Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

ORGANIZATION OF INFORMATION

Management's Discussion and Analysis provides a narrative of the Company's financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections:

Overview

Seasonality

Business Segment Results

Quarter Results

Nine-Month Results

Other Financial Information

Financial Condition

Commitments and Contingencies

Other Matters

Market Risk

OVERVIEW

Our summary consolidated results are presented below:



                                         Quarter Ended                             Nine Months Ended
(in millions, except per share      June 27,       June 28,                    June 27,        June 28,
data)                                 2009           2008         Change         2009            2008          Change
Revenues                           $  8,596       $  9,236         (7)   %    $  26,282       $  28,398         (7)   %
Costs and expenses                   (6,998)        (7,215)         3    %      (22,180)        (22,446)         1    %
Restructuring and impairment
charges                                 (21)             -         nm              (326)              -         nm
Other income                              -             32         nm               114              32         nm
Net interest expense                    (75)          (141)        47    %         (342)           (411)        17    %
Equity in the income of
investees                               155            175        (11)   %          449             442          2    %

Income before income taxes and
minority interests                    1,657          2,087        (21)   %        3,997           6,015        (34)   %
Income taxes                           (626)          (712)        12    %       (1,462)         (2,183)        33    %
Minority interests                      (77)           (91)        15    %         (123)           (165)        25    %

Net income                         $    954       $  1,284        (26)   %    $   2,412       $   3,667        (34)   %

Diluted earnings per share         $   0.51       $   0.66        (23)   %    $    1.29       $    1.87        (31)   %

Quarter Results

Diluted earnings per share (EPS) decreased 23% for the quarter primarily due to lower operating results driven by lower broadcast and cable advertising sales, decreased guest spending at Walt Disney World and Disneyland Paris, the timing of revenue recognition related to annual programming commitments at ESPN, higher pilot expenses at the ABC Television Network, lower worldwide home entertainment and television distribution revenues at our film studio and decreased operating results at The Disney Stores and Merchandise Licensing. These decreases were partially offset by the benefit of contractual rate increases and subscriber growth on fees from cable, satellite and telecommunications service providers (affiliate fees) at ESPN and improved performance from our theatrical releases.

The current quarter results also included restructuring charges totaling $0.01 per share while the prior-year quarter included an accounting gain related to the acquisition of the Disney Stores North America, a gain on the sale of movies.com, and the favorable resolution of certain prior-year income tax matters, which collectively benefited EPS by $0.04.

Nine-Month Results

Diluted earnings per share decreased 31% for the nine months primarily due to lower operating results driven by lower broadcast and cable advertising sales, a decline in worldwide sales of DVD units, decreased guest spending and volumes at our domestic parks and Disneyland Paris, and higher programming costs and a bad debt charge at our broadcasting businesses. These decreases were partially offset by contractual rate increases on affiliate fees, principally at ESPN. The current nine months included restructuring and impairment charges, partially offset by a gain on the sale of our investment in two pay television services in Latin America. Collectively, these two items adversely affected EPS by a net $0.07. The prior year nine months EPS included the gains and tax benefits totaling $0.04 per share as discussed above.

SEASONALITY

The Company's businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter and nine months ended June 27, 2009 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year.

Media Networks revenues are subject to seasonal advertising patterns and changes in viewership levels. In general, advertising revenues are somewhat higher during the fall and somewhat lower during the summer months. Affiliate revenues are typically collected ratably throughout the year. Certain affiliate revenues at ESPN are deferred until annual programming commitments are met, and these commitments are typically satisfied during the second half of the Company's fiscal year which generally results in higher revenue recognition during that period.

Parks and Resorts revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel and leisure activities. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early-winter and spring-holiday periods.

Studio Entertainment revenues fluctuate due to the timing and performance of releases in the theatrical, home entertainment, and television markets. Release dates are determined by several factors, including competition and the timing of vacation and holiday periods.

Consumer Products revenues are influenced by seasonal consumer purchasing behavior and by the timing and performance of theatrical releases and cable programming broadcasts.

Interactive Media revenues fluctuate due to the timing and performance of video game releases which are determined by several factors, including theatrical releases and cable programming broadcasts, competition and the timing of holiday periods. Revenues from our internet and mobile operations are not subject to significant seasonal trends.

