The company acquired the operations of ABC, Inc. ("ABC") on February 9, 1996. During 1997, the company sold KCAL, a Los Angeles television station, completed its final ABC purchase price allocation and determination of the related intangible assets and disposed of certain ABC publishing assets. To enhance comparability, certain information for 1997 and 1996 is presented on a "pro forma" basis, which assumes that these events occurred at the beginning of 1996. The pro forma results are not necessarily indicative of the combined results that would have occurred had these events actually occurred at the beginning of 1996.

(in millions, except per share data)

    The following discussion of 1998 versus 1997 and 1997 versus 1996 performance includes comparisons to pro forma results for 1997 and 1996. The company believes pro forma results represent a meaningful comparative standard for assessing net income, changes in net income and earnings trends because the pro forma results include comparable operations in each year presented. The discussion of the Theme Parks and Resorts segment does not include pro forma comparisons, since the pro forma adjustments did not impact this segment.

1998 vs. 1997 Compared to 1997 pro forma results, revenues increased 6% to $23 billion, driven by growth in all business segments. Net income and diluted earnings per share increased 4% and 3% to $1.9 billion and $.89, respectively. These results were driven by a reduction in net expense associated with corporate activities and other and lower net interest expense, partially offset by decreased operating income. The reduction in net expense associated with corporate activities and other was driven by improved results from the company's equity investments, including A&E Television and Lifetime Television, and a gain on the sale of the company's interest in Scandinavian Broadcasting System. Decreased net interest expense reflected lower average debt balances during the year. Lower operating income was driven by a decline in Creative Content results, partially offset by improvements from Theme Parks and Resorts and Broadcasting.

    As reported revenues increased 2% and net income and diluted earnings per share decreased by 6%. The as reported results reflect the items described above as well as the impact of the disposition of certain ABC publishing assets and the sale of KCAL in 1997.

    In April 1997, the company purchased a significant equity stake in Starwave Corporation ("Starwave"), an internet technology company. In connection with the acquisition, the company was granted an option to purchase substantially all the remaining shares of Starwave. The company exercised the option during the third quarter of 1998. Accordingly, the accounts of Starwave have been included in the company's September 30, 1998 consolidated financial statements. On June 18, 1998, the company reached an agreement for the acquisition of Starwave by Infoseek Corporation ("Infoseek"), a publicly-held internet search company, pursuant to a merger. On November 18, 1998, the shareholders of both Infoseek and Starwave approved the merger. As a result of the merger and the company's purchase of additional shares of Infoseek common stock pursuant to the merger agreement, the company owns approximately 43% of Infoseek's outstanding common stock. In addition, pursuant to the merger agreement, the company purchased warrants enabling it, under certain circumstances, to achieve a majority stake in Infoseek. These warrants vest over a three-year period and expire in five years. Effective as of the November 18, 1998 closing date of the transaction, the company will record a significant non-cash gain, a write-off for purchased in-process research and development costs and an increase in investments, reflecting the company's share of the fair value of Infoseek's intangible assets. The company is currently performing the necessary valuations to determine the gain, the research and development write-off and the amount of and amortization period for the intangible assets. Thereafter, the company will account for its investment in Infoseek under the equity method. The merger is not expected to have a material effect on the company's financial position.

1997 vs. 1996 Compared to 1996 pro forma results, pro forma revenues increased 8% to $21.6 billion, reflecting growth in all business segments. Pro forma net income and diluted earnings per share, excluding non-recurring items, increased 22% and 23% to $1.8 billion and $.86, respectively. These results were driven by increased operating income across all business segments, partially offset by an increase in corporate activities and other driven by certain non-recurring items in both years. 1997 reflects settlements with former senior executives and 1996 reflects certain gains at ABC, primarily related to the sale of an investment in a cellular communications company.

    As reported revenues increased 20%, reflecting increases in all business segments and the impact of the acquisition of ABC. Net income, excluding the non-recurring items discussed above, increased 23%, driven by increased operating income for each business segment. Diluted earnings per share, excluding the non-recurring items, increased 11%, reflecting net income growth, partially offset by the impact of additional shares issued in connection with the acquisition. Results for 1997 included a full period of ABC's operations.

