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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended June 30, 2008

Commission file number 001-32337

DREAMWORKS ANIMATION SKG, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 68-0589190                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification no.)
|                                                               | 
|1000 Flower Street Glendale, California                        |  | 91201                               
|(Address of principal executive offices)                       |  | (Zip code)                          

(818) 695-5000

(Registrants telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definition 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   ̈

(Do not check if a smaller reporting
company)

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

Indicate the number of shares outstanding of
each of the registrants classes of common stock: As of June 30, 2008, there were 80,568,821 shares of Class A common stock and 11,884,461 shares of Class B common stock of the registrant outstanding.









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TABLE OF CONTENTS



|              |  |                                                                                       |  |     
|------------- |  | ------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                       |  | Page
|PART I.       |  | FINANCIAL INFORMATION                                                                 |  |     
|              |  |                                                                                      
|Item 1.       |  | Financial StatementsDreamWorks Animation SKG, Inc. (unaudited)                       |  | 2   
|              |  |                                                                                      
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 14  
|              |  |                                                                                      
|Item 3.       |  | Quantitative and Qualitative Disclosure About Market Risk                             |  | 28  
|              |  |                                                                                      
|Item 4.       |  | Controls and Procedures                                                               |  | 28  
|              |  |                                                                                      
|PART II.      |  | OTHER INFORMATION                                                                     |  |     
|              |  |                                                                                      
|Item 1.       |  | Legal Proceedings                                                                     |  | 29  
|              |  |                                                                                      
|Item 1A.      |  | Risk Factors                                                                          |  | 29  
|              |  |                                                                                      
|Item 2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 29  
|              |  |                                                                                      
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                   |  | 30  
|              |  |                                                                                      
|Item 6.       |  | Exhibits                                                                              |  | 33  
|              | 
|SIGNATURES    |  | 34                                                                                   
|              | 
|EXHIBIT INDEX |  | 35                                                                                   

Unless the context otherwise requires, the terms DreamWorks Animation, the Company,
we, us and our refer to DreamWorks Animation SKG, Inc., its consolidated subsidiaries, predecessors in interest, and the subsidiaries and assets and liabilities contributed to it by DreamWorks L.L.C.
(DreamWorks Studios) on October 27, 2004 in connection with our separation from DreamWorks Studios, including Pacific Data Images, Inc. and its subsidiary, Pacific Data Images, LLC.



1



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##### Table of Contents

PART IFINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

DREAMWORKS ANIMATION SKG,
INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                |  |                                                    |           |   |                  |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                |  | June 30,2008                                       |           |   | December 31,2007 |  
|                                                                                                                                                                                                |  | (unaudited)                                        |           |   |                  |  
|                                                                                                                                                                                                |  | (in thousands, except par value and share amounts) |          
|Assets                                                                                                                                                                                          |  |                                                    |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                                       |  | $                                                  | 401,617   |   |                  | $ | 292,489   |  
|Trade accounts receivable, net of allowance for doubtful accounts                                                                                                                               |  |                                                    | 14,172    |   |                  |   | 3,470     |  
|Receivable from Paramount, net of reserve for returns and allowance for doubtful accounts                                                                                                       |  |                                                    | 84,266    |   |                  |   | 272,647   |  
|Film costs, net                                                                                                                                                                                 |  |                                                    | 581,631   |   |                  |   | 541,917   |  
|Prepaid expenses and other assets                                                                                                                                                               |  |                                                    | 33,049    |   |                  |   | 47,609    |  
|Property, plant, and equipment, net of accumulated depreciation and amortization                                                                                                                |  |                                                    | 96,070    |   |                  |   | 86,772    |  
|Deferred taxes, net                                                                                                                                                                             |  |                                                    | 50,039    |   |                  |   | 48,664    |  
|Goodwill                                                                                                                                                                                        |  |                                                    | 34,216    |   |                  |   | 34,216    |  
|                                                                                                                                                                                                |  |                                                    |           |   |                  |   |           |  
|Total assets                                                                                                                                                                                    |  | $                                                  | 1,295,060 |   |                  | $ | 1,327,784 |  
|                                                                                                                                                                                                |  |                                                    |           |   |                  |   |           |  
|Liabilities and Stockholders Equity                                                                                                                                                            |  |                                                    |           |   |                  |   |           |  
|Liabilities:                                                                                                                                                                                    |  |                                                    |           |   |                  |   |           |  
|Accounts payable                                                                                                                                                                                |  | $                                                  | 8,959     |   |                  | $ | 3,169     |  
|Accrued liabilities                                                                                                                                                                             |  |                                                    | 87,315    |   |                  |   | 108,457   |  
|Payable to stockholder                                                                                                                                                                          |  |                                                    | 48,166    |   |                  |   | 68,371    |  
|Income taxes payable                                                                                                                                                                            |  |                                                    | 20,131    |   |                  |   | 31,651    |  
|Deferred revenue and other advances                                                                                                                                                             |  |                                                    | 52,391    |   |                  |   | 24,561    |  
|Borrowings and other debt                                                                                                                                                                       |  |                                                    | 70,059    |   |                  |   | 70,059    |  
|                                                                                                                                                                                                |  |                                                    |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                               |  |                                                    | 287,021   |   |                  |   | 306,268   |  
|Commitments and contingencies                                                                                                                                                                   |  |                                                    |           |   |                  |   |           |  
|Minority interest                                                                                                                                                                               |  |                                                    | 2,941     |   |                  |   | 2,941     |  
|Stockholders equity:                                                                                                                                                                           |  |                                                    |           |   |                  |   |           |  
|Class A common stock, par value $.01 per share, 350,000,000 shares authorized, 94,696,219 and 93,547,321 shares issued, as of
June 30, 2008 and December 31, 2007, respectively                 |  |                                                    | 947       |   |                  |   | 935       |  
|Class B common stock, par value $.01 per share, 150,000,000 shares authorized, 11,884,461 and 12,984,461 shares issued and outstanding, as of
June 30, 2008 and December 31, 2007, respectively |  |                                                    | 119       |   |                  |   | 130       |  
|Additional paid-in capital                                                                                                                                                                      |  |                                                    | 852,707   |   |                  |   | 831,115   |  
|Retained earnings                                                                                                                                                                               |  |                                                    | 556,355   |   |                  |   | 502,763   |  
|Less: Class A Treasury common stock, at cost, 14,127,398 and 10,445,278 shares, as of June 30, 2008 and December 31, 2007,
respectively                                                         |  |                                                    | (405,030  | ) |                  |   | (316,368  | )
|                                                                                                                                                                                                |  |                                                    |           |   |                  |   |           |  
|Total stockholders equity                                                                                                                                                                      |  |                                                    | 1,005,098 |   |                  |   | 1,018,575 |  
|                                                                                                                                                                                                |  |                                                    |           |   |                  |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                      |  | $                                                  | 1,295,060 |   |                  | $ | 1,327,784 |  
|                                                                                                                                                                                                |  |                                                    |           |   |                  |   |           |  

See accompanying notes.



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DREAMWORKS ANIMATION SKG, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



|                                                      |  |                                          |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ---------------------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                      |  | Three Months EndedJune 30,               |         |   | Six Months EndedJune 30, |  
|                                                      |  | 2008                                     |         |   | 2007                     |   |         | 2008 |  |   | 2007    |  
|                                                      |  | (in thousands, except per share amounts) |        
|Revenues                                              |  | $                                        | 140,787 |   |                          | $ | 222,471 |      |  | $ | 297,354 |   |  | $ | 316,199 |  
|Costs of revenues                                     |  |                                          | 75,168  |   |                          |   | 110,645 |      |  |   | 170,918 |   |  |   | 164,124 |  
|                                                      |  |                                          |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                                          |  |                                          | 65,619  |   |                          |   | 111,826 |      |  |   | 126,436 |   |  |   | 152,075 |  
|Selling, general and administrative expenses          |  |                                          | 27,630  |   |                          |   | 27,466  |      |  |   | 54,488  |   |  |   | 53,236  |  
|                                                      |  |                                          |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Operating income                                      |  |                                          | 37,989  |   |                          |   | 84,360  |      |  |   | 71,948  |   |  |   | 98,839  |  
|Interest income, net                                  |  |                                          | 2,474   |   |                          |   | 6,382   |      |  |   | 5,457   |   |  |   | 12,653  |  
|Other income, net                                     |  |                                          | 1,080   |   |                          |   | 1,439   |      |  |   | 1,857   |   |  |   | 2,883   |  
|Increase in income tax benefit payable to stockholder |  |                                          | (8,010  | ) |                          |   | (23,909 | )    |  |   | (17,440 | ) |  |   | (29,726 | )
|                                                      |  |                                          |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Income before income taxes                            |  |                                          | 33,533  |   |                          |   | 68,272  |      |  |   | 61,822  |   |  |   | 84,649  |  
|Provision for income taxes                            |  |                                          | 6,040   |   |                          |   | 6,494   |      |  |   | 8,230   |   |  |   | 7,471   |  
|                                                      |  |                                          |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net income                                            |  | $                                        | 27,493  |   |                          | $ | 61,778  |      |  | $ | 53,592  |   |  | $ | 77,178  |  
|                                                      |  |                                          |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic net income per share                            |  | $                                        | 0.30    |   |                          | $ | 0.61    |      |  | $ | 0.59    |   |  | $ | 0.75    |  
|Diluted net income per share                          |  | $                                        | 0.30    |   |                          | $ | 0.60    |      |  | $ | 0.58    |   |  | $ | 0.75    |  
|Shares used in computing net income per share         |  |                                          |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                 |  |                                          | 90,370  |   |                          |   | 102,052 |      |  |   | 91,366  |   |  |   | 102,716 |  
|Diluted                                               |  |                                          | 90,788  |   |                          |   | 102,466 |      |  |   | 91,615  |   |  |   | 103,105 |  



See accompanying notes.



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DREAMWORKS ANIMATION SKG, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                  |  |                          |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Six Months EndedJune 30, |         
|                                                                                  |  | 2008                     |          |   | 2007 |  
|                                                                                  |  | (in thousands)           |         
|Operating activities                                                              |  |                          |          |   |      |   |          |  
|Net income                                                                        |  | $                        | 53,592   |   |      | $ | 77,178   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |          |   |      |   |          |  
|Amortization and write off of film costs                                          |  |                          | 158,931  |   |      |   | 154,908  |  
|Stock compensation expense                                                        |  |                          | 18,277   |   |      |   | 19,150   |  
|Depreciation and amortization                                                     |  |                          | 4,971    |   |      |   | 4,691    |  
|Revenue earned against deferred revenue and other advances                        |  |                          | (42,084  | ) |      |   | (47,690  | )
|Deferred taxes, net                                                               |  |                          | (1,375   | ) |      |   | (12,383  | )
|Change in operating assets and liabilities:                                       |  |                          |          |   |      |   |          |  
|Trade accounts receivable                                                         |  |                          | (10,702  | ) |      |   | (2,061   | )
|Receivable from Paramount                                                         |  |                          | 188,381  |   |      |   | (25,390  | )
|Film costs                                                                        |  |                          | (196,643 | ) |      |   | (208,330 | )
|Prepaid expenses and other assets                                                 |  |                          | 15,239   |   |      |   | (39,352  | )
|Accounts payable and accrued liabilities                                          |  |                          | (15,428  | ) |      |   | 33,077   |  
|Payable to stockholder                                                            |  |                          | (20,205  | ) |      |   | 7,802    |  
|Income taxes payable, net                                                         |  |                          | (11,538  | ) |      |   | 18,872   |  
|Deferred revenue and other advances                                               |  |                          | 75,553   |   |      |   | 41,394   |  
|                                                                                  |  |                          |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                          | 216,969  |   |      |   | 21,866   |  
|                                                                                  |  |                          |          |   |      |   |          |  
|Investing activities                                                              |  |                          |          |   |      |   |          |  
|Purchases of property, plant and equipment                                        |  |                          | (18,765  | ) |      |   | (1,370   | )
|                                                                                  |  |                          |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                          | (18,765  | ) |      |   | (1,370   | )
|                                                                                  |  |                          |          |   |      |   |          |  
|Financing Activities                                                              |  |                          |          |   |      |   |          |  
|Purchase of treasury stock                                                        |  |                          | (88,662  | ) |      |   | (44,050  | )
|Other                                                                             |  |                          | (414     | ) |      |   | 830      |  
|                                                                                  |  |                          |          |   |      |   |          |  
|Net cash used in financing activities                                             |  |                          | (89,076  | ) |      |   | (43,220  | )
|                                                                                  |  |                          |          |   |      |   |          |  
|Increase in cash and cash equivalents                                             |  |                          | 109,128  |   |      |   | (22,724  | )
|Cash and cash equivalents at beginning of period                                  |  |                          | 292,489  |   |      |   | 506,304  |  
|                                                                                  |  |                          |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                        | 401,617  |   |      | $ | 483,580  |  
|                                                                                  |  |                          |          |   |      |   |          |  
|Supplemental disclosure of cash flow information:                                 |  |                          |          |   |      |   |          |  
|Cash paid during the period for income taxes, net                                 |  | $                        | 21,076   |   |      | $ | 724      |  
|                                                                                  |  |                          |          |   |      |   |          |  
|Cash paid during the period for interest, net of amounts capitalized              |  | $                        | 567      |   |      | $ | 85       |  
|                                                                                  |  |                          |          |   |      |   |          |  

See accompanying notes.



