Edgar Filing: Warner Music Group Corp.

Quarterly report for the period ended June 30, 2008

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-32502

Warner Music Group Corp.

(Exact name of Registrant as specified in its charter)

Delaware

13-4271875

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

75 Rockefeller Plaza

New York, NY 10019

(Address of principal executive offices)

(212) 275-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer x		Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x

As of August 5, 2008, the number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding was 153,919,646

WARNER MUSIC GROUP CORP.

INDEX


		Page
Part I.	Financial Information
Item 1.	Financial Statements (unaudited)	3
	Consolidated Balance Sheets as of June 30, 2008 and September 30, 2007	3
	Consolidated Statements of Operations for the Three and Nine months ended June 30, 2008 and June 30, 2007	4
	Consolidated Statements of Cash Flows for the Nine months ended June 30, 2008 and June 30, 2007	5
	Consolidated Statement of Shareholders’ Deficit for the Nine months ended June 30, 2008	6
	Notes to Consolidated Interim Financial Statements	7
	Supplementary Information—Consolidating Financial Statements	18
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	49
Part II.	Other Information
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	60
Item 4.	Submission of Matters to a Vote of Security Holders	60
Item 5.	Other Information	60
Item 6.	Exhibits	61
Signatures		62

Warner Music Group Corp.

Consolidated Balance Sheets


	June 30, 2008			September 30, 2007
	(unaudited)			(audited)
	(in millions)
Assets
Current assets:
Cash and equivalents	$	338		$	333
Accounts receivable, less allowances of $166 and $192		481			555
Inventories, net		57			58
Royalty advances expected to be recouped within one year		192			176
Deferred tax assets		38			40
Other current assets		36			33

Total current assets		1,142			1,195
Royalty advances expected to be recouped after one year		235			216
Investments		166			146
Property, plant and equipment, net		125			133
Goodwill		1,072			1,065
Intangible assets subject to amortization, net		1,596			1,632
Intangible assets not subject to amortization		100			100
Other assets		83			85

Total assets	$	4,519		$	4,572

Liabilities and Shareholders’ Deficit
Current liabilities:
Accounts payable	$	178		$	225
Accrued royalties		1,291			1,226
Taxes and other withholdings		21			33
Dividends payable		1			23
Current portion of long-term debt		17			17
Deferred revenue		109			56
Other current liabilities		275			302

Total current liabilities		1,892			1,882
Long-term debt		2,255			2,256
Dividends payable		—			1
Deferred tax liabilities		245			244
Other noncurrent liabilities		226			225

Total liabilities	$	4,618		$	4,608

Commitments and Contingencies (See Note 12)
Shareholders’ deficit:
Common stock ($0.001 par value; 500,000,000 shares authorized; 153,919,646 and 149,524,737 shares issued and outstanding)		—			—
Additional paid-in capital		586			579
Accumulated deficit		(692	)		(614	)
Accumulated other comprehensive income (loss), net		7			(1	)

Total shareholders’ deficit	$	(99	)	$	(36	)

Total liabilities and shareholders’ deficit	$	4,519		$	4,572

See accompanying notes.

Warner Music Group Corp.

Consolidated Statements of Operations (Unaudited)


	Three Months Ended June 30,						Nine Months Ended June 30,
	2008			2007			2008			2007
	(in millions, except per share data)
Revenues (b)	$	848		$	804		$	2,637		$	2,516
Costs and expenses:
Cost of revenues (a)(b)		(441	)		(429	)		(1,399	)		(1,364	)
Selling, general and administrative expenses (a)(b)		(300	)		(297	)		(935	)		(862	)
Other income, net		—			52			3			52
Restructuring costs		—			(32	)		—			(44	)
Amortization of intangible assets		(56	)		(52	)		(165	)		(153	)

Total costs and expenses		(797	)		(758	)		(2,496	)		(2,371	)

Operating income from continuing operations		51			46			141			145
Interest expense, net (b)		(43	)		(45	)		(138	)		(137	)
Minority interest expense		(2	)		(2	)		(4	)		(2	)
Other loss, net		(2	)		(4	)		(4	)		(4	)

Income (loss) from continuing operations before income taxes		4			(5	)		(5	)		2
Income tax expense		(13	)		(11	)		(36	)		(27	)

Loss from continuing operations	$	(9	)	$	(16	)	$	(41	)	$	(25	)
Loss from discontinued operations, net of taxes		—			(1	)		(21	)		(1	)

Net loss	$	(9	)	$	(17	)	$	(62	)	$	(26	)


Net loss per common share:
Basic earnings per share:
Loss from continuing operations	$	(0.06	)	$	(0.11	)	$	(0.28	)	$	(0.17	)
Loss from discontinued operations		—			(0.01	)		(0.14	)		(0.01	)

Net loss	$	(0.06	)	$	(0.12	)	$	(0.42	)	$	(0.18	)

Diluted earnings per share:
Loss from continuing operations	$	(0.06	)	$	(0.11	)	$	(0.28	)	$	(0.17	)
Loss from discontinued operations		—			(0.01	)		(0.14	)		(0.01	)

Net loss	$	(0.06	)	$	(0.12	)	$	(0.42	)	$	(0.18	)

Weighted average common shares:
Basic		148.9			146.9			148.0			145.9
Diluted		148.9			146.9			148.0			145.9
(a) Includes depreciation expense of:	$	(9	)	$	(10	)	$	(35	)	$	(30	)
(b) Includes the following income (expenses) resulting from transactions with related companies
Revenues	$	1		$	1		$	2		$	4
Cost of revenues		—			—			1			(1	)
Selling, general and administrative expenses		—			—			—			(4	)

See accompanying notes.

Warner Music Group Corp.

Consolidated Statements of Cash Flows (Unaudited)


	Nine Months Ended June 30, 2008			Nine Months Ended June 30, 2007
	(in millions)
Cash flows from operating activities
Net loss	$	(62	)	$	(26	)
Loss from discontinued operations, net of tax		21			1

Loss from continuing operations	$	(41	)	$	(25	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		200			183
Deferred taxes		(5	)		2
Non-cash interest expense		35			46
Non-cash stock-based compensation expense		7			7
Other non-cash items		(1	)		(4	)
Minority interest expense		4			2
Changes in operating assets and liabilities:
Accounts receivable		93			101
Inventories		4			(2	)
Royalty advances		(29	)		(32	)
Accounts payable and accrued liabilities		(59	)		(63	)
Other balance sheet changes		(23	)		(18	)

Net cash provided by operating activities		185			197

Cash flows from investing activities
Investments and acquisition of businesses		(122	)		(75	)
Acquisition of publishing copyrights		(21	)		(5	)
Loans to third parties		(3	)		(26	)
Proceeds from the sale of buildings		—			7
Proceeds from the sale of investments		24			18
Capital expenditures		(26	)		(21	)

Net cash used in investing activities		(148	)		(102	)

Cash flows from financing activities
Debt repayments		(13	)		(13	)
Proceeds from the exercise of stock options		—			2
Dividends paid		(42	)		(59	)

Net cash used in financing activities		(55	)		(70	)
Effect of foreign currency exchange rate changes on cash		23			4

Net increase in cash and equivalents		5			29
Cash and equivalents at beginning of period		333			367

Cash and equivalents at end of period	$	338		$	396

See accompanying notes.

Warner Music Group Corp.

Consolidated Statement of Shareholders’ Deficit (Unaudited)


	Common Stock		Additional Paid-in Capital		Accumulated Deficit						Total Shareholders’ Deficit
	Shares	($ 0.001 per share)	Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Deficit
	(in millions, except number of common shares)
Balance at September 30, 2007	149,524,737	—	$	579	$	(614	)	$	(1	)	$	(36	)
Comprehensive loss:
Net loss	—	—		—		(62	)		—			(62	)
Foreign currency translation adjustment	—	—		—		—			17			17
Deferred losses on derivative financial instruments	—	—		—		—			(9	)		(9	)

Total comprehensive loss	—	—		—		(62	)		8			(54	)
Dividends	—	—		—		(19	)		—			(19	)
Impact of change in accounting (a)	—	—		—		3			—			3
Exercises of stock options	42,700	—		—		—			—			—
Issuance of stock options and restricted shares of common stock	4,352,209	—		7		—			—			7

Balance at June 30, 2008	153,919,646	—	$	586	$	(692	)	$	7		$	(99	)

(a)	See Note 2, Basis of Presentation.

See accompanying notes.

Warner Music Group Corp.

Notes to Consolidated Interim Financial Statements (Unaudited)

1. Description of Business

Warner Music Group Corp. (the “Company” or “Parent”) was formed by a private equity consortium of investors (the “Investor Group”) on November 21, 2003. The Company is the direct parent of WMG Holdings Corp. (“Holdings”), which is the direct parent of WMG Acquisition Corp. (“Acquisition Corp.”). Acquisition Corp. is one of the world’s major music-based content companies and the successor to substantially all of the interests of the Recorded Music and Music Publishing businesses of Time Warner Inc. (“Time Warner”). Effective March 1, 2004, Acquisition Corp. acquired such interests from Time Warner for approximately $2.6 billion (the “Acquisition”). The original Investor Group included affiliates of Thomas H. Lee Partners L.P. (“THL”), affiliates of Bain Capital Investors, LLC (“Bain”), affiliates of Providence Equity Partners, Inc. (“Providence”) and Music Capital Partners, L.P. (“Music Capital”). Music Capital’s partnership agreement required that the Music Capital partnership dissolve and commence winding up by the second anniversary of the Company’s May 2005 initial public offering. As a result, on May 7, 2007, Music Capital made a pro rata distribution of all shares of common stock of the Company held by it to its partners. The shares held by Music Capital had been subject to a stockholders agreement among Music Capital, THL, Bain and Providence and certain other parties. As a result of the distribution, the shares distributed by Music Capital ceased to be subject to the voting and other provisions of the stockholders agreement and Music Capital was no longer part of the Investor Group subject to the stockholders agreement.

The Company classifies its business interests into two fundamental operations: Recorded Music and Music Publishing. A brief description of these operations is presented below.

Recorded Music Operations

The Company’s Recorded Music business primarily consists of the discovery and development of artists and the related marketing, distribution and licensing of recorded music produced by such artists. In addition to the more traditional methods of discovering and developing artists, following the Acquisition the Company established the Independent Label Group (“ILG”) to discover artists earlier in the process and at lower cost by leveraging the Company’s independent distribution network.

The Company is also diversifying its revenues beyond its traditional businesses by partnering with artists in other areas of their careers. The Company is building capabilities and platforms for exploiting a broader set of music-related rights to participate across the artist brands it helps create. Expansion of the Company’s capabilities in this area have included strategic acquisitions and partnerships with companies involved in artist management, merchandising, strategic marketing and brand management, ticketing, touring, fan clubs, original programming and video entertainment. The Company believes enhancement of these capabilities will permit it to diversify revenue streams to better capitalize on the growth areas of the music industry, permit it to build stronger, long-term relationships with artists and more effectively connect artists and fans.

In the U.S., Recorded Music operations are conducted principally through the Company’s major record labels—Warner Bros. Records and The Atlantic Records Group. The Company’s Recorded Music operations also include Rhino Entertainment (“Rhino”), a division that specializes in marketing the Company’s music catalog through compilations and reissuances of previously released music and video titles, as well as in the licensing of recordings to and from third parties for various uses, including film and television soundtracks.

In January 2007, the Company acquired a majority interest in Roadrunner, which includes Roadrunner Records, one of the leading hard rock and heavy metal labels (see Note 5). The Company also conducts its Recorded Music operations through a collection of additional record labels, including, among others, Asylum, Bad Boy, Cordless, East West, Elektra, Lava, Nonesuch, Reprise, Rykodisc, Sire and Word.

Outside the U.S., recorded music activities are conducted in more than 50 countries, primarily through Warner Music International (“WMI”) and its various subsidiaries, affiliates and non-affiliated licensees. WMI engages in the same activities as the Company’s U.S. labels: discovering and signing artists and distributing, marketing and selling their recorded music. In most cases, WMI also markets and distributes the records of those artists for whom the Company’s domestic record labels have international rights. In certain smaller countries, WMI licenses to unaffiliated third-party record labels the right to distribute its records. Recorded Music activities in Canada are conducted through Warner Music’s North American operations.

