Lions Gate Entertainment Corp.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
		For the quarterly period ended December 31, 2006
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
		For the transition period from to

Commission File No.: 1-14880

Lions Gate Entertainment Corp.

(Exact name of registrant as specified in its charter)


British Columbia, Canada		N/A
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1055 West Hastings Street, Suite 2200

Vancouver, British Columbia V6E 2E9

and

2700 Colorado Avenue, Suite 200

Santa Monica, California 90404

(Address of principal executive offices)

(877) 848-3866

(Registrant’s 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 þ No o

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.

Large accelerated Filer þ Accelerated Filer o Non-accelerated Filer o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Title of Each Class		Outstanding at February 1, 2007

Common Shares, no par value per share		116,755,446 shares

FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases you can identify forward-looking statements by terms such as “may,” “intend,” “will,” “could,” “would,” “expects,” “believe,” “estimate,” or the negative of these terms, and similar expressions intended to identify forward-looking statements.

These forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Also, these forward-looking statements present our estimates and assumptions only as of the date of this report. Except for our ongoing obligation to disclose material information as required by federal securities laws, we do not intend to update you concerning any future revisions to any forward-looking statements to reflect events or circumstances occurring after the date of this report.

Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including the substantial investment of capital required to produce and market films and television series, increased costs for producing and marketing feature films, budget overruns, limitations imposed by our credit facilities, unpredictability of the commercial success of our motion pictures and television programming, the cost of defending our intellectual property, difficulties in integrating acquired businesses, technological changes and other trends affecting the entertainment industry, and the risk factors found under the heading “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 14, 2006, which risk factors are incorporated herein by reference.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

LIONS GATE ENTERTAINMENT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS


	December 31,			March 31,
	2006			2006
	(Unaudited)			(Note 1)
	(Amounts in thousands, except share amounts)

ASSETS
Cash and cash equivalents	$	39,473		$	46,978
Restricted cash		9,970			820
Investments — auction rate securities		206,643			167,081
Investments — equity securities		14,080			14,921
Accounts receivable, net of reserve for video returns and allowances of $71,252 (March 31, 2006 — $73,366) and provision for doubtful accounts of $9,455 (March 31, 2006 — $10,934)		117,040			182,659
Investment in films and television programs		535,452			417,750
Property and equipment		13,319			7,218
Goodwill		197,805			185,117
Other assets		23,869			30,705

	$	1,157,651		$	1,053,249


LIABILITIES
Accounts payable and accrued liabilities	$	168,391		$	188,793
Unpresented bank drafts		—			14,772
Participation and residuals		170,710			164,326
Film obligations		194,359			120,661
Subordinated notes		325,000			385,000
Deferred revenue		81,184			30,427

		939,644			903,979

Commitments and contingencies

SHAREHOLDERS’ EQUITY
Common shares, no par value, 500,000,000 shares authorized, 116,750,808 at December 31, 2006 and 104,422,765 at March 31, 2006 shares issued and outstanding		395,444			328,771
Series B preferred shares (10 shares issued and outstanding)		—			—
Restricted share units		—			5,178
Unearned compensation		—			(4,032	)
Accumulated deficit		(174,671	)		(177,130	)
Accumulated other comprehensive loss		(2,766	)		(3,517	)

		218,007			149,270

	$	1,157,651		$	1,053,249

See accompanying notes.

LIONS GATE ENTERTAINMENT CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	December 31,			December 31,			December 31,			December 31,
	2006			2005			2006			2005
	(Amounts in thousands, except per share amounts)

Revenues	$	254,531		$	229,313		$	645,156		$	633,130

Expenses:
Direct operating		110,921			110,128			274,189			318,352
Distribution and marketing		95,803			99,486			296,194			290,655
General and administration		23,347			12,887			64,307			45,229
Depreciation		824			416			1,949			1,348

Total expenses		230,895			222,917			636,639			655,584

Operating Income (Loss)		23,636			6,396			8,517			(22,454	)

Other Expense (Income):
Interest expense		4,601			4,698			14,181			13,954
Interest rate swaps mark-to-market		—			—			—			123
Interest income		(2,906	)		(1,046	)		(7,753	)		(2,962	)

Total other expenses		1,695			3,652			6,428			11,115
Income (Loss) Before Equity Interests and Income Taxes		21,941			2,744			2,089			(33,569	)
Equity interests		(425	)		(44	)		(802	)		(98	)

Income (Loss) Before Income Taxes		21,516			2,700			1,287			(33,667	)
Income tax provision (benefit)		1,061			(221	)		(1,172	)		240

Income (Loss) before discontinued operations		20,455			2,921			2,459			(33,907	)
Income from discontinued operations, net of tax of $579 (Note 1)		—			221			—			1,124

Net Income (Loss)	$	20,455		$	3,142		$	2,459		$	(32,783	)

Basic Per Share Data:
Basic Income (Loss) Per Common Share From Continuing Operations	$	0.19		$	0.03		$	0.02		$	(0.33	)
Basic Income Per Common Share From Discontinued Operations		—			—			—			0.01

Basic Net Income (Loss) per Common Share	$	0.19		$	0.03		$	0.02		$	(0.32	)

Diluted Per Share Data:
Diluted Earnings (Loss) Per Common Share From Continuing Operations	$	0.17		$	0.03		$	0.02		$	(0.33	)
Diluted Earnings Per Common Share From Discontinued Operations		—			—			—			0.01

Diluted Net Income (Loss) per Common Share	$	0.17		$	0.03		$	0.02		$	(0.32	)

See accompanying notes.

