To Disney Owners and Fellow Cast Members:

Michael D. Eisner Chairman and CEO, The Walt Disney Company

    I am looking out the window and can see the seasons change (yes, the seasons do change in Los Angeles — the eucalyptus leaves droop more and the sprinklers go on less often). I am reminded that our rhythms are set by the seasons and that any number of human endeavors are ruled by the calendar. Such as this annual report. Every 12 months we compile it, and every 12 months I sit down to write you this letter.

There's just one problem with this annual exercise: It implies that businesses can be run in neat 12-month chunks of time. Unfortunately, the business cycle has its own seasons, which are not ruled by the orderly and predictable orbit of the earth around the sun. Indeed, at Disney, we live by a 60-month calendar. We set our goals over rolling five-year timelines. In this context, each year is more like a season. Some are sunny and some are overcast, but each is merely a period of passage and not a destination. Our five-year calendars force us to think long-term. They make us devise strategies that add value, not squeeze profits.

But this is an annual report, not a quinquennial report. Our fiscal year earnings were roughly the same as they were in the previous 12 months. This flat performance probably doesn't come as a surprise to you, given the metaphorical way I opened this letter, trying to ease gently into a discussion of what appears to be our twice-a-decade problem.

I'll call it "semi-decadal" because in many ways 1998 reminds me of 1991, a year that also featured languishing earnings. But I believe that there is a more important similarity between 1998 and 1991 ... namely, that both were years of key strategic investments and significant new initiatives.

In 1991, our initiatives included three new hotels at Walt Disney World; Hyperion Books; Discover Magazine; the Disney Vacation Club; Fantasmic! and the CarToon Spin at Disneyland and Muppet 3D at the Disney-MGM Studios.

In 1998, the list of major new initiatives was even longer, with Disney's Animal Kingdom; DisneyQuest; the Disney Cruise Line; ESPNZone; ESPN-The Magazine; Jane magazine; new Disney Channels in Italy and Spain; Downtown Disney and the All-Star Movies Resort at Walt Disney World; Radio Disney; the ESPN Classic sports channel; Toon Disney on cable; the new Tomorrowland at Disneyland; the refurbishment of Anaheim Stadium; the acquisition of Starwave; the investment in Infoseek and the creation of the Go Network™. In 1998, I also saw the end of an initiative begun five years ago and subsequently accomplished in midnight-to-2 a.m. shifts, namely my book, Work in Progress. At long last, it is finally done! It turned out to be a book about the challenges of running a creative company, utilizing examples from my personal experience. It did not destroy my marriage, it was reviewed reasonably well, despite some criticism for not being "a kiss and tell," and it has yet to be read by my three sons — who fortunately have their own lives and have heard enough stories from their father.

As with our 1991 initiatives, our 1998 efforts are all designed to further Disney's overall corporate mission — to offer quality entertainment that people will seek out. Consider what this really means. About 2,300 years ago, the Greek philosopher Theophrastus said, "Time is the most valuable thing a man can spend." It still is. At Disney, we are dedicated to creating entertainment of such excellence that people will choose to spend some of their valuable time with us. All of our 1998 initiatives are geared toward this goal. Given their high quality and given the evidence that people all over the world will be enjoying more and more disposable time (a horrible phrase, considering time's preciousness) in the years ahead, these investments have the potential to create significant growth down the road. Unfortunately, like all investments that create theoretical opportunities in the future, they cost real money right now. Consequently, during the fiscal season that was 1998, they helped drag down our net income. But that's the short-run story. In the long run (which is the run that really matters), we believe they will enrich our company.

Not only do all of these initiatives represent wonderful ways to spend one's time, but they also reflect a tremendous range of experience. Some, like Disney's Animal Kingdom, the new Tomorrowland and the expansion of the Disney Channel, are extensions of established forms of Disney entertainment. Others, like DisneyQuest, the Disney Cruise Line and the Go Network, encompass forms of entertainment that are new to us. They reflect our belief that developments such as regional entertainment, the cruise business and the Internet relate directly to our core business and are opportunities that will help lead us to the future.

The future was very much on our minds this past October, when we held a senior management retreat at my parents' apple orchard in Vermont. Although we were a week late for "cow appreciation day" in Woodstock, we were not too late to cruise Sam's Army and Navy Store (recently renamed Sam's Outfitters for political correctness) or to meet and hike, communicate and get excited and organized about the seasons and years and decade ahead. We pondered the ecological environment and the economic environment, which a few weeks earlier the pundits had proclaimed was teetering on the brink of recession. Lately, they seem to be saying "never mind."

