evidence, it is more likely than not that some amount of recorded deferred tax assets will not be realized, a valuation allowance is established for that amount that, in management’s judgment, is sufficient to reduce the deferred tax asset to an amount that is more likely than not to be realized.

In July 2006, the FASB issued guidance which clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company adopted this guidance on its income tax positions at the beginning of fiscal year 2008 which resulted in reductions of $148 million and $15 million to opening retained earnings and minority interests, respectively.

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Table of Contents

Income taxes

The effective income tax rate for the quarter increased to 37.8% from 34.1% in the prior-year quarter as the prior year included a benefit from the favorable resolution of certain prior-year income tax matters.

Income Taxes

The effective income tax rate is as follows:

The decrease in the effective income tax rate for the quarter and six months was primarily due to the favorable impacts of legislative changes and the resolution of certain prior-year income tax matters, partially offset by the impact of a non-deductible impairment charge that was recorded in the second quarter of the current year.

Income taxes

The effective income tax rate for the quarter decreased to 34.8% from 37.6% in the prior-year quarter primarily due to the favorable impacts of legislative changes and the resolution of certain prior-year income tax matters, partially offset by the impact of a non-deductible impairment charge that was recorded in the second quarter of the current year.

Income Taxes

The Company accounts for current and deferred income taxes in accordance with FAS 109, Accounting for Income Taxes. When appropriate, deferred tax assets and liabilities are recorded with respect to temporary differences in the accounting treatment of items for financial reporting purposes and for income tax purposes. Where, based on the weight of all available evidence, it is more likely than not that some amount of recorded deferred tax assets will not be realized, a valuation allowance is established for that amount that, in management’s judgment, is sufficient to reduce the deferred tax asset to an amount that is more likely than not to be realized.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN 48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized

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is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company adopted FIN 48 at the beginning of fiscal year 2008. Applying FIN 48 to all tax positions upon adoption resulted in reductions of $148 million and $15 million to opening retained earnings and minority interests, respectively.

Income Taxes

The effective income tax rate decreased 0.9 percentage points from 37.3% to 36.4% for the quarter. The decrease in the effective income tax rate was driven by increased benefits from Internal Revenue Code (IRC) Section 199 related to qualified domestic production activities.

Income Taxes

The Company accounts for current and deferred income taxes in accordance with FAS 109, Accounting for Income Taxes. When appropriate, deferred tax assets and liabilities are recorded with respect to temporary differences in the accounting treatment of items for financial reporting purposes and for income tax purposes. Where, based on the weight of all available evidence, it is more likely than not that some amount of recorded deferred tax assets will not be realized, a valuation allowance is established for that amount that, in management’s judgment, is sufficient to reduce the deferred tax asset to an amount that is more likely than not to be realized.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN 48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company adopted FIN 48 at the beginning of fiscal year 2008. Applying FIN 48 to all tax positions upon adoption resulted in reductions of $148 million and $15 million to opening retained earnings and minority interests, respectively.

Income Taxes

The Company
accounts for current and deferred income taxes in accordance with FAS 109, Accounting for Income Taxes. When appropriate, deferred tax assets and liabilities are recorded with respect to temporary differences in the accounting treatment of
items for financial reporting purposes and for income tax purposes. Where, based on the weight of all available evidence, it is more likely than not that some amount of recorded deferred tax assets will not be realized, a valuation allowance is
established for that amount that, in management’s judgment, is sufficient to reduce the deferred tax asset to an amount that is more likely than not to be realized.

FACE="Times New Roman" SIZE="2">In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability
threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN 48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing
authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent
likely of being realized upon ultimate settlement. The Company adopted FIN 48 at the beginning of fiscal year 2008. Applying FIN 48 to all tax positions upon adoption resulted in reductions of $148 million and $15 million to opening
retained earnings and minority interests, respectively.

Income Taxes

The effective income tax rate was as follows:

The decrease in the effective income tax rate for the year was primarily due to increased benefits from Internal Revenue Code (IRC) Section 199 related to qualified domestic production activities. The increase in the effective income tax rate for the quarter reflected favorable resolutions of prior-year income tax matters in the prior-year quarter, partially offset by higher IRC Section 199 benefits.

Income Taxes

The effective income tax rate for the quarter decreased to 34.1% from 37.6% in the prior-year quarter driven by the favorable resolution of certain prior-year income tax matters which reduced the effective income tax rate in the current-year quarter by approximately 3.0 percentage points.

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Income Taxes

The effective income tax rate is as follows:

The decrease in the effective income tax rate for the quarter and nine months was primarily attributable to the favorable resolution of certain prior-year income tax matters, which reduced the effective income tax rate in the current-year quarter by approximately 3.0 percentage points, and to increased benefits from Internal Revenue Code (IRC) Section 199 related to qualified domestic production activities.

Income Taxes

The effective income tax rate is as follows:

The decrease in the effective income tax rate for the quarter and six months was primarily attributable to increased benefits from Internal Revenue Code (IRC) Section 199 related to qualified domestic production activities, partially offset by the continued phase-out of tax benefits resulting from the exclusion of certain foreign source income. The enactment of IRC Section 199 and the repeal of the exclusion of certain foreign source income were part of the American Jobs Creation Act of 2004.

Income Taxes

The effective income tax rate for the quarter was 37.3% compared to 37.5% in the prior-year quarter.

