Walt Disney Company (DIS)

Media Networks

Media Networks revenues for the quarter increased 7% to $4.2 billion and segment operating income increased 11% to $724 million. The following table provides further detail of the Media Networks results (in millions):

Cable Networks

Operating income at Cable Networks increased $27 million to $544 million for the quarter driven by increases at the worldwide Disney Channels and ESPN, partially offset by a decrease in income from equity investments. The increase at the worldwide Disney Channels was driven by higher affiliate revenue due to subscriber growth internationally and higher contractual rates domestically. The increase at ESPN was due to higher affiliate and advertising revenue, partially offset by higher programming and production costs. The increase in affiliate revenue was primarily due to higher contractual rates and subscriber growth, including growth from the launch of a new network in the United Kingdom while higher advertising revenue was due to an increase in sold inventory, partially offset by lower rates. Higher programming and production costs reflected costs for soccer programming rights for the new network in the United Kingdom and increased contractual costs for college football and NFL programming. Decreased equity income was driven by increased programming and restructuring costs, partially offset by higher advertising and affiliate revenue at A&E Television Networks (AETN) which now includes the Lifetime networks. Restructuring charges at AETN were primarily for severance costs as a result of the combination of AETN and Lifetime in the fourth quarter of fiscal 2009.

Broadcasting

Operating income at Broadcasting increased $42 million to $180 million for the quarter primarily due to the absence of a bad debt charge in connection with the bankruptcy of a syndication customer in the prior-year quarter and higher revenues from ABC Studios productions driven by increased third party network license fees and international sales of Criminal Minds. These increases were partially offset by decreases at the ABC Television Network and owned television stations. At the ABC Television Network,

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results reflected lower primetime ratings and advertising rates, partially offset by a shift from political news coverage in primetime in the prior-year quarter to entertainment programming in the current quarter. At the owned television stations, results reflected lower advertising revenue due to higher political advertising sales in the prior-year quarter.

MEDIA NETWORKS

The Media Networks segment is comprised of a domestic broadcast television network, television production and distribution operations, domestic television stations, international and domestic cable networks, domestic broadcast radio networks and stations, and publishing and digital operations.

Media Networks

Revenues

Media Networks revenues increased 6%, or $944 million, to $15.9 billion, consisting of a 10% increase, or $874 million, at the Cable Networks and a 1% increase, or $70 million, at Broadcasting.

Increased Cable Networks revenues were primarily due to growth of $654 million from Affiliate Fees and $206 million from advertising revenues. Increased Affilitate Fees in fiscal 2008 were driven by increases at ESPN and, to a lesser extent, the worldwide Disney Channels and ABC Family. The increase at ESPN was primarily due to contractual rate increases and subscriber growth, the increase at the worldwide Disney Channels was driven by subscriber growth and the increase at ABC Family was due to contractual rate increases. Higher advertising revenues at ESPN and ABC Family reflected improved rates and ratings. Higher DVD sales, primarily High School Musical, were partially offset by the favorable settlement of a claim with an international distributor in fiscal 2007.

Increased Broadcasting revenues reflected higher international sales of ABC Studios productions partially offset by decreased advertising revenues, largely at the owned television stations. Increased international sales of ABC Studios productions were driven by Grey’s Anatomy, Private Practice and Reaper. Fiscal 2008 revenues at the ABC Television Network were comparable to fiscal 2007 as the impact of lower ratings was offset by higher advertising rates and digital media revenues.

Costs and Expenses

Costs and expenses increased 6%, or $609 million, to $11.5 billion, consisting of an 7% increase, or $448 million, at the Cable Networks and a 3% increase, or $161 million, at Broadcasting. The increase at Cable Networks was primarily due to increased costs at ESPN and to a lesser extent, the worldwide Disney Channels, driven by higher programming, administrative and marketing costs. These increases were partially offset by the absence of Major League Baseball programming costs at ABC Family. The increase at Broadcasting was primarily due to higher production cost amortization related to international sales of our programs.

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Table of Contents

Segment Operating Income

Segment operating income increased 10%, or $447 million, to $5.0 billion due to an increase of $536 million at the Cable Networks partially offset by a decrease of $89 million at Broadcasting. The increase at the Cable Networks was primarily due to growth at ESPN, higher income at our cable equity investments, and increases at ABC Family and the domestic Disney Channels, partially offset by a favorable settlement of a claim with an international distributor in fiscal 2007. The decrease at Broadcasting was due to lower advertising revenues at the owned television stations. The increase in income at our cable equity investments was primarily due to higher affiliate and advertising revenue at Lifetime and a gain on the sale of a European cable channel.

