The Walt Disney Company and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollars in millions, except per share amounts)

NOTE 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Walt Disney Company owns 100% of Disney Enterprises, Inc. (DEI) which, together with its subsidiaries (the company), is a diversified worldwide entertainment company with operations in the following businesses.

MEDIA NETWORKS

The company operates the ABC Television Network, which has affiliated stations providing coverage to U.S. television households. The company also owns television and radio stations, most of which are affiliated with either the ABC Television Network or the ABC Radio Networks. The company’s cable and international broadcast operations are principally involved in the production and distribution of cable television programming, the licensing of programming to domestic and international markets and investing in foreign television broadcasting, production and distribution entities. Primary cable programming services, which operate through consolidated subsidiary companies, are ESPN-branded networks, the Disney Channel and Disney Channel International. Other programming services that operate through joint ventures, and are accounted for under the equity method, include A&E Television Networks, Lifetime Entertainment Services and E! Entertainment Television.

STUDIO ENTERTAINMENT

The company produces and acquires live-action and animated motion pictures for distribution to the theatrical, home video and television markets. The company also produces original television programming for network, first-run syndication, pay and international syndication markets, stage plays and musical recordings. The company distributes these products through its own distribution and marketing companies in the United States and most foreign markets.

THEME PARKS AND RESORTS

The company operates the Walt Disney World Resort in Florida, and Disneyland Park, the Disneyland Hotel and the Disneyland Pacific Hotel in California. The Walt Disney World Resort includes the Magic Kingdom, Epcot, Disney-MGM Studios and Disney’s Animal Kingdom, thirteen resort hotels and a complex of villas and suites, a retail, dining and entertainment complex, a sports complex, conference centers, campgrounds, golf courses, water parks and other recreational facilities. In addition, the resort operates Disney Cruise Line from Port Canaveral, Florida. Disney Regional Entertainment designs, develops and operates a variety of new entertainment concepts based on Disney brands and creative properties, operating under the names ESPN Zone and DisneyQuest. The company earns royalties on revenues generated by the Tokyo Disneyland theme park near Tokyo, Japan, which is owned and operated by an unrelated Japanese corporation. The company also has an investment in Euro Disney S.C.A., a publicly-held French entity that operates Disneyland Paris. The company’s Walt Disney Imagineering unit designs and develops new theme park concepts and attractions, as well as resort properties. The company also manages and markets vacation ownership interests in the Disney Vacation Club. Included in Theme Parks and Resorts are the company’s National Hockey League franchise, the Mighty Ducks of Anaheim, and the Anaheim Angels, a Major League Baseball team.

CONSUMER PRODUCTS

The company licenses the name “Walt Disney,” as well as the company’s characters, visual and literary properties, to various consumer manufacturers, retailers, show promoters and publishers throughout the world. The company also engages in direct retail distribution principally through the Disney Stores, and produces books and magazines for the general public in the United States and Europe. In addition, the company produces audio and computer software products for the entertainment market, as well as film, video and computer software products for the educational marketplace.

INTERNET AND DIRECT MARKETING

The Internet business develops, publishes and distributes content for online services intended to appeal to broad consumer interest in sports, news, family and entertainment. Internet websites include disney.com, Family.com, ESPN.com, ABCNEWS.com, ABCSports.com and ABC.com. The Internet business also produces Disney’s Club Blast, an entertainment and educational online subscription service for kids. Internet commerce activities include the DisneyStore.com, which markets Disney-themed merchandise online, Disney Travel Online, which offers travel packages to the Walt Disney World Resort and other Disney destinations and ESPNStore.com, which offers ESPN-themed and other sports-related merchandise. The Direct Marketing business operates the Walt Disney Catalog, which markets Disney-themed merchandise via direct mail.

SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation  The consolidated financial statements of the company include the accounts of The Walt Disney Company and its subsidiaries after elimination of intercompany accounts and transactions.

Accounting Changes  Effective September 30, 1999, the company adopted Statement of Financial Accounting Standards (SFAS) No. 131 Disclosure about Segments of an Enterprise and Related Information (SFAS 131) (see Note 11).

    During the first quarter, the company adopted SFAS No. 130 Reporting Comprehensive Income, which requires that the company present comprehensive income, a measure that reflects all non-owner changes in equity, in addition to net income. Comprehensive income has been reflected in the accompanying Consolidated Statements of Stockholders’ Equity.

    During 1998, the company adopted SFAS No. 128 Earnings Per Share (SFAS 128), which specifies the method of computation, presentation and disclosure for earnings per share (EPS). SFAS 128 requires the presentation of two EPS amounts, basic and diluted. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS includes the dilution that would occur if outstanding stock options and other dilutive securities were exercised and is comparable to the EPS the company has historically reported. The company uses the treasury stock method to calculate the impact of outstanding stock options. Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation.

    During 1997, the company adopted SFAS No. 123 Accounting for Stock-Based Compensation (SFAS 123), which requires disclosure of the fair value and other characteristics of stock options (see Note 9). The company has chosen under the provisions of SFAS 123 to continue using the intrinsic-value method of accounting for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB 25).