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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





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

THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended September 30, 2008

Commission file number 001-32337

DREAMWORKS ANIMATION SKG, INC.

(Exact name of registrant as specified in its charter)



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

(818) 695-5000

(Registrants telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

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

(Do not check if a smaller reporting
company)

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

Indicate the number of shares outstanding of
each of the registrants classes of common stock: As of September 30, 2008, there were 78,184,330 shares of Class A common stock and 11,419,461 shares of Class B 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)                       |  | 2   
|              |  |                                                                                      
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 13  
|              |  |                                                                                      
|Item 3.       |  | Quantitative and Qualitative Disclosure About Market Risk                             |  | 27  
|              |  |                                                                                      
|Item 4.       |  | Controls and Procedures                                                               |  | 27  
|              |  |                                                                                      
|PART II.      |  | OTHER INFORMATION                                                                     |  |     
|              |  |                                                                                      
|Item 1.       |  | Legal Proceedings                                                                     |  | 28  
|              |  |                                                                                      
|Item 1A.      |  | Risk Factors                                                                          |  | 28  
|              |  |                                                                                      
|Item 2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 29  
|              |  |                                                                                      
|Item 5.       |  | Other Information                                                                     |  | 29  
|              |  |                                                                                      
|Item 6.       |  | Exhibits                                                                              |  | 32  
|              | 
|SIGNATURES    |  | 33                                                                                   
|              | 
|EXHIBIT INDEX |  | 34                                                                                   

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



1



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##### Table of Contents

PART IFINANCIAL INFORMATION



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

DREAMWORKS ANIMATION SKG,
INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                     |  |                                                    |           |   |                  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                     |  | September 30,2008                                  |           |   | December 31,2007 |  
|                                                                                                                                                                                                     |  | (unaudited)                                        |           |   |                  |  
|                                                                                                                                                                                                     |  | (in thousands, except par value and share amounts) |          
|Assets                                                                                                                                                                                               |  |                                                    |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                                            |  | $                                                  | 337,905   |   |                  | $ | 292,489   |  
|Trade accounts receivable, net of allowance for doubtful accounts                                                                                                                                    |  |                                                    | 14,967    |   |                  |   | 3,470     |  
|Receivable from Paramount, net of reserve for returns and allowance for doubtful accounts                                                                                                            |  |                                                    | 71,967    |   |                  |   | 272,647   |  
|Film costs, net                                                                                                                                                                                      |  |                                                    | 622,970   |   |                  |   | 541,917   |  
|Prepaid expenses and other assets                                                                                                                                                                    |  |                                                    | 37,030    |   |                  |   | 47,609    |  
|Property, plant, and equipment, net of accumulated depreciation and amortization                                                                                                                     |  |                                                    | 103,951   |   |                  |   | 86,772    |  
|Deferred taxes, net                                                                                                                                                                                  |  |                                                    | 48,073    |   |                  |   | 48,664    |  
|Goodwill                                                                                                                                                                                             |  |                                                    | 34,216    |   |                  |   | 34,216    |  
|                                                                                                                                                                                                     |  |                                                    |           |   |                  |   |           |  
|Total assets                                                                                                                                                                                         |  | $                                                  | 1,271,079 |   |                  | $ | 1,327,784 |  
|                                                                                                                                                                                                     |  |                                                    |           |   |                  |   |           |  
|Liabilities and Stockholders Equity                                                                                                                                                                 |  |                                                    |           |   |                  |   |           |  
|Liabilities:                                                                                                                                                                                         |  |                                                    |           |   |                  |   |           |  
|Accounts payable                                                                                                                                                                                     |  | $                                                  | 6,162     |   |                  | $ | 3,169     |  
|Accrued liabilities                                                                                                                                                                                  |  |                                                    | 108,496   |   |                  |   | 108,457   |  
|Payable to stockholder                                                                                                                                                                               |  |                                                    | 55,927    |   |                  |   | 68,371    |  
|Income taxes payable                                                                                                                                                                                 |  |                                                    | 14,832    |   |                  |   | 31,651    |  
|Deferred revenue and other advances                                                                                                                                                                  |  |                                                    | 46,985    |   |                  |   | 24,561    |  
|Borrowings and other debt                                                                                                                                                                            |  |                                                    | 70,059    |   |                  |   | 70,059    |  
|                                                                                                                                                                                                     |  |                                                    |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                    |  |                                                    | 302,461   |   |                  |   | 306,268   |  
|Commitments and contingencies                                                                                                                                                                        |  |                                                    |           |   |                  |   |           |  
|Minority interest                                                                                                                                                                                    |  |                                                    | 2,941     |   |                  |   | 2,941     |  
|Stockholders equity:                                                                                                                                                                                |  |                                                    |           |   |                  |   |           |  
|Class A common stock, par value $.01 per share, 350,000,000 shares authorized, 95,211,372 and 93,547,321 shares issued, as of
September 30, 2008 and December 31, 2007, respectively                 |  |                                                    | 952       |   |                  |   | 935       |  
|Class B common stock, par value $.01 per share, 150,000,000 shares authorized, 11,419,461 and 12,984,461 shares issued and outstanding, as of
September 30, 2008 and December 31, 2007, respectively |  |                                                    | 114       |   |                  |   | 130       |  
|Additional paid-in capital                                                                                                                                                                           |  |                                                    | 865,113   |   |                  |   | 831,115   |  
|Retained earnings                                                                                                                                                                                    |  |                                                    | 593,706   |   |                  |   | 502,763   |  
|Less: Class A Treasury common stock, at cost, 17,027,042 and 10,445,278 shares, as of September 30, 2008 and December 31, 2007,
respectively                                                         |  |                                                    | (494,208  | ) |                  |   | (316,368  | )
|                                                                                                                                                                                                     |  |                                                    |           |   |                  |   |           |  
|Total stockholders equity                                                                                                                                                                           |  |                                                    | 965,677   |   |                  |   | 1,018,575 |  
|                                                                                                                                                                                                     |  |                                                    |           |   |                  |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                           |  | $                                                  | 1,271,079 |   |                  | $ | 1,327,784 |  
|                                                                                                                                                                                                     |  |                                                    |           |   |                  |   |           |  

See accompanying notes.



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DREAMWORKS ANIMATION SKG, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



|                                                      |  |                                          |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ---------------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                      |  | Three Months EndedSeptember 30,          |         |   | Nine Months EndedSeptember 30, |  
|                                                      |  | 2008                                     |         |   | 2007                           |   |         | 2008 |  |   | 2007    |  
|                                                      |  | (in thousands, except per share amounts) |        
|Revenues                                              |  | $                                        | 151,525 |   |                                | $ | 160,751 |      |  | $ | 450,227 |   |  | $ | 476,950 |  
|Costs of revenues                                     |  |                                          | 75,518  |   |                                |   | 70,028  |      |  |   | 248,101 |   |  |   | 234,152 |  
|                                                      |  |                                          |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                                          |  |                                          | 76,007  |   |                                |   | 90,723  |      |  |   | 202,126 |   |  |   | 242,798 |  
|Selling, general and administrative expenses          |  |                                          | 29,872  |   |                                |   | 23,826  |      |  |   | 84,043  |   |  |   | 77,062  |  
|                                                      |  |                                          |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Operating income                                      |  |                                          | 46,135  |   |                                |   | 66,897  |      |  |   | 118,083 |   |  |   | 165,736 |  
|Interest income, net                                  |  |                                          | 2,312   |   |                                |   | 6,571   |      |  |   | 7,769   |   |  |   | 19,224  |  
|Other income, net                                     |  |                                          | 1,444   |   |                                |   | 1,478   |      |  |   | 3,301   |   |  |   | 4,361   |  
|Increase in income tax benefit payable to stockholder |  |                                          | (7,760  | ) |                                |   | (21,968 | )    |  |   | (25,200 | ) |  |   | (51,694 | )
|                                                      |  |                                          |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income before income taxes                            |  |                                          | 42,131  |   |                                |   | 52,978  |      |  |   | 103,953 |   |  |   | 137,627 |  
|Provision for income taxes                            |  |                                          | 4,780   |   |                                |   | 5,936   |      |  |   | 13,010  |   |  |   | 13,407  |  
|                                                      |  |                                          |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income                                            |  | $                                        | 37,351  |   |                                | $ | 47,042  |      |  | $ | 90,943  |   |  | $ | 124,220 |  
|                                                      |  |                                          |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic net income per share                            |  | $                                        | 0.42    |   |                                | $ | 0.47    |      |  | $ | 1.00    |   |  | $ | 1.22    |  
|Diluted net income per share                          |  | $                                        | 0.41    |   |                                | $ | 0.47    |      |  | $ | 0.99    |   |  | $ | 1.22    |  
|Shares used in computing net income per share         |  |                                          |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                 |  |                                          | 89,281  |   |                                |   | 99,367  |      |  |   | 90,667  |   |  |   | 101,593 |  
|Diluted                                               |  |                                          | 90,665  |   |                                |   | 99,891  |      |  |   | 91,755  |   |  |   | 102,043 |  





See accompanying notes.