While we didn't find a crystal ball at Sam's Outfitters, we did crystallize a Disney methodology for weathering any economic storms that may lie ahead. That methodology can be stated quite simply: "Put the creative process first and while we're at it, try to make sure not to lose money." At its heart, ours is a creative company, and creativity of all kinds — artistic, financial and administrative — holds the key to prospering as the new century approaches, whatever surprises it may bring with it. By the way, this methodology is nothing new. Throughout its 75-year history, creativity has been the hallmark of our company and has driven its remarkable success.

On October 16, we honored this legacy of creativity during our 75th anniversary celebration. On this occasion, we inducted another 19 people as Disney Legends, including two especially legendary individuals. The first was Virginia Davis, who starred in the Alice Comedies, the very first films produced by the Disney Brothers Cartoon Studio. The second was Roy E. Disney, who is vice chairman of our Board of Directors and chairman of Feature Animation. If it weren't for Roy, the Disney legacy would have ended at its 60th anniversary. It was in 1984 that he provided crucial leadership in fending off corporate raiders intent on breaking the company apart. Roy is also a record-setting international yachtsman, which I mention because, when he's not on the high seas, he continues to be an invaluable rudder and stabilizer for our company. You need look no further than his name to see why Roy understands better than anyone the essence of Disney ... an essence, I might add, that was remarkably evident in those very first Alice Comedies.

Two individuals who are also legends in their own right are Card Walker and Dick Nunis, who have announced their retirement as members of our Board of Directors, with Dick also stepping down as chairman of Walt Disney Attractions. Between them, these two men have dedicated 103 years to our company! Card first joined Disney in 1938 and ultimately served as chairman and chief executive officer, while Dick started in 1955 and went on to head our Attractions division. They may be retiring, but I will continue to rely on their wisdom and insights about all things Disney.

During one of his last public appearances, Gene Autry joins Anaheim Angels manager Terry Collins in celebrating the opening of Edison International Field.

And, while I'm recognizing legends, I want to mention the Singing Cowboy, Gene Autry, who died this year. He was not only a Hollywood legend and a brilliant businessman, but also a good friend of our company, dating back to the days of Walt, who served on the original board of directors of Gene's Angels baseball team. I am sure Gene is somewhere smiling at the Angels' acquisition of Mo Vaughn, a quality star who completely fits into Gene's Cowboy Code, especially Code #6: "He must help people in distress."

The weekend following our 75th anniversary celebration, we conducted the Disney VoluntEARS Global Celebration of Children. During these two days, nearly 11,000 Disney cast members volunteered in 212 cities in 44 states, five Canadian provinces, 24 countries, on five continents. Our goal was to further celebrate our 75th anniversary by helping 75,000 children around the globe. This was one more way to honor the Disney heritage of making the world a better and happier place.

Toward the end of the year, action was taken in Washington that should help us further protect and build on our heritage. Congress passed and the President signed an extension of the copyright law, assuring that Mickey Mouse's home will continue to be exclusively at The Walt Disney Company.

One important way that we're continuing to make Mickey and his friends feel right at home is a new initiative for 1999, tentatively called MouseWorks. We are producing brand new cartoon shorts featuring everyone's favorite mice, ducks and dogs - Mickey, Minnie, Donald, Daisy, Pluto and Goofy (yes, Goofy is a dog). Some of these shorts will initially appear with Disney theatrical and video releases. After that, they will form the basis of a television series that will appear initially in the United States and eventually around the world. In recent decades, these Disney stars have remained incredibly popular despite the fact they've rarely ventured away from their residences in Toon Town. Now they are going to be put back to work doing what they do best - entertaining their fans on the big and little screen.

One other parallel between 1998 and 1991 was the bad news/good news of our live-action movie business. The bad news is that 1998 was a tough year for us. As in 1991, we succumbed to the overall industry trend of paying more and more for talent in front of and behind the camera. Of course, we had our successes, such as the number one film of the summer, Armageddon, and the remake of The Parent Trap. We also had some highly regarded films such as The Horse Whisperer and Beloved. And Miramax enjoyed the commercially and artistically successful Good Will Hunting. But, in too many instances, profits did not materialize from the revenues achieved by our films. Stated more bluntly, either the films and marketing cost too much, or the audience rejected our ideas. Whatever the reason, we're glad fiscal '98 is over in this area.