Recorded Music distribution operations include WEA Corp., which markets and sells music and DVD products to retailers and wholesale distributors in the U.S.; ADA, which distributes the products of independent labels to retail and wholesale distributors in the U.S.; Ryko Distribution, which distributes music and DVD releases from Rykodisc, Ryko’s record label, and third-party record and video labels; various distribution centers and ventures operated internationally; an 80% interest in Word Entertainment, which specializes in the distribution of music products in the Christian retail marketplace; and ADA Global, which provides ADA’s distribution services to independent labels outside of the U.S. through a network of affiliated and non-affiliated distributors.

The Company plays an integral role in virtually all aspects of the music value chain from discovering and developing talent, to producing albums and promoting artists and their products. After an artist has entered into a contract with one of the Company’s record labels, a master recording of the artist’s music is created. The recording is then replicated for sale to consumers primarily in the CD and digital formats. In the U.S., WEA Corp., ADA, Ryko Distribution and Word market, sell and deliver product, either directly or through sub-distributors and wholesalers, to thousands of record stores, mass merchants and other retailers. The Company’s recorded music products are also sold in physical form to online physical retailers such as Amazon.com, barnesandnoble.com and bestbuy.com and in digital form to online digital retailers like Apple’s iTunes and mobile full-track download stores such as those operated by Verizon or Sprint.

The Company has integrated the sale of digital content into all aspects of its Recorded Music and Music Publishing businesses including A&R, marketing, promotion and distribution. The Company’s new media executives work closely with the A&R departments of its labels to make sure that while a record is being made, digital assets are also created with all of our distribution channels in mind, including subscription services such as Rhapsody and satellite radio, social networking sites such as MySpace, user-generated content sites such as YouTube, Internet portals and music-centered destinations, such as Slacker. The Company also works side by side with its mobile and online partners to test new concepts. The Company believes existing and new digital businesses will be a significant source of growth for the next several years and will provide new opportunities to monetize its assets and create new revenue streams. As a music content company, the Company has assets that go beyond its recorded music and music publishing catalogs, such as its music video library, that it now has the opportunity to monetize through digital channels. In general, digital music content is sold through two primary channels: online and mobile. The proportion of digital revenues attributed to each distribution channel varies by region and since digital music is in the early stages of growth, proportions may change as the roll-out of new technologies continues. As an owner of musical content, the Company believes it is well positioned to take advantage of growth in digital distribution and emerging technologies to maximize the value of its assets.

Music Publishing Operations

Where Recorded Music is focused on exploiting a particular recording of a song, Music Publishing is an intellectual property business focused on the exploitation of the song itself. In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rights holders, the Company’s Music Publishing business garners a share of the revenues generated from use of the song.

The Company’s Music Publishing operations include Warner/Chappell its global Music Publishing company headquartered in Los Angeles with operations in over 50 countries through various subsidiaries, affiliates and non-affiliated licensees. The Company owns or controls rights to more than one million musical compositions, including numerous pop hits, American standards, folk songs and motion picture and theatrical compositions. Assembled over decades, our award-winning catalog includes over 65,000 songwriters and composers and a diverse range of genres including pop, rock, jazz, country, R&B, hip-hop, rap, reggae, Latin, folk, blues, symphonic, soul, Broadway, techno, alternative, gospel and other Christian music. Warner/Chappell also administers the music and soundtracks of several third-party television and film producers and studios, including Lucasfilm, Ltd., Hallmark Entertainment, Disney Music Publishing, New Line Cinema and Warner Bros. Studios. In 2007, the Company entered the production music library business with the acquisition of Non-Stop Music. Production music is a complementary alternative to licensing standards and contemporary hits for television, film and advertising producers.

Publishing revenues are derived from four main sources:

•

Mechanical: the licensor receives royalties with respect to compositions embodied in recordings sold in any format or configuration, including physical recordings (e.g., CDs, DVDs, video-cassettes), online and wireless downloads and mobile phone ringtones.

•

Performance: the licensor receives royalties if the composition is performed publicly through broadcast of music on television, radio, cable and satellite, live performance at a concert or other venue (e.g., arena concerts, nightclubs), online and wireless streaming and performance of music in staged theatrical productions.

•

Synchronization: the licensor receives royalties or fees for the right to use the composition in combination with visual images such as in films or television programs, television commercials and videogames.

•

Other: the licensor receives royalties from other uses such as in toys or novelty items and for use in sheet music.

2. Basis of Presentation

Interim Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article

10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Our business is seasonal, therefore, operating results for the three- and nine-month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending September 30, 2008.

The consolidated balance sheet at September 30, 2007 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007 (Registration No. 001-32502).

Basis of Consolidation

The accompanying financial statements present the consolidated accounts of all entities in which the Company has a controlling voting interest and/or variable interest entities required to be consolidated in accordance with U.S. GAAP. Significant inter-company balances and transactions have been eliminated.

New Accounting Pronouncements

In October 2007, the Company adopted the provisions of FASB Statement No. 48, “Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing application of a more likely than not threshold to the recognition and derecognition of uncertain tax positions. FIN 48 also prescribes guidance on measurement, classification, interest and penalties, accounting for interim periods, and disclosures. Upon adoption of FIN 48, the Company recorded a cumulative adjustment of $3 million, with a corresponding adjustment to the opening balance of accumulated deficit. As of the date of adoption, the Company had $1 million of unrecognized tax benefits, all of which would affect the effective tax rate if recognized. The Company classifies interest and penalties related to uncertain tax positions as a component of income tax expense. As of the date of adoption and June 30, 2008, the Company had accrued no material interest or penalties.

The Company and its subsidiaries file income tax returns in the U.S. and various foreign jurisdictions. The Internal Revenue Service has commenced a routine examination of the Company’s U.S. income tax returns for the fiscal years ended September 30, 2004 through September 30, 2006.

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value under U.S. GAAP and expands disclosures about fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The impact of this standard is not expected to be material to the Company’s consolidated financial statements. The Company will adopt the provisions of FAS 157 in fiscal 2009.

In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, (“FAS 159”)”—including an Amendment of SFAS 115, which permits but does not require the Company to measure financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The impact of this standard is not expected to be material to the Company’s consolidated financial statements. The Company will adopt the provisions of FAS 159 in fiscal 2009.

3. Comprehensive Income (loss)

Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net loss. For the Company, the components of other comprehensive loss primarily consist of foreign currency translation gains and losses and deferred gains and losses on financial instruments designated as hedges under FASB Statement No. 133, “Accounting for Derivative and Hedging Activities”, which include interest-rate swaps and foreign exchange contracts, as well as changes to the minimum pension liability. The following summary sets forth the components of comprehensive income (loss), net of related taxes (in millions):


	Three Months Ended						Nine Months Ended
	June 30, 2008			June 30, 2007			June 30, 2008			June 30, 2007
Net loss	$	(9	)	$	(17	)	$	(62	)	$	(26	)
Foreign currency translation gains (losses) (a)		(1	)		3			17			(3	)
Derivative financial instruments gains (losses)		11			4			(9	)		(3	)

Comprehensive income (loss)	$	1		$	(10	)	$	(54	)	$	(32	)

(a)	The foreign currency translation adjustments are not adjusted for income taxes as they relate to permanent investments in international subsidiaries.

4. Net Loss Per Common Share

The Company computes net loss per common share in accordance with FASB Statement No. 128, “Earnings per Share” (“FAS 128”). Under the provisions of FAS 128, basic net loss per common share is computed by dividing the net loss applicable to common shares after preferred dividend requirements, if any, by the weighted average of common shares outstanding during the period. Diluted net loss per common share adjusts basic net loss per common share for the effects of stock options, warrants and other potentially dilutive financial instruments, only in the periods in which such effect is dilutive.

The calculation of diluted net loss per common share excludes an adjustment to the weighted-average common shares outstanding for the potential dilution that would occur if the Company’s stock options were exercised or the Company’s restricted stock had vested. In the periods reported, the effect of the assumed exercise of any outstanding stock options and the assumed vesting of shares of restricted shares would have been antidilutive and accordingly, the following share amounts were excluded from the calculation of diluted net loss per share (in millions):


	Three Months Ended		Nine months ended
	June 30, 2008	June 30, 2007	June 30, 2008	June 30, 2007
Stock options	2.0	2.0	2.0	2.0
Restricted stock	2.0	2.0	1.0	3.0

5. Significant Acquisitions and Dispositions

Acquisition of Interest in Frank Sinatra Estate

The Company acquired a 50% interest in Frank Sinatra Enterprises, LLC (“FSE”) on November 19, 2007 for $50 million. FSE is a limited liability company established to administer licenses for use of Frank Sinatra’s name and likeness and manage all aspects of his music, film and stage content. The transaction was accounted for under the purchase method of accounting, based on the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” and the results of operations of FSE have been included in the Company’s results of operations from the date of the acquisition. The purchase price has been preliminarily allocated to the underlying net assets acquired in proportion to the estimated fair value, principally as follows: recorded music catalog, $33 million; trademarks, $10 million; and goodwill $7 million.

Acquisition of Roadrunner Music Group

On January 29, 2007, the Company acquired 73.5% of Roadrunner, which includes Roadrunner Records, a leading hard rock and heavy metal label. The transaction was accounted for under the purchase method of accounting, and the results of operations of Roadrunner have been included in the Company’s results of operations from the date of acquisition. The purchase price has been allocated to the underlying net assets acquired in proportion to the estimated fair value, principally recorded music catalog, artist contracts and goodwill. The accompanying consolidated financial statements include the following allocation of the approximately $83 million purchase price, consisting of a cash payment of $59 million and estimated future payment obligations of $24 million: recorded music catalog, $15 million; artists’ contracts, $26 million; goodwill, $39 million; tangible assets, $36 million; and tangible liabilities, $33 million.

In connection with the signing of the initial agreement in December 2006, the Company loaned Roadrunner approximately $52 million in the form of a promissory note. The note was repaid in connection with the close of the acquisition on January 29, 2007. In addition, in connection with the closing, the Company loaned the minority owner approximately $14.3 million in the form of a promissory note, which bears an annual simple rate of interest of 4.73% and matures in six years.

Discontinued Operations

During the nine months ended June 30, 2008, the Company determined that it would shut down the operations of Bulldog Entertainment (“Bulldog”), an entertainment services company. As a result of this triggering event, the Company performed an impairment test at December 31, 2007 and determined that an $18 million impairment charge was necessary to adjust the assets to fair market value, based on the discounted value of future cash flows. The Company shut down these operations in January 2008 and as such Bulldog is reported as a discontinued operation in the consolidated financial statements of the Company. In the nine months ended June 30, 2008, the Company recorded a loss related to its discontinued operation of $21 million, which included costs to shut down the operations and an impairment charge related to goodwill of the operation of $18 million.

6. Inventories

Inventories consist of the following (in millions):


	June 30, 2008		September 30, 2007
	(unaudited)		(audited)
Compact discs, cassettes and other music-related products	$	55	$	56
Published sheet music and song books		2		2

	$	57	$	58

7. Goodwill and Intangible Assets

Goodwill

The following analysis details the changes in goodwill for each reportable segment during the nine months ended June 30, 2008 (in millions):


	Recorded Music			Music Publishing		Total
Balance at September 30, 2007 (audited)	$	474		$	591	$	1,065
Acquisitions (a)		18			—		18
Disposition (b)		(18	)		—		(18	)
Other adjustments (c)		7			—		7

Balance at June 30, 2008 (unaudited)	$	481		$	591	$	1,072

(a)	Acquisitions include $7 million of goodwill acquired as part of an investment in FSE as more fully described in Note 5, as well as $9 million related to the acquisition during the quarter ended March 31, 2008 of a tour, production, promotion and booking company.

(b)	Disposition relates to the impairment and discontinued operation of Bulldog as more fully described in Note 5.

(c)	Other adjustments primarily represent foreign currency translation adjustments.