CREATIVE CONTENT
1998 vs. 1997 Revenues increased 2% or $204 million to $10.3 billion compared with pro forma 1997, driven by growth of $204 million in television distribution, $136 million in the Disney Stores, $54 million in domestic publishing and $51 million in domestic character merchandise licensing. These increases were partially offset by declines in worldwide home video and theatrical motion picture distribution of $330 million. Growth in television distribution revenue was driven by higher volume of television programming and theatrical releases distributed to the worldwide television market. Increased revenues at the Disney Stores reflected an increase in comparable store sales in North America and Europe and continued worldwide expansion, partially offset by a decrease in comparable store sales in Asian markets. The increase in domestic publishing revenues resulted from the success of book titles such as Don't Sweat the Small Stuff and the launch of ESPN The Magazine. Character merchandise licensing growth was driven primarily by the continued strength of Winnie the Pooh in the domestic market, partially offset by declines internationally, primarily due to softness in Asian markets. Lower worldwide home video revenues reflected difficult comparisons to the prior year, which benefited from the strength of Toy Story, The Hunchback of Notre Dame and 101 Dalmatians, compared to the current year release of Lady & the Tramp, Hercules and The Little Mermaid, as well as economic weaknesses in Asian markets. In worldwide theatrical motion picture distribution, while current year revenues reflected successful box-office performances of Armageddon, Disney's highest-grossing live-action film, and Mulan, its most recent animated release, revenues were lower overall due to difficult comparisons to the prior year, which benefited from the strong performances of 101 Dalmatians, Ransom and The English Patient.

    On an as reported basis, revenues decreased $635 million or 6%, reflecting the items described above, as well as the impact of the disposition of certain ABC publishing assets in the prior year.

    Operating income decreased 17% or $290 million to $1.4 billion compared with pro forma 1997 results, reflecting declines in worldwide theatrical motion picture distribution and international home video. These declines were partially offset by growth in television distribution, increases in domestic merchandise licensing, Disney Store growth in North America and Europe and improved results in domestic home video, driven by the success of The Little Mermaid, Lady & the Tramp and Peter Pan. Costs and expenses, which consist primarily of production cost amortization, distribution and selling expenses, product costs, labor and leasehold expenses, increased 6% or $494 million. The increase was driven by increased writedowns related to domestic theatrical live-action releases and an increase in production costs for theatrical and television product, as well as an increase in the number of shows produced for network television and syndication. Production cost increases are reflective of industry trends: as competition for creative talent has increased, costs within the industry have increased at a rate significantly above inflation. Cost and expense increases were also due to increased activity related to internet start-up businesses. In addition, current year costs and expenses reflected charges totaling $64 million related to strategic downsizing in the company's consumer product business, particularly in response to Asian economic difficulties, and consolidation of certain studio operations in its filmed entertainment business. Increased expenses for the year were partially offset by declines in distribution and selling expenses in the home video and domestic theatrical motion picture distribution markets reflecting lower volume, declines within television distribution due to the termination of a network production joint venture and a decrease in development and other operating expenses at Disney Interactive.

    On an as reported basis, operating income decreased $479 million or 25%, reflecting the items described above, as well as the impact of the disposition of certain ABC publishing assets in the prior year.

1997 vs. 1996 Pro forma revenues increased 6% or $534 million to $10.1 billion compared with pro forma 1996, driven by growth of $210 million in the Disney Stores, $143 million in character merchandise licensing, $104 million in television distribution and $88 million in home video. Growth at the Disney Stores reflected continued worldwide expansion with 106 new stores opening in 1997. Increases in character merchandise licensing reflected the strength of Winnie the Pooh and Toy Story domestically, and standard characters and 101 Dalmatians worldwide. The increase in television revenues was driven by an increase in the distribution of film and television product in the international television market. Home video results reflected the successful performance of Toy Story, The Hunchback of Notre Dame and 101 Dalmatians worldwide and Bambi and Sleeping Beauty domestically.

    On an as reported basis, revenues increased $778 million or 8%, reflecting the items described above, as well as increased revenues from ABC's publishing assets up to the date of disposition. Additionally, 1997 included a full period of revenues from certain ABC Television production operations.

    Pro forma operating income increased 18% or $258 million to $1.7 billion compared with pro forma 1996, reflecting improved results for theatrical distribution, character merchandise licensing and television distribution, partially offset by a reduction in home video results. Costs and expenses, increased 3% or $276 million, reflecting increased amortization in the home video market and continued expansion of the Disney Stores, offset by a reduction in distribution costs in the domestic theatrical market and the write-off of certain theatrical development projects in the prior year.

    On an as reported basis, operating income increased $321 million or 21%, reflecting the items described above as well as higher operating income from ABC's publishing assets up to the date of disposition.

BROADCASTING
1998 vs. 1997 Revenues increased 10% or $641 million to $7.1 billion compared with pro forma 1997 results, reflecting a $427 million increase at ESPN and the Disney Channel, a $110 million increase at the television network and an $81 million increase at the television stations. A strong advertising market resulted in increased revenues at ESPN and the television stations and subscriber growth contributed to revenue increases at ESPN and the Disney Channel. Television network growth was driven by higher sports advertising revenues, primarily attributable to the 1998 soccer World Cup.

    On an as reported basis, revenues increased $620 million or 10%, reflecting the items described above, partially offset by the impact of the sale of KCAL in the prior year.

