View:

Download DOC

Download PDF

Download XLS

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2007

OR

For the transition period from                                       to                                      

Commission File Number 001-32686

VIACOM INC.

(Exact name of registrant as specified in its charter)

1515 Broadway

New York, NY 10036

(212) 258-6000

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:

None

(Title Of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x  No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ¨  No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x  Accelerated filer ¨  Non-accelerated filer ¨  Smaller reporting company ¨

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

As of the close of business on June 30, 2007, the last business day for the registrant’s most recently completed second fiscal quarter, there were 58,288,799 shares of the registrant’s Class A common stock, par value $0.001 per share, and 620,257,916 shares of its Class B common stock, par value $0.001 per share, outstanding. The aggregate market value of Class A common stock held by non-affiliates as of June 30, 2007 was approximately $476.6 million (based upon the closing price of $41.60 per share as reported by the New York Stock Exchange on June 29, 2007). The aggregate market value of Class B common stock held by non-affiliates as of June 30, 2007 was approximately $24.5 billion (based upon the closing price of $41.63 per share as reported by the New York Stock Exchange on June 29, 2007).

As of January 31, 2008, 57,373,044 shares of our Class A common stock and 583,508,627 shares of our Class B common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Viacom Inc.’s Notice of 2008 Annual Meeting of Stockholders and Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the “Proxy Statement”) (Portion of Item 5) (Part III).

Table of Contents

TABLE OF CONTENTS

Table of Contents

PART I

Item 1. Business.

Viacom is a leading global entertainment content company. We engage audiences on television, motion picture and digital platforms through many of the world’s best known entertainment brands. We operate through two reporting segments: Media Networks, which includes MTV Networks (“MTVN”) and BET Networks (“BETN”); and Filmed Entertainment. References in this document to “Viacom,” “Company,” “we,” “us” and “our” mean Viacom Inc. and our consolidated subsidiaries through which our various businesses are conducted, unless the context requires otherwise.

MEDIA NETWORKS

Through a combination of original and acquired programming and other entertainment content, the Media Networks brands are focused on providing content that appeals to key demographics attractive to advertisers across multiple distribution platforms, including cable television, satellite, mobile and digital media assets.

		MTV Networks reaches over 520 million households worldwide via its multiplatform properties, which include MTV: Music Television®, MTV2®, mtvU®, MTV Tr3s®, VH1®, VH1 Classic™, CMT®: Country Music Television™, Logo®, Harmonix®, Nickelodeon®, Nick at Nite®, Noggin®, The N™, Nicktoons®, Neopets®, COMEDY CENTRAL®, Spike TV® and TV Land®, among others. Operating in 160 countries and territories, MTV Networks connects with its audiences through its approximately 150 channels and 300 interactive digital media properties, which include online, broadband, mobile and interactive television services, and its robust consumer products business.
		BET Networks is a leading provider of entertainment, music, news and public affairs television programming targeted to the African-American audience. The primary BET channel reaches approximately 88 million domestic television households and can be seen in the United States, Canada, the Caribbean and, beginning February 28, 2008, the United Kingdom. BET® is the preeminent African-American media brand with a diverse group of business extensions: BET.com®; BET Digital Networks, comprised of BETJ™, BET Gospel® and BET Hip Hop®; and BET International, among other properties.

FILMED ENTERTAINMENT

The Filmed Entertainment segment produces, finances and distributes motion pictures and other entertainment content through its well-known group of brands. In 2007, Paramount was ranked the number one motion picture studio based on domestic box office revenues.

1

Table of Contents

Our Media Networks segment derives revenues principally from advertising sales, affiliate fees and ancillary revenues. Revenues from the Filmed Entertainment segment are generated primarily from feature film production and distribution, including exhibition of motion pictures in theatrical release, sale of home entertainment product, and distribution to pay and basic cable television, broadcast television, syndicated television and digital media. Revenues from the Media Networks segment accounted for 60%, 64% and 71% of our revenues for 2007, 2006 and 2005, respectively, and revenues from the Filmed Entertainment segment accounted for 41%, 37% and 31% of our revenues for those periods, respectively, with elimination of intercompany revenues being (1)%, (1)% and (2)%, respectively. We generated approximately 27% of our total revenues in 2007 from international operations, principally in Europe, 24% in 2006 and 22% in 2005. In 2007, our total international revenues were $3.68 billion, of which 63% was generated in Europe.

Key Transactions

The following describes some of our key acquisitions, dispositions, investments and strategic arrangements in 2007:

Viacom

Media Networks

Filmed Entertainment

For additional information about these transactions and other acquisitions and dispositions, see Notes 4 and 20 to our consolidated financial statements.

2

Table of Contents

Our Separation from CBS Corporation

On December 31, 2005, we became a stand-alone public company in connection with our separation from the former Viacom Inc. (“Former Viacom”), which is now known as CBS Corporation. In connection with the separation, each share of Former Viacom Class A common stock was converted into the right to receive 0.5 of a share of Viacom Class A common stock and 0.5 of a share of CBS Corporation Class A common stock. Similarly, each share of Former Viacom Class B common stock was converted into the right to receive 0.5 of a share of Viacom Class B common stock and 0.5 of a share of CBS Corporation Class B common stock.

Corporate Information

We were organized as a Delaware corporation in 2005 and our principal offices are located at 1515 Broadway, New York, New York 10036. Our telephone number is (212) 258-6000 and our website is www.viacom.com. Information on our website is not intended to be incorporated into this annual report.

Business Strategy

Viacom produces branded entertainment content for highly desirable demographics, which we seek to distribute through virtually every platform that our audiences use to consume entertainment. In addition to maintaining our connection with the fans of our content, we are focused on expanding and enhancing our brands through the creation of original hit programming and other content, including games, and the expansion of the experiences we offer through online and wireless platforms. We seek to increase our revenues by expanding our audiences and offering creative ways for advertisers, cable, satellite and mobile operators, and other interested parties to reach these audiences. Internationally, we are expanding our presence while focusing our resources in the regions and on the demographics that offer the greatest growth opportunities for our brands. In the motion picture business, we are focused on continuing to improve revenues, our market position and profitability through the continued development of franchise and branded films and the diversification of revenue streams, such as making library product available online. Companywide, we are committed to fostering a creative and diverse culture, which will enable us to continue to develop unique and cutting-edge content for our audiences and maintain our position as a market leader.

MEDIA NETWORKS

Through MTV Networks and BET Networks, our media networks businesses own and operate program services, websites and other digital media services in the United States and abroad. Our Media Networks segment generates revenues principally from three sources: (i) the sale of advertising time on our cable television networks and digital properties and services, (ii) the receipt of affiliate fees from cable television operators, direct-to-home or “DTH” satellite operators, mobile networks and other distributors and (iii) ancillary revenues, which include home entertainment sales of our programming, the licensing of our content to third parties, the licensing of our brands for consumer products, including video games, and the creation and distribution of video games and other interactive products. In 2007, revenues from advertising sales, affiliate fees and ancillary sales were 58%, 29% and 13%, respectively, of total revenues for the Media Networks segment.

For our program services, the advertising revenues generated by each program service depend on the number of households subscribing to the service, household and viewership demographics and ratings as determined by third party research companies such as Nielsen Media Research (“Nielsen”). Both MTV Networks and BET Networks target key audience demographics considered particularly attractive to advertisers, notably viewers in the 18-49 age range who are viewed as having significant spending power. In addition, our individual program services further target niche audience groups. For example, BET Networks provides programming targeted to African-American audiences, Nickelodeon and other MTVN Kids and Family Group channels target the younger demographics and the MTVN Entertainment group primarily exhibits programs targeted to adult and male viewers. The advertising industry has recently introduced commercial ratings, which measure audience size for a

3

Table of Contents

commercial. Commercial ratings are currently measured on a “C3” basis, which means the number of viewers that watch the commercial live or via playback during the three days following the live broadcast. We are exploring various alternatives for the pricing, structure and volume of our advertising spots and commercial segments to reflect this new ratings methodology, which will largely be effective beginning in 2008. Our advertising revenues may also fluctuate due to the mix and availability of programming and entertainment content, the overall strength of the advertising market and seasonal variations, being typically highest in the fourth quarter.

In our digital operations, our online revenue has traditionally been derived from a combination of advertising and sponsorships, subscription services and e-commerce, and with our rapid extension of our brands and content to new distribution platforms, we are working toward new ways of monetizing our increased reach and functionality. Our Media Networks segment now operates approximately 300 interactive digital media properties around the world and during the fourth quarter of 2007, we averaged approximately 89 million unique visitors per month. Our on-air programming drives traffic to our digital properties and vice versa, effectively driving convergent advertising sales, which we believe will be increasingly important to our business. In addition, the virtual communities we have created, such as Nicktropolis, our virtual world for Nickelodeon, are beginning to yield revenues and we are continuing to grow and develop these worlds. MTV Networks also syndicates ad-supported long-form and short-form video content to select online video destinations which creates additional opportunities for audiences to interact with our content online, ultimately driving viewership back to our core channels and online properties.

Revenues from affiliate fees are negotiated with individual cable television operators, DTH satellite operators, mobile networks and other distributors, generally resulting in multi-year carriage agreements with set rate increases. The amount of the fee we receive is determined in part by the number of subscribers to, and success of the programming offered by, our program services. We are currently negotiating renewals of several long-term affiliation agreements, and are looking to build stronger and more expansive multi-media partnerships with the various distributors of our content that maximize the value of these relationships for our brands.

Our ancillary revenues are principally derived from sales of home entertainment products, consumer products licenses and video game sales. We have a dynamic, worldwide consumer products licensing business, which licenses popular characters such as those featured in SpongeBob SquarePants, The Backyardigans, Dora the Explorer, Neopets and South Park in connection with merchandising, video games and publishing worldwide. We generally are paid a royalty based upon a percentage of the licensee’s wholesale revenues, with an advance against future expected royalties. Licensing revenue may vary from period to period depending on the popularity of the property available for license in a particular period and the popularity of licensed products among consumers. In connection with our 2006 acquisition of Harmonix Music Systems, Inc., we expanded our operations to include the creation, marketing and publishing of video games and other interactive products. In November 2007, we launched Rock Band™, a new game that allows players to experience music from the world’s biggest rock artists as a virtual band using drum, bass/lead guitar and microphone peripherals. In addition, as a result of partnerships with major record labels and leading music publishers, Rock Band gamers can choose from and download songs spanning all genres of rock. As of December 31, 2007, over 1.1 million Rock Band bundles had been sold for the Xbox 360^® and Sony’s PlayStation ^®2 and PLAYSTATION^®3 platforms since its launch on November 20, 2007, and we plan to continue to grow and enhance this franchise.

Our media networks properties have also forged a number of partnerships with other leaders in the digital world. In addition to our new strategic arrangement with Microsoft and the Rhapsody America venture with RealNetworks described above, we distribute video content through online syndication partners including AOL, Bebo, Comcast’s Fancast, Joost, MSN Dailymotion, GoFish, imeem, MeeVee and Veoh. We also have arrangements in place with download-to-own services, including Apple’s iTunes, Amazon, BitTorrent, Wal-Mart and Microsoft’s Xbox 360, to make various MTV, MTV2, VH1, CMT, Logo, Nickelodeon, Nick Jr., Nick at Nite, The N, Comedy Central, Spike TV, TV Land and BET programs available for purchase online. We have a multi-year deal with Yahoo! under which, among other things, Yahoo! is the exclusive provider of sponsored site

4

Table of Contents

search and content match on certain of our websites. In addition, we have a multi-year strategic relationship with Social Project, Inc., which develops and operates our Flux social networking platform that launched in September 2007. Flux creates a seamless connection between our large brand and niche, vertical sites, as well as content and communities from all over the Internet, allowing our audiences to collect and share their favorite content from anywhere.

Social Responsibility

Viacom’s social responsibility commitment leverages the power of its brands and the strength of its audience relationships to encourage action on a variety of pro-social issues that are important to our partners, employees, audiences and shareholders alike. Our businesses fuel social change through programs like BET’s Rap-It-Up, CMT’s One Country, Comedy Central’s Address the Mess, MTV’s Think, Nickelodeon’s Let’s Just Play, Noggin’s Get Ready to Read, TV Land’s Family Table and Viacom’s commitment to the Dr. Martin Luther King Memorial in Washington D.C. In September 2007, The VH1 Save The Music Foundation celebrated 10 years of successfully restoring music education programs in public schools across the country. More information about our social responsibility initiatives is available on our website.

MTV NETWORKS

MTV Networks is generally comprised of four groups based on target audience, similarity of programming and other factors: the Music and Logo Group, the Kids and Family Group, the Entertainment Group and International. Information about each group and its key brands is discussed below. Unless otherwise indicated, the domestic television household numbers set forth below are according to Nielsen, the Internet user data is according to comScore Media Metrix (U.S. data only unless otherwise indicated) and the video stream data is based on internal tracking. International reach statistics are derived from internal data review coupled with external sources when available.

