Walt Disney Company (DIS)

Studio Entertainment

Studio Entertainment revenues for the quarter were essentially flat at $1.9 billion and segment operating income increased 30% to $243 million. Higher operating income was primarily due to an increase in domestic home entertainment, partially offset by decreases in domestic theatrical distribution and music distribution.

Higher domestic home entertainment results were primarily due to lower distribution costs and marketing expenses, driven by cost reduction initiatives, and lower production cost amortization and participation expense. The decrease in amortization and participation expense reflected the strong performance of Up and The Proposal in the current quarter compared to WALL-E and The Chronicles of Narnia: Prince Caspian, which had high participation costs, in the prior-year quarter.

The decrease in domestic theatrical distribution was driven by higher film cost write-downs in the current quarter. Lower results in music distribution were primarily due to lower album sales reflecting the strong performance of High School Musical 3 in the prior-year quarter.

STUDIO ENTERTAINMENT

The Studio Entertainment segment produces and acquires live-action and animated motion pictures, direct-to-video content, musical recordings and live stage plays.

The Company distributes produced and acquired films (including its film and television library) in the theatrical, home entertainment and television markets. Each of these market windows is discussed in more detail below.

In August 2009, the Company entered into an agreement with DreamWorks Studios (“DreamWorks”) to distribute live-action motion pictures produced by DreamWorks over the next seven years under the Touchstone Pictures banner. As part of the agreement, the Company will provide certain financing, which as of October 3, 2009, totaled $100 million.

Studio Entertainment

Revenues

Revenues decreased 16%, or $1.2 billion, to $6.1 billion primarily due to decreases of $978 million in worldwide home entertainment, $129 million in music distribution and $106 million in worldwide television distribution.

The decrease in worldwide home entertainment revenues was primarily due to lower unit sales and net effective pricing, reflecting the overall decline in the DVD market and the strength of Pirates of the Caribbean: At World’s End in the prior year. Significant other titles included WALL-E and The Chronicles of Narnia: Prince Caspian in the current year while the prior year included Ratatouille, National Treasure 2: Book of Secrets and Enchanted.

34

Table of Contents

Lower revenues in music distribution reflected the strong performance of the Hannah Montana concert tour and Miley Cyrus and Jonas Brothers CD titles in the prior year. The decrease in worldwide television distribution was driven by fewer significant titles in the current year.

Cost and Expenses

Costs and expenses, which consist primarily of production cost amortization, distribution and marketing expenses, product costs and participation costs decreased 5%, or $305 million, primarily due to decreases in worldwide home entertainment and music distribution, partially offset by an increase in worldwide theatrical distribution.

The decrease in costs at worldwide home entertainment was primarily due to lower distribution costs and production cost amortization resulting from a decline in DVD unit sales. The decrease in music distribution reflected the absence of costs associated with the Hannah Montana concert tour in the prior year. Increased costs and expenses in worldwide theatrical distribution reflected higher marketing costs for current year releases and higher film cost write-downs.

Segment Operating Income

Segment operating income decreased 84%, or $911 million, to $175 million primarily due to decreases at worldwide home entertainment, worldwide theatrical distribution and worldwide television distribution.

Studio Entertainment

Revenues

Revenues decreased 2%, or $143 million, to $7.3 billion primarily due to decreases of $117 million in worldwide television distribution, $112 million in domestic theatrical distribution, and $66 million in domestic home entertainment, partially offset by an increase of $147 million in international home entertainment.

The decrease in worldwide television distribution revenues was driven by the absence of the multi-season sale of Home Improvement which occurred in fiscal 2007. Lower revenues in domestic theatrical distribution reflected the strong performance of fiscal 2007 titles, including Pirates of the Caribbean: At World’s End, Ratatouille, and Wild Hogs, compared to the titles in fiscal 2008, which included National Treasure 2: Book of Secrets and WALL-E. Lower revenues in domestic home entertainment were primarily due to a decline in unit sales reflecting the performance of Pirates of the Caribbean: At World’s End and Ratatouille in fiscal 2008 compared to Pirates of the Caribbean: Dead Man’s Chest and Cars in fiscal 2007.

Revenue growth in international home entertainment was primarily due to a higher unit sales mix of television series DVD sets, which have higher average unit sales prices.

Cost and Expenses

Costs and expenses for fiscal 2008 were comparable to fiscal 2007 as decreases in worldwide television distribution and domestic theatrical distribution were largely offset by an increase in international home entertainment.

Lower costs and expenses in worldwide television distribution were primarily due to a decrease in amortization and participation costs driven by the absence of the Home Improvement sale. The decrease in domestic theatrical distribution was primarily due to lower amortization expense reflecting decreased revenues for fiscal 2008 releases and lower film cost write-downs. The increase in international home entertainment was primarily due to higher distribution costs driven by extensive marketing campaigns in fiscal 2008.

