Financial Review

Overview

We believe that Disney’s long-term prosperity fundamentally rests on our ability to create exceptional content that audiences around the world embrace, to deliver that content, to the greatest extent possible, to consumers when, how and where they want it, and to do so in a way that delivers economic value to our shareholders over the long term. Allocating capital profitably and managing our day-to-day operations to maximize Disney’s opportunity for both creative and financial success are the most important ways that we serve the owners of our Company.

Creativity and innovation, especially around branded products with franchise potential, are critical factors that drive our Company’s performance, reinforce the promise of our brands and strengthen our relationship with consumers around the world. In order to gauge how efficiently we are translating our creative successes into economic value, we track three primary financial metrics: earnings per share (EPS), return on invested capital (ROIC), and after tax cash flow. We believe that we must deliver strong results on all of these metrics over time. None of them, taken alone, is a sufficient indicator of value creation, but we believe delivering attractive results for all three of these metrics over the long run will drive long-term economic prosperity for our Company. Fiscal 2006 was the fourth consecutive year that Disney delivered solid improvement in each of these key metrics.

As we target these long-term financial goals, we will continually fortify our established businesses because they remain a vital part of our future. These businesses maintain and build our brands, even as they continue to deliver attractive earnings growth and substantial cash flow. At the same time, we will embrace and seek to capitalize on the changes that are transforming the media business. Across the Company, we are pioneering new distribution opportunities and investing in a wide variety of initiatives to position Disney as a preeminent player in the rapidly evolving media marketplace.

Two primary factors guide how we allocate capital both internally and to new ventures; first, the potential size and strategic relevance of the market opportunity an initiative offers and, second, whether or not we can capture and sustain a competitive advantage in the business we are considering entering. Sustainable competitive advantages – such as the tremendous strength of our Company’s brands, Disney’s spectacular library, our fundamental storytelling and creative capabilities, our ability to monetize creative success across many businesses and our experienced front-line management teams – can deliver enhanced financial performance. We constantly seek to translate these benefits into greater profitability, growth potential and ultimately, attractive returns on investment.

Delivering attractive returns that are comfortably above our Company’s weighted average cost of capital is the basis by which we can create value for shareholders. Since strategic investment can sometimes pressure near-term returns, even while creating the foundation for future performance, we assess trends in financial metrics over time rather than looking only at short-term results.