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DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Basis of Presentation

Business

The businesses and
activities of DreamWorks Animation SKG, Inc. (DreamWorks Animation or the Company) include the development, production and exploitation of animated films and characters in the worldwide theatrical, home
entertainment, television, merchandising and licensing and other markets. The Companys films are distributed in theatrical, home entertainment and television markets on a worldwide basis by Paramount Pictures Corporation, a subsidiary of
Viacom Inc., and its affiliates (collectively, Paramount) pursuant to an exclusive distribution agreement and a fulfillment services agreement through the later of (i) the Companys delivery to Paramount of 13 new
animated feature films and (ii) December 31, 2012, unless, in either case, terminated earlier in accordance with the terms of the agreements. The Company generally retains all other rights to exploit its films, including commercial tie-in
and promotional rights with respect to each film, as well as merchandising, interactive, literary publishing, music publishing and soundtrack rights.

Basis of Presentation and Use of Estimates

The consolidated financial statements of the Company present the financial
position, results of operations and cash flows of DreamWorks Animation and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The accompanying unaudited financial statements as of
June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC) and in accordance
with United States generally accepted accounting principles (GAAP) for interim financial information. Accordingly, certain information and footnote disclosures normally included in comprehensive financial statements have been
condensed or omitted pursuant to such rules and regulations. The consolidated balance sheet as of December 31, 2007, was derived from audited financial statements.

These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007
(the 2007 Form 10-K).

The accompanying unaudited consolidated financial statements reflect all adjustments, consisting
of only normal recurring items, which in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown. The results of operations for such periods are not necessarily indicative of the results
expected for the full year or for any future period.

The preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of ultimate revenues and ultimate costs of film and television product, estimates of product sales that will
be returned and the amount of receivables that ultimately will be collected, the potential outcome of future tax consequences of events that have been recognized in the Companys financial statements, loss contingencies and estimates used in
the determination of the fair value of stock options and other equity awards for stock-based compensation. Actual results could differ from those estimates. To the extent that there are material differences between these estimates and actual
results, the Companys financial condition or results of operations will be affected. Estimates are based on past experience and other assumptions that management believes are reasonable under the circumstances, and management evaluates these
estimates on an ongoing basis.

Certain amounts in the prior periods consolidated balance sheet, consolidated statement of cash flows
and financial statement footnotes have been reclassified to conform to the current periods presentation.



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DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued FAS No. 157, Fair Value Measurements
(FAS 157). FAS 157 establishes a common definition of fair value to be used whenever GAAP requires (or permits) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new
circumstances. It also requires expanded disclosure about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. On
February 12, 2008, the FASB issued FASB Staff Position No. FAS No. 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2) which defers the effective date for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually), to fiscal years beginning after November 15, 2008. In addition, in February 2007, the FASB
issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115 (FAS 159). FAS 159 expands the use of fair value accounting
but does not affect existing standards that require assets or liabilities to be carried at fair value. Under FAS 159, a company may elect to use fair value to measure most financial assets and liabilities and any changes in fair value are recognized
in earnings. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. The Company adopted both FAS 157 and
FAS 159 on January 1, 2008 for its financial assets and liabilities and, in accordance with FSP 157-2, deferred the effective date for its nonfinancial assets and liabilities. The adoption of FAS 157 and FAS 159 had no impact on the
Companys consolidated financial statements.

In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in
Consolidated Financial Statementsan amendment of Accounting Research Bulletin No. 51 (FAS 160). FAS 160 clarifies the classification in a companys consolidated balance sheet and the accounting for and disclosure of
transactions between the company and holders of noncontrolling interests. FAS 160 is effective for the Company January 1, 2009. Early adoption is not permitted. The Company does not expect the adoption of FAS 160 will have a material impact on
its consolidated financial statements.

2. Film Costs

Film costs consist of the following (in thousands):



|                                |  |              |         |                  |   |        
|------------------------------- |  | ------------ | ------- | ---------------- | - | -------
|                                |  | June 30,2008 |         | December 31,2007
|                                |  | (unaudited)  |         |                 
|In release, net of amortization |  | $            | 288,950 |                  | $ | 267,724
|In production                   |  |              | 230,727 |                  |   | 239,450
|In development                  |  |              | 61,954  |                  |   | 34,743 
|                                |  |              |         |                  |   |        
|Total film costs                |  | $            | 581,631 |                  | $ | 541,917
|                                |  |              |         |                  |   |        

The Company anticipates that 55% and 89% of in release film costs as of June 30,
2008 will be amortized over the next 12 months and three years, respectively.

As of June 30, 2008, the Company has accrued
participation and residuals costs totaling $39.8 million. The Company currently estimates that it will pay approximately $21.5 million of such costs in the next 12 months.



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DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



3. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):



|                             |  |              |        |                  |   |        
|---------------------------- |  | ------------ | ------ | ---------------- | - | -------
|                             |  | June 30,2008 |        | December 31,2007
|                             |  | (unaudited)  |        |                 
|Employee compensation        |  | $            | 32,456 |                  | $ | 54,675 
|Participations and residuals |  |              | 39,842 |                  |   | 37,275 
|Deferred rent                |  |              | 6,080  |                  |   | 6,686  
|Other accrued liabilities    |  |              | 8,937  |                  |   | 9,821  
|                             |  |              |        |                  |   |        
|Total accrued liabilities    |  | $            | 87,315 |                  | $ | 108,457
|                             |  |              |        |                  |   |        

4. Deferred Revenue and Other Advances

Deferred revenue and other advances and the related amounts earned consist of the following (in thousands):



|                                          |  |              |        |                  |   |                            |  |                          |        |      |   |        |  |   |        |  |   |       
|----------------------------------------- |  | ------------ | ------ | ---------------- | - | -------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------ |  | - | ------
|                                          |  |              |        |                  |   | Amounts Earned            
|                                          |  | June 30,2008 |        | December 31,2007 |   | Three Months EndedJune 30, |  | Six Months EndedJune 30,
|                                          |  |              |        | 2008             |   | 2007                       |  | 2008                     |        | 2007
|                                          |  | (unaudited)  |        |                  |   | (unaudited)               
|Home Box Office Inc., Advance             |  | $            | 13,333 |                  | $ |                           |  | $                        | 13,333 |      | $ | 13,627 |  | $ | 13,333 |  | $ | 13,922
|Strategic Alliance/Development Advance(1) |  |              | 4,627  |                  |   | 2,104                      |  |                          | 5,826  |      |   | 4,020  |  |   | 7,977  |  |   | 5,624 
|Deferred Revenue                          |  |              | 10,498 |                  |   | 5,594                      |  |                          | 9,674  |      |   | 17,485 |  |   | 9,983  |  |   | 17,595
|Licensing Advances                        |  |              | 20,863 |                  |   | 13,185                     |  |                          | 313    |      |   | 5,852  |  |   | 1,322  |  |   | 7,760 
|Other Advances                            |  |              | 3,070  |                  |   | 3,678                      |  |                          | 4,557  |      |   | 4,557  |  |   | 5,108  |  |   | 4,557 
|                                          |  |              |        |                  |   |                            |  |                          |        |      |   |        |  |   |        |  |   |       
|Total deferred revenue and other advances |  | $            | 52,391 |                  | $ | 24,561                     |  |                          |        |      |   |        |  |   |        |  |   |       
|                                          |  |              |        |                  |   |                            |  |                          |        |      |   |        |  |   |        |  |   |       



|(1) | Of the total amounts earned against the Strategic Alliance/Development Advances, $4.2 million and $1.6
million, respectively, for the three months ended June 30, 2008 and 2007, and $5.7 million and $1.8 million, respectively, for the six months ended June 30 , 2008 and 2007, were capitalized as an offset to film costs or property, plant and
equipment.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5. Financing Arrangements

Credit Agreements.On June 24, 2008, the Company entered into a new revolving credit facility (New Credit Facility) with several banks pursuant to which the Company is permitted to
borrow up to $125.0 million. The Company is required to pay a commitment fee at an annual rate of 0.375% on undrawn amounts. Interest on borrowed amounts is determined by reference to either the lending banks base rate plus 0.50% per
annum or to LIBOR plus 1.50% per annum. Borrowings are secured by substantially all the Companys assets. The New Credit Facility requires the Company to maintain a specified leverage ratio and, subject to specific exceptions, prohibits
the Company from taking certain actions without the lenders consent, such as granting liens or entering into any merger or other significant transaction. The New Credit Facility terminates on June 24, 2013. As of June 30, 2008, there
were no borrowings under the New Credit Facility.



7



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##### Table of Contents

DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In connection with entering into the New Credit Facility, the Company terminated its prior $100
million revolving credit facility (Prior Credit Facility) and the Company did not incur any material termination penalties in connection with this termination.

Outstanding Financing. The following table summarizes the balances outstanding and other information associated with the Companys
various financing arrangements that were outstanding either at June 30, 2008 and\or December 31, 2007 (in thousands):



|                              |  |                     |        |                  |   |                                |  |              |                            |       |               |                          |   |      |     |  |      |       |     |  |   |       |     |  |   |       |    
|----------------------------- |  | ------------------- | ------ | ---------------- | - | ------------------------------ |  | ------------ | -------------------------- | ----- | ------------- | ------------------------ | - | ---- | --- |  | ---- | ----- | --- |  | - | ----- | --- |  | - | ----- | ---
|                              |  |                     |        |                  |   |                                |  |              |                            |       | Interest Cost |                         
|                              |  | Balance Outstanding |        | Maturity Date    |   | InterestRate as ofJune 30,2008 |  |              | Three Months EndedJune 30, |       |               | Six Months EndedJune 30, |  
|                              |  | June 30,2008        |        | December 31,2007 |   |                                |  | 2008         |                            |       | 2007          |                          |   | 2008 |     |  | 2007 |      
|Animation Campus Financing(1) |  | $                   | 73,000 |                  | $ | 73,000                         |  | October 2009 |                            | 2.60  | %             |                          | $ | 762  |     |  | $    | 1,196 |     |  | $ | 1,643 |     |  | $ | 2,365 |    
|New Credit Facility           |  | $                   |       |                  |   | N/A                            |  | June 2013    |                            | 0.375 | %(2)          |                          | $ |     | (2) |  |      | N/A   |     |  | $ |      | (2) |  |   | N/A   |    
|Prior Credit Facility(3)      |  |                     | N/A    |                  | $ |                               |  | N/A          |                            | N/A   |               |                          | $ | 180  | (3) |  | $    | 382   | (3) |  | $ | 372   | (3) |  | $ | 760   | (3)



|(1) | The entire amount of the obligation, $73.0 million, is due and payable in October 2009, bears interest primarily at
30-day commercial paper rates and is fully collateralized by the underlying real property. In connection with the adoption of FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, the special-purpose entity
associated with this financing was consolidated by the Company as of December 31, 2003 and, as such, the balance of the obligation is presented on the consolidated balance sheets as $70.1 million of borrowings and other debt and a $2.9 million
minority interest.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | As of June 30, 2008, there was no debt outstanding under the New Credit Facility. The Company is required to pay a
commitment fee of 0.375% per annum on undrawn amounts. Amounts associated with the commitment fee were immaterial for the three- and six-month periods ended June 30, 2008.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | There was no debt outstanding under the Prior Credit Facility for the respective periods prior to its termination in
June 2008. Under the Prior Credit Facility, the Company was required to pay a commitment fee of 0.75% on undrawn amounts.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of June 30, 2008, the Company was in compliance with all applicable financial debt covenants.

Interest Capitalized to
Film Costs. Interest capitalized to film costs during the three months ended June 30, 2008 and 2007 totaled $0.8 million and $2.3 million, respectively, and for the six months ended June 30, 2008 and 2007 totaled $1.6 million and
$4.6 million, respectively.