LIONS GATE ENTERTAINMENT CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


																					Accumulated
					Series B				Restricted									Comprehensive			Other
	Common Shares				Preferred Shares				Share			Unearned			Accumulated			Income			Comprehensive
	Number		Amount		Number		Amount		Units			Compensation			Deficit			(Loss)			Loss			Total
	(Amounts in thousands, except share amounts)

Balance at March 31, 2005		101,843,708	$	305,662		10	$	—	$	—		$	—		$	(183,226	)				$	(5,297	)	$	117,139
Exercise of stock options		361,310		1,408																					1,408
Issuance of common shares to directors for services		20,408		203																					203
Impact of previously modified stock options		—		27																					27
Issuance of common shares in connection with acquisition of film assets		399,042		3,775																					3,775
Issuance of common shares in connection with acquisition of common shares of Image Entertainment		1,104,004		11,537																					11,537
Issuance of common shares in connection with acquisition of Redbus		643,460		5,643																					5,643
Issuance of restricted share units										5,694			(5,694	)											—
Amortization of restricted share units													1,662												1,662
Vesting of restricted share units		50,833		516						(516	)														—
Comprehensive income (loss)
Net income																6,096		$	6,096						6,096
Foreign currency translation adjustments																			2,223			2,223			2,223
Net unrealized loss on foreign exchange contracts																			(356	)		(356	)		(356	)
Unrealized loss on investments — available for sale																			(87	)		(87	)		(87	)

Comprehensive income																		$	7,876

Balance at March 31, 2006		104,422,765		328,771		10		—		5,178			(4,032	)		(177,130	)					(3,517	)		149,270
Reclassification of unearned compensation and restricted share common units upon adoption of SFAS No. 123(R)				1,146						(5,178	)		4,032												—
Exercise of stock options		1,097,387		3,280																					3,280
Stock based compensation, net of share units withholding tax obligations of $440		99,424		4,117																					4,117
Issuance of common shares to directors for services		25,568		238																					238
Conversion of 4.875% notes, net of unamortized issuance costs		11,105,664		57,892																					57,892
Comprehensive income (loss)
Net income																2,459		$	2,459						2,459
Foreign currency translation adjustments																			1,791			1,791			1,791
Net unrealized loss on foreign exchange contracts																			(200	)		(200	)		(200	)
Unrealized loss on investments — available for sale																			(840	)		(840	)		(840	)

Comprehensive income																		$	3,210						—

Balance at December 31, 2006		116,750,808	$	395,444		10	$	—	$	—		$	—		$	(174,671	)				$	(2,766	)	$	218,007

See accompanying notes.

LIONS GATE ENTERTAINMENT CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months			Nine Months
	Ended			Ended
	December 31,			December 31,
	2006			2005
	(Amounts in thousands)

Operating Activities:
Net income (loss)	$	2,459		$	(32,783	)
Income from discontinued operations		—			1,124

Income (loss) from continuing operations		2,459			(33,907	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation of property and equipment		1,949			1,348
Amortization of deferred financing costs		2,915			2,814
Amortization of films and television programs		142,982			191,337
Amortization of intangible assets		702			1,760
Non-cash stock-based compensation		4,795			1,403
Interest rate swaps mark-to-market		—			123
Equity interests		802			98
Changes in operating assets and liabilities:
Restricted cash		(9,150	)		2,117
Accounts receivable, net		76,829			13,076
Investment in films and television programs		(246,567	)		(215,192	)
Other assets		5,079			(3,511	)
Accounts payable and accrued liabilities		(23,733	)		43,083
Unpresented bank drafts		(14,772	)		—
Participation and residuals		1,048			39,203
Film obligations		70,134			33,840
Deferred revenue		50,233			(20,467	)

Net Cash Flows Provided By Operating Activities — continuing operations		65,705			57,125
Net Cash Flows Provided By Operating Activities — discontinued operations		—			1,808

Net Cash Flows Provided By Operating Activities		65,705			58,933

Investing Activities:
Purchases of investments — auction rate securities		(575,789	)		(163,400	)
Sales of investments — auction rate securities		536,226			82,500
Purchases of investments — equity securities		—			(3,470	)
Funding of joint venture — FEARnet		(5,000	)		—
Cash received from sale of investment		—			2,945
Acquisition of Debmar, net of cash acquired		(24,137	)		—
Acquisition of Redbus, net of cash acquired		—			(27,122	)
Purchases of property and equipment		(7,737	)		(4,173	)

Net Cash Flows Used In Investing Activities — continuing operations		(76,437	)		(112,720	)
Net Cash Flows Provided By Investing Activities — discontinued operations		—			114

Net Cash Flows Used In Investing Activities		(76,437	)		(112,606	)

Financing Activities:
Issuance of common shares		3,280			779
Financing fees		—			(240	)
Repayment of subordinated notes		—			(5,000	)

Net Cash Flows Provided By (Used In) Financing Activities — continuing operations		3,280			(4,461	)
Net Cash Flows Used In Financing Activities — discontinued operations		—			(2,523	)

Net Cash Flows Provided By (Used In) Financing Activities		3,280			(6,984	)

Net Change In Cash And Cash Equivalents		(7,452	)		(60,657	)

Foreign Exchange Effects on Cash — continuing operations		(53	)		(1,774	)
Foreign Exchange Effects on Cash — discontinued operations		—			140

Foreign Exchange Effects on Cash		(53	)		(1,634	)

Cash and Cash Equivalents — Beginning Of Period		46,978			112,839

Cash and Cash Equivalents — End Of Period	$	39,473		$	50,548

See accompanying notes.