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DREAMWORKS ANIMATION SKG, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                  |  |                                |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Nine Months EndedSeptember 30, |         
|                                                                                  |  | 2008                           |          |   | 2007 |  
|                                                                                  |  | (in thousands)                 |         
|Operating activities                                                              |  |                                |          |   |      |   |          |  
|Net income                                                                        |  | $                              | 90,943   |   |      | $ | 124,220  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                |          |   |      |   |          |  
|Amortization and write off of film costs                                          |  |                                | 225,884  |   |      |   | 219,949  |  
|Stock compensation expense                                                        |  |                                | 28,533   |   |      |   | 25,467   |  
|Depreciation and amortization                                                     |  |                                | 10,381   |   |      |   | 6,829    |  
|Revenue earned against deferred revenue and other advances                        |  |                                | (58,419  | ) |      |   | (65,478  | )
|Deferred taxes, net                                                               |  |                                | 591      |   |      |   | (26,953  | )
|Change in operating assets and liabilities:                                       |  |                                |          |   |      |   |          |  
|Trade accounts receivable                                                         |  |                                | (11,497  | ) |      |   | (3,049   | )
|Receivable from Paramount                                                         |  |                                | 200,680  |   |      |   | 105,307  |  
|Film costs                                                                        |  |                                | (303,704 | ) |      |   | (289,035 | )
|Prepaid expenses and other assets                                                 |  |                                | 11,120   |   |      |   | (29,999  | )
|Accounts payable and accrued liabilities                                          |  |                                | 2,910    |   |      |   | 52,714   |  
|Payable to stockholder                                                            |  |                                | (12,444  | ) |      |   | 29,852   |  
|Income taxes payable, net                                                         |  |                                | (16,991  | ) |      |   | 25,249   |  
|Deferred revenue and other advances                                               |  |                                | 88,877   |   |      |   | 60,512   |  
|                                                                                  |  |                                |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                                | 256,864  |   |      |   | 235,585  |  
|                                                                                  |  |                                |          |   |      |   |          |  
|Investing activities                                                              |  |                                |          |   |      |   |          |  
|Purchases of property, plant and equipment                                        |  |                                | (34,088  | ) |      |   | (5,466   | )
|                                                                                  |  |                                |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                                | (34,088  | ) |      |   | (5,466   | )
|                                                                                  |  |                                |          |   |      |   |          |  
|Financing Activities                                                              |  |                                |          |   |      |   |          |  
|Purchase of treasury stock                                                        |  |                                | (177,840 | ) |      |   | (194,356 | )
|Other                                                                             |  |                                | 480      |   |      |   | 1,617    |  
|                                                                                  |  |                                |          |   |      |   |          |  
|Net cash used in financing activities                                             |  |                                | (177,360 | ) |      |   | (192,739 | )
|                                                                                  |  |                                |          |   |      |   |          |  
|Increase in cash and cash equivalents                                             |  |                                | 45,416   |   |      |   | 37,380   |  
|Cash and cash equivalents at beginning of period                                  |  |                                | 292,489  |   |      |   | 506,304  |  
|                                                                                  |  |                                |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                              | 337,905  |   |      | $ | 543,684  |  
|                                                                                  |  |                                |          |   |      |   |          |  
|Supplemental disclosure of cash flow information:                                 |  |                                |          |   |      |   |          |  
|Cash paid during the period for income taxes, net                                 |  | $                              | 29,271   |   |      | $ | 14,835   |  
|                                                                                  |  |                                |          |   |      |   |          |  
|Cash paid during the period for interest, net of amounts capitalized              |  | $                              | 719      |   |      | $ |         |  
|                                                                                  |  |                                |          |   |      |   |          |  

See accompanying notes.



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DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Basis of Presentation

Business

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

Basis of Presentation and Use of Estimates

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

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

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

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

Certain amounts in the
prior periods consolidated financial statements have been reclassified to conform to the current periods presentation.



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DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Recent Accounting Pronouncements

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

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

2. Film Costs

Film costs consist of the following (in thousands):



|                                |  |                   |         |                  |   |        
|------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                |  | September 30,2008 |         | December 31,2007
|                                |  | (unaudited)       |         |                 
|In release, net of amortization |  | $                 | 238,348 |                  | $ | 267,724
|In production                   |  |                   | 346,158 |                  |   | 239,450
|In development                  |  |                   | 38,464  |                  |   | 34,743 
|                                |  |                   |         |                  |   |        
|Total film costs                |  | $                 | 622,970 |                  | $ | 541,917
|                                |  |                   |         |                  |   |        

The Company anticipates that 50% and 87% of in release film costs as of
September 30, 2008 will be amortized over the next 12 months and three years, respectively.



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DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



3. Property, Plant and Equipment

Property, plant and equipment consist of the following (in thousands):



|                                          |  |                   |         |   |                  |   |         |  
|----------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                          |  | September 30,2008 |         |   | December 31,2007 |  
|                                          |  | (unaudited)       |         |   |                  |  
|Land, buildings and improvements          |  | $                 | 127,127 |   |                  | $ | 117,060 |  
|Furniture and equipment                   |  |                   | 13,409  |   |                  |   | 9,811   |  
|Computer hardware and software            |  |                   | 24,279  |   |                  |   | 13,456  |  
|                                          |  |                   |         |   |                  |   |         |  
|Total property, plant and equipment       |  |                   | 164,815 |   |                  |   | 140,327 |  
|Accumulated depreciation and amortization |  |                   | (60,864 | ) |                  |   | (53,555 | )
|                                          |  |                   |         |   |                  |   |         |  
|Property, plant and equipment, net        |  | $                 | 103,951 |   |                  | $ | 86,772  |  
|                                          |  |                   |         |   |                  |   |         |  

4. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):



|                             |  |                   |         |                  |   |        
|---------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                             |  | September 30,2008 |         | December 31,2007
|                             |  | (unaudited)       |         |                 
|Employee compensation        |  | $                 | 48,696  |                  | $ | 54,675 
|Participations and residuals |  |                   | 44,482  |                  |   | 37,275 
|Deferred rent                |  |                   | 6,326   |                  |   | 6,686  
|Other accrued liabilities    |  |                   | 8,992   |                  |   | 9,821  
|                             |  |                   |         |                  |   |        
|Total accrued liabilities    |  | $                 | 108,496 |                  | $ | 108,457
|                             |  |                   |         |                  |   |        

As of September 30, 2008, the Company estimates that in the next 12 months it will pay
approximately $25.7 million of it accrued participation and residual costs.

5. Deferred Revenue and Other Advances

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



|                                          |  |                   |        |                  |   |                                 |  |                                |        |      |   |        |  |   |        |  |   |       
|----------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------------------------------- |  | ------------------------------ | ------ | ---- | - | ------ |  | - | ------ |  | - | ------
|                                          |  |                   |        |                  |   | Amounts Earned                 
|                                          |  | September 30,2008 |        | December 31,2007 |   | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|                                          |  |                   |        | 2008             |   | 2007                            |  | 2008                           |        | 2007
|                                          |  | (unaudited)       |        |                  |   | (unaudited)                    
|Home Box Office Inc., Advance             |  | $                 |       |                  | $ |                                |  | $                              | 13,333 |      | $ | 13,628 |  | $ | 26,666 |  | $ | 27,550
|Strategic Alliance/Development Advance(1) |  |                   | 3,316  |                  |   | 2,104                           |  |                                | 3,811  |      |   | 4,491  |  |   | 11,788 |  |   | 10,115
|Deferred Revenue                          |  |                   | 12,135 |                  |   | 5,594                           |  |                                | 837    |      |   | 792    |  |   | 10,820 |  |   | 18,387
|Licensing Advances                        |  |                   | 26,472 |                  |   | 13,185                          |  |                                | 391    |      |   | 360    |  |   | 1,713  |  |   | 8,120 
|Other Advances                            |  |                   | 5,062  |                  |   | 3,678                           |  |                                | 358    |      |   | 591    |  |   | 5,466  |  |   | 5,148 
|                                          |  |                   |        |                  |   |                                 |  |                                |        |      |   |        |  |   |        |  |   |       
|Total deferred revenue and other advances |  | $                 | 46,985 |                  | $ | 24,561                          |  |                                |        |      |   |        |  |   |        |  |   |       
|                                          |  |                   |        |                  |   |                                 |  |                                |        |      |   |        |  |   |        |  |   |       



|(1) | Of the total amounts earned against the Strategic Alliance/Development Advances, $2.4 million for each of
the three-month periods ended September 30, 2008 and 2007, and $8.0 million and $3.8 million, respectively, for the nine months ended September 30, 2008 and 2007, were capitalized as an offset to film costs or property, plant and
equipment.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



7



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##### Table of Contents

DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



6. Financing Arrangements

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

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

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



|                              |  |                     |        |                  |   |                                     |  |              |                                |       |               |                               |   |      |     |  |      |       |     |  |   |       |     |  |   |       |    
|----------------------------- |  | ------------------- | ------ | ---------------- | - | ----------------------------------- |  | ------------ | ------------------------------ | ----- | ------------- | ----------------------------- | - | ---- | --- |  | ---- | ----- | --- |  | - | ----- | --- |  | - | ----- | ---
|                              |  |                     |        |                  |   |                                     |  |              |                                |       | Interest Cost |                              
|                              |  | Balance Outstanding |        | Maturity Date    |   | InterestRate as ofSeptember 30,2008 |  |              | Three MonthsEndedSeptember 30, |       |               | Nine MonthsEndedSeptember 30, |  
|                              |  | September 30,2008   |        | December 31,2007 |   |                                     |  | 2008         |                                |       | 2007          |                               |   | 2008 |     |  | 2007 |      
|Animation Campus Financing(1) |  | $                   | 73,000 |                  | $ | 73,000                              |  | October 2009 |                                | 2.57  | %             |                               | $ | 706  |     |  | $    | 1,229 |     |  | $ | 2,349 |     |  | $ | 3,594 |    
|New Credit Facility           |  | $                   |       |                  |   | N/A                                 |  | June 2013    |                                | 0.375 | %(2)          |                               | $ | 131  | (2) |  |      | N/A   |     |  | $ | 131   | (2) |  |   | N/A   |    
|Prior Credit Facility(3)      |  |                     | N/A    |                  | $ |                                    |  | N/A          |                                | N/A   |               |                               |   | N/A  |     |  | $    | 192   | (3) |  | $ | 372   | (3) |  | $ | 952   | (3)



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

|(2) | As of September 30, 2008, there was no debt outstanding under the New Credit Facility. The Company is required to
pay a commitment fee of 0.375% per annum on undrawn amounts.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

Interest
Capitalized to Film Costs. Interest capitalized to film costs during the three months ended September 30, 2008 and 2007 totaled $0.7 million and $2.3 million, respectively, and for the nine months ended September 30, 2008 and 2007
totaled $2.3 million and $6.9 million, respectively.