8



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##### Table of Contents

DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



6. Income Taxes

The provision for income taxes for the three and six months ended June 30, 2008 and 2007, respectively, differed from the amounts computed by applying the U.S. Federal statutory rate of 35% to income before
income taxes and increase in income tax benefit payable to stockholder as a result of the following:



|                                                                                 |  |                            |    |  |                          |    |  |       |    |  |       |   
|-------------------------------------------------------------------------------- |  | -------------------------- | -- |  | ------------------------ | -- |  | ----- | -- |  | ----- | --
|                                                                                 |  | Three Months EndedJune 30, |    |  | Six Months EndedJune 30, |   
|                                                                                 |  | 2008                       |    |  | 2007                     |    |  | 2008  |    |  | 2007  |   
|                                                                                 |  | (unaudited)                |   
|Provision for income taxes (excluding effects of Stockholders Tax Agreement)(1) |  |                            |    |  |                          |    |  |       |    |  |       |   
|U.S. Federal statutory rate                                                      |  | 35.0                       | %  |  | 35.0                     | %  |  | 35.0  | %  |  | 35.0  | % 
|U.S. state taxes, net of Federal benefit                                         |  | 2.2                        |    |  | 2.1                      |    |  | 2.0   |    |  | 1.9   |   
|Revaluation of deferred tax assets, net                                          |  | (1.4                       | )  |  | (3.3                     | )  |  | (3.6  | )  |  | (4.2  | ) 
|Other                                                                            |  | (2.0                       | )  |  | (0.8                     | )  |  | (1.0  | )  |  | (0.2  | ) 
|                                                                                 |  |                            |    |  |                          |    |  |       |    |  |       |   
|Total provision excluding effect of Stockholders Tax Agreement(1)               |  | 33.8                       | %  |  | 33.0                     | %  |  | 32.4  | %  |  | 32.5  | % 
|                                                                                 |  |                            |    |  |                          |    |  |       |    |  |       |   
|Effects of Stockholders Tax Agreement(1)                                        |  |                            |    |  |                          |    |  |       |    |  |       |   
|U.S. state taxes, net of Federal benefit                                         |  | (1.1                       | )  |  | (0.7                     | )  |  | (1.2  | )  |  | (0.7  | ) 
|Revaluation of deferred tax assets, net                                          |  | (18.9                      | )  |  | (27.2                    | )  |  | (21.5 | )  |  | (26.9 | ) 
|Other                                                                            |  | 0.7                        |    |  | 1.9                      |    |  | 0.7   |    |  | 1.6   |   
|                                                                                 |  |                            |    |  |                          |    |  |       |    |  |       |   
|Total effect of Stockholders Tax Agreement(1)                                   |  | (19.3                      | )% |  | (26.0                    | )% |  | (22.0 | )% |  | (26.0 | )%
|                                                                                 |  |                            |    |  |                          |    |  |       |    |  |       |   
|Total net provision for income taxes                                             |  | 14.5                       | %  |  | 7.0                      | %  |  | 10.4  | %  |  | 6.5   | % 
|                                                                                 |  |                            |    |  |                          |    |  |       |    |  |       |   



|(1) | Stockholders Tax Agreement: As a result of a series of transactions entered into by affiliates controlled
by a stockholder, the Company is obligated to remit to an affiliate of this stockholder 85% of any such cash savings in U.S. Federal income tax and California franchise tax and certain other related tax benefits.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Companys federal income tax returns for the tax years ended December 31, 2005 and December 31, 2006 are currently under examination
by the Internal Revenue Service (IRS). The Companys California Franchise tax returns for the years ended December 31, 2004 and 2005 are currently under examination by the Franchise Tax Board (FTB).
The IRS has concluded its limited-scope audit of the Companys federal income tax return for the period from October 24, 2004 through December 31, 2004 without any adjustments. All tax years since the Companys separation from
DreamWorks Studios on October 27, 2004 remain open to audit by relevant federal, state and local taxing jurisdictions.

7. Stockholders
Equity

Class A Common Stock

Stock Repurchase Programs.In December 2007, the Companys Board of Directors approved a stock repurchase program pursuant to which the Company was authorized to repurchase up to an aggregate of $150 million of its
outstanding stock. From January 1, 2008 through June 30, 2008, the Company repurchased approximately 3.7 million shares of its outstanding Class A common stock for $88.2 million. In July 2008, the Companys Board of
Directors terminated the December 2007 share repurchase program and approved a new stock repurchase program pursuant to which the Company may repurchase up to an aggregate of $150 million of its outstanding stock.



9



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##### Table of Contents

DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Class B Common Stock

Conversion of Class B Common Stock.In May 2008, David Geffen, a significant stockholder and member of the Companys Board of Directors, converted 1,100,000 shares of the Companys Class B common
stock into an equal amount of shares of the Companys Class A common stock. This transaction had no impact on the total amount of the Companys shares outstanding.

8. Equity-Based Compensation

The Company recognizes stock-based compensation in accordance with the
provisions of FASB Statement No. 123 (revised 2004), Share-Based Payment (FAS 123R). Under FAS 123R, the Company recognizes compensation costs for equity awards granted to its employees based on their grant-date
fair value. Most of the Companys equity awards contain vesting conditions dependent upon the completion of specified service periods. The Company has awarded some equity awards to senior management that are dependent upon the achievement of
established sets of performance or market-based criteria. Compensation cost for service-based equity awards is recognized ratably over the vesting period. Compensation cost for performance-based awards is adjusted to reflect the probability of
vesting.

The impact of stock options (including stock appreciation rights) and restricted stock awards on net income (excluding amounts
capitalized) for the three- and six- month periods ended June 30, 2008 and 2007, respectively, was as follows (in thousands):



|                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                    |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                    |  | 2008                       |        |   | 2007                     |   |        | 2008 |  |   | 2007   |  
|                                    |  | (unaudited)                |       
|Total equity-based compensation     |  | $                          | 8,583  |   |                          | $ | 9,595  |      |  | $ | 18,277 |   |  | $ | 19,150 |  
|Tax impact(1)                       |  |                            | (2,901 | ) |                          |   | (3,042 | )    |  |   | (5,922 | ) |  |   | (6,070 | )
|                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Reduction in net income, net of tax |  | $                          | 5,682  |   |                          | $ | 6,553  |      |  | $ | 12,355 |   |  | $ | 13,080 |  
|                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



|(1) | Tax impact is determined at the Companys annual blended effective tax rate, excluding the effect of the
Stockholders Tax Agreement (see Note 6).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

Equity-based compensation cost capitalized as a part of film costs was
$1.4 million and $0.9 million for the three-month periods ended June 30, 2008 and 2007, respectively, and $2.9 million and $1.6 million for the six-month periods ended June 30, 2008 and 2007, respectively.



10



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##### Table of Contents

DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following tables set forth the number and weighted average fair value of equity awards granted
during the three- and six-month periods ended June 30, 2008 and 2007:



|                                            |  |                            |  |                           |       |                |    |                           |   |      
|------------------------------------------- |  | -------------------------- |  | ------------------------- | ----- | -------------- | -- | ------------------------- | - | -----
|                                            |  | Three Months EndedJune 30, |  | Six Months EndedJune 30, 
|                                            |  | NumberGranted              |  | WeightedAverage FairValue |       | NumberGranted  |    | WeightedAverage FairValue
|                                            |  | (unaudited)               
|                                            |  | (in thousands)             |  |                           |       | (in thousands) |    |                          
|2008                                        |  |                            |  |                           |       |                |    |                           |   |      
|Stock appreciation rights                   |  | 15                         |  | $                         | 11.10 |                | 59 |                           | $ | 9.99 
|Restricted stock and restricted stock units |  | 34                         |  | $                         | 29.54 |                | 69 |                           | $ | 27.69
|2007                                        |  |                            |  |                           |       |                |    |                           |   |      
|Stock appreciation rights                   |  | 17                         |  | $                         | 12.67 |                | 34 |                           | $ | 11.95
|Restricted stock and restricted stock units |  | 25                         |  | $                         | 29.83 |                | 51 |                           | $ | 28.23

As of June 30, 2008, the total compensation cost related to unvested equity awards granted to
employees (excluding equity awards with performance objectives deemed not probable of achievement) but not yet recognized was approximately $62.5 million. This cost will be amortized on a straight-line basis over a weighted average life of 2.4
years.

9. Significant Customer and Segment Information

Significant Customer.Paramount represented 66.3% and 84.2% of total revenue for the three-month periods ended June 30, 2008 and 2007, respectively, and 73.5% and 86.6% for the six-month periods ended
June 30, 2008 and 2007, respectively.

Revenue by Film.

The Companys revenue by film consists of the following (in thousands):



|                        |  |                            |         |                          |   |         |  |      |         |  |   |        
|----------------------- |  | -------------------------- | ------- | ------------------------ | - | ------- |  | ---- | ------- |  | - | -------
|                        |  | Three Months EndedJune 30, |         | Six Months EndedJune 30,
|                        |  | 2008                       |         | 2007                     |   | 2008    |  | 2007
|                        |  | (unaudited)               
|Kung Fu Panda           |  | $                          | 46,438  |                          | $ |        |  | $    | 46,438  |  | $ |       
|Shrek the Third         |  |                            | 29,855  |                          |   | 109,098 |  |      | 78,122  |  |   | 109,098
|Bee Movie               |  |                            | 25,533  |                          |   |        |  |      | 74,455  |  |   |       
|Over the Hedge          |  |                            | 5,390   |                          |   | 26,856  |  |      | 9,502   |  |   | 59,929 
|Flushed Away            |  |                            | 7,296   |                          |   | 12,358  |  |      | 19,932  |  |   | 13,572 
|Film Library / Other(1) |  |                            | 26,275  |                          |   | 74,159  |  |      | 68,905  |  |   | 133,600
|                        |  |                            |         |                          |   |         |  |      |         |  |   |        
|                        |  | $                          | 140,787 |                          | $ | 222,471 |  | $    | 297,354 |  | $ | 316,199
|                        |  |                            |         |                          |   |         |  |      |         |  |   |        



|(1) | Primarily includes film library revenue from Antz, Prince of Egypt, The Road to El Dorado, Chicken Run, Joseph: King
of Dreams, Shrek, Spirit: Stallion of the Cimarron, Sinbad: Legend of the Seven Seas, Shrek 2, Shark Tale, Madagascar, and Wallace & Gromit: The Curse of the Were-Rabbit.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



10. Commitments and Contingencies

Legal Proceedings. From time to time, the Company is involved in legal proceedings arising in the ordinary course of its business, typically
intellectual property litigation and infringement claims related to the Companys feature films, which could cause the Company to incur significant expenses or prevent the Company from releasing a film. The Company also has been the subject of
patent and copyright claims relating to technology and ideas that it may use or feature in connection with the production, marketing or exploitation of the Companys feature films, which may affect the Companys ability to continue to do
so. While the resolution of these matters cannot be predicted with certainty, the Company does not believe, based on current knowledge, that any existing legal proceedings or claims are likely to have a material adverse effect on its financial
position, results of operations or liquidity.

11. Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share (in thousands except per share amounts):



|                                                                       |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                       |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                       |  | 2008                       |        |   | 2007                     |   |         | 2008 |  |   | 2007   |  
|                                                                       |  | (unaudited)                |       
|Numerator:                                                             |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Net income                                                             |  | $                          | 27,493 |   |                          | $ | 61,778  |      |  | $ | 53,592 |   |  | $ | 77,178  |  
|Denominator:                                                           |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Weighted average common shares and denominator for basic calculation:  |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Weighted average common shares outstanding                             |  |                            | 92,386 |   |                          |   | 104,541 |      |  |   | 93,382 |   |  |   | 105,205 |  
|Less: Unvested restricted stock                                        |  |                            | (2,016 | ) |                          |   | (2,489  | )    |  |   | (2,016 | ) |  |   | (2,489  | )
|                                                                       |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Denominator for basic calculation                                      |  |                            | 90,370 |   |                          |   | 102,052 |      |  |   | 91,366 |   |  |   | 102,716 |  
|                                                                       |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Weighted average effects of dilutive equity-based compensation awards: |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Employee stock options and stock appreciation rights                   |  |                            | 119    |   |                          |   | 166     |      |  |   | 108    |   |  |   | 172     |  
|Restricted stock awards                                                |  |                            | 299    |   |                          |   | 248     |      |  |   | 141    |   |  |   | 217     |  
|                                                                       |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Denominator for diluted calculation                                    |  |                            | 90,788 |   |                          |   | 102,466 |      |  |   | 91,615 |   |  |   | 103,105 |  
|                                                                       |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Net income per sharebasic                                             |  | $                          | 0.30   |   |                          | $ | 0.61    |      |  | $ | 0.59   |   |  | $ | 0.75    |  
|Net income per sharediluted                                           |  | $                          | 0.30   |   |                          | $ | 0.60    |      |  | $ | 0.58   |   |  | $ | 0.75    |  



12



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##### Table of Contents

DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table sets forth (in thousands) the weighted average number of options to purchase
shares of common stock and stock appreciation rights, and shares of restricted common stock which were not included in the calculation of diluted per share amounts because they were anti-dilutive. In addition, the table sets forth the following
weighted average number of equity awards subject to performance conditions which were also not included in the calculation of diluted net income per share because the number of shares that ultimately will be issued is contingent upon the
Companys performance against measures established for the performance period:



|                                                |  |                            |  |                          |  |       |  |      
|----------------------------------------------- |  | -------------------------- |  | ------------------------ |  | ----- |  | -----
|                                                |  | Three Months EndedJune 30, |  | Six Months EndedJune 30,
|                                                |  | 2008                       |  | 2007                     |  | 2008  |  | 2007 
|                                                |  | (unaudited)               
|Options to purchase shares of common stock      |  | 1,204                      |  | 1,263                    |  | 1,270 |  | 1,253
|Stock appreciations rights                      |  | 2,461                      |  | 1,290                    |  | 2,446 |  | 1,299
|Equity awards subject to performance conditions |  | 1,849                      |  | 1,849                    |  | 1,849 |  | 1,849
|                                                |  |                            |  |                          |  |       |  |      
|Total                                           |  | 5,514                      |  | 4,402                    |  | 5,565 |  | 4,401
|                                                |  |                            |  |                          |  |       |  |      



13



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------

This section and other parts of this Quarterly Report on Form 10-Q (the Quarterly Report) contain forward-looking
statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. You should read the following discussion and analysis in conjunction with our unaudited
consolidated financial statements and the related notes thereto contained elsewhere in this Quarterly Report, and our audited consolidated financial statements and related notes thereto, Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Risk Factors section included in our Annual Report on Form 10-K for the year ended December 31, 2007 (the 2007 Form 10-K). We urge you to carefully review and
consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the Securities and Exchange Commission (theSEC), including our 2007 Form 10-K and Current Reports on Form 8-K, before
deciding to purchase, hold or sell our common stock.