Segment Operating Income

Segment operating income decreased 9%, or $109 million, to $1.1 billion primarily due to lower revenues in domestic home entertainment.

39

Table of Contents

Studio Entertainment

The Company produces and acquires live-action and animated motion pictures for worldwide distribution to the theatrical, home entertainment, and television markets. The Company distributes these products through its own distribution and marketing companies in the United States and foreign markets primarily under the Walt Disney Pictures, Touchstone Pictures, Miramax, Pixar, and Disneynature banners, as well as Dimension for titles released prior to September 30, 2005. The Company also produces stage plays, musical recordings and live entertainment events.

67

Table of Contents

Studio Entertainment

Studio Entertainment revenues for the year decreased 16% to $6.1 billion and segment operating income decreased 84% to $175 million. For the quarter, revenues increased 3% to $1.5 billion and segment operating income decreased $111 million to a loss of $13 million.

Lower operating income for the year was primarily due to decreases in worldwide home entertainment, worldwide theatrical distribution and worldwide television distribution.

The decline in worldwide home entertainment was driven by lower unit sales and net effective pricing, partially offset by lower production cost amortization and marketing costs. Decreased unit sales reflect the overall decline in the DVD market and the strength of Pirates of the Caribbean: At World’s End in the prior year. Significant other titles included WALL-E and The Chronicles of Narnia: Prince Caspian in the current year while the prior year included Ratatouille, Enchanted and National Treasure: Book of Secrets.

Lower results in worldwide theatrical distribution were primarily due to a weaker performing slate of titles in the current year and higher film cost write-downs. Successful current year titles included UP and The Proposal while the prior year included National Treasure: Book of Secrets and WALL-E. The decrease in worldwide television distribution was driven by fewer significant titles in the current period.

Lower operating results for the quarter were primarily due to higher film cost write-downs in domestic theatrical distribution and a decline in music distribution reflecting the strong performance of the Jonas Brothers and Miley Cyrus titles in the prior-year quarter.

Studio Entertainment

Studio Entertainment revenues for the quarter decreased 12% to $1.3 billion and segment operating income decreased $109 million to a loss of $12 million. Lower segment operating results were driven by decreases in worldwide home entertainment and worldwide television distribution, partially offset by an increase in domestic theatrical distribution.

The decrease in worldwide home entertainment was due to lower unit sales of catalog titles and current releases. The Company also recognized lower net effective revenue per unit. Significant current quarter titles included Bedtime Stories, Confessions of a Shopaholic and Bolt while the prior-year quarter included National Treasure 2: Book of Secrets and Enchanted. Lower results in worldwide television distribution reflected more significant titles in the prior-year quarter including Game Plan and Ratatouille in domestic pay television markets and The Chronicles of Narnia: The Lion, The Witch and The Wardrobe in international markets.

The increase in domestic theatrical distribution was primarily due to the strong performance in the current year of UP and Hannah Montana: The Movie, partially offset by higher film cost write-downs and marketing expenses for future quarter releases. The prior-year quarter included The Chronicles of Narnia: Prince Caspian and WALL-E, which was released at the end of the quarter.

Studio Entertainment

Revenues

Revenues decreased 21%, or $387 million, to $1.4 billion primarily due to decreases of $225 million in worldwide home entertainment, $50 million in domestic theatrical distribution, and $34 million in music distribution.

Lower worldwide home entertainment revenues were primarily due to lower unit sales in the domestic market reflecting the performance of current quarter titles, and to a lesser extent, lower average unit sales prices in international markets driven by a higher average selling price for Ratatouille in the prior-year quarter. Significant current-quarter titles in the domestic market included Bolt, Beverly Hills Chihuahua and High School Musical 3: Senior Year, while the prior-year quarter included Enchanted, Game Plan, and No Country for Old Men.

The decrease in domestic theatrical distribution revenues was primarily due to the performance of current quarter titles, including Bedtime Stories, Race to Witch Mountain and Confessions of a Shopaholic, compared to National Treasure 2: Book of Secrets, Hannah Montana/Miley Cyrus: Best of Both Worlds and Step Up 2 in the prior-year quarter. Lower revenues in music distribution reflected the strong performance of the Hannah Montana concert tour in the prior-year quarter.

Costs and Expenses

Costs and expenses, which consist primarily of production cost amortization, distribution and marketing expenses, product costs and participation costs, were essentially flat at $1.4 billion as decreases in international home entertainment and music distribution were largely offset by an increase in worldwide theatrical distribution.