Other Intangible Assets

Other intangible assets consist of the following (in millions):


	September 30, 2007			Acquisitions (a)	Other (b)	June 30, 2008
	(audited)					(unaudited)
Intangible assets subject to amortization:
Recorded music catalog	$	1,319		45	7	$	1,371
Music publishing copyrights		916		21	36		973
Artist contracts		66		7	2		75
Trademarks		11		10	—		21
Other intangible assets		6		1	—		7

		2,318		84	45		2,447
Accumulated amortization		(686	)				(851	)

Total net intangible assets subject to amortization		1,632					1,596
Intangible assets not subject to amortization:
Trademarks and brands		100					100

Total net other intangible assets	$	1,732				$	1,696

(a)	The acquisitions primarily relate to $33 million of music catalog and $10 million of trademarks acquired in the connection with the investment in FSE as more fully described in Note 5.

(b)	Other represents foreign currency translation adjustments.

8. Restructuring Costs

Realignment Plan for Fiscal Year 2007

In the second quarter of fiscal year 2007, the Company announced plans to implement changes intended to better align the Company’s workforce with the changing nature of the music industry. These changes are part of the Company’s continued evolution from a traditional record and songs-based business to a music-based content company and its ongoing management of its cost structure. The changes included a continued redeployment of resources to focus on new business initiatives to help the Company diversify its revenue streams, including digital opportunities. The realignment plan was also designed to improve the operating effectiveness of the Company’s current businesses and to realign its management structure to, among other things, effectively address the continued development of digital distribution channels along with the decline of industry-wide CD sales.

The plan consisted of the reorganization of management structures to more adequately and carefully address regional needs and new business requirements, to reduce organizational complexity and to improve leadership channels. The Company also continued to shift resources from the physical sales channels to efforts focused on digital distribution and emerging technologies and other new revenue streams. Part of the plan also resulted in the outsourcing of some back-office functions as a cost-savings measure.

The changes described above were implemented in fiscal year 2007. The Company incurred substantially all of the costs associated with the realignment plan in fiscal 2007. This included approximately $50 million of restructuring costs and $13 million of implementation costs. In connection with the plan, the Company reduced headcount by approximately 400 employees. The Company expects that the majority of any cost savings will be offset by new business initiatives in areas related to digital distribution and video. Restructuring costs consist of the following (in millions):


	Employee Terminations			Other Exit Costs		Total
Liability as of September 30, 2007	$	16		$	1	$	17
Cash paid during the nine months ended June 30, 2008		(12	)		—		(12	)

Liability as of June 30, 2008	$	4		$	1	$	5

Acquisition-Related Restructuring Costs

As of June 30, 2008, the Company had approximately $18 million of liabilities for Acquisition-related restructuring costs. These primarily relate to restructuring efforts implemented in fiscal 2005 following the Acquisition. These liabilities represent estimates of future cash obligations for all restructuring activities that have been implemented, as well as for all restructuring activities that have been committed to by management but have yet to occur. The outstanding balance of these liabilities primarily relates to extended payment terms for severance obligations and long-term lease obligations for vacated facilities. These remaining lease obligations are expected to be settled by 2019. The Company expects to pay the majority of the remaining costs by the end of fiscal year 2008. Restructuring costs consist of the following (in millions):


	Employee Terminations		Other Exit Costs			Total
Liability as of September 30, 2007	$	3	$	19		$	22
Cash paid during the nine months ended June 30, 2008		—		—			—
Non-cash reductions during the nine months ended June 30, 2008 (a)		—		(4	)		(4	)

Liability as of June 30, 2008	$	3	$	15		$	18

(a)	Principally relates to changes in foreign currency exchange rates and the non-cash write-off of the carrying value of advances relating to terminating certain artist, songwriter, co-publisher and other contracts.

9. Debt

The Company’s long-term debt consists of (in millions):


	June 30, 2008			September 30, 2007
	(unaudited)			(audited)
Senior secured credit facility due 2011:
Term loan (a)	$	1,383		$	1,396
7.375% U.S. dollar-denominated Senior Subordinated Notes due 2014—Acquisition Corp.		465			465
8.125% Sterling-denominated Senior Subordinated Notes due 2014—Acquisition Corp. (b)		199			202
9.5% Senior Discount Notes due 2014—Holdings (c)		225			210

Total debt		2,272			2,273
Less current portion		(17	)		(17	)

Total long-term debt	$	2,255		$	2,256

(a)	Decrease in debt is a result of quarterly principal amortization payments of our term loans under our senior secured credit facility.

(b)	Change represents the impact of foreign currency exchange rates on the carrying value of the Sterling-denominated notes.

(c)	Change represents the accrual of interest on the discount notes in the form of an increase in the accreted value of the discount notes.

Restricted Net Assets

The Company is a holding company that conducts substantially all its business operations through its subsidiary, Acquisition Corp. and its subsidiaries. Accordingly, the ability of the Company to obtain funds from its subsidiaries is restricted by the senior secured credit facility of Acquisition Corp., the indenture for the 7.375% U.S. dollar-denominated Senior Subordinated Notes due 2014 and the 8.125% Sterling-denominated Senior Subordinated Notes due 2014 issued by Acquisition Corp. (collectively, the “Acquisition Corp. Senior Subordinated Notes”) and the indenture for the 9.5% Senior Discount Notes due 2014 issued by Holdings (the “Holdings Discount Notes”).

10. Stock-based Compensation

The following table represents the expense recorded by the Company with respect to its stock-based awards for the three and nine months ended June 30, 2008 and June 30, 2007 (in millions):


	Three Months Ended				Nine Months Ended
	June 30, 2008		June 30, 2007		June 30, 2008		June 30, 2007
Recorded Music	$	2	$	1	$	4	$	5
Music Publishing		—		—		—		(1	)
Corporate expenses		1		1		3		3

Total	$	3	$	2	$	7	$	7

During the three months ended June 30, 2008, the Company awarded 275,000 stock options stock to its employees. During the nine months ended June 30, 2008, the Company awarded 6,387,010 stock options and 4,546,312 shares of restricted stock to its employees.

11. Shareholders’ Deficit

Return of Capital and Dividends Paid

On February 6, 2008, the Company declared a dividend on its outstanding common stock at a rate of $0.13 per share, or approximately $19 million in the aggregate, which was paid on February 29, 2008 to the Company’s shareholders, except for the portion of the dividends with respect to the unvested restricted stock, which will be paid at such time as such shares become vested.

On September 4, 2007, the Company declared a dividend on its outstanding common stock at a rate of $0.13 per share, or approximately $19 million in the aggregate, which was paid on October 24, 2007 to the Company’s shareholders, except for the portion of the dividends with respect to the unvested restricted stock, which will be paid at such time as such shares become vested.

Dividend Policy

The Company has discontinued its previous policy of paying a regular quarterly dividend. On February 29, 2008, the Company paid its final quarterly dividend of $0.13 per share under the discontinued policy. The Company currently intends to retain future earnings to build cash on the balance sheet and invest in its business, particularly in A&R. Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors our Board of Directors may deem relevant.

Vesting of Restricted Stock

During the nine months ended June 30, 2008, 1,797,437 shares of restricted stock purchased by or awarded to certain employees vested.

12. Commitments and Contingencies

Pricing of Digital Music Downloads

On December 20, 2005 and February 3, 2006, the Attorney General of the State of New York served the Company with requests for information in connection with an industry-wide investigation as to whether the practices of industry participants concerning the pricing of digital music downloads violate Section 1 of the Sherman Act, New York State General Business Law §§340 et seq., New York Executive Law §63(12), and related statutes. On February 28, 2006, the Antitrust Division of the U.S. Department of Justice served the Company with a request for information in the form of a Civil Investigative Demand as to whether its activities relating to the pricing of digitally downloaded music violate Section 1 of the Sherman Act. The Company has provided documents and other information in response to these requests and intends to continue to fully cooperate with the New York Attorney General’s and Department of Justice’s industry-wide inquiries. Subsequent to the announcements of the above governmental investigations, more than thirty putative class action lawsuits concerning the pricing of digital music downloads have been filed. On August 15, 2006, the Judicial Panel on Multidistrict Litigation consolidated these actions for pre-trial proceedings in the Southern District of New York. The consolidated amended complaint, filed on April 13, 2007, alleges conspiracy among record companies to delay the release of their content for digital distribution, inflate their pricing of CDs and fix

prices for digital downloads. The complaint seeks unspecified compensatory, statutory and treble damages. All defendants, including the Company, filed a motion to dismiss the consolidated amended complaint on July 30, 2007. The Court heard an argument on this motion on March 25, 2008 and reserved decision. The Company intends to defend against these lawsuits vigorously, but is unable to predict the outcome of these suits. Any litigation the Company may become involved in as a result of the inquiries of the Attorney General and Department of Justice, regardless of the merits of the claim, could be costly and divert the time and resources of management.

Other Matters

In addition to the matters discussed above, the Company is involved in other litigation arising in the normal course of business. Management does not believe that any legal proceedings pending against the Company will have, individually, or in the aggregate, a material adverse effect on its business. However, the Company cannot predict with certainty the outcome of any litigation or the potential for future litigation. Regardless of the outcome, litigation can have an adverse impact on the Company, including its brand value, because of defense costs, diversion of management resources and other factors.

13. Derivative Financial Instruments

During the nine months ended June 30, 2008, the Company did not enter into additional interest rate swap agreements to hedge the variability of its expected future cash interest payments. However, the Company entered into additional foreign exchange contracts to hedge its foreign currency royalty payments through the fourth quarter of fiscal year 2008. As of June 30, 2008, the Company had interest rate swap agreements to hedge a total notional debt amount of $897 million and recorded deferred losses in comprehensive income of $12 million, as well as $3 million of deferred net gains in comprehensive income related to foreign currency hedging.

14. Segment Information

As discussed more fully described in Note 1, based on the nature of its products and services, the Company classifies its business interests into two fundamental operations: Recorded Music and Music Publishing. Information as to each of these operations is set forth below. The Company evaluates performance based on several factors, of which the primary financial measure is operating income (loss) before non-cash depreciation of tangible assets, non-cash amortization of intangible assets and non-cash impairment charges to reduce the carrying value of goodwill and intangible assets (“OIBDA”). The Company has supplemented its analysis of OIBDA results by segment with an analysis of operating income (loss) by segment.

The accounting policies of the Company’s business segments are the same as those described in the summary of significant accounting policies included elsewhere herein. The Company accounts for intersegment sales at fair value as if the sales were to third parties. While intercompany transactions are treated like third-party transactions to determine segment performance, the revenues (and corresponding expenses recognized by the segment that is counterparty to the transaction) are eliminated in consolidation, therefore, do not themselves impact its consolidated results. All income statement categories exclude the results of discontinued operations. Segment information consists of the following (in millions):


Three Months Ended	Recorded Music			Music Publishing		Corporate expenses and eliminations		Total
June 30, 2008
Revenues	$	686		168		(6	)	$	848
OIBDA		110		33		(27	)		116
Depreciation of property, plant and equipment		(5	)	(1	)	(3	)		(9	)
Amortization of intangible assets		(39	)	(17	)	—			(56	)

Operating income (loss) from continuing operations	$	66		15		(30	)	$	51

June 30, 2007
Revenues	$	653		157		(6	)	$	804
OIBDA		110		33		(35	)		108
Depreciation of property, plant and equipment		(7	)	—		(3	)		(10	)
Amortization of intangible assets		(37	)	(15	)	—			(52	)

Operating income (loss) from continuing operations	$	66		18		(38	)	$	46


Nine Months Ended	Recorded Music			Music Publishing		Corporate expenses and eliminations		Total
June 30, 2008
Revenues	$	2,188		467		(18	)	$	2,637
OIBDA		316		108		(83	)		341
Depreciation of property, plant and equipment		(24	)	(3	)	(8	)		(35	)
Amortization of intangible assets		(115	)	(50	)	—			(165	)

Operating income (loss) from continuing operations	$	177		55		(91	)	$	141

June 30, 2007
Revenues	$	2,101		433		(18	)	$	2,516
OIBDA		306		105		(83	)		328
Depreciation of property, plant and equipment		(19	)	(2	)	(9	)		(30	)
Amortization of intangible assets		(109	)	(44	)	—			(153	)

Operating income (loss) from continuing operations	$	178		59		(92	)	$	145

15. Additional Financial Information

Cash Interest and Taxes

The Company made interest payments of approximately $127 million and $121 million during the nine months ended June 30, 2008 and June 30, 2007, respectively. The Company paid approximately $58 million and $51 million of income and withholding taxes in the nine months ended June 30, 2008 and June 30, 2007, respectively. The Company received $9 million and $7 million of income tax refunds in the nine months ended June 30, 2008 and June 30, 2007, respectively.