8



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##### Table of Contents

DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



7. Income Taxes

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



|                                                                                 |  |                                 |    |  |                                |    |  |       |    |  |       |   
|-------------------------------------------------------------------------------- |  | ------------------------------- | -- |  | ------------------------------ | -- |  | ----- | -- |  | ----- | --
|                                                                                 |  | Three Months EndedSeptember 30, |    |  | Nine Months EndedSeptember 30, |   
|                                                                                 |  | 2008                            |    |  | 2007                           |    |  | 2008  |    |  | 2007  |   
|                                                                                 |  | (unaudited)                     |   
|Provision for income taxes (excluding effects of Stockholders Tax Agreement)(1) |  |                                 |    |  |                                |    |  |       |    |  |       |   
|U.S. Federal statutory rate                                                      |  | 35.0                            | %  |  | 35.0                           | %  |  | 35.0  | %  |  | 35.0  | % 
|U.S. state taxes, net of Federal benefit                                         |  | 1.3                             |    |  | 2.4                            |    |  | 1.7   |    |  | 2.1   |   
|Revaluation of deferred tax assets, net                                          |  | (4.9                            | )  |  | (15.8                          | )  |  | (4.1  | )  |  | (8.8  | ) 
|Other                                                                            |  | (6.3                            | )  |  | 0.9                            |    |  | (3.0  | )  |  | 0.3   |   
|                                                                                 |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Total provision excluding effect of Stockholders Tax Agreement(1)               |  | 25.1                            | %  |  | 22.5                           | %  |  | 29.6  | %  |  | 28.6  | % 
|                                                                                 |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Effects of Stockholders Tax Agreement(1)                                        |  |                                 |    |  |                                |    |  |       |    |  |       |   
|U.S. state taxes, net of Federal benefit                                         |  | (0.7                            | )  |  | (1.3                           | )  |  | (1.0  | )  |  | (1.0  | ) 
|Revaluation of deferred tax assets, net                                          |  | (17.4                           | )  |  | (16.0                          | )  |  | (19.9 | )  |  | (22.6 | ) 
|Other                                                                            |  | 2.6                             |    |  | 2.7                            |    |  | 1.4   |    |  | 2.1   |   
|                                                                                 |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Total effect of Stockholders Tax Agreement(1)                                   |  | (15.5                           | )% |  | (14.6                          | )% |  | (19.5 | )% |  | (21.5 | )%
|                                                                                 |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Total net provision for income taxes                                             |  | 9.6                             | %  |  | 7.9                            | %  |  | 10.1  | %  |  | 7.1   | % 
|                                                                                 |  |                                 |    |  |                                |    |  |       |    |  |       |   



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

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

8. Stockholders
Equity

Class A Common Stock

Stock Repurchase Programs.In December 2007, the Companys Board of Directors approved a stock repurchase program pursuant to which the Company was authorized to repurchase up to an aggregate of $150 million of its
outstanding stock. In July 2008, the Companys Board of Directors terminated the December 2007 share repurchase program, which had approximately $62 million of unused authorization, and approved a new stock repurchase program pursuant to which
the Company may repurchase up to an additional aggregate of $150 million of its outstanding stock. Pursuant to these programs, from January 1, 2008 through September 30, 2008, the Company repurchased approximately 6.5 million shares
of its outstanding Class A common stock for approximately $177 million. As of September 30, 2008, the Company had remaining authorization under the July 2008 stock repurchase program to repurchase approximately $61 million of its
outstanding stock.



9



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##### Table of Contents

DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Class B Common Stock

Conversion of Class B Common Stock.In May 2008 and July 2008, David Geffen, a significant stockholder and member of the Companys Board of Directors, converted 1,100,000 and 465,000 shares,
respectively, of the Companys Class B common stock into an equal amount of shares of the Companys Class A common. Upon conversion, these shares were immediately donated to a charitable organization established by Mr. Geffen.
These transactions had no impact on the total amount of the Companys shares outstanding.

9. Equity-Based Compensation

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

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



|                                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                |  | 2008                            |        |   | 2007                           |   |        | 2008 |  |   | 2007   |  
|                                |  | (unaudited)                     |       
|Total equity-based compensation |  | $                               | 10,256 |   |                                | $ | 6,318  |      |  | $ | 28,533 |   |  | $ | 25,467 |  
|Tax impact(1)                   |  |                                 | (2,574 | ) |                                |   | (1,422 | )    |  |   | (8,446 | ) |  |   | (7,284 | )
|                                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Reduction in net income         |  | $                               | 7,682  |   |                                | $ | 4,896  |      |  | $ | 20,087 |   |  | $ | 18,183 |  
|                                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  



|(1) | Tax impact is determined at the Companys blended effective tax rate, excluding the effect of the
Stockholders Tax Agreement (see Note 7).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

Equity-based compensation cost capitalized as a part of film costs was
$1.4 million and $0.9 million for the three-month periods ended September 30, 2008 and 2007, respectively, and $4.3 million and $2.5 million for the nine-month periods ended September 30, 2008 and 2007, respectively.



10



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##### Table of Contents

DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                            |  |                                 |  |                                |       |                |     |                           |   |      
|------------------------------------------- |  | ------------------------------- |  | ------------------------------ | ----- | -------------- | --- | ------------------------- | - | -----
|                                            |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|                                            |  | NumberGranted                   |  | WeightedAverage FairValue      |       | NumberGranted  |     | WeightedAverage FairValue
|                                            |  | (unaudited)                    
|                                            |  | (in thousands)                  |  |                                |       | (in thousands) |     |                          
|2008                                        |  |                                 |  |                                |       |                |     |                           |   |      
|Stock appreciation rights                   |  | 49                              |  | $                              | 12.25 |                | 107 |                           | $ | 11.02
|Restricted stock and restricted stock units |  | 76                              |  | $                              | 29.72 |                | 130 |                           | $ | 28.59
|2007                                        |  |                                 |  |                                |       |                |     |                           |   |      
|Stock appreciation rights                   |  | 131                             |  | $                              | 14.42 |                | 165 |                           | $ | 13.91
|Restricted stock and restricted stock units |  | 44                              |  | $                              | 32.86 |                | 94  |                           | $ | 30.37

As of September 30, 2008, the total compensation cost related to unvested equity awards
granted to employees (excluding equity awards with performance objectives deemed not probable of achievement) but not yet recognized was approximately $53.4 million. This cost will be amortized on a straight-line basis over a weighted average life
of approximately 2 years.

10. Significant Customer and Segment Information

Significant Customer.Paramount represented 78.6% and 90.3% of total revenue for the three-month periods ended September 30, 2008 and
2007, respectively, and 73.1% and 87.9% for the nine-month periods ended September 30, 2008 and 2007, respectively.

Revenue by Film.

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



|                        |  |                                 |         |                                |   |         |  |      |         |  |   |        
|----------------------- |  | ------------------------------- | ------- | ------------------------------ | - | ------- |  | ---- | ------- |  | - | -------
|                        |  | Three Months EndedSeptember 30, |         | Nine Months EndedSeptember 30,
|                        |  | 2008                            |         | 2007                           |   | 2008    |  | 2007
|                        |  | (unaudited)                    
|Kung Fu Panda           |  | $                               | 63,281  |                                | $ |        |  | $    | 109,719 |  | $ |       
|Shrek the Third         |  |                                 | 32,526  |                                |   | 92,075  |  |      | 110,648 |  |   | 201,173
|Bee Movie               |  |                                 | 27,266  |                                |   |        |  |      | 101,721 |  |   |       
|Over the Hedge          |  |                                 | 2,443   |                                |   | 17,847  |  |      | 11,945  |  |   | 77,776 
|Flushed Away            |  |                                 | 2,589   |                                |   | 17,298  |  |      | 22,521  |  |   | 30,870 
|Film Library / Other(1) |  |                                 | 23,420  |                                |   | 33,531  |  |      | 93,673  |  |   | 167,131
|                        |  |                                 |         |                                |   |         |  |      |         |  |   |        
|                        |  | $                               | 151,525 |                                | $ | 160,751 |  | $    | 450,227 |  | $ | 476,950
|                        |  |                                 |         |                                |   |         |  |      |         |  |   |        



|(1) | Primarily includes film library revenue from Antz, Prince of Egypt, The Road to El Dorado, Chicken Run, Joseph: King
of Dreams, Shrek, Spirit: Stallion of the Cimarron, Sinbad: Legend of the Seven Seas, Shrek 2, Shark Tale, Madagascar, and Wallace & Gromit: The Curse of the Were-Rabbitand other revenues which include the 2007 television special
Shrek the Halls.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