BUSINESS SEGMENT RESULTS

The Company evaluates the performance of its operating segments based on segment
operating income, which is shown below along with segment revenues:



                                        Quarter Ended                            Nine Months Ended
                                  June 27,        June 28,                   June 27,        June 28,
(in millions)                       2009            2008         Change        2009            2008         Change
Revenues:
Media Networks                   $    3,961      $    4,054      (2)   %    $   11,484      $   11,713      (2)   %
Parks and Resorts                     2,751           3,038      (9)   %         7,823           8,535      (8)   %
Studio Entertainment                  1,261           1,433     (12)   %         4,641           5,896     (21)   %
Consumer Products                       510             569     (10)   %         1,779           1,680       6    %
Interactive Media                       113             142     (20)   %           555             574      (3)   %

                                 $    8,596      $    9,236      (7)   %    $   26,282      $   28,398      (7)   %

Segment operating income:
Media Networks                   $    1,319      $    1,520     (13)   %    $    3,280      $    3,805     (14)   %
Parks and Resorts                       521             641     (19)   %         1,074           1,485     (28)   %
Studio Entertainment                   (12)              97      nm                188             988     (81)   %
Consumer Products                        96             153     (37)   %           458             567     (19)   %
Interactive Media                      (75)            (91)      18    %         (181)           (138)     (31)   %

                                 $    1,849      $    2,320     (20)   %    $    4,819      $    6,707     (28)   %

The following table reconciles segment operating income to income before income taxes and minority interests:

                                          Quarter Ended                                Nine Months Ended
                                    June 27,         June 28,                      June 27,         June 28,
(in millions)                         2009             2008          Change          2009             2008         Change
Segment operating income          $     1,849      $     2,320       (20)   %    $     4,819      $     6,707     (28)   %
Corporate and unallocated
shared expenses                          (96)            (124)        23    %          (268)            (313)      14    %
Restructuring and impairment
charges                                  (21)                -        nm               (326)                -      nm
Other income                                -               32        nm                 114               32      nm
Net interest expense                     (75)            (141)        47    %          (342)            (411)      17    %

Income before income taxes and
minority interests                $     1,657      $     2,087       (21)   %    $     3,997      $     6,015     (34)   %

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF

          FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)



Depreciation expense is as follows:



                                            Quarter Ended                              Nine Months Ended
                                      June 27,         June 28,                    June 27,         June 28,
(in millions)                           2009             2008         Change         2009             2008         Change
Media Networks
Cable Networks                      $        26      $        22      18    %    $        82      $        66      24    %
Broadcasting                                 22               23      (4)   %             66               66        -   %

Total Media Networks                         48               45       7    %            148              132      12    %

Parks and Resorts
Domestic                                    200              203      (1)   %            606              603        -   %
International                                83               89      (7)   %            239              256      (7)   %

Total Parks and Resorts                     283              292      (3)   %            845              859      (2)   %

Studio Entertainment                         12               10      20    %             36               28      29    %
Consumer Products                             8                4     100    %             21               13      62    %
Interactive Media                             7                5      40    %             20               13      54    %
Corporate                                    32               31       3    %             96               91       5    %

Total depreciation expense          $       390      $       387       1    %    $     1,166      $     1,136       3    %

Media Networks

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



                                         Quarter Ended                             Nine Months Ended
                                   June 27,        June 28,                    June 27,         June 28,
(in millions)                        2009            2008         Change         2009             2008         Change
Revenues:
Cable Networks                    $    2,563      $    2,592      (1)   %    $     7,219      $     7,114       1    %
Broadcasting                           1,398           1,462      (4)   %          4,265            4,599      (7)   %

                                  $    3,961      $    4,054      (2)   %    $    11,484      $    11,713      (2)   %

Segment operating income:
Cable Networks                    $    1,115      $    1,212      (8)   %    $     2,776      $     2,892      (4)   %
Broadcasting                             204             308     (34)   %            504              913     (45)   %

                                  $    1,319      $    1,520     (13)   %    $     3,280      $     3,805     (14)   %

Revenues

Media Networks revenues decreased 2%, or $93 million, to $4.0 billion, consisting of a 1% decrease, or $29 million, at the Cable Networks, and a 4% decrease, or $64 million, at Broadcasting.

Decreased Cable Networks revenues were due to decreases of $66 million in advertising revenues and $1 million in affiliate fees, partially offset by an increase of $38 million in other revenues. Decreased advertising revenue was due to a decrease at ESPN driven by lower units sold, partially offset by higher rates. A decrease in affiliate fees due to the timing of revenue recognition related to annual programming commitments at ESPN was offset by contractual rate increases and subscriber growth and an increase at the domestic Disney Channel. The increase in affiliate fees at the domestic Disney Channel, which was due to contractual rate increases, was partially offset by lower DVD sales.

