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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

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, or a non-accelerated filer. See definition of accelerated file and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                    Accelerated
filer ̈Non-accelerated filer ̈

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, 2007, there were 89,140,200 shares of
Class A common stock, 15,341,462 shares of Class B common stock and 1 share of Class C common stock of the registrant outstanding.



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##### Table of Contents

TABLE OF CONTENTS



|              |  |                                                                                       |  |     
|------------- |  | ------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                       |  | Page
|PART I.       |  | FINANCIAL INFORMATION                                                                 |  |     
|              |  |                                                                                      
|Item 1.       |  | Financial StatementsDreamWorks Animation SKG, Inc. (unaudited)                       |  | 3   
|              |  |                                                                                      
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16  
|              |  |                                                                                      
|Item 3.       |  | Quantitative and Qualitative Disclosure About Market Risk                             |  | 30  
|              |  |                                                                                      
|Item 4.       |  | Controls and Procedures                                                               |  | 30  
|              |  |                                                                                      
|PART II.      |  | OTHER INFORMATION                                                                     |  |     
|              |  |                                                                                      
|Item 1.       |  | Legal Proceedings                                                                     |  | 31  
|              |  |                                                                                      
|Item 1A.      |  | Risk Factors                                                                          |  | 31  
|              |  |                                                                                      
|Item 2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 31  
|              |  |                                                                                      
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                   |  | 32  
|              |  |                                                                                      
|Item 6.       |  | Exhibits                                                                              |  | 32  
|              | 
|SIGNATURES    |  | 33                                                                                   
|              | 
|EXHIBIT INDEX |  | 34                                                                                   



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FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q (the Quarterly Report), including Part I,
Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate, and managements beliefs
and assumptions made by management. Such statements include, in particular, statements about our plans, strategies and prospects. In some cases, forward-looking statements can be identified by the use of words such as may,
could, would, might, will, should, expect(s), forecast, predict, potential, continue, anticipates,
intends, plans, believes, seeks, estimates, is scheduled for, targeted, and variations of such words and similar expressions. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking
statements as a result of various factors, including but not limited to those risks and uncertainties listed under Part I, Item 1ARisk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006
(2006 Form 10-K), which should be read in conjunction with this Quarterly Report (as updated by Item 1A, Risk Factors, in Part II of this Quarterly Report), in our other filings with the Securities and Exchange
Commission (the SEC) or in materials incorporated therein by reference.

Except as required under the federal securities
laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

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 (the Separation Date) in connection with our separation from DreamWorks Studios (the Separation), including Pacific Data Images, Inc. (PDI) and its subsidiary, Pacific Data
Images, LLC (PDI LLC).



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PART I
FINANCIAL INFORMATION

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

DREAMWORKS ANIMATION SKG,
INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                               |  |                                                    |           |   |                   |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                                                                               |  | June 30, 2007                                      |           |   | December 31, 2006 |  
|                                                                                                                                                                                               |  | (unaudited)                                        |           |   |                   |  
|                                                                                                                                                                                               |  | (in thousands, except par value and share amounts) |          
|Assets                                                                                                                                                                                         |  |                                                    |           |   |                   |   |           |  
|Cash and cash equivalents                                                                                                                                                                      |  | $                                                  | 483,580   |   |                   | $ | 506,304   |  
|Trade accounts receivable, net of allowance for doubtful accounts                                                                                                                              |  |                                                    | 3,269     |   |                   |   | 1,208     |  
|Receivable from Paramount, net of reserve for returns and allowances for doubtful accounts                                                                                                     |  |                                                    | 147,793   |   |                   |   | 122,403   |  
|Film costs, net                                                                                                                                                                                |  |                                                    | 558,828   |   |                   |   | 502,440   |  
|Property, plant, and equipment, net of accumulated depreciation and amortization                                                                                                               |  |                                                    | 81,550    |   |                   |   | 83,416    |  
|Deferred taxes, net                                                                                                                                                                            |  |                                                    | 20,117    |   |                   |   | 3,590     |  
|Goodwill                                                                                                                                                                                       |  |                                                    | 34,216    |   |                   |   | 34,216    |  
|Prepaid expenses and other assets                                                                                                                                                              |  |                                                    | 62,396    |   |                   |   | 26,892    |  
|                                                                                                                                                                                               |  |                                                    |           |   |                   |   |           |  
|Total assets                                                                                                                                                                                   |  | $                                                  | 1,391,749 |   |                   | $ | 1,280,469 |  
|                                                                                                                                                                                               |  |                                                    |           |   |                   |   |           |  
|Liabilities and Stockholders Equity                                                                                                                                                           |  |                                                    |           |   |                   |   |           |  
|Liabilities:                                                                                                                                                                                   |  |                                                    |           |   |                   |   |           |  
|Accounts payable                                                                                                                                                                               |  |                                                    | 4,940     |   |                   |   | 5,021     |  
|Payable to stockholder                                                                                                                                                                         |  |                                                    | 10,075    |   |                   |   | 6,436     |  
|Accrued liabilities                                                                                                                                                                            |  |                                                    | 86,251    |   |                   |   | 52,516    |  
|Income taxes payable                                                                                                                                                                           |  |                                                    | 32,531    |   |                   |   | 3,173     |  
|Advances and unearned revenue                                                                                                                                                                  |  |                                                    | 49,100    |   |                   |   | 57,164    |  
|Obligations under capital leases                                                                                                                                                               |  |                                                    | 880       |   |                   |   | 1,335     |  
|Bank borrowings and other debt                                                                                                                                                                 |  |                                                    | 119,324   |   |                   |   | 118,615   |  
|                                                                                                                                                                                               |  |                                                    |           |   |                   |   |           |  
|Total liabilities                                                                                                                                                                              |  |                                                    | 303,101   |   |                   |   | 244,260   |  
|Commitments and contingencies                                                                                                                                                                  |  |                                                    |           |   |                   |   |           |  
|Non-controlling minority interest                                                                                                                                                              |  |                                                    | 2,941     |   |                   |   | 2,941     |  
|Stockholders equity:                                                                                                                                                                          |  |                                                    |           |   |                   |   |           |  
|Class A common stock, par value $.01 per share, 350,000,000 shares authorized, 91,129,093 and 90,694,412 shares issued, as of
June 30, 2007 and December 31, 2006, respectively                |  |                                                    | 911       |   |                   |   | 907       |  
|Class B common stock, par value $.01 per share, 150,000,000 shares authorized, 15,341,462 and 15,677,462 shares issued and outstanding as of
June 30, 2007 and December 31, 2006, respectively |  |                                                    | 153       |   |                   |   | 157       |  
|Class C common stock, par value $.01 per share, one share authorized and issued and outstanding                                                                                                |  |                                                    |          |   |                   |   |          |  
|Additional paid-in capital                                                                                                                                                                     |  |                                                    | 778,921   |   |                   |   | 757,484   |  
|Retained earnings                                                                                                                                                                              |  |                                                    | 361,578   |   |                   |   | 286,525   |  
|Less: Treasury stock, at cost, 1,988,893 and 391,139 shares, as of June 30, 2007 and December 31, 2006, respectively                                                                           |  |                                                    | (55,856   | ) |                   |   | (11,805   | )
|                                                                                                                                                                                               |  |                                                    |           |   |                   |   |           |  
|Total stockholders equity                                                                                                                                                                     |  |                                                    | 1,085,707 |   |                   |   | 1,033,268 |  
|                                                                                                                                                                                               |  |                                                    |           |   |                   |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                     |  | $                                                  | 1,391,749 |   |                   | $ | 1,280,469 |  
|                                                                                                                                                                                               |  |                                                    |           |   |                   |   |           |  

See accompanying notes.



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DREAMWORKS ANIMATION SKG, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                      |  |                                          |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ---------------------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                      |  | Three Months Ended June 30,              |         |   | Six Months Ended June 30, |  
|                                                      |  | 2007                                     |         |   | 2006                      |   |         | 2007 |  |   | 2006    |  
|                                                      |  | (in thousands, except per share amounts) |        
|Operating revenue                                     |  | $                                        | 222,471 |   |                           | $ | 74,886  |      |  | $ | 316,199 |   |  | $ | 134,982 |  
|Costs of revenue                                      |  |                                          | 110,645 |   |                           |   | 40,501  |      |  |   | 164,124 |   |  |   | 67,455  |  
|                                                      |  |                                          |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                                          |  |                                          | 111,826 |   |                           |   | 34,385  |      |  |   | 152,075 |   |  |   | 67,527  |  
|Selling, general and administrative expenses          |  |                                          | 27,466  |   |                           |   | 21,263  |      |  |   | 53,236  |   |  |   | 39,970  |  
|                                                      |  |                                          |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Operating income                                      |  |                                          | 84,360  |   |                           |   | 13,122  |      |  |   | 98,839  |   |  |   | 27,557  |  
|Interest income, net                                  |  |                                          | 6,382   |   |                           |   | 5,756   |      |  |   | 12,653  |   |  |   | 10,522  |  
|Other income, net                                     |  |                                          | 1,439   |   |                           |   | 1,481   |      |  |   | 2,883   |   |  |   | 2,941   |  
|Increase in income tax benefit payable to stockholder |  |                                          | (23,909 | ) |                           |   | (3,825  | )    |  |   | (29,726 | ) |  |   | (7,615  | )
|                                                      |  |                                          |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Income before income taxes                            |  |                                          | 68,272  |   |                           |   | 16,534  |      |  |   | 84,649  |   |  |   | 33,405  |  
|Provision for income taxes                            |  |                                          | 6,494   |   |                           |   | 2,870   |      |  |   | 7,471   |   |  |   | 7,413   |  
|                                                      |  |                                          |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Net income                                            |  | $                                        | 61,778  |   |                           | $ | 13,664  |      |  | $ | 77,178  |   |  | $ | 25,992  |  
|                                                      |  |                                          |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Basic net income per share                            |  | $                                        | 0.61    |   |                           | $ | 0.13    |      |  | $ | 0.75    |   |  | $ | 0.25    |  
|Diluted net income per share                          |  | $                                        | 0.60    |   |                           | $ | 0.13    |      |  | $ | 0.75    |   |  | $ | 0.25    |  
|Shares used in computing net income per share         |  |                                          |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                 |  |                                          | 102,052 |   |                           |   | 103,303 |      |  |   | 102,716 |   |  |   | 103,247 |  
|Diluted                                               |  |                                          | 102,466 |   |                           |   | 103,563 |      |  |   | 103,105 |   |  |   | 103,618 |  



See accompanying notes.