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Financial Statements

The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp.

Holdings has issued and outstanding the Holdings Discount Notes. The Holdings Discount Notes are guaranteed by the Company. These guarantees are full, unconditional, joint and several. The following consolidating financial statements are presented for the information of the holders of the Holdings Discount Notes and present the results of operations, financial position and cash flows of (i) the Company, which is the guarantor of the Holdings Discount Notes, (ii) Holdings, which is the issuer of the Holdings Discount Notes, (iii) the subsidiaries of Holdings (Acquisition Corp. is the only direct subsidiary of Holdings) and (iv) the eliminations necessary to arrive at the information for the Company on a consolidated basis. Investments in consolidated subsidiaries are presented under the equity method of accounting.

The Company and Holdings are holding companies that conduct substantially all their business operations through Acquisition Corp. and its subsidiaries. Accordingly, the ability of the Company to obtain funds from its subsidiaries is restricted by the senior secured credit facility of Acquisition Corp., the indenture for the Acquisition Corp. Senior Subordinated Notes and the indenture for the Holdings Discount Notes.

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Balance Sheet (unaudited)

June 30, 2008


	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.		Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Assets:
Current assets:
Cash and equivalents	$	98		$	—		$	240	$	—	$	338
Accounts receivable, net		—			—			481		—		481
Inventories, net		—			—			57		—		57
Royalty advances expected to be recouped within one year		—			—			192		—		192
Deferred tax assets		—			—			38		—		38
Other current assets		—			—			36		—		36
Total current assets		98			—			1,044		—		1,142
Royalty advances expected to be recouped after one year		—			—			235		—		235
Investments		(197	)		24			166		173		166
Property, plant and equipment, net		—			—			125		—		125
Goodwill		—			—			1,072		—		1,072
Intangible assets subject to amortization, net		—			—			1,596		—		1,596
Intangible assets not subject to amortization		—			—			100		—		100
Other assets		—			4			79		—		83

Total assets	$	(99	)	$	28		$	4,417	$	173	$	4,519

Liabilities and shareholders’ (deficit) equity:
Current liabilities:
Accounts payable	$	—		$	—		$	178	$	—	$	178
Accrued royalties		—			—			1,291		—		1,291
Taxes and other withholdings		1			—			20		—		21
Dividends payable		1			—			—		—		1
Current portion of long-term debt		—			—			17		—		17
Deferred revenue		—			—			109		—		109
Other current liabilities		1			—			274		—		275

Total current liabilities		3			—			1,889		—		1,892
Long-term debt		—			225			2,030		—		2,255
Deferred tax liabilities, net		—			—			245		—		245
Other noncurrent liabilities		(3	)		—			229		—		226

Total liabilities		—			225			4,393		—		4,618

Shareholders’ (deficit) equity		(99	)		(197	)		24		173		(99	)

Total liabilities and shareholders’ (deficit) equity	$	(99	)	$	28		$	4,417	$	173	$	4,519

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Balance Sheet (audited)

September 30, 2007


	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.		Eliminations			Warner Music Group Corp. Consolidated
	(in millions)
Assets:
Current assets:
Cash and equivalents	$	74		$	—		$	259	$	—		$	333
Due (to) from affiliates		(2	)		—			2		—			—
Accounts receivable, net		—			—			555		—			555
Inventories, net		—			—			58		—			58
Royalty advances expected to be recouped within one year		—			—			176		—			176
Deferred tax assets		—			—			40		—			40
Other current assets		—			—			33		—			33

Total current assets		72			—			1,123		—			1,195
Royalty advances expected to be recouped after one year		—			—			216		—			216
Investments in and advances (from) to consolidated subsidiaries		(85	)		121			—		(36	)		—
Investments		—			—			146		—			146
Property, plant and equipment		—			—			133		—			133
Goodwill		—			—			1,065		—			1,065
Intangible assets subject to amortization		—			—			1,632		—			1,632
Intangible assets not subject to amortization		—			—			100		—			100
Other assets		—			4			81		—			85

Total assets	$	(13	)	$	125		$	4,496	$	(36	)	$	4,572

Liabilities and Shareholders’ (Deficit) Equity:
Current liabilities:
Accounts payable	$	—		$	—		$	225	$	—		$	225
Accrued royalties		—			—			1,226		—			1,226
Taxes and other withholdings		2			—			31		—			33
Dividends payable		23			—			—		—			23
Current portion of long-term debt		—			—			17		—			17
Deferred revenue		—			—			56		—			56
Other current liabilities		—			—			302		—			302

Total current liabilities		25			—			1,857		—			1,882
Long-term debt		—			210			2,046		—			2,256
Dividends payable		1			—			—		—			1
Deferred tax liabilities, net		—			—			244		—			244
Other noncurrent liabilities		(3	)		—			228		—			225

Total liabilities		23			210			4,375		—			4,608

Shareholders’ (deficit) equity		(36	)		(85	)		121		(36	)		(36	)

Total liabilities and shareholders’ (deficit) equity	$	(13	)	$	125		$	4,496	$	(36	)	$	4,572

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statements of Operations (unaudited)

For the Three Months Ended June 30, 2008 and 2007


	Three Months Ended June 30, 2008
	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations			Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	—		$	848		$	—		$	848
Costs and expenses:
Cost of revenues		—			—			(441	)		—			(441	)
Selling, general and administrative expenses		—			—			(300	)		—			(300	)
Amortization of intangible assets								(56	)					(56	)

Total costs and expenses		—			—			(797	)		—			(797	)

Operating income from continuing operations		—			—			51			—			51
Interest expense, net		—			(5	)		(38	)		—			(43	)
Minority Interest		—			—			(2	)		—			(2	)
Other loss		(9	)		(4	)		(2	)		13			(2	)

(Loss) income from continuing operations before income taxes		(9	)		(9	)		9			13			4
Income tax expense		—			—			(13	)		—			(13	)

(Loss) income from continuing operations	$	(9	)	$	(9	)	$	(4	)	$	13		$	(9	)
Loss from discontinued operations, net of taxes		—			—			—			—			—

Net (loss) income	$	(9	)	$	(9	)	$	(4	)	$	13		$	(9	)


	Three Months Ended June 30, 2007
	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations			Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	—		$	804		$	—		$	804
Costs and expenses:
Cost of revenues		—			—			(429	)		—			(429	)
Selling, general and administrative expenses		—			—			(297	)		—			(297	)
Other income								52						52
Restructuring costs		—			—			(32	)		—			(32	)
Amortization of intangible assets		—			—			(52	)		—			(52	)

Total costs and expenses		—			—			(758	)		—			(758	)

Operating income		—			—			46			—			46
Interest income (expense), net		1			(5	)		(41	)		—			(45	)
Minority interest		—			—			(2	)		—			(2	)
Other expense, net		10			1			(4	)		(11	)		(4	)

(Loss) income from continuing operations before income taxes		11			(4	)		(1	)		(11	)		(5	)
Income tax expense		—			—			(11	)		—			(11	)

Net (loss) income	$	11		$	(4	)	$	(12	)	$	(11	)	$	(16	)
Loss from discontinued operations, net of taxes		—			—			(1	)		—			(1	)

Net (loss) income	$	11		$	(4	)	$	(13	)	$	(11	)	$	(17	)

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statements of Operations (unaudited)

For the Nine months ended June 30, 2008 and 2007


	Nine Months Ended June 30, 2008
	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	—		$	2,637		$	—	$	2,637
Costs and expenses:
Cost of revenues		—			—			(1,399	)		—		(1,399	)
Selling, general and administrative expenses		—			—			(935	)		—		(935	)
Other Income		—			—			3			—		3
Restructuring costs		—			—			—			—
Amortization of intangible assets		—			—			(165	)		—		(165	)

Total costs and expenses		—			—			(2,496	)		—		(2,496	)

Operating income from continuing operations		—			—			141			—		141
Interest income (expense), net		—			(15	)		(123	)		—		(138	)
Minority interest		—			—			(4	)		—		(4	)
Other expense, net		(62	)		(47	)		(4	)		113		(4	)

(Loss) income from continuing operations before income taxes		(62	)		(62	)		10			113		(5	)
Income tax expense		—			—			(36	)		—		(36	)

(Loss) income from continuing operations	$	(62	)	$	(62	)	$	(26	)	$	113	$	(41	)
Loss from discontinued operations, net of taxes								(21	)				(21	)

Net (loss) income	$	(62	)	$	(62	)	$	(47	)	$	113	$	(62	)


	Nine Months Ended June 30, 2007
	Warner Music Group Corp.		WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—	$	—		$	2,516		$	—	$	2,516
Costs and expenses:
Cost of revenues		—		—			(1,364	)		—		(1,364	)
Selling, general and administrative expenses		—		—			(862	)		—		(862	)
Other Income		—		—			52			—		52
Restructuring costs		—		—			(44	)		—		(44	)
Amortization of intangible assets		—		—			(153	)		—		(153	)

Total costs and expenses		—		—			(2,371	)		—		(2,371	)

Operating income		—		—			145			—		145
Interest income (expense), net		2		(14	)		(125	)		—		(137	)
Minority interest		—		—			(2	)		—		(2	)
Other expense, net		—		—			(4	)		—		(4	)

(Loss) income from continuing operations before income taxes		2		(14	)		14			—		2
Income tax expense		—		—			(27	)		—		(27	)

(Loss) income from continuing operations	$	2	$	(14	)	$	(13	)	$	—	$	(25	)
Loss from discontinued operations, net of taxes		—		—			(1	)		—		(1	)

Net (loss) income	$	2	$	(14	)	$	(14	)	$	—	$	(26	)

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statement of Cash Flows (unaudited)

For the Nine Months Ended June 30, 2008


	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations			Consolidated
	(in millions)
Cash flows from operating activities:
Net (loss) income	$	(62	)	$	(62	)	$	(47	)	$	109		$	(62	)
Loss from discontinued operations, net of tax		—			—			21			—			21

(Loss) income from continued operations	$	(62	)	$	(62	)	$	(26	)	$	109		$	(41	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		—			—			200			—			200
Deferred taxes		—			—			(5	)		—			(5	)
Non-cash interest expense		—			15			20			—			35
Non-cash stock compensation expense		—			—			7			—			7
Other non-cash items		62			47			(1	)		(109	)		(1	)
Minority interest		—			—			4			—			4
Changes in operating assets and liabilities:
Accounts receivable		—			—			93			—			93
Royalty advances		—			—			(29	)		—			(29	)
Inventories		—			—			4			—			4
Accounts payable and accrued liabilities		—			—			(59	)		—			(59	)
Other balance sheet changes		(9	)		—			(14	)		—			(23	)

Net cash (used in) provided by operating activities		(9	)		—			194			—			185

Cash flows from investing activities:
Investments and acquisitions of businesses		—			—			(122	)		—			(122	)
Acquisition of publishing rights		—			—			(21	)		—			(21	)
Loans to third parties		—			—			(3	)		—			(3	)
Proceeds from the sale of shares		—			—			24			—			24
Capital expenditures		—			—			(26	)		—			(26	)

Net cash (used in) provided by investing activities		—			—			(148	)		—			(148	)

Cash flows from financing activities:
Quarterly debt repayments		—			—			(13	)		—			(13	)
Increase in intercompany		7			—			(7	)					—
Return of capital and dividends paid		(42	)		(68	)		(68	)		136			(42	)
Return of capital received		68			68			—			(136	)		—

Net cash provided by (used in) financing activities		33			—			(88	)		—			(55	)

Effect of foreign currency exchange rate changes on cash		—			—			23			—			23

Net increase (decrease) in cash and equivalents		24			—			(19	)		—			5
Cash and equivalents at beginning of period		74			—			259			—			333

Cash and equivalents at end of period	$	98			—		$	240			—		$	338

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statement of Cash Flows (unaudited)

For the Nine Months Ended June 30, 2007


	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations			Consolidated
	(in millions)
Cash flows from operating activities:
Net (loss) income	$	2		$	(14	)	$	(14	)	$	—		$	(26	)
Loss from discontinued operations, net of tax		—			—			1			—		$	1