Certain of the Company's existing contracts with cable and satellite operators 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. During the quarter, we had a net deferral of $37 million of revenue compared to the prior-year quarter when we had a net recognition of $79 million of previously deferred revenue. Deferred revenues of $533 million as of the end of the current quarter are expected to be recognized in the fourth quarter of the current year compared to $395 million that was recognized in the fourth quarter of the prior year.

Decreased Broadcasting revenues were primarily due to lower advertising sales at the owned television stations and at the ABC Television Network, partially offset by higher international sales of ABC Studios productions led by Criminal Minds, Ugly Betty and Grey's Anatomy. Lower advertising revenues at the ABC Television Network were primarily due to decreases in news, daytime and primetime. The decrease in primetime was due to lower ratings.

Costs and Expenses

Costs and expenses at Media Networks, which consist primarily of programming rights costs, production cost amortization, participation costs, distribution and marketing expenses, labor costs, and general and administrative costs, increased 3%, or $83 million, reflecting a 3% increase, or $43 million, at the Cable Networks, and a 3% increase, or $40 million, at Broadcasting. The increase at Cable Networks was driven by higher rights costs at ESPN and increased programming costs at ABC Family, partially offset by lower production costs at ESPN. The increase at Broadcasting was driven by higher primetime programming costs, which reflected increased pilot costs as pick-up decisions this year generally occurred in the current quarter compared to the fourth quarter of the prior year as the Writers Guild of America work stoppage led to delays in pick-up decisions.

Segment Operating Income

Segment operating income decreased 13%, or $201 million, to $1.3 billion for the quarter due to a decrease of 8%, or $97 million, at the Cable Networks, and a decrease of 34%, or $104 million, at Broadcasting. The decrease at Cable Networks was driven by ESPN as decreased revenue recognition related to annual programming commitments and lower advertising revenues were partially offset by the benefit of contractual rate increases and subscriber growth on affiliate fees. The decrease at Broadcasting was primarily due to lower advertising sales and increased pilot costs, partially offset by increased international sales of ABC Studios productions.

Parks and Resorts

Revenues

Parks and Resorts revenues decreased 9%, or $287 million, to $2.8 billion due to decreases of $182 million at our domestic operations and $105 million at our international operations. Revenues reflected the shift of the Easter holiday season from the second quarter of fiscal 2008 to the third quarter of fiscal 2009.

Domestic Operations

At our domestic operations, decreased revenues reflected decreased guest spending and lower corporate alliance income recognition at the Walt Disney World Resort. Decreased guest spending was due to lower average daily hotel room rates and lower average ticket prices, which included the impact of promotional programs such as our Buy 4, Get 3 Free program.

The following table presents attendance, per capita theme park guest spending and hotel statistics for our domestic properties:

                                        East Coast                              West Coast                            Total Domestic
                                       Quarter Ended                          Quarter Ended                           Quarter Ended
                               June 27,             June 28,           June 27,           June 28,            June 27,             June 28,
                                 2009                 2008               2009               2008                2009                 2008
Parks
(Increase/decrease)
Attendance                           -  %               (2) %              10  %               -  %                 3  %                (1) %
Per Capita Guest
Spending                           (4)  %                3  %              (8) %              (2) %                (6) %                 1  %
Hotels (1)
Occupancy                           91  %               92  %              83  %              91  %                91  %                92  %
Available Room Nights
(in thousands)                  2,143                2,136               200                200                2,343                2,336
Per Room Guest
Spending                      $   214              $   235             $ 308              $ 339              $   221              $   244

(1) Per room guest spending consists of the average daily hotel room rate as well as guest spending on food, beverage and merchandise at the hotels. Hotel statistics include rentals of Disney Vacation Club units.

International Operations

At our international operations, decreased revenues were due to a decline at Disneyland Paris driven by the unfavorable impact of foreign currency translation as a result of the strengthening of the U.S. dollar against the Euro, and decreased guest spending and hotel occupancy. Decreased guest spending was due to lower average ticket prices as well as decreased food, beverage and merchandise spending.

Costs and Expenses

Costs and expenses, which consist principally of labor, depreciation, costs of merchandise, food and beverage sold, marketing and sales expense, repairs and maintenance and entertainment, decreased 7%, or $167 million. The decrease in costs and expenses was driven by decreases at Disneyland Paris and the Walt Disney World Resort, partially offset by an increase at Disney Vacation Club. The decrease at Disneyland Paris was primarily due to the favorable impact of foreign currency translation, as a result of the strengthening of the U.S. dollar against the Euro. Lower costs at the Walt Disney World Resort reflected savings from cost mitigation activities and lower volume-related costs, partially offset by labor and other cost inflation. The increase at Disney Vacation Club reflected higher per unit cost of sales.