Music and Logo Group

The Music and Logo Group includes our music-oriented program services and digital properties, which generally provide youth-oriented programming targeting the 18-24 and 18-34 demographics, and Logo, our channel for the lesbian, gay, bisexual and transgender audience. Some of our key brands in this group include:

		MTV: Music Television
		•     MTV is a leading multimedia destination offering a diverse line-up of original programming, music videos, news and commentary and awards shows, among other programs. MTV’s programming covers everything from music, fashion, lifestyle and sports to attitudes, politics, news and trends. MTV was named the World’s Most Valuable Pure Media Brand for the eighth year in a row, according to The Interbrand/Business Week 2007 World’s Most Valuable Brands Report. •     Programming highlights in 2007 included A Shot At Love With Tila Tequila, The Hills, Life of Ryan, Making the Band, Run’s House, Human Giant, The MTV Video Music Awards and The MTV Movie Awards, among others. MTV operates numerous online destinations, communities and virtual worlds, delivers and creates content for its robust MTV mobile platform, has interests in home video, radio syndication, recorded music, publishing and consumer products, and has feature films distributed by Paramount under the MTV Films brand. •     MTV reached approximately 96 million domestic television households as of December 31, 2007. Worldwide, MTV can be seen in more than 520 million households in 160 countries and territories as of December 31, 2007 via its channels, branded program blocks on third party broadcasters and broadband services.

5

Table of Contents

		MTV Digital
		•     MTV.com is an ad-supported online/broadband service featuring entertainment and pop culture content, including music, music videos and performances, news and interviews, movies, video games, ringtones, and links to MTV shows and specials. •     In the fourth quarter of 2007, MTV.com averaged approximately 8 million monthly unique visitors and recorded nearly 200 million video streams. •     In 2007, MTV launched six new virtual worlds, including “Virtual Hills,” “Virtual Real World Sydney,” “The Virtual VMAs” and “Virtual Pimp My Ride,” with viewers spending more than 183 million minutes “in-world” over the year according to internal data. MTV also launched nine social-media portals such as RealWorldCasting.com, IAmOnTila.com, WannaBeMade.com and MySuperSweet16.com, which generated 75 million page views and nearly 6 million visits throughout the year according to internal data.
		MTV2 •     MTV2 is a music-oriented network featuring music videos, long form music programs, exclusive access to interviews with bands and ground-breaking music before it hits mainstream, as well as a line-up of irreverent, lifestyle and cross-platform programming. •     Programming highlights in 2007 included Dew Circuit Breakout, Subterranean, Headbangers Ball and Sucker Free. •     MTV2 reached approximately 72 million domestic television households as of December 31, 2007.
		mtvU
		•     mtvU is an on-air, online, wireless and on campus network created by and for the college audience. Distributing its content via satellite 24 hours a day to over 750 campuses and through cable, mobile and other outlets, mtvU is the largest and most comprehensive multi-platform channel for college students. •     mtvU also owns and operates media/entertainment websites dedicated to matters of interest to college students and college communities, including www.mtvu.com, a network of college newspaper websites referred to as the College Media Network, as well as RateMyProfessors.com.
		•     This bi-cultural entertainment destination is rooted in the fusion of Latin and American music, cultures and languages. MTV Tr3s is now available in over 50% of domestic Hispanic television households. MTV Mobile also launched MTV Tr3s Mobile as a separate video channel across multiple carriers in March 2007. •     MTV Tr3s reached approximately 6.2 million Hispanic households and approximately 31.9 million domestic television households as of December 31, 2007.
		VH1
		•     VH1’s variety of original and acquired programming primarily focuses on music, artists and pop culture. •     Programming highlights in 2007 included Rock of Love, The Salt-n-Pepa Show, I Love New York 2, Charm School and America’s Most Smartest Model, as well as cornerstone events such as the VH1 Hip Hop Honors and the VH1 Rock Honors. •     VH1 reached approximately 95 million domestic television households as of December 31, 2007.

6

Table of Contents

		VH1 Digital
		•     VH1 Digital, which includes VH1.com, VH1Classic.com, VH1 Mobile, VH1 Games and several targeted websites such as BestWeekEver.TV, brings users music and pop-culture content, live events and performances, exclusive celebrity interviews, news, original series, online games and extensive broadband video, including thousands of music videos. •     In the fourth quarter of 2007, VH1.com averaged approximately 4.5 million monthly unique visitors and recorded more than 67 million video streams.
		CMT: Country Music Television and CMT.com
		•     CMT is the top-rated country music network in the United States, carrying original country-music related programming, specials, live concerts and events and music videos. CMT.com features the largest collection of country music videos online and is a recognized authority in country music, news, events and awards shows. •     Programming highlights in 2007 included the CMT Music Awards, CMT original film Dale, Dallas Cowboys Cheerleaders: Making the Team, Trick My Truck, CMT Giants: Hank Williams Jr. and CMT Crossroads. •     CMT reached approximately 87 million domestic television households as of December 31, 2007. In the fourth quarter of 2007, CMT.com averaged approximately 2.2 million monthly unique visitors and recorded more than 27 million video streams.
		Logo
		•     Logo features lesbian and gay-themed feature films, ongoing documentary series, newscasts tailored for the gay and lesbian community and original shows and specials. Logo’s family of websites, including LOGOonline.com, feature a large library of mainstream lesbian, gay, bisexual and transgender-themed streaming video as well as original shows, podcasts, news, blogs and other entertainment that have made it a leading destination for this audience. •     Programming highlights for 2007 included The Big Gay Sketch Show, Rick & Steve: The Happiest Gay Couple in All the World, Exes & Ohs and The Visible Vote 08, a forum on gay and lesbian issues featuring six presidential candidates. •     Logo reached approximately 30 million domestic television households as of December 31, 2007 according to internal data.
		Harmonix
		•     Acquired by MTVN in 2006, Harmonix is one of the world’s leading developers of music-based games, including critically acclaimed games such as Guitar Hero, Frequency, Amplitude and the Karaoke Revolution series. Harmonix’s latest game is Rock Band, which as of December 31, 2007 had sold over 1.1 million bundles since its launch on November 20, 2007. •     Targeting both core gamers (primarily men 15-30) as well as casual gamers (age and gender neutral), Harmonix’s creations have won numerous awards including Interactive Achievement Awards, Game Developer Choice Awards and BAFTA Awards. In 2007 alone, Rock Band won over 30 awards, including E3’s Game Critics Award for Best of Show, WIRED’s Game of the Year and USA Today’s Best Video Game for Teens, and was named one of TIME Magazine’s Best Games of 2007.

7

Table of Contents

Other key properties of the Music and Logo Group include MTV Films, MTVN’s motion picture business, which released Blades of Glory with DreamWorks Pictures in 2007, Freedom Writers with Paramount in 2007 and How She Move with Paramount in 2008; MTV Games, a section of MTV.com for casual games and other game-related content; MHD: Music High-Definition; VH1 Classic; and VH1 Soul.

Kids and Family Group

The Kids and Family Group provides high-quality entertainment and educational programs, websites and broadband services targeted to kids ages 2-17 and families. Some of our key properties in this group include:

		Nickelodeon and Nick at Nite
		•     Nickelodeon, now in its 28th year, has been the number one rated basic cable network for nearly 13 years according to Nielsen. Nickelodeon and Nick Jr., a programming block designed for two to five year olds, feature original programming during daytime hours created for kids ages two to 14. Nickelodeon produces and distributes television programming worldwide, has a dynamic consumer products business, is a leading developer of digital content for kids, and makes feature films under the Nickelodeon Movies brand. Programming highlights in 2007 include iCarly, SpongeBob SquarePants, Back at the Barnyard, Dora the Explorer, The Wonder Pets, The Kids’ Choice Awards and The Naked Brothers Band, and the original made-for-television movies Shredderman and Last Day of Summer. •     Nick at Nite airs during the evening hours and overnight and features classic sitcoms as well as family friendly original programming. Programming highlights in 2007 included hit sitcoms such as George Lopez, The Fresh Prince of Bel-Air and Home Improvement. •     Nickelodeon and Nick at Nite reached approximately 96 million domestic television households as of December 31, 2007. Worldwide, Nickelodeon can be seen in approximately 230 million households in 149 territories as of December 31, 2007 via its channels, branded program blocks on third party broadcasters and broadband services.
		Noggin and The N
		•     Noggin is a commercial-free, educational channel for preschoolers by day which transformed into The N, an advertising-supported network for teens, at night. Both brands operate websites with games, videos, educational and other content for their target audiences. As of January 1, 2008, Noggin and The N became separate, 24-hour channels. •     Noggin programming highlights in 2007 included a mix of original Noggin programming such as The Upside Down Show, Jack’s Big Music Show, Pinky Dinky Doo and Oobi as well as licensed Nick Jr. favorites such as Dora the Explorer, The Backyardigans, The Wonder Pets and Blue’s Clues. The N’s featured original and licensed programming included Degrassi: The Next Generation, Beyond the Break, South of Nowhere, The Best Years and About a Girl. •     Noggin and The N reached approximately 64 million domestic television households as of December 31, 2007.
		Neopets.com
		•     Neopets is an online youth-focused virtual world that allows members to create and take care of virtual pets. It also offers games, auctions, trades and messaging. •     Neopets has approximately 44 million members, and in the fourth quarter of 2007, Neopets averaged approximately 3.5 million monthly unique visitors globally.

8

Table of Contents

Other Kids and Family Group properties include Nicktoons, which reached approximately 50 million domestic television households as of December 31, 2007; Quizilla, a website for teens to share quizzes, stories and other creative writing; Nick Jr. Video and The Click, which are the broadband services of Nick Jr. and The N, respectively; AddictingGames.com and Shockwave.com, which offer free and paid downloadable online games, together averaging 13.6 million monthly unique visitors in the fourth quarter of 2007; Nickelodeon Movies, Nickelodeon’s motion picture business which released The Spiderwick Chronicles in February 2008 with Paramount; and the websites ParentsConnect.com and GoCityKids.com, which provide information and discussion boards for parents on local events for kids, health and development, activities and resources, among other things. In addition, Nickelodeon has begun licensing its brand to hotels and other entertainment outlets.

Entertainment Group

The Entertainment Group produces and distributes programming and online content and games that generally target adult and male audiences. Some of our key properties in this group include:

		COMEDY CENTRAL
		•     COMEDY CENTRAL is television’s only all-comedy network and is a consistent top 10-rated cable network among all adults ages 18-49 according to Nielsen. The network also offers original programming via a variety of websites including comedycentral.com, as well as other outlets such as iTunes and all major mobile carriers. COMEDY CENTRAL also has interests in home video, recorded comedy and a live comedy touring business. •     Programming highlights in 2007 included the Peabody® and Emmy®-winning series The Daily Show with Jon Stewart and South Park, The Sarah Silverman Program, The Colbert Report, Lil’ Bush, Mind of Mencia and RENO 911!. •     COMEDY CENTRAL reached approximately 95 million domestic television households as of December 31, 2007.
		Comedycentral.com
		•     Comedycentral.com is a broadband video platform featuring behind-the-scenes footage, exclusive video clips, TV shows and series, games and comedy performances from COMEDY CENTRAL. Other COMEDY CENTRAL online properties include thedailyshow.com and Colbertnation.com, the official fan sites of The Daily Show with Jon Stewart and The Colbert Report, Jokes.com, the largest stand-up comedy library online, and Southparkstudios.com, a joint venture in which COMEDY CENTRAL owns a 51% interest, which is the official homepage of South Park and features the latest in South Park news and content. •     In the fourth quarter of 2007, COMEDY CENTRAL’s online properties averaged 3.4 million monthly unique visitors and recorded more than 56 million video streams.

9

Table of Contents

Other Entertainment Group properties include AtomFilms.com, a broadband service for original short films and online video clips; AddictingClips.com, which houses entertaining original and user-generated video clips; and GameTrailers.com, which produces broadcast quality video content for video games.

MTV Networks International

Worldwide, MTV Networks’ operations reached over 520 million households in 160 countries as of December 31, 2007. MTVN International owns and operates, participates in as a joint venturer and/or licenses to third parties to operate over 120 program services, including extensions of our multimedia brands MTV, VH1 and Nickelodeon, and program services created specifically for international and/or non-English speaking audiences such as TMF (The Music Factory), Paramount Comedy, COMEDY CENTRAL Germany, Game One, The Box, VIVA and QOOB, among others. MTVN International also operates or licenses its brands for more than 130 online properties internationally. Most of the MTVN International program services are regionally customized for the particular viewers through the inclusion of local music, programming and on-air personalities, and use of the local language. MTV Networks’ operations in Europe, Africa and the Middle East represent its largest international presence.

We strategically pursue the development, license and acquisition of program services in international markets and engage in the syndication and distribution of consumer products. In November 2007, we established a joint venture in India, called Viacom 18, with Network18, a leading Indian media and entertainment company, by contributing MTVN’s India operations, with cash and other consideration contributed to the venture by Network18. Viacom 18 includes television, film and digital media content across numerous brands as well as consumer products and is expected to become India’s leading multi-platform entertainment company. The joint venture is planning to launch a new Hindi-language general entertainment channel in India in 2008 and is expected to launch additional niche channels and digital content in the future. Viacom 18 also has a motion picture studio which will produce, acquire and distribute Hindi-language films.