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.	General

Nature of Operations

Lions Gate Entertainment Corp. (the “Company,” “Lionsgate,” “we,” “us” or “our”) is a diversified independent producer and distributor of motion pictures, television programming, home entertainment, video-on-demand and music content. The Company also acquires distribution rights from a wide variety of studios, production companies and independent producers.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Lionsgate and all of its wholly owned and controlled subsidiaries.

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these unaudited condensed consolidated financial statements. Operating results for the three and nine months ended December 31, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ended March 31, 2007. The balance sheet at March 31, 2006 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006.

Certain amounts presented for fiscal 2006 have been reclassified to conform to the fiscal 2007 presentation.

Sale of Studio Facility and Revised Prior Year Presentation

As a result of the Company’s sale of the studio facilities on March 15, 2006, the Company’s consolidated statements of operations for the three and nine months ended December 31, 2005 have been revised to reflect total revenues of $1.7 million and $4.7 million and total expenses of $1.5 million and $3.6 million of the studio facilities for the three and nine months ended December 31, 2005, respectively, net within the discontinued operations section of the consolidated statements of operations.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The most significant estimates made by management in the preparation of the financial statements relate to ultimate revenue and costs for investment in films and television programs; estimates of sales returns, provision for doubtful accounts, fair value of assets and liabilities for allocation of the purchase price of companies acquired, income taxes and accruals for contingent liabilities; and impairment assessments for investment in films and television programs, property and equipment, goodwill and intangible assets. Actual results could differ from such estimates.

Recent Accounting Pronouncements

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

eliminates the alternative to use the intrinsic method of accounting under APB No. 25. SFAS No. 123(R) requires all public companies accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments, to account for these types of transactions using a fair-value-based method. Effective April 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment,” (SFAS No. 123(R)) using the modified-prospective transition method. Under such transition method, compensation cost recognized in the three and nine months ended December 31, 2006 includes: (a) compensation cost for all stock options granted prior to, but not yet vested as of, April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted on or after April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). See note 12 for further discussion of the Company’s stock-based compensation in accordance with SFAS No. 123(R).

FASB Issued Interpretation No. 48. In July 2006, the FASB issued Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of SFAS No. 109”, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In particular, this interpretation requires uncertain tax positions to be recognized only if they are “more-likely-than-not” to be upheld based on their technical merits. Additionally, the measurement of the tax position will be based on the largest amount that is determined to have greater than a 50% likelihood of realization upon ultimate settlement. Any resulting cumulative effect of applying the provisions of FIN 48 upon adoption would be reported as an adjustment to the beginning balance of retained earnings in the period of adoption. FIN 48 will be effective as of the beginning of fiscal year 2008. We have not yet evaluated the impact of this interpretation on the Company’s consolidated financial statements.


2.	Investments Available-For-Sale

Investments classified as available-for-sale are reported at fair value based on quoted market prices, with unrealized gains and losses excluded from earnings and reported as other comprehensive income or loss (see note 10). The cost of investments sold is determined in accordance with the specific identification method. As of December 31, 2006, the cost, unrealized losses and carrying value of the Company’s available-for-sale investments were as follows:


			Unrealized
			Holding			Carrying
	Cost		Losses			Value
	(Amounts in thousands)

Auction Rate Securities
Auction rate notes	$	206,643	$	—		$	206,643
Equity Securities
Equity securities		15,007		(927	)		14,080

	$	221,650	$	(927	)	$	220,723

The Company began investing in Auction Rate Securities (“ARS”) during the fiscal year ended March 31, 2006. The ARS carry interest rates or dividend yields that are periodically re-set through auctions, typically every 7, 14, 28, or 35 days. ARS are usually issued with long-term maturities or in perpetuity and are auctioned at par. Thus, the return on the investment between auction dates is determined by the interest rate or dividend yield set through the auctions. Accordingly, dividends and interest earned on auction rate investments are computed as a percentage of the principal amount of the security. Interest and dividend income earned during the three- and nine-month periods ended December 31, 2006 on ARS was $2.1 million and $5.7 million, respectively. There was no interest or dividend income earned on ARS during the three- and nine-month periods ended December 31, 2005. The

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company minimizes its credit risk associated with investments by investing primarily in investment grade, highly liquid securities.

In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and based on our ability to market and sell these instruments, we classify ARS as available-for-sale securities and carry them at fair value.

Equity securities are comprised of the Company’s investment in the common shares of Image Entertainment, Inc. (“Image”), a distributor of DVDs and entertainment programming. During the fiscal year ended March 31, 2006, the Company purchased in the open market 1,150,000 common shares of Image for $3.5 million in cash, representing an average cost per share of $3.02. Also during the fiscal year ended March 31, 2006, the Company completed a negotiated exchange with certain shareholders of Image in which the Company exchanged 1,104,004 of its common shares (at $10.45 per share) in return for 2,883,996 common shares of Image (at $4.00 per share). The cost on an exchanged basis of the additional 2,883,996 common shares of Image is $11.5 million. As of December 31, 2006 and March 31, 2006, the Company held 4,033,996 common shares of Image acquired at an average cost per share of $3.72; the shares held by the Company represent approximately 18.7% of Image’s outstanding common shares as of January 31, 2007. The closing price of Image’s common shares on December 31, 2006 was $3.49 per common share (March 31, 2006 — $3.70 per common share). As a result, the Company had unrealized losses of $0.9 million and $0.1 million on its investment in Image common shares as of December 31, 2006 and March 31, 2006, respectively. The Company has reported the increase in the unrealized loss of $0.8 million as other comprehensive loss in the condensed consolidated statement of shareholders’ equity for the nine months ended December 31, 2006.