The decrease in costs at international home entertainment was primarily due to lower distribution expenses and production cost amortization. Lower amortization was driven by the strong performance of Ratatouille in the prior-year quarter. The decrease in music distribution reflected higher costs and expenses associated with the Hannah Montana concert tour in the prior-year quarter.

Higher costs in theatrical distribution were primarily due to higher international production cost amortization driven by Bolt in the current quarter, and higher international distribution expenses driven by more titles in release. Additionally, costs increased in the domestic market primarily due to higher marketing expenses for future quarter releases.

Segment Operating Income

Segment operating income decreased 97%, or $364 million, to $13 million primarily due to decreases in domestic home entertainment and worldwide theatrical distribution.

Studio Entertainment

Revenues

Revenues decreased 24%, or $1.1 billion, to $3.4 billion primarily due to decreases of $741 million in worldwide home entertainment, $97 million in domestic theatrical distribution and $89 million in music distribution.

The decrease in worldwide home entertainment was driven by a decline in DVD unit sales reflecting the strong performance of Pirates of the Caribbean: At World’s End and Ratatouille in the prior-

30

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

year period. Key current period titles included WALL-E, The Chronicles of Narnia: Prince Caspian, and Tinkerbell.

The decrease in domestic theatrical distribution was primarily due to the performance of current period titles, including Bedtime Stories and Bolt, compared to National Treasure 2: Book of Secrets and Enchanted in the prior-year period. Lower revenues in music distribution reflected the strong performance of the Hannah Montana concert tour in the prior-year period.

Costs and Expenses

Costs and expenses decreased 11%, or $392 million, primarily due to a decrease of $316 million in worldwide home entertainment driven by lower amortization and distribution expenses as a result of decreased unit sales, and a decrease of $54 million in music distribution reflecting higher costs associated with the Hannah Montana concert tour in the prior-year period.

Segment Operating Income

Segment operating income decreased 78%, or $691 million, to $200 million primarily due to decreases in worldwide home entertainment and domestic theatrical distribution.

Studio Entertainment

Studio Entertainment revenues for the quarter decreased 21% to $1.4 billion and segment operating income decreased 97% to $13 million. The decrease in segment operating income was primarily due to decreases in domestic home entertainment and worldwide theatrical distribution.

The decrease in domestic home entertainment was driven by lower unit sales reflecting the performance of current quarter titles, which included High School Musical 3: Senior Year, Beverly Hills Chihuahua and Bolt, as compared to Enchanted, Game Plan and No Country for Old Men in the prior-year quarter.

The decrease in worldwide theatrical distribution reflected a lower performing slate of titles in the current quarter in both domestic and international markets and higher distribution expense for future quarter releases in domestic markets. Significant current quarter titles domestically included Bedtime Stories, Race to Witch Mountain and Confessions of a Shopaholic while the prior-year quarter included National Treasure 2: Book of Secrets, Hannah Montana/Miley Cyrus: Best of Both Worlds and Enchanted.

Significant current quarter titles internationally included Confessions of a Shopaholic, Bolt and Bedtime Stories compared to the strong performance of Enchanted and National Treasure 2: Book of Secrets in the prior-year quarter.

Studio Entertainment

Studio Entertainment revenues for the quarter decreased 26% to $1.9 billion and segment operating income decreased 64% to $187 million.

Lower segment operating income was primarily due to decreased DVD unit sales at worldwide home entertainment reflecting the strong performance of Pirates of the Caribbean: At World’s End, High School Musical 2, Jungle Book Platinum Release and Ratatouille in the prior-year quarter and lower catalog sales in the current quarter. Key current quarter releases included WALL-E, Sleeping Beauty Platinum Release, Tinker Bell and The Chronicles of Narnia: Prince Caspian.

Studio Entertainment

Revenues

Revenues decreased 26%, or $696 million, to $1.9 billion primarily due to a decrease of $516 million at worldwide home entertainment driven by a decline in DVD unit sales reflecting the strong performance of Pirates of the Caribbean: At World’s End, High School Musical 2, Ratatouille and Jungle Book Platinum Release in the prior-year quarter and lower catalog sales in the current quarter. Key current quarter releases included WALL-E, The Chronicles of Narnia: Prince Caspian and Tinker Bell.

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

23

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.

Segment Operating Income

Segment operating income decreased 64%, or $327 million, to $187 million primarily due to a decrease at worldwide home entertainment.

