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Madagascar DVD Drives DreamWorks Animation 1st Quarter

For the first quarter of 2006, DreamWorks Animation SKG Inc. reported total revenue of $60.1 million and net income of approximately $12.3 million, or $0.12 per share on a fully diluted basis, driven primarily by the home entertainment sales of MADAGASCAR. However, this compares to revenue of $167 million and net income of $45.7 million, or $0.44 per share on a fully diluted basis for the same period in 2005. The company ended the period with $505.5 million of cash and cash equivalents.

"The quarter's results were primarily driven by the home video performance of MADAGASCAR," commented Jeffrey Katzenberg, DreamWorks Animation's ceo. "During its initial release the title performed well in a highly competitive home video market."

MADAGASCAR contributed approximately $30.7 million of revenue in the quarter, and, since its release in the fourth quarter of 2005, the film has reached an estimated 17.5 million units shipped through the first quarter of 2006, net of actual returns and estimated future returns. In addition, international pay television and home video sales for SHARK TALE contributed approximately $13.1 million. Library and other films accounted for approximately $16.3 million in revenue for the quarter. By the end of the first quarter the company's distributor had not fully recovered the marketing and distribution costs for SHREK 2 and WALLACE AND GROMIT: THE CURSE OF THE WERE-RABBIT. As a result, DreamWorks Animation did not recognize any revenue under the distribution agreement for these films.

The company reported that it is now operating under its new distribution agreement with Paramount Pictures. DreamWorks Animation's first movie under the Paramount distribution agreement, OVER THE HEDGE, will be released on May 19, 2006. The Paramount agreement, which runs through 2012, replaced the company's distribution deal with DreamWorks Studios. As previously disclosed, the company received a $75 million signing bonus from Paramount as part of this new agreement. In the first quarter, these proceeds were used towards the repayment of the $75 million advance, plus interest, to Universal Studios. The repayment of the Universal advance reduced the company's debt balance to approximately $119.7 million at the end of the first quarter.

Looking at the remainder of the year, the company expects the balance of 2006 to be primarily driven by the theatrical and home video performance of OVER THE HEDGE. As with any of its films, the company does not expect to recognize any significant revenue until after its distributor recovers the upfront distribution and marketing costs, which may not occur until a film is released in home video.

"We are certainly proud of our next release, OVER THE HEDGE, which is a fun film for the entire family and a great way to kick off the summer movie season," added Katzenberg.

As previously stated, the company anticipates that SG&A for the full year of 2006 will increase by approximately 15% over the $76.5 million of SG&A for the full year of 2005. This is primarily driven by increased management costs as well as additional services that the company has taken responsibility for under the new distribution agreement with Paramount. Under the new agreement, the company will receive reimbursements to help offset some of these the additional costs. These reimbursements will effectively serve as a reduction to the company's cost of distribution and the benefit will be amortized equally over the minimum number of films required under the new distribution agreement. This benefit will be recorded as film revenue and the company will now recognize approximately $4.6 million of revenue upon the release of each film starting with OVER THE HEDGE in the second quarter of 2006.

DreamWorks Animation is principally devoted to developing and producing computer-generated animated feature films.

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Rick DeMott
Animation World Network
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