3.	Investment in Films and Television Programs


	December 31,		March 31,
	2006		2006
	(Amounts in thousands)

Motion Picture Segment — Theatrical and Non-Theatrical Films
Released, net of accumulated amortization	$	161,249	$	154,574
Acquired libraries, net of accumulated amortization		94,974		105,144
Completed and not released		27,576		30,444
In progress		99,400		47,487
In development		4,237		3,104
Product inventory		33,558		28,179

		420,994		368,932

Television Segment — Direct-to-Television Programs
Released, net of accumulated amortization		55,516		36,003
In progress		58,505		12,311
In development		437		504

		114,458		48,818

	$	535,452	$	417,750

Acquired libraries of $95.0 million at December 31, 2006 (March 31, 2006 — $105.1 million) include the Trimark library acquired October 2000, the Artisan library acquired December 2003, the Modern Entertainment, Ltd. (“Modern”) library acquired in August 2005, and the Redbus library acquired in October 2005 (refer to note 8). On August 17, 2005, the Company acquired certain of the film assets and accounts receivable of Modern, a licensor of film rights to DVD distributors, broadcasters and cable networks for total consideration of $7.3 million,

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

comprised of $3.5 million in cash and 399,042 shares of the Company’s common shares valued at $3.8 million. In addition, the Company recorded $0.2 million in direct transaction costs comprised primarily of legal costs incurred in connection with the purchased assets. The allocation of the Modern purchase price to the assets acquired was $5.3 million to investment in films and television programs and $2.2 million to accounts receivable. The Trimark library is amortized over its expected revenue stream for a period of 20 years from the acquisition date. The remaining amortization period on the Trimark library at December 31, 2006 is 13.75 years on unamortized costs of $16.2 million. The Artisan library includes titles released at least three years prior to the date of acquisition and is amortized over its expected revenue stream for a period of 20 years from the date of acquisition. The remaining amortization period on the Artisan library at December 31, 2006 is 17.0 years on unamortized costs of $71.7 million. The Modern library is amortized over its expected revenue stream for a period of 20 years from the acquisition date. The remaining amortization period on the Modern library at December 31, 2006 is 18.5 years on unamortized costs of $4.9 million. The Redbus library includes titles released at least three years prior to the date of acquisition and is amortized over its expected revenue stream for a period of 20 years from the date of acquisition. The remaining amortization period on the Redbus library at December 31, 2006 is 18.75 years on unamortized costs of $2.1 million. The preliminary estimate of the fair value of the individual film and television titles acquired as part of the acquisition of Debmar-Mercury LLC (note 8) were included in released, net of accumulated amortization in the direct-to-television category above.

The Company expects approximately 39.5% of completed films and television programs, net of accumulated amortization, will be amortized during the one-year period ending December 31, 2007. Additionally, the Company expects approximately 80.1% of completed and released films and television programs, net of accumulated amortization and excluding acquired libraries, will be amortized during the three-year period ending December 31, 2009.


4.	Other Assets


	December 31,		March 31,
	2006		2006
	(Amounts in thousands)

Deferred financing costs, net of accumulated amortization	$	10,927	$	15,626
Prepaid expenses and other		11,986		13,037
Intangible assets, net		956		1,478
Deferred print costs		—		564

	$	23,869	$	30,705

Deferred Financing Costs. Deferred financing costs primarily include costs incurred in connection with the credit facility (see note 5) and the issuance of the 4.875% Notes, the 2.9375% Notes and the 3.625% Notes (see note 7) that are deferred and amortized to interest expense.

Other Investments.

Maple: On April 8, 2005, Lionsgate entered into library and output agreements with Maple Pictures, a Canadian corporation, for the distribution of Lionsgate’s motion picture, television and home video product in Canada. As part of this transaction, Maple Pictures purchased a majority of the Company’s interest in Christal Distribution, a number of production entities and other Lionsgate distribution assets in Canada. Maple Pictures was formed by two former Lionsgate executives and a third-party equity investor. Lionsgate also acquired and currently owns a 10% minority interest in Maple Pictures.

As a result of these transactions with Maple Pictures, Lionsgate recorded an investment in Maple Pictures of $2.1 million in other assets in the consolidated balance sheet. The Company is accounting for the investment in Maple Pictures using the equity method because of the Company’s ownership percentage and Board representation.

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the three and nine months ended December 31, 2006, a loss of $0.1 million is recorded in equity interests in the consolidated statements of operations. For the three and nine months ended December 31, 2005, a loss of $0.1 million is recorded in equity interests in the consolidated statements of operations. For the three and nine months ended December 31, 2006, the Company received dividends of $0.1 million. No dividends were received for the three and nine months ended December 31, 2005. The investment in Maple Pictures is $1.7 million as of December 31, 2006 (March 31, 2006 — $2.0 million).

CinemaNow: At March 31, 2006, the Company had a 30% equity interest on an undiluted basis in CinemaNow, Inc. (“CinemaNow”). The investment in CinemaNow was accounted for using the equity method. The investment in CinemaNow was nil at March 31, 2006. In June 2006, the Company purchased $1.0 million Series E Preferred Stock as part of a $20.3 million round of financing secured by CinemaNow. At December 31, 2006, the Company’s equity interest in CinemaNow is 18.8% on a fully diluted basis and 21.1% on an undiluted basis. For the three and nine months ended December 31, 2006, a loss of $0.4 million and $0.7 million, respectively, was recorded in equity interests in the consolidated statements of operations. There was no gain or loss recorded for the three and nine months ended December 31, 2005 in equity interests in the consolidated statements of operations. The investment in CinemaNow is $0.3 million as of December 31, 2006 (March 31, 2006 — nil).