Overview

Our Business and Distribution and Servicing Arrangements

Our business is primarily devoted to
developing and producing computer-generated, or CG, animated feature films. Our films are distributed in theatrical, home entertainment and television markets on a worldwide basis by Paramount Pictures Corporation, a subsidiary of Viacom Inc., and
its affiliates (collectively, Paramount) pursuant to an exclusive distribution agreement and a fulfillment services agreement. We generally retain all other rights to exploit our films, including commercial tie-in and promotional
rights with respect to each film, as well as merchandising, interactive, literary publishing, music publishing and soundtrack rights. Please see Part I, Item 1 BusinessDistribution and Servicing Arrangements in our 2007 Form
10-K for a discussion of our distribution and servicing arrangements with Paramount.

Our Revenues and Costs

Our feature films are the source of substantially all of our revenue. We derive revenue from the worldwide exploitation of our feature films in the
following markets:



| |  |  | Theatrical and Home EntertainmentOur films are distributed in the worldwide theatrical and home entertainment markets by Paramount, our distributor and
fulfillment service provider. International results are generally reported to us by our distributor on a 30-day lag. Paramount uses film receipts to recover the distribution and marketing expenses it incurs for each film and to cover its 8%
distribution fee. Accordingly, we only record revenue from the theatrical and home entertainment exploitation of our films to the extent it exceeds our distributors costs and fee, which may be several quarters after a films theatrical
release.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | TelevisionOur films are distributed in the worldwide free and pay television markets by our distributor. Paramount licenses our films pursuant to
output agreements and individual and package film agreements, which generally provide that the exhibitor pay a fee for each film exhibited during the specified license period for that film, which may vary according to the theatrical success of the
film. The majority of our revenue from television licensing is based on predetermined rates and schedules that have been established as part of output arrangements between our distributor and various television licensees.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Licensing/MerchandisingWe generate royalty-based revenues from the licensing of our character and film elements to consumer product companies
worldwide. Typically, these agreements provide us with a royalty based upon a percentage of net sales of the products. We also license our characters and storylines for use in conjunction with our promotional partners products or services. In
exchange, we generally receive promotional fees as well as the additional marketing benefits from cross-promotional opportunities. Because these activities are not subject to our exclusive distribution agreement or fulfillment services agreement
with Paramount, we receive payment of licensing and merchandising revenues directly from third parties.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14



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##### Table of Contents

For a detailed description of our sources of revenues, please see Managements Discussion and
Analysis of Financial Condition and Results of OperationsOur Revenues and CostsSources of Revenue in our 2007 Form 10-K.

Our primary operating expenses include:



| |  |  | Costs of RevenuesUnder our distribution arrangements, our costs of revenues primarily include the amortization of capitalized production, overhead and
interest costs, participation and residual costs and write-offs of amounts previously capitalized for films not expected to be released or released films not expected to recoup their capitalized costs. As the profitability for each film varies
depending upon its individual projection of total revenue to be received from all sources and its amount of capitalized costs incurred, amortization of capitalized film costs as a percentage of film revenue may vary from period to period due to
several factors, including: (i) changes in the mix of films earning revenue, (ii) changes in the estimate of any films estimated remaining total revenue to be received from all sources or capitalized costs and (iii) write-downs
of film costs due to changes in the estimated fair value of unamortized film costs. Generally, our costs of revenues do not include distribution and marketing costs or third-party distribution and fulfillment services fees. Distribution and
marketing costs would only be included in our costs of revenues to the extent that we caused our distributor to make additional expenditures in excess of agreed amounts. Exclusive of our distribution arrangements, our costs of revenues also include
direct costs for sales commissions to outside third parties for the licensing and merchandising of our characters.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Selling, General and Administrative ExpensesOur selling, general and administrative expenses consist primarily of employee compensation (including
salaries, bonuses, stock compensation and employee benefits), rent, insurance and fees for professional services.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For a
detailed description of our operating expenses, please see Managements Discussion and Analysis of Financial Condition and Results of OperationsOur Revenues and CostsCosts of Revenues and Selling, General and
Administrative Expenses in our 2007 Form 10-K.

Because our films are distributed in foreign countries, fluctuations in foreign
currency exchange rates can affect our business, results of operations and cash flow. For a detailed discussion of our foreign currency risk, please see Quantitative and Qualitative Disclosures About Market Risk under Part I, Item 3
of this Quarterly Report.

Seasonality

Our revenues fluctuate based upon the timing of our films theatrical and home entertainment releases and the recoupment position of our distributor on a film-by-film basis, which varies depending upon a films overall
performance. For example, our distributor reported revenue for both our second quarter 2008 and 2007 releases, Kung Fu Panda(released on June 6, 2008) and Shrek the Third(released on May 18, 2007), during the same quarter
as their respective theatrical release as a result of each films strong domestic theatrical performance. Conversely, for Bee Movie,which was theatrically released on November 2, 2007, no revenue was reported to us by our
distributor until the first quarter of 2008, because our distributor is entitled to first recover its marketing and distribution costs (including its distribution fee) before we recognize any revenue generated from the exploitation of the film.
Furthermore, revenues related to the licensing of our character and film elements are influenced by seasonal consumer purchasing behavior and the timing of animated theatrical releases. As a result, our annual or quarterly operating results for any
period are not necessarily indicative of results to be expected for future periods.



15



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##### Table of Contents

Results of Operations

Overview of Financial Results

The following table sets forth, for the periods presented, certain data from our
unaudited consolidated statements of income. This information should be read in conjunction with our unaudited consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report.



|                                                                 |  |                                                      |       |   |                          |   |       |          |  |   |          |   |  |       |    |  |      |       |   |          |   |       |          |  |   |       |   |  |       |   
|---------------------------------------------------------------- |  | ---------------------------------------------------- | ----- | - | ------------------------ | - | ----- | -------- |  | - | -------- | - |  | ----- | -- |  | ---- | ----- | - | -------- | - | ----- | -------- |  | - | ----- | - |  | ----- | --
|                                                                 |  | Three Months EndedJune 30,                           |       |   | Six Months EndedJune 30, |  
|                                                                 |  | 2008                                                 |       |   | 2007                     |   |       | $ Change |  |   | % Change |   |  | 2008  |    |  | 2007 |       |   | $ Change |   |       | % Change | 
|                                                                 |  | (unaudited)                                          |      
|                                                                 |  | (in millions, except percentages and per share data) |      
|Revenues                                                         |  | $                                                    | 140.8 |   |                          | $ | 222.5 |          |  | $ | (81.7    | ) |  | (36.7 | )% |  | $    | 297.4 |   |          | $ | 316.2 |          |  | $ | (18.8 | ) |  | (5.9  | )%
|Costs of revenues                                                |  |                                                      | 75.2  |   |                          |   | 110.6 |          |  |   | 35.4     |   |  | 32.0  | %  |  |      | 170.9 |   |          |   | 164.1 |          |  |   | (6.8  | ) |  | (4.1  | )%
|Selling, general and administrative expenses                     |  |                                                      | 27.6  |   |                          |   | 27.5  |          |  |   | (0.1     | ) |  | (0.4  | )% |  |      | 54.5  |   |          |   | 53.2  |          |  |   | (1.3  | ) |  | (2.4  | )%
|                                                                 |  |                                                      |       |   |                          |   |       |          |  |   |          |   |  |       |    |  |      |       |   |          |   |       |          |  |   |       |   |  |       |   
|Operating income                                                 |  |                                                      | 38.0  |   |                          |   | 84.4  |          |  |   | (46.4    | ) |  | (55.0 | )% |  |      | 72.0  |   |          |   | 98.9  |          |  |   | (26.9 | ) |  | (27.2 | )%
|Interest income, net                                             |  |                                                      | 2.4   |   |                          |   | 6.4   |          |  |   | (4.0     | ) |  | (62.5 | )% |  |      | 5.4   |   |          |   | 12.6  |          |  |   | (7.2  | ) |  | (57.1 | )%
|Other income, net                                                |  |                                                      | 1.1   |   |                          |   | 1.4   |          |  |   | (0.3     | ) |  | (21.4 | )% |  |      | 1.8   |   |          |   | 2.9   |          |  |   | (1.1  | ) |  | (37.9 | )%
|Increase in income tax benefit payable to stockholder            |  |                                                      | (8.0  | ) |                          |   | (23.9 | )        |  |   | 15.9     |   |  | 66.5  | %  |  |      | (17.4 | ) |          |   | (29.7 | )        |  |   | 12.3  |   |  | 41.4  | % 
|                                                                 |  |                                                      |       |   |                          |   |       |          |  |   |          |   |  |       |    |  |      |       |   |          |   |       |          |  |   |       |   |  |       |   
|Income before income taxes                                       |  |                                                      | 33.5  |   |                          |   | 68.3  |          |  |   | (34.8    | ) |  | (51.0 | )% |  |      | 61.8  |   |          |   | 84.7  |          |  |   | (22.9 | ) |  | (27.0 | )%
|Provision for income taxes                                       |  |                                                      | 6.0   |   |                          |   | 6.5   |          |  |   | 0.5      |   |  | 7.7   | %  |  |      | 8.2   |   |          |   | 7.5   |          |  |   | (0.7  | ) |  | (9.3  | )%
|                                                                 |  |                                                      |       |   |                          |   |       |          |  |   |          |   |  |       |    |  |      |       |   |          |   |       |          |  |   |       |   |  |       |   
|Net income                                                       |  | $                                                    | 27.5  |   |                          | $ | 61.8  |          |  | $ | (34.3    | ) |  | (55.5 | )% |  | $    | 53.6  |   |          | $ | 77.2  |          |  | $ | (23.6 | ) |  | (30.6 | )%
|                                                                 |  |                                                      |       |   |                          |   |       |          |  |   |          |   |  |       |    |  |      |       |   |          |   |       |          |  |   |       |   |  |       |   
|Diluted net income per share                                     |  | $                                                    | 0.30  |   |                          | $ | 0.60  |          |  | $ | (0.30    | ) |  | (50.0 | )% |  | $    | 0.58  |   |          | $ | 0.75  |          |  | $ | (0.17 | ) |  | (22.7 | )%
|                                                                 |  |                                                      |       |   |                          |   |       |          |  |   |          |   |  |       |    |  |      |       |   |          |   |       |          |  |   |       |   |  |       |   
|Diluted shares used in computing diluted net income per share(1) |  |                                                      | 90.8  |   |                          |   | 102.5 |          |  |   | N/A      |   |  | 11.4  | %  |  |      | 91.6  |   |          |   | 103.1 |          |  |   | N/A   |   |  | 11.2  | % 
|                                                                 |  |                                                      |       |   |                          |   |       |          |  |   |          |   |  |       |    |  |      |       |   |          |   |       |          |  |   |       |   |  |       |   



|(1) | During the three- and six-month periods ended June 30, 2008, and the year ended December 31, 2007, we
repurchased a total of 3.5 million, 3.7 million and 10.1 million shares of our Class A common stock, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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

The following table sets forth (in millions), for the periods presented, our revenues by film. This information should be read in conjunction with
our unaudited consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report.

