Financial Review

Business Segment Performance

Studio Entertainment

In 2006, our Studio Entertainment segment contributed substantial profit growth while also serving as one of the Company’s most important creative engines. The success of our Disney branded titles, including The Chronicles of Narnia: The Lion, The Witch and The Wardrobe, Pirates of the Caribbean: Dead Man’s Chest and Cars – coupled with our efforts to reduce overall film investment, marketing and distribution expenses – helped Studio Entertainment to more than triple its operating profit versus fiscal 2005.

The Studio’s results reinforce our strategy to allocate resources toward developing Disney-branded franchises that can be leveraged across the Company. Cars, for example, not only contributed to the Studio’s 2006 performance, but also served as the basis for one of Disney Consumer Products’ most successful merchandise programs. We are also exploring adding a Cars-based attraction at one or more of our theme parks around the world.

The acquisition of Pixar was an important and valuable step for our Company. Although the transaction resulted in EPS dilution in 2006 and will result in even greater dilution in 2007, the broad-based effect of Cars illustrates that Pixar’s creative output and talent have a wide-ranging impact on creative efforts across our Company. We believe that this company-wide impact improves our long-term earnings potential. The success of the integration to date and the wonderful characters and stories that we expect to leverage across the Company for years to come underscore our confidence in the value-creating potential of this acquisition.