2007 Annual Report As a celebration of the creative spirit that drives everything we do at DreamWorks Animation, we held an artwork contest in 2007 in which we invited all employees to submit a design to be featured in the Annual Report. Every submission celebrated the unique and fulfilling process of working on an animated film at the Company. Rhion Magee, Consumer Products, created the winning submission. Dear Fellow Shareholders, I am pleased to report that 2007 was our most successful year since we took DreamWorks Animation public in 2004, thanks in large part to the blockbuster success of Shrek the Third and the Shrek franchise as a whole. In addition to boasting the best domestic opening in the history of animated film, Shrek the Third became the second highest grossing film of 2007 in the U.S. and the fourth best performing animated movie of all time. Even in a challenging home video market, Shrek the Third has risen above the competition and performed well. In 2007, we advanced our mission to successfully expand the Shrek brand with Shrek the Halls, our first made-for-television special. Over 21 million people throughout the U.S. watched the program this past holiday season on ABC. Additionally, Shrek made his first appearance at the annual Macy’s Thanksgiving Day Parade as the official 2007 Ambassador for the event. In December, we will take our brand expansion one step further by bringing Shrek the Musical to the Broadway Theatre in New York City. We are very excited about this tremendous opportunity to further extend one of the most successful franchises in Hollywood history. Our second theatrical release of 2007, Bee Movie, told a unique story in the voice of one of the world’s legendary comedic talents. Working alongside Jerry Seinfeld—with all of his passion and energy—was one of the most thrilling things to happen at DreamWorks Animation since its inception. Visually, the film was stunning and we are all very proud of its many creative accomplishments. Achieving an improved level of consistency in our films’ performances is key to realizing the full potential of our business model. Every one of our movies must tell a great story in a compelling way to successfully stand out among the clutter and competition. We have dedicated a considerable amount of resources and energy in 2007 toward differentiating our films and, as a result, DreamWorks Animation now has one of the strongest upcoming slates with which I have ever been associated. This year, on June 6, we will release Kung Fu Panda, a film that I believe captures the elements our audience has come to expect of a DreamWorks Animation film: great storytelling, exciting characters, emotion and humor. On November 7, the second chapter of our popular Madagascar franchise will come to a theater near you and early in 2009 our Madagascar penguins will make their television debut in a new series on Nickelodeon. While each film must begin with a good story, we have also focused on building and utilizing leading visual technology to help distinguish our product. Digital technology can now deliver a heightened viewing experience at the movie theater and I believe that 3D is poised to take movie-going to a whole new level. We worked very hard throughout 2007 to position DreamWorks Animation at the forefront of this movement. “Ultimate 3-D” is the innovative development process that draws audiences into our stories in dazzling and engrossing ways. Next year, we will become the first studio to produce all of our movies in “Ultimate 3-D,” beginning with Monsters vs. Aliens in March of 2009. In this way, we hope to make DreamWorks Animation films premium events that both attract larger audiences and command higher ticket prices at the box office. I am very enthusiastic about our strong film slate and the many prospects that lie ahead for the Company in 2008 and beyond. I am grateful to our artists and employees for their hard work, creativity and enthusiasm and I’d like to thank them for their many contributions to the Company every day. It’s an exciting time for them, our management team and, I believe, our shareholders. On behalf of all of us at DreamWorks Animation, thank you for your continued support. Sincerely, Jeffrey Katzenberg, CEO, DreamWorks Animation PLEASE SEE AN ELECTRONIC VERSION OF OUR 2007 ANNUAL REPORT AT: WWW. DREAMWORKSANIMATION. COM/2007AR 2007 FINANCIAL RESULTS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2007 ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . 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.) Campanile Building 1000 Flower Street Glendale, California 91201 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (818) 695-5000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which Registered Class A Common Stock, par value $0.01 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ‘ No È. 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 È No ‘. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer È 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 È. The aggregate market value of Class A common stock held by non-affiliates as of June 30, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1,670,393,275 using the closing price of $28.84 as reported by the New York Stock Exchange as of such date. As of such date, non-affiliates held no shares of Class B common stock or Class C common stock. There is no active market for the Class B common stock or Class C common stock. Shares of Class A common stock held by all executive officers and directors of the registrant and all persons filing Schedules 13G with respect to the registrant’s common stock have been deemed, solely for the purpose of the foregoing calculations, to be held by “affiliates” of the registrant as of June 30, 2007. As of January 31, 2008, there were 81,592,861 shares of Class A common stock and 12,984,462 shares of Class B common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain information required by Part III of this Annual Report on Form 10-K is incorporated by reference from the registrant’s definitive proxy statement (the “Proxy Statement”) to be filed pursuant to Regulation 14A with respect to the registrant’s 2008 annual meeting of stockholders. Except with respect to information specifically incorporated by reference in this Annual Report on Form 10-K, the Proxy Statement is not deemed to be filed as part hereof. DreamWorks Animation SKG, Inc. Form 10-K For the Year Ended December 31, 2007 Page PART I Item 1. Business ....................................................... 1 Item 1A. Risk Factors .................................................... 18 Item 1B. Unresolved Staff Comments ....................................... 35 Item 2. Properties ...................................................... 35 Item 3. Legal Proceedings ............................................... 35 Item 4. Submission of Matters to a Vote of Security Holders .................... 35 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ................................ 39 Item 6. Selected Financial Data ........................................... 42 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ................................................. 46 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............. 67 Item 8. Financial Statements and Supplementary Data ......................... 67 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................................... 67 Item 9A. Controls and Procedures .......................................... 67 Item 9B. Other Information ............................................... 68 PART III Item 10. Directors and Executive Officers of the Registrant ...................... 69 Item 11. Executive Compensation .......................................... 69 Item 12. Security Ownership of Certain Beneficial Owners and Management ........ 69 Item 13. Certain Relationships and Related Transactions ........................ 69 Item 14. Principal Accountant Fees and Services .............................. 69 PART IV Item 15.