10

Table of Contents

We are also focused on strategically expanding our international presence by ensuring that we have the appropriate forms of ownership interests in our properties worldwide. This involves concentrating our resources in the regions and on the demographics that offer the greatest growth opportunity for our brands, such as Germany, Japan and the United Kingdom and entering into licensing arrangements in other regions that can be best exploited by our partners. For example, we launched COMEDY CENTRAL Germany in 2007 as the only comedy network on free terrestrial television in the market. In the Middle East, we launched MTV Arabia through a long-term licensing partnership between MTVN International and TECOM Investments’ media unit, Arab Media Group. Nickelodeon Arabia is also set to launch in 2008 as part of that agreement. In Russia, we sold our non-controlling equity investment in MTV Russia but continue to derive revenues through trademark and other licenses.

BET NETWORKS

BET Networks owns and operates program services, including its flagship BET^® channel and the BET Digital Networks—BETJ™ (formerly BET Jazz), BET Gospel^® and BET Hip Hop^® .

		•     BET Networks is the nation’s leading television network providing entertainment, music, news and public affairs programming targeted to the African-American audience. BET is a dominant consumer brand in the urban marketplace with a diverse group of branded businesses, including BET, BETJ, which is devoted primarily to jazz, R&B and neo-soul music, BET Gospel, which focuses on gospel music and spiritual programming, and BET Hip Hop, which features hip hop music programming and performances. BET is focused on expanding its slate of original programming and launched 10 new original series in 2007.
		•     Programming highlights on BET in 2007 included The BET Awards, The BET Hip Hop Awards, Celebration of Gospel, American Gangster, College Hill and Sunday Best.
		•     BET reached approximately 88 million domestic television households as of December 31, 2007. According to internal data, BETJ reached approximately 25 million domestic television households, and BET Gospel and BET Hip Hop reached 760,000 and 250,000 domestic television households, respectively.
		•     BET.com is a leading online destination for African-Americans and offers users content and interactive features for news, entertainment, community and other areas tailored to the unique interests and issues of African-Americans. BET.com also provides interactive entertainment content for BET Networks’ program services. •     In the fourth quarter of 2007, BET.com averaged approximately 3 million monthly unique visitors.

Other BET Networks properties include a broadband website, BET on Blast, which features music videos, news, interviews, third party licensed content and other content from BET’s cable networks, and BET Mobile, which provides ringtones, games, social networking and other content for cellular phones and digital services such as video-on-demand and digital downloading. BET International is focused on expanding the distribution of BET original programming into international markets and on February 28, 2008, launched its BET channel in the United Kingdom.

Media Networks Competition

MTV Networks and BET Networks compete for advertising revenue with other cable and broadcast television networks, online and mobile outlets, radio programming and print media. MTV Networks generally competes with other widely distributed cable networks such as TBS, TNT, Discovery, ESPN, SciFi, FX, Lifetime and USA Network, the broadcast television networks and digital properties such as MySpace.com and YouTube.com. Each

11

Table of Contents

programming service also competes for its target audiences with competitors’ programming services that target the same audience. For example, Nickelodeon and its related properties compete for younger viewers with several of The Walt Disney Company’s properties. Similarly, BET Networks competes with African-American oriented shows on cable and broadcast networks including TV One and online properties such as Blackplanet.com and AOL Blackvoices. We also compete with other cable networks for affiliate fees derived from distribution agreements with cable television operators, DTH satellite operators and other distributors. Our networks also compete with other content producers for actors, writers, producers and other creative talent and for new show ideas and the acquisition of popular programming.

FILMED ENTERTAINMENT

The Filmed Entertainment segment produces, finances and distributes motion pictures under the Paramount Pictures, DreamWorks Pictures, Paramount Vantage, Paramount Classics, MTV Films and Nickelodeon Movies brands. In general, motion pictures produced or acquired for distribution by the filmed entertainment group are exhibited theatrically in the U.S. and internationally, followed by their release on DVDs, video-on-demand, pay and free cable television, broadcast television and syndicated television (the “distribution windows”), and, in some cases, licensing to airlines, hotels, schools and universities.

Our Filmed Entertainment segment generates revenues principally from: (i) the theatrical release of motion pictures in domestic and international markets, (ii) home entertainment, which includes sales of DVDs and other products relating to the motion pictures as well as other programming and (iii) license fees paid worldwide by third parties for exhibition rights on various media. The Filmed Entertainment segment also generates ancillary revenues from providing production services to third parties, primarily at Paramount’s studio lot, consumer products licensing, and distribution of its content through new online and mobile platforms.

In choosing films to produce, the filmed entertainment group aims to create a carefully balanced film slate that represents a variety of genres, styles, and levels of investment—with the goal of creating entertainment for both niche audiences and worldwide appeal. Each motion picture is a separate and distinct product with its profitability dependent upon many factors, among which public response and cost are of fundamental importance. Revenues from motion picture theatrical releases tend to be cyclical with increases during the summer months, around holidays and in the fourth quarter. Competition from other motion pictures released around the same time and/or for audience leisure time generally may affect theatrical revenues. The theatrical success of a motion picture is a significant factor in determining the revenues it is likely to generate in home entertainment product sales and licensing fees during the various other distribution windows. The costs associated with producing, marketing and distributing a motion picture can be significant, and can also cause our results to vary depending on the timing of a motion picture’s release. In some instances, we enter into film financing arrangements in connection with a particular film which we believe may improve our investment returns and reduce our economic risk on a particular film.

Paramount’s digital entertainment group is pursuing increased distribution of motion pictures through new online and mobile platforms, including offering certain titles for sale and rent on iTunes and offering more mobile content. This group is also beginning to develop and produce feature length movies that will be released initially on non-theatrical platforms, such as Jackass 2.5 (in conjunction with MTV Films) in 2007, which is the first feature-length film initially released on a digital platform followed by release two weeks later on DVD.

Paramount’s licensing programs include consumer products, themed restaurants, live stage plays, film clip licensing and theme parks. Revenues are typically derived from royalties based on the licensee’s revenues, with an advance against future expected royalties, and may vary based on the popularity of the brand or licensed product with consumers.

12

Table of Contents

FEATURE FILM PRODUCTION AND DISTRIBUTION

Domestic and International Distribution

In domestic markets, Paramount performs its own marketing and distribution services. Paramount’s feature films initially theatrically released in the United States on or after January 1, 1998 have been exhibited in U.S. premium subscription television exclusively on the program services of Showtime Networks, which is owned by

13

Table of Contents

CBS Corporation, for certain windows. This agreement applies to films theatrically released through December 2007, and we are exploring various alternatives for the distribution of 2008 and future films in the pay television window. DreamWorks L.L.C. (“DreamWorks”) has a separate, similar arrangement with Home Box Office covering a specified number of DreamWorks and DreamWorks Animation feature films, which is currently expected to include films theatrically released through 2013. We also distribute Paramount and DreamWorks films domestically in the other distribution windows such as DVD, video-on-demand, basic cable and broadcast television and on various digital platforms.

Through 2006, Paramount, through its international affiliates, generally distributed its motion pictures for theatrical release outside the United States and Canada through United International Pictures (“UIP”), a company that we and an affiliate of Universal Studios, Inc. (“Universal”) own jointly. In January 2007, Paramount and Universal began theatrical self-distribution in 15 key countries that were separated from UIP’s distribution business, with each party taking over the UIP operating entity in designated countries. Paramount and Universal each have the option to continue a transitional distribution arrangement with the other party in the respective countries for up to two years. Effective January 1, 2008, both Paramount and Universal exited UIP Japan, and Paramount has set up its own distribution operation in Japan. The UIP joint venture continues to operate in certain other territories. These self-distribution activities represent a significant expansion of Paramount’s international presence, and it intends to continue to expand internationally through increased direct distribution and acquisition of local content.

Key Agreements

In connection with our acquisition of DreamWorks in January 2006, Paramount, DreamWorks and certain of their international affiliates entered into a seven-year agreement with DreamWorks Animation for certain exclusive distribution rights to and home video fulfillment services for the animated films produced by DreamWorks Animation. The output term of the agreement expires on the later of the delivery of thirteen qualified animated motion pictures and December 31, 2012, subject to earlier termination under certain limited circumstances.

In connection with our sale of a controlling interest in DW Funding, the owner of the DreamWorks live-action film library, in May 2006, Paramount and its international affiliates retained the exclusive distribution rights to previously released DreamWorks films for a five-year period, which is renewable under certain circumstances. We retained a minority equity interest in DW Funding.

Filmed Entertainment Competition

Our motion picture brands compete for audiences with the other major studios such as Disney, Fox, Sony Pictures, Universal and Warner Bros., as well as independent film producers, in the production and distribution of motion pictures and other entertainment content. Our competitive position primarily depends on the number and quality of the films produced, their distribution and marketing success, and public response. We also compete to obtain creative talent, including actors, directors and writers, and scripts for motion pictures, all of which are essential to our success. Our motion picture brands also compete with these studios and other producers of entertainment content for distribution of their products through the various distribution windows and on digital platforms.

REGULATION

Our businesses are subject to and affected by regulations of U.S. federal, state and local governmental authorities, and our international operations are subject to laws and regulations of local countries and pan-national bodies such as the European Union. The rules, regulations, policies and procedures affecting these businesses are constantly subject to change. The descriptions which follow are summaries and should be read in conjunction with the texts of the relevant statutes, rules and regulations. The descriptions do not purport to describe all present and proposed statutes, rules and regulations affecting our businesses.

14

Table of Contents

Intellectual Property

We are fundamentally a content company and the protection of our brands and entertainment content, and the laws affecting our intellectual property, are of significant importance to us. See the section entitled “Intellectual Property” below for more information on our brands.

Copyright Law and Content

In the United States, under current law, the copyright term for authored works is the life of the author plus 70 years. For works-made-for-hire, the copyright term is the shorter of 95 years from first publication or 120 years from creation. Some advocacy groups have urged the courts or Congress to reduce the protections afforded rights holders under the copyright laws, including the Digital Millennium Copyright Act, as amended. We are strongly opposed to this position, which we believe gives insufficient weight to the importance of incentives to promote investment in creative works and the need to protect rights holders from the increased risks of piracy in the digital environment.

Piracy

Unauthorized reproduction, distribution or display of copyrighted material over the Internet or through other methods of distribution, such as through websites that allow the viewing, sharing and/or downloading of entertainment content by either ignoring or interfering with the content’s security features and copyrighted status, interferes with the market for copyrighted works and disrupts our ability to exploit our content. In addition, piracy of motion pictures through unauthorized distribution on DVDs and other platforms continues to present challenges for our industry. We are actively engaged in enforcement and other activities to protect our intellectual property, including monitoring notable online destinations that distribute our content, and participating in various industry-wide enforcement initiatives, education and public relations programs and legislative activity on a worldwide basis. One promising area of enforcement activity is to work with network operators, such as internet service providers, to automatically detect piracy within their networks. However, the FCC has initiated a formal rulemaking proceeding which may lead to regulatory limitations on the ability of U.S. network operators to implement such systems. While many legal protections exist in this area, the law continues to evolve and we are increasingly expending resources to appropriately protect our content.

Media Networks

Online Music Royalties

MTV Networks and BET Networks currently obtain content for their online properties from their respective cable channels, record labels, music publishers, independent producers and artists. MTV Networks and BET Networks also obtain certain rights to some of their website content, such as performance rights of song composers and rights to non-interactive digital transmission of recordings, pursuant to licenses from performing rights organizations such as ASCAP and BMI and through statutory compulsory licenses established by the Digital Millennium Copyright Act, as amended. The royalties payable for the compulsory licenses are established periodically by Copyright Arbitration Royalty Panels and are largely outside our control.

Programming Distribution

Some policymakers maintain that cable television operators should be required by law to offer programming to subscribers on a network-by-network, or “à la carte,” basis or provide specific program tiers such as those providing only family appropriate programming. In 2004, the FCC’s Media Bureau released a report which concluded that à la carte regulation would tend to decrease programming diversity and would not be in consumers’ best interests; however, it released a subsequent report in 2006 that found that à la carte regulation might benefit some consumers. Legislation was introduced and defeated by the Senate in 2006 that would effectively require cable television operators to offer all programming on an à la carte basis. Nevertheless, the Chairman of the FCC remains focused on the issue. The FCC is also reviewing whether companies that own multiple cable networks should be required to enter into affiliation agreements with cable television operators

15

Table of Contents

and other distributors on an “unbundled” or network-by-network basis. The unbundling or tiering of our program services by cable television operators or other distributors, including a decision not to include some or all of our networks in a tier, or a requirement that we enter into affiliation agreements on a network-by-network basis, could reduce distribution of certain of our program services, perhaps significantly. It could also lead to reduced viewership on some or all of our networks and increased marketing expenses, negatively affecting our revenues from advertising and affiliate fees and our results of operations.