Studio Entertainment

The Company produces and acquires live-action and animated motion pictures for worldwide distribution to the theatrical, home entertainment, and television markets. The Company distributes these products through its own distribution and marketing companies in the United States and foreign markets primarily under the Walt Disney Pictures, Touchstone Pictures, and Miramax banners, as well as Dimension for titles released prior to September 30, 2005. On

56

May 5, 2006, the Company completed an all stock acquisition of Pixar, a digital animation studio. As a result of the acquisition the Company produces feature animation films under both the Disney and Pixar banners. Refer to Note 3 for information about the acquisition. The Company also produces stage plays, musical recordings and live entertainment events.

Studio Entertainment

The Company produces and acquires live-action and animated motion pictures for worldwide distribution to the theatrical, home entertainment, and television markets. The Company distributes these products through its own distribution and marketing companies in the United States and foreign markets primarily under the Walt Disney Pictures, Touchstone Pictures, and Miramax banners, as well as Dimension for titles released prior to September 30, 2005. On May 5, 2006, the Company completed an all stock acquisition of Pixar, a digital animation studio. As a result

66

Table of Contents

of the acquisition the Company produces feature animation films under both the Disney and Pixar banners. Refer to Note 3 for information about the acquisition. The Company also produces stage plays, musical recordings and live entertainment events.

Studio Entertainment

Studio Entertainment

Studio Entertainment revenues for the year decreased 2% to $7.3 billion and segment operating income decreased 9% to $1.1 billion. For the quarter, revenues decreased 5% to $1.5 billion and segment operating income decreased $70 million to $98 million.

Lower operating income for the year was primarily due to a decrease in domestic home entertainment reflecting the performance of current-year titles including Pirates of the Caribbean: At World’s End and Ratatouille, compared to Pirates of the Caribbean: Dead Man’s Chest and Cars in the prior year.

For the quarter, lower operating income was driven by a decrease in domestic theatrical distribution reflecting weaker performing titles in the current quarter and higher marketing expenses for releases after the end of the quarter, including Beverly Hills Chihuahua.

Studio Entertainment

Studio Entertainment revenues for the quarter decreased from $1.8 billion to $1.4 billion and segment operating income decreased from $190 million to $97 million.

Lower segment operating income was primarily due to a decrease in worldwide theatrical distribution reflecting the strong performance of Pirates of the Caribbean: At World’s End in the prior-year quarter compared to The Chronicles of Narnia: Prince Caspian in the current quarter.

Studio Entertainment

26

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Revenues

Revenues were essentially flat at $5.9 billion primarily due to decreases of $84 million in domestic theatrical distribution and $63 million in domestic home entertainment, largely offset by an increase of $133 million in international home entertainment.

The decrease in domestic theatrical distribution revenues was primarily due to the performance of current-year period titles which included National Treasure 2: Book of Secrets, The Chronicles of Narnia: Prince Caspian and Enchanted compared to the prior year, which included Pirates of the Caribbean: At World’s End and Wild Hogs. Lower revenues in domestic home entertainment were primarily due to a decline in unit sales reflecting the performance of Pirates of the Caribbean: At World’s End and Ratatouille in the current-year period compared to Pirates of the Caribbean: Dead Man’s Chest and Cars in the prior-year period.

Revenue growth in international home entertainment was primarily due to higher unit sales in the current year of new releases and television DVD box-sets which have higher average unit sales prices compared to the prior year that had more sales of catalogue titles.

Costs and Expenses

Costs and expenses were flat compared to the prior-year period primarily due to an increase in international home entertainment offset by a decrease in domestic theatrical distribution.

The increase in international home entertainment was primarily due to higher distribution expenses driven by extensive marketing campaigns to launch current period titles. The decrease in domestic theatrical distribution was primarily due to lower amortization driven by lower production costs for current period releases, lower distribution expenses driven by fewer releases that had extensive marketing campaigns in the current period, and lower film cost write-downs.

Segment Operating Income

Segment operating income decreased 4%, or $39 million, to $988 million primarily due to a decrease in domestic home entertainment, partially offset by an increase in domestic theatrical distribution.

Studio Entertainment

Revenues

Revenues increased 7%, or $280 million, to $4.5 billion, primarily due to increases of $269 million in worldwide theatrical distribution and $91 million in international home entertainment, partially offset by a decrease of $84 million in domestic home entertainment.

The increase in worldwide theatrical distribution revenues was primarily due to the strong performance of current period titles including National Treasure 2: Book of Secrets and Enchanted in the domestic and international markets, and the strong performance internationally of Ratatouille, as compared to the prior-year period, which included Déjà Vu in the domestic and international markets and Wild Hogs in the domestic market.

The revenue growth in international home entertainment was primarily due to increased sales of television DVD box-sets which have a higher average unit sales price. The decrease in domestic home entertainment was primarily due to lower unit sales reflecting the performance of current-period titles including Pirates of the Caribbean: At World’s End, Ratatouille and Enchanted, as compared to the strong performance of Pirates of the Caribbean: Dead Man’s Chest, Cars and Little Mermaid Platinum Release in the prior-year period.