LOGO



|(1) | For each period shown, Current year theatrical releases consists of revenues attributable to films released
during the current year, Prior year theatrical releases consists of revenues attributable to films released during the immediately prior year and All Other consists of revenues attributable to films released during all
previous periods, including our library titles, as well as revenues from any other sources.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenues. For
the three months ended June 30, 2008, our revenue was $140.8 million, a decrease of $81.7 million, or 36.7%, as compared to $222.5 million for the three months ended June 30, 2007. As illustrated in the revenue chart above, the decrease in
revenue in the second quarter of 2008 as compared to the second quarter of 2007 was primarily related to the comparative performance of the films comprising the Current year theatrical releases and All Other categories.
Kung Fu Panda, our most recent theatrical release, while contributing 33.0% of the total revenue for the second quarter of 2008, contributed approximately $63 million less revenue than the higher-grossing Shrek the Third for the
second quarter of 2007, which, in addition, was released in the domestic theatrical market approximately two weeks earlier in the second quarter of 2007 than Kung Fu Pandain the comparable quarter of 2008.In addition, as a result of
$25.5 million of net revenue reported by our current distributor in the second quarter of 2007 associated with the conclusion of the transition of our home entertainment fulfillment services from our prior distributor and, to a lesser extent, an
increase in home entertainment revenue for both Shrekand Shrek 2 in connection with Shrek the Thirds theatrical release, the revenue generated by the films comprising our All Other category during the three
months ended June 30, 2008 was approximately $35 million less than that for the three months ended June 30, 2007.

Revenue for
the quarter ended June 30, 2008, was comprised of amounts earned by a variety of films. Kung Fu Panda, our most recent theatrical release and single greatest source of revenue for the quarter, contributed $46.4 million earned in both the
domestic theatrical market and through ancillary revenue sources. In addition to merchandising and licensing revenue, ancillary revenue for Kung Fu Pandaincludes non-recurring revenue associated with the completion of a strategic
relationship that accounted for slightly less than half of the films total revenue for the second quarter of 2008. Bee Movie, our 2007 fourth quarter release, generated $25.5 million of revenue primarily attributable to the
international home entertainment market and Shrek the Third earned an additional $29.9 million of revenue earned primarily in the domestic pay television market. Over the Hedge, Flushed Awayand Wallace & Gromitcontributed additional revenue of $5.4 million, $7.3 million and $5.3 million, respectively, earned primarily in the international television markets. Our other properties, including our library of titles, contributed revenues totaling $21.0
million earned across a variety of worldwide markets.



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##### Table of Contents

For the second quarter of 2007, Shrek the Third,the single greatest source of revenue,
contributed $109.1 million of revenue earned in the domestic theatrical market and ancillary markets (which includes merchandising and licensing). The remaining revenue for the quarter was contributed by a variety of films across several markets:
Over the Hedgecontributed $26.9 million of revenue earned largely in the domestic pay television market, Flushed Away generated revenue in a variety of markets totaling $12.4 million, Wallace & Gromitgenerated revenue
of $14.7 million attributable primarily to the worldwide home entertainment market and our other films, including our library titles, contributed revenues totaling $59.4 million generated in a variety of markets. In addition, during the second
quarter of 2007, the transition of our home entertainment fulfillment services from Universal Studios Inc. (Universal Studios) to Paramount was substantially completed. As a result, the net revenue reported to us by our
distributor for this quarter for several of our films, including Wallace & Gromit and some of our library titles, increased by $25.5 million as a result of a reduction of certain previously recorded estimates of home entertainment
product returns and marketing costs.

Costs of Revenues. Costs of revenues decreased by $35.4 million, or 32.0%, to $75.2
million for the three months ended June 30, 2008. Cost of revenues (the primary component of which is film amortization costs) as a percentage of film revenue was 53.4% for the three months ended June 30, 2008 and 49.7% for the three
months ended June 30, 2007. While the amortization rate for the film comprising each quarters respective Current year theatrical releases category was comparable, the increase in amortization of film costs as a percentage of
film revenue for the three months ended June 30, 2008 was primarily due to the combined higher rate of amortization for our 2008 Prior year theatrical releases (Shrek the ThirdandBee Movie)for the three months ended
June 30, 2008, as compared to the amortization rate for our 2007 Prior year theatrical releases (Over the HedgeandFlushed Away)during the comparable period of 2007.This increase in amortization rates between
the periods was slightly offset by the lower rates of amortization for the All Other category during the quarter ended June 30, 2008 as compared to the quarter ended June 30, 2007.

Selling, General and Administrative Expenses. Selling, general and administrative expenses (including stock compensation expense) totaled
$27.6 million for the three months ended June 30, 2008, and remained relatively unchanged from $27.5 million for the three months ended June 30, 2007. This slight aggregate increase related to higher employee-related costs and increased
corporate travel offset by a $1.0 million decrease in stock compensation expense. The decrease in stock compensation expense was due to additional expense recorded in the second quarter of 2007 associated with the increase in the anticipated level
of achievement of certain performance-based equity awards granted to certain executive officers partially offset by additional expense associated with the continued growth in the number of equity awards granted to the overall employee base. As of
June 30, 2008, the total compensation cost related to unvested equity awards granted to employees (excluding equity awards with performance objectives deemed not probable of achievement) but not yet recognized was approximately $62.5 million.
This cost will be amortized on a straight-line basis over a weighted average life of 2.4 years.

Operating Income. Operating
income for the three months ended June 30, 2008 was $38.0 million compared to $84.4 million for the comparable period of 2007. The decrease of $46.4 million in operating income for the three months ended June 30, 2008 was primarily due to
the stronger performance of Shrek the Third during the three months ended June 30, 2007 as compared to our most current theatrical release, Kung Fu Panda,during the comparable period of 2008 and lower revenue contributed by our
All Other category quarter-over-quarter primarily as a result of the additional revenue reported by our distributor in the second quarter of 2007 as a result of the completion of the transition of home entertainment fulfillment services
from our prior distributor.

Interest Income, Net. For the three months ended June 30, 2008, total net interest income was
$2.4 million, a decrease of $4.0 million or 62.5% from $6.4 million for the same period of 2007. The decrease in net interest income for the second quarter of 2008 as compared to the second quarter of 2007 was mainly due to lower average rates of
interest earned on cash and cash equivalents and, to a lesser extent, lower average balances of cash and cash equivalents largely due to the stock repurchases made throughout 2007 and continuing in first quarter of 2008.



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Interest expense capitalized to production film costs was $0.8 million and $2.3 million for the three
months ended June 30, 2008 and 2007, respectively. The $1.5 million decrease between the periods was primarily due to the decrease in amount of interest expense eligible for capitalization during the second quarter of 2008 because of the
repayment of debt in 2007.

Other Income, Net. For the three months ended June 30, 2008 and 2007, total other income was
$1.1 million and $1.4 million respectively. Other income in both years consisted entirely of income recognized in connection with preferred vendor arrangements.

Increase in Income Tax Benefit Payable to Stockholder. As a result of a partial increase in the tax basis of our tangible and intangible assets attributable to transactions entered into by affiliates
controlled by a stockholder (Tax Basis Increase), we may pay reduced tax amounts to the extent we generate sufficient taxable income in the future. As discussed below in Critical Accounting Policies and
EstimatesProvision for Income Taxes, we are obligated to remit to such affiliates 85% of any cash savings in U.S. Federal income tax and California franchise tax and certain other related tax benefits, subject to repayment if it is
determined that these savings should not have been available to us. For the quarter ended June 30, 2008, we recorded $9.4 million in net tax benefits associated with the Tax Basis Increase as a reduction in the provision for income taxes and
recorded an expense of $8.0 million representing 85% of these recognized benefits to increase income tax benefit payable to stockholder.

During the quarter ended June 30, 2007, we recognized $28.1 million in net tax benefits associated with the Tax Basis Increase as an increase in the provision for income taxes and recorded an expense of $23.9 million representing 85%
of these recognized benefits to increase the income tax benefit payable to stockholder for the three months ended June 30, 2007.

Provision for Income Taxes. For the three months ended June 30, 2008 and 2007, we recorded a provision for income taxes of $6.0 million and $6.5 million, respectively, or an effective tax rate of 14.5% and 7.0%,
respectively. The quarter-over-quarter change in the effective tax rate is driven by changes in the valuation allowance required against the deferred tax assets. Our effective tax rate for both periods was lower than the 35% statutory federal rate
because of the decrease in our valuation allowance for deferred tax assets primarily resulting from the increase in the net tax benefits recognized from the Tax Basis Increase as described above. However, when our provision for income taxes is
combined with the amounts associated with the Increase in Income Tax Benefit Payable to Shareholder (see above), the combined percentages remain relatively consistent between the three months ended June 30, 2008 and June 30, 2007, at 33.8%
and 33.0%, respectively.

Net Income. Net income for the three months ended June 30, 2008 was $27.5 million, or $0.30 per
diluted share, compared to a net income of $61.8 million, or $0.60 net income per diluted share, in the corresponding period in 2007.



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##### Table of Contents

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

The following table sets forth (in millions), for the periods presented, our revenues by film. This information should be read in conjunction with
our unaudited consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report.

LOGO



|(1) | For each period shown, Current year theatrical releases consists of revenues attributable to films released
during the current year, Prior year theatrical releases consists of revenues attributable to films released during the immediately prior year and All Other consists of revenues attributable to films released during all
previous periods, including our library titles, as well as revenues from any other sources.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenues. For
the six months ended June 30, 2008, our revenues totaled $297.4 million, a decrease of $18.8 million, or 5.9%, as compared to $316.2 million for the six months ended June 30, 2007. As illustrated in the chart above, the slight change in
revenues for the first six months of 2008 as compared to the corresponding period in 2007 is a function of the lower revenues contributed by the films comprising the Current year theatrical releases and All Other categories
being largely offset by the stronger performance of the Prior year theatrical releases category. Kung Fu Panda, while performing strongly enough in the domestic theatrical market to enable our distributor to report revenue during
the same quarter as its respective theatrical release, contributed approximately $63 million less revenue than the higher-grossing Shrek the Third in the first half of 2007, which, moreover, was released in the domestic theatrical market
approximately two weeks earlier in the second quarter of 2007 thanKung Fu Pandain the comparable period of 2008. In addition, the All Other category benefited in the first six months of 2007 from $25.5 million of net
revenue reported by our current distributor in the second quarter of 2007 associated with the conclusion of the transition of our home entertainment fulfillment services from our prior distributor. Nevertheless, the stronger performance of our 2008
Prior year theatrical releases (Shrek the ThirdandBee Movie)as compared to 2007s Prior year theatrical releases(Over the Hedge and Flushed Away)largely offset the unfavorable revenue
comparisons for the Current year theatrical releases and All Other categories.

Several films contributed to
our revenue totaling $297.4 million for the six-month period ended June 30, 2008. Kung Fu Panda, our most recent release, contributed $46.4 million of revenue associated with its domestic theatrical release and ancillary revenue sources.
In addition to merchandising and licensing revenue, ancillary revenue for Kung Fu Pandaincluded non-recurring revenue associated with the completion of a strategic relationship that accounted for slightly less than half of the films
total revenue for the six months ended June 30, 2008. Our Prior year theatrical releases, Shrek the Thirdand Bee Movie, generated a total of $152.6 million primarily attributable to the worldwide theatrical, home
entertainment and ancillary markets (including non-recurring revenue associated with strategic relationship that accounted for slightly less than one-third of



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##### Table of Contents

Bee Moviestotal revenue for the six months ended June 30, 2008) and Over the Hedge, Flushed Awayand
Wallace & Gromitcontributed additional revenue of $9.5 million, $19.9 million and $13.4 million, respectively, earned primarily in the international television and worldwide home entertainment markets. Our other properties,
including our library of titles, contributed revenues totaling $55.6 million earned across a variety of worldwide markets.

For the six
months ended June 30, 2007, a variety of films across several markets contributed to our total revenue of $316.2 million: Shrek the Third, the single greatest source of revenue, contributed $109.1 million of revenue earned primarily in the
domestic theatrical market and ancillary markets (which includes merchandising and licensing); Over the Hedge contributed $59.9 million of revenue earned largely in the worldwide home entertainment and domestic pay television markets; FlushedAway contributed $13.6 million earned across a variety of markets;Wallace & Gromitcontributed $24.1 million earned primarily in worldwide television and worldwide home entertainment markets; and our other films, including our
library of titles, contributed revenues totaling $109.5 million, respectively, generated in a variety of markets. In addition, during the second quarter of 2007, the transition of our home entertainment fulfillment services from Universal Studios to
Paramount was substantially completed. As a result, the net revenue reported to us by our distributor for the six months ended June 30, 2007 for several of out titles, including Wallace & Gromit and some of our library titles,
increased by $25.5 million as a result of a reduction of certain previously recorded estimates of home entertainment product returns and marketing costs.