ABC Radio Transaction

On June 12, 2007, the Company completed the spin-off of its wholly-owned subsidiary, ABC Radio Holdings, Inc., which was then merged into a subsidiary of Citadel Broadcasting Corporation (Citadel). Prior to the spin-off, the Company consolidated its ABC Radio business, consisting of 22 large-market radio stations and the ABC Radio Network businesses, under ABC Radio Holdings, Inc. The transaction did not include the Company’s ESPN Radio or Radio Disney network and station businesses. The results of the ABC Radio business have been reported as discontinued operations for all periods presented. The Company now includes the ESPN Radio and Radio Disney network and stations businesses with Cable Networks in the Media Networks segment. Prior to the transaction, the Company’s radio businesses were included with Broadcasting in the Media Networks segment. Previously reported results have been reclassified to reflect this presentation.

Summarized financial information for the discontinued operations is as follows (in millions, except per share data):

Media Networks

The Company operates the ABC Television Network and ten owned television stations, as well as the ESPN Radio Network and Radio Disney Network (the Radio Networks) and 46 owned radio stations. Both the television and radio networks have affiliated stations providing coverage to households throughout the United States. The Company has cable networks that are principally involved in the production and distribution of cable television programming, the licensing of programming in domestic and international markets, and investing in foreign television broadcasting, production, and distribution entities. Primary cable programming services that operate through consolidated subsidiaries are the ESPN-branded networks, Disney Channel Worldwide, SOAPnet, Disney XD and ABC Family. Other programming services that operate through a joint venture and are accounted for under the equity method include A&E Television Networks and Lifetime Entertainment Services. The Company also produces original television programming for network, first-run syndication, pay, and international syndication markets, along with original animated television programming for network, pay, and international syndication markets. Additionally, the Company operates ABC-, ESPN-, ABC Family- and SOAPnet-branded internet businesses.

On June 12, 2007, the Company completed the spin-off of its wholly owned subsidiary, ABC Radio Holdings, Inc., and its merger into a subsidiary of Citadel Broadcasting Corporation (Citadel). Prior to the spin-off, the Company consolidated its ABC Radio Business, consisting of 22 large-market radio stations and the ABC Radio Network businesses, under ABC Radio Holdings, Inc. The transaction did not include the Company’s ESPN Radio or Radio Disney network and station businesses. Additional information regarding this transaction is included in Note 5.

Media Networks

Media Networks revenues for the quarter increased 2% to $3.6 billion and segment operating income decreased 4% to $1.3 billion. The following table provides further detail of the Media Networks results (in millions):

Cable Networks

Operating income at Cable Networks increased 5% to $1.1 billion for the quarter due to growth at ESPN, ABC Family and the domestic Disney Channel. The growth at ESPN was driven by higher affiliate revenue primarily due to contractual rate increases partially offset by decreased advertising revenues and higher programming costs. The decrease in advertising revenues was due to a decrease in sold inventory, partially offset by higher rates. Operating income growth at ABC Family reflected higher advertising and affiliate revenue, both of which were driven by higher rates, along with higher sold advertising units, while growth at the domestic Disney Channel was driven by higher affiliate revenue due to higher rates.

Broadcasting

Operating income at Broadcasting decreased 38% to $162 million for the quarter primarily due to lower advertising sales at the owned television stations and higher programming costs at the ABC Television Network due to an increase in production expenses, partially offset by increased sales of ABC Studios productions in international markets, led by Ugly Betty, Desperate Housewives and Criminal Minds. Higher production expenses reflected more production activity during the current quarter compared to the prior-year quarter which was affected by the Writers’ Guild of America work stoppage.

Media Networks

Revenues

Media Networks revenues decreased 2%, or $136 million, to $7.5 billion, consisting of a 9% decrease, or $270 million, at Broadcasting, and a 3% increase, or $134 million, at the Cable Networks.

Increased Cable Networks revenues were due to growth of $243 million from Cable Service Providers, partially offset by a $95 million decrease in advertising revenues and $14 million in other revenues. Increased revenues from Cable Service Providers were primarily due to contractual rate increases at ESPN and to a lesser extent, the domestic Disney Channel and ABC Family. Lower advertising revenue reflected lower units sold, partially offset by higher rates at ESPN. Lower advertising revenue at ESPN was partially offset by an increase at ABC Family. The decrease in other revenues reflected the success of High School Musical 2 DVD sales in the prior-year.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

Decreased Broadcasting revenues were primarily due to lower advertising revenues at the ABC Television Network and at the owned television stations, partially offset by higher international sales of ABC Studios productions. The decrease in advertising revenues at the ABC Television Network was driven by lower ratings. Increased international sales of ABC Studios productions were led by Ugly Betty, Desperate Housewives and Private Practice.