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DREAMWORKS ANIMATION SKG, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                                                    |  |                           |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                                    |  | Six Months Ended June 30, |         
|                                                                                                                    |  | 2007                      |          |   | 2006 |  
|                                                                                                                    |  | (in thousands)            |         
|Operating activities                                                                                                |  |                           |          |   |      |   |          |  
|Net income                                                                                                          |  | $                         | 77,178   |   |      | $ | 25,992   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                   |  |                           |          |   |      |   |          |  
|Amortization and write off of film costs                                                                            |  |                           | 154,908  |   |      |   | 64,766   |  
|Stock compensation expense                                                                                          |  |                           | 19,150   |   |      |   | 11,183   |  
|Depreciation and amortization                                                                                       |  |                           | 4,691    |   |      |   | 4,180    |  
|Revenue earned against advances and unearned revenue                                                                |  |                           | (47,690  | ) |      |   | (25,951  | )
|Deferred taxes, net                                                                                                 |  |                           | (12,383  | ) |      |   | 50,194   |  
|Change in operating assets and liabilities:                                                                         |  |                           |          |   |      |   |          |  
|Trade accounts receivable                                                                                           |  |                           | (2,061   | ) |      |   | 8,641    |  
|Receivable from Distributor for Distribution and Services Agreements                                                |  |                           | (25,390  | ) |      |   | 152,930  |  
|Film costs                                                                                                          |  |                           | (211,255 | ) |      |   | (132,579 | )
|Prepaid expenses and other assets                                                                                   |  |                           | (36,427  | ) |      |   | (10,075  | )
|Payable to stockholder                                                                                              |  |                           | 7,802    |   |      |   | (22,300  | )
|Accounts payable and accrued expenses                                                                               |  |                           | 33,532   |   |      |   | (167     | )
|Income taxes                                                                                                        |  |                           | 18,455   |   |      |   | (43,449  | )
|Advances and unearned revenue                                                                                       |  |                           | 41,394   |   |      |   | 40,630   |  
|                                                                                                                    |  |                           |          |   |      |   |          |  
|Net cash provided by operating activities                                                                           |  |                           | 21,904   |   |      |   | 123,995  |  
|                                                                                                                    |  |                           |          |   |      |   |          |  
|Investing activities                                                                                                |  |                           |          |   |      |   |          |  
|Purchases of property, plant, and equipment                                                                         |  |                           | (1,370   | ) |      |   | (849     | )
|                                                                                                                    |  |                           |          |   |      |   |          |  
|Net cash used in investing activities                                                                               |  |                           | (1,370   | ) |      |   | (849     | )
|                                                                                                                    |  |                           |          |   |      |   |          |  
|Financing Activities                                                                                                |  |                           |          |   |      |   |          |  
|Payments on capital leases                                                                                          |  |                           | (455     | ) |      |   | (420     | )
|Receipts from exercise of stock options                                                                             |  |                           | 573      |   |      |   | 654      |  
|Excess tax benefits from employee equity awards                                                                     |  |                           | 674      |   |      |   | 175      |  
|Purchase of treasury stock                                                                                          |  |                           | (44,050  | ) |      |   | (403     | )
|Paramount signing bonus deemed a contribution from controlling stockholders                                         |  |                           |         |   |      |   | 75,000   |  
|Repayment of Universal Studios advance                                                                              |  |                           |         |   |      |   | (75,000  | )
|                                                                                                                    |  |                           |          |   |      |   |          |  
|Net cash provided by (used in) financing activities                                                                 |  |                           | (43,258  | ) |      |   | 6        |  
|                                                                                                                    |  |                           |          |   |      |   |          |  
|Increase (decrease) in cash and cash equivalents                                                                    |  |                           | (22,724  | ) |      |   | 123,152  |  
|Cash and cash equivalents at beginning of period                                                                    |  |                           | 506,304  |   |      |   | 403,796  |  
|                                                                                                                    |  |                           |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                                                          |  | $                         | 483,580  |   |      | $ | 526,948  |  
|                                                                                                                    |  |                           |          |   |      |   |          |  
|Supplemental disclosure of cash flow information:                                                                   |  |                           |          |   |      |   |          |  
|Cash paid during the period for income taxes, net                                                                   |  | $                         | 724      |   |      | $ | 494      |  
|                                                                                                                    |  |                           |          |   |      |   |          |  
|Cash paid during the period for interest, net of amounts capitalized                                                |  | $                         | 85       |   |      | $ | 76       |  
|                                                                                                                    |  |                           |          |   |      |   |          |  
|Supplemental disclosure of non-cash operating activities:                                                           |  |                           |          |   |      |   |          |  
|Transfer on January 31, 2006 of net receivable from affiliate to Paramount for Distribution and Services Agreements |  | $                         |         |   |      | $ | 102,509  |  
|                                                                                                                    |  |                           |          |   |      |   |          |  



See accompanying notes.



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DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization 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. DreamWorks Animation began developing and producing animated films as a division of DreamWorks L.L.C. (DreamWorks Studios) upon its
formation in 1994. On October 27, 2004, the Company was spun off from DreamWorks Studios and, immediately thereafter, the Company sold shares to the public as a part of an initial public offering that closed November 2, 2004. At the time
of the separation from DreamWorks Studios, DreamWorks Studios and DreamWorks Animation were effectively under common ownership and control.

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. (Viacom), and its affiliates
(collectively, Paramount) pursuant to an exclusive distribution agreement and a fulfillment services agreement (collectively, the Paramount Agreements) (see Note 5). The Company retains all other rights to
exploit its films, including the right to make prequels and sequels, commercial tie-in and promotional rights with respect to each film, as well as merchandising, interactive, literary publishing, music publishing and soundtrack rights. Prior to
January 31, 2006, including the one-month period ended January 31, 2006, the Company was party to a distribution agreement with DreamWorks Studios (the DreamWorks Studios Distribution Agreement) (see Note 7).

Basis of Presentation and Use of Estimates

The
consolidated financial statements of DreamWorks Animation present the stand-alone financial position, results of operations and cash flows of DreamWorks Animation and include the accounts of DreamWorks Animation and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated. The accompanying unaudited financial data as of June 30, 2007 and for the three and six months ended June 30, 2007 and 2006 has 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, 2006, 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, 2006 (the 2006 Form 10-K) and the Companys Current Report on Form 8-K dated July 31, 2007.

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 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



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DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 and financial statement footnotes have been reclassified to
conform to the current periods presentation.

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 when the Company is required to use a fair-value measure for recognition or disclosure purposes under GAAP. In addition, in February 2007, the FASB issued
FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS 159) which permits entities to choose to measure many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value. Both FAS 157 and FAS 159 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact that the adoption of FAS 157 and FAS 159 will have,
if any, on its consolidated financial statements.

2. Net Income Per Share

The Company calculates net income per share in accordance with FASB Statement No. 128 Earnings Per Share. Basic per share amounts exclude
dilution and are calculated using the weighted average number of common shares outstanding for the period. Diluted per share amounts are calculated using the weighted average number of common shares outstanding during the period and, if dilutive,
potential common shares outstanding during the period. Potential common shares include unvested restricted stock and common shares issuable upon exercise of stock options and stock appreciation rights using the treasury stock method.

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



|                                                                       |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | --------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                       |  | Three Months Ended June 30, |         |   | Six Months Ended June 30, |  
|                                                                       |  | 2007                        |         |   | 2006                      |   |         | 2007 |  |   | 2006    |  
|                                                                       |  | (unaudited)                 |        
|Numerator:                                                             |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Net income                                                             |  | $                           | 61,778  |   |                           | $ | 13,664  |      |  | $ | 77,178  |   |  | $ | 25,992  |  
|Denominator:                                                           |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Weighted average common shares and denominator for basic calculation:  |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Weighted average common shares                                         |  |                             | 104,541 |   |                           |   | 105,994 |      |  |   | 105,205 |   |  |   | 105,938 |  
|Unvested restricted stock subject to repurchase                        |  |                             | (2,489  | ) |                           |   | (2,691  | )    |  |   | (2,489  | ) |  |   | (2,691  | )
|                                                                       |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Denominator for basic calculation                                      |  |                             | 102,052 |   |                           |   | 103,303 |      |  |   | 102,716 |   |  |   | 103,247 |  
|                                                                       |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Weighted average effects of dilutive equity-based compensation awards: |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Employee stock options\stock appreciation rights                       |  |                             | 166     |   |                           |   | 191     |      |  |   | 172     |   |  |   | 211     |  
|Restricted stock awards                                                |  |                             | 248     |   |                           |   | 69      |      |  |   | 217     |   |  |   | 160     |  
|                                                                       |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Denominator for diluted calculation                                    |  |                             | 102,466 |   |                           |   | 103,563 |      |  |   | 103,105 |   |  |   | 103,618 |  
|                                                                       |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Net income per sharebasic                                             |  | $                           | 0.61    |   |                           | $ | 0.13    |      |  | $ | 0.75    |   |  | $ | 0.25    |  
|Net income per sharediluted                                           |  | $                           | 0.60    |   |                           | $ | 0.13    |      |  | $ | 0.75    |   |  | $ | 0.25    |  



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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 weighted average number of 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 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 will be ultimately issued in future periods
is contingent upon the Companys performance against measures established for the performance period:



|                                                                          |  |                             |  |                           |  |       |  |      
|------------------------------------------------------------------------- |  | --------------------------- |  | ------------------------- |  | ----- |  | -----
|                                                                          |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|                                                                          |  | (unaudited)                
|                                                                          |  | 2007                        |  | 2006                      |  | 2007  |  | 2006 
|Options to purchase shares of common stock and stock appreciations rights |  | 2,553                       |  | 2,003                     |  | 2,552 |  | 2,215
|Equity awards subject to performance conditions                           |  | 1,849                       |  | 1,849                     |  | 1,849 |  | 1,789
|                                                                          |  |                             |  |                           |  |       |  |      
|Total                                                                     |  | 4,402                       |  | 3,852                     |  | 4,401 |  | 4,004
|                                                                          |  |                             |  |                           |  |       |  |      

3. Film Costs

The following is an analysis of film costs (in thousands):



|                                |  |               |         |                   |   |        
|------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|                                |  | June 30, 2007 |         | December 31, 2006
|                                |  | (unaudited)   |         |                  
|In release, net of amortization |  | $             | 272,434 |                   | $ | 213,664
|In production:                  |  |               |         |                   |   |        
|Animated feature films          |  |               | 233,856 |                   |   | 247,298
|Television special              |  |               | 17,996  |                   |   | 7,855  
|In development                  |  |               | 34,542  |                   |   | 33,623 
|                                |  |               |         |                   |   |        
|Total film costs                |  | $             | 558,828 |                   | $ | 502,440
|                                |  |               |         |                   |   |        

The Company anticipates that 60% and 86% of in release film costs as of June 30,
2007 will be amortized over the next 12 months and three years, respectively. Each period in the ordinary course of business, the Company reassesses the estimated remaining total revenue to be received from all sources for each film
(Ultimate Revenues). A change in estimate of Ultimate Revenues for any given film impacts the timing of that films amortization in the current and future periods. For the six-month period ended June 30, 2007, the change
in estimate of Ultimate Revenues for several of the Companys previously released films resulted in an increase in net income of approximately $9.4 million (net of a $4.4 million tax impact) or $0.09 per basic and diluted per share.

As of June 30, 2007, the Companys accrued compensation and residual costs totaled $28.5 million. The Company currently
estimates that it will pay approximately $16.7 million of such costs in the next 12 months.