Costs of Revenues. Costs of revenues increased by $6.8 million, or 4.1%, to $170.9 million for the six months ended June 30, 2008. Cost of revenues (the primary component of which is film amortization
costs) as a percentage of film revenue was 57.5% for the six months ended June 30, 2008 and 51.9% for the six months ended June 30, 2007. While the amortization rates for each periods respective Current year theatrical
release (Kung Fu Pandaand Shrek the Third)were largely consistent, the increase in amortization of film costs as a percentage of film revenue was principally because the combined amortization rate for our 2008 Prior year
theatrical releases for the six months ended June 30, 2008, was higher than that for 2007 Prior year theatrical releases (Over the HedgeandFlushed Away) during the comparable period of 2007.This
increase in amortization rates between the six-month periods was slightly offset by the combined lower rate of amortization for the All Other category during the six months ended June 30, 2008 as compared to the six months ended
June 30, 2007.

Selling, General and Administrative Expenses. Total selling, general and administrative expenses (which
includes stock compensation expense) increased by $1.3 million to $54.5 million for the six months ended June 30, 2008 from $53.2 million for the six months ended June 30, 2007. This 2.4% aggregate increase related to higher
employee-related costs and increased corporate travel partially offset by a $0.8 million decrease in stock compensation expense. The decrease in stock compensation expense period-over-period is primarily due to the additional expense recorded during
the six-month period ended June 30, 2007 associated with the increase in the expected level of achievement of certain performance-based awards granted to executive officers as offset by the current year additional expense associated with the
increase in the number of equity awards granted to the overall employee base.

Operating Income. Operating income for the six
months ended June 30, 2008 was $72.0 million, a decrease of $26.9 million, or 27.2%, compared to that of $98.9 million for the comparable period of 2007. The decrease in operating income for the six-month period ended June 30, 2008 was
largely as a result of the combined impact of the performance of our current theatrical release, Kung Fu Panda, as compared to the superior performance of Shrek the Thirdduring the comparable period of 2007 and the additional revenue
reported by our distributor in the second quarter of 2007 as a result of the completion of the transition of home entertainment fulfillment services from our prior distributor. This combined impact was partially offset by the stronger performance of
the Prior year theatrical releases category during the six months ended June 30, 2008 as compared to the comparable period of 2007.



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Interest Income, Net. For the six months ended June 30, 2008, total net interest income
was $5.4 million, a decrease of $7.2 million or 57.1% from $12.6 million for the same period of 2007. The decrease in net interest income for the first six months of 2008 as compared to the first six months of 2007 was due to a combination of lower
average rates of interest earned on cash and cash equivalents and lower average balances of cash and cash equivalents largely due to the stock repurchases made throughout 2007 and continuing in first quarter of 2008.

Interest expense capitalized to production film costs was $1.6 million and $4.6 million for the six months ended June 30, 2008 and 2007,
respectively. The $3.0 million decrease between the periods was primarily due to the decrease in amount of interest expense eligible for capitalization during the first six months of 2008 because of the repayment of debt in 2007.

Other Income, Net. For the six months ended June 30, 2008 and 2007, total other income was $1.8 million and $2.9 million respectively.
Other income in both years consisted entirely of income recognized in connection with preferred vendor arrangements.

Increase in Income
Tax Benefit Payable to Stockholder. As a result of the Tax Basis Increase, we are obligated to remit to the stockholders affiliate 85% of any such cash savings in U.S. Federal income tax and California franchise tax and certain
other related tax benefits, subject to repayment if it is determined that these savings should not have been available to us. For the six months ended June 30, 2008, we recorded $20.5 million in net tax benefits associated with the Tax Basis
Increase as a reduction in the provision for income taxes and recorded an expense of $17.4 million representing 85% of these recognized benefits to increase income tax benefit payable to stockholder.

For the six months ended June 30, 2007, we recognized $34.9 million in net tax benefits associated with the Tax Basis Increase as a reduction in the
provision for income taxes and recorded an expense of $29.7 million representing 85% of these recognized benefits to increase income tax benefit payable to stockholder.

Provision for Income Taxes. For the six months ended June 30, 2008 and 2007, we recorded a provision for income taxes of $8.2 million and $7.5 million, respectively, or an effective tax rate of 10.4%
and 6.5%, respectively. The period-over-period change in the effective tax rate is driven by changes in the valuation allowance required against the deferred tax assets. Our effective tax rate for both periods was lower than the 35% statutory
federal rate because of the decrease in our valuation allowance for deferred tax assets primarily resulting from the increase in the net tax benefits recognized from the Tax Basis Increase as described above. However, when our provision for income
taxes is combined with the amounts associated with the Increase in Income Tax Benefit Payable to Shareholder (see above), the combined percentages remain relatively consistent at 32.4% and 32.5% for the six months ended June 30, 2008 and
June 30, 2007, respectively.

Net Income. Net income for the six months ended June 30, 2008 was $53.6 million, or
$0.58 per diluted share, compared to a net income of $77.2 million, or $0.75 net income per diluted share, in the corresponding period in 2007.

Financing Arrangements

On June 24, 2008, we entered into a new $125.0 million revolving credit facility (New
Credit Facility) with several banks. In connection therewith, we terminated our prior $100.0 million revolving credit facility (Prior Credit Facility). For further discussion of both our New Credit Facility and our Prior
Credit Facility see Note 5 to the unaudited consolidated financial statements contained in Part I, Item 1 of this Quarterly Report.

Other than entering into our New Credit Facility and terminating our Prior Credit Facility, there have been no material changes during the period covered by this Quarterly Report to the financing arrangements specified in the section
Managements Discussion and Analysis of Financial Condition and Results of Operation included in our 2007 Form 10-K.



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As of June 30, 2008, we were in compliance with all applicable financial debt covenants.

For a more detailed description of our various financing arrangements, please see Note 5 to the unaudited consolidated financial statements contained
in Part I, Item 1 of this Quarterly Report and the Managements Discussion and Analysis of Financial Condition and Results of Operation section of our 2007 Form 10-K.

Liquidity and Capital Resources

Current Financial Condition

Our primary operating needs are to fund the production and development costs of our films, make participation and residual
payments, fund selling, general and administrative costs and capital expenditures. Our operating activities for the six months ended June 30, 2008 generated adequate cash to meet our operating needs. For the next 12 months, we expect that cash
on hand and cash from operations will be sufficient to satisfy our anticipated cash needs for working capital, stock repurchases and technology capital expenditures. In the event that these cash flows are insufficient, we expect to be able to draw
funds from our revolving credit facility to meet these needs. Over the next two years we expect to spend approximately $85 million to expand and make general improvements to our animation facility located in Glendale, California in order to
accomodate general business growth, including 3D expansion. We are still currently evaluating the various alternatives for the funding of this project, including using existing cash on hand and several financing options.

As of June 30, 2008, we had cash and cash equivalents totaling $401.6 million, a $109.1 million increase compared to $292.5 million at
December 31, 2007. Components of this change in cash for the six months ended June 30, 2008, as well as for the six months ended June 30, 2007, are provided below in more detail.

Operating Activities

Net provided by operating
activities for the six months ended June 30, 2008 and 2007 is a follows (in thousands):



|                                          |  |      |         |      |   |       
|----------------------------------------- |  | ---- | ------- | ---- | - | ------
|                                          |  | 2008 |         | 2007
|Net cash provided by operating activities |  | $    | 216,969 |      | $ | 21,866

Net cash provided by operating activities for the first six months of 2008 was primarily
attributable to the collection of revenue associated with Shrek the Thirds worldwide home entertainment release, Bee Movies worldwide theatrical release, worldwide television revenue for Madagascar and, to a lesser
extent, the collection of worldwide television and home entertainment revenues for our other films, including Over the Hedge, Shrek 2andShrek. The operating cash provided by the collection of revenues during the first six
months of 2008 was offset by $37.6 million paid to an affiliate of a stockholder related to tax benefits realized in 2007 from the Tax Basis Increase, $21.1 million paid (net of refunds) for estimated federal and state income taxes and $44.4 million
paid related to employee bonus plans. The operating cash provided by revenues was also partially offset by film production and development spending and participation and residual payments. Net cash provided by operating activities for the first six
months of 2007 was $21.9 million and was primarily attributable to collection of revenue associated with Over the Hedges worldwide home entertainment sales and, to a lesser extent, the collection of worldwide television and home
entertainment revenues for Madagascar, SharkTale and Shrek 2. The operating cash provided during the first six months of 2007 was offset by $22.0 million payment to an affiliate of a stockholder related to tax benefits realized in 2006
from the Tax Basis Increase, film production and development spending and participation and residual payments. In addition, during the first six months of 2007 we made payments totaling $46.9 million to our distributor for distribution costs that
had been incurred and appropriately reflected in our consolidated financial statements, but not deducted from remittances, in prior years.



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Investing Activities

Net cash used in investing activities for the six months ended June 30, 2008 and 2007 is a follows (in thousands):



|                                      |  |      |         |   |      |   |        |  
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                      |  | 2008 |         |   | 2007 |  
|Net cash used in investing activities |  | $    | (18,765 | ) |      | $ | (1,370 | )

Net cash used in investing activities for the six months ended June 30, 2008 and 2007 was
primarily related to the investment in property, plant and equipment. The increase in the investment in property, plant and equipment for the six months ended June 30, 2008 as compared to the same period of 2007 is related to new strategic
technology initiatives and alliances as well as the expansion of our Glendale campus.

Financing Activities

Net cash used in financing activities for the six months ended June 30, 2008 and 2007 is as follows (in thousands):



|                                      |  |      |         |   |      |   |         |  
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                      |  | 2008 |         |   | 2007 |  
|Net cash used in financing activities |  | $    | (89,076 | ) |      | $ | (43,220 | )

Net cash used in financing activities for both six-month periods ended June 30, 2008 and 2007
was primarily comprised of repurchases of our Class A common stock.

Contractual Obligations

There have been no material changes during the period covered by this Quarterly Report to the contractual obligations specified in the table of
contractual obligations included in the section Managements Discussion and Analysis of Financial Condition and Results of Operation included in our 2007 Form 10-K.

As of June 30, 2008 we had non-cancelable talent commitments totaling approximately $26.9 million that are payable over the next five years.

Critical Accounting Policies and Estimates

Our significant accounting policies are outlined in Note 2 to the audited consolidated financial statements contained in our 2007 Form 10-K. We prepare our consolidated financial statements in accordance with United States generally
accepted accounting principles (GAAP). In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and
liabilities including estimates of ultimate revenues and costs of film and television product, estimates of product sales that will be returned, the potential outcome of future tax consequences of events that have been recognized in our financial
statements and estimates used in the determination of the fair value of stock options and other equity awards for the determination of stock-based compensation. In some cases, changes in the accounting estimates are reasonably likely to occur from
period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be
affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We believe that the application of the following accounting
policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management.



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Revenue Recognition

We recognize revenue from the distribution of our animated feature films when earned and reported to us by our distributor, as reasonably determinable in accordance with the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants Statement of Position 00-2, Accounting by Producers or Distributors of Films (the SOP).

Pursuant to our distribution and servicing arrangements, we recognize revenue net of reserves for returns, rebates and other incentives after our
distributor has (i) retained a distribution fee of 8.0% of revenue (without deduction for any distribution and marketing costs or third-party distribution and fulfillment services fees) and (ii) recovered all of its distribution and
marketing costs with respect to our films on a title-by-title basis. International results are generally reported to us by our distributor one month in arrears. Because a third party is the principal distributor of our films, in accordance with the
SOP, the amount of revenue that we recognize from our films in any given period is dependent on the timing, accuracy and sufficiency of the information we receive from our distributor. As typical in the film industry, our distributor may make
adjustments in future periods to information previously provided to us that could have a material impact on our operating results in later periods. Furthermore, management may, in its judgment, make material adjustments to the information reported
by our distributor to ensure that revenues are accurately reflected in our financial statements. To date, our distributor has not made subsequent, nor has management made, material adjustments to information provided by our distributor and used in
the preparation of our historical financial statements.

Revenue from the theatrical exhibition of films is recognized at the later of when
a film is exhibited in theaters or when revenue is reported by our distributor.

Revenue from the sale of home video units is recognized at
the later of when product is made available for retail sale and when video sales to customers are reported to us by third parties, such as fulfillment service providers or distributors. In addition, we and our distributor provide for future
returns of home video product and for customer programs and sales incentives. We and our distributor calculate these estimates by analyzing a combination of historical returns, current economic trends, projections of consumer demand for our product
and point-of-sale data available from certain retailers. Based on this information, a percentage of each sale is reserved, and in the case of product returns, provided that the customer has the right of return. Customers are currently given varying
rights of return, from 15% up to 100%. However, although we and our distributor allow various rights of return for our customers, we do not believe that these rights are critical in establishing return estimates, because other factors, such as our
historical experience with similar types of sales, information we receive from retailers and our assessment of the products appeal based on domestic box office success and other research, are more important to the estimation process.