Horror Entertainment, LLC. On October 10, 2006, the Company purchased 300 membership interests in Horror Entertainment, LLC (“FEARnet”), a multiplatform programming and content service provider of horror genre films operating under the branding of “FEARnet.” In addition, the Company entered into a 5-year license agreement with FEARnet for the US territories and possessions whereby the Company will license content to FEARnet for VOD and broadband exhibition. The Company has agreed not to compete in the area of a channel within the horror genre and the Company cannot license to a horror genre competitor more than 25 titles in any year during the term of the license agreement. The Company made a capital contribution to FEARnet of $5.0 million at the date of acquisition and has committed to a total capital contribution of $13.3 million, which is expected to be fully funded over the next two-year period. Under certain circumstances, if the Company defaults on any of its funding obligations, then the Company could forfeit its equity and its license agreement with FEARnet could be terminated. The Company is accounting for the investment in FEARnet using the equity method because of the Company’s ownership percentage of 33.33%. Due to the timing in availability of financial statements from FEARnet, the Company will record its share of the FEARnet results on a one quarter lag. Accordingly, the Company has not recorded its equity interests in the earnings or losses of FEARnet through December 31, 2006 in the consolidated statements of operations. The investment in FEARnet is $5.0 million as December 31, 2006 (March 31, 2006 — nil).


5.	Bank Loans

At December 31, 2006, the Company had a $215 million revolving line of credit, of which $10 million is available for borrowing by Lions Gate UK in either U.S. dollars or British pounds sterling. At December 31, 2006, the Company had no borrowings (March 31, 2006 — nil) under the credit facility. The credit facility expires December 31, 2008 and bears interest at 2.75% over the “Adjusted LIBOR” or the “Canadian Bankers Acceptance” rate (as defined in the credit facility), or 1.75% over the U.S. or Canadian prime rates. The availability of funds under the credit facility is limited by the borrowing base. Amounts available under the credit facility are also limited by outstanding letters of credit, which amounted to $0.3 million at December 31, 2006. At December 31, 2006 there was $214.7 million available under the credit facility. The Company is required to pay a monthly commitment fee based upon 0.50% per annum on the total credit facility of $215 million less the amount drawn. Right, title and interest in and to all personal property of Lions Gate Entertainment Corp. and Lions Gate Entertainment Inc. is pledged as security for the credit facility. The credit facility is senior to the Company’s film obligations and subordinated notes. The credit facility restricts the Company from paying cash dividends on its common shares.

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


6.	Film Obligations and Participation and Residuals


	December 31,		March 31,
	2006		2006
	(Amounts in thousands)

Minimum guarantees	$	36,113	$	22,865
Minimum guarantees and production obligations initially incurred for a term of more than one year		125,071		76,821
Theatrical marketing		9,908		1,770
Film productions		23,267		19,205

	$	194,359	$	120,661

Participation and residuals	$	170,710	$	164,326

The Company expects approximately 63% of accrued participations and residuals will be paid during the one-year period ending December 31, 2007.


7.	Subordinated Notes

3.625% Notes. In February 2005, Lions Gate Entertainment Inc. sold $175.0 million of 3.625% Convertible Senior Subordinated Notes (the “3.625% Notes”). The Company received $170.2 million of net proceeds after paying placement agents’ fees from the sale of $175.0 million of the 3.625% Notes. The Company also paid $0.6 million of offering expenses incurred in connection with the 3.625% Notes. Interest on the 3.625% Notes is payable semi-annually on March 15 and September 15, commencing on September 15, 2005. After March 15, 2012, interest will be 3.125% per annum on the principal amount of the 3.625% Notes, payable semi-annually on March 15 and September 15 of each year. The 3.625% Notes mature on March 15, 2025. Lions Gate Entertainment Inc. may redeem all or a portion of the 3.625% Notes at its option on or after March 15, 2012 at 100% of their principal amount, together with accrued and unpaid interest through the date of redemption.

The holder may require Lions Gate Entertainment Inc. to repurchase the 3.625% Notes on March 15, 2012, 2015 and 2020 or upon a change in control at a price equal to 100% of the principal amount, together with accrued and unpaid interest through the date of repurchase. Under certain circumstances, if the holder requires Lions Gate Entertainment Inc. to repurchase all or a portion of their notes upon a change in control, they will be entitled to receive a make whole premium. The amount of the make whole premium, if any, will be based on the price of our common shares on the effective date of the change in control. No make whole premium will be paid if the price of our common shares is less than $10.35 per share or if the price of the common shares of the Company exceeds $75.00 per share.

The 3.625% Notes are convertible, at the option of the holder, at any time before the close of business on or prior to the trading day immediately before the maturity date, if the notes have not been previously redeemed or repurchased, at a conversion rate of 70.0133 shares per $1,000 principal amount of the 3.625% Notes, subject to adjustment in certain circumstances, which is equal to a conversion price of approximately $14.28 per share. Upon conversion of the 3.625% Notes, the Company has the option to deliver, in lieu of common shares, cash or a combination of cash and our common shares. The holder may convert the 3.625% Notes into our common shares prior to maturity if the notes have been called for redemption, a change in control occurs or certain corporate transactions occur.