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##### Table of Contents

DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



4. Financing Arrangements

Outstanding Financing.    The following table summarizes the balances outstanding and other information associated with the Companys various financing arrangements:



|                              |  |                                    |        |                             |                   |   |                                   |     |  |                             |  |      |      |  |   |      |     |  |      |     |     |  |   |     |     |  |   |     |    
|----------------------------- |  | ---------------------------------- | ------ | --------------------------- | ----------------- | - | --------------------------------- | --- |  | --------------------------- |  | ---- | ---- |  | - | ---- | --- |  | ---- | --- | --- |  | - | --- | --- |  | - | --- | ---
|                              |  | Balance Outstanding (in thousands) |        |                             | Maturity Date     |   | Interest Rate as of June 30, 2007 |     |  | Interest Cost (in millions) | 
|                              |  |                                    |        | Three Months Ended June 30, |                   |   | Six Months Ended June 30,         |    
|                              |  | June 30, 2007                      |        |                             | December 31, 2006 |   |                                   |     |  | 2007                        |  |      | 2006 |  |   | 2007 |     |  | 2006 |    
|Animation Campus Financing(1) |  | $                                  | 73,000 | (1)                         |                   | $ | 73,000                            | (1) |  | October 2009                |  | 5.31 | %    |  | $ | 1.2  |     |  | $    | 1.1 |     |  | $ | 2.4 |     |  | $ | 2.1 |    
|Revolving Credit Facility     |  | $                                  |       |                             |                   | $ |                                  |     |  | October 2009                |  | 0.75 | %(2) |  | $ | 0.4  | (2) |  | $    | 0.4 | (2) |  | $ | 0.8 | (2) |  | $ | 0.8 | (2)
|HBO Subordinated Notes(3)     |  | $                                  | 50,000 |                             |                   | $ | 50,000                            |     |  | November 2007               |  | 5.86 | %    |  | $ | 1.1  |     |  | $    | 1.0 |     |  | $ | 2.2 |     |  | $ | 2.0 |    

---

|(1) | In connection with the adoption of FASB Interpretation No. 46 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 bank borrowings and other debt and a $2.9 million non-controlling minority interest.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The Company has a revolving credit facility with a number of banks. There was no debt outstanding for
the respective periods. This rate represents a commitment fee which the Company is required to pay on undrawn amounts. The commitment fee paid on undrawn amounts is an annual rate of 0.75% on any date when amounts drawn are greater than or equal to
fifty-percent of the aggregate commitments under the credit facility and 0.50% on any other date. Interest on borrowed amounts is determined either at a floating rate of LIBOR plus 1.75% or the alternate base rate (which is generally the prime rate)
plus 0.75% per annum.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The subordinated notes are recorded net of a discount of $0.7 million and $1.4 million as of June 30,
2007 and December 31, 2006, respectively, which will be amortized to interest expense over the remaining term of the subordinated loan agreement.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On June 29, 2007, the Company elected, under the terms of its revolving credit facility, to reduce the aggregate commitment of the credit facility from $200 million to $100 million. No other terms of the agreement
were modified. Accordingly, the Company recorded $0.5 million of additional interest expense, which represented fifty-percent of the remaining unamortized deferred costs associated with the establishment of the credit facility, in the statement of
operations for the three- and six- month periods ended June 30, 2007.

In January 2006, the Company was required to repay an advance due to
Universal Studios Inc. (Universal Studios), plus interest, totaling approximately $75.6 million in connection with the termination of its distribution and servicing arrangements with DreamWorks Studios. The Company repaid such
amount in January 2006 using the proceeds of a $75.0 million signing bonus received from Paramount in connection with the Paramount Agreements (see Note 7).

As of June 30, 2007 the Company was in compliance with all applicable debt covenants.

Interest
Capitalized to Film Costs.    Interest capitalized to film costs during the three months ended June 30, 2007 and 2006 totaled $2.3 million and $2.2 million, respectively, and for the six months ended June 30, 2007 and 2006
totaled $4.6 million and $4.7 million, respectively.



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DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



5. Distribution and Servicing Arrangements with Paramount

Distribution and Servicing Arrangements with Paramount.    On January 31, 2006, DreamWorks Studios was acquired by Viacom (the
Acquisition). As result of the Acquisition, the Company terminated the DreamWorks Studios Distribution Agreement, and concurrently entered into the Paramount Agreements, which became effective upon the closing of the
Acquisition. Pursuant to the Paramount Agreements, the Company granted Paramount and its affiliates (including DreamWorks Studios) the exclusive right to distribute its films in theatrical, home entertainment and television markets on a worldwide
basis 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 Paramount Agreements. Upon
Viacoms acquisition of DreamWorks Studios on January 31, 2006, and in connection with the termination of the DreamWorks Studios Distribution Agreement and the effectiveness of the Paramount Agreements, all amounts due to or from DreamWorks
Studios pursuant to the DreamWorks Studios Distribution Agreement, on a per-film basis, were transferred to Paramount.

The Paramount
Agreements provide that DreamWorks Animation is responsible for all of the costs of developing and producing its animated feature films and direct-to-video films, including contingent compensation and residual costs, and Paramount is generally
responsible for all out-of-pocket costs, charges and expenses incurred in the distribution (including prints and the manufacture of home video units), advertising, marketing, publicizing and promotion of each film. The Paramount Agreements also
provide that Paramount is entitled to (i) retain a fee of 8.0% of revenue (without deduction of any distribution or marketing costs, and third- party distribution and fulfillment services fees) and (ii) recoup all of its distribution and marketing
costs and home video fulfillment costs with respect to the Companys films on a title-by-title basis prior to the Company recognizing any revenue. If a feature film or a direct-to-video film does not generate revenue in all media, net of the
8.0% fee, sufficient for Paramount and their affiliates to recoup its expenses under the Paramount Agreements, Paramount and its affiliates will not be entitled to recoup those costs from proceeds of the Companys other feature films or
direct-to-video films, and the Company will not be required to repay Paramount or its affiliates for such amounts.

In addition, Paramount
is obligated to pay the Company annual cost reimbursements during the period that the Company is delivering new films pursuant to the Paramount Agreements. The Company is allocating the total amount of these annual cost reimbursements during the
period equally to each of the films delivered and is recognizing the amount allocated to each film, approximately $4.6 million, as revenue upon the release of that film. These annual cost reimbursements are guaranteed and thus independent from
Paramounts right to recoup its distribution and marketing costs for each film and, as a result, are recorded as revenue by the Company without regard to Paramounts recoupment position for each film.

In the ordinary course of reconciling balances with its distributor in a prior period, the Company determined that the net balance with Paramount, as
reflected in the accompanying consolidated balance sheets as of June 30, 2007 and prior periods, may be misstated. The Company believes that this misstatement relates to certain amounts due to DreamWorks Studios being overstated at the time the
Company was spun off from DreamWorks Studios and at the time that DreamWorks Studios was acquired by Viacom. The Company and Paramount are in discussions regarding this issue, but it has not been resolved. The Company currently believes that the
resolution of this issue will not have a material impact on its financial condition or cash flows and will have no impact on its results of operations as the impact of any resolution would be to adjust stockholders equity.

Paramount: Other Services and Information.    As of June 30, 2007, the Company provided limited office space and
telecommunications support to Paramount and Paramount continued to provide the Company with minimal storage facility space and corporate aircraft services pursuant to the terms of a services agreement and



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DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



an aircraft time-share agreement originally entered into with DreamWorks Studios. The Company incurred costs from Paramount for the three months ended
June 30, 2007 and 2006, totaling $0.3 million and $1.2 million, respectively, and for the six months ended June 30, 2007 and 2006, totaling $0.6 million and $2.9 million, respectively. For the three and six months ended June 30, 2007,
the amount Paramount was charged by the Company was not material. For the three and six months ended June 30, 2006, Paramount was charged costs from the Company totaling $1.0 million and $2.0 million, respectively. In addition, under the terms
of the Paramount Agreements, Paramount will also provide the Company at a minimal cost with certain production-related services, including but not limited to film music licensing, archiving of film materials and credits as well as information
technology oversight, participation and residual accounting and travel.

6. Significant Customer and Segment Information

Significant Customer.    Upon the effectiveness of the Paramount Agreements, a substantial portion of the Companys
revenue is derived directly from Paramount. Paramount represented 87% and 84% of total revenue for the three-month periods ended June 30, 2007 and 2006, respectively, and 84% and 82% of total revenue for the six- and five-month periods ended
June 30, 2007 and 2006, respectively. During the effectiveness of the DreamWorks Studios Distribution Agreement, a substantial portion of the Companys revenue was derived directly from DreamWorks Studios, and consequently, Universal
Studios, which acted as DreamWorks Studios distributor. Universal Studios (through its agreements with DreamWorks Studios) would have represented 80% of revenues for the one month ended January 31, 2006.

Revenue by Film.

The following is a summary of the
Companys revenue by film (in thousands):



|                                               |  |                             |         |                           |   |        |  |      |         |  |   |        
|---------------------------------------------- |  | --------------------------- | ------- | ------------------------- | - | ------ |  | ---- | ------- |  | - | -------
|                                               |  | Three Months Ended June 30, |         | Six Months Ended June 30,
|                                               |  | 2007                        |         | 2006                      |   | 2007   |  | 2006
|                                               |  | (unaudited)                
|Shrek the Third                                |  | $                           | 109,098 |                           | $ |       |  | $    | 109,098 |  | $ |       
|Flushed Away                                   |  |                             | 12,358  |                           |   |       |  |      | 13,572  |  |   |       
|Over the Hedge                                 |  |                             | 26,856  |                           |   | 10,693 |  |      | 59,929  |  |   | 10,693 
|Wallace & Gromit: The Curse of the Were-Rabbit |  |                             | 14,705  |                           |   | 3,351  |  |      | 24,111  |  |   | 3,351  
|Madagascar                                     |  |                             | 12,663  |                           |   | 37,855 |  |      | 19,086  |  |   | 68,510 
|Shark Tale                                     |  |                             | 10,664  |                           |   | 9,556  |  |      | 28,809  |  |   | 22,622 
|Film Library/Other(1)                          |  |                             | 36,127  |                           |   | 13,431 |  |      | 61,594  |  |   | 29,806 
|                                               |  |                             |         |                           |   |        |  |      |         |  |   |        
|                                               |  | $                           | 222,471 |                           | $ | 74,886 |  | $    | 316,199 |  | $ | 134,982
|                                               |  |                             |         |                           |   |        |  |      |         |  |   |        

---

|(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 Seasand Shrek 2. For the three and six months ended June 30, 2006, Sinbad: Legend of the Seven Seasrevenue of $5.6 million and
$9.1 million, respectively, and Shrek 2 revenue of $1.6 million and $6.0 million, respectively, have been reclassified to Film Library/Other to conform to the current-year presentation.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



7. Related Party Transactions

Arrangement with Affiliate of a Stockholder.    The Company has an arrangement with an affiliate of a stockholder to share tax
benefits generated by the stockholder (see Note 10).