Costs and Expenses

Costs and expenses increased 7%, or $226 million, primarily due to increases in worldwide home entertainment and international theatrical distribution, partially offset by lower film cost write-downs.

Higher costs at worldwide home entertainment were primarily due to higher distribution expenses driven by extensive marketing campaigns for the current period titles in international markets. The increase in international theatrical distribution was primarily due to higher distribution expenses and production cost amortization associated with stronger performing current-period titles.

Segment Operating Income

Segment operating income increased 6%, or $54 million, to $891 million, primarily due to an increase in worldwide theatrical distribution, partially offset by a decrease in worldwide home entertainment.

28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued)

Studio Entertainment

Studio Entertainment revenues for the quarter increased 18% to $1.8 billion and segment operating income increased 61% to $377 million. Segment operating income growth was primarily due to increases in domestic home entertainment and worldwide theatrical distribution.

The growth in domestic home entertainment was driven by higher unit sales reflecting the performance of current quarter titles, which included Enchanted, Game Plan and No Country for Old Men as compared to Peter Pan Platinum Release, The Guardian and The Prestige in the prior-year quarter.

The increase in worldwide theatrical distribution was driven by lower distribution expenses due to significant marketing costs in the prior-year quarter for Meet the Robinsons, which was released at the end of March 2007, and the domestic performance of current quarter titles led by the continued success of National Treasure 2: Book of Secrets and the release of Hannah Montana/Miley Cyrus: Best of Both Worlds. In international markets, the improvement was primarily due to the strong performance of Enchanted and National Treasure 2: Book of Secrets.

Studio Entertainment

Revenues

Revenues were essentially flat at $2.6 billion compared to the prior-year quarter as a decrease of $216 million in domestic home entertainment was largely offset by increases of $158 million in worldwide theatrical distribution and $52 million in music distribution.

22

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—(continued)

The increase in worldwide theatrical distribution revenues was primarily due to the strong performance of current quarter titles including Enchanted, National Treasure: Book of Secrets and Game Plan in the domestic and international markets, and the strong performance internationally of Ratatouille as compared to the prior-year quarter, which included Déjà Vu, The Santa Clause 3 and The Guardian in the domestic and international markets. The revenue growth in music distribution was driven by the strong performance of the Hannah Montana concert tour and High School Musical CDs.

Lower domestic home entertainment revenues were primarily due to a decline in unit sales reflecting the performance of current quarter titles, including Pirates of the Caribbean: At World’s End, Ratatouille and Jungle Book Platinum release, as compared to the strong performance in the prior-year quarter of Pirates of the Caribbean: Dead Man’s Chest, Cars and Little Mermaid Platinum release.

Costs and Expenses

Costs and expenses, which consist primarily of production cost amortization, distribution and marketing expenses, product costs and participation costs, increased 5%, or $97 million primarily due to increases in worldwide theatrical distribution and worldwide home entertainment.

The increase in worldwide theatrical distribution costs was driven by higher distribution expenses associated with the current quarter releases and higher production cost amortization driven by Ratatouille which was in wide release in international markets in the current quarter compared to Cars which was at the end of its international release in the prior-year quarter. These increases were partially offset by lower film cost write-downs.

Higher costs and expenses in worldwide home entertainment were primarily due to increased distribution expenses driven by higher marketing costs in international markets, partially offset by a decrease domestically due to lower unit sales.

Segment Operating Income

Segment operating income decreased 15%, or $89 million, to $514 million primarily due to a decrease in domestic home entertainment partially offset by increases in worldwide theatrical distribution and music distribution.

On November 5, 2007, members of the Writers Guild of America commenced a work stoppage. See Risk Factors on page 36 for further information regarding the impact of the work stoppage.

Studio Entertainment

Studio Entertainment segment operating income for the quarter decreased 15% to $514 million while revenues were essentially flat at $2.6 billion. Lower segment operating income was primarily due to a decrease in domestic home entertainment partially offset by increases in worldwide theatrical distribution and music distribution.

3

At domestic home entertainment, despite the strong performance in the current quarter of Pirates of the Caribbean: At World’s End, Ratatouille and Jungle Book Platinum Release, results were down due to lower unit sales compared to the prior-year quarter, which included Cars, Pirates of the Caribbean: Dead Man’s Chest and Little Mermaid Platinum Release.