Income (loss) from continued operations	$	2		$	(14	)	$	(13	)	$	—		$	(25	)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation and amortization		—			—			183			—			183
Deferred taxes		—			—			2			—			2
Non-cash interest expense		—			14			32			—			46
Non-cash stock compensation expense		—			—			7			—			7
Non-cash non-recurring charges		—			—			(4	)		—			(4	)
Minority interest		—			—			2			—			2
Changes in operating assets and liabilities:
Accounts receivable		—			—			101			—			101
Inventories		—			—			(2	)		—			(2	)
Royalty advances		—			—			(32	)		—			(32	)
Accounts payable and accrued liabilities		—			—			(63	)		—			(63	)
Other balance sheet changes		—			—			(18	)		—			(18	)

Net cash provided by operating activities		2			—			195			—			197

Cash flows from investing activities:
Investments and acquisitions		—			—			(75	)		—			(75	)
Acquisition of publishing rights		—			—			(5	)		—			(5	)
Loan to third parties		—			—			(26	)		—			(26	)
Proceeds from the sale of buildings		—			—			7			—			7
Proceeds from the sale of investments		18			—			—			—			18
Capital expenditures		—			—			(21	)		—			(21	)

Net cash provided by (used in) investing activities		18			—			(120	)		—			(102	)

Cash flows from financing activities:
Quarterly debt repayments		—			—			(13	)		—			(13	)
Change in intercompany		(1	)		—			1			—			—
Return of capital received		80			80			—			(160	)		—
Return of capital and dividends paid		(59	)		(80	)		(80	)		160			(59	)
Proceeds from the exercise of stock options		2			—			—			—			2

Net cash provided by (used in) financing activities		22			—			(92	)		—			(70	)

Effect of foreign currency exchange rate changes on cash		—			—			4			—			4

Net increase (decrease) in cash and equivalents		42			—			(13	)		—			29
Cash and equivalents at beginning of period		41			—			326			—			367

Cash and equivalents at end of period	$	83		$	—		$	313		$	—		$	396

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition with the unaudited interim financial statements included elsewhere in this Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2008 (the “Quarterly Report”). This discussion contains forward-looking statements and involves numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements.

We make available on our Internet website free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K as soon as practicable after we electronically file such reports with the Securities and Exchange Commission (the “SEC”). Our website address is www.wmg.com. The information contained in our website is not incorporated by reference in this Quarterly Report.

“SAFE HARBOR” STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Quarterly Report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Quarterly Report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs, cost savings, industry trends and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or the negative thereof or variations thereon or similar terminology. Such statements include, among others, statements regarding our ability to develop talent and attract future talent, to monetize our music content, including through new distribution channels and formats to capitalize on the growth areas of the music industry, to effectively deploy our capital including the level and success of future A&R investments, the development of digital music and the effect of digital distribution channels on our business, including whether or not the Internet will become an important sales channel and whether we will be able to achieve higher margins from digital sales, the success of strategic actions we are taking to accelerate our transformation as we redefine our role in the music industry, our success in limiting piracy, our ability to compete in the highly competitive markets in which we operate, the growth of the music industry and the effect of our and the music industry’s efforts to combat piracy on the industry, our intentions with respect to our dividend policy, our ability to fund our future capital needs and the effect of litigation on us. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report. Additionally important factors could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report. As stated elsewhere in this Quarterly Report, such risks, uncertainties and other important factors include, among others:

•

the impact of our substantial leverage on our ability to raise additional capital to fund our operations, on our ability to react to changes in the economy or our industry and on our ability to meet our obligations under our indebtedness;

•

the continued decline in the global recorded music industry and the rate of overall decline in the music industry;

•

our ability to continue to identify, sign and retain desirable talent at manageable costs;

•

the threat posed to our business by piracy of music by means of home CD-R activity, Internet peer-to-peer file-sharing and sideloading of unauthorized content;

•

the significant threat posed to our business and the music industry by organized industrial piracy;

•

the popular demand for particular recording artists and/or songwriters and albums and the timely completion of albums by major recording artists and/or songwriters;

•

the diversity and quality of our portfolio of songwriters;

•

the diversity and quality of our album releases;

•

significant fluctuations in our results of operations and cash flows due to the nature of our business;

•

our involvement in intellectual property litigation;

•

the possible downward pressure on our pricing and profit margins;

•

the seasonal and cyclical nature of recorded music sales;

•

our ability to continue to enforce our intellectual property rights in digital environments;

•

the ability to develop a successful business model applicable to a digital environment;

•

the impact of heightened and intensive competition in the recorded music and music publishing businesses and our inability to execute our business strategy;

•

risks associated with our non-U.S. operations, including limited legal protections of our intellectual property rights and restrictions on the repatriation of capital;

•

the impact of legitimate music distribution on the Internet or the introduction of other new music distribution formats;

•

the reliance on a limited number of online music stores and their ability to significantly influence the pricing structure for online music stores;

•

the impact of rate regulations on our Recorded Music and Music Publishing businesses;

•

the impact of rates on other income streams that may be set by arbitration proceedings on our business;

•

risks associated with the fluctuations in foreign currency exchange rates;

•

our ability and the ability of our joint venture partners to operate our existing joint ventures satisfactorily;

•

the enactment of legislation limiting the terms by which an individual can be bound under a “personal services” contract;

•

potential loss of catalog if it is determined that recording artists have a right to recapture recordings under the U.S. Copyright Act;

•

changes in law and government regulations;

•

legal or other developments related to pending litigation or investigations by the Attorney General of the State of New York and the Department of Justice;

•

trends that affect the end uses of our musical compositions (which include uses in broadcast radio and television, film and advertising businesses);

•

the growth of other products that compete for the disposable income of consumers;

•

risks inherent in relying on one supplier for manufacturing, packaging and distribution services in North America and Europe;

•

risks inherent in our acquiring or investing in other businesses including our ability to successfully manage new businesses that we may acquire as we diversify revenue streams within the music industry;

•

the impact of our realignment plan on our business;

•

the possibility that our owners’ interests will conflict with ours or yours;

•

failure to attract and retain key personnel.

There may be other factors not presently known to us or which we currently consider to be immaterial that may cause our actual results to differ materially from the forward-looking statements.

All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report. We disclaim any duty to publicly update or revise forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

INTRODUCTION

Warner Music Group Corp. was formed by the Investor Group on November 21, 2003. The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp. Acquisition Corp is one of the world’s major music companies and the successor to substantially all of the interests of the Recorded Music and Music Publishing businesses of Time Warner. Effective March 1, 2004, Acquisition Corp acquired such interests from Time Warner for approximately $2.6 billion. The original Investor Group included affiliates of THL, affiliates of Bain, affiliates of Providence and Music Capital. Music Capital’s partnership agreement required that the Music Capital partnership dissolve and commence winding up by the second anniversary of the Company’s May 2005 initial public offering. As a result, on May 7, 2007, Music Capital made a pro rata distribution of all shares of common stock of the Company held by it to its partners. The shares held by Music Capital had been subject to a stockholders agreement among Music Capital, THL, Bain and Providence and certain other parties. As a result of the distribution, the shares distributed by Music Capital ceased to be subject to the voting and other provisions of the stockholders agreement and Music Capital was no longer part of the Investor Group subject to the stockholders agreement.

The Company and Holdings are holding companies that conduct substantially all of their business operations through their subsidiaries. The terms “we,” “us,” “our,” “ours,” and the “Company” refer collectively to Warner Music Group Corp. and its consolidated subsidiaries, except where otherwise indicated.

Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is provided as a supplement to the unaudited financial statements and footnotes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations. MD&A is organized as follows:

•

Overview. This section provides a general description of our business, as well as recent developments that we believe are important in understanding our results of operations and financial condition and in anticipating future trends.

•

Results of operations. This section provides an analysis of our results of operations for the three and nine months ended June 30, 2008 and June 30, 2007. This analysis is presented on both a consolidated and segment basis.

•

Financial condition and liquidity. This section provides an analysis of our cash flows for the nine months ended June 30, 2008 and June 30, 2007, as well as a discussion of our financial condition and liquidity as of June 30, 2008. The discussion of our financial condition and liquidity includes (i) our available financial capacity under the revolving credit portion of our senior secured credit facility and (ii) a summary of our key debt compliance measures under our debt agreements.

Use of OIBDA

We evaluate our operating performance based on several factors, including our primary financial measure of operating income (loss) before non-cash depreciation of tangible assets, non-cash amortization of intangible assets and non-cash impairment charges to reduce the carrying value of goodwill and intangible assets (which we refer to as “OIBDA”). We consider OIBDA to be an important indicator of the operational strengths and performance of our businesses, including the ability to provide cash flows to service debt. However, a limitation of the use of OIBDA as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Accordingly, OIBDA should be considered in addition to, not as a substitute for, operating income (loss), net income (loss) and other measures of financial performance reported in accordance with U.S. GAAP.

Use of Constant Currency

As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve the ability to understand the Company's operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a constant-currency basis as one measure to evaluate our performance. We calculate constant-currency by calculating prior-year results using current-year foreign currency exchange rates. We generally refer to such amounts calculated on a constant-currency basis as “excluding the impact of foreign currency exchange rates”. These results should be considered in addition to, not as a substitute for, results reported in accordance with U.S. GAAP. Results on a constant-currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with U.S. GAAP.

OVERVIEW

Description of Business

We are one of the world’s major music-based content companies. We classify our business interests into two fundamental operations: Recorded Music and Music Publishing. A brief description of each of these operations is presented below.

Our business is seasonal, therefore, operating results for the three and nine months ended June 30, 2008 are not necessarily indicative of the results that may be expected for fiscal year ending September 30, 2008.

Recorded Music Operations

Our Recorded Music business primarily consists of the discovery and development of artists and the related marketing, distribution and licensing of recorded music produced by such artists. In addition to the more traditional methods of discovering and developing artists, following the Acquisition we established ILG to discover artists earlier in their careers and at a lower cost by leveraging our independent distribution network.

In the U.S., our Recorded Music operations are conducted principally through our major record labels—Warner Bros. Records and The Atlantic Records Group. Our Recorded Music operations also include Rhino, a division that specializes in marketing our music catalog through compilations and reissuances of previously released music and video titles, as well as in the licensing of recordings to and from third parties for various uses, including film and television soundtracks.

On January 29, 2007, the Company acquired a majority interest in Roadrunner, which includes Roadrunner Records, one of the leading hard rock and heavy metal labels. We also conduct our Recorded Music operations through a collection of additional record labels, including, among others, Asylum, Bad Boy, Cordless, East West, Elektra, Lava, Nonesuch, Reprise, Rykodisc, Sire and Word.

Outside the U.S., our recorded music activities are conducted in more than 50 countries primarily through WMI and its various subsidiaries, affiliates and non-affiliated licensees. WMI engages in the same activities as our U.S. labels: discovering and signing artists and distributing, marketing and selling their recorded music. In most cases, WMI also markets and distributes the records of those artists for whom our domestic record labels have international rights. In certain smaller countries, WMI licenses to unaffiliated third-party record labels the right to distribute its records. Recorded Music activities in Canada are conducted though Warner Music’s North American operations.

Our Recorded Music distribution operations include WEA Corp, which markets and sells music and DVD products to retailers and wholesale distributors in the U.S.; ADA, which distributes the products of independent labels to retail and wholesale distributors in the U.S.; Ryko Distribution, which distributes music and DVD releases from Rykodisc, Ryko’s record label, and third-party record and video labels; various distribution centers and ventures operated internationally; an 80% interest in Word Entertainment, which specializes in the distribution of music products in the Christian retail marketplace; and the ADA U.K., which provides ADA’s distribution services outside of the U.S. through a network of affiliated and non-affiliated distributors.

We play an integral role in virtually all aspects of the music value chain from discovering and developing talent, to producing albums and promoting artists and their products. After an artist has entered into a contract with one of our record labels, a master recording of the artist’s music is created. The recording is then replicated for sale to consumers primarily in the CD and digital formats. In the U.S., WEA Corp., ADA, Ryko Distribution and Word market, sell and deliver product, either directly or through sub-distributors and wholesalers, to thousands of record stores, mass merchants and other retailers. Our recorded music products are also sold in physical form to online physical retailers such as Amazon.com, barnesandnoble.com and bestbuy.com and in digital form to online digital retailers like Apple’s iTunes and mobile full-track download stores such as those operated by Verizon or Sprint.