2.9375% Notes. In October 2004, Lions Gate Entertainment Inc. sold $150.0 million of 2.9375% Convertible Senior Subordinated Notes (the “2.9375% Notes”). The Company received $146.0 million of net proceeds after paying placement agents’ fees from the sale of $150.0 million of the 2.9375% Notes. The Company also paid $0.7 million of offering expenses incurred in connection with the 2.9375% Notes. Interest on the 2.9375% Notes is payable semi-annually on April 15 and October 15, commencing on April 15, 2005, and the 2.9375% Notes mature

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

on October 15, 2024. From October 15, 2009 to October 14, 2010, Lions Gate Entertainment Inc. may redeem the 2.9375% Notes at 100.839%; from October 15, 2010 to October 14, 2011, Lions Gate Entertainment Inc. may redeem the 2.9375% Notes at 100.420%; and thereafter at 100%.

The holder may require Lions Gate Entertainment Inc. to repurchase the 2.9375% Notes on October 15, 2011, 2014 and 2019 or upon a change in control at a price equal to 100% of the principal amount, together with accrued and unpaid interest through the date of repurchase. Under certain circumstances, if the holder requires Lions Gate Entertainment Inc. to repurchase all or a portion of their notes upon a change in control, they will be entitled to receive a make whole premium. The amount of the make whole premium, if any, will be based on the price of our common shares on the effective date of the change in control. No make whole premium will be paid if the price of our common shares is less than $8.79 per share or if the price of our common shares exceeds $50.00 per share.

The holder may convert the 2.9375% Notes into our common shares prior to maturity only if the price of our common shares issuable upon conversion of a note reaches a specified threshold over a specified period, the trading price of the notes falls below certain thresholds, the notes have been called for redemption, a change in control occurs or certain corporate transactions occur. In addition, under certain circumstances, if the holder converts their notes upon a change in control, such holder will be entitled to receive a make whole premium. Before the close of business on or prior to the trading day immediately before the maturity date, if the notes have not been previously redeemed or repurchased, the holder may convert the notes into our common shares at a conversion rate of 86.9565 shares per $1,000 principal amount of the 2.9375% Notes, subject to adjustment in certain circumstances, which is equal to a conversion price of approximately $11.50 per share.

4.875% Notes. In December 2003, Lions Gate Entertainment Inc. sold $60.0 million of 4.875% Convertible Senior Subordinated Notes (the “4.875% Notes”). The Company received $57.0 million of net proceeds after paying placement agents’ fees from the sale of $60.0 million of the 4.875% Notes. The Company also paid $0.7 million of offering expenses incurred in connection with the 4.875% Notes.

The 4.875% Notes were convertible, at the option of the holder, at any time before the close of business on or prior to the trading day immediately before the maturity date if the notes had not been previously redeemed or repurchased at a conversion rate of 185.0944 shares per $1,000 principal amount of the 4.875% Notes, subject to adjustment in certain circumstances, which is equal to a conversion price of approximately $5.40 per share. Lions Gate Entertainment Inc. had the option to redeem the 4.875% Notes at its option on or after December 15, 2006 at 100% of their principal amount plus accrued and unpaid interest if the closing price of our common shares had exceeded $9.45 per share for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day before the date of notice of redemption.

Upon conversion of the 4.875% Notes, the Company had the option to deliver, in lieu of common shares, cash or a combination of cash and our common shares.

On December 15, 2006, in response to our optional redemption notice, all of the noteholders of the 4.875% Notes voluntarily elected to convert their notes into the Company’s common shares. A total of $60 million of principal was converted into 11,105,664 common shares at a conversion price of $5.40 per share. In connection with this conversion, the principal amount net of the unamortized portion of the financing costs associated with the original conversion of the 4.875% Notes of approximately $2.1 million was recorded as an increase to common shares. The shares issued pursuant to the conversion were previously reserved for such issuance pursuant to the conversion.


8.	Acquisitions and Divestitures

Acquisition of Debmar-Mercury LLC

On July 3, 2006, the Company acquired all of the capital stock of Debmar-Mercury LLC (“Debmar”), an independent distributor of film and television packages. Consideration for the Debmar acquisition was

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$27.5 million, comprised of a combination of $24.5 million in cash paid on July 3, 2006 and up to $3.0 million in common shares of the Company to be issued as of January 1, 2008 if there are no breaches requiring indemnification by the seller of certain representations and warranties made by the seller. An additional $0.2 million has been incurred in acquisition costs. The $3.0 million of shares to be issued has been recorded as part of the purchase consideration and reflected as a liability. If no incremental liabilities become known by January 1, 2008 then the shares will be issued and the $3.0 million will be reclassified to equity. The purchase price may be adjusted for the payment of additional consideration contingent on the financial performance of Debmar for the five-year period ending June 30, 2011. The Debmar acquisition provides the Company with the rights to distribute certain television properties such as the television series, South Park, and provides the Company with an experienced management team to further enhance its capacity to syndicate its own television programming and feature film packages.

The Debmar acquisition was accounted for as a purchase, with the results of operations of Debmar consolidated from July 3, 2006. Goodwill of $13.8 million represents the excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired. The preliminary allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their fair values is as follows:


	Preliminary
	Balance Sheet
	(Amounts in
	thousands)

Cash and cash equivalents	$	603
Accounts receivable, net		10,113
Investment in films and television programs		12,200
Other assets acquired		522
Goodwill		13,849
Other liabilities assumed		(9,547	)

Total	$	27,740

The allocation above is preliminary until completion and receipt of final appraisals of the net assets acquired. The $13.8 million of goodwill was assigned to the television reporting segment. Pro forma information for the Debmar acquisition is not presented because the assets acquired and the results of operations were not material to the Company’s condensed consolidated balance sheets or consolidated statement of operations, respectively.