The improvement in worldwide theatrical distribution was primarily due to the strong domestic performance of current quarter titles, including Game Plan, National Treasure: Book of Secrets and Enchanted, and the performance internationally of Ratatouille in the current quarter as well as lower film cost write-downs. The growth in music distribution was driven by the Hannah Montana concert tour and High School Musical CDs.

Studio Entertainment

The Company produces and acquires live-action and animated motion pictures for worldwide distribution to the theatrical, home entertainment, and television markets. The Company distributes these products through its own distribution and marketing companies in the United States and foreign markets primarily under the Walt Disney Pictures, Touchstone Pictures, and Miramax banners, as well as Dimension for titles released prior to September 30, 2005. On May 5, 2006, the Company completed an all stock acquisition of Pixar, a digital animation studio. As a result of the acquisition the Company now produces feature animation films under both the Disney and Pixar banners. Refer to Note 3 for information about the acquisition. The Company also produces stage plays and musical recordings.

Studio Entertainment

Studio Entertainment segment operating income for the year increased 65% to $1.2 billion while revenues were essentially flat at $7.5 billion. For the quarter, segment operating income decreased 21% to $170 million and revenues decreased 24% to $1.5 billion.

For the year, higher operating income reflected the strong performance of current year titles including Disney/Pixar’s Cars, Pirates of the Caribbean: Dead Man’s Chest, and the Little Mermaid Platinum Release in domestic home entertainment, compared to The Chronicles of Narnia: The Lion, The Witch and The Wardrobe and the Cinderella Platinum Release in the prior year. Revenues were essentially flat as the increase in domestic home entertainment revenues as well as revenue gains from the strong performance of the Hannah Montana and High School Musical soundtracks in the Disney music business were largely offset by lower revenues at worldwide theatrical distribution due to the strong performance of Pirates of the Caribbean: Dead Man’s Chest in the prior year.

For the quarter, lower operating income was primarily due to a decrease in worldwide theatrical distribution reflecting the strong performance of Pirates of the Caribbean: Dead Man’s Chest in the prior-year quarter, partially offset by lower film cost write-downs and improvements in the Disney music business driven by the strong performance of Hannah Montana and High School Musical.

Studio Entertainment

Revenues

Revenues increased 8%, or $434 million, to $6.0 billion primarily due to an increase of $343 million in worldwide home entertainment driven by increased DVD unit sales resulting from the strong performance of Pirates of the Caribbean: Dead Man’s Chest and Disney/Pixar’s Cars in the current period compared to The Chronicles of Narnia: The Lion, The Witch and The Wardrobe in the prior-year period.

Cost and Expenses

Costs and expenses decreased 2%, or $82 million primarily due to a decrease in worldwide theatrical distribution driven by lower film cost write-downs and distribution costs. Lower distribution costs were driven by a decrease in international distribution costs as the prior-year period included more titles in release.

Segment Operating Income

Segment operating income increased $516 million to $1.0 billion primarily due to increases in worldwide home entertainment and worldwide theatrical distribution.

Studio Entertainment

Studio Entertainment revenues for the quarter increased 4% to $1.8 billion and segment operating income decreased 20% to $192 million. Lower segment operating income was primarily due to a decrease in worldwide home entertainment partially offset by an increase in international theatrical distribution.

The decrease in worldwide home entertainment was primarily due to lower DVD sales, reflecting the strong performance of The Chronicles of Narnia: The Lion, The Witch and The Wardrobe in the prior-year quarter.

The improvement in international theatrical distribution was driven by the strong performance of Pirates of the Caribbean: At World’s End in the current quarter. At domestic theatrical distribution, the strong performance of Pirates of the Caribbean: At

4

World’s End was offset by higher distribution costs driven by marketing expenses for Disney/Pixar’s Ratatouille, which was released late in the current quarter.

Studio Entertainment

Studio Entertainment revenues for the quarter decreased 13% to $1.6 billion and segment operating income increased 60% to $235 million. The decrease in revenues was primarily due to international theatrical distribution reflecting the strong performance of The Chronicles of Narnia: The Lion, The Witch and The Wardrobe and Chicken Little in the prior-year quarter, as well as fewer titles in release in the current quarter.

Segment operating income growth was primarily due to improved domestic theatrical distribution results driven by a better-performing slate of titles in the current quarter and lower distribution expense due to timing of releases. Significant current-quarter releases included Wild Hogs and Bridge to Terabithia while the prior-year quarter included Eight Below and Shaggy Dog. The revenue decline in international theatrical distribution was largely offset by lower distribution costs, participation expense and production cost amortization resulting from fewer titles in the current quarter.

Studio Entertainment

Revenues

Revenues increased 10%, or $364 million, to $4.2 billion primarily due to an increase of $664 million in worldwide home entertainment partially offset by a decrease of $366 million in worldwide theatrical distribution.