Costs and Expenses

Costs and expenses at Media Networks increased 3%, or $198 million, reflecting a 5% increase, or $163 million, at the Cable Networks, and a 1% increase, or $35 million, at Broadcasting. The increase at Cable Networks was primarily due to higher sports programming and general and administrative costs at ESPN. The increase at Broadcasting was primarily due to a bad debt charge in connection with the bankruptcy of a syndication customer.

Segment Operating Income

Segment operating income decreased 14%, or $324 million, to $2.0 billion due to decreases of $305 million at Broadcasting and $19 million at the Cable Networks. The decrease at Broadcasting was primarily due to lower advertising revenue at the ABC Television Network and the owned television stations and a bad debt charge in connection with the bankruptcy of a syndication customer, partially offset by higher international sales of ABC Studios productions. The decrease at the Cable Networks was primarily due to decreases at the domestic Disney Channel and at ESPN, partially offset by an increase at ABC Family.

Media Networks

Media Networks revenues for the quarter decreased 5% to $3.9 billion and segment operating income decreased 29% to $655 million. The following table provides further detail of the Media Networks results (in millions):

Cable Networks

Operating income at Cable Networks decreased $69 million to $517 million for the quarter driven by decreases at the domestic Disney Channels and at ESPN. The decrease at the domestic Disney Channels was due to lower DVD sales reflecting the success of High School Musical 2 in the prior-year quarter. The decrease at ESPN was primarily due to lower advertising revenues and higher programming and administrative costs, partially offset by higher affiliate revenue. The decrease in advertising revenues was due to a decrease in sold inventory, partially offset by higher rates. Higher programming costs reflected increased costs for NFL programming. The increase in affiliate revenue was due to higher contractual rates and, to a lesser extent, subscriber growth.

Broadcasting

Operating income at Broadcasting decreased $205 million to $138 million for the quarter primarily due to lower advertising revenue at the ABC Television Network and at the owned television stations, and a bad debt charge in connection with the bankruptcy of a syndication customer. These decreases were partially offset by 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. The decrease in advertising revenues at the ABC Television Network was primarily due to lower primetime ratings.

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Media Networks

The Company operates the ABC Television Network and ten owned television stations, as well as the ESPN Radio Network and Radio Disney Network (the Radio Networks) and 46 owned radio stations. Both the television and radio networks have affiliated stations providing coverage to households throughout the United States. The Company has cable networks that are principally involved in the production and distribution of cable television programming, the licensing of programming in domestic and international markets, and investing in foreign television broadcasting, production, and distribution entities. Primary cable programming services that operate through consolidated subsidiary companies are the ESPN-branded networks, Disney Channel Worldwide, SOAPnet, Toon Disney, ABC Family Channel, and Jetix channels in Europe and Latin America. Other programming services that operate through joint ventures and are accounted for under the equity method include A&E Television Networks and Lifetime Entertainment Services. The Company also produces original television programming for network, first-run syndication, pay, and international syndication markets, along with original animated television programming for network, pay, and international syndication markets. Additionally, the Company operates ABC-, ESPN-, ABC Family- and SOAPnet-branded internet website businesses.

On June 12, 2007, the Company completed the spin-off of its wholly owned subsidiary, ABC Radio Holdings, Inc., and its merger into a subsidiary of Citadel Broadcasting Corporation (Citadel). Prior to the spin-off, the Company consolidated its ABC Radio Business, consisting of 22 large-market radio stations and the ABC Radio Network businesses, under ABC Radio Holdings, Inc. The transaction did not include the Company’s ESPN Radio or Radio Disney network and station businesses. Additional information regarding this transaction is included in Note 3.

Media Networks

The following table provides supplemental revenue and segment operating income detail for the Media Networks segment:

Revenues

Media Networks revenues decreased 5%, or $206 million, to $3.9 billion, consisting of a 2% increase, or $40 million, at the Cable Networks and a 14% decrease, or $246 million, at Broadcasting.

Increased Cable Networks revenues were due to growth of $111 million from Cable Service Providers, partially offset by decreases of $55 million in advertising revenues and $16 million in other revenues. Revenues from Cable Service Providers are generally derived from fees charged on a per subscriber basis, and the increase in the current quarter was due to contractual rate increases and, to a lesser extent, subscriber growth primarily at ESPN. Lower advertising revenue reflected a decrease in sold inventory, partially offset by higher rates. The decrease in other revenues was driven by lower DVD sales reflecting the success of High School Musical 2 in the prior-year quarter, partially offset by miscellaneous other revenue increases.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Certain of the Company’s contracts with Cable Service Providers include annual programming commitments. In these cases, revenue subject to the commitment is deferred until the annual commitments are satisfied which generally results in revenue shifting from the first half of the year to the second half.

