Walt Disney Company (DIS)

Interactive Media

Interactive Media revenues for the quarter decreased 29% to $221 million and operating results improved from a loss of $45 million in the prior-year quarter to a loss of $10 million in the current quarter driven by improvements at Disney Interactive Studios and Disney Online.

At Disney Interactive Studios, lower unit sales of self-published video games, driven by fewer releases, were more than offset by lower marketing expenses, inventory costs and bad debt charges. The increase at Disney Online was driven by increased subscription revenues at Club Penguin.

INTERACTIVE MEDIA

The Disney Interactive Media Group creates and delivers Disney-branded entertainment and lifestyle content across interactive media platforms. The primary operating businesses of the Disney Interactive Media Group are Disney Interactive Studios which produces video games for global distribution and Disney Online which produces web sites and online virtual worlds in the United States and internationally. The Disney Interactive Media Group’s internet operations derive revenue from a combination of advertising and sponsorships, subscription services and e-commerce. The Disney Interactive Media Group also manages the Company’s Disney-branded mobile phone initiative in Japan and provides technical infrastructure services to the Company’s non Disney-branded websites, such

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Table of Contents

as ABC.com and ESPN.com, and to its Disney-branded e-commerce websites, principally DisneyStore.com and Walt Disney Parks and Resorts Online. The Disney Interactive Media Group is reimbursed for the cost of providing these technical infrastructure services, and since these other websites are managed within the Company’s other segments, the financial results of these websites are reported within the Company’s other segments rather than as part of the Disney Interactive Media Group.

Interactive Media

Revenues

Interactive Media revenues decreased 1%, or $7 million, to $712 million primarily due to a decrease of $58 million at Disney Interactive Studios, driven by lower sales of self-published video games and decreased licensing revenues, partially offset by increases of $39 million at our mobile phone service business in Japan, which was launched in the second quarter of fiscal 2008, and $11 million at Disney Online driven by increased subscription revenues at Club Penguin.

At Disney Interactive Studios, lower self-published video games sales reflected decreased net effective pricing and unit sales. Significant current year titles included High School Musical 3, Sing It and Bolt as compared to the prior year, which included High School Musical, Turok, Hannah Montana 2 and Pure. The decrease in licensing revenues was primarily due to the performance of WALL-E, Cars and Ratatouille in the prior year.

Costs and Expenses

Costs and expenses, which consist primarily of video game and internet product development costs, cost of sales, distribution and marketing expenses, general and administrative costs, and technology infrastructure costs, increased 4%, or $35 million, to $1.0 billion.

The increase was primarily due to higher unit cost of sales and distribution costs, which included the costs for bundled accessories and music royalties for certain current-year titles at Disney Interactive Studios, higher expenses at our mobile phone service business in Japan driven by a full year of operations, partially offset by a decrease at Disney Online driven by lower marketing costs.

Segment Operating Loss

Segment operating loss increased 14%, or $37 million, to $295 million driven by lower results at Disney Interactive Studio partially offset by improved results at Disney Online.

Interactive Media

Revenues

Interactive Media revenues increased 47%, or $229 million, to $719 million primarily due to increases of $160 million at Disney Interactive Studios and $71 million at Disney Online.

The increase at Disney Interactive Studios was primarily due to the performance of new High School Musical, Hannah Montana and Turok self-published video games in fiscal 2008 compared to Pirates of the Caribbean, Spectrobes and Meet the Robinsons games in fiscal 2007. The increase at Disney Online reflected higher virtual world subscription revenue due to a full year of Club Penguin, which was acquired in the fourth quarter of fiscal 2007.

Costs and Expenses

Costs and expenses 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 the domestic mobile phone service, which was shut down 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.

Segment Operating Loss

Segment operating loss decreased 11%, or $33 million, to $258 million driven by reduced costs due to the shutdown of the domestic mobile phone service in the first quarter of fiscal 2008, partially offset by higher marketing costs at Disney Online.

Interactive Media

Interactive Media revenues for the year decreased 1% to $712 million and segment operating results decreased 14% to a loss of $295 million. For the quarter, revenues increased 8% to $157 million and segment operating results improved 5% to a loss of $114 million.

Lower operating results for the year were due to a decrease at Disney Interactive Studios, partially offset by an increase at Disney Online. Lower results at Disney Interactive Studios were driven by decreased net effective pricing and unit sales of self-published video games, decreased licensing revenue and higher unit cost of sales, which included the cost of bundled accessories and music royalties for current year titles. Significant self-published video games in the current year included High School Musical 3 and Sing It while the prior year included High School Musical, Turok and Pure. Improved results at Disney Online reflected lower marketing costs and higher Club Penguin subscription revenues.