We have integrated the sale of digital content into all aspects of our Recorded Music and Music Publishing businesses including A&R, marketing, promotion and distribution. Our new media executives work closely with the A&R departments of our labels to make sure that while a record is being made, digital assets are also created with all of our distribution channels in mind, including subscription services such as Rhapsody and satellite radio, social networking sites such as MySpace, user-generated content sites such as YouTube, Internet portals and music-centered destinations, such as Slacker. We also work side by side with our mobile and online partners to test new concepts. We believe existing and new digital businesses will be a significant source of growth for the next several years and will provide new opportunities to monetize our assets and create new revenue streams. As a music content company, we have assets that go beyond our recorded music and music publishing catalogs, such as our music video library, that we now have the opportunity to monetize through digital channels. In general, digital music content is sold through two primary channels: online and mobile. The proportion of digital revenues attributed to each distribution channel varies by region and since digital music is in the early stages of growth, these proportions may change as the roll-out of new technologies continues. As an owner of musical content, we believe we are well positioned to take advantage of growth in digital distribution and emerging technologies to maximize the value of our assets.

We are also diversifying our revenues beyond our traditional businesses by partnering with artists in other areas of their career. We are building capabilities and platforms for exploiting a broader set of music-related rights to participate across the artist brands we help create. Expansion of our capabilities in this area have included strategic acquisitions and partnerships with companies involved in artist management, merchandising, strategic marketing and brand management, ticketing, touring, fan clubs, original programming and video entertainment. We believe enhancement of these capabilities will permit us to diversify revenue streams to better capitalize on the growth areas of the music industry, permit us to build stronger, long-term relationships with artists and more effectively connect artists and fans.

Our principal Recorded Music revenue sources are sales of CDs, online digital downloads, mobile phone downloads and ringtones and other recorded music products and license fees received for the ancillary uses of our Recorded Music catalog. The principal costs associated with our Recorded Music operations are as follows:

•

royalty costs and artist and repertoire costs—the costs associated with (i) paying royalties to artists, producers, songwriters, other copyright holders and trade unions, (ii) signing and developing artists, (iii) creating master recordings in the studio and (iv) creating artwork for album covers and liner notes;

•

product costs—the costs to manufacture, package and distribute product to wholesale and retail distribution outlets;

•

selling and marketing costs—the costs associated with the promotion and marketing of artists and recorded music products, including costs to produce music videos for promotional purposes and artist tour support; and

•

general and administrative costs—the costs associated with general overhead and other administrative costs.

Music Publishing Operations

Where recorded music is focused on exploiting a particular recording of a song, music publishing is an intellectual property business focused on the exploitation of the song itself. In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rights holders, our Music Publishing business garners a share of the revenues generated from use of the song.

Our Music Publishing operations include Warner/Chappell, our global Music Publishing company headquartered in Los Angeles with operations in over 50 countries through various subsidiaries, affiliates and non-affiliated licensees. We own or control rights to more than one million musical compositions, including numerous pop hits, American standards, folk songs and motion picture and theatrical compositions. Assembled over decades, our award-winning catalog includes over 65,000 songwriters and composers and a diverse range of genres including pop, rock, jazz, country, R&B, hip-hop, rap, reggae, Latin, folk, blues, symphonic, soul, Broadway, techno, alternative, gospel and other Christian music. Warner/Chappell also administers the music and soundtracks of several third-party television and film producers and studios, including Lucasfilm, Ltd., Hallmark Entertainment, Disney Music Publishing, New Line Cinema and Warner Bros. Studios. In 2007, we entered the production music library business with the acquisition of Non-Stop Music. Production music is a complementary alternative to licensing standards and contemporary hits for television, film and advertising producers.

Publishing revenues are derived from four main sources:

•

Other: the licensor receives royalties from other uses such as in toys or novelty items and for use in sheet music.

The principal costs associated with our Music Publishing operations are as follows:

•

artist and repertoire costs—the costs associated with (i) signing and developing songwriters and (ii) paying royalties to songwriters, co-publishers and other copyright holders in connection with income generated from the exploitation of their copyrighted works; and

•

administration costs—the costs associated with general overhead and other administrative costs.

Factors Affecting Results of Operations and Financial Condition

Market Factors

Since 1999, the recorded music industry has been unstable and the worldwide market has contracted considerably, which has adversely affected our operating results. The industry-wide decline can be attributed primarily to digital piracy. Other drivers of this decline are the bankruptcies of record retailers and wholesalers, growing competition for consumer discretionary spending and retail shelf space, and the maturation of the CD format, which has slowed the historical growth pattern of recorded music sales. While CD sales still generate most of the recorded music revenues, CD sales continue to decline industry-wide and we expect that trend to continue. While new formats for selling recorded music product have been created, including the legal downloading of digital music using the Internet and the distribution of music on mobile devices, significant revenue streams from these new formats are just beginning to emerge and have not yet reached a level where they offset the declines in CD sales. The recorded music industry performance may continue to negatively impact our operating results. In addition, a declining recorded music industry could continue to have an adverse impact on the music publishing business. This is because our Music Publishing business generates a portion of its revenues from mechanical royalties received from the sale of music in physical recorded music formats such as the CD.

Realignment Plan for Fiscal Year 2007

In the second quarter of fiscal year 2007, the Company announced plans to implement changes intended to better align the Company’s workforce with the changing nature of the music industry. These changes are part of the Company’s continued evolution from a traditional record and songs-based business to a music-based content company and its ongoing management of its cost structure. The changes included a continued redeployment of resources to focus on new business initiatives to help the Company diversify its revenue streams, including digital opportunities. The realignment plan was also designed to improve the operating effectiveness of our current businesses and to realign our management structure to, among other things, effectively address the continued development of digital distribution channels along with the decline of industry-wide CD sales.

The plan consisted of the reorganization of management structures to more adequately and carefully address regional needs and new business requirements, to reduce organizational complexity and to improve leadership channels. The Company also continued to shift resources from our physical sales channels to efforts focused on digital distribution and emerging technologies and other new revenue streams. Part of the plan also resulted in the outsourcing of some back-office functions as a cost-savings measure.

The changes described above were implemented in fiscal year 2007. The Company incurred substantially all of the costs associated with the realignment plan in fiscal year 2007. This included approximately $50 million of restructuring costs and $13 million of implementation costs, primarily all of which were paid in cash. In connection with the plan, the Company reduced headcount by approximately 400 employees. The Company expects that the majority of any cost savings will be offset by new business initiatives in areas related to digital distribution and video.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Consolidated Historical Results

Revenues

Our revenues were composed of the following amounts (in millions):


	For the Three Months Ended June 30,						*2008 vs 2007*
	2008			2007			$ Change			% Change
Revenue by Type
Physical sales	$	469		$	493		$	(24	)	-5	%
Digital		156			112			44		39	%
Licensing		61			48			13		27	%

Total Recorded Music		686			653			33		5	%
Mechanical		59			63			(4	)	-6	%
Performance		69			59			10		17	%
Synchronization		25			23			2		9	%
Digital		10			7			3		43	%
Other		5			5			—		—

Total Music Publishing		168			157			11		7	%
Intersegment elimination		(6	)		(6	)		—		—

Total Revenue	$	848		$	804		$	44		5	%

Revenue by Geographical Location
U.S. Recorded Music	$	319		$	345		$	(26	)	-8	%
U.S. Publishing		58			58			—		—

Total U.S.		377			403			(26	)	-6	%
International Recorded Music		367			308			59		19	%
International Publishing		110			99			11		11	%

Total International		477			407			70		17	%
Intersegment eliminations		(6	)		(6	)		—		—

Total Revenue	$	848		$	804		$	44		5	%

Total Revenue

Total revenues increased by $44 million, or 5%, to $848 million, from $804 million for the three months ended June 30, 2007. Excluding the favorable impact of foreign currency exchange rates, total revenues decreased $9 million or 1%. Recorded Music and Music Publishing revenues comprised 80% and 20% of the total revenues for the three months ended June 30, 2008, respectively, compared to 81% and 19% for the three months ended June 30, 2007, respectively. U.S. and international revenues comprised 44% and 56% of total revenues for the three months ended June 30, 2008, compared to 50% for both U.S. and international for the three months ended June 30, 2007, respectively. These percentages are calculated prior to intersegment eliminations.

Total digital revenues increased by $47 million, or 39%, to $166 million from $119 million for the three months ended June 30, 2007. Excluding the favorable impact of foreign currency exchange rates, total digital sales increased by $43 million. Total digital revenue represented 20% and 15% of consolidated revenues for the three months ended June 30, 2008 and June 30, 2007, respectively. Total digital revenues for the three months ended June 30, 2008 were comprised of U.S. revenues of $107 million, or 64% of total digital revenues, and international revenues of $59 million, or 36% of total digital revenues. Total digital revenues for the three months ended June 30, 2007 were comprised of U.S. revenues of $82 million, or 69% of total digital revenues, and international revenues of $37 million, or 31% of total digital revenues.

Recorded Music revenues increased by $33 million, or 5% to $686 million for the three months ended June 30, 2008. Excluding the impact of foreign currency exchange rates, total Recorded Music revenues decreased $8 million, or 1% for the three months ended June 30, 2008. This performance was tempered by the ongoing transition in the recorded music industry, which is characterized by a shift in consumption patterns from an increase in physical sales to new forms of digital music and the continued impact of digital piracy. The increase was primarily attributable to digital revenues of $44 million and strengthening in international revenues, primarily Europe. The increase in digital revenues reflects continued growth and development of new distribution channels and continued proliferation of digital as a preferred means of consumption and digital marketing efforts. This increase was partially offset by the decrease of $24 million in physical sales. The decrease in

physical CD sales was driven by the timing of releases and the overall market declines in physical sales. In addition, U.S. retailers continue to actively manage their inventory levels in response to the tougher economy and credit markets as well as the changing underlying demand for physical recorded music product resulting in lower physical inventory levels.

Music Publishing revenues increased to $168 million for the three months ended June 30, 2008 as compared to $157 million for the three months ended June 30, 2007. Excluding the favorable impact of foreign currency exchange rates, total Music Publishing revenues decreased $1 million or 1%.

Revenue by Geographical Location

U.S. revenues decreased by $26 million, or 6%, to $377 million from $403 million for the three months ended June 30, 2008 due to a decrease of $49 million in physical sales. Prior period differences in the U.S. Recorded Music business were due to the timing of releases and declines in the physical business. This was offset by an increase of $24 million in digital revenues which was due primarily to the continued growth of digital distribution channels, and digital marketing efforts.

International revenues increased by $70 million, or 17% to $477 million for the three months ended June 30, 2008 from $407 million for the three months ended June 30, 2007. This increase was primarily related to an increase of $39 million in physical and licensing revenues and an increase of $20 million in digital revenues. The increase in physical sales primarily relates to a strong local international repertoire and a larger number of top-selling albums in international territories, primarily in Europe. The increase in digital revenues reflects continued growth and development of new distribution channels and continued proliferation of digital as a preferred means of consumption. Excluding the favorable impact of foreign currency exchange rates, total international revenue increased by $17 million, or 4%. In addition, Music Publishing revenues increased primarily due to an increase in performance revenue.

Cost of revenues

Our cost of revenues is composed of the following amounts (in millions):


	For the Three Months Ended June 30,				*2008 vs 2007*
	2008		2007		$ Change			% Change
Artist and repertoire costs	$	298	$	298	$	—		—
Product costs		132		115		17		15	%
Licensing costs		11		16		(5	)	-31	%

Total cost of revenues	$	441	$	429	$	12		3	%

Our cost of revenues increased by $12 million, or 3%, from $429 million for the three months ended June 30, 2007. Expressed as a percent of revenues, cost of revenues was 52% and 53% for the three months ended June 30, 2008 and June 30, 2007, respectively.

Artist and repertoire costs decreased as a percentage of revenues to 35% in the current year from 37% in the prior year driven primarily by lower royalty rates on products sold in the current-year period compared with those in the prior-year period.

Product costs increased from 14% of revenues in the three months ended June 30, 2007 to 16% of revenues in the three months ended June 30, 2008. The increase was primarily due to changes in product mix and higher distribution fees on third-party distribution revenues.