Revenue from both free and pay television licensing agreements is recognized at the later of the time the production is made available for
exhibition in those markets or it is reported to us by our distributor.

Revenue from licensing and merchandising is recognized when the
associated films have been released and the criteria for revenue recognition have been met. In most instances, this generally results in the recognition of revenue in periods when royalties are reported by licensees or cash is received.

Film Costs Amortization

Once a film is
released, the amount of film costs, participations and residual costs relating to that film are amortized and included in costs of revenues in the proportion that the revenue during the period for each film (Current Revenue) bears
to the estimated remaining total revenue to be received from all sources (Ultimate Revenue) as of the beginning of the current fiscal year under the individual-film-forecast-computation method in accordance with the SOP. The
amount of film costs that is amortized each period will therefore depend on the ratio of Current Revenue to Ultimate Revenue for each film for such period. We make certain estimates and



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judgments of Ultimate Revenue to be received for each film based on information received from our distributor and our knowledge of the industry.
Historically, there has been a close correlation between the success of a film in the domestic box office market and the films success in the international theatrical and worldwide home entertainment markets. In general, films that achieve
domestic box office success also tend to experience success in the home entertainment and international theatrical markets. While we continue to believe that domestic box office performance is a key indicator of a films potential performance
in these subsequent markets, we do not believe that it is the only factor influencing the films performance in these markets and recognize that a range of other market and film-specific factors can have a significant impact.

Estimates of Ultimate Revenue and anticipated participation and residual costs are reviewed periodically and are revised if necessary. A change in any
given period to the Ultimate Revenue for an individual film will result in an increase or decrease to the percentage of amortization of capitalized film costs relative to a previous period. An increase in estimate of Ultimate Revenues will lower the
percentage rate of amortization while, conversely, a decrease in the estimate of Ultimate Revenue will raise the percentage rate of amortization. In addition, we evaluate film production costs for impairment each reporting period on a film-by-film
basis in accordance with the requirements of the SOP. If estimated remaining revenue is not sufficient to recover the unamortized film costs for that film, the unamortized film costs will be written down to fair value determined using a net present
value calculation. The cost of any such write downs are reflected in costs of revenues.

Stock-Based Compensation

We record employee stock-based compensation in accordance with the provisions of FAS No. 123 (revised 2004), Share-Based Payment
(FAS 123R) which requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.

The fair value of stock option grants with either service-based or performance-based vesting criteria is estimated on the date of grant using the
Black-Scholes option-pricing model. Some of the primary input assumptions of the Black-Scholes option-pricing model are volatility, dividend yield, the weighted average expected option term and the risk-free interest rate. As permitted by and
outlined in Staff Accounting Bulletin (SAB) 107, Share-Based Payment (SAB 107) released by the SEC, we apply the simplified method of calculating the weighted average expected term. The
simplified method defines the weighted average expected term as being the average of the weighted average of the vesting period and contractual term of each stock option granted. Given our lack of sufficient historical exercise data for stock option
grants and as permitted under SAB 110, Use of a Simplified Method, which was released by the SEC in December 2007, we continue to use the simplified method for calculating the expected term. Once sufficient information regarding exercise
behavior, such as historical exercise data or exercise information from external sources, becomes available, we will be required to utilize another method to determine the weighted average expected term. In addition, in accordance with SAB 107, the
estimated volatility incorporates both historical volatility and the implied volatility of publicly traded options. As required by FAS 123R, management made an estimate of expected forfeitures and is recognizing compensation costs only for those
equity awards expected to vest.

For equity awards of stock options to purchase and restricted shares of our common stock that contain
certain performance-based measures, compensation costs are adjusted to reflect the estimated probability of vesting. For equity awards of stock appreciation rights to purchase and restricted shares of our common stock which contain a market-based
condition (such as vesting based upon stock-price appreciation), we use a Monte-Carlo simulation option-pricing model to determine the awards grant-date fair value. The Monte-Carlo simulation option-pricing model takes into account the same
input assumptions as the Black-Scholes model as outlined above, however, it also further incorporates into the fair-value determination the possibility that the market condition may not be satisfied and impact of the possible differing stock price
paths. Compensation costs related to awards with a market-based condition will be recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided.



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Estimates of the fair value of stock options are not intended to predict actual future events or the
value ultimately realized by employees who receive stock option awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by us under FAS 123R. Changes to our underlying stock price or
satisfaction of performance criteria for performance-based awards granted to employees could significantly affect compensation expense to be recognized in future periods.

Provision for Income Taxes

We account for income taxes pursuant to FAS No. 109,
Accounting for Income Taxes (FAS 109). Under the asset and liability method of FAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FAS 109, the effect on deferred tax assets and liabilities of a change in tax rates or a change in tax status is recognized in
income in the period that includes the enactment date. We record a valuation allowance to reduce our deferred income tax assets to the amount that is more likely than not to be realized. In evaluating our ability to recover our deferred income tax
assets, management considers all available positive and negative evidence, including our operating results, ongoing prudent and feasible tax-planning strategies and forecasts of future taxable income.

At the time of our separation from DreamWorks Studios, affiliates controlled by a stockholder entered into a series of transactions that resulted in a
partial increase in the tax basis of the Companys tangible and intangible assets (previously defined above as the Tax Basis Increase). The Tax Basis increase was $1.61 billion, resulting in a potential tax benefit to us of approximately $595.0
million that is expected to be realized over 15 years if we generate sufficient taxable income. The Tax Basis Increase is expected to reduce the amount of tax that we may pay in the future to the extent we generate taxable income in sufficient
amounts in the future. We are obligated to remit to our stockholders affiliate 85% of any such cash savings in U.S. Federal income tax and California franchise tax and certain other related tax benefits, subject to repayment if it is
determined that these savings should not have been available to us.

In July 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48), which became effective for us on
January 1, 2007. FIN 48 sets out the use of a single comprehensive model to address uncertainty in tax positions and clarifies the accounting for income taxes by establishing the minimum recognition threshold and a measurement attribute for tax
positions taken or expected to be taken in a tax return in order to be recognized in the financial statements. We continue to follow the practice of recognizing interest and penalties related to income tax matters as part of the provision for income
taxes.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements please see Note 1 to the unaudited consolidated financial statements contained in Part I, Item 1 of this Quarterly Report.



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Market and Exchange Rate Risk

For quantitative and qualitative disclosures about our interest rate, foreign
currency, and credit risks, please see Part II, Item 7A Quantitative and Qualitative Disclosures About Market Risk, of our 2007 Form 10-K. Exposure to our interest rate, foreign currency and credit risks have not changed materially
since December 31, 2007.



|Item 4. | Controls and Procedures
|------- | -----------------------

(a) Evaluation of disclosure controls
and procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the
effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report. In designing and evaluating the disclosure controls
and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.

Based on that evaluation, our chief executive officer and
chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the second quarter to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the
Securities Exchange Act of 1934, as amended, is accurately recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including
our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in
internal controls over financial reporting.

There were no changes in our internal control over financial reporting that occurred during
the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART IIOTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

See discussion of Legal
Proceedings in Note 10 to the unaudited consolidated financial statements contained in Part I, Item 1 of this Quarterly Report.



|Item 1A. | Risk Factors
|-------- | ------------

Information concerning certain risks
and uncertainties appears in Part I, Item 1A Risk Factors of the Companys 2007 Form 10-K. You should carefully consider these risks and uncertainties before making an investment decision with respect to shares of our
Class A common stock. Such risks and uncertainties could materially adversely affect our business, financial condition or operating results.

During the period covered by this Quarterly Report, there have been no material changes from the risk factors previously disclosed in the Companys 2007 Form 10-K or filings subsequently made with the SEC, except for the risk factor
We could be adversely affected by strikes and other union activity included in our 2007 Form 10-K, which is updated as follows:

We could be
adversely affected by strikes and other union activity.

A strike by one or more of the unions that provide personnel essential to the
production of our feature films could delay or halt our ongoing production activities. Along with the major U.S. film studios, we employ members of IATSE on many of our productions. We are currently subject to collective bargaining agreements with
IATSE, the Local 839 of IATSE (the Animation Guild and Affiliated Optical Electronic and Graphic Arts), the Local 700 of IATSE (the Motion Picture Editors Guild) and SAG. The collective bargaining agreements with IATSE (including our agreements with
Local 700 and Local 839 of IATSE) expire in July 2009, respectively. The collective bargaining agreement with SAG expired in June 2008 and, as of the date of filing of this Quarterly Report on Form 10-Q, the parties have not entered into a
replacement agreement. We may also become subject to additional collective bargaining agreements. A strike by SAG or any other halt or delay, depending on the length of time involved, could cause a delay of the release date of our feature films and
thereby could adversely affect the revenue that the films generate. In addition, strikes by unions with which we do not have a collective bargaining agreement (such as the recent strike by the Writers Guild of America) can have adverse effects on
the entertainment industry in general and, thus, indirectly on us.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

The following table shows Company repurchases of its Class A common stock for the three months ended June 30, 2008.



|                       |  |                                |  |                            |       |                                                                            |         |                                                                                                         |   |           
|---------------------- |  | ------------------------------ |  | -------------------------- | ----- | -------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------------------------------- | - | ----------
|                       |  | Total Number ofSharesPurchased |  | AveragePrice Paidper Share |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced Planor Program |         | Maximum Number(or ApproximateDollar
Value)of Shares That MayYet Be PurchasedUnder the Plan orProgram(1)
|April 1April 30, 2008 |  | 185,431                        |  | $                          | 25.52 |                                                                            | 185,431 |                                                                                                         | $ | 61,830,000
|May 1May 31, 2008     |  |                               |  |                            | N/A   |                                                                            |        |                                                                                                         | $ | 61,830,000
|June 1June 30, 2008   |  |                               |  |                            | N/A   |                                                                            |        |                                                                                                         | $ | 61,830,000
|                       |  |                                |  |                            |       |                                                                            |         |                                                                                                         |   |           
|Total                  |  | 185,431                        |  | $                          | 25.52 |                                                                            | 185,431 |                                                                                                         |   |           



|(1) | On December 17, 2007, the Company disclosed that its Board of Directors had approved a new stock repurchase
program. Under this program, the Company was authorized to repurchase up to an aggregate of $150 million of its outstanding Class A common stock. In July 2008, the Companys Board of Directors terminated the December 2007 share repurchase
program and approved a new stock repurchase program pursuant to which the Company may repurchase up to an aggregate of $150 million of its outstanding stock.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Items 3 is not applicable and has been omitted.



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

On May 7, 2008, the Company held its Annual Meeting of stockholders. The agenda items for such meeting are shown below along with the vote of the Companys Class A and Class B common stock with respect to such agenda items.



|1. | Elections of 12 directors to serve for the ensuing year or until their successors are duly elected and qualified.
|-- | -----------------------------------------------------------------------------------------------------------------



|                        |  |                |  |               
|----------------------- |  | -------------- |  | --------------
|                        |  | Votes Cast For |  | Votes Withheld
|Jeffrey Katzenberg      |  | 241,068,265    |  | 18,249,092    
|Roger A. Enrico         |  | 259,064,275    |  | 307,748       
|Harry Skip Brittenham |  | 258,873,703    |  | 498,320       
|Lewis. W Coleman        |  | 257,639,281    |  | 1,732,742     
|Thomas Freston          |  | 259,135,526    |  | 236,496       
|Judson C. Green         |  | 258,951,546    |  | 420,476       
|David Geffen            |  | 241,127,252    |  | 18,244,770    
|Mellody Hobson          |  | 259,068,819    |  | 303,205       
|Michael J. Montgomery   |  | 259,108,877    |  | 263,146       
|Nathan Myhrvold         |  | 259,066,156    |  | 305,866       
|Margaret C. Whitman     |  | 254,176,559    |  | 5,195,464     
|Karl M. von der Heyden  |  | 259,063,858    |  | 308,165       



|2. | Approval of an amendment to the Companys Restated Certificate of Incorporation to increase the maximum number of directors from 12 to 15.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------



|                 |  |                
|---------------- |  | ---------------
|                 |  | Number of Votes
|Votes for        |  | 259,008,950    
|Votes against    |  | 347,311        
|Votes abstain    |  | 15,761         
|Broker non-votes |  | 0              



|3. | Approval of an amendment to the Companys Restated Certificate of Incorporation to change the composition of the Nominating and Governance Committee.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------



|                 |  |                
|---------------- |  | ---------------
|                 |  | Number of Votes
|Votes for        |  | 259,136,379    
|Votes against    |  | 174,090        
|Votes abstain    |  | 61,552         
|Broker non-votes |  | 0              



|4. | Approval of the adoption of the 2008 Omnibus Incentive Compensation Plan.
|-- | -------------------------------------------------------------------------



|                 |  |                
|---------------- |  | ---------------
|                 |  | Number of Votes
|Votes for        |  | 243,566,973    
|Votes against    |  | 5,822,793      
|Votes abstain    |  | 1,330,281      
|Broker non-votes |  | 8,651,975      



|5. | Approval of the adoption of the 2008 Annual Incentive Plan.
|-- | -----------------------------------------------------------



|                 |  |                
|---------------- |  | ---------------
|                 |  | Number of Votes
|Votes for        |  | 247,029,697    
|Votes against    |  | 2,347,258      
|Votes abstain    |  | 28,758         
|Broker non-votes |  | 8,651,976      