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DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Distribution and Servicing Arrangements with DreamWorks Studios.    The
DreamWorks Studios Distribution Agreement remained in effect through January 31, 2006. The Company incurred distribution fees payable to DreamWorks Studios of $3.7 million for the one-month period ended January 31, 2006.

The Company continues to provide services to DreamWorks Studios related to the licensing of products based on DreamWorks Studios films and
characters in such films. For the three and six month periods ended June 30, 2007 and 2006, revenue earned from licensing activities on behalf of DreamWorks Studios was not material.

Contribution from Controlling Stockholders.    Upon the effectiveness of the Paramount Agreements Paramount was required to
pay the Company a $75.0 million signing bonus. Because the effectiveness of the Paramount Agreements and Viacoms acquisition of DreamWorks Studios were each conditioned upon the others occurrence, and because the Company and DreamWorks
Studios were effectively under common control up to the closing of the Acquisition, in the first quarter of 2006 the Company recorded the $75.0 million signing bonus received from Paramount, which is $48.7 million on an after-tax basis, as an
increase to Additional-Paid-in-Capital. In addition, the signing bonus, before tax, has been reflected in the accompanying statement of cash flows as a deemed contribution from controlling stockholders. The Company used the proceeds of the signing
bonus to repay a $75.6 million advance, plus interest, to Universal Studios which the Company was contractually required to pay (see Note 4).

8.
Stockholders Equity

Class A Common Stock

Stock Repurchase Program.    In February 2007, the Companys Board of Directors approved a stock repurchase program of the Companys Class A common stock (Stock
Repurchase Program). Under the Stock Repurchase Program, the Company may repurchase up to an aggregate of $150 million of its outstanding Class A common stock through the period ending August 31, 2008. Repurchases, if any, may be
made via open-market purchases, block trades, private transactions or such other transactions as the Company deems appropriate. As of June 30, 2007, the Company had repurchased approximately 1.5 million shares and had remaining authority
to repurchase approximately $106.6 million of the Companys outstanding shares pursuant to the Stock Repurchase Program.

Class B Common Stock
Conversion

Conversion of Class B Common Stock.    In May 2007, 336,000 shares of the Companys Class B
common stock were converted into an equal amount of shares of the Companys Class A common stock at the request of the stockholder who owned such shares. This transaction had no impact on the total amount of the Companys shares
outstanding.

9. Employee Benefit Plans

Employee
Equity Plans

Compensation Cost Recognized.    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 which are dependent upon the
achievement of established sets of performance or market-based criteria.



12



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DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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. Generally, equity awards are forfeited by employees who terminate prior to vesting. However, certain employment contracts for certain named executive
officers provide for the acceleration of vesting in the event of a change in control or specified termination events. 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. The Company currently satisfies exercises of stock options and stock appreciation rights, the vesting of restricted stock and the delivery of shares upon the vesting of restricted
stock units with the issuance of new shares.

The fair value of stock option grants or stock appreciation rights with service or
performance-based vesting conditions is estimated on the date of grant using the Black-Scholes option-pricing model. Primary input assumptions of the Black-Scholes model used to estimate the fair value of stock options include the grant price of the
award, the companys dividend yield, volatility of the companys stock, the risk-free interest rate and expected option term. As permitted by and outlined in Staff Accounting Bulletin (SAB) 107, Share-Based
Payment released by the SEC, the Company applies 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. The use of the simplified method is permissible only through December 31, 2007, after which time the Company 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. Estimates of the fair value of stock options are not intended to
predict actual future events of 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 the Company under FAS 123R.

The assumptions used in the Black-Scholes model for the three and six months ended June 30, 2007 and 2006 were as follows:



|                         |  |                                     |  |             |    
|------------------------ |  | ----------------------------------- |  | ----------- | ---
|                         |  | Three and Six Months Ended
June 30, | 
|                         |  | 2007                                |  | 2006        |    
|Dividend yield           |  | 0%                                  |  | 0%          |    
|Expected volatility      |  | 35%                                 |  | 35%-40%     | (1)
|Risk-free interest rate  |  | 4.44-4.54%                          |  | 4.19%-5.01% |    
|Expected term (in years) |  | 6.0                                 |  | 6.6         |    

---

|(1) | The Company utilized an expected volatility of 35% for the three months ended June 30, 2006 and 40%
for the three months ended March 31, 2006.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

For equity awards subject to market-based vesting conditions (such as
stock-price appreciation), the Company uses a Monte-Carlo simulation option-pricing model to determine the 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 the impact of the possible differing stock price paths.



13



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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, 2007 and 2006, respectively:



|                          |  |                             |  |                           |       |                |     |                           |   |      
|------------------------- |  | --------------------------- |  | ------------------------- | ----- | -------------- | --- | ------------------------- | - | -----
|                          |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|                          |  | Number Granted              |  | WeightedAverage FairValue |       | NumberGranted  |     | WeightedAverage FairValue
|                          |  | (unaudited)                
|                          |  | (in thousands)              |  |                           |       | (in thousands) |     |                          
|2007                      |  |                             |  |                           |       |                |     |                           |   |      
|Stock appreciation rights |  | 17                          |  | $                         | 12.67 |                | 34  |                           | $ | 11.95
|Restricted stock          |  | 25                          |  | $                         | 29.83 |                | 51  |                           | $ | 28.23
|2006                      |  |                             |  |                           |       |                |     |                           |   |      
|Stock appreciation rights |  | 5                           |  | $                         | 10.50 |                | 140 |                           | $ | 12.38
|Restricted stock          |  | 10                          |  | $                         | 25.85 |                | 211 |                           | $ | 24.32

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, 2007 and 2006, respectively, was as follows (in thousands):



|                                |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                                |  | 2007                        |        |   | 2006                      |   |        | 2007 |  |   | 2006   |  
|                                |  | (unaudited)                 |       
|Total equity-based compensation |  | $                           | 9,595  |   |                           | $ | 6,426  |      |  | $ | 19,150 |   |  | $ | 11,183 |  
|Tax impact(1)                   |  |                             | (3,042 | ) |                           |   | (2,335 | )    |  |   | (6,070 | ) |  |   | (4,064 | )
|                                |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Reduction in net income         |  | $                           | 6,553  |   |                           | $ | 4,091  |      |  | $ | 13,080 |   |  | $ | 7,119  |  
|                                |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  

---

|(1) | Tax impact is determined at the Companys annual blended effective tax rate.
|--- | ----------------------------------------------------------------------------

Compensation cost capitalized as a part of film costs was $0.9 million and $0.4 million for the three-month periods
ended June 30, 2007 and 2006, respectively, and $1.6 million and $0.8 million for the six-month periods ended June 30, 2007 and 2006, respectively. As of June 30, 2007, 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 $67.9 million. This cost will be amortized on a straight-line basis over a weighted average life
of 2.7 years.

Other Employee Benefit Plans

On June 7, 2007, the Company approved the adoption of the Special Deferral Election Plan (the Plan), a non-qualified deferred compensation plan. The Plan, which is effective as of July 1, 2007, is available for
selected employees of the Company and its subsidiaries.

10. Income Taxes

At the time of the Companys 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 (Tax Basis Increase). This Tax Basis Increase is expected to reduce the amount of tax that the Company may pay in the future to
the extent that the Company generates taxable income in sufficient amounts in the future. The Company is 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 the Company.



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DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In July 2006, the 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 the Company 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. As a result of the adoption of FIN 48, the Company recognized a $2.1 million net increase to reserves for uncertain tax positions as a decrease to opening retained earnings. As of January 1, 2007 (the adoption date of FIN 48), the
Company had approximately $73.5 million of gross unrecognized tax benefits, of which $18.7 million would affect the Companys effective tax rate if recognized. Also, if the $18.7 million of gross unrecognized tax benefits were recognized, it
would result in a $7.6 million increase in income tax benefit payable to shareholder relating to the Tax Basis Increase. The Company continues to follow the practice of recognizing interest and penalties related to income tax matters as a part of
provision for income taxes. As of January 1, 2007 and June 30, 2007, the Company had approximately $1.3 million and $1.9 million, respectively, of accrued interest and penalties related to uncertain tax positions.

The provision for income taxes for the three and six months ended June 30, 2007 and 2006, 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 Ended June 30, |   |  | Six Months Ended June 30, |  
|                                         |  | 2007                        |   |  | 2006                      |   |  | 2007  |   |  | 2006  |  
|                                         |  | (unaudited)                 |  
|U.S. Federal statutory rate              |  | 35.0                        | % |  | 35.0                      | % |  | 35.0  | % |  | 35.0  | %
|U.S. state taxes, net of Federal benefit |  | 1.4                         |   |  | 3.3                       |   |  | 1.2   |   |  | 3.3   |  
|Revaluation of deferred tax assets, net  |  | (30.5                       | ) |  | (24.0                     | ) |  | (31.1 | ) |  | (20.9 | )
|Reserves and other                       |  | 1.1                         |   |  | (0.2                      | ) |  | 1.4   |   |  | 0.7   |  
|                                         |  |                             |   |  |                           |   |  |       |   |  |       |  
|Effective tax rate                       |  | 7.0                         | % |  | 14.1                      | % |  | 6.5   | % |  | 18.1  | %
|                                         |  |                             |   |  |                           |   |  |       |   |  |       |  

The Companys federal income tax return for the period from October 27, 2004 through
December 31, 2004 is currently under examination by the Internal Revenue Service (IRS). The Companys California franchise tax returns for the years ended December 31, 2004 and December 31, 2005 are currently
under examination by the Franchise Tax Board (FTB). The Company believes it has adequately provided for any adjustments which ultimately may result from these examinations. The tax period from October 27, 2004 through
December 31, 2004 and tax years 2005 and 2006 remain subject to examination by taxing authorities.

11. 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 cash flows.



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##### Table of Contents

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

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our Unaudited Consolidated
Financial Statements and the related notes thereto contained elsewhere in this Quarterly Report, and our Managements Discussion and Analysis of Financial Condition and Results of Operations contained in our 2006 Form 10-K which
contains additional information concerning our business and financial statements. The information contained in this Quarterly Report is not a complete description of our business or the risks associated with an investment in our common stock. 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 SEC, including our 2006 Form 10-K and subsequent reports on Form 8-K, which discuss our business in greater
detail.

Overview

Our Business

Our business is primarily devoted to developing and producing computer-generated, or CG, animated feature films. Prior to
October 27, 2004, we were a division of DreamWorks Studios and our operations were conducted through DreamWorks Studios. On October 27, 2004, we were spun off from DreamWorks Studios and, as a result, the animation business of DreamWorks
Studios was transferred to DreamWorks Animation SKG, Inc., the entity through which we now conduct our business.