Decreased Broadcasting revenues were primarily due to lower advertising revenue at the ABC Television Network and at the owned television stations. The decrease in advertising revenues at the ABC Television Network was driven by lower primetime ratings.

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.

Segment Operating Income

Segment operating income decreased 29%, or $274 million, to $655 million for the quarter due to a decrease of 12%, or $69 million, at the Cable Networks and a decrease of 60%, or $205 million, at Broadcasting. The decrease at the Cable Networks was primarily due to decreases at the domestic Disney Channels and at ESPN. The decrease at Broadcasting was primarily due to lower primetime advertising revenue at the ABC Television Network and at the owned television stations, and a bad debt charge in connection with the bankruptcy of a syndication customer, partially offset by lower programming and development costs.

Media Networks

The Company operates the ABC Television Network and ten owned television stations, as well as the ESPN Radio Network and Radio Disney Network (the Radio Networks) and 46 owned radio stations. Both the television and radio networks have affiliated stations providing coverage to households throughout the United States. The Company has cable networks that are principally involved in the production and distribution of cable television programming, the licensing of programming in domestic and international markets, and investing in foreign television broadcasting, production, and distribution entities. Primary cable programming services that operate through consolidated subsidiary companies are the ESPN-branded networks, Disney Channel Worldwide, SOAPnet, Toon Disney, ABC Family Channel, and Jetix channels in Europe and Latin America. Other programming services that operate through joint ventures and are accounted for under the equity method include A&E Television Networks and Lifetime Entertainment Services. The Company also produces original television programming for network, first-run syndication, pay, and international syndication markets, along with original animated television programming for network, pay, and international syndication markets. Additionally, the Company operates ABC-, ESPN-, ABC Family-, SOAPnet- and Disney-branded internet website businesses, as well as Club Penguin, an online virtual world for kids.

On June 12, 2007, the Company completed the spin-off of its wholly owned subsidiary, ABC Radio Holdings, Inc., and its merger into a subsidiary of Citadel Broadcasting Corporation (Citadel). Prior to the spin-off, the Company consolidated its ABC Radio Business, consisting of 22 large-market radio stations and the ABC Radio Network businesses, under ABC Radio Holdings, Inc. The transaction did not include the Company’s ESPN Radio or Radio Disney network and station businesses. Additional information regarding this transaction is included in Note 3.

Media Networks

Media Networks

Media Networks revenues for the quarter increased 8% to $4.1 billion and segment operating income increased 9% to $1.5 billion. The following table provides further detail of the Media Networks results (in millions):

Cable Networks

Operating income at Cable Networks increased 14% to $1.2 billion for the quarter primarily due to growth at ESPN and, to a lesser extent, higher income from our cable equity investments and an increase at the international Disney Channels. The growth at ESPN was driven by higher affiliate and advertising revenue, partially offset by higher programming and production, administrative and marketing costs. The increase in affiliate revenue was primarily due to contractual rate increases, subscriber growth, and increased recognition of previously deferred revenue related to annual programming commitments. Higher programming and production costs reflected increased sports rights costs for various sporting events and included production costs for additional NBA games. During the quarter, ESPN recognized $78 million of previously deferred revenues compared to $49 million in the prior-year quarter. Remaining deferred revenues of $396 million as of the end of the current quarter are expected to be recognized in the fourth quarter of the fiscal year compared to $359 million recognized in the fourth quarter of the prior year. Higher income from our cable equity investments was primarily due to the recognition of previously deferred revenues in connection with finalizing certain affiliate contracts at ESPN’s Star Sports joint venture in Asia and higher advertising revenues at Lifetime. Increased operating income at the international Disney Channels reflected higher affiliate revenues due to subscriber growth.

Broadcasting

Operating income at Broadcasting decreased 11% to $260 million for the quarter primarily due to higher production cost amortization related to programs in syndication and lower advertising sales at the owned television stations, partially offset by lower costs for new scripted programming for the ABC Television Network. These decreased costs were the result of lower expenses for pilots as pick up decisions were delayed in the current year primarily due to the Writers Guild of America work stoppage.

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Revenues at the ABC Television Network were comparable to the prior year as the impact of lower ratings was offset by higher advertising rates and digital media revenues.