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|6. | Ratification of the appointment of Ernst & Young LLP as the Companys independent registered accounting firm for the year ending December 31, 2008.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------



|                 |  |                
|---------------- |  | ---------------
|                 |  | Number of Votes
|Votes for:       |  | 259,281,415    
|Votes against:   |  | 61,848         
|Votes abstained: |  | 28,758         
|Broker non-votes |  | 0              



|Item 5. | Other Information.
|------- | ------------------

Transition of Roger Enrico to Non-executive
Chairman Status

On July 24, 2008, the Companys Board of Directors approved the transition of Roger Enrico, the Companys
executive Chairman of the Board, to non-executive Chairman status. As a result, the Company and Mr. Enrico have entered into a letter agreement dated July 24, 2008 which specifies that, except as specifically set forth in the letter agreement, his
former employment agreement, dated October 25, 2007, has been terminated and provides for the treatment of outstanding equity awards previously granted to Mr. Enrico. The letter agreement generally provides that any unvested equity awards as of July
24, 2008 will continue to vest in accordance with their terms provided that Mr. Enrico remains a director until October 23, 2009. If Mr. Enrico remains a director until October 23, 2009 or he ceases to be a director prior to October 23, 2009 for any
reason other than voluntary resignation, these awards will automatically vest as of such date (in the case of time-vested awards) or will continue to vest in accordance with their terms and dependent upon the achievement of specified performance
criteria (in the case of performance-vested awards) and will remain exercisable for the remainder of the term of the grant. The letter agreement also provides for the treatment of stock options or stock appreciation rights that were vested as of
July 24, 2008 or that become vested on or prior to October 23, 2009.

The foregoing description of the letter agreement is qualified in its
entirety by reference to such agreement, which is attached as Exhibit 10.3 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

Amended and Restated Employment Agreement with Lewis W. Coleman

On July 23, 2008, the Companys Compensation Committee
voted to approve an amended and restated employment agreement between the Company and Lewis W. Coleman (the Restated Agreement). The Restated Agreement amends and restates in its entirety the Companys previous agreement with Mr.
Coleman dated as of October 25, 2007 (the Prior Agreement).

Term. The Restated Agreement extends the term of Mr.
Colemans employment to December 31, 2011.

Title. Pursuant to the Restated Agreement, Mr. Colemans title will remain
President of the Company. In addition, Mr. Coleman is currently serving as the Companys Chief Financial Officer.

Salary and
Annual Incentive Awards. Under the Restated Agreement, Mr. Coleman will have an annual base salary of $1,262,000. As provided in the Prior Agreement, the Restated Agreement also provides that Mr. Coleman will receive an annual equity grant with
a grant-date value of $500,000, in lieu of additional salary. In addition, subject in all instances to the discretion of the Companys Compensation Committee, Mr. Coleman will continue to be eligible to receive annual cash or equity incentive
awards with a target value of $1,000,000. The actual incentive awards received will depend on the Companys performance.

Long-Term
Equity Incentive Awards. As provided in the Prior Agreement, Mr. Coleman will continue to be eligible, subject to annual approval by the Compensation Committee, to receive annual equity incentive awards of restricted stock units
(RSUs) and stock appreciation rights (or such other form of equity-based compensation as the Compensation Committee may determine) with a target grant-date value of $2,750,000.



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In addition to the compensation described above, Mr. Coleman is eligible for certain other benefits (such
as reimbursement of business expenses).

Termination Events. As provided in the Prior Agreement, the Restated Agreement further
provides that the Company may terminate Mr. Colemans employment during the employment period with or without cause (as defined in the Restated Agreement) and Mr. Coleman may terminate his employment for good reason (as defined in the Restated
Agreement).

If the Company terminates Mr. Colemans employment other than for cause, incapacity or death, or Mr. Coleman
terminates employment for good reason, the Company will generally continue his base salary (including the value of any equity awards made in lieu of salary) and benefits until expiration of the term of the Restated Agreement. Mr. Coleman will also
receive an annual cash amount equal to the average annual bonuses that have been paid to him during the three immediately preceding years until the expiration of the employment agreement term. In addition, all equity-based compensation held by Mr.
Coleman will generally accelerate vesting (with respect to grants having performance-based vesting criteria, on the basis that any target goals have been achieved) and remain exercisable for the remainder of the term of the grant. In addition, Mr.
Colemans employment agreement provides that, if he is terminated prior to the Company making annual equity grants in 2008, he will be entitled to receive one additional grant of each of the following items: (i) an equity grant in lieu of an
annual cash bonus (if no cash bonuses have been paid) at the target amount of $1,000,000, and (ii) an equity grant with a grant-date value of $2,750,000 in lieu of a long-term equity incentive award.

In the event that Mr. Coleman dies or becomes disabled during the term, the Restated Agreement provides for the receipt of continued salary and other
benefits for a specified term. The Restated Agreement also provides, with respect to outstanding equity awards granted on or after January 1, 2009, that Mr. Coleman will be entitled to receive or exercise a percentage of each award determined base
on the length of time he was employed prior to termination (in the case of awards having performance-based vesting criteria, subject to attainment of the applicable performance goals) and Mr. Coleman will receive credit for the shorter of (A) an
additional year of service or (B) 50% of the remaining term of the Restated Agreement. The exercisable portion of any award will remain exercisable for the remaining term of the grant.

With respect to awards made before January 1, 2009, the Restated Agreement provides that, if Mr. Colemans employment terminates for any reason
(including death or disability but excluding termination for cause or voluntary resignation without good reason), all of Mr. Colemans unvested awards will accelerate vesting (with respect to grants having performance-based criteria, subject to
the achievement of any applicable performance goals), and remain exercisable for the remainder of the term of the grant.

Following the end
of the term of the Restated Agreement (provided Mr. Colemans employment has not earlier terminated), the Restated Agreement provides that Mr. Coleman will not be required to perform any additional services for the awards granted to him to
become fully vested, exercisable and nonforfeitable, provided that any such awards will continue to be subject to the achievement of any applicable performance goals. All options and other similar awards will remain exercisable for the remaining
original term of the grant.

The Restated Agreement continues to provide (as did the Prior Agreement) that Mr. Colemans outstanding
unvested equity awards granted before January 1, 2009 will become vested and exercisable (in the case of performance-vested awards, on the basis of achievement of target goals) upon a change in control (as defined in the Restated Agreement), and
will remain exercisable for the remainder of the grant term. With respect to awards granted on or after January 1, 2009, the Restated Agreement provides that such awards will become vested and exercisable (in the case of performance-vested awards,
on the basis of achievement of target goals) if Mr. Coleman is involuntarily terminated or he terminates for good reason within 12 months following a change in control. In addition, if Mr. Coleman is involuntarily terminated or he terminates
for good reason within 12 months following a change in control, the Restated Agreement provides that the cash severance payments to him (as described above with respect to his base salary and annual cash incentive award) will continue for the
greater of (i) the remaining term of the Restated Agreement or (ii) two years.



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If Mr. Colemans employment is terminated by the Company for cause, he will not be entitled to any
equity-based compensation that has not already vested, although he will be entitled to payment for any unpaid base salary and any additional non-contingent cash compensation earned prior to termination.

Miscellaneous.The Company has agreed to indemnify Mr. Coleman to the fullest extent permitted by law against any claims or losses arising in
connection with his service to the Company or any affiliate. In addition, the Company will indemnify Mr. Coleman, on a fully grossed-up basis, for any tax imposed by Section 4999 of the Code on excess parachute payments (as defined in
Section 280G of the Code) in connection with certain changes in control; provided, however, that if the excess parachute payments are no more than 10% greater than the amount that could be paid without causing tax liability under Section
4999 then the payments to Mr. Coleman will be reduced such that no tax liability is incurred. If any payment due to Mr. Coleman is subject to a six-month delay pursuant to Section 409A of the Code, the Company will pay interest on such delayed
payments. Mr. Coleman has agreed to non-solicitation and confidentiality provisions in the respective Restated Agreement. In certain instances (e.g., the treatment of Mr. Colemans outstanding equity award upon a change in control), if
any other Company executive officer is entitled to more favorable treatment upon the occurrence of such event than provided in the Restated Agreement, Mr. Coleman will be entitled to be treated similarly.

As provided in the Prior Agreement, certain RSU awards granted to Mr. Coleman will automatically vest on December 31, 2008, although Mr. Coleman has
agreed not to transfer any shares issued to him from such awards until the earliest of (i) December 31, 2011, (ii) the originally scheduled vesting date of such awards, (iii) 30 days following his death and (iv) the date the RSUs would have
otherwise accelerated in accordance with the Restated Agreement.

The foregoing description of the Restated Agreement is qualified in its
entirety by reference to the Restated Agreement, which is attached as Exhibit 10.4 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.



|Item 6. | Exhibits
|------- | --------



|              |  |                                                                                                                                                                                                                                                   
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                       
|3.1           |  | Certificate of Amendment of Restated Certificate of Incorporation of the Company (as filed June 20, 2008).                                                                                                                                        
|              | 
|3.2           |  | Restated Certificate of Incorporation of the Company (as amended through June 20, 2008).                                                                                                                                                          
|              | 
|4.1           |  | Restated Certificate of Incorporation of the Company (filed as Exhibit 3.2 hereto).                                                                                                                                                               
|              | 
|10.1          |  | Nonexclusive Aircraft Sublease Agreement dated as of June 11, 2008 by and between DreamWorks Animation SKG, Inc. and M&JK Dream LLC, incorporated by reference to Exhibit 99.1 to the
Companys Current Report on Form 8-K filed on June 13, 2008.
|              | 
|10.2          |  | Credit Agreement dated as of June 24, 2008 among DreamWorks Animation SKG, Inc. and the lenders party thereto, incorporated by reference to Exhibit 99.1 to the Companys Current Report
on Form 8-K filed on June 27, 2008.                      
|              | 
|10.3          |  | Letter Agreement dated as of July 24, 2008 by and between the Company and Roger Enrico.                                                                                                                                                           
|              | 
|10.4          |  | Amended and Restated Employment Agreement dated as of July 24, 2008 by and between the Company and Lewis W. Coleman.                                                                                                                              
|              | 
|31.1          |  | Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                              
|              | 
|31.2          |  | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                              
|              | 
|32.1          |  | Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                   



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                    |  |  |  |                                |  |                         |  |                                      
|------------------- |  |  |  | ------------------------------ |  | ----------------------- |  | -------------------------------------
|                    |  |  |  | DREAMWORKS ANIMATION SKG, INC.
|                    |  |  | 
|Date: July 29, 2008 |  |  |  | By:                            |  | /s/    LEWIS W. COLEMAN
|                    |  |  |  |                                |  | Name:                   |  | Lewis W. Coleman                     
|                    |  |  |  |                                |  | Title:                  |  | President and Chief Financial Officer



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                   
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                       
|3.1           |  | Certificate of Amendment of Restated Certificate of Incorporation of the Company (as filed June 20, 2008).                                                                                                                                        
|              | 
|3.2           |  | Restated Certificate of Incorporation of the Company (as amended through June 20, 2008).                                                                                                                                                          
|              | 
|4.1           |  | Restated Certificate of Incorporation of the Company (filed as Exhibit 3.2 hereto).                                                                                                                                                               
|              | 
|10.1          |  | Nonexclusive Aircraft Sublease Agreement dated as of June 11, 2008 by and between DreamWorks Animation SKG, Inc. and M&JK Dream LLC, incorporated by reference to Exhibit 99.1 to the
Companys Current Report on Form 8-K filed on June 13, 2008.
|              | 
|10.2          |  | Credit Agreement dated as of June 24, 2008 among DreamWorks Animation SKG, Inc. and the lenders party thereto, incorporated by reference to Exhibit 99.1 to the Companys Current Report
on Form 8-K filed on June 27, 2008.                      
|              | 
|10.3          |  | Letter Agreement dated as of July 24, 2008 by and between the Company and Roger Enrico.                                                                                                                                                           
|              | 
|10.4          |  | Amended and Restated Employment Agreement dated as of July 24, 2008 by and between the Company and Lewis W. Coleman.                                                                                                                              
|              | 
|31.1          |  | Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                              
|              | 
|31.2          |  | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                              
|              | 
|32.1          |  | Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                   



35