Children’s Programming

Federal legislation and FCC rules limit the amount and content of commercial matter that may be shown on cable channels during programming designed for children 12 years of age and younger. On January 2, 2007, new FCC rules regarding children’s advertising became effective. These rules revise the definition of time-limited “commercial matter” in children’s programming so that promotional announcements for age-appropriate programming on the same channel, or other educational/informational programming on any channel, do not count as commercial time; retain limits on the display of website addresses during children’s program material and relax certain restrictions on host selling via websites; extend children’s programming obligations to digital television multicast stations; and restore the case-by-case approach for determining whether a preempted children’s program can continue to count as a “core” children’s program.

In November 2006, the UK Office of Communications (OFCOM) issued restrictions on the television advertising of food and drink products to children. The restrictions include scheduling restrictions on ads for foods and drinks high in fat, salt and sugar in and around children’s programming (children aged four to nine); an expansion of the definition of “children” (beginning January 1, 2008) to include persons aged four to fifteen, which affects our non-children oriented channels; application to all OFCOM-licensed channels regardless of the country in which their target audience is located; and bans on celebrity and licensed character ads for certain products targeted at primary school children. Implementation of the measures commenced in March 2007 and is being phased-in until the end of 2008 for dedicated children’s channels whose ability to replace lost revenues from food and drink advertisers is harder to achieve. OFCOM is actively monitoring the impact of the restrictions.

Various other laws and regulations intended to protect the interests of children are applicable to our businesses, including measures designed to protect the privacy of minors online.

Indecency

Some policymakers support the extension of indecency rules applicable to over-the-air television broadcasters to cover cable and satellite programming. If such an extension occurred and was not found to be unconstitutional, our content could be subject to additional regulation.

Under the Pence Amendment to the Adam Walsh Child Protection and Safety Act of 2006, record keeping and on-screen notice requirements that previously applied only to depictions of actual sexual conduct were extended to also cover certain displays and simulated depictions which could be present in mainstream entertainment. A safe harbor provision provides an exemption for producers who maintain identifying information for other purposes such as immigration law requirements.

Program Access

Under the Communications Act, vertically integrated cable programmers are generally prohibited from offering different prices, terms or conditions to competing multichannel video programming distributors unless the differential is justified by certain permissible factors set forth in the FCC’s regulations. The FCC’s “program access” rules also limit the ability of a vertically integrated cable programmer to enter into exclusive distribution arrangements with cable television operators. A cable programmer is considered to be vertically integrated if it owns or is owned by a cable television operator in whole or in part under the FCC’s program access attribution rules. Cable television operators for this purpose may include telephone companies that provide video

16

Table of Contents

programming directly to subscribers. Our wholly owned program services are not currently subject to the program access rules. Our flexibility to negotiate the most favorable terms available for our content and our ability to offer cable television operators exclusive programming could be adversely affected if we were to become subject to the program access rules.

INTELLECTUAL PROPERTY

We create, own and distribute intellectual property worldwide. It is our practice to protect our motion picture, television and online product, brands, characters, publications and other original and acquired works, ancillary goods and services. The following brands, logos, trade names, trademarks and related trademark families are among those strongly identified with the product lines they represent and are significant assets of ours: Viacom^®, MTV Networks^®, MTV: Music Television^®, VH1^®, CMT^®: Country Music Television™, Logo^®, Nickelodeon^®, Nick at Nite^®, Nick Jr.^®, Noggin^®, Neopets^®, COMEDY CENTRAL^®, Spike TV^®, TV Land^®, iFILM^®, MTVN International™, TMF™, VIVA™, BET Networks™, BET^®, BETJ™, BET.com^®, BET Mobile^®, Paramount Pictures^® and other domestic and international program services and digital properties. We also license the DreamWorks^® trademarks and logos from DreamWorks Animation. As a result, domestic and foreign laws and enforcement efforts protecting intellectual property rights are important to us, and we actively enforce our intellectual property rights against infringements.

EMPLOYEES AND LABOR MATTERS

At December 31, 2007, we employed approximately 10,800 full-time and part-time employees worldwide. We also had approximately 2,300 freelance employees on our payroll as of December 31, 2007, and use many other freelance and temporary employees in the ordinary course of our business. In 2008, we intend to convert some of the freelance positions to full-time employee positions.

We engage the services of writers, directors, actors and other talent, trade employees and others who are subject to collective bargaining agreements. We recently concluded new three-year agreements with the Writers Guild of America and the Directors Guild of America. The agreement with the Screen Actors Guild expires on June 30, 2008. We have not begun negotiations with the Screen Actors Guild. A labor dispute with the Screen Actors Guild could shut down production of feature films and programs made for television. Such a labor dispute may disrupt our operations and reduce our revenues, and we may not be able to negotiate favorable terms for a renewal.

FINANCIAL INFORMATION ABOUT SEGMENTS AND FOREIGN AND DOMESTIC OPERATIONS

Financial and other information by reporting segment and geographic area as of December 31, 2007 and 2006 and for the three years ended December 31, 2007 is set forth in Note 19 to our consolidated financial statements.

AVAILABLE INFORMATION

We file annual, quarterly and current reports, proxy and information statements, and other information with the Securities and Exchange Commission (the “SEC”). Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed with or furnished to the SEC pursuant to the Securities Exchange Act of 1934, as amended, will be available free of charge on our website at www.viacom.com (under “investor relations”) as soon as reasonably practicable after such reports are filed with the SEC. These documents are also available on the SEC’s website at www.sec.gov.

On June 29, 2007, we submitted to the New York Stock Exchange (“NYSE”) the Annual CEO Certification required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual. We have also filed with this annual report the certifications required under Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2.

17

Table of Contents

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K, including “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition,” contains both historical and forward-looking statements. All statements which are not statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are not based on historical facts, but rather reflect our current expectations concerning future results and events. Forward-looking statements generally can be identified by the use of statements that include phrases such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will” or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals are or may be forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that are difficult to predict and which may cause our actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements. These risks, uncertainties and other factors are discussed in “Item 1A. Risk Factors” below. Other risks, or updates to the risks discussed below, may be described from time to time in our news releases and other filings made under the securities laws, including our reports on Form 10-Q and Form 8-K. There may be additional risks, uncertainties and factors that we do not currently view as material or that are not necessarily known. The forward-looking statements included in this document are made only as of the date of this document and, under Section 27A of the Securities Act and Section 21E of the Exchange Act, we do not have any obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances.

18

Table of Contents

Item 1A. Risk Factors.

A wide range of risks may affect our business and financial results, now and in the future. We consider the risks described below to be the most significant. There may be other currently unknown or unpredictable economic, business, competitive, regulatory or other factors that could have material adverse effects on our future results.

Risks Related to our Business

Our Success is Dependent upon Audience Acceptance of our Programming, Motion Pictures and Other Entertainment Content which is Difficult to Predict

The production and distribution of programming, motion pictures and other entertainment content are inherently risky businesses because the revenues we derive from various sources depend primarily on our content’s acceptance by the public, which is difficult to predict. Audience tastes change frequently and it is a challenge to anticipate what offerings will be successful at a certain point in time. The success of our programming, motion pictures and other content also depends upon the quality and acceptance of competing programs, motion pictures and other offerings available or released into the marketplace at or near the same time. Other factors, including the availability of alternative forms of entertainment and leisure time activities, general economic conditions, piracy, digital and on-demand distribution and growing competition for consumer discretionary spending, the level of which may be decreasing due to the economic landscape, may also affect the audience for our content.

In our Media Networks business, our advertising revenues typically are reflective of a program’s ratings, with higher ratings generally generating higher advertising revenues. In 2007, some of our program services, including MTV, BET and Nickelodeon, experienced ratings fluctuations or declines. Those trends could continue at those or other networks and reduce the amount of advertising revenue the affected networks receive. Low audience ratings could also negatively affect the affiliate fees we receive and/or limit a network’s distribution potential. In addition, the advertising industry has recently begun to change the way it measures ratings, moving from audience ratings, which measure audience size for a program, to commercial ratings, which measure audience size for a commercial. Commercial ratings are currently measured on a “C3” basis, which means the number of viewers that watch the commercial live or via playback during the three days following the live broadcast. This is a different way of measuring viewership, and if we are unable to successfully adapt the pricing, structure and volume of our advertising spots to this new methodology, or if viewers change channels or fast forward during commercials, our advertising revenues could decline.

In our Filmed Entertainment business, the theatrical success of a motion picture affects not only the theatrical revenues we receive but also those from other distribution channels, such as DVD sales, television licenses and sales of licensed consumer products. In addition, because the timing of recognition of certain motion picture expenses is based on estimates of future revenues, such costs may be accelerated if the motion picture does not perform as expected, thereby affecting our results of operations. A poor theatrical performance may also negatively affect our negotiating strength with theater chains, distributors and retailers, resulting in less desirable product promotion.

Consequently, public acceptance of our programming, motion pictures and other entertainment content is core to our business and has the ability to affect all of our revenue streams. A reduction in the popularity of our content could have a significant, adverse effect on our revenues.

We Must Respond to and Capitalize on Rapid Changes in Consumer Behavior resulting from New Technologies and Distribution Platforms in Order to Remain Competitive and Exploit New Opportunities

Technology in the online and mobile arenas continues to evolve rapidly. We must adapt to changing consumer behavior driven by technological advances such as video-on-demand, increased mobility of content and a desire for more short form, user-generated and interactive content. Changing consumer behavior may impact our traditional distribution methods, for example, by reducing viewership of our programming, the demand for DVD

19

Table of Contents

product or pay television subscriptions and/or the desire to see motion pictures in theaters. We have recently seen an industry-wide decline in domestic DVD sales, and it is uncertain if such decline will continue. In addition, consumers are increasingly viewing content from handheld or portable devices, and watching it on a time- delayed basis. We must continue to adapt our content to these viewership habits. Technologies which enable users to fast-forward or skip advertisements may affect the attractiveness of our offerings to advertisers and could therefore adversely affect our revenues. If we cannot adapt to the changing lifestyles and preferences of our target audiences and capitalize on technological advances with favorable business models, there could be a negative effect on our business.

Increased Costs for Programming, Motion Pictures and Other Content May Adversely Affect Our Profits

In our Media Networks segment, we have historically produced a significant amount of original programming and intend to continue to increase our investment in this area. We also acquire programming, such as motion pictures and television series, from other television production companies and studios and pay a license fee in connection with the acquired rights. Our investments in original and acquired programming increase our expenses, and may not be recouped when the program is broadcast or distributed, therefore leading to decreased profitability.

The Filmed Entertainment segment’s core business involves the production, marketing and distribution of motion pictures, the costs of which have been increasing. We also release certain “tentpole” motion pictures that generally have higher costs than the other films released during the year. Therefore, a “tentpole” film’s underperformance theatrically can significantly affect our revenues and profitability, and negatively affect the revenues we receive from other distribution platforms.

An increase in other licensing costs could also affect our profits. For example, we license music and music videos for exhibition on our cable networks, websites and other content outlets from record companies in exchange for cash or advertising time or for promotional consideration only. We have entered into global music video licensing agreements with the major record companies and major music publishers and into global or regional license agreements with certain independent record companies. We also license various other music rights from record companies, music publishers, performing rights societies and others. There can be no assurance that we will be able to obtain license renewals or additional license agreements or, if so, on favorable terms.

Our Revenues, Expenses and Operating Results May Vary Based on the Timing, Mix, Number and Availability of Our Programming and Motion Pictures

Our revenues and operating results fluctuate due to the timing, mix, number and availability of our theatrical motion picture and home entertainment releases, programming, and license periods for our entertainment content. For example, results may increase or decrease during a particular period due to differences in the number of films released compared to the corresponding period the prior year, or due to the timing of a major event such as an awards show falling in two different quarters year over year. Our operating results also fluctuate due to the timing of the recognition of production and print and advertising expenses, which are typically largely incurred prior to the release of programs, motion pictures and home entertainment product, with the recognition of related revenues in later periods. In addition, the success of our individual mix of titles may vary period over period, causing our operating results to fluctuate.

Our business also has experienced and is expected to continue to experience some seasonality due to, among other things, seasonal advertising patterns and seasonal influences on audiences’ viewing habits and attendance. Typically, our revenue from advertising increases in the fourth quarter due to the holiday season and revenue from motion pictures increases in the summer, around holidays and in the fourth quarter. The effects of these variances make it difficult to estimate future operating results based on the results of any specific quarter.

20

Table of Contents

Piracy of Our Entertainment Content, Including Digital Piracy and Other Unauthorized Exhibitions of Our Content, May Decrease Revenue Received from Our Programming and Motion Pictures and Adversely Affect Our Business and Profitability

The success of our business depends in part on our ability to maintain the intellectual property rights to our entertainment content. We are fundamentally a content company and piracy of our brands, motion pictures and DVDs, programming, digital content and other intellectual property has the potential to significantly affect us. Piracy is particularly prevalent in many parts of the world that lack effective enforcement of copyright and technical protective measures similar to existing law in the United States. However, piracy is also a challenge domestically, and the interpretation of copyright laws as applied to our content remains in flux. Piracy and other unauthorized uses of content are made easier by technological advances allowing the conversion of motion pictures, programming and other content into digital formats, which facilitates the creation, transmission and sharing of high quality unauthorized copies. Unauthorized reproduction, distribution or display of our content over the Internet or through other methods of distribution, such as through websites that allow the viewing, sharing and/or downloading of entertainment content by either ignoring or interfering with the content’s security features and copyrighted status is a threat to our ability to protect our creative works and to recoup or profit from the expense incurred to create such works. Unauthorized use of our entertainment content may have an adverse effect on our business because it reduces the revenue that we potentially could receive from the legitimate sale and distribution of our content. We are actively engaged in enforcement and other activities to protect our intellectual property, and we are increasingly expending resources in connection with these efforts. These efforts to prevent the unauthorized use of our content may affect our profitability, and may not be successful in reducing piracy.