DREAMWORKS ANIMATION SKG, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



11. Commitments and Contingencies

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

12. Net Income Per Share

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



|                                                                       |  |                                 |        |   |                                |   |         |      |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                       |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                       |  | 2008                            |        |   | 2007                           |   |         | 2008 |  |   | 2007   |  
|                                                                       |  | (unaudited)                     |       
|Numerator:                                                             |  |                                 |        |   |                                |   |         |      |  |   |        |   |  |   |         |  
|Net income                                                             |  | $                               | 37,351 |   |                                | $ | 47,042  |      |  | $ | 90,943 |   |  | $ | 124,220 |  
|Denominator:                                                           |  |                                 |        |   |                                |   |         |      |  |   |        |   |  |   |         |  
|Weighted average common shares and denominator for basic calculation:  |  |                                 |        |   |                                |   |         |      |  |   |        |   |  |   |         |  
|Weighted average common shares outstanding                             |  |                                 | 91,262 |   |                                |   | 101,734 |      |  |   | 92,648 |   |  |   | 103,960 |  
|Less: Unvested restricted stock                                        |  |                                 | (1,981 | ) |                                |   | (2,367  | )    |  |   | (1,981 | ) |  |   | (2,367  | )
|                                                                       |  |                                 |        |   |                                |   |         |      |  |   |        |   |  |   |         |  
|Denominator for basic calculation                                      |  |                                 | 89,281 |   |                                |   | 99,367  |      |  |   | 90,667 |   |  |   | 101,593 |  
|                                                                       |  |                                 |        |   |                                |   |         |      |  |   |        |   |  |   |         |  
|Weighted average effects of dilutive equity-based compensation awards: |  |                                 |        |   |                                |   |         |      |  |   |        |   |  |   |         |  
|Employee stock options and stock appreciation rights                   |  |                                 | 120    |   |                                |   | 161     |      |  |   | 111    |   |  |   | 168     |  
|Restricted stock awards                                                |  |                                 | 1,264  |   |                                |   | 363     |      |  |   | 977    |   |  |   | 282     |  
|                                                                       |  |                                 |        |   |                                |   |         |      |  |   |        |   |  |   |         |  
|Denominator for diluted calculation                                    |  |                                 | 90,665 |   |                                |   | 99,891  |      |  |   | 91,755 |   |  |   | 102,043 |  
|                                                                       |  |                                 |        |   |                                |   |         |      |  |   |        |   |  |   |         |  
|Net income per sharebasic                                             |  | $                               | 0.42   |   |                                | $ | 0.47    |      |  | $ | 1.00   |   |  | $ | 1.22    |  
|Net income per sharediluted                                           |  | $                               | 0.41   |   |                                | $ | 0.47    |      |  | $ | 0.99   |   |  | $ | 1.22    |  

The following table sets forth (in thousands) the weighted average number of options to purchase
shares of common stock, stock appreciation rights, and equity awards subject to performance conditions which were not included in the calculation of diluted per share amounts because they were anti-dilutive.



|                                                |  |                                 |  |                                |  |       |  |      
|----------------------------------------------- |  | ------------------------------- |  | ------------------------------ |  | ----- |  | -----
|                                                |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|                                                |  | 2008                            |  | 2007                           |  | 2008  |  | 2007 
|                                                |  | (unaudited)                    
|Options to purchase shares of common stock      |  | 1,864                           |  | 1,336                          |  | 1,685 |  | 1,280
|Stock appreciations rights                      |  | 2,497                           |  | 1,118                          |  | 2,504 |  | 1,279
|Equity awards subject to performance conditions |  |                                |  | 1,849                          |  |      |  | 1,849
|                                                |  |                                 |  |                                |  |       |  |      
|Total                                           |  | 4,361                           |  | 4,303                          |  | 4,189 |  | 4,408
|                                                |  |                                 |  |                                |  |       |  |      



12



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##### Table of Contents

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

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

Overview

Our Business and Distribution and Servicing Arrangements

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

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



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

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



13



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##### Table of Contents

Our primary operating expenses include:



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



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

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

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

Seasonality

Our revenues fluctuate based upon the timing of our films theatrical and home entertainment releases and the recoupment position of our distributor on a film-by-film basis, which varies depending upon a films overall
performance. 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.



14



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##### Table of Contents

Results of Operations

Overview of Financial Results

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



|                                                                 |  |                                                      |       |   |                                |   |       |          |  |   |          |   |  |       |    |  |      |       |   |          |   |       |          |  |   |       |   |  |       |   
|---------------------------------------------------------------- |  | ---------------------------------------------------- | ----- | - | ------------------------------ | - | ----- | -------- |  | - | -------- | - |  | ----- | -- |  | ---- | ----- | - | -------- | - | ----- | -------- |  | - | ----- | - |  | ----- | --
|                                                                 |  | Three Months EndedSeptember 30,                      |       |   | Nine Months EndedSeptember 30, |  
|                                                                 |  | 2008                                                 |       |   | 2007                           |   |       | $ Change |  |   | % Change |   |  | 2008  |    |  | 2007 |       |   | $ Change |   |       | % Change | 
|                                                                 |  | (unaudited)                                          |      
|                                                                 |  | (in millions, except percentages and per share data) |      
|Revenues                                                         |  | $                                                    | 151.5 |   |                                | $ | 160.7 |          |  | $ | (9.2     | ) |  | (5.7  | )% |  | $    | 450.2 |   |          | $ | 477.0 |          |  | $ | (26.8 | ) |  | (5.6  | )%
|Costs of revenues                                                |  |                                                      | 75.5  |   |                                |   | 70.0  |          |  |   | (5.5     | ) |  | (7.9  | )% |  |      | 248.1 |   |          |   | 234.2 |          |  |   | (13.9 | ) |  | (5.9  | )%
|Selling, general and administrative expenses                     |  |                                                      | 29.9  |   |                                |   | 23.8  |          |  |   | (6.1     | ) |  | (25.6 | )% |  |      | 84.0  |   |          |   | 77.1  |          |  |   | (6.9  | ) |  | (8.9  | )%
|                                                                 |  |                                                      |       |   |                                |   |       |          |  |   |          |   |  |       |    |  |      |       |   |          |   |       |          |  |   |       |   |  |       |   
|Operating income                                                 |  |                                                      | 46.1  |   |                                |   | 66.9  |          |  |   | (20.8    | ) |  | (31.1 | )% |  |      | 118.1 |   |          |   | 165.7 |          |  |   | (47.6 | ) |  | (28.7 | )%
|Interest income, net                                             |  |                                                      | 2.3   |   |                                |   | 6.6   |          |  |   | (4.3     | ) |  | (65.2 | )% |  |      | 7.7   |   |          |   | 19.2  |          |  |   | (11.5 | ) |  | (59.9 | )%
|Other income, net                                                |  |                                                      | 1.4   |   |                                |   | 1.5   |          |  |   | (0.1     | ) |  | (6.7  | )% |  |      | 3.3   |   |          |   | 4.4   |          |  |   | (1.1  | ) |  | (25.0 | )%
|Increase in income tax benefit payable to stockholder            |  |                                                      | (7.7  | ) |                                |   | (22.0 | )        |  |   | 14.3     |   |  | 65.0  | %  |  |      | (25.2 | ) |          |   | (51.7 | )        |  |   | 26.5  |   |  | 51.3  | % 
|                                                                 |  |                                                      |       |   |                                |   |       |          |  |   |          |   |  |       |    |  |      |       |   |          |   |       |          |  |   |       |   |  |       |   
|Income before income taxes                                       |  |                                                      | 42.1  |   |                                |   | 53.0  |          |  |   | (10.9    | ) |  | (20.6 | )% |  |      | 103.9 |   |          |   | 137.6 |          |  |   | (33.7 | ) |  | (24.5 | )%
|Provision for income taxes                                       |  |                                                      | 4.8   |   |                                |   | 5.9   |          |  |   | 1.1      |   |  | 18.6  | %  |  |      | 13.0  |   |          |   | 13.4  |          |  |   | 0.4   |   |  | 3.0   | % 
|                                                                 |  |                                                      |       |   |                                |   |       |          |  |   |          |   |  |       |    |  |      |       |   |          |   |       |          |  |   |       |   |  |       |   
|Net income                                                       |  | $                                                    | 37.3  |   |                                | $ | 47.1  |          |  | $ | (9.8     | ) |  | (20.8 | )% |  | $    | 90.9  |   |          | $ | 124.2 |          |  | $ | (33.3 | ) |  | (26.8 | )%
|                                                                 |  |                                                      |       |   |                                |   |       |          |  |   |          |   |  |       |    |  |      |       |   |          |   |       |          |  |   |       |   |  |       |   
|Diluted net income per share                                     |  | $                                                    | 0.41  |   |                                | $ | 0.47  |          |  | $ | (0.06    | ) |  | (12.8 | )% |  | $    | 0.99  |   |          | $ | 1.22  |          |  | $ | (0.23 | ) |  | (18.9 | )%
|                                                                 |  |                                                      |       |   |                                |   |       |          |  |   |          |   |  |       |    |  |      |       |   |          |   |       |          |  |   |       |   |  |       |   
|Diluted shares used in computing diluted net income per share(1) |  |                                                      | 90.7  |   |                                |   | 99.9  |          |  |   | N/A      |   |  | 9.2   | %  |  |      | 91.8  |   |          |   | 102.0 |          |  |   | N/A   |   |  | 10.0  | % 
|                                                                 |  |                                                      |       |   |                                |   |       |          |  |   |          |   |  |       |    |  |      |       |   |          |   |       |          |  |   |       |   |  |       |   



|(1) | During the three- and nine-month periods ended September 30, 2008, and the year ended December 31, 2007, we
repurchased a total of 2.9 million, 6.6 million and 10.1 million shares of our Class A common stock, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15



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##### Table of Contents

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

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

LOGO



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

Revenues. For
the three months ended September 30, 2008, our revenue was $151.5 million, a decrease of $9.2 million, or 5.7%, as compared to $160.8 million for the three months ended September 30, 2007. As illustrated in the revenue chart above, the
decrease in revenue in the third quarter of 2008 as compared to the third quarter of 2007 was primarily related to the comparative performance of the films comprising the Current year theatrical releases category being largely offset by
the stronger performance of the Prior year theatrical releases category. Kung Fu Panda, our most recent theatrical release, while contributing 41% of the total revenue for the third quarter of 2008, contributed approximately $28.8
million less revenue than the higher-grossing Shrek the Third for the comparable period of 2007.However, the stronger performance of our 2008 Prior year theatrical releases (Shrek the ThirdandBee Movie)as
compared to 2007s Prior year theatrical releases(Over the Hedge and Flushed Away)largely offset the decline in revenue for the Current year theatrical releases category.