Selling, general and administrative expenses

Our selling, general and administrative expenses are composed of the following amounts (in millions):


	For the Three Months Ended June 30,				*2008 vs 2007*
	2008		2007		$ Change			% Change
General and administrative expense (1)	$	145	$	142	$	3		2	%
Selling and marketing expense		136		130		6		5	%
Distribution expense		19		25		(6	)	-24	%

Total selling, general and administrative expense	$	300	$	297	$	3		1	%

(1)	Includes depreciation expense of $9 million and $10 million for the three months ended June 30, 2008, and 2007, respectively.

Selling, general and administrative expenses increased by $3 million, or 1%, to $300 million for the three months ended June 30, 2008. Expressed as a percent of revenues, selling, general and administrative expenses were 36% and 37% for the three months ended June 30, 2008 and June 30, 2007, respectively.

General and administrative costs increased by $3 million compared to the three months ended June 30, 2007. The increase in general and administrative costs reflects recent acquisitions and various upgrades to our IT infrastructure, including financial reporting systems.

Selling and marketing remained flat as a percentage of revenues at 16% for the three months ended June 30, 2008 and June 30, 2007.

Distribution costs decreased by $6 million compared to the three months ended June 30, 2007. The decrease distribution costs primarily reflects the decline in the physical distribution of products as well as a decrease in bad debt expense from the prior year.

Other income

Other income was $52 million for the three months ended June 30, 2007. The income related to the settlement of contingent claims held by us relating to Bertelsmann’s relationships with Napster in 2000-2001 that occurred during the three months ended June 30, 2007. We recorded the income based on the settlement amount, net of estimated amounts payable to our recording artists and songwriters with respect to royalties. We did not record any other income for the three months ended June 30, 2008.

Restructuring costs

Our restructuring costs were $32 million for the three months ended June 30, 2007. These were mainly severance costs incurred in connection with our realignment plan. We did not record any restructuring costs in the three months ended June 30, 2008.

Reconciliation of Consolidated Historical OIBDA to Operating Income and Net Loss

As previously described, we use OIBDA as our primary measure of financial performance. The following table reconciles OIBDA to operating income from continuing operations, and further provides the components from operating income from continuing operations to net loss for purposes of the discussion that follows (in millions):


	For the Three Months Ended June 30,						*2008 vs 2007*
	2008			2007			$ Change			% Change
OIBDA	$	116		$	108		$	8		7	%
Depreciation expense		(9	)		(10	)		1		-10	%
Amortization expense		(56	)		(52	)		(4	)	8	%

Operating income from continuing operations		51			46			5		11	%
Interest expense, net		(43	)		(45	)		2		-4	%
Minority interest, net		(2	)		(2	)		—		—
Other expense, net		(2	)		(4	)		2		-50	%

Income (loss) from continuing operations before income taxes		4			(5	)		9		n/a
Income tax expense		(13	)		(11	)		(2	)	18	%

Loss from continuing operations		(9	)		(16	)		7		-44	%
Loss from discontinued operations, net of taxes		—			(1	)		1		-100	%

Net loss	$	(9	)	$	(17	)	$	8		-47	%

OIBDA

Our OIBDA increased by $8 million to $116 million for the three months ended June 30, 2008 as compared to $108 million for the three months ended June 30, 2007. Excluding the impact of foreign currency exchange rates, OIBDA increased $1 million, or 1%, for the three months ended June 30, 2008. Expressed as a percentage of revenues, total OIBDA margin was 14% for the three months ended June 30, 2008 and June 30, 2007. The increase in OIBDA primarily relates to decreased cost of revenues as a percentage of revenues to 52% for the three months ended June 30, 2008 from 53% for the three months ended June 30, 2007, and decreased selling, general and administrative costs as a percentage of revenues to 35% for the three months ended June 30, 2008 from 37% for the three months ended June 30, 2007.

See “Business Segment Results” presented hereinafter for a discussion of OIBDA by business segment.

Depreciation expense

Our depreciation expense decreased by $1 million, to $9 million for three months ended June 30, 2008.

Amortization expense

Amortization expense for the three months ended June 30, 2008 increased by $4 million, or 8%, to $56 million. The increase in amortization expense relates to the acquisition of various music publishing copyrights and our acquisition rights related to Frank Sinatra Enterprises in the first quarter of fiscal year 2008.

Operating income from continuing operations

Our operating income from continuing operations increased $5 million, to $51 million for the three months ended June 30, 2008 as compared to $46 million for the prior year. The increase in operating income primarily relates to the decreased cost of revenues as a percentage of revenues to 52% for the three months ended June 30, 2008 from 53% for the three months ended June 30, 2007, and decreased selling, general and administrative costs as a percentage of revenues to 35% for the three months ended June 30, 2008 compared from 37% for the three months ended June 30, 2007.

Interest expense, net

Our interest expense, net, decreased $2 million to $43 million for the three months ended June 30, 2008 as compared to $45 million for the three months ended June 30, 2007. This was the result of the fluctuations in interest income earned on our cash balances.

See “—Financial Condition and Liquidity” for more information.

Minority interest expense, net

Minority interest expense for the three months ended June 30, 2008 and for June 30, 2007 was $2 million, which related to the acquisition of several majority-owned affiliates during the prior-year period.

Other expense, net

Other expense, net for the three months ended June 30, 2008 reflects currency exchange movements associated with inter-company receivables and payables that are short term in nature and realized gains and losses on certain foreign currency hedging activities.

Income tax expense

Income tax expense was $13 million for the three months ended June 30, 2008 compared to $11 million for the three months ended June 30, 2007. The increase in tax expense is primarily related to an increase in income earned by our foreign affiliates compared to the prior-year quarter. There is no tax benefit realized from any related U.S. losses as a full valuation allowance exists.

Loss from continuing operations

Our loss from continuing operations decreased by $7 million to $9 million for the three months ended June 30, 2008 as compared to loss of $16 million for the three months ended June 30, 2007. The decrease in the loss from continuing operations is primarily the result of an increase in operating income from continuing operations and a decrease in interest expense and improvements in OIBDA and operating income discussed above.

Net loss

Our net loss decreased by $8 million, to $9 million for the three months ended June 30, 2008 as compared to a net loss of $17 million for the three months ended June 30, 2007. The decrease in the net loss is primarily the result of an increase in operating income from continuing operations and a decrease in interest expense, net.

Business Segment Results

Revenue, OIBDA and operating income (loss) from continuing operations by business segment are as follows (in millions):


	For the Three Months Ended June 30,						*2008 vs 2007*
	2008			2007			$ Change			% Change
Recorded Music
Revenue	$	686		$	653		$	33		5	%
OIBDA		110			110			—		—
Operating income from continuing operations		66			66			—		—

Music Publishing
Revenue	$	168		$	157		$	11		7	%
OIBDA		33			33			—		—
Operating income from continuing operations		15			18			(3	)	-17	%

Corporate expenses and eliminations
Revenue	$	(6	)	$	(6	)	$	—		—
OIBDA		(27	)		(35	)		8		-23	%
Operating loss from continuing operations		(30	)		(38	)		8		-21	%

Total
Revenue	$	848		$	804		$	44		5	%
OIBDA		116			108			8		7	%
Operating income from continuing operations		51			46			5		11	%

Recorded Music

Revenues

Recorded Music revenues increased by $33 million, or 5%, to $686 million for the three months ended June 30, 2008 from $653 million for the three months ended June 30, 2007. Excluding the impact of foreign currency exchange rates, total Recorded Music revenues decreased $8 million, or 1% for the three months ended June 30, 2008. Recorded Music revenues represented 80% and 81% of consolidated revenues, prior to corporate and revenue eliminations, for the three months ended June 30, 2008 and June 30, 2007, respectively. International Recorded Music revenues were $367 million and $308 million, or 53% and 47% of consolidated Recorded Music revenues for the three months ended June 30, 2008 and June 30, 2007, respectively.

The increase in Recorded Music revenues was primarily attributable to an increase in digital sales of $44 million, or 39%. The increase in digital revenue reflects the continued growth and development of new distribution channels and the continued proliferation of digital as a preferred means of consumption and digital marketing efforts. The increase was comprised of an increase in U.S. digital sales of $24 million and an increase in international digital sales of $20 million. Digital sales comprised approximately 23% of Recorded Music revenues for the three months ended June 30, 2008, up from 17% of Recorded Music revenues in the three months ended June 30, 2007 which is reflective of the shifting of the market to digital media from physical media. Licensing revenue also increased by $13 million, or 27%, to $61 million for the three months ended June 30, 2008 from $48 million for the three months ended June 30, 2007. The increases to Recorded Music digital and licensing revenues were partially offset by a decrease in physical sales of $24 million for the three months ended June 30, 2008. The decrease in physical sales was driven by the timing of releases and declines in the physical business not being offset by growth in the digital business. In addition, U.S. retailers continue to actively manage their inventory levels in response to the tougher economy and credit markets as well as the changing underlying demand for physical recorded music product. The U.S. physical declines were partially offset by strong international results, particularly in Europe.

OIBDA and Operating income from continuing operations

Recorded Music OIBDA was $110 million for both the three months ended June 30, 2008 and June 30, 2007. Recorded Music operating income from continuing operations included the following (in millions):


	For the Three Months Ended June 30,						*2008 vs 2007*
	2008			2007			$ Change			% Change
OIBDA	$	110		$	110		$	—		—
Depreciation and amortization		(44	)		(44	)		—		—

Operating income from continuing operations	$	66		$	66		$	—		—

Recorded Music cost of revenues is composed of the following amounts (in millions):

	For the Three Months Ended June 30,						*2008 vs 2007*
	2008			2007			$ Change			% Change
Artist and repertoire costs	$	185		$	193		$	(8	)	-4	%
Product costs		132			115			17		15	%
Licensing		10			17			(7	)	-41	%

Total cost of revenues	$	327		$	325		$	2		1	%

Recorded Music selling, general and administrative expenses are composed of the following amounts (in millions):

	For the Three Months Ended June 30,						*2008 vs 2007*
	2008			2007			$ Change			% Change
General and administrative expense (1)	$	103		$	92		$	11		12	%
Selling and marketing expense		133			127			6		5	%
Distribution expense		18			25			(7	)	-28	%

Total selling, general and administrative expense	$	254		$	244		$	10		4	%

(1)	Includes depreciation expense of $5 million and $7 million for the three months ended June 30, 2008 and June 30, 2007, respectively.

Recorded Music operating income from continuing operations remained flat year-over-year.

Recorded Music OIBDA remained flat year-over year at $110 million for both the three months ended June 30, 2008 and June 30, 2007. Expressed as a percentage of Recorded Music revenues, Recorded Music OIBDA was 16% and 17% for the three months ended June 30, 2008 and June 30, 2007, respectively. Excluding the impact of foreign currency exchange rates, OIBDA decreased by $5 million due primarily to the decrease in other income related to the Recorded Music portion of the Napster Settlement of $49 million.

Cost of revenues

Recorded Music cost of revenues increased $2 million, or 1% for the three months ended June 30, 2008. This was comprised of an increase in product costs of $17 million, offset by decreases in artist and repertoire costs of $8 million and licensing costs of $7 million. The increase was primarily due to changes in product mix and higher distribution fees on third-party distribution revenues. Artist and repertoire costs decreased by 3% as a percentage of revenues. This decrease was in line with the decrease in physical sales and lower artist and product mix consisting of copyright royalty rates.

Selling, general and administrative costs

Recorded Music selling, general and administrative costs increased $10 million, or 4%, for the three months ended June 30, 2008. This increase was primarily the result of an increase in distribution costs as previously described and an increase in general and administrative costs associated with several recent acquisitions and reflects various investments in IT infrastructure. These increases were offset in part by a decrease in marketing costs due to continued cost management efforts and timing of releases.

Music Publishing

Revenues

Music Publishing revenues increased 7% to $168 million for the three months ended June 30, 2008 as compared to $157 million for the three months ended June 30, 2007. Excluding the favorable impact of foreign currency exchange rates, total Music Publishing revenues decreased $1 million or 1%.

Mechanical revenue decreased by $4 million as a result of continued industry-wide declines in physical sales. The mechanical revenue declines were offset by an increase in performance revenue, which increased by $10 million primarily related to the popularity of certain compositions and synchronization revenue, which increased by $2 million related to additional proliferation into new media. Digital revenues increased $3 million as the transition in the recorded music industry continues.