The Loss of Affiliation Agreements Could Cause Our Revenues to Decline in Any Given Period or in Specific Markets

We are dependent upon our affiliation agreements with cable television operators, DTH satellite operators and other distributors for the distribution of our program services. We have agreements in place with the major distributors, some of which are currently being renegotiated, and others of which expire over the next several years and we expect to renegotiate on a rolling basis. There can be no assurance that these affiliation agreements will be renewed in the future on terms, including pricing, acceptable to us. The loss of a significant number of these arrangements or the loss of carriage on the most widely available programming tiers could reduce the distribution of our program services and decrease the potential audience for our programs, which could adversely affect advertising and affiliate fee revenues. In addition, further consolidation among cable and DTH satellite operators and increased vertical integration of such distributors into the cable or broadcast television businesses could adversely affect our ability to negotiate favorable terms for distribution of our program services.

The Loss of Key Talent Could Disrupt Our Business and Adversely Affect Our Revenues

Our business depends upon the continued efforts, abilities and expertise of our corporate and divisional executive teams and entertainment personalities. We employ or contract with several entertainment personalities with loyal audiences and also produce motion pictures with highly regarded directors, actors and other talent. These individuals are important to achieving audience endorsement of our programs, motion pictures and other content. There can be no assurance that these individuals will remain with us or will retain their current appeal. If we fail to retain these individuals or if our entertainment personalities lose their current appeal, our revenues could be adversely affected.

The Failure or Destruction of Satellites and Facilities that We Depend Upon to Distribute Our Programming Could Adversely Affect Our Business and Results of Operations

We use satellite systems to transmit our program services to cable television operators and other distributors worldwide. The distribution facilities include uplinks, communications satellites and downlinks. Notwithstanding

21

Table of Contents

back-up and redundant systems, transmissions may be disrupted as a result of local disasters that impair on-ground uplinks or downlinks, or as a result of an impairment of a satellite. Currently, there are a limited number of communications satellites available for the transmission of programming. If a disruption occurs, we may not be able to secure alternate distribution facilities in a timely manner. Failure to do so could have a material adverse effect on our business and results of operations.

Our Obligations Related to Guarantees and Litigation Could Adversely Impact Our Financial Condition

We have both recorded and potential liabilities and costs related to discontinued operations and former businesses, including, among other things, potential liabilities to landlords if Blockbuster Inc. should default on certain store leases or if Famous Players Inc. should default on certain theater leases. In connection with the sale of the DreamWorks live-action film library to DW Funding in 2006, we are subject to a put option obligation at the then current fair value of DW Funding, commencing nine months prior to the fifth anniversary of the sale. We also have a corresponding call option exercisable at fair value. To the extent the current fair value at the option closing date is insufficient to repay certain indebtedness, including any unpaid interest, of DW Funding guaranteed by us, we would be required to pay the difference. In addition, we are involved in pending and threatened litigation from time to time. We cannot assure you that our reserves are sufficient to cover these liabilities in their entirety or any one of these liabilities when it becomes due or at what point any of these or new liabilities may affect us. Therefore, there can be no assurance that these liabilities will not have an adverse effect on our financial condition.

Risks Related to our Industry

Changes in Advertising Markets Could Cause Our Revenues and Operating Results to Decline Significantly in Any Given Period or in Specific Markets

We derive substantial revenues from the sale of advertising on a variety of platforms. A decline in advertising expenditures could significantly adversely affect our revenues and operating results in any given period. Declines can be caused by the economic prospects of specific advertisers or industries, or the economy in general, including the possibility of a recession. Prospective advertisers could alter their spending priorities based on these or other factors. Economic uncertainty can also be caused by disasters, acts of terrorism, political uncertainty or hostilities and could lead to a reduction in advertising expenditures.

In addition, advertising revenues may be affected by increasing competition for the leisure time of audiences, including shifts in spending toward online outlets and away from more traditional media, or toward new ways of purchasing advertising, such as through advertising exchanges. For example, we and other cable network owners may provide advertising inventory on our networks to cable television operators, DTH satellite operators and other intermediaries who resell that inventory in competition with us. These types of sales are becoming more common and intermediaries are bundling this inventory with inventory in other media and aggregating it with detailed data regarding viewers, which could be more attractive to advertisers than our offerings. In addition, many of these intermediaries are much larger companies than we are and may be able to use that scale to create volume and pricing advantages.

Advertising expenditures by companies in certain sectors of the economy, including children’s toys, electronics, video games and other entertainment sectors, represent a sizeable portion of our advertising revenues. Any political, economic, social or technological change may result in a reduction of these sectors’ advertising expenditures. For example, Federal legislators and regulators could impose additional limitations on advertising to children in an effort to combat childhood obesity and unhealthy eating or for other reasons. Any reduction in advertising expenditures could have an adverse effect on our revenues and results of operations.

22

Table of Contents

Our Businesses Operate in Highly Competitive Industries

Participants in the cable networks, digital and motion picture industries depend primarily upon the sale of advertising, receipt of affiliate fees and revenues generated by the exhibition and distribution of motion pictures on various media. Competition for viewers, advertising and distribution is intense and comes from broadcast television, specialty cable networks, online and mobile properties, movie studios and independent film producers and distributors, local, regional and national newspapers, video gaming sites and other media that compete for audiences. In particular, online websites and search engines have seen significant advertising growth, a portion of which is derived from traditional cable network advertisers. In addition, our competitors include market participants with interests in multiple media businesses which are often vertically integrated. Our ability to compete successfully depends on a number of factors, including our ability to provide high quality and popular entertainment content, adapt to new technologies and distribution platforms and achieve widespread distribution. Distribution capacity may become increasingly limited as broadcasters transition to digital formats, especially if “must carry” regulations are extended to channels beyond the broadcaster’s primary channel. More television options increase competition for viewers, and competitors targeting programming to narrowly defined audiences may gain an advantage over us for television advertising and subscription revenues. There can be no assurance that we will be able to compete successfully in the future against existing or potential competitors, or that competition will not have a material adverse effect on our business, financial condition or results of operations.

Requirements that Cable Television Operators Offer Programming on an à la Carte or Tiered Basis May Decrease the Distribution of Program Services and Affect Our Results of Operations

Certain policymakers maintain that cable television operators should be required to offer programming to subscribers on a network-by-network, or à la carte, basis or to provide programming tiers designed specifically for certain audiences, such as family tiers. In response, certain cable television operators and other distributors have introduced tiers to their customers that may or may not include some or all of our networks. Legislation was introduced and defeated by the Senate in 2006 that would effectively require cable television operators to offer all programming on an à la carte basis, but there continues to be focus on the issue. The FCC is also reviewing whether companies that own cable networks should be required to enter into affiliation agreements with cable television operators and other distributors on an “unbundled” or network-by-network basis. The unbundling or tiering of our program services by cable television operators or other distributors, including a decision not to include some or all of our networks in a tier, or a requirement that we enter into affiliation agreements on a network-by-network basis, could reduce distribution of certain of our program services, perhaps significantly. It could also lead to reduced viewership on some or all of our networks and increased marketing expenses, negatively affecting our revenues from advertising and affiliate fees and our results of operations.

Changes in U.S. or Foreign Communications Laws or Other Regulations May Have an Adverse Effect on Our Business

The multichannel video programming and distribution industries in the United States are highly regulated by U.S. federal laws and regulations issued and administered by various federal agencies, including the FCC. Our program services and online properties are subject to a variety of laws and regulations, including those relating to issues such as content regulation, user privacy and data protection and consumer protection, among others. For example, various laws and regulations are intended to protect the interests of children, including limits on the amount and content of commercial material that may be shown, restrictions on children’s advertising and measures designed to protect the privacy of minors.

In addition, the U.S. Congress and the FCC currently have under consideration, and may in the future adopt, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect the operations and ownership of our U.S. media properties. For example, some policymakers support the extension of indecency rules applicable to over-the-air broadcasters to cover cable and satellite programming. Other domestic and international regulators, including OFCOM in the United Kingdom, support additional limitations on advertising to children. Copyright and piracy issues may also become the subject of regulatory action in

23

Table of Contents

addition to the judicial action we are currently seeing. Our business could be affected, potentially materially, by any such new laws, regulations and policies. We could incur substantial costs to comply with new laws and regulations or substantial penalties or other liabilities if we fail to comply. We could also be required to change or limit certain of our business practices. Similarly, changes in regulations imposed by governments in other jurisdictions in which we, or entities in which we have an interest, operate could adversely affect our business, results of operations and ability to expand these operations beyond their current scope.

We Could Be Adversely Affected by Strikes and Other Union Activity

We and our suppliers engage the services of writers, directors, actors and other talent, trade employees and others who are subject to collective bargaining agreements. In the fourth quarter of 2007, the members of the Writer’s Guild of America went on strike, and a new agreement was not approved until February 2008. The Directors Guild of America and Screen Actors Guild collective bargaining agreements expire in 2008, and while an agreement has been reached with the Directors Guild, negotiations with the Screen Actors Guild have not yet commenced. Any extended work stoppage could affect our ability to produce new motion pictures and programs, in which case we would air repeat, acquired reality or other content that does not require union labor. Such a labor dispute may disrupt our operations and reduce our revenues, and we may not be able to negotiate favorable terms for a renewal, which could increase our costs.

Political and Economic Risks Associated with Our Businesses Could Harm Our Financial Condition

Our businesses operate and have customers worldwide, and we are focused on expanding our international operations in key markets, some of which are emerging markets. Inherent risks of doing business in international markets include, among other risks, changes in the economic environment, export restrictions, currency exchange controls and/or fluctuations, tariffs and other trade barriers and longer payment cycles. We may incur substantial expense as a result of the imposition of new restrictions or changes in the existing economic environment in the regions where we do business. Acts of terrorism or other hostilities, or other future financial, political, economic or other uncertainties, could lead to a reduction in advertising and other revenue, which could adversely affect our business, financial condition or results of operations.

Risks Related to our Separation from CBS Corporation

Our Business and Other Businesses Which Are Controlled By Sumner Redstone, Including CBS Corporation, Are and Will Continue to Be Attributable to Each Other for Certain Regulatory Purposes

So long as we and CBS Corporation are under common control, each company’s businesses, as well as the businesses of any other commonly controlled company, such as National Amusements, Inc. (“NAI”), NAIRI, Inc. and Midway Games, Inc., which is also controlled by Mr. Redstone, may be attributable to the other companies for purposes of U.S. and non-U.S. antitrust rules and regulations, certain rules and regulations of the FCC, and certain rules regarding political campaign contributions in the United States, among others. The businesses of each company may continue to be attributable to the other companies for FCC purposes even after the companies cease to be commonly controlled, if the companies share common officers, directors, or attributable stockholders. As a result, the businesses and conduct of any of these other companies may have the effect of limiting the activities or strategic business alternatives available to us.

The Separation Agreement Between CBS Corporation and Us Prohibits Us from Engaging in Certain Types of Businesses

Under the terms of the Separation Agreement, we generally agreed that we will not own or acquire certain interests in specified types of media companies if such ownership would cause CBS Corporation to be in violation of U.S. federal laws limiting the ownership of broadcast licenses or if it would limit CBS Corporation’s ability under these laws to acquire television or radio stations or television networks. Additionally, we may not make acquisitions, enter into agreements or accept or agree to any condition that purports to bind CBS

24

Table of Contents

Corporation or subjects CBS Corporation to restrictions it is not otherwise subject to by legal order without CBS Corporation’s consent. We and CBS Corporation have agreed that prior to the earliest of (1) the fourth anniversary of the separation (December 31, 2009), (2) the date on which none of Mr. Redstone, NAI, NAIRI or any of their successors, assigns or transferees are deemed to have interests in both CBS Corporation and Viacom that are attributable under applicable U.S. federal laws and (3) the date on which the other company ceases to own the video programming vendors that it owns as of the separation, neither of us will own or acquire an interest in a cable television operator if such ownership would subject the other company to U.S. federal laws regulating contractual relationships between video programming vendors and video programming distributors that the other company is not then subject to. These restrictions could limit the strategic business alternatives available to us.

We Rely on CBS Corporation’s Performance under Various Agreements

In connection with the separation, we entered into various agreements, including the Separation Agreement, Tax Matters Agreement, and certain related party arrangements pursuant to which we provide services and products to CBS Corporation after the separation. The Separation Agreement sets forth the distribution of assets, liabilities, rights and obligations between us and CBS Corporation pursuant to the separation, and includes indemnification obligations for such liabilities and obligations. In addition, pursuant to the Tax Matters Agreement, certain income tax liabilities and related responsibilities are allocated between, and indemnification obligations have been assumed by, each of us and CBS Corporation. Each company will rely on the other company to satisfy its performance and payment obligations under these agreements. Certain of the liabilities to be assumed or indemnified by us or CBS Corporation under these agreements are legal or contractual liabilities of the other company. If CBS Corporation were to breach or be unable to satisfy its material obligations under these agreements, including a failure to satisfy its indemnification obligations, we could suffer operational difficulties or significant losses.