Income Taxes

The effective income tax rate was as follows:

The higher effective tax rate for the year and the quarter reflected a reduction in the tax benefits realized from an exclusion of certain foreign source income and higher effective state tax rates. For the current year quarter, these increases were partially offset by favorable adjustments related to prior-year income tax matters.

The exclusion of certain foreign source income was repealed on a phase-out basis as part of the American Jobs Creation Act of 2004. No exclusion is available for transactions originating after the first quarter of fiscal 2007.

Income Taxes

The effective income tax rate for the quarter increased to 37.6% from 33.7% in the prior-year quarter. The increase was primarily due to a reduction in the tax benefits realized from an exclusion of certain foreign source income. The prior-year quarter rate also benefited from a non-taxable gain recorded in connection with the Pixar acquisition.

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The exclusion of certain foreign source income was repealed on a phase-out basis as part of the American Jobs Creation Act of 2004. No exclusion is available for transactions originating after the first quarter of fiscal 2007.

Income Taxes

The effective income tax rate is as follows:

The effective income tax rate increased for the quarter and nine months primarily due to a reduction in the tax benefits realized from an exclusion of certain foreign source income and a benefit in the prior-year quarter from a non-taxable gain recorded in connection with the Pixar acquisition. For the nine months, the effective income tax rate also increased due to an adjustment to previously recognized tax benefits with respect to Hong Kong Disneyland, which was recorded in the second quarter of fiscal 2007.

The exclusion of certain foreign source income was repealed on a phase-out basis as part of the American Jobs Creation Act of 2004. No exclusion is available for transactions originating after the first quarter of fiscal 2007.

Income Taxes

The effective income tax rate is as follows:

The effective income tax rate increased for the quarter and six months due to an adjustment to previously recognized tax benefits with respect to Hong Kong Disneyland and a reduction in the benefit from the exclusion of certain foreign source income.

The exclusion of certain foreign source income was repealed on a phase-out basis as part of the American Jobs Creation Act of 2004. No exclusion is available for transactions originating after the first quarter of fiscal 2007.

Income Taxes

The effective income tax rate for the quarter increased to 38.7% from 35.2% in the prior-year quarter. The increase was due to an adjustment to previously recognized tax benefits with respect to Hong Kong Disneyland and a reduction in the benefits from an exclusion of certain foreign source income.

The exclusion of certain foreign source income was repealed on a phase-out basis as part of the American Jobs Creation Act of 2004. No exclusion is available for transactions originating after the first quarter of fiscal 2007.

Income Taxes

The effective income tax rate is as follows:

The effective income tax rate increased primarily due to a reduction in the benefits from an exclusion of certain foreign source income. This exclusion was repealed on a phase-out basis as part of the American Jobs Creation Act of 2004. No exclusion will be available for transactions originating after the first quarter of fiscal 2007.

Income Taxes

The effective income tax rate for the quarter increased to 37.6% from 36.4% in the prior-year quarter. The increase was primarily due to a reduction in the benefits from an exclusion of certain foreign source income. This exclusion was repealed on a phase-out basis as part of the American Jobs Creation Act of 2004. No exclusion will be available for transactions originating after the first quarter of fiscal 2007.

Income Taxes

The effective income tax rate was 34.7% for the year and 34.0% for the quarter compared to 31.1% and 3.3% for the prior year and prior-year quarter, respectively. The lower effective tax rate for the prior year and the prior-year quarter reflected a greater release of reserves as a result of the favorable resolution of certain tax matters

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and the benefit from a one-time deduction permitted under the American Jobs Creation Act of 2004 related to the repatriation of foreign earnings.

Income Taxes

The effective income tax rate is as follows:

The effective income tax rate remained flat at 33.8% for the quarter. The current quarter benefited from the non-taxable gain on the deemed termination of the Pixar distribution agreement and the release of tax reserves related to the favorable resolution of certain state income tax matters. The 2005 quarter benefited from a favorable tax adjustment to a prior-year estimate.

The tax provisions for the current quarter and nine months reflect estimated tax benefits of $35 million and $78 million, respectively, from an exclusion provided under U.S. income tax laws with respect to certain extraterritorial income attributable to foreign trading gross receipts (FTGRs). This exclusion was repealed as part of the American Jobs Creation Act of 2004 (the Act), which was enacted on October 22, 2004. The Act provides for a phase-out such that the exclusion for the Company’s otherwise qualifying FTGRs generated in fiscal 2005, 2006 and 2007 has and will be limited to approximately 85%, 65% and 15%, respectively, and no exclusion will generally be available in fiscal years 2008 and thereafter.

The Act also includes a new deduction for qualifying domestic production activities which first impacts the Company in the current year. The tax provisions for the current quarter and nine months reflect estimated tax benefits of $8 million and $19 million, respectively, with respect to this deduction.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—(continued)

The deduction in the current year, which is calculated at 3% of net income from qualified production activities, represents the first year of a phase-in period for this deduction which will ultimately increase to a 9% deduction beginning in fiscal 2011 when fully phased-in.

Income Taxes

The effective income tax rate for the quarter remained flat at 33.8%. The current quarter benefited from the non-taxable gain on the deemed termination of the Pixar distribution agreement and the release of tax reserves related to the favorable resolution of certain state income tax matters. The 2005 quarter benefited from a favorable tax adjustment to a prior-year estimate.

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