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 Paramount on a 30-day lag. Paramount uses film receipts to recover the distribution and marketing expenses they incur for each film and to cover their 8%
distribution fee. Accordingly, we only record revenue from our films to the extent it exceeds our distributors costs and distribution fee. As a result of the expected marketing and distribution costs that our distributor will incur and the
structure of our distribution and servicing arrangements, our distributor may not report to us and, therefore, we may not recognize any revenue from the exploitation of our films for several quarters after the theatrical release of our films.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | TelevisionOur films are distributed in the worldwide free and pay television markets by our distributor. Our distributor 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.
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 distribution arrangements, we receive payment of licensing and merchandising
revenues directly from third parties.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 2006 Form 10-K.



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##### Table of Contents

Our primary operating expenses include:



| |  |  | Costs of RevenueUnder our distribution arrangements, our costs of revenue include the amortization of capitalized production, overhead and interest
costs, contingent compensation 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. Generally, our costs of revenue 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 revenue 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 revenue 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 salaries, employee benefits, rent and
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 Revenue and Selling, General and Administrative Expenses in our 2006 Form 10-K.

Because our films are distributed in foreign countries, fluctuations in foreign currency exchange rates can adversely 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.

Our Distribution and Servicing Arrangements

Our films are distributed in theatrical, home entertainment and television markets on a worldwide basis by Paramount Pictures Corporation, a subsidiary of Viacom Inc. (Viacom), and its affiliates (collectively,
Paramount) pursuant to an exclusive distribution agreement and a fulfillment services agreement (collectively, the Paramount Agreements). We retain all other rights to exploit our films, including the right to
make prequels and sequels, commercial tie-in and promotional rights with respect to each film, as well as merchandising, interactive, literary publishing, music publishing and soundtrack rights. Prior to January 31, 2006, including the
one-month period ended January 31, 2006, we were party to a distribution agreement with DreamWorks Studios (the DreamWorks Studios Distribution Agreement). Please see Part I, Item 1 BusinessDistribution and
Servicing Arrangements in our 2006 Form 10-K for a discussion of our distribution and servicing arrangements with DreamWorks Studios and Paramount.

Pursuant to the Paramount Agreements, Paramount is also obligated to pay us annual cost reimbursements. We are allocating the total amount of these annual cost reimbursements equally to each of the new films we are
delivering to Paramount under the Paramount Agreements. We are recognizing the amount allocated to each film, approximately $4.6 million, as revenue upon the release of that film. These annual cost reimbursements are guaranteed and independent from
Paramounts right to recoup its distribution and marketing costs for each film and as a result are recognized as revenue without regard to Paramounts recoupment position for each film. Please see Part I, Item 1
BusinessDistribution and Servicing ArrangementsHow We Distribute, Promote and Market our Films with Paramount of our 2006 Form 10-K for a discussion of our distribution and servicing arrangements with Paramount.

In the ordinary course of reconciling balances with our distributor in a prior period, we determined that the net balance with Paramount, as reflected
in our unaudited consolidated balance sheets as of June 30, 2007 and prior periods, may be misstated. We believe that this misstatement relates to certain amounts due to DreamWorks Studios being overstated at the Separation Date and at the time
that DreamWorks Studios was acquired by Viacom. We are in discussions with Paramount regarding this issue, but it has not been resolved. We currently believe that the resolution of this issue will not have a material impact on our financial
condition or cash flows and will have no impact on our results of operations as the impact of any resolution would be to adjust stockholders equity.



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##### Table of Contents

Under the terms of the Paramount Distribution Agreement, Paramount has also agreed to provide us at a
minimal cost with certain production-related services, including but not limited to film music licensing, archiving of film materials and credits as well as information technology oversight, participation and residual accounting and travel.

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,
although Flushed Awaywas theatrically released on November 3, 2006, no revenue was reported to us by our distributor until the second quarter of 2007, because our distributor is entitled to first recover its marketing and distribution
costs (including its distribution fee) before we can recognize any revenue generated from the exploitation of the film. Conversely, our distributor reported revenue for our most recent theatrical release, Shrek the Thirdreleased on
May 18, 2007, during the same quarter as its theatrical release as a result of the films strong domestic theatrical performance. In addition, international results are generally reported to us by our distributor on a 30-day lag.
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.



Results of Operations

Overview of Financial Results

The following table sets forth, for the periods presented, certain data from our unaudited consolidated statements of operations. 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 Ended June 30,                          |       |   | Six Months Ended June 30, |  
|                                                      |  | 2007                                                 |       |   | 2006                      |   |      | $ Change |  |   | % Change |   |  | 2007   |    |  | 2006 |       |   | $ Change |   |       | % Change | 
|                                                      |  | (unaudited)                                          |      
|                                                      |  | (in millions, except percentages and per share data) |      
|Operating revenue                                     |  | $                                                    | 222.5 |   |                           | $ | 74.9 |          |  | $ | 147.6    |   |  | 197.1  | %  |  | $    | 316.2 |   |          | $ | 135.0 |          |  | $ | 181.2 |   |  | 134.2  | % 
|Costs of revenue                                      |  |                                                      | 110.6 |   |                           |   | 40.5 |          |  |   | (70.1    | ) |  | (173.1 | )% |  |      | 164.1 |   |          |   | 67.4  |          |  |   | (96.7 | ) |  | (143.5 | )%
|Selling, general and administrative expenses          |  |                                                      | 27.5  |   |                           |   | 21.3 |          |  |   | (6.2     | ) |  | (29.1  | )% |  |      | 53.2  |   |          |   | 40.0  |          |  |   | (13.2 | ) |  | (33.0  | )%
|                                                      |  |                                                      |       |   |                           |   |      |          |  |   |          |   |  |        |    |  |      |       |   |          |   |       |          |  |   |       |   |  |        |   
|Operating income                                      |  |                                                      | 84.4  |   |                           |   | 13.1 |          |  |   | 71.3     |   |  | 544.3  | %  |  |      | 98.9  |   |          |   | 27.6  |          |  |   | 71.3  |   |  | 258.3  | % 
|Interest income, net                                  |  |                                                      | 6.4   |   |                           |   | 5.8  |          |  |   | 0.6      |   |  | 10.3   | %  |  |      | 12.6  |   |          |   | 10.5  |          |  |   | 2.1   |   |  | 20.0   | % 
|Other income, net                                     |  |                                                      | 1.4   |   |                           |   | 1.5  |          |  |   | (0.1     | ) |  | (6.7   | )% |  |      | 2.9   |   |          |   | 2.9   |          |  |   |      |   |  |       | % 
|Increase in income tax benefit payable to stockholder |  |                                                      | (23.9 | ) |                           |   | (3.8 | )        |  |   | (20.1    | ) |  | (528.9 | )% |  |      | (29.7 | ) |          |   | (7.6  | )        |  |   | (22.1 | ) |  | 290.8  | % 
|                                                      |  |                                                      |       |   |                           |   |      |          |  |   |          |   |  |        |    |  |      |       |   |          |   |       |          |  |   |       |   |  |        |   
|Income before income taxes                            |  |                                                      | 68.3  |   |                           |   | 16.6 |          |  |   | 51.7     |   |  | 311.4  | %  |  |      | 84.7  |   |          |   | 33.4  |          |  |   | 51.3  |   |  | 153.6  | % 
|Provision for income taxes                            |  |                                                      | 6.5   |   |                           |   | 2.9  |          |  |   | (3.6     | ) |  | (124.1 | )% |  |      | 7.5   |   |          |   | 7.4   |          |  |   | (0.1  | ) |  | (1.4   | )%
|                                                      |  |                                                      |       |   |                           |   |      |          |  |   |          |   |  |        |    |  |      |       |   |          |   |       |          |  |   |       |   |  |        |   
|Net income                                            |  | $                                                    | 61.8  |   |                           | $ | 13.7 |          |  | $ | 48.1     |   |  | 351.1  | %  |  | $    | 77.2  |   |          | $ | 26.0  |          |  | $ | 51.2  |   |  | 196.9  | % 
|                                                      |  |                                                      |       |   |                           |   |      |          |  |   |          |   |  |        |    |  |      |       |   |          |   |       |          |  |   |       |   |  |        |   
|Diluted net income per share                          |  | $                                                    | 0.60  |   |                           | $ | 0.13 |          |  | $ | 0.47     |   |  | 361.5  | %  |  | $    | 0.75  |   |          | $ | 0.25  |          |  | $ | 0.50  |   |  | 200.0  | % 
|                                                      |  |                                                      |       |   |                           |   |      |          |  |   |          |   |  |        |    |  |      |       |   |          |   |       |          |  |   |       |   |  |        |   

We periodically reassess the nature of our operating costs to determine if we should make changes
to our future estimate of the allocation between amounts capitalized as part of film costs and amounts recorded as expense in our statement of operations. During the first quarter of 2007, in response to certain changes to our production
process and organizational structure, we determined that certain operating costs (totaling $4.8 million and $9.0 million on a pre-tax basis for the three- and six-month periods ended June 30, 2007, respectively) incurred in 2007 and in
future periods that, absent these changes, would have been capitalized as part of film costs in previous years should now be recorded as an expense. This change in estimate results in costs which had once been capitalized as film costs now
being recognized as an expense in the period in which such costs are incurred.



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Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

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 as well as revenues from any other sources.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Operating
Revenue.    For the three months ended June 30, 2007, our operating revenue was $222.5 million, an increase of $147.6 million, or 197.1%, as compared to $74.9 million for the three months ended June 30, 2006. As
illustrated in the chart above, the increase in revenue in the second quarter of 2007 from the second quarter of 2006 is primarily related to Shrek the Thirds strong performance in the domestic theatrical market.As a result of
Shrek the Thirdssignificant domestic theatrical box-office receipts, our distributor reported revenue to us in the same period as the films theatrical release because Shrek the Thirdsgross revenues exceeded the
marketing and distribution costs incurred by our distributor. In the second quarter of 2006, as more historically typical for our films in the quarter of their initial theatrical release, no revenue was reported to us by our distributor directly
associated with the May 2006 theatrical release, Over the Hedge. Also contributing to the period-over-period increase in revenue was the continued growth in the size of our film library as reflected by the stronger performance of our
All Other titles in 2007 (which, for the second quarter of 2007, includes Madagascar, Shark Tale and Shrek 2).

For the second quarter of 2007, a variety of films across several markets contributed to our total revenue of $222.5 million: 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); Over the Hedgecontributed $26.9 million of revenue earned largely in the domestic pay television market;FlushedAway, our 2006 fourth
quarter theatrical release, generated revenue in a variety of markets totaling $12.4 million; and Shark Talecontributed $10.7 million of revenue earned mostly in the international television market. In addition, Wallace &
Gromit and Madagascargenerated revenue of $14.7 million and $12.7 million, respectively, attributable primarily to the worldwide home entertainment market. 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 Wallace &
Gromit and Madagascar, and to a lesser extent some of our other films, increased by $25.5 million as a result of a reduction of certain previously recorded estimates of home entertainment product returns and marketing costs. This change
in estimate partially contributed to the change in estimated total revenue to be received from all sources (Ultimate Revenue) which is discussed below in Costs of Revenue. Our other films, including our library
titles, contributed revenues totaling $36.0 million generated in a variety of markets.