Our Historical Financial Information May Not Be Indicative of Our Results as a Separate Company

The historical financial information presented in this Form 10-K relating to 2005 prior to our separation from CBS Corporation is presented on a carve-out basis and may not necessarily reflect what our results of operations, financial condition and cash flows would have been had we been operating as a stand-alone entity during the periods presented or what our results of operations, financial condition and cash flows will be in the future. As a result, historical financial information should not be relied upon as being indicative of our future results of operations, financial condition and cash flows.

Risks Related to our Control Structure

NAI, Through Its Voting Control of Viacom, is in a Position to Control Actions that Require Stockholder Approval and May Have Interests that are Different than Yours

NAI, through its beneficial ownership of our Class A common stock, has voting control of Viacom. Sumner M. Redstone, the controlling stockholder, Chairman and Chief Executive Officer of NAI, serves as our Executive Chairman and Founder, and Shari Redstone, the President and a director of NAI, serves as the non-executive Vice Chair of our Board of Directors. In addition, Philippe Dauman, our President and Chief Executive Officer, and George Abrams are directors of both NAI and Viacom. NAI is in a position to control the outcome of corporate actions that require stockholder approval, including the election of directors and transactions involving a change of control. The interests of NAI may not be the same as yours and you will be unable to affect the outcome of our corporate actions for so long as NAI retains voting control.

Certain Members of Management, Directors and Stockholders May Face Actual or Potential Conflicts of Interest

Certain members of our management team and directors own both our common stock and CBS Corporation common stock, and both Viacom and CBS Corporation are controlled by NAI. Mr. Redstone, the controlling

25

Table of Contents

stockholder, Chairman and Chief Executive Officer of NAI, serves as our Executive Chairman and Founder and the Executive Chairman and Founder of CBS Corporation. Ms. Redstone, the President and a director of NAI, serves as non-executive Vice Chair of the Board of Directors of both Viacom and CBS Corporation. Ms. Redstone also serves as Chair of the Board of Directors of Midway Games, which is also controlled by NAI. Mr. Dauman, our President and Chief Executive Officer, and Mr. Abrams are directors of both NAI and Viacom, and Frederic Salerno is a director of both Viacom and CBS Corporation.

The NAI ownership structure and the common directors could create, or appear to create, potential conflicts of interest when the management, directors and controlling stockholder of the commonly controlled entities face decisions that could have different implications for each of us. For example, potential conflicts of interest could arise in connection with the resolution of any dispute between Viacom and CBS Corporation regarding the terms of the agreements governing the separation and the relationship between Viacom and CBS Corporation thereafter. Potential conflicts of interest, or the appearance thereof, could also arise when we and CBS Corporation enter into any commercial arrangements with each other in the future, despite review by our directors not affiliated with CBS Corporation. Mr. Redstone, Ms. Redstone and Mr. Salerno may also face conflicts of interest with regard to the allocation of time between us and CBS Corporation.

Our certificate of incorporation and the CBS Corporation certificate of incorporation both contain provisions related to corporate opportunities that may be of interest to us and to CBS Corporation. Our certificate of incorporation provides that in the event that a director, officer or controlling stockholder of ours who is also a director, officer or controlling stockholder of CBS Corporation acquires knowledge of a potential corporate opportunity for both Viacom and CBS Corporation, such director, officer or controlling stockholder may present such opportunity to us or CBS Corporation or both, as such director, officer or controlling stockholder deems appropriate in his or her sole discretion, and that by doing so such person will have satisfied his or her fiduciary duties to us and our stockholders. In addition, our certificate of incorporation provides that we renounce any interest in any such opportunity presented to CBS Corporation and, similarly, that CBS Corporation renounce any interest in any such opportunity presented to us. These provisions create the possibility that a corporate opportunity of one company may be used for the benefit of the other company.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

Our world headquarters is located at 1515 Broadway, New York, New York, where we rent approximately 1.4 million square feet for executive offices and certain of our operating divisions. The lease for the majority of the space runs to 2010, with four renewal options based on market rates at the time of renewal for five years each thereafter. We have also entered into long-term lease agreements for approximately 278,000 square feet of office space at 1540 Broadway, New York, New York and approximately 400,000 square feet of office space at 345 Hudson Street, New York, New York and expect to commence occupancy of each of such locations in mid-2008. We also occupy the following major facilities for certain of MTV Networks businesses: (a) approximately 310,000 square feet of leased office space at 1633 Broadway, New York, New York, through 2010, and (b) approximately 225,000 square feet of office space at three facilities on 26th Street in Santa Monica, California, under leases which expire between 2011 and 2016.

BET’s headquarters at One BET Plaza in Washington, D.C. contains approximately 228,000 square feet of office and studio space, the majority of which is leased through 2013 and the balance of which is owned.

Paramount owns the Paramount Pictures studio at 5555 Melrose Avenue, Los Angeles, California, located on approximately 62 acres.

26

Table of Contents

We also own and lease office, studio and warehouse space, broadcast, antenna and satellite transmission facilities throughout the United States and several other countries around the world for our businesses. We consider our properties adequate for our present needs.

Item 3. Legal Proceedings.

Litigation is inherently uncertain and always difficult to predict. However, based on our understanding and evaluation of the relevant facts and circumstances, we believe that the legal matters described below and other litigation to which we are a party are not likely, in the aggregate, to have a material adverse effect on our results of operations, financial position or cash flows.

Pending Litigation

In March 2007, we filed a complaint in the Federal Court for the Southern District of New York against Google Inc. (“Google”) and its wholly owned subsidiary YouTube, alleging that Google and YouTube violated and continue to violate our copyrights. We are seeking both damages and injunctive relief, and the lawsuit is currently in discovery.

Former Viacom, NAI, Blockbuster and we, and certain of their and our respective present and former officers and directors, are currently defendants in an ERISA action in the United States District Court for the Northern District of Texas relating to the 2004 split-off of Blockbuster from Former Viacom pursuant to an exchange offer. A consolidated securities action in the United States District Court for the Northern District of Texas and a state law action in the Court of Chancery of Delaware arising from the same facts were dismissed in September 2007 and February 2008, respectively. The plaintiff in the latter action have filed a notice of appeal. The plaintiff in the ERISA action alleges that the defendants in that case breached fiduciary obligations to the Blockbuster Investment Plan by continuing to offer to plan participants Blockbuster stock from and after November 2003 and by offering to Plan participants the opportunity to exchange their shares of Former Viacom common stock for the shares of Blockbuster common stock. On September 24, 2007, defendants’ motion to dismiss the ERISA action was granted in part and denied in part, and in November, the plaintiff filed an amended complaint, which the defendants moved to dismiss in January. Blockbuster has agreed to indemnify Former Viacom and its employees, officers and directors with respect to any liabilities arising out of any material untrue statements and omissions in those portions of the 2004 Prospectus-Offer to Exchange relating to the split-off that were provided by Blockbuster, and we have agreed to indemnify CBS Corporation for any losses arising from these lawsuits. We believe that the plaintiffs’ positions in these litigations are without merit and intend to continue to vigorously defend ourselves.

In September 2007, Brantley, et al. v. NBC Universal, Inc., et al., was filed in the U.S. District Court for the Central District of California against us and several other program content providers on behalf of a purported nationwide class of cable and satellite subscribers. The plaintiffs also sued several major cable and satellite program distributors, alleging against all defendants violations of Sections 1 and 2 of the Sherman Antitrust Act. The complaint alleges that the programmer defendants conspired to sell and/or license programming on a “bundled” basis to the distributor defendants, who in turn offer programming to their customers in bundles, rather than on a channel by channel (or “à la carte”) basis. Plaintiffs seek, among other things, treble monetary damages in an unspecified amount and an injunction to compel the offering of channels to subscribers on an “à la carte” basis. In December 2007, all of the defendants moved to dismiss the amended complaint, and we intend to vigorously defend this lawsuit.

Concluded Litigation

On July 13, 2005, two identical shareholder derivative lawsuits were filed against Former Viacom relating to the compensation of Sumner Redstone, Tom Freston and Leslie Moonves, each of whom was an executive officer of Former Viacom. On November 27, 2007, the judge in the case approved a final settlement, the costs of which were immaterial and have been evenly shared with CBS Corporation.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

27

Table of Contents

OUR EXECUTIVE OFFICERS

The following table sets forth the name, age and position of each person who served as a Viacom executive officer as of January 31, 2008.

Information about each person who serves as an executive officer of our company is set forth below.

28

Table of Contents

29

Table of Contents

PART II

Item 5. Market for Viacom Inc.’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our voting Class A common stock and non-voting Class B common stock are listed and traded on the New York Stock Exchange under the symbols “VIA” and “VIA.B”, respectively. Our common stock began trading on the NYSE on January 3, 2006 at an opening price of $40.00 for our Class A common stock and $41.12 for our Class B common stock.

The table below shows, for the periods indicated, the high and low daily close prices per share of our Class A and Class B common stock as reported in Thomson Financial markets services.

We do not currently anticipate paying dividends on our Class A common stock or Class B common stock. The declaration and payment of dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, earnings, legal requirements and other factors as our Board of Directors deems relevant.

As of January 31, 2008, there were approximately 2,000 record holders of our Class A common stock and 33,000 record holders of our Class B common stock.

30

Table of Contents

Performance Graph

The following graph compares the cumulative total stockholder return on our Class A common stock and our Class B common stock with the cumulative total return of the companies listed in the Standard & Poor’s 500 Stock Index and a peer group of companies comprised of Time Warner Inc., The Walt Disney Company, News Corporation, The E.W. Scripps Company, Discovery Holding Company and CBS Corporation.

The performance graph assumes $100 invested on January 1, 2006 in each of our Class A common stock, Class B common stock, the S&P 500 Index and the stock of the peer group companies identified below, including reinvestment of dividends, for each calendar quarter through the calendar year ended December 31, 2007.

Total Cumulative Stockholder Return

for the Four-Quarter Periods Ended December 31, 2007 and 2006

Share Repurchases

From January 2006 until June 22, 2007, we repurchased shares of our Class B common stock under a $3.0 billion stock repurchase program. In connection with the program, we entered into an agreement with National Amusements Inc. (“NAI”) and NAIRI (the “NAIRI Agreement”) pursuant to which we agreed to buy from NAI and NAIRI a number of shares of our Class B common stock each month such that the ownership percentage of our Class A common stock and Class B common stock (considered as a single class) held by NAI and/or NAIRI would not increase as a result of our purchase of shares under the program. On May 30, 2007, we announced that our Board of Directors had approved a new stock repurchase program under which we are authorized to acquire up to an additional $4.0 billion of Viacom Class A and Class B common stock. The independent members of the Board of Directors also approved NAI and NAIRI’s continued participation in the new program on substantially the same terms as those on which it participated in the previous program and the NAIRI Agreement was amended accordingly. We commenced repurchases under the $4.0 billion stock repurchase program on June 22, 2007.

31

Table of Contents

The following table provides information about our purchases of equity securities under our $4.0 billion stock repurchase program and the NAIRI Agreement during the quarter ended December 31, 2007:

Equity Compensation Plan Information

Information required by this item is contained in the Proxy Statement for our 2008 Annual Meeting of Stockholders under the heading “Equity Compensation Plan Information,” which information is incorporated herein by reference.

Item 6. Selected Financial Data.

The selected Consolidated Statement of Earnings data for the three years ended December 31, 2007 and the Consolidated Balance Sheet data at December 31, 2007 and 2006 should be read in conjunction with the audited financial statements and related “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and other financial information presented elsewhere in this annual report. The selected Consolidated Statement of Earnings data for the years ended December 31, 2004 and 2003 and the Consolidated Balance Sheet data at December 31, 2005, 2004 and 2003 have been derived from audited financial statements not included herein.

CONSOLIDATED STATEMENT OF EARNINGS DATA

(in millions, except earnings per share amounts)

32

Table of Contents

CONSOLIDATED BALANCE SHEET DATA

(in millions)

33

Table of Contents

Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition.

Management’s discussion and analysis of results of operations and financial condition is provided as a supplement to and should be read in conjunction with the consolidated financial statements and related notes to enhance the understanding of our results of operations, financial condition and cash flows. References in this document to “Viacom,” “Company,” “we,” “us” and “our” mean Viacom Inc. and our consolidated subsidiaries through which our various businesses are conducted, unless the context requires otherwise. Certain amounts have been reclassified to conform to the 2007 presentation.