Revenue for the quarter ended September 30, 2008, was comprised of amounts earned by a variety of films. Kung Fu Panda, our most recent
theatrical release and single greatest source of revenue for the quarter, contributed $63.3 million earned primarily in the worldwide theatrical market and through ancillary revenue sources. Bee Movie, our 2007 fourth quarter release,
generated $27.3 million of revenue primarily attributable to the domestic television and worldwide home entertainment markets and Shrek the Third earned an additional $32.5 million of revenue earned primarily in the international television
market. Over the Hedge and Flushed Awaycontributed revenues totaling of $5.0 million earned primarily in the international television markets. Our other properties, including our library titles which include Madagascar, Shrek 2
and Shrek, contributed revenues totaling $23.4 million earned across a variety of worldwide markets.

For the third quarter of 2007,
a variety of films across several markets contributed to our total revenue of $160.7 million: Shrek the Third, the single greatest source of revenue, contributed $92.1 million of revenue earned primarily in the international theatrical market
and ancillary markets, which includes merchandising and licensing; Flushed Away, our 2006 fourth quarter theatrical release, generated revenue totaling $17.3 million



16



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##### Table of Contents

attributable to the domestic pay television and worldwide home entertainment markets; and Over the Hedge contributed $17.8 million of revenue earned
largely in the international pay television and worldwide home entertainment markets. Our other films, including our library titles which include Shrek 2, contributed revenues totaling $33.6 million attributable primarily to the international
television and worldwide home entertainment markets.

Costs of Revenues. Costs of revenues increased by $5.5 million, or 7.9%,
to $75.5 million for the three months ended September 30, 2008. Cost of revenues (the primary component of which is film amortization costs) as a percentage of film revenue was 49.8% for the three months ended September 30, 2008 compared
to 43.6% for the three months ended September 30, 2007. While the amortization rate for the films comprising each quarters respective Current year theatrical releases category was fairly comparable, the increase in
amortization of film costs as a percentage of film revenue for the three months ended September 30, 2008 was primarily due to the combined higher rate of amortization for our 2008 Prior year theatrical releases (Shrek the ThirdandBee Movie)for the three months ended September 30, 2008, as compared to the amortization rate for our 2007 Prior year theatrical releases (Over the HedgeandFlushed Away)during the comparable period
of 2007.This increase in amortization rates between the periods was slightly offset by the lower rates of amortization for the All Other category during the quarter ended September 30, 2008 as compared to the quarter ended
September 30, 2007.

Selling, General and Administrative Expenses. Selling, general and administrative expenses (including
stock compensation expense) totaled $29.9 million for the three months ended September 30, 2008, an increase of $6.1 million from $23.8 million for the three months ended September 30, 2007. The increase in selling, general and
administrative expenses is largely related to approximately $3.7 million of higher stock compensation expense, which is generally due to the continued growth in the number of equity awards granted to the overall employee base and the impact of the
revision to the terms of certain equity grants, approximately $1.2 million of higher facilities costs related to the expansion of the Companys headquarters, and the impact of new business initiatives.

Operating Income. Operating income for the three months ended September 30, 2008 was $46.1 million compared to $66.9 million for the
comparable period of 2007. The decrease of $20.8 million in operating income for the three months ended September 30, 2008 was primarily due to the stronger performance of Shrek the Third during the three months ended September 30,
2007 as compared to our most current theatrical release, Kung Fu Panda,during the comparable period of 2008 and increased selling, general and administrative expenses.

Interest Income, Net. For the three months ended September 30, 2008, total net interest income was $2.3 million, a decrease of $4.3
million or 65.2% from $6.6 million for the same period of 2007. The decrease in net interest income for the third quarter of 2008 as compared to the third quarter of 2007 was mainly due to lower average rates of interest earned on cash and cash
equivalents and, to a lesser extent, lower average balances of cash and cash equivalents largely due to the stock repurchases made throughout 2007 and continuing in 2008.

Interest expense capitalized to production film costs was $0.7 million and $2.3 million for the three months ended September 2008 and 2007, respectively. The $1.6 million decrease between the periods was primarily due
to the decrease in amount of interest expense eligible for capitalization during the third quarter of 2008 because of the repayment of debt in 2007 and lower interest rates in 2008 associated with our various financing arrangements.

Other Income, Net. For the three months ended September 30, 2008 total other income was $1.4 million and remained relatively unchanged
from that for the third quarter of 2007. Other income in both years consisted entirely of income recognized in connection with preferred vendor arrangements.

Increase in Income Tax Benefit Payable to Stockholder. As a result of a partial increase in the tax basis of our tangible and intangible assets attributable to transactions entered into by affiliates
controlled by a stockholder (Tax Basis Increase), we may pay reduced tax amounts to the extent we generate sufficient taxable income in the future. As discussed below in Critical Accounting Policies and
EstimatesProvision for Income Taxes,



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we are obligated to remit to such affiliates 85% of any cash savings in U.S. Federal income tax and California franchise tax and certain other related tax
benefits, subject to repayment if it is determined that these savings should not have been available to us. For the quarter ended September 30, 2008, we recorded $9.1 million in net tax benefits associated with the Tax Basis Increase as a
reduction in the provision for income taxes and recorded an expense of $7.7 million representing 85% of these recognized benefits to increase income tax benefit payable to stockholder.

During the quarter ended September 30, 2007, we recognized $25.8 million in net tax benefits associated with the Tax Basis Increase as an increase
in the provision for income taxes and recorded an expense of $22.0 million representing 85% of these recognized benefits to increase the income tax benefit payable to stockholder for the three months ended September 30, 2007.

Provision for Income Taxes. For the three months ended September 30, 2008 and 2007, we recorded a provision for income taxes of $4.8
million and $5.9 million, respectively, or an effective tax rate of 9.6% and 7.9%, respectively. The quarter-over-quarter change in the effective tax rate is driven by changes in the valuation allowance required against the deferred tax assets. Our
effective tax rate for both periods was lower than the 35% statutory federal rate because of the decrease in our valuation allowance for deferred tax assets primarily resulting from the increase in the net tax benefits recognized from the Tax Basis
Increase as described above. However, when our provision for income taxes is combined with the amounts associated with the Increase in Income Tax Benefit Payable to Shareholder (see above), the combined percentages remain relatively consistent
between the three months ended September 30, 2008 and September 30, 2007, at 25.1% and 22.5%, respectively.

Net
Income. Net income for the three months ended September 30, 2008 was $37.3 million, or $0.41 per diluted share, compared to a net income of $47.1 million, or $0.47 net income per diluted share, in the corresponding period in 2007.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

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

LOGO



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



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Revenues. For the nine months ended September 30, 2008, our revenues totaled $450.2
million, a decrease of $26.8 million, or 5.6%, as compared to $477.0 million for the nine months ended September 30, 2007. As illustrated in the chart above, the change in revenues for the first nine months of 2008 as compared to the
corresponding period in 2007 is a function of the lower revenues contributed by the films comprising the Current year theatrical releases and All Other categories being largely offset by the stronger performance of the
Prior year theatrical releases category. Kung Fu Panda, while performing strong enough to contribute almost a quarter of our total revenue for the nine months ended September 30, 2008, contributed approximately $90 million
less revenue in the first nine months of 2008 than the higher-grossing Shrek the Thirdcontributed during the comparable period of 2007. In addition, the All Other category benefited in the first nine months of 2007 from
$25.5 million of net revenue reported by our current distributor in the second quarter of 2007 associated with the conclusion of the transition of our home entertainment fulfillment services from our prior distributor. Nevertheless, the stronger
performance of our 2008 Prior year theatrical releases (Shrek the ThirdandBee Movie)as compared to 2007s Prior year theatrical releases(Over the Hedge and Flushed Away)largely offset the
decline in revenue for the Current year theatrical releases and All Other categories.