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For the second quarter of 2006, a variety of films across several markets contributed to our total
revenue of $74.9 million. Madagascarsrevenue, which contributed the most significant portion of our revenue for the quarter, totaled $37.9 million earned in the domestic pay television, worldwide home entertainment, and ancillary
markets. As is historically typical for our films in the quarter of their initial theatrical release, no revenue was reported to us by our distributor directly associated with Over the Hedge during the second quarter of 2006. However, Over
the Hedge did generate $10.7 million of ancillary revenue comprised of merchandising and licensing revenue and the $4.6 million of revenue associated with the annual reimbursable amounts received from our distributor. Shark Tale
contributed $9.6 million of revenue in the quarter earned primarily in the international television markets and Wallace & Gromit, our theatrical release in the fourth quarter of 2005, contributed $3.4 million of revenue. Our other
films, including our library titles, contributed revenues totaling $13.3 million.

Costs of Revenue.    Costs of
revenue increased by $70.1 million, or 173.1%, to $110.6 million for the three months ended June 30, 2007. Amortization of film costs, the primary component of costs of revenue, for released films as a percentage of film revenue in the three
months ended June 30, 2007 was 44.1%, compared to 48.0% for the three months ended June 30, 2006. The moderate decrease in amortization as a percentage of film revenue for the three months ended June 30, 2007 was primarily due to the
change in the mix of films earning revenue. The primary source of revenue, and thus the primary driver of film amortization costs, for the second quarter of 2007 was Shrek the Third, which, due to the size of its Ultimate Revenue in
comparison to its capitalized costs, had a lower rate of amortization as compared to the overall mix of films comprising film amortization for 2006. In addition, although to a lesser extent, a change in estimated Ultimate Revenues for several of our
titles contributed to the lower rate of amortization in the second quarter of 2007. See Note 3 to the unaudited consolidated financial statements contained in Part I, Item 1 of this Quarterly Report for further information regarding this change
in estimate.

Selling, General and Administrative Expenses.    Total selling, general and administrative
expenses increased by $6.2 million to $27.5 million (including $9.6 million of stock compensation expense which is discussed in the following paragraph) for the three months ended June 30, 2007 from $21.3 million (including a stock compensation
expense of $6.4 million) for the three months ended June 30, 2006. The $3.0 million increase in selling, general and administrative expenses (other than stock compensation expense which is discussed in the following paragraph) is primarily
related to higher employee-related costs, including the company-wide incentive bonus plan, and DreamWorks Studios vacating office space previously sub-leased from us.

Stock compensation expense was $9.6 million for the quarter ended June 30, 2007, as compared to $6.4 million for the same period for 2006. The increase in stock compensation expense resulted primarily from a
higher anticipated probability of achieving specified cumulative performance goals associated with certain executive officers grants of restricted stock. As of June 30, 2007, 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 $67.9 million. This cost will be amortized on a straight-line basis over a weighted average life
of 2.7 years.

Operating Income.    Operating income for the three months ended June 30, 2007 was $84.4
million, an increase of $71.3 million, or 544.3%, as compared to $13.1 million for the comparable period of 2006. Operating income increased in the second quarter of 2007 principally due to higher operating revenues associated with the theatrical
release of Shrek the Third as offset by higher film amortization cost and increased selling, general and administrative costs.

Interest Income (Net of expense).    For the three months ended June 30, 2007, total interest income was $7.6 million, an increase of $1.3 million or 20.6% from $6.3 million for the same period of 2006.
The increase was primarily a result of the higher interest rates associated with balances of cash and cash equivalents. Total interest expense for the three months ended June 30, 2007 and 2006 was $1.2 million and $0.6 million, respectively.
Interest expense for the quarter ended June 30, 2007 was higher than that for the second quarter of



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2006 due to a $0.5 million write-off of deferred debt costs made in connection with the voluntary reduction to our revolving line of credit and higher
interest rates associated with existing financing arrangements. This increase in expense was offset by a decrease of $0.6 million as a result of the full repayment of an interest-bearing advance in January 2006.

Interest expense capitalized to production film costs for the three months ended June 30, 2007, was $2.3 million and remained principally
unchanged from that for the same period of 2006.

Other Income (Net of expense).    For the three months ended
June 30, 2007, total other income was $1.4 million, consisting entirely of income recognized in connection with preferred vendor arrangements. This amount remained essentially unchanged from that reported for the comparable period of 2006.

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 at the time of our separation from DreamWorks Studios (Tax Basis Increase), we may pay reduced tax amounts to
the extent we generate sufficient taxable income in the future. As discussed in Note 10 to the unaudited consolidated financial statements contained in Part I, Item 1 of this Quarterly Report, we are obligated to remit to such affiliate 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. Each quarter we review our deferred
tax assets based on their estimated year-end value. During the quarter ended June 30, 2007, as a result of our review, we revalued our deferred tax assets and determined that $28.1 million of additional deductions in future years will be
realized from the Tax Basis Increase than previously estimated. Accordingly, we have recorded an expense of $23.9 million to increase the income tax benefit payable to stockholder for the three months ended June 30, 2007.

During the quarter ended June 30, 2006 we revalued our deferred tax assets and determined that $4.5 million of additional deductions in future years
will be realized from the Tax Basis Increase than previously estimated. Accordingly, we recorded an expense of $3.8 million to increase the income tax benefit payable to stockholder for the three months ended June 30, 2006.

Provision for Income Taxes.    For the three months ended June 30, 2007 and 2006, we recorded a provision for income
taxes of $6.5 million and $2.9 million, respectively. Our effective tax rate (as a percentage of income before income taxes and before increase in income tax benefit payable to stockholder) was 7.0% and 14.1% for the three months ended June 30,
2007 and 2006, respectively. 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. See Note 10 to the unaudited consolidated financial statements contained in Part I, Item 1 of this Quarterly Report for further information regarding the provision for income
taxes.

Net Income.    Net income for the three months ended June 30, 2007 was $61.8 million or $0.60 per
diluted share. This compared favorably to a net income of $13.7 million, or $0.13 net income per diluted share, in the corresponding period in 2006.



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Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

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 as well as revenues from any other sources.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Operating
Revenue.    For the six months ended June 30, 2007, our operating revenue was $316.2 million, an increase of $181.2 million, or 134.2%, as compared to $135.0 million for the six months ended June 30, 2006. As
illustrated in the chart above, the increase in revenue for the six month period ended June 30, 2007 as compared to the same period of 2006 is primarily related to Shrek the Thirdsstrong performance in the domestic theatrical
market.As discussed above in our comparison of quarterly results, as a result of Shrek the Thirdssignificant domestic box-office receipts, our distributor reported revenues to us in the same period as the films theatrical
release while, in the comparable period of the prior year, no revenue was reported to us by our distributor directly associated with the theatrical release of Over the Hedge because the marketing and distribution costs incurred for this film
by our distributor exceeded its gross revenues. The increase in year-over-year revenue is also related to the stronger performance of the All Other titles (which, for the six months ended June 30, 2007, includes Madagascar, Shark
Tale and Shrek 2) due to the continual growth of the number of films comprising this category.

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 Hedgecontributed $59.9 million of revenue earned largely in the worldwide home entertainment and domestic pay television markets;
Wallace & Gromitand Shark Talecontributed $24.1 million and $28.8 million of revenue, respectively, earned primarily in worldwide television and worldwide home entertainment markets; Madagascargenerated revenue of
$19.1 million earned principally attributable to the worldwide home entertainment market; and FlushedAway, our 2006 fourth quarter theatrical release, contributed $13.6 million earned across 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 Wallace & Gromit and Madagascar, and to a lesser extent some of our other films, increased by $25.5 million as a result of a reduction of certain previously recorded estimates of home entertainment
product returns and marketing costs. This change in estimate partially contributed to the change in Ultimate Revenue which is discussed below in Costs of Revenue. Our other films, including our library of titles which includes
Shrek 2, contributed revenues totaling $61.6 million, respectively, generated in a variety of markets.



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Operating revenue for the six months ended June 30, 2006 was primarily driven by Madagascar
in the home video and domestic pay television markets. During the six months ended June 30, 2006, Madagascar generated total revenue of $68.5 million, including revenue earned through merchandising and licensing. Shark Tale
contributed additional revenue of $22.6 million earned primarily in the international television markets. In addition, Over the Hedge contributed $10.7 million of ancillary revenue including merchandising and licensing revenue as well as an
additional $4.6 million of revenue associated with the annual reimbursable amounts received pursuant to the Paramount Agreements. Wallace & Gromitcontributed $3.4 million in revenues. Our other films, including library titles,
contributed $29.8 million of revenue generated in a variety of markets.

Costs of Revenue.    Costs of revenue
increased by $96.7 million, or 143.5%, to $164.1 million for the six months ended June 30, 2007. Amortization of film costs, the primary component of costs of revenue, for released films as a percentage of film revenue in the six months ended
June 30, 2007 was 46.5%, compared to 46.0% for the six months ended June 30, 2006. Although there was a significant change in the mix of films earning revenue and, although to a lesser extent, a change in estimated Ultimate Revenues for
several of our titles, amortization as a percentage of film revenue for the six months ended June 30, 2007 was consistent with that for the same period of 2006. See Note 3 to the unaudited consolidated financial statements contained in Part I,
Item 1 of this Quarterly Report for further information regarding the change in estimate of Ultimate Revenues.

Selling, General
and Administrative Expenses.    Total selling, general and administrative expenses increased by $13.2 million to $53.2 million (including $19.1 million of stock compensation expense which is discussed in the following
paragraph) for the six months ended June 30, 2007 from $40.0 million (including a stock compensation expense of $11.2 million) for the six months ended June 30, 2006. The $5.3 million increase in selling, general and administrative
expenses (other than stock compensation expense which is discussed in the following paragraph) is primarily related to higher employee-related costs, including the company-wide incentive bonus plan, and DreamWorks Studios vacating office space
previously sub-leased from us.

Stock compensation expense was $19.1 million for the six months ended June 30, 2007, as compared to
$11.2 million for the same period for 2006. The increase in stock compensation expense resulted primarily from a higher anticipated probability of achieving specified cumulative performance goals associated with certain executive officers
grants of restricted stock.

Operating Income.    Operating income for the six months ended June 30, 2007
was $98.9 million, an increase of $71.3 million, or 258.3%, compared to that of $27.6 million for the comparable period of 2006. The increase in operating revenue for the six-month period ended June 30, 2007 was largely as a result of the
strong theatrical performance of Shrek the Third as offset by higher film amortization cost and increased selling, general and administrative costs.

Interest Income (Net of expense).    For the six months ended June 30, 2007, total interest income was $14.3 million, an increase of $2.7 million or 23.3% from $11.6 million for
the same period of 2006. The increase was primarily a result of the combination of higher interest rates and higher balances of cash and cash equivalents. Total interest expense for each of the six months ended June 30, 2007 and 2006 was $1.7
million and $1.1 million, respectively. Interest expense for the six-month period ended June 30, 2007 was higher than that for the same period of 2006 as a result of the $0.5 million write-off of deferred debt costs made in connection with the
voluntary reduction to our revolving line of credit and higher interest rates associated with existing financing arrangements. This increase in expense was offset by a decrease of $0.6 million as a result of the full repayment of an
interest-bearing advance in January 2006.