Digital sales represented 6% and 5% of Music Publishing revenues for the three months ended June 30, 2008 and June 30, 2007, respectively. Music Publishing revenues represented 20% and 19% of consolidated revenues, prior to corporate and revenue eliminations, for the three months ended June 30, 2008 and June 30, 2007, respectively.

OIBDA and Operating income from continuing operations

Music Publishing OIBDA remained flat year-over year. Music Publishing operating income from continuing operations includes the following (in millions):


	For the Three Months Ended June 30,						*2008 vs 2007*
	2008			2007			$ Change			% Change
OIBDA	$	33		$	33		$	—		—
Depreciation and amortization		(18	)		(15	)		(3	)	20	%

Operating income from continuing operations	$	15		$	18		$	(3	)	-17	%

Music Publishing cost of revenues is composed of the following amounts (in millions):


	For the Three Months Ended June 30,				*2008 vs 2007*
	2008		2007		$ Change		% Change
Artist and repertoire costs	$	121	$	111	$	10	9	%

Total cost of revenues	$	121	$	111	$	10	9	%

Music Publishing selling, general and administrative expenses is comprised of the following amounts (in millions):


	For the Three Months Ended June 30,				*2008 vs 2007*
	2008		2007		$ Change		% Change
General and administrative expense (1)	$	15	$	15	$	—	—

Total selling, general and administrative expense	$	15	$	15	$	—	—

(1)	Includes depreciation expense of $1 million for the three months ended June 30, 2008.

Music Publishing operating income from continuing operations decreased $3 million or 17% for the three months ended June 30, 2008 reflecting a portion of prior-year items, including $1 million in expenses related to the company’s fiscal 2007 realignment initiatives and a $3 million benefit related to our settlement with Bertelsmann AG regarding Napster.

Music Publishing OIBDA remained flat year-over-year for the three months ended June 30, 2008 and June 30, 2007. Expressed as a percentage of Music Publishing revenues, Music Publishing OIBDA was 20% and 21% for the three months ended June 30, 2008 and June 30, 2007, respectively. Excluding a $4 million favorable impact of foreign currency exchange rates, Music Publishing OIBDA decreased by $4 million.

Cost of revenues

Music Publishing artist and repertoire costs increased by $10 million, or 9% which was primarily related to the change in revenue mix discussed above as different royalty rates apply to the different revenue streams.

Selling, general and administrative expenses

Music Publishing selling, general and administrative costs remained flat year-over-year.

Corporate Expenses and Eliminations

Corporate expenses before depreciation and amortization expense decreased by $8 million, to $27 million for the three months ended June 30, 2008 as compared to $35 million for the three months ended June 30, 2007.

Nine months ended June 30, 2008 Compared to Nine months ended June 30, 2007

Consolidated Historical Results

Revenues

Our revenues were composed of the following amounts (in millions):


	For the Nine Months Ended June 30,						*2008 vs 2007*
	2008			2007			$ Change			% Change
Revenue by Type
Physical sales	$	1,576		$	1,626		$	(50	)	-3	%
Digital		443			310			133		43	%
Licensing		169			165			4		2	%

Total Recorded Music		2,188			2,101			87		4	%
Mechanical		177			180			(3	)	-2	%
Performance		180			159			21		13	%
Synchronization		67			62			5		8	%
Digital		28			20			8		40	%
Other		15			12			3		25	%

Total Music Publishing		467			433			34		8	%
Intersegment elimination		(18	)		(18	)		—		—

Total Revenue	$	2,637		$	2,516		$	121		5	%
Revenue by Geographical Location
U.S. Recorded Music	$	1,016		$	1,065		$	(49	)	-5	%
U.S. Publishing		169			162			7		4	%

Total U.S.		1,185			1,227			42		-3	%
International Recorded Music		1,172			1,036			136		13	%
International Publishing		298			271			27		10	%

Total International		1,470			1,307			163		12	%
Intersegment eliminations		(18	)		(18	)		—		—

Total Revenue	$	2,637		$	2,516		$	121		5	%

Total Revenue

Total revenues increased by $121 million, or 5%, to $2,637 million, from $2,516 million for the nine months ended June 30, 2007. Excluding the favorable impact of foreign currency exchange rates, total revenues decreased $32 million or 1%. Recorded Music and Music Publishing revenues comprised 82% and 18% of total revenues for the nine months ended June 30, 2008, respectively, compared to 83% and 17% for the nine months ended June 30, 2007. U.S and international revenues comprised 45% and 55% for the nine months ended June 30, 2008, compared to 49% and 51% for the nine months ended June 30, 2007, respectively.

Total digital revenues increased by $141 million, or 43% to $471 million, from $330 million for the nine months ended June 30, 2007. Excluding the impact of foreign currency rates, total digital revenues increased by $131 million, or 39% to $471 million, from $340 million for the nine months ended June 30, 2007. Total digital revenues represented 18% and 13% of consolidated revenues for the nine months ended June 30, 2008 and June 30, 2007, respectively. Total digital revenues for the nine months ended June 30, 2008 were comprised of U.S. revenues of $305 million, or 65% of total digital revenues, and international revenues of $166 million, or 35% of total digital revenues. Total digital revenues for the nine months ended June 30, 2007 were comprised of U.S. revenues of $226 million, or 68% of total digital revenues, and international revenues of $104 million, or 32% of total digital revenues.

Recorded Music revenues increased by $87 million, or 4%, from $2,101 million for the nine months ended June 30, 2007. Excluding the impact of foreign currency exchange rates, total Recorded Music revenues decreased $31 million, or 1% for the nine months ended June 30, 2008. The increase was primarily attributable to the increase in digital sales of $133 million and $4 million in licensing revenue, offset by a decrease in physical sales of $50 million. The increase in digital revenues reflects continued growth and development of new distribution channels and continued proliferation of digital as a preferred means of consumption and digital marketing efforts, as well as a rate increase on revenue from satellite radio services in the U.S. The decrease in physical sales was driven by the timing of releases and overall declines in the physical market. In addition, U.S. retailers are more actively managing their inventory levels in response to the tougher economy and credit markets as well as the changing underlying demand for physical recorded music product.

Music Publishing revenues increased to $467 million for the nine months ended June 30, 2008 as compared to $433 million for the nine months ended June 30, 2007. Excluding the favorable impact of foreign currency exchange rates, total Music Publishing revenues decreased $1 million, or less than a percentage point.

Revenue by Geographical Location

U.S. revenues decreased by $42 million, or 3%, due to a decrease of $97 million in physical sales and $26 million in licensing revenues. Period over period variances in the U.S. Recorded Music business were due to the timing of releases and declines in the physical business which are not currently being offset by growth in the digital business, though digital performance was quite strong. In addition, U.S. retailers are more actively managing their inventory levels in response to the tougher economy and credit markets as well as the changing underlying demand for physical recorded music product. The decrease in U.S. licensing revenues is primarily due to the signing of several significant licensing deals in the prior-year quarter. This was offset by an increase in Recorded Music digital revenue of $74 million which was driven by continued growth and development of new distribution channels as well as a rate increase on revenue from satellite radio services in the U.S. In addition, there was an increase in U.S. Music Publishing revenues of $7 million.

International revenues increased by $163 million, or 12% to $1,470 million, from $1,307 million for the nine months ended June 30, 2007. Excluding the favorable impact of foreign currency, international revenues increased $10 million, or 1%, from $1,460 in the nine months ended June 30, 2007. The increase was related to the increase in international physical sales of $47 million and $59 million of international digital sales. In addition, licensing revenues increased by $30 million and Music Publishing revenues increased by $27 million. The increase in physical sales primarily relates to a stronger local repertoire and larger number of top-selling albums in international territories, primarily in Asia and Europe. The increase in digital revenues reflects continued growth and development of new distribution channels and continued proliferation of digital as a preferred means of consumption and digital marketing efforts. Licensing revenue increased related to an increase in broadcasting fees. In addition, Music Publishing revenues increased primarily due to an increase in performance revenue.

Cost of revenues

Our cost of revenues is composed of the following amounts (in millions):


	For the Nine Months Ended June 30,				*2008 vs 2007*
	2008		2007		$ Change		% Change
Artist and repertoire costs	$	910	$	890	$	20	2	%
Product costs		434		420		14	3	%
Licensing costs		55		54		1	2	%

Total cost of revenues	$	1,399	$	1,364	$	35	3	%

Our cost of revenues increased by $35 million, or 3%, from $1,364 million for the nine months ended June 30, 2007. Expressed as a percent of revenues, cost of revenues was 53% and 54% for the three months ended June 30, 2008 and June 30, 2007, respectively.

Artist and repertoire costs remained flat as a percentage of revenues year-over-year at 35% for the nine months ended June 30, 2008 and June 30, 2007.

Product costs decreased slightly as a percentage of revenues from 17% of revenues in the nine months ended June 30, 2007 to 16% of revenues in the nine months ended June 30, 2008. The decrease reflects a change in the product mix.

Selling, general and administrative expenses

Our selling, general and administrative expenses are composed of the following amounts (in millions):


	For the Nine Months Ended June 30,				*2008 vs 2007*
	2008		2007		$ Change		% Change
General and administrative expense (1)	$	444	$	392	$	52	13	%
Selling and marketing expense		429		413		16	4	%
Distribution expense		62		57		5	9	%

Total selling, general and administrative expense	$	935	$	862	$	73	8	%

(1)	Includes depreciation expense of $35 million and $30 million for the nine months ended June 30, 2008, and 2007, respectively.

Selling, general and administrative expenses increased by $73 million, or 8%, to $935 million for the nine months ended June 30, 2008. Expressed as a percent of revenues, selling, general and administrative expenses were 35% and 34% for the nine months ended June 30, 2008 and June 30, 2007, respectively.

General and administrative costs increased by $52 million or 13%, which was primarily driven by an increase in general and administrative costs reflects various upgrades to our IT infrastructure, including financial reporting systems, as well as an increase related to recent acquisitions.

Selling and marketing remained flat as a percentage of revenues at 16% for the nine months ended June 30, 2008 and June 30, 2007.

Distribution costs increased by $5 million, or 9%, for the nine months ended June 30, 2007. Expressed as a percentage of revenues, distribution costs remained flat year over year.

Other income

Other income was $3 million and $52 million for the nine months ended June 30, 2008 and June 30, 2007, respectively. Other income of $3 million for the nine months ended June 30, 2008 relates primarily to our share of a contingent payment related to the settlement with Kazaa recorded in the first quarter of this fiscal year. Other income of $52 million for the nine months ended June 30, 2007 million related to the settlement of contingent claims held by us relating to Bertelsmann’s relationships with Napster in 2000-2001. We recorded the income based on the settlement amount, net of estimated amounts payable to our recording artists and songwriters with respect to royalties.

Restructuring costs

Our restructuring costs were $44 million for the nine months ended June 30, 2007. These were mainly severance costs incurred in connection with our realignment plan of which $32 million was recorded in the three months ended June 30, 2007. We did not record any restructuring costs in the three months ended June 30, 2008.

Reconciliation of Consolidated Historical OIBDA to Operating Income and Net Income (Loss)

As previously described, we use OIBDA as our primary measure of financial performance. The following table reconciles OIBDA to operating income, from continuing operations and further provides the components from operating income from continuing operations to net loss for purposes of the discussion that follows (in millions):


	For the Nine Months Ended June 30,						*2008 vs 2007*
	2008			2007			$ Change			% Change
OIBDA	$	341		$	328		$	13		4	%
Depreciation expense		(35	)		(30	)		(5	)	17	%
Amortization expense		(165	)		(153	)		(12	)	8	%

Operating income from continuing operations	$	141		$	145			(4	)	-3	%
Interest expense, net		(138	)		(137	)		(1	)	1	%
Minority interest expense		(4	)		(2	)		(2	)	100	%
Other expense, net		(4	)		(4	)		—		—

(Loss) income from continuing operations before income taxes	$	(5	)	$	2			(7	)	n/a

Income tax expense		(36	)		(27	)		(9	)	33	%
Loss from continuing operations	$	(41	)	$	(25	)		(16	)	64	%

Loss from discontinued operations		(21	)		(1	)		(20	)	n/a
Net loss	$	(62	)	$	(26	)