Several films
contributed to our revenue for the nine-month period ended September 30, 2008. Kung Fu Panda, our most recent release, contributed $109.7 million of revenue associated with its worldwide theatrical release and ancillary revenue sources.
In addition to merchandising and licensing revenue, ancillary revenue for Kung Fu Pandaincluded non-recurring revenue associated with the completion of a strategic relationship that accounted for slightly less than a quarter of the
films total revenue for the nine months ended September 30, 2008. Our Prior year theatrical releases, Shrek the Thirdand Bee Movie, generated a total of $212.4 million primarily attributable to the worldwide
theatrical, home entertainment and ancillary markets (including non-recurring revenue associated with strategic relationship that accounted for slightly less than a quarter of Bee Moviestotal revenue for the nine months
ended September 30, 2008) and Over the Hedge, Flushed Awayand Wallace & Gromitcontributed additional revenue of $11.9 million, $22.5 million and $16.1 million, respectively, earned primarily in the international
television and worldwide home entertainment markets. Our other properties, including our library of titles which includes Madagascar, contributed revenues totaling $77.6 million earned principally in the international television and worldwide
home entertainment markets.

For the nine months ended September 30, 2007, a variety of films across several markets contributed to
our total revenue of $477.0 million: Shrek the Third, the single greatest source of revenue, contributed $201.2 million of revenue earned primarily in the worldwide theatrical market and ancillary markets (which includes merchandising and
licensing); Over the Hedge contributed $77.8 million of revenue earned largely in the worldwide home entertainment and domestic pay television markets; Flushed Away contributed $30.9 million earned across a variety of markets; and our
other films, including our library of titles, contributed revenues totaling $167.1 million, respectively, generated primarily in the worldwide television and home entertainment 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 quarter ended June 30, 2007 for several of out titles,
including Wallace & Gromit and some of our library titles, increased by $25.5 million due to a reduction of certain previously recorded estimates of home entertainment product returns and marketing costs.

Costs of Revenues. Costs of revenues increased by $13.9 million, or 5.9%, to $248.1 million for the nine months ended September 30,
2008. Cost of revenues (the primary component of which is film amortization costs) as a percentage of film revenue was 55.1% for the nine months ended September 30, 2008 and 49.1% for the nine months ended September 30, 2007. While the
amortization rates for each periods respective Current year theatrical release (Kung Fu Pandaand Shrek the Third)were largely consistent, the increase in amortization of film costs as a percentage of film revenue
was principally because the combined amortization rate for our 2008 Prior year theatrical releases for the nine months ended September 30, 2008, was higher than that for 2007 Prior year theatrical releases (Over the
HedgeandFlushed Away) during the comparable period of 2007.This increase in amortization rates between the nine-month periods was slightly offset by the combined lower rate of



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amortization for the All Other category during the nine months ended September 30, 2008 as compared to the nine months ended
September 30, 2007.

Selling, General and Administrative Expenses. Total selling, general and administrative expenses
(which includes stock compensation expense) increased by $6.9 million, or 8.9%, to $84.0 million for the nine months ended September 30, 2008 from $77.1 million for the nine months ended September 30, 2007. The increase spans several
categories, including approximately $3.0 of higher stock compensation expense which is generally due to the continued growth in the number of grants made to the overall employee base, approximately $2.0 million of increased corporate travel costs
related to new business developments, and $1.9 million higher facilities costs related to the expansion of our Company headquarters.

Operating Income. Operating income for the nine months ended September 30, 2008 was $118.1 million, a decrease of $47.6 million, or 28.7%, compared to that of $165.7 million for the comparable period of 2007. The decrease
in operating income for the nine-month period ended September 30, 2008 was largely as a result of the combined impact of the performance of our current theatrical release, Kung Fu Panda, as compared to the superior performance of
Shrek the Thirdduring the comparable period of 2007 and the additional revenue reported by our distributor in the second quarter of 2007 as a result of the completion of the transition of home entertainment fulfillment services from our
prior distributor. This combined impact was partially offset by the stronger performance of the Prior year theatrical releases category during the nine months ended September 30, 2008 as compared to the comparable period of 2007.
Additionally, higher selling, general and administrative costs contributed to the decrease in operating income.

Interest Income,
Net. For the nine months ended September 30, 2008, total net interest income was $7.7 million, a decrease of $11.5 million or 59.9% from $19.2 million for the same period of 2007. The decrease in net interest income for the first nine
months of 2008 as compared to the first nine months of 2007 was due to a combination of lower average rates of interest earned on cash and cash equivalents and lower average balances of cash and cash equivalents largely due to the stock repurchases
made throughout 2007 and continuing in 2008.

Interest expense capitalized to production film costs was $2.3 million and $6.9 million for
the nine months ended September 30, 2008 and 2007, respectively. The $4.6 million decrease between the periods was primarily due to the decrease in amount of interest expense eligible for capitalization during the first nine months of 2008
because of the repayment of debt in 2007 and lower interest rates in 2008 associated with our various financing arrangements.

Other
Income, Net. For the nine months ended September 30, 2008 and 2007, total other income was $3.3 million and $4.4 million respectively. Other income in both years consisted entirely of income recognized in connection with preferred
vendor arrangements.

Increase in Income Tax Benefit Payable to Stockholder. As a result of the Tax Basis Increase, we are
obligated to remit to the stockholders affiliate 85% of any such cash savings in U.S. Federal income tax and California franchise tax and certain other related tax benefits, subject to repayment if it is determined that these savings should
not have been available to us. For the nine months ended September 30, 2008, we recorded $29.6 million in net tax benefits associated with the Tax Basis Increase as a reduction in the provision for income taxes and recorded an expense of $25.2
million representing 85% of these recognized benefits to increase income tax benefit payable to stockholder.

For the nine months ended
September 30, 2007, we recognized $60.8 million in net tax benefits associated with the Tax Basis Increase as a reduction in the provision for income taxes and recorded an expense of $51.7 million representing 85% of these recognized benefits
to increase income tax benefit payable to stockholder.

Provision for Income Taxes. For the nine months ended
September 30, 2008 and 2007, we recorded a provision for income taxes of $13.0 million and $13.4 million, respectively, or an effective tax rate of 10.1% and



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7.1%, respectively. The period-over-period change in the effective tax rate is driven by changes in the valuation allowance required against the deferred tax
assets. Our effective tax rate for both periods was lower than the 35% statutory federal rate because of the decrease in our valuation allowance for deferred tax assets primarily resulting from the increase in the net tax benefits recognized from
the Tax Basis Increase as described above. However, when our provision for income taxes is combined with the amounts associated with the Increase in Income Tax Benefit Payable to Shareholder (see above), the combined percentages remain relatively
consistent at 29.6% and 28.6% for the nine months ended September 30, 2008 and September 30, 2007, respectively.

Net
Income. Net income for the nine months ended September 30, 2008 was $90.9 million, or $0.99 per diluted share, compared to a net income of $124.2 million, or $1.22 net income per diluted share, in the corresponding period in 2007.

Financing Arrangements

On
June 24, 2008, we entered into a new $125.0 million revolving credit facility (New Credit Facility) with several banks. In connection therewith, we terminated our prior $100.0 million revolving credit facility (Prior
Credit Facility). For further discussion of both our New Credit Facility and our Prior Credit Facility see Note 6 to the unaudited consolidated financial statements contained in Part I, Item 1 of this Quarterly Report.

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

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

For a more detailed description of our various financing arrangements, please see Note 6 to the unaudited consolidated financial statements contained in
Part I, Item 1 of this Quarterly Report and the Managements Discussion and Analysis of Financial Condition and Results of Operation section of our 2007 Form 10-K.

Liquidity and Capital Resources

Current Financial Condition

Our primary operating needs are to fund the production and development costs of our films, make participation and residual payments, fund selling, general
and administrative costs and capital expenditures. Our operating activities for the nine months ended September 30, 2008 generated adequate cash to meet our operating needs. For the next 12 months, we expect that cash on hand and cash from
operations will be sufficient to satisfy our anticipated cash needs for working capital, stock repurchases and capital expenditures. In the event that these cash flows are insufficient, we expect to be able to draw funds from our revolving credit
facility to meet these needs. Over the next two years, we expect to spend approximately $73 million to expand and make general improvements to our Company headquarters located in Glendale, California in order to accommodate general business growth,
including 3D expansion. In addition, in October 2009 we are required to repay the $73.0 million principal associated with the existing financing of our Companys headquarters (see Note 6 to our unaudited consolidated financial statements). We
are currently evaluating the various alternatives for the funding of the expansion of our Companys headquarters and repayment of the existing financing of our Companys headquarters, including using cash on hand and several financing
options.

As of September 30, 2008, we had cash and cash equivalents totaling $337.9 million. Our cash and cash equivalents consist of
cash on deposit and short-term money market investments, which are primarily either invested in U.S. government obligations or guaranteed by the U.S. government. Our cash and cash equivalents balance at September 30, 2008 increased by $45.4
million from that of $292.5 million at December 31, 2007. Components of this change in cash for the nine months ended September 30, 2008, as well as for the nine months ended September 30, 2007, are provided below in more detail.



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Operating Activities

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



|                                          |  |      |         |      |   |        
|----------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                          |  | 2008 |         | 2007
|Net cash provided by operating activities |  | $    | 256,864 |      | $ | 235,585

Net cash provided by operating activities for the first nine months of 2008 was primarily
attributable to the collection of revenue associated with Kung Fu PandasandBee Moviesworldwide theatrical release, Shrek the Thirdsworldwide home entertainment release, worldwide television revenue for
Madagascarand, to a lesser extent, the collection of worldwide television and home entertainment revenues for our other films, including Over the Hedge, Shrek 2and Shrek. The operating cash provided by the collection of
revenues during the first nine months of 2008 was offset by $37.6 million paid to an affiliate of a stockholder related to tax benefits realized in 2007 from the Tax Basis Increase, $29.3 million paid (net of refunds) for estimated federal and state
income taxes and $44.4 million paid related to employee bonus plans. The operating cash provided by revenues was also partially offset by film production and development spending and participation and residual payments.