Significant components of the management’s discussion and analysis of results of operations and financial condition section include:

34

Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

OVERVIEW

Summary

We are a leading global entertainment content company. We engage audiences on television, motion picture and digital platforms through many of the world’s best known entertainment brands, including MTV^®, VH1^®, CMT^®, Logo^®, Harmonix^®, Nickelodeon^®, Noggin^®, Nick at Nite^®, AddictingGames™, Neopets^®, COMEDY CENTRAL^®, Spike TV^®, TV Land^®, AtomFilms^®, Gametrailers™, BET^®, Paramount Pictures^®, DreamWorks Pictures™ and Paramount Vantage™.

On December 31, 2005, we became a stand-alone public company in connection with our separation from Former Viacom, which is now known as CBS Corporation. See “The Separation from CBS Corporation” section below for more information. References in this document to CBS Corporation mean CBS Corporation and its consolidated subsidiaries, unless the context requires otherwise.

We manage our operations through two reporting segments: Media Networks, which includes MTV Networks (“MTVN”) and BET Networks (“BETN”), and Filmed Entertainment.

Media Networks

Through a combination of original and acquired programming and other entertainment content, the Media Networks brands are focused on providing content that appeals to key demographics attractive to advertisers across multiple distribution platforms, including cable television, satellite, mobile and digital media assets. Our leading program services reach over 520 million households worldwide, operating in more than 160 countries and territories. We have approximately 150 channels and 300 interactive digital media properties, which include online, broadband, mobile and interactive television services, and operate a robust consumer products business. MTVN is a major producer of mobile video content for major carriers and mobile virtual network operators in the United States and internationally, and MTVN and BETN content is also available for download to own through deals with third parties such as AOL, Amazon, Apple and Microsoft.

We continue to invest organically and through select acquisitions and investments in digital media and other assets that are attractive to the demographics we serve. For example, in 2007, MTV Networks and Real Networks, Inc. created Rhapsody America, a venture that provides subscription-based digital music services, among other services. We contributed a $230 million non-interest bearing note payable and certain assets related to MTVN’s URGE digital music service for a 49% stake in Rhapsody America. Internationally, we are expanding our presence while focusing our resources in the regions and on the demographics that offer the greatest growth opportunities for our brands. In India, we established a joint venture (“Viacom 18”) with Network18 Fincap Limited (“Network18”), a leading entertainment and media company in India, through the contribution of our existing MTV Networks’ India operations to the venture, with cash and other consideration contributed to the venture by Network18. In the Russian market, we sold our non-controlling equity investment in MTV Russia.

The Media Networks segment is focused on expanding and enhancing our brands through the creation of original hit programming and other content, including games, and the expansion of the experiences we offer through online and wireless platforms. We seek to increase our revenues by expanding our audiences and offering creative ways for advertisers, cable, satellite and mobile operators and other interested parties to reach these audiences.

Our Media Networks segment generates revenues principally from three sources: (i) the sale of advertising time on our cable television networks and digital properties and services, (ii) the receipt of affiliate fees from cable

35

Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

television operators, direct-to-home or “DTH” satellite operators, mobile networks and other distributors and (iii) ancillary revenues, which include home entertainment sales of our programming, the licensing of our content to third parties, the licensing of our brands for consumer products, including video games, and the creation and distribution of video games and other interactive products. We derive revenues from our home entertainment products and video games, such as Rock Band and Guitar Hero and our consumer products business that licenses popular characters such as those featured in SpongeBob SquarePants, The Backyardigans, Dora the Explorer, Neopets and South Park to consumer product companies.

Our content is designed to target key audience demographics and the popularity of our programming creates a powerful reason for advertisers to purchase commercial time on our cable television networks and digital properties and services. The advertising industry has recently introduced commercial ratings which measure audience size for a commercial. Commercial ratings are currently measured on a “C3” basis, which means the number of viewers that watch the commercial live or via playback during the three days following the live broadcast. We are exploring various alternatives for the pricing, structure and volume of our advertising spots and commercial segments to reflect this new ratings methodology, which will largely be effective beginning in 2008.

Audience ratings also create demand on the part of cable television operators, direct-to-home or “DTH” satellite operators, mobile networks and other distributors to deliver our content to their customers, which allows us to obtain multi-year affiliation deals that provide us with a reasonably stable source of affiliate fee revenues. We are currently negotiating renewals of several long-term affiliation agreements, and are looking to build stronger and more expansive multi-media partnerships with the various distributors of our content that maximize the value of these relationships for our brands.

Media Networks segment revenue growth depends on the continued increase of advertising revenues and affiliate fees which we expect will be driven by the popularity of our programming and other entertainment content and, in part, by the increased availability of our content on new distribution platforms and our ability to monetize our multiplatform presence. In addition, our advertising revenues may fluctuate due to the mix and availability of programming and entertainment content, the overall strength of the advertising market and seasonal variations, being typically highest in the fourth quarter. Growth also depends on the continued demand for our properties to generate license fees, including for use by licensees in their commercial products sold at retail.

We incur production costs in connection with creating original content for our networks. These costs are comprised of expenses associated with retaining creative talent including actors, writers and producers, as well as marketing and distribution costs that drive awareness and make our content available for distribution to consumers directly. We also incur costs to acquire content such as television series from production companies.

Filmed Entertainment

The Filmed Entertainment segment produces, finances and distributes motion pictures under the Paramount Pictures, DreamWorks Pictures, Paramount Vantage, Paramount Classics, MTV Films and Nickelodeon Movies brands. Paramount’s library consists of approximately 3,500 motion pictures and a small number of television programs. In general, motion pictures produced or acquired for distribution by the Filmed Entertainment segment are exhibited theatrically in the U.S. and internationally, followed by their release on DVDs, videos-on-demand, pay and free cable television, broadcast television and syndicated television (the “distribution windows”), and, in some cases, licensing to airlines, hotels, schools and universities.

During 2007, Transformers was released under the DreamWorks and Paramount labels and Shrek the Third, a DreamWorks Animation production, was distributed by Paramount. We also released There Will Be Blood and

36

Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

No Country for Old Men under the Paramount Vantage label, and DreamWorks titles such as Norbit, Disturbia and Blades of Glory, which was released in association with MTV Films. Films released under the Paramount label included Beowulf and Freedom Writers, which was released in association with MTV Films.

On January 31, 2006, we completed the acquisition of DreamWorks L.L.C. (“DreamWorks”) a leading producer of live-action motion pictures and television programming. In connection with the acquisition, we acquired certain exclusive distribution rights to and home video fulfillment services for the animated feature films produced by DreamWorks Animation SKG, Inc. (“DreamWorks Animation” and collectively, the “DWA agreements”) and also acquired a live-action film library (the “live-action library”) consisting of 59 films released through September 16, 2005. In May 2006, we sold a controlling interest in DW Funding LLC (“DW Funding”), the entity which owns the live-action library, and entered into an agreement for the exclusive worldwide distribution rights to the library for a five-year period, which is renewable under certain circumstances. Separately, we also have a distribution arrangement with Marvel under which the first release will be Iron Man in 2008.

In domestic markets, we perform our own marketing and distribution services. Through 2006, through our international affiliates, we generally distributed our motion pictures for theatrical release outside the United States and Canada through United International Pictures (“UIP”), a company that we and an affiliate of Universal Studios, Inc. (“Universal”) own jointly. In January 2007, Paramount and Universal began theatrical self-distribution in 15 key countries that were separated from UIP’s distribution business, with each party taking over the UIP operating entity in designated countries. Paramount and Universal each have the option to continue a transitional distribution arrangement with the other party in the respective countries for up to two years. Effective January 1, 2008, both Paramount and Universal exited UIP Japan, and Paramount has set up its own distribution operation in Japan. The UIP joint venture continues to operate in certain other territories. These self-distribution activities represent a significant expansion of Paramount’s international presence, and we intend to continue to expand internationally through increased direct distribution and acquisition of local content.

The Filmed Entertainment segment is also focused on continuing to improve our market position and profitability through the continued development of franchise and branded films, and the diversification of revenue streams, such as making library product available online. We intend to grow Filmed Entertainment segment revenues by continuing to capitalize on our Paramount, DreamWorks, and Paramount Vantage labels and on our various media networks’ brands. Developing synergies across our brands permits us to leverage the core MTVN and BETN audiences.

Our Filmed Entertainment segment generates revenues principally from: (i) the theatrical release of motion pictures in domestic and international markets, (ii) home entertainment, which includes sales of DVDs and other products relating to the motion pictures as well as other programming and (iii) license fees paid worldwide by third parties for exhibition rights on various media. Ancillary revenues are principally derived from studio income, consumer products licensing and distribution of our content through new online and mobile platforms. Our Filmed Entertainment segment results of operations substantially depend on the number and quality of films produced, their distribution and marketing success and public response, as well as our ability to obtain creative talent and scripts for motion pictures. Revenues from motion picture theatrical releases tend to be cyclical with increases during the summer months, around holidays and in the fourth quarter. The theatrical success of a motion picture is also a significant factor in determining the revenues it is likely to generate in home entertainment product sales and licensing fees during the various other distribution windows.

We incur marketing costs before and throughout the theatrical release of a film and, to a lesser extent, other exhibition windows. Such costs are incurred to generate public interest in our films and are expensed as incurred; therefore, we typically incur losses with respect to a particular film prior to and during the film’s theatrical

37

Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

exhibition. In addition, for films we distribute on behalf of DreamWorks Animation or similar distribution arrangements, we expense print and advertising costs as incurred and typically recover such costs following the release. Therefore, the results of the Filmed Entertainment segment can be volatile as films work their way through the various distribution windows, generally incurring losses in the pre-release and theatrical windows before moving to profitability in subsequent distribution windows such as home video and television.

Production costs are capitalized as incurred and amortized over the flow of ultimate revenues. We have entered into film financing arrangements under which third parties participate in the financing of the production costs of a film in exchange for a partial copyright interest. We believe such arrangements may improve our investment returns and reduce our economic risk on a particular film.

The Separation from CBS Corporation

On December 31, 2005, we became a stand-alone public company in connection with our separation from CBS Corporation. In connection with the separation, each share of Former Viacom Class A common stock was converted into the right to receive 0.5 of a share of Viacom Class A common stock and 0.5 of a share of CBS Corporation Class A common stock. Similarly, each share of Former Viacom Class B common stock was converted into the right to receive 0.5 of a share of Viacom Class B common stock and 0.5 of a share of CBS Corporation Class B common stock. Holders of Viacom Class A and Class B common stock received cash in lieu of fractional shares.

In connection with the separation, we and CBS Corporation entered into the Separation Agreement as well as certain other agreements to govern the terms of the separation and certain of the ongoing relationships between CBS Corporation and us after the separation. These agreements include a Transition Services Agreement and a Tax Matters Agreement. These related party arrangements are more fully described below and in the notes to the consolidated financial statements.

The Separation Agreement provided that we were responsible for the first $195.0 million in costs directly related to the separation with amounts incurred in excess of $195.0 million being split equally between us and CBS Corporation. Included as a component of Selling, general and administrative expenses in our Consolidated Statement of Earnings is $163.5 million of transaction costs for the year ended December 31, 2005. Such amounts principally included severance amounts, expenditures on information systems and investment banking and other professional fees.

Special Dividend to Former Viacom

In accordance with the terms of the Separation Agreement, in December 2005 we paid a preliminary special dividend to Former Viacom of $5.40 billion which was subject to adjustments for, among other items, actual Former Viacom debt as of the date of the separation and actual CBS Corporation cash flow for 2005, compared to estimates used to calculate the preliminary special dividend. In 2006 and 2007 we made further payments of $206.1 million and $170.0 million, respectively, to CBS Corporation in final resolution of the adjustments.

Basis of Presentation

The consolidated financial statements as of and for the years ended December 31, 2007 and 2006 reflect our actual results of operations, financial position and cash flows. The consolidated financial statements as of and for the year ended December 31, 2005 are presented on a carve-out basis and reflect the results of operations, financial position and cash flows of our businesses when they were a part of Former Viacom. The consolidated financial results for 2005 may not necessarily reflect what our results of operations, financial position and cash flows would have been had we been a separate, stand-alone company during the period. For example, the indebtedness of Former Viacom, other than capital lease obligations, was not assumed by us; therefore, debt service cost is not reflected in our Consolidated Statement of Earnings for the period ended December 31, 2005.

38

Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

The Consolidated Statement of Earnings for the year ended December 31, 2005 includes allocations of Former Viacom corporate expenses and Paramount corporate overhead including accounting, treasury, tax, legal, human resources, information systems and other services, as well as depreciation and amortization on allocated costs, to reflect our utilization of such shared services and assets. Total corporate costs allocated to us, excluding separation costs described above, were $162.0 million for the year ended December 31, 2005 and were primarily included in selling, general and administrative expenses in the accompanying Consolidated Statements of Earnings. Management believes the methodologies used to allocate charges for the services described above are reasonable.

The assets and liabilities of Former Viacom assigned to us pursuant to the terms of the Separation Agreement are accounted for at the historical book values of such assets and liabilities. As noted previously, the indebtedness of Former Viacom, other than certain capital lease obligations, was not transferred to us. Prior to the separation, Former Viacom centrally managed the cash flows generated from our various businesses.