Segment Operating Income

Segment operating income decreased 19%, or $120 million, to $521 million due to decreases at the Walt Disney World Resort, Disneyland Paris and Disney Vacation Club.

Studio Entertainment

Revenues

Revenues for the quarter decreased 12%, or $172 million, to $1.3 billion due to decreases of $181 million in worldwide home entertainment and $105 million in worldwide television distribution, partially offset by an increase of $134 million in domestic theatrical distribution.

Lower worldwide home entertainment revenues reflected 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, Bolt and Confessions of a Shopaholic while the prior-year quarter included National Treasure 2: Book of Secrets and Enchanted.

The decrease in worldwide television distribution revenues was primarily due to 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.

Higher domestic theatrical distribution revenues were driven by the strong performance of current quarter titles including UP and Hannah Montana: The Movie. The prior-year quarter included The Chronicles of Narnia: Prince Caspian and WALL-E, which was released at the end of the quarter.

Costs and Expenses

Costs and expenses, which consist primarily of production cost amortization, distribution and marketing expenses, product costs and participation costs, decreased 5%, or $63 million, driven by lower distribution costs in worldwide home entertainment resulting from a decline in DVD unit sales, and lower production cost amortization and participation costs in worldwide television distribution, partially offset by higher film cost write-downs and marketing expenses for future quarter theatrical releases.

Segment Operating Income

Segment operating income decreased $109 million to a loss of $12 million as a result of decreases in worldwide home entertainment and worldwide television distribution, partially offset by an increase in domestic theatrical distribution.

Consumer Products

Revenues

Revenues for the quarter decreased 10%, or $59 million, to $510 million, primarily due to decreases of $26 million at Merchandise Licensing driven by lower earned royalty revenue across multiple product categories and $20 million at our retail business primarily due to an unfavorable impact of foreign currency translation at The Disney Stores Europe as a result of the strengthening of the U.S. dollar against the British pound and Euro.

At the Disney Stores North America, an increase in revenue from a full period of operations in the current quarter as compared to a partial period in the prior year was largely offset by a decrease resulting from fewer stores in operation during the current quarter and the loss of royalty revenue from the former licensee.

Costs and Expenses

Costs and expenses, which consist primarily of cost of sales, salaries and benefits, marketing, and occupancy, were essentially flat at $414 million as an increase at our retail business was largely offset by lower administrative costs at Merchandise Licensing.

Higher costs and expenses at our retail business were driven by a full period of the Disney Store North America operations partially offset by fewer stores in operation during the current quarter. The

increase was partially offset by a favorable impact of foreign currency translation at the Disney Stores Europe as a result of the strengthening of the U.S. dollar against the British pound and Euro.

Operating Income

Segment operating income decreased 37%, or $57 million, to $96 million, primarily due to lower results at our retail business and at Merchandise Licensing.

Interactive Media

Revenues

Interactive Media revenues decreased 20%, or $29 million, to $113 million primarily due to a decrease at Disney Interactive Studios driven by lower unit sales of self-published video games in the current quarter reflecting the strong performance of The Chronicles of Narnia: Prince Caspian in the prior-year quarter.

Costs and Expenses

Costs and expenses, which consist primarily of video game and internet product development costs, cost of sales, distribution and marketing expenses, general and administrative costs, and technology infrastructure costs, decreased 19%, or $45 million, to $188 million primarily due to decreases at Disney Interactive Studios and Disney Online.

Lower costs and expenses at Disney Interactive Studios was driven by lower costs of sales associated with a decline in video game sales, reduced marketing expenses and decreased product development costs. The decrease at Disney Online reflected lower product development costs and reduced marketing expenses.

Operating Loss

Segment operating loss decreased 18% to $75 million due to lower costs at Disney Online partially offset by lower unit volumes at Disney Interactive Studios.

BUSINESS SEGMENT RESULTS - Nine Month Results

Media Networks

Revenues

Media Networks revenues decreased 2%, or $229 million, to $11.5 billion, consisting of a 1% increase, or $105 million, at the Cable Networks, and a 7% decrease, or $334 million, at Broadcasting.

Increased Cable Networks revenues were due to growth of $242 million in affiliate fees and $24 million in other revenues, partially offset by a $161 million decrease in advertising revenues. Increased affiliate fees were primarily due to contractual rate increases at ESPN and, to a lesser extent, the domestic Disney Channel and ABC Family, and subscriber growth at ESPN. These increases were partially offset by an increase in deferred revenue related to annual programming commitments at ESPN due to the timing of programming. Higher affiliate fees at the domestic Disney Channel were more than offset by lower DVD . . .