The increase in worldwide home entertainment revenues was primarily due to increased DVD unit sales resulting from the strong performance of current-period titles including Pirates of the Caribbean: Dead Man’s Chest, Disney/Pixar’s Cars and Little Mermaid Platinum release. Lower worldwide theatrical distribution revenues were

23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—(continued)

primarily due to the strong performance of The Chronicles of Narnia: The Lion, The Witch and The Wardrobe and Chicken Little in the prior-year six months compared to the current period titles, which included Déjà vu and Wild Hogs.

Costs and Expenses

Costs and expenses decreased 6%, or $200 million primarily due to a decrease in worldwide theatrical distribution partially offset by an increase in worldwide home entertainment.

Lower costs and expenses in worldwide theatrical distribution were driven by lower distribution costs, participation costs, production cost amortization and film cost write-downs. Distribution costs were lower as the prior-year period included higher profile films that had extensive marketing campaigns. The decrease in participation costs and production cost amortization was driven by the strong prior-year performance including The Chronicles of Narnia: The Lion, The Witch and The Wardrobe. The increase at worldwide home entertainment was driven by higher participation costs and production cost amortization due to increased unit sales in the current-period.

Segment Operating Income

Segment operating income increased $564 million, to $839 million, due to an improvement at worldwide home entertainment.

Studio Entertainment

Revenues

Studio Entertainment revenues increased 29%, or $588 million, to $2.6 billion primarily due to an increase of $747 million in worldwide home entertainment, partially offset by a decrease of $211 million in worldwide theatrical motion picture distribution.

The increase in worldwide home entertainment revenues was primarily due to increased DVD unit sales resulting from the strong performance of Pirates of the Caribbean: Dead Man’s Chest, Disney/Pixar’s Cars and The Little Mermaid Platinum Release. Lower worldwide theatrical motion picture distribution revenues reflected the performance of current-quarter titles, which included Déjà Vu, Santa Clause 3 and The Guardian compared to the strong performance of The Chronicles of Narnia: The Lion, The Witch and The Wardrobe, Chicken Little and Flightplan in the prior-year quarter.

Costs and Expenses

Costs and expenses, which consist primarily of production cost amortization, distribution and marketing expenses, product costs and participation costs, increased 6%, or $112 million. Higher costs and expenses were primarily due to an increase in worldwide home entertainment partially offset by a decrease in worldwide theatrical motion picture distribution.

Higher costs and expenses in worldwide home entertainment were driven by higher production cost amortization, participation costs and distribution costs due to the increased unit sales in the current quarter. The decrease in worldwide theatrical motion picture distribution was driven by lower participation costs, resulting from lower box-office performance of current quarter titles, and lower film cost write-downs.

Segment Operating Income

Segment operating income increased $476 million, to $604 million, primarily due to an improvement in worldwide home entertainment, partially offset by lower results in worldwide theatrical motion picture distribution.

Studio Entertainment

Studio Entertainment revenues for the quarter increased 29% to $2.6 billion and segment operating income increased from $128 million to $604 million. Segment operating income growth was due to significantly higher unit sales at worldwide home entertainment, partially offset by lower results in worldwide theatrical motion picture distribution.

The successful home entertainment releases of Pirates of the Caribbean: Dead Man’s Chest, Disney/Pixar’s Cars, and Little Mermaid Platinum Release drove the increased DVD unit sales compared to the prior-year quarter, which included Cinderella Platinum Release, Miyazaki’s Howl’s Moving Castle, and Herbie: Fully Loaded.

The decrease in worldwide theatrical motion picture distribution reflected the performance of current quarter titles including Déjà Vu and Santa Clause 3 compared to the strong performance of The Chronicles of Narnia: The Lion, the Witch and the Wardrobe in the prior-year quarter.

Studio Entertainment

The Company produces and acquires live-action and animated motion pictures for worldwide distribution to the theatrical, home entertainment, and television markets. The Company distributes these products through its own distribution and marketing companies in the United States and most foreign markets primarily under the Walt Disney Pictures, Touchstone Pictures, and Miramax banners, as well as Dimension for titles released prior to September 30, 2005. On May 5, 2006, the Company completed an all stock acquisition of Pixar, a digital animation studio. As a result of the acquisition the Company now produces feature animation films under both the Disney and Pixar banners. Refer to Note 3 for information about the acquisition. The Company also produces stage plays and musical recordings.

Studio Entertainment

Studio Entertainment revenues for the year decreased 1% to $7.5 billion and segment operating income increased from $207 million to $729 million. Operating income growth was primarily due to improvements in worldwide theatrical motion picture distribution and worldwide home entertainment.