Interest expense capitalized to production film costs for the six months ended June 30,
2007, was $4.6 million and remained principally unchanged from that for the same period of 2006.

Other Income (Net of
expense).    For the six-month period ended June 30, 2007, total other income was $2.9 million, consisting entirely of income recognized in connection with preferred vendor arrangements. This amount remained unchanged
from that reported for the comparable period of 2006.



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Increase in Income Tax Benefit Payable to Stockholder.As a result of the
Tax Basis Increase and our quarterly revaluation of deferred tax assets, we have recognized $34.9 million and $9.0 million of additional net tax benefits than previously estimated for the six months ended June 30, 2007 and 2006, respectively.
We are obligated to remit to such affiliate 85% of any cash savings in U.S. Federal income tax and California franchise tax and certain other related tax benefits. Accordingly, we have recorded an expense of $29.7 million and $7.6 million to
increase income tax benefit payable to stockholder for the six months ended June 30, 2007 and 2006, respectively.

Provision for
Income Taxes.For the six months ended June 30, 2007 and 2006, we recorded a provision for income taxes of $7.5 million and $7.4 million, respectively. Our effective tax rate (as a percentage of income before income
taxes before increase in income tax benefit payable to stockholder) was 6.5% and 18.1% for the six months ended June 30, 2007 and 2006, respectively.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. See Note 10 to the unaudited consolidated financial
statements contained in Part I, Item 1 of this Quarterly Report for further information regarding the provision for income taxes.

Net Income.    Net income for the six months ended June 30, 2007 was $77.2 million or $0.75 per diluted share. This compared favorably to a net income of $26.0 million, or $0.25 net income per diluted share,
in the corresponding period in 2006.

Financing Arrangements

The following table summarizes the balances outstanding and other information associated with our various financing arrangements:



|                              |  |                                    |        |                            |                   |   |                                 |     |  |                             |  |      |      |  |   |      |     |  |      |     |     |  |   |     |     |  |   |     |    
|----------------------------- |  | ---------------------------------- | ------ | -------------------------- | ----------------- | - | ------------------------------- | --- |  | --------------------------- |  | ---- | ---- |  | - | ---- | --- |  | ---- | --- | --- |  | - | --- | --- |  | - | --- | ---
|                              |  | Balance Outstanding (in thousands) |        |                            | Maturity Date     |   | InterestRate as ofJune 30, 2007 |     |  | Interest Cost (in millions) | 
|                              |  |                                    |        | Three Months EndedJune 30, |                   |   | Six Months EndedJune 30,        |    
|                              |  | June 30, 2007                      |        |                            | December 31, 2006 |   |                                 |     |  | 2007                        |  |      | 2006 |  |   | 2007 |     |  | 2006 |    
|Animation Campus Financing(1) |  | $                                  | 73,000 | (1)                        |                   | $ | 73,000                          | (1) |  | October 2009                |  | 5.31 | %    |  | $ | 1.2  |     |  | $    | 1.1 |     |  | $ | 2.4 |     |  | $ | 2.1 |    
|Revolving Credit Facility     |  | $                                  |       |                            |                   | $ |                                |     |  | October 2009                |  | 0.75 | %(2) |  | $ | 0.4  | (2) |  | $    | 0.4 | (2) |  | $ | 0.8 | (2) |  | $ | 0.8 | (2)
|HBO Subordinated Notes(3)     |  | $                                  | 50,000 |                            |                   | $ | 50,000                          |     |  | November 2007               |  | 5.86 | %    |  | $ | 1.1  |     |  | $    | 1.0 |     |  | $ | 2.2 |     |  | $ | 2.0 |    

---

|(1) | In connection with the adoption of FASB Interpretation No. 46 Consolidation of Variable
Interest Entities, the special-purpose entity associated with this financing was consolidated by us 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
bank borrowings and other debt and a $2.9 million non-controlling minority interest.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | We have a revolving credit facility with a number of banks. There was no debt outstanding for the
respective periods. This rate represents a commitment fee which the Company is required to pay on undrawn amounts. The commitment fee paid on undrawn amounts is an annual rate of 0.75% on any date when the drawn amounts are greater than or equal to
fifty-percent of the aggregate commitments under the credit facility and 0.50% on any other date. Interest on borrowed amounts is determined either at a floating rate of LIBOR plus 1.75% or the alternate base rate (which is generally the prime rate)
plus 0.75% per annum.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The subordinated notes are recorded net of a discount of $0.7 million and $1.4 million as of
June 30, 2007 and December 31, 2006, respectively, which will be amortized to interest expense over the remaining term of the subordinated loan agreement. The subordinated notes are expected to be repaid in November 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On June 29, 2007, we elected, under the terms of our revolving credit facility, to reduce the aggregate commitment
of the credit facility from $200 million to $100 million. Please see Note 4 to our unaudited consolidated financial statements for further discussion.



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In addition, in January 2006, we were required to repay an advance due to Universal Studios, plus
interest, totaling approximately $75.6 million in connection with the termination of its distribution and servicing arrangements with DreamWorks Studios. We repaid such amount in January 2006 using the proceeds of a $75.0 million signing bonus
received from Paramount in connection with the Paramount Agreements. For further discussion, please see Note 7 to our unaudited consolidated financial statements.

As of June 30, 2007 we were in compliance with all applicable debt covenants.

For a more detailed
description of our various financing arrangements, please see the Managements Discussion and Analysis of Financial Condition and Results of Operation section of our 2006 Form 10-K.

Contractual Obligations

There have been no material
changes during the period covered by this Quarterly Report, outside of the ordinary course of business, 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 2006 Form 10-K.

As of June 30, 2007 we had
non-cancelable talent commitments totaling approximately $17.8 million that are payable over the next five years.

Liquidity and Capital Resources

The Companys operating activities through the period ended June 30, 2007 generated adequate cash to meet our operating
needs. As of June 30, 2007 we had cash and cash equivalents totaling $483.6 million, a $22.7 million decrease compared to $506.3 million at December 31, 2006. The principal components of the change in cash and cash equivalents during
the six months ended June 30, 2007 were cash generated from operating activities of $21.9 million, which was offset by repurchases of $44.1 million of our Class A common stock (which was comprised of repurchases of $43.4 million made
pursuant to an approved stock repurchase program and $0.7 million of shares repurchased in connection with the withholding of restricted shares to cover employee withholding taxes for vested restricted stock awards) and $1.4 million invested in
equipment. 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 and capital expenditures. In the event that these cash flows are insufficient, we
expect to be able to draw funds from the revolving credit facility to meet these needs.



|                                                    |  |                  |         |   |               |   |         |  
|--------------------------------------------------- |  | ---------------- | ------- | - | ------------- | - | ------- | -
|                                                    |  | Six months ended |        
|                                                    |  | June 30, 2007    |         |   | June 30, 2006 |  
|                                                    |  | (in thousands)   |        
|Net cash provided by operating activities           |  | $                | 21,904  |   |               | $ | 123,995 |  
|Net cash used in investing activities               |  |                  | (1,370  | ) |               |   | (849    | )
|Net cash provided by (used in) financing activities |  |                  | (43,258 | ) |               |   | 6       |  

Net cash provided by operating activities for the first six months of 2007 was $21.9 million and
was primarily attributable to the collection of revenue attributable to Over the Hedges worldwide home entertainment sales and to a lesser extent the collection of worldwide television and home entertainment revenues for Madagascar,
Shark Tale and Shrek 2. In accordance with the terms of our distribution agreement, we expect to begin collecting the revenue generated by Shrek the Thirdstheatrical release early in the third quarter of 2007. The operating
cash provided during the first six months of 2007 was offset by a $46.9 million payment to our distributor for prior-period costs which our distributor had not deducted from previous remittances made to us, a $22.0 million payment to an affiliate of
a stockholder related to tax benefits realized in 2006 from the Tax Basis Increase, film production spending and contingent compensation (including contingent compensation payments associated with Shrek the Third). Net cash provided by
operating activities for the first six months of 2006 was



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$124.0 million and was primarily attributable to collection of revenue earned in 2005 by both Madagascar and Wallace and Gromitin the
theatrical worldwide home entertainment markets, partially offset by a $30.0 million payment to an affiliate of a stockholder related to tax benefits realized in 2005 from the Tax Basis Increase, film production spending and contingent
compensation.

Net cash used in investing activities for the six months ended June 30, 2007 and 2006 was $1.4 million and $0.9
million, respectively, resulting primarily from the investment in equipment.

Net cash used in financing activities for the six months
ended June 30, 2007 was $43.3 million and net cash provided by financing activities for the six months ended June 30, 2006 was less than $0.1 million. For the six months ended June 30, 2007, net cash used in financing activities was
primarily comprised of repurchases of our Class A common stock totaling $43.4 million made pursuant to a stock repurchase program approved by our Board of Directors in February 2007 (Stock Repurchase Program). As of
June 30, 2007, we had remaining authority to repurchase approximately $106.6 million of our outstanding shares pursuant to the Stock Repurchase Program. Repurchases of our Class A common stock also include the withholding of stock to cover
employee withholding taxes for vested restricted stock awards. For the six months ended June 30, 2006, net cash used in financing activities consisted mainly of a $75.0 million advance repayment and payments related to employee withholding
taxes for vested restricted stock awards for which we withheld stock from the respective employees. This use of cash in financing activities was largely offset by cash provided by financing activities consisting primarily of the $75.0 million
signing bonus received from Paramount pursuant to terms of the Paramount Agreements.

For the remainder of 2007, we expect our commitments
to fund production costs (excluding capitalized interest and overhead expense), to make contingent compensation and residual payments (on films released to date) and to fund technology capital expenditures will be approximately $120 million. In
addition, in the fourth quarter of 2007 we expect to repay in full the $50 million of subordinated debt due to Home Box Office, Inc. (HBO). We also currently expect in 2007 that either we will remit to Paramount or that they will
deduct from receipts due to us in the ordinary course of business under the Paramount Agreements up to approximately $40 million. This amount relates primarily to prior-period costs which were not deducted from cash remitted to us by our
distributor in periods ending on or before June 30, 2007 and which we have recorded as a liability within the receivable from Paramount as of June 30, 2007.

Critical Accounting Policies and Estimates

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. For a summary of our significant accounting policies,
see Note 2 of the Consolidated Financial Statements in the 2006 Form 10-K.



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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). The following are the conditions that must be met in order to recognize
revenue in accordance with the SOP: (i) persuasive evidence of a sale or licensing arrangement with a customer exists; (ii) the film is complete and has been delivered or is available for immediate and unconditional delivery;
(iii) the license period of the arrangement has begun and the customer can begin its exploitation, exhibition or sale; (iv) the arrangement fee is fixed or determinable and (v) collection of the arrangement fee is reasonably assured.
Amounts received from customers prior to the availability date of the product are included in unearned revenue. International results are generally reported to us by our distributor a month in arrears.