    Operating income increased 3% or $40 million to $1.3 billion compared with pro forma 1997 results reflecting increased revenues at ESPN, the Disney Channel and the television stations, partially offset by lower results at the television network and start-up and operating losses from new business initiatives. Results at the television network reflected the impact of lower ratings and increased costs and expenses. Costs and expenses, which consist primarily of programming rights and amortization, production costs, distribution and selling expenses and labor costs, increased 12% or $601 million, reflecting increased programming and production costs at ESPN, higher program amortization at the television network, reflecting a reduction in benefits from the ABC acquisition, increased costs related to the NFL contract (see discussion below) and start-up and operating costs related to new business initiatives.

    On an as reported basis, operating income increased $31 million or 2%, reflecting the items described above, partially offset by the impact of the sale of KCAL in the prior year.

    The company has continued to invest in its existing cable television networks and in new cable ventures to diversify and expand the available distribution channels for acquired and company programming. During 1998, the company acquired the Classic Sports Network, a cable network devoted to memorable sporting events, invested in a number of international cable ventures and continued its international expansion of the Disney Channel.

    The company's cable operations continue to provide strong earnings growth. The company's results for 1998 reflect an increase in pretax income of $148 million or 18% for mature cable properties compared with 1997 results, including the company's share of earnings from ESPN, the Disney Channel, A&E Television and Lifetime Television. These increases were partially offset by the company's recognition of its proportionate share of losses associated with start-up cable ventures. Start-up cable ventures are generally operations that are in the process of establishing distribution channels and a subscriber base and that have not reached their full level of normalized operations. These include various domestic and international ESPN and Disney Channel start-up cable ventures. The company's pretax income reflected an increase of 20% from all cable properties.

    The financial results of ESPN and the Disney Channel are included in Broadcasting operating income. The company's share of all other cable operations and the ESPN minority interest deduction are reported in "Corporate activities and other" in the Consolidated Statements of Income.

    There has been a continuing decline in viewership at all major broadcast networks, including ABC, reflecting the growth in the cable industry's share of viewers. In addition, there have been continuing increases in the cost of sports and other programming.

    During the second quarter of 1998, the company entered into a new agreement with the National Football League (the "NFL") for the right to broadcast NFL football games on the ABC Television Network and ESPN. The contract provides for total payments of approximately $9 billion over an eight-year period, commencing with the 1998 season. The programming rights fees under the new contract are significantly higher than those required by the previous contract and the fee increases exceed the estimated revenue increases over the contract term. The higher fees under the new contract reflect various factors, including increased competition for sports programming rights and an increase in the number of games to be broadcast by ESPN. The company is pursuing a variety of strategies, including marketing efforts, to reduce the impact of the higher costs. The contract's impact on the company's results over the remaining contract term is dependent upon a number of factors, including the strength of the advertising markets, effectiveness of marketing efforts and the size of viewer audiences.

    The cost of the NFL contract is charged to expense based on the ratio of each period's gross revenues to estimated total gross revenues. Estimates of total gross revenues can change significantly and accordingly, they are reviewed periodically and amortization is adjusted if necessary. Such adjustments could have a material effect on results of operations in future periods.

1997 vs. 1996 Pro forma revenues increased 8% or $492 million to $6.5 billion compared with pro forma 1996, driven by increases of $336 million at ESPN and the Disney Channel, and $74 million at the television network. The increases at ESPN and the Disney Channel were due primarily to higher advertising revenues and affiliate fees due primarily to expansion, subscriber growth and improved advertising rates. Growth in revenues at the television network was primarily the result of improved performance of sports, news and latenight programming, partially offset by a decline in primetime ratings.

    On an as reported basis, revenues increased $2.4 billion or 60%, reflecting a full period of ABC's broadcasting operations in 1997.

    Pro forma operating income increased 19% or $201 million to $1.3 billion compared with pro forma 1996, reflecting increases in revenues at ESPN and the Disney Channel, as well as improved results at the television stations, partially offset by decreases at the television network. Results at the television network reflected the impact of lower ratings, partially offset by benefits arising from the period's sporting events, improvements in children's programming, continued strength in the advertising market and decreased program amortization. Costs and expenses increased 6% or $291 million. This increase reflected increased programming rights and production costs, driven by international growth at ESPN and increases at the television network, partially offset by benefits arising from reductions in program amortization and other costs at the television network, primarily attributable to the acquisition.

    On an as reported basis, operating income increased $512 million or 65%, reflecting a full period of ABC's broadcasting operations in 1997.

    The company's results for 1997 reflect an increase in pretax income of $182 million or 28% for mature cable properties compared with 1996 results. These increases were partially offset by the company's recognition of its proportionate share of losses associated with start-up cable ventures. Overall, the company's pretax income increased 29% in 1997 from all cable properties.