Net cash provided by operating activities for the first nine months of 2007 was $235.6 million and was primarily attributable to collection of revenue
attributable to Shrek the Thirds worldwide theatrical release and Over the Hedges worldwide home entertainment sales and, to a lesser extent, the collection of worldwide theatrical, television and home entertainment
revenues for our other films, including Flushed Away, Madagascar, Shark Taleand Shrek 2. The operating cash provided during the first nine months of 2007 was offset by $22.0 million payment to an affiliate of a stockholder related to
tax benefits realized in 2006 from the Tax Basis Increase, a $13.1 million payment for estimated federal income taxes and $46.9 million paid to our distributor for distribution costs not deducted from remittances in prior years. In addition, cash
provided by operating actives for 2007 was partially offset by film production and development spending and participation and residual payments.

Investing Activities

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



|                                      |  |      |         |   |      |   |        |  
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                      |  | 2008 |         |   | 2007 |  
|Net cash used in investing activities |  | $    | (34,088 | ) |      | $ | (5,466 | )

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

Financing Activities

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



|                                      |  |      |          |   |      |   |          |  
|------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                      |  | 2008 |          |   | 2007 |  
|Net cash used in financing activities |  | $    | (177,360 | ) |      | $ | (192,739 | )

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



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Contractual Obligations

Contractual Obligations. As of September 30, 2008, we had contractual commitments to make the following payments (in thousands and on an undiscounted basis):



|                                          |  |                      |        |      |   |         |  |      |       |      |   |            |  |       |       |  |   |   |  |   |        
|----------------------------------------- |  | -------------------- | ------ | ---- | - | ------- |  | ---- | ----- | ---- | - | ---------- |  | ----- | ----- |  | - | - |  | - | -------
|                                          |  | Payments Due by Year
|Contractual Cash Obligations              |  | Remainder2008        |        | 2009 |   | 2010    |  | 2011 |       | 2012 |   | Thereafter |  | Total
|Operating leases                          |  | $                    | 1,846  |      | $ | 7,406   |  | $    | 7,572 |      | $ | 6,185      |  | $     | 3,197 |  | $ |  |  | $ | 26,206 
|Glendale animation campus note payable(1) |  |                      |       |      |   | 73,000  |  |      |      |      |   |           |  |       |      |  |   |  |  |   | 73,000 
|Other(2)                                  |  |                      | 20,501 |      |   | 40,960  |  |      | 300   |      |   | 300        |  |       | 250   |  |   |  |  |   | 62,311 
|                                          |  |                      |        |      |   |         |  |      |       |      |   |            |  |       |       |  |   |   |  |   |        
|Total contractual cash obligations        |  | $                    | 22,347 |      | $ | 121,366 |  | $    | 7,872 |      | $ | 6,485      |  | $     | 3,447 |  | $ |  |  | $ | 161,517
|                                          |  |                      |        |      |   |         |  |      |       |      |   |            |  |       |       |  |   |   |  |   |        



|(1) | We operate an animation campus in Glendale, California subject to a lease from a special-purpose entity that acquired
the property for $73.0 million in March 2002 and leased the facility to us for an initial term of five years, which was subsequently extended through October 2009. In addition to the principal amount of $73.0 million that is due in October 2009, we
are obligated to pay interest based primarily on 30-day commercial paper rates (2.57% at September 30, 2008). For further discussion, please see Note 6 to our unaudited consolidated financial statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Other commitments are principally comprised of a definitive contractual commitment related to the expansion of the
Glendale campus which is cancellable in certain limited circumstances.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additionally, as of September 30, 2008 we
had non-cancelable talent commitments totaling approximately $24.3 million that are payable over the next five years.

Critical Accounting Policies
and Estimates

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

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).



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

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

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

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

Revenue from licensing and merchandising is recognized when the associated films have been released and the criteria for revenue recognition have been met. Licensing and merchandising related minimum guarantees are generally recognized as
revenue upon the theatrical release of a film and royalty-based revenues (revenues based upon a percentage of net sales of the products) are generally recognized as revenue in periods when royalties are reported by licensees or cash is received.

Film Costs Amortization

Once a
film is released, the amount of film costs, participations and residual costs relating to that film are amortized and included in costs of revenues in the proportion that the revenue during the period for each film (Current
Revenue) bears to the estimated remaining total revenue to be received from all sources (Ultimate Revenue) as of the beginning of the current fiscal year under the individual-film-forecast-computation method in
accordance with the SOP. The amount of film costs that is amortized each period will therefore depend on the ratio of Current Revenue to Ultimate Revenue for each film for such period. We make certain estimates and judgments of Ultimate Revenue to
be received for each film based on information received from our distributor and our knowledge of the industry. Historically, there has been a close correlation between the success of a film in the domestic box office market and the films
success in the international theatrical and worldwide home entertainment markets. In general, films that achieve domestic box office success also tend to experience success in the home entertainment and international theatrical markets. While we
continue to believe that domestic box



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office performance is a key indicator of a films potential performance in these subsequent markets, we do not believe that it is the only factor
influencing the films performance in these markets and recognize that a range of other market and film-specific factors can have a significant impact.

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

Stock-Based Compensation

We record employee stock-based compensation in accordance with the provisions of FAS No. 123 (revised 2004), Share-Based Payment (FAS 123R) which requires a public entity to measure
the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. As of September 30, 2008, the total compensation cost related to unvested equity awards granted to employees
(excluding equity awards with performance objectives deemed not probable of achievement) but not yet recognized was approximately $53.4 million, which will be amortized on a straight-line basis over a weighted average life of approximately 2 years.

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

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

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



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the reasonableness of the original estimates of fair value made by us under FAS 123R. Changes to our underlying stock price or satisfaction of performance
criteria for performance-based awards granted to employees could significantly affect compensation expense to be recognized in future periods.

Provision for Income Taxes

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

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

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

Recent Accounting Pronouncements

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



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

Market and Exchange Rate Risk

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



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

(a) Evaluation of disclosure controls
and procedures.

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

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

(b) Changes in
internal controls over financial reporting.

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



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PART IIOTHER INFORMATION



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

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

During the period covered by this Quarterly Report, there have been no material changes from the risk factors previously disclosed in the Companys 2007 Form 10-K or filings subsequently made with the SEC, except for the risk factor
Changes in the United States, global or regional economic conditions could adversely affect the profitability of our business included in our 2007 Form 10-K, which is updated as follows:

Changes in the United States, global or regional economic conditions could adversely affect the profitability of our business.

The global economy is currently experiencing a significant contraction, with an almost unprecedented lack of availability of business and consumer credit.
This current decrease and any future decrease in economic activity in the United States or in other regions of the world in which we do business could significantly and adversely affect our results of operations and financial condition in a number
of ways. Any decline in economic conditions may reduce the performance of our theatrical and home entertainment releases and purchases of our licensed consumer products, thereby reducing our revenues and earnings. We may also experience increased
returns by the retailers that purchase our home entertainment releases. Further, bankruptcies or similar events by retailers may cause us to incur bad debt expense at levels higher than historically experienced. In periods of generally increasing
prices, or of increased price levels in a particular sector such as the energy sector, we may experience a shift in consumerdemand away from the entertainment and consumer products we offer, which could also adversely affect our revenues
and, at thesame time, increase our costs.



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

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



|                               |  |                                   |  |                            |       |                                                                            |           |                                                                                                         |   |            
|------------------------------ |  | --------------------------------- |  | -------------------------- | ----- | -------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------------------------------- | - | -----------
|                               |  | Total Number ofSharesPurchased(1) |  | AveragePrice Paidper Share |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced Planor Program |           | Maximum Number(or ApproximateDollar
Value)of Shares That MayYet Be PurchasedUnder the Plan orProgram(2)
|July 1July 31, 2008           |  |                                  |  | $                          |      |                                                                            |          |                                                                                                         | $ | 150,000,000
|August 1August 31, 2008       |  | 2,022,330                         |  | $                          | 30.64 |                                                                            | 2,022,330 |                                                                                                         | $ | 88,030,930 
|September 1September 30, 2008 |  | 858,100                           |  | $                          | 31.21 |                                                                            | 858,100   |                                                                                                         | $ | 61,248,995 
|                               |  |                                   |  |                            |       |                                                                            |           |                                                                                                         |   |            
|Total                          |  | 2,880,430                         |  | $                          | 30.81 |                                                                            | 2,880,430 |                                                                                                         |   |            



|(1) | Does not include trades pending settlement as of the end of the respective period.
|--- | ----------------------------------------------------------------------------------

|(2) | In July 2008, the Companys Board of Directors approved a stock repurchase program pursuant to which the Company
may repurchase up to an aggregate of $150 million of its outstanding stock.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

Amendment and Restatement of Special Deferral
Election Plan

On October 23, 2008, the Compensation Committee of the Board of Directors of the Company approved the amendment and
restatement of the Companys Special Deferral Election Plan (the Plan). The amendment and restatement was made generally for purposes of compliance with Section 409A of the Internal Revenue Code and did not involve any substantive
changes to the previous version of the Plan. The Plan is available for executive officers and certain other highly compensated employees of the Company and its subsidiaries. The Plan generally permits eligible participants to defer up to 85% of
their base salary and up to 100% of their annual incentive bonus or any special bonus or other incentive compensation which they earn. Each participants account under the Plan is credited with earnings, at periodic intervals, at a rate equal
to the actual rate of return for such period of the investment fund or funds or index or indices selected by the participant from the range of investment vehicles offered under the Plan. Participants are permitted to designate the commencement date
or event for distribution of their account balance under the Plan based on the available options under the Plan, including termination of employment, a specified date, a change in control of the Company or certain combinations of the foregoing. Each
participant may also select the method of distribution in accordance with the options available under the Plan, including lump sum payment or installments over a period of up to 10 years.