We and our distributor provide for future returns of home video product at the time the products are sold. We and our distributor calculate an estimate
of future returns of product 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, 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. Generally, customer payment terms are within 90 days from the end of the month in which the product was shipped. Actual returns are charged
against the reserve.

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. Although our distributor has agreed to provide us with the most current information
available to enable us to recognize our share of revenue, management may make adjustments to that information based on its estimates and judgments. For example, management may make adjustments to revenue derived from home video units for estimates
of return reserves, rebates and other incentives that may differ from those that the distributor recommends. The estimates of reserves may be adjusted periodically based on actual rates of returns, inventory levels in the distribution channel, as
well as other business and industry information. Management also reviews expense estimates made by our distributor and may make adjustments to these estimates that, in its judgment, are appropriate in order to ensure that net operating revenues are
accurately reflected in the financial statements. In addition, as is typical in the movie industry, our distributor and its sub-distributors may also make subsequent adjustments to the information that they provide and these adjustments could have a
material impact on our operating results in later periods.

Film Cost Amortization

Once a film is released, the amount of film costs relating to that film, contingent compensation and residual costs are amortized and included in costs of
revenue in the proportion that the revenue during the period for each film (Current Revenue) bears to the estimated remaining Ultimate Revenue for each film as of the beginning of the current fiscal period under the
individual-film-forecast-computation method in accordance with the provision of the SOP. The amount of film costs that are amortized each period will therefore depend on the ratio of Current Revenue to Ultimate Revenue for each film for such period.
Amortization 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 any films Ultimate Revenue and capitalized costs
and (iii) write-downs of film costs due to changes in the estimated fair value of unamortized film costs.

We make certain estimates
and judgments of Ultimate Revenue to be received for each film based on information received from our distributor and our knowledge of the industry. Estimates of Ultimate Revenue and



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anticipated contingent compensation 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. Unamortized film production costs are evaluated 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.

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 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. The use of the simplified method is permissible only through December 31,
2007, after which time we will be required to use 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 which 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.

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. In addition, future grants of equity awards will result in additional compensation expense in future periods.

Provision for Income Taxes

We account for income taxes pursuant to SFAS 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



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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, we consider all available positive and negative evidence,
including our operating results, ongoing prudent and feasible tax-planning strategies and forecasts of future taxable income.

Significant
judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We
establish reserves for tax-related uncertainties based on estimates of whether, and to the extent to which, additional taxes and interest and penalties will be due. These reserves are established when, despite our belief that our tax return
positions are fully supportable, we believe certain positions are likely to be challenged and may not be sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax
audit. The provision for income taxes includes the impact of reserve provisions and changes to the reserves that are considered appropriate, as well as the associated net interest and penalties.

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. As a result of the adoption of FIN 48, we recognized a $2.1 million net increase to reserves for uncertain tax positions as a decrease to opening retained earnings. As of January 1, 2007 (the adoption date of FIN 48), we had
approximately $73.5 million of gross unrecognized tax benefits, of which $18.7 million would affect the Companys effective tax rate if recognized. Also, if the $18.7 million of gross unrealized tax benefits were recognized, it would
result in a $7.6 million increase in income tax benefit payable to shareholder relating to the Tax Basis Increase. We continue to follow the practice of recognizing interest and penalties related to income tax matters as a part of provision for
income taxes. As of January 1, 2007 and June 30, 2007, we had approximately $1.3 million and $1.9 million, respectively, of accrued interest and penalties related to uncertain tax positions. The tax period from October 27, 2004
through December 31, 2004 and tax years 2005 and 2006 remain subject to examination by taxing authorities.

In addition, we are
subject to the examination of our tax returns by the IRS and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Our federal
income tax return for the period October 27, 2004 through December 31, 2004 is currently under examination by the IRS and our California state income tax returns for the period October 27, 2004 through December 31, 2004 and for
the year ended December 31, 2005 are currently under examination by the California Franchise Tax Board. While we believe that we have adequately provided for our tax liabilities, including the outcome of these examinations, it is possible that
the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the reserves for tax contingencies and the amounts owed by us are recorded in the period they become known. The ultimate outcome of these tax
contingencies could have a material effect on our financial position, results of operations or cash flows.

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 2006 Form 10-K. Exposure to our interest rate, foreign currency and credit risks have not changed materially
since December 31, 2006.



|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 Securities and Exchange Commission 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.

The scope of our assessment of our internal controls over financial reporting includes our internal controls that monitor the accuracy, completeness and
timeliness of information reported to us by our third party distribution partner. While we are working closely with our distributor to understand and potentially enhance their processes impacting our internal controls over financial reporting, we
cannot guarantee that they have sufficient internal controls over the accuracy, completeness and timeliness of information reported to us. For a further discussion, please see our 2006 Form 10-K under Part I, Item 1A Risk
FactorsInternal control assessments at our third party distributor and service provider could result in deficiencies, significant deficiencies or material weaknesses in our internal control over financial reporting.

(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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##### Table of Contents

PART II
OTHER INFORMATION



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

See discussion of Legal
Proceedings in Note 11 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 Forward-Looking Statements of this Quarterly Report, and Part I, Item 1A Risk Factors of the Companys 2006 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
2006 Form 10-K or filings subsequently made with the SEC.



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

The following table shows Company repurchases of its common stock for the three months ended June 30, 2007.



|                       |  |                                    |     |  |                            |       |                                                                                 |         |                                                                                                             |   |            
|---------------------- |  | ---------------------------------- | --- |  | -------------------------- | ----- | ------------------------------------------------------------------------------- | ------- | ----------------------------------------------------------------------------------------------------------- | - | -----------
|                       |  | Total Number ofShares Purchased(1) |     |  | AveragePrice Paidper Share |       | Total Number ofShares Purchased as Part of PubliclyAnnounced Plan or Program(2) |         | Maximum Number (or approximate dollar
value)of Shares That May Yet be PurchasedUnder the Plan or Program(2)
|April 1April 30, 2007 |  | 285,557                            | (3) |  | $                          | 30.68 |                                                                                 | 285,500 |                                                                                                             | $ | 106,567,000
|May 1May 31, 2007     |  | 3,674                              | (3) |  | $                          | 28.78 |                                                                                 | N/A     |                                                                                                             | $ | 106,567,000
|June 1June 30, 2007   |  | 706                                | (4) |  | $                          | 28.91 |                                                                                 | N/A     |                                                                                                             | $ | 106,567,000
|                       |  |                                    |     |  |                            |       |                                                                                 |         |                                                                                                             |   |            
|Total                  |  | 289,937                            |     |  | $                          | 30.65 |                                                                                 | 285,500 |                                                                                                             | $ | 106,567,000

---

|(1) | Does not include shares forfeited to the Company upon the expiration or cancellation of unvested
restricted stock awards.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(2) | On February 28, 2007, the Company disclosed that its Board of Directors had approved a stock
repurchase program. Under this program, the Company may repurchase up to an aggregate of $150 million of its outstanding Class A common stock through the period ending August 31, 2008.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes 57 shares repurchased in connection with the withholding of a portion of restricted shares to
cover employees withholding taxes for vested restricted stock awards.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Represents stock repurchased in connection with the withholding of a portion of restricted shares to
cover employees withholding taxes for vested restricted stock awards.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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

At the Companys Annual Meeting of Stockholders held on May 9, 2007, the stockholders elected 11 directors to serve for the ensuing year (or until their successors are duly elected and qualified) and ratified the appointment of
Ernst & Young LLP to serve as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2007. The table below shows the results of the stockholders voting with respect to the
election of our directors:



|                       |  |                |  |               
|---------------------- |  | -------------- |  | --------------
|                       |  | Votes Cast For |  | Votes Withheld
|Jeffrey Katzenberg     |  | 298,578,688    |  | 20,681,274    
|Roger A. Enrico        |  | 311,897,133    |  | 7,362,829     
|Lewis. W Coleman       |  | 313,055,829    |  | 6,204,133     
|Judson C. Green        |  | 313,968,132    |  | 5,291,830     
|David Geffen           |  | 298,594,842    |  | 20,665,120    
|Mellody Hobson         |  | 314,045,550    |  | 5,214,412     
|Michael J. Montgomery  |  | 314,045,302    |  | 5,214,660     
|Nathan Myhrvold        |  | 314,045,820    |  | 5,214,142     
|Howard Schultz         |  | 314,047,190    |  | 5,212,772     
|Margaret C. Whitman    |  | 297,289,212    |  | 21,970,750    
|Karl M. von der Heyden |  | 314,045,154    |  | 5,214,808     

In addition, the Class C stockholder acted by written consent on May 9, 2007 to elect Paul G.
Allen to serve as the Class C director for the ensuing year (or until his successor is duly elected and qualified).

The stockholders
voting with respect to the ratification of Ernst & Young LLP as our independent registered public accounting firm was as follows:



|                 |  |                
|---------------- |  | ---------------
|                 |  | Number of Votes
|Votes for:       |  | 313,208,350    
|Votes against:   |  | 19,052         
|Votes abstained: |  | 32,560         

Items 3 and 5 are not applicable and have been omitted.



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



|            |  |                                                                                                                                                                                           
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Title                                                                                                                                                                                     
|10.1        |  | Form of Restricted Stock Unit Award Agreement (Time Vested).                                                                                                                              
|            | 
|10.2        |  | Special Deferral Election PlanBasic Plan Document (Incorporated by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K filed on June 12, 2007).                        
|            | 
|10.3        |  | Special Deferral Election PlanAdoption Agreement (Incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form 8-K filed on June 12, 2007).                         
|            | 
|10.4        |  | Special Deferral Election PlanPlan Amendment effective as of July 1, 2007 (Incorporated by reference to Exhibit 99.3 to the Companys Current Report on Form 8-K filed on June 12,
2007).
|            | 
|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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##### Table of Contents

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 31, 2007 |  |  |  | By:                            |  | /S/    LEWIS W.
COLEMAN
|                    |  |  |  |                                |  | Name:                   |  | Lewis W. Coleman                                               
|                    |  |  |  |                                |  | Title:                  |  | President, Chief Financial Officer and Chief Accounting Officer



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##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                                                           
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                               
|10.1          |  | Form of Restricted Stock Unit Award Agreement (Time Vested).                                                                                                                              
|              | 
|10.2          |  | Special Deferral Election PlanBasic Plan Document (Incorporated by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K filed on June 12, 2007).                        
|              | 
|10.3          |  | Special Deferral Election PlanAdoption Agreement (Incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form 8-K filed on June 12, 2007).                         
|              | 
|10.4          |  | Special Deferral Election PlanPlan Amendment effective as of July 1, 2007 (Incorporated by reference to Exhibit 99.3 to the Companys Current Report on Form 8-K filed on June 12,
2007).
|              | 
|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.           



34