Sale of Studio Facilities

On March 15, 2006, the Company sold its studio facility located in Vancouver, British Columbia. The purchase price of $35.3 million (net of commissions) was paid in cash. As a result of the sale of the studio facility, the Company recognized a gain, net of tax, of $4.9 million in the fiscal year ended March 31, 2006. Studio facilities previously comprised the Company’s studio facilities reporting segment.

As a result of the Company’s sale of the studio facilities, the Company’s consolidated financial statements for all previous periods presented have been revised to reflect the studio facilities’ operations, net of tax, as discontinued operations, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Summarized financial information for the discontinued studio facilities operations is as follows (in millions):


	Three Months		Nine Months
	Ended		Ended
	December 31,		December 31,
Statements of Operations Data	2005		2005
	(Unaudited)
	(Amounts in millions)

Revenue	$	1.7	$	4.7
Total expenses		1.5		3.6

Acquisition of Lions Gate UK, formerly Redbus Group Limited

On October 17, 2005, the Company acquired all outstanding shares of Redbus, an independent film distributor located in the United Kingdom. Consideration for the Redbus acquisition was $35.5 million, comprised of a combination of $28.0 million in cash, $6.4 million in Lionsgate common shares and direct transaction costs of $1.1 million. In addition, the Company assumed other obligations (including accounts payable and accrued liabilities and film obligations) of $19.4 million. At the closing of the transaction the Company issued 643,460 common shares to Redbus Group Limited (“RGL”) valued at approximately $5.6 million, or $8.77 per share, and will issue up to an additional 94,937 common shares to RGL upon satisfaction of the terms of the escrow agreement, valued at approximately $0.8 million and recorded as a liability until satisfaction of the terms of the escrow agreement. Assuming no incremental liabilities become known at the end of the escrow period, the additional shares will be issued to the sellers and the $0.8 million will be reclassified to equity. Direct transaction costs are considered liabilities assumed in the acquisition, and as such, are included in the purchase price. Direct transaction costs consist primarily of legal and accounting fees.

The goodwill arising from the acquisition of Redbus is included in the goodwill of the motion pictures segment as disclosed in note 13. Pro forma information for the Redbus acquisition is not presented because the assets acquired and the results of operations were not material to the Company’s condensed consolidated balance sheets or consolidated statement of operations, respectively.


9.	Direct Operating Expenses


	Three Months			Three Months		Nine Months			Nine Months
	Ended			Ended		Ended			Ended
	December 31,			December 31,		December 31,			December 31,
	2006			2005		2006			2005
	(Amounts in thousands)

Amortization of films and television programs	$	60,984		$	56,928	$	142,982		$	191,337
Participation and residual expense		51,183			48,003		132,205			118,221
Amortization of acquired intangible assets		214			520		702			1,760
Other expenses		(1,460	)		4,677		(1,700	)		7,034

	$	110,921		$	110,128	$	274,189		$	318,352

Other expenses include the provision for doubtful accounts. The negative other expenses for the three and nine months ended December 31, 2006 are due to the reversal of the provision for doubtful accounts associated with the collection of a portion of accounts receivable previously reserved.

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11. Earnings (Loss) Per Share

The Company calculates earnings (loss) per share in accordance with SFAS No. 128, “Earnings Per Share.” Basic earnings (loss) per share is calculated based on the weighted average common shares outstanding for the period. The weighted average number of common shares outstanding during the three and nine months ended December 31, 2006 were 107,583,000 shares and 105,639,000 shares, respectively (2005 — 103,936,000 and 102,724,000 shares, respectively). Basic earnings (loss) per share for the three and nine months ended December 31, 2006 and 2005 are presented below:


	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	December 31,		December 31,		December 31,		December 31,
	2006		2005		2006		2005
	(Amounts in thousands)

Basic Earnings (Loss) Per Share:
Continuing operations:
Numerator:
Income (Loss) before discontinued operations	$	20,455	$	2,921	$	2,459	$	(33,907	)

Denominator:
Weighted average common shares outstanding		107,583		103,936		105,639		102,724

Basic Income (Loss) Per Common Share From Continuing Operations	$	0.19	$	0.03	$	0.02	$	(0.33	)

Discontinued operations:
Numerator:
Income from discontinued operations	$	—	$	221	$	—	$	1,124

Denominator:
Weighted average common shares outstanding		107,583		103,936		105,639		102,724

Basic Income Per Common Share From Discontinued Operations	$	—	$	0.00	$	—	$	0.01

Net Income (Loss) per Common Share	$	0.19	$	0.03	$	0.02	$	(0.32	)

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Diluted earnings per share includes the dilutive effect, if any, of the share purchase options, the restricted share units, and the conversion of the 4.875% Notes, the 2.9375% Notes, the 3.625% Notes. Diluted income per common share for the three and nine months ended December 31, 2006 and the three months ended December 31, 2005 is presented below:


	Three Months		Nine Months		Three Months
	Ended		Ended		Ended
	December 31,		December 31,		December 31,
	2006		2006		2005
	(Amounts in thousands)

Diluted Earnings Per Share:
Continuing operations
Numerator:
Income before discontinued operations	$	20,455	$	2,459	$	2,921
Add:
Interest on convertible notes, net of tax		3,132		—		—
Amortization of deferred financing costs, net of tax		450		—		—

Proforma Income before discontinued operations		24,037		2,459		2,921
Income from discontinued operations		—		—		221

Proforma Net Income	$	24,037	$	2,459	$	3,142

Denominator:
Weighted average common shares outstanding		107,583		105,639		103,936
Effect of dilutive securities:
Conversion of 4.875% notes, net of unamortized issuance costs		34,349		—		—
Share purchase options		2,346		2,551		2,876
Restricted share units		341		197		413

Adjusted weighted average common shares outstanding		144,619		108,387		107,225

Diluted Income Per Common Share From Continuing Operations	$	0.17	$	0.02	$	0.03

Diluted Income Per Common Share From Discontinued Operations	$	—	$	—	$	0.00

Diluted Net Income per Common Share	$	0.17	$	0.02	$	0.03

Diluted loss per common share for the nine months ended December 31, 2005 was not included above because the dilutive effect of the share purchase options, the restricted share units and convertible notes were anti-dilutive. Additionally, the dilutive effect of the convertible notes are not included in diluted income per common share for the nine months ended December 31, 2006 and three months ended December 31, 2005 as they are anti-dilutive.