Discontinued Operations

Discontinued operations for 2007 principally relate to the sale of Famous Music. Famous Music and Famous Players, a Canadian-based theater chain sold in 2005, have been reported as discontinued operations for all periods presented. Also included in discontinued operations is the release of tax reserves resulting from audit settlements related to discontinued businesses, including Blockbuster Inc., which was split off from Former Viacom in 2004.

CONSOLIDATED RESULTS OF OPERATIONS

Our summary consolidated results of operations are presented below for the years ended December 31, 2007, 2006 and 2005. The year ended December 31, 2005 is presented on a carve-out basis.

NM = not meaningful

39

Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

Revenues

Revenues for the year ended December 31, 2007 increased $2.06 billion, or 18%, to $13.42 billion. Media Networks segment revenues increased $860.5 million, or 12%, to $8.10 billion. Net acquisitions (defined as acquisitions net of dispositions) in our Media Networks segment contributed net incremental revenues of $91.5 million. A detailed description of the 2006 and 2007 transactions included in net acquisitions is contained in the Media Networks segment section. Filmed Entertainment segment revenues increased $1.20 billion, or 28%, to $5.48 billion, including $100.5 million in incremental revenues for the month of January 2007 from the acquisition of DreamWorks, which closed on January 31, 2006.

Revenues for the year ended December 31, 2006 increased $1.84 billion, or 19%, to $11.36 billion compared to 2005. Media Networks segment revenues increased $483.1 million, or 7%, to $7.24 billion. Acquisitions completed by the Media Networks segment in 2006 contributed $125.3 million to revenues. Filmed Entertainment segment revenues increased $1.37 billion, or 47%, to $4.27 billion compared to 2005. The acquisition of DreamWorks and related distribution activities for DreamWorks Animation and the live-action library contributed $1.36 billion to 2006 revenues, accounting for the significant increase in revenues as compared to 2005.

Additional factors contributing to revenue growth are discussed in greater detail within the section Segment Results of Operations.

The following tables present our revenues by component in both total dollar values and as a percentage of total revenues:

We generated 27% of our total consolidated revenues from international markets in 2007 as compared to 24% and 22% in 2006 and 2005, respectively. International net acquisitions by the Media Networks segment contributed $5.0 million and $77.4 million of incremental revenue during 2007 and 2006, respectively, principally in Europe. Our principal international businesses are in Europe, of which the United Kingdom and Germany accounted for approximately 49%, 54%, and 64% of total European revenues for the years ended December 31, 2007, 2006 and 2005, respectively.

40

Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

Expenses and Operating Income

Operating Expenses

Operating expenses for the year ended December 31, 2007 increased $1.47 billion, or 25%, to $7.43 billion. For the year ended December 31, 2006, operating expenses increased $1.29 billion, or 28%, compared to 2005.

Production and programming expenditures increased 17%, or $675.6 million, for the year ended December 31, 2007, to $4.57 billion principally driven by increased film amortization in our Filmed Entertainment segment. The increase in feature film amortization was primarily attributable to the release of Shrek the Third and Transformers and the number and timing of other theatrical releases. Programming costs, the largest operating expense of our Media Networks segment, also increased, primarily as a result of continued investment in original and acquired programming.

Production and programming expenditures increased 23%, or $735.7 million, for the year ended December 31, 2006, to $3.90 billion principally driven by increased film amortization in our Filmed Entertainment segment and an increase in total program amortization in our Media Networks segment. The increase in film amortization is due to the amount, timing and mix of film releases, which was driven in part by the acquisition of DreamWorks partially offset by the 2005 charge of $31.6 million for abandonment of certain projects in development.

Distribution expenses increased $827.1 million, or 45%, for the year ended December 31, 2007, to $2.66 billion, primarily due to higher print and advertising expenditures in our Filmed Entertainment segment reflecting the increased number of theatrical and home entertainment releases during the year, including Shrek the Third and Transformers, and timing of those releases. In addition, a full year of operating activity from DreamWorks and the related distribution activities for DreamWorks Animation and DW Funding added to distribution expenses for the period. For films we distribute on behalf of DreamWorks Animation and DW Funding, we expense print and advertising costs as incurred and typically recover such costs following the theatrical release. Increased distribution expenses in our Media Networks segment reflect costs associated with the release of Rock Band and increased home entertainment distribution costs.

Distribution expenses increased $539.6 million, or 42%, for the year ended December 31, 2006, to $1.83 billion, reflecting higher print and advertising expenditures in our Filmed Entertainment segment as a result of the number and timing of our theatrical releases and the commencement of distribution activities for DreamWorks Animation and live-action film library productions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were up 18%, or $398.0 million, for the year ended December 31, 2007 compared with the year ended December 31, 2006, primarily due to higher employee compensation expense, including cash and equity-based incentive compensation, the full year impact of net acquisitions, the impact of foreign exchange, increased legal fees and bad debt expenses, and costs associated with new business

41

Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

initiatives. Incremental restructuring charges of $62.8 million related to restructuring actions at MTVN were substantially offset by the impact of the $73.3 million net compensation charge taken in 2006 in connection with executive management changes.

Selling, general and administrative expenses were up 1%, or $30.9 million, for the year ended December 31, 2006 compared with the year ended December 31, 2005. This increase was due to incremental equity-based compensation expense of $52.0 million, as a result of the adoption of a new accounting standard on equity compensation on a modified prospective basis and net charges associated with executive management changes of $73.3 million, including $11.5 million of equity-based compensation related to the resignation of the former President and Chief Executive Officer and former Executive Vice President and Chief Financial Officer, partially offset by an amendment to the employment agreement with our Executive Chairman and Founder. Additionally, selling, general and administrative expenses increased in 2006 compared to 2005 primarily due to the consolidation of entities previously accounted for as equity investments. These increases were partially offset by nonrecurring 2005 separation related charges of $163.5 million and severance expenses of $70.5 million, incurred principally during the fourth quarter of 2005.

Depreciation and Amortization

Depreciation and amortization expense increased $27.4 million, or 8%, for the year ended December 31, 2007 principally as a result of an increase in depreciation on current-year fixed asset additions. Additionally, we experienced an increase in intangible asset amortization expense resulting from a full year of amortization on 2006 acquisitions, particularly DreamWorks by the Filmed Entertainment segment.

Depreciation and amortization expense increased $109.1 million, or 43%, for the year ended December 31, 2006 compared with 2005, principally as the result of increased intangible asset amortization expense resulting from 2006 acquisitions in both segments including DreamWorks intangible asset amortization of $43.5 million, 2006 digital media acquisitions of $16.3 million and higher full year amortization related to 2005 acquisitions.

Each component of expense is discussed in greater detail within the section Segment Results of Operations.

Operating Income

Operating income increased 6%, or $169.1 million for the year ended December 31, 2007 to $2.94 billion. Media Networks operating income increased 5% or $143.6 million with the 12% increase in revenues partially offset by a 17% growth in expenses, principally compensation-related costs, including restructuring charges of $77.5 million in 2007 versus $14.7 million in 2006, programming costs and costs associated with Rock Band. Filmed Entertainment operating income decreased by $28.4 million, or 22%, principally due to higher distribution-related costs, principally print and advertising, and higher feature film amortization related to a greater number of film releases during the year, as well as costs associated with new business initiatives. The increase in Filmed Entertainment expenses was partially offset by increased revenues on certain 2007 releases, in particular Transformers and Shrek the Third, and revenues from prior year releases. Corporate expenses declined $50.2 million largely due to the net compensation charge of $73.3 million recorded in 2006, partially offset by increased equity compensation and legal expenses.

Operating income increased 17%, or $407.9 million for the year ended December 31, 2006 to $2.77 billion compared with 2005. The Media Networks segment operating income increased 11% or $294.2 million, principally as a result of increased revenues and lower variable compensation and severance expenses. Filmed Entertainment segment operating income increased $69.5 million principally due to increased profitability of the 2006 film slate compared to the 2005 slate, additional third party distribution arrangements, lower development costs as well as $31.6 million in charges related to the abandonment of certain projects in development taken in 2005. Corporate expenses declined $38.6 million as increases related to executive management changes, as previously discussed, and general overhead increases were more than offset by the reduction in separation costs.

42

Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

Interest Expense, Net

Interest expense, net includes costs related to our senior notes and debentures, credit facilities, note payable, commercial paper, capital lease obligations and amounts associated with our derivative financial instruments. For 2007, interest expense, net increased $21.9 million from the prior year due to an increase in interest rates reflecting the impact of the fixed-rate debt issuances during 2006 and 2007, which more than offset the decrease in average debt outstanding. See the Liquidity and Capital Resources section for additional information on our outstanding indebtedness. The decrease in average debt outstanding resulted principally from the use of cash flow provided by operations and proceeds received from dispositions during 2007 of $555.2 million to repay indebtedness.

For the year ended December 31, 2006, interest expense, net increased $424.1 million as compared to 2005 principally due to higher average debt outstanding and higher interest rates in 2006. The higher average debt outstanding primarily is a result of the timing related to funding the special dividend payments to CBS Corporation made in connection with the separation, the purchase of DreamWorks, the various acquisitions of our Media Networks segment and the purchase of common stock under our stock repurchase program.

Gain on Sale of Equity Investment

In 2007, we sold our non-controlling investment in MTV Russia for $191.1 million and recognized a pre-tax gain on the sale of $151.0 million.

Other Items, Net

Other items, net for the year ended December 31, 2007 reflected net expenses of $43.4 million principally arising from losses on securitization programs as well as a $36.0 million impairment charge related to the bankruptcy filing of Amp’d Mobile, partially offset by foreign exchange gains.

For 2006, other items, net reflected a loss of $14.0 million which was a $14.5 million, or 51%, improvement over 2005. This improvement was principally a result of increased transactional foreign exchange gains partially offset by increased losses on securitization programs.

Provision for Income Taxes

For 2007, we recorded income tax expense of $929.0 million on pretax earnings of $2.58 billion resulting in an effective tax rate of 36.0% compared to 31.9% in 2006. The increase in our effective tax rate over the year ended December 31, 2006 is principally due to $15.0 million, or 0.6 percentage points of discrete tax benefits recognized in 2007 versus $141.8 million, or 6.1 percentage points, in 2006. The discrete tax benefits in both years were principally the result of audit settlements. Excluding the impact of the discrete tax benefits, the reduction in the effective tax rate is principally due to incremental tax benefits associated with qualified production activities, a higher mix of international profits in markets where income is taxed at rates lower than the U.S. statutory rate and lower state taxes.

For the year ended December 31, 2006, we recorded income tax expense of $736.9 million on pretax earnings of $2.31 billion resulting in an effective tax rate of 31.9%, inclusive of the discrete tax benefits. Our effective tax rate in 2005 was 44.0% principally reflecting the effect of non-deductible separation related expenses included in the total separation costs of $163.5 million.

Equity in Earnings of Affiliated Companies, Net of Tax

Equity in earnings of affiliated companies, net of tax was $0.2 million and $7.3 million for the years ended December 31, 2007 and 2006, respectively. In the third quarter of 2007, we began recognizing our share of the losses from Rhapsody America.

43

Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

Equity in earnings of affiliated companies, net of tax declined $2.1 million in 2006 as compared to December 31, 2005 as increased equity earnings generally attributable to our Media Network affiliates was offset principally by the impact of consolidating Nick UK which was previously accounted for on the equity basis of accounting prior to the acquisition of an incremental ownership interest in June 2006 which allows us to control the entity.

Minority Interest, Net of Tax

Minority interest expense, net of tax, which represents ownership held by third parties of certain consolidated entities, was $20.2 million for the year ended December 31, 2007 as compared to $14.0 million and $3.8 million in 2006 and 2005, respectively. The increase in expense is primarily attributable to the consolidation of Nick UK and MTV Japan, as well as normal operating increases.

Discontinued Operations, Net of Tax

Earnings from discontinued operations for the year ended December 31, 2007 principally reflect a gain recorded in connection with the sale of Famous Music. Famous Music and Famous Players, a Canadian-based theater chain disposed of in 2005, have been reported as discontinued operations in the consolidated financial statements for all periods presented. For the year ended December 31, 2006, discontinued operations include the release of tax reserves resulting from audit settlements related to discontinued businesses, including Blockbuster Inc. which was split off from Former Viacom in 2004.

44

Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

SEGMENT RESULTS OF OPERATIONS

The following table presents segment revenues, expenses and operating income for the three years ended December 31, 2007. Operating income is used as the measurement of segment operating performance. Transactions between reportable segments are accounted for as third-party arrangements for the purposes of presenting reportable segment results of operations. Typical intersegment transactions include the purchase of advertising by the Filmed Entertainment segment on Media Networks segment properties and the purchase of the Filmed Entertainment segment’s feature films exhibition rights by the Media Networks segment. The elimination of such intercompany transactions from the consolidated results of operations is included within Eliminations in the table below. Certain amounts in 2005 and 2006 have been reclassified to conform to the 2007 presentation.

NM = not meaningful

45

Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

Media Networks

Worldwide revenues increased $860.5 million, or 12%, in 2007 to $8.10 billion, led by an 8% increase in advertising revenues. Affiliate fees and ancillary revenues were up 14% and 27%, respectively. Net acquisitions, as further discussed below, contributed $91.5 million to revenue growth.

NM = not meaningful