For the quarter, revenues increased 33% to $2.0 billion and segment operating income increased $527 million to $214 million. The increase in operating income was primarily due to improvements in worldwide theatrical motion picture distribution and worldwide home entertainment.

The improvement in worldwide theatrical motion picture distribution for the year was primarily due to lower distribution costs resulting from fewer domestic Miramax releases and the outstanding performance of Pirates of the Caribbean: Dead Man’s Chest. Other successful current year titles included The Chronicles of Narnia: The Lion, The Witch and The Wardrobe and Disney/Pixar’s Cars.

Worldwide home entertainment growth for the year was primarily due to reduced marketing and trade programs, lower distribution costs driven in part by fewer returns, and improved margins from increased sales of television series DVD box sets, partially offset by a decline in unit sales resulting from a higher number of strong performing titles in the prior year. Significant current year titles included The Chronicles of Narnia: The Lion, The Witch and The Wardrobe, Cinderella Platinum Release, and Chicken Little, while prior-year titles included Disney/Pixar’s The Incredibles, National Treasure, Aladdin Platinum Release, and Bambi Platinum Release.

For the quarter, the improvement in worldwide theatrical motion picture distribution was primarily due to the strong performance of Pirates of the Caribbean: Dead Man’s Chest, lower film cost write-downs at Miramax, and lower distribution costs resulting from fewer Miramax releases. The increase in worldwide home entertainment was primarily due to a favorable mix of titles with lower production cost amortization, as well as reduced marketing expenditures.

Studio Entertainment

Studio Entertainment revenues for the quarter increased 17% to $1.7 billion and segment operating income increased $284 million to $240 million. Higher segment operating income was due to improvements in worldwide home entertainment and domestic theatrical motion picture distribution, partially offset by a decrease in international theatrical motion picture distribution.

Worldwide home entertainment growth was primarily due to the strong performance of The Chronicles of Narnia: The Lion, the Witch and The Wardrobe, lower distribution costs driven in part by fewer returns and reduced marketing expenditures.

The improvement in domestic theatrical motion picture distribution was driven by reduced distribution costs associated with Miramax releases in the current quarter and the stronger performing slate of titles, led by the most recent Disney/Pixar animated release, Cars. The decrease in international theatrical motion picture distribution resulted from higher distribution costs driven by the timing of marketing expenses for Cars which began its international release late in the quarter. Current quarter results in the theatrical markets were dampened by marketing expenses related to Pirates of the Caribbean: Dead Man’s Chest, which was released subsequent to the end of the quarter.

Studio Entertainment

Revenues

Revenues decreased 9%, or $560 million, to $5.5 billion primarily due to decreases of $602 million in worldwide home entertainment, $35 million in television distribution and $30 million in worldwide theatrical motion picture distribution, partially offset by an increase of $56 million in music distribution driven by the strong performance of High School Musical and Rascal Flatts.

Lower worldwide home entertainment revenues were primarily due to a decline in unit sales. Significant current period titles included The Chronicles of Narnia: The Lion, The Witch and The Wardrobe, Cinderella Platinum Release and Chicken Little while prior-year period titles included The Incredibles, National Treasure, Bambi Platinum Release and Aladdin Platinum Release.

Lower television distribution revenues were primarily due to fewer strong-performing titles in the domestic markets relative to the prior-year period.

The decrease in worldwide theatrical motion picture distribution revenues was driven by fewer domestic Miramax theatrical releases in the current period, partially offset by the strong box-office performance of The Chronicles of Narnia: The Lion, The Witch and The Wardrobe, Chicken Little and Cars compared to the prior-year period titles, which included The Incredibles and National Treasure.

Costs and Expenses

Costs and expenses decreased 10%, or $555 million, primarily due to decreases in worldwide home entertainment, partially offset by higher music distribution expenses.

The decline in costs and expenses at worldwide home entertainment was primarily due to lower distribution costs and production cost amortization as a result of decreased unit sales.

28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—(continued)

Segment Operating Income

Segment operating income decreased 1%, or $5 million, to $515 million as decreases in worldwide television distribution and worldwide theatrical motion picture distribution were largely offset by an increase in worldwide home entertainment.

Revenues

      Worldwide home entertainment revenues increased due to higher DVD unit sales in fiscal 2004, which included Disney/ Pixar’s Finding Nemo, Pirates of the Caribbean, The Lion King Platinum Release and Brother Bear compared to fiscal 2003, which included Lilo & Stitch and Beauty and the Beast. Revenues in television distribution increased due to higher pay television sales due to better performances of live-action titles. Worldwide theatrical motion picture distribution revenue decreased

-47-

Costs and Expenses

Segment Operating Income