The documents constituting the Plan, as amended and restated, are attached as Exhibits 10.1 and 10.2 and are incorporated by reference herein.

Time Sharing Agreement with Intellectual Ventures Management, LLC

On October 27, 2008, the Company entered into a Time Sharing Agreement for use of an aircraft that is owned by Intellectual Ventures Management, LLC (IVM), a company controlled by one of the Companys
directors, Nathan Myrhvold. Under this agreement, if Mr. Myrhvold uses the aircraft to attend Board meetings or other Company functions, the Company pays an hourly rate equal to two times the fuel cost, plus certain enumerated expenses such as
landing fees, crew travel costs and catering.

The Time Sharing Agreement is attached as Exhibit 10.5 to this Quarterly Report on Form 10-Q
and is incorporated herein by reference.

Resignation of David Geffen as Director

On October 28, 2008, David Geffen, one of the Companys directors and a significant stockholder, informed the Company that he was resigning as a
director effective immediately.



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Amended and Restated Employment Agreement with Ann Daly

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

Term. The Restated Agreement extends the term of Ms. Dalys employment to December 31, 2013.

Title. Pursuant to the Restated Agreement, Ms. Dalys title will remain Chief Operating Officer of the Company.

Salary. Under the Restated Agreement, Ms. Daly will have an annual base salary of $1,012,000.

Initial Award of Performance-Based Restricted Stock Units.The Restated Agreement provides that Ms. Daly will receive an award of
performance-based restricted stock units having a grant-date value targeted at $9,000,000.

Annual Incentive Awards. Commencing in
2011, Ms. Daly will receive an annual equity award with a grant-date value of $500,000 in lieu of additional salary. In addition, subject in all instances to the discretion of the Compensation Committee, Ms. Daly will continue to be eligible to
receive an annual cash or equity incentive award with a target value of $750,000. The actual incentive award received will depend on the Companys performance.

Long-Term Equity Incentive Awards. Commencing in 2011, Ms. Daly will be eligible, subject to annual approval by the Compensation Committee, to receive annual equity incentive awards of restricted stock and
stock options (or such other form of equity-based compensation as the Compensation Committee may determine) with a grant-date value targeted at $2,500,000.

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

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

If the Company terminates Ms. Dalys employment other than for cause, incapacity or death, or Ms. Daly terminates her employment for good reason,
the Company will generally continue her base salary (including, if employment terminates on or after January 1, 2011, the value of any equity awards made in lieu of Ms. Dalys base salary) and benefits until expiration of the term of the
Restated Agreement. Ms. Daly will also receive an annual cash amount equal to the average annual bonuses that have been paid to her during the three immediately preceding years until expiration of the term of the Restated Agreement. Moreover, all
equity-based compensation held by Ms. Daly will generally accelerate vesting (with respect to grants having performance-based vesting criteria, on the basis that any mid-range or target goals have been achieved) and remain exercisable for the
remainder of the term of the grant. In addition, if Ms. Dalys employment is involuntarily terminated or she terminates her employment for good reason within 12 months following a change of control (as defined in the Restated Agreement), the
Restated Agreement provides that the annual cash amounts described above will continue for the greater of (i) the remaining term of the Restated Agreement or (ii) two years.

In the event that Ms. Daly dies or becomes disabled during the term, the Restated Agreement provides for the receipt of continued salary (in the case of
disability, at a rate equal to 50% of Ms. Dalys base salary) and other benefits for a specified term. The Restated Agreement also provides that Ms. Daly will be entitled to receive or exercise a percentage of each equity award determined based
on the length of time she was employed



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prior to death or disability (in the case of awards having performance-based vesting criteria, subject to attainment of the applicable performance goals) and
Ms. Daly will receive credit for the shorter of (A) an additional year of service or (B) 50% of the remaining term of the Restated Agreement. The exercisable portion of any equity award will remain exercisable for the remaining term of the grant.

Following the end of the term of the Restated Agreement (provided Ms. Dalys employment has not earlier terminated), the Restated
Agreement provides that Ms. Daly will be entitled to all equity-based compensation that has vested and, if she retires from the Company, her equity-based compensation that has not vested will become vested, provided that any such compensation will
continue to be subject to the achievement of any applicable performance goals. All options and other similar awards will remain exercisable for the remaining original term of the grant. Ms. Daly will be considered to have retired from the Company if
her employment with the Company terminates within 30 days following the end of the term of the Restated Agreement and, as of such date, she is 55 years old and the sum of her age and years of service with the Company is at least 70. In the event
that an employment agreement between the Company and Jeffrey Katzenberg provides for vesting of Mr. Katzenbergs equity-based compensation awards in connection with the expiration of such agreement on terms that are more favorable than provided
in the Restated Agreement, Ms. Daly will generally be entitled to be treated similarly. If Ms. Daly does not retire following the end of the term of the Restated Agreement, her outstanding equity-based compensation awards will continue to vest
during her continued employment in accordance with their terms and any new employment agreement between Ms. Daly and the Company.

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

Change of control. In the event of a change of control, all unvested
equity-based compensation held by Ms. Daly will remain unvested and continue to vest in accordance with its terms. However, unless outstanding awards are assumed or substituted for with new awards covering stock of a successor corporation in the
event of a change of control, all such equity-based compensation will accelerate vesting (with respect to grants having performance-based vesting criteria, on the basis that any mid-range or target goals have been achieved) immediately prior to the
change of control. In the event that, during the 12-month period following a change of control, Ms. Dalys employment is terminated by the Company other than for cause or by her for good reason, all equity-based compensation held by Ms. Daly
will accelerate vesting (with respect to grants having performance-based vesting criteria, on the basis that any mid-range or target goals have been achieved) and remain exercisable for the remainder of the term of the grant.

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

The foregoing description of the Restated Agreement is qualified in its entirety by reference to the Restated Agreement, which is attached as Exhibit 10.8 to this Quarterly Report on Form 10-Q and is incorporated
herein by reference.

Items 3 and 4 are not applicable and have been omitted.



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##### Table of Contents

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



|              |  |                                                                                                                                                                                                                            
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                
|10.1          |  | Special Deferral Election Plan                                                                                                                                                                                             
|              | 
|10.2          |  | Special Deferral Election PlanAdoption Agreement                                                                                                                                                                          
|              | 
|10.3          |  | Repurchase Agreement dated as of August 11, 2008 by and between the Company and The Wunderkinder Foundation, incorporated by reference to Exhibit 99.1 to the Companys Current Report on
Form 8-K filed on August 13, 2008
|              | 
|10.4          |  | Time Sharing Agreement dated as of October 16, 2008 by and between the Company and Amblin Films, LLC incorporated by reference to Exhibit 99.1 to the Companys Current Report on
Form 8-K filed on October 22, 2008      
|              | 
|10.5          |  | Time Sharing Agreement dated as of October 27, 2008 by and between the Company and Intellectual Ventures Management, LLC                                                                                                   
|              | 
|10.6          |  | Form of Restricted Stock Unit Award Agreement for Non-employee Directors (to be used for grants to Roger Enrico)                                                                                                           
|              | 
|10.7          |  | Form of Restricted Share Award Agreement                                                                                                                                                                                   
|              | 
|10.8          |  | Amended and Restated Employment Agreement dated as of October 23, 2008 by and between DreamWorks Animation SKG, Inc. and Ann Daly                                                                                          
|              | 
|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: October 28, 2008 |  |  |  | By: |  | /S/    LEWIS W. COLEMAN       
|                       |  |  |  |     |  | Name:                          |  | Lewis W. Coleman                     
|                       |  |  |  |     |  | Title:                         |  | President and Chief Financial Officer



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##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                            
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                
|10.1          |  | Special Deferral Election Plan                                                                                                                                                                                             
|              | 
|10.2          |  | Special Deferral Election PlanAdoption Agreement                                                                                                                                                                          
|              | 
|10.3          |  | Repurchase Agreement dated as of August 11, 2008 by and between the Company and The Wunderkinder Foundation, incorporated by reference to Exhibit 99.1 to the Companys Current Report on
Form 8-K filed on August 13, 2008
|              | 
|10.4          |  | Time Sharing Agreement dated as of October 16, 2008 by and between the Company and Amblin Films, LLC incorporated by reference to Exhibit 99.1 to the Companys Current Report on
Form 8-K filed on October 22, 2008      
|              | 
|10.5          |  | Time Sharing Agreement dated as of October 27, 2008 by and between the Company and Intellectual Ventures Management, LLC                                                                                                   
|              | 
|10.6          |  | Form of Restricted Stock Unit Award Agreement for Non-employee Directors (to be used for grants to Roger Enrico)                                                                                                           
|              | 
|10.7          |  | Form of Restricted Share Award Agreement                                                                                                                                                                                   
|              | 
|10.8          |  | Amended and Restated Employment Agreement dated as of October 23, 2008 by and between DreamWorks Animation SKG, Inc. and Ann Daly                                                                                          
|              | 
|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