For the quarter, the improved operating results were primarily due to lower marketing and product development costs as well as increased Club Penguin subscription revenue at Disney Online, partially offset by higher cost of sales at Disney Interactive Studios.

Interactive Media

Interactive Media revenues for the quarter decreased 20% to $113 million and segment operating results improved from a loss of $91 million in the prior-year quarter to a loss of $75 million in the current quarter.

Lower segment operating loss reflected lower marketing and product development costs at Disney Online and at Disney Interactive Studios. Lower costs at Disney Interactive Studios were more than offset by a decline in unit sales of self-published video games at Disney Interactive Studios reflecting the strong performance of The Chronicles of Narnia: Prince Caspian in the prior-year quarter.

Interactive Media

Interactive Media revenues for the quarter decreased 17% to $129 million and segment operating loss was essentially flat at $61 million as a decrease in revenues at Disney Interactive Studios was largely offset by increased revenues from our mobile phone service business in Japan, which was launched in the second quarter of fiscal 2008, lower marketing expenses at Disney Interactive Studios and Disney Online and lower administrative costs at Disney Online. The decline in revenues at Disney Interactive Studios was driven by lower sales of self-published video games reflecting the strong performance of Turok in the prior-year quarter.

Interactive Media

Revenues

Interactive Media revenues decreased 17%, or $27 million, to $129 million primarily due to a decrease of $41 million at Disney Interactive Studios partially offset by an increase of $17 million driven by our mobile phone service business in Japan, which was launched in the second quarter of fiscal 2008.

The decrease at Disney Interactive Studios was primarily due to lower sales of self-published video games in the current quarter reflecting the strong performance of Turok in the prior-year quarter.

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, decreased 11%, or $23 million, to $193 million.

The decrease was primarily due to lower marketing expenses at Disney Online and decreased costs of sales and marketing expenses associated with lower video game sales at Disney Interactive Studios in the current quarter.

Operating Loss

Segment operating loss increased 2% to $61 million due to a decline at Disney Interactive Studios partially offset by increases at our mobile phone service business in Japan and at Disney Online.

Interactive Media

Revenues

Interactive Media revenues increased 2%, or $10 million, to $442 million. The revenue growth was primarily due to an increase of $29 million driven by our mobile phone service business in Japan, which was launched in the second quarter of fiscal 2008, partially offset by a decrease of $18 million at Disney Interactive Studios driven by decreased licensing revenues due to the strong performance of Cars in the prior-year period.

Costs and Expenses

Costs and expenses increased 15%, or $72 million, to $551 million driven by an increase at Disney Interactive Studios and higher expenses at our mobile phone service business in Japan. The increase at Disney Interactive Studios was primarily due to an increase in unit cost of sales, in part reflecting associated accessories, and higher distribution costs and marketing expenses.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

Operating Income

Segment operating loss increased $59 million to $106 million due to a decline at Disney Interactive Studios.

Interactive Media

Revenues

Interactive Media revenues increased 13%, or $37 million, to $313 million primarily due to an increase of $23 million at Disney Interactive Studios.

The increase at Disney Interactive Studios was primarily due to higher video game unit volume driven by current quarter titles, which included High School Musical 3, Sing It and Bolt compared to the prior-year quarter, which included High School Musical and Hannah Montana.

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.

Operating Income

Segment operating income decreased $58 million to a loss of $45 million due to a decline at Disney Interactive Studios.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Interactive Media

Interactive Media revenues for the quarter increased 13% to $313 million and segment operating income decreased $58 million to a loss of $45 million.

Lower segment operating income was primarily due to a decline at Disney Interactive Studios as higher sales volume was more than offset by an increase in unit cost of sales and higher marketing expenses in the current quarter.

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Interactive Media

Revenues

Interactive Media revenues increased 27%, or $105 million, to $490 million primarily due to an increase of $76 million at Disney Interactive Studios.

Growth at Disney Interactive Studios was due to the performance of fiscal 2007 titles driven by Pirates of the Caribbean: At World’s End, Spectrobes and Meet the Robinsons compared to fiscal 2006 titles, which included The Chronicles of Narnia and Chicken Little.

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 50%, or $261 million, to $781 million. The increase was primarily due to higher cost of sales, video game development costs and marketing costs at Disney Interactive Studios and higher costs related to mobile phone services, including costs associated with the shut down of the domestic business.

Segment Operating Loss

Segment operating loss increased $156 million, to $291 million, primarily due to higher costs of mobile phone service activities and the increased investment in video game development costs at Disney Interactive Studios.