12.	Accounting for Stock-Based Compensation

Share-Based Compensation

Adoption of SFAS No. 123(R)

As of December 31, 2006, the Company had two stock option and long-term incentive plans that permit the grant of stock options and other equity awards to certain employees, officers and non-employee directors, which are

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

described more fully below. Prior to April 1, 2006, the Company accounted for stock-based compensation under the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB Opinion No. 25), and related Interpretations, as permitted under SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123). The intrinsic value method requires recognition of compensation expense over the applicable vesting period for the difference between the exercise price of the stock option and the market value of the underlying stock on the date of grant. Since the exercise price of our stock options is equal to the market value of the underlying stock at the date of grant, the Company has not historically recognized compensation costs associated with share based awards, with the exception of stock appreciation rights (“SARs”) and restricted share units discussed below and to a very limited extent the modification of awards previously issued.

Effective April 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment” (SFAS No. 123(R)), using the modified-prospective transition method. Under such transition method, compensation cost recognized in the three and nine months ended December 31, 2006 includes: (a) compensation cost for all stock options granted prior to, but not yet vested as of April 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted on or after April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated. As a result of adopting SFAS No. 123(R) on April 1, 2006, the Company’s income from operations before income taxes and net income for the three and nine months ended December 31, 2006 are both $0.7 million and $2.4 million, respectively, lower than if the Company had continued to account for share-based compensation under APB Opinion No. 25. The $0.7 million charge for the three months ended December 31, 2006 consisted of the recognition of compensation expense of $0.9 million associated with stock options granted offset by a $0.2 million change in the fair value as compared to the change in the intrinsic value of stock appreciation rights. The $2.4 million charge for the nine months ended December 31, 2006 consisted of the recognition of compensation expense of $1.7 million associated with stock options granted in previous years and $0.7 million attributable to the valuation of stock appreciation rights at fair value rather than intrinsic value as previously required. For the three and nine months ended December 31, 2006, the Company’s basic income per share would have been $0.01 and $0.03 higher, respectively, and diluted income per share would have not changed for the three months ended and would have been $0.03 higher for the nine months if the Company had not adopted SFAS No. 123(R).

SFAS No. 123(R) requires the cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. There were no tax benefits realized from the deduction of amounts related to share based payments in the three and nine months ended December 31, 2006 and 2005. Prior to the adoption of SFAS No. 123(R) and upon issuance of the restricted share units pursuant to the agreements, an unamortized compensation expense equivalent to the market value of the shares on the date of grant was charged to stockholders’ equity as unearned compensation and amortized over the applicable vested periods. As a result of adopting SFAS No. 123(R) on April 1, 2006, the Company transferred the remaining unearned compensation balance in its stockholders’ equity to common share capital. Prior to the adoption of SFAS No. 123(R), the Company recorded forfeitures of restricted share units, if any, and any compensation cost previously recognized for unvested restricted share units was reversed in the period of forfeiture. Beginning April 1, 2006, the Company records forfeitures in accordance with SFAS No. 123(R) by estimating the forfeiture rates for share-based awards upfront and recording a true-up adjustment for the actual forfeitures. In the three and nine months ended December 31, 2006, the calculation of forfeitures did not have a material effect on the Company’s results of operations, financial position or cash flows.

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The fair value of each option award is estimated on the date of grant using a closed-form option valuation model (Black-Scholes) based on the assumptions noted in the following table. Expected volatilities are based on implied volatilities from traded options on our stock, historical volatility of Lionsgate stock and other factors. The expected term of options granted represents the period of time that options granted are expected to be outstanding. During the nine months ended December 31, 2006, two officers were each granted options to purchase 1.1 million shares of common stock. The following table represents the assumptions used in the Black-Scholes option-pricing model for options granted during the nine months ended December 31, 2006 and 2005:


	Nine Months Ended
	December 31,
	2006			2005

Risk-free interest rate		4.7	%		4.0	%
Expected option lives (in years)		6			5
Expected volatility for options		31	%		33	%
Expected dividend yield		None			None

The weighted-average grant-date fair values for options granted during the nine months ended December 31, 2006 and 2005 were $3.92 and $3.61, respectively.

The following table illustrates the effect on net loss and loss per common share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock options issued and modified under the Company’s stock option plans to the three and nine months ended December 31, 2005. For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes option-pricing model and amortized to expense over the options’ vesting periods.


	Three Months			Nine Months
	Ended			Ended
	December 31,			December 31,
	2005			2005
	(Amounts in thousands, except per share data)

Numerator:
Net income (loss), as reported	$	3,142		$	(32,783	)
Add: stock-based compensation expense calculated using intrinsic value method and included in reported net income (loss)		—			27
Deduct: stock-based compensation expense calculated using fair value method		(419	)		(1,553	)

Net income (loss), pro forma	$	2,723		$	(34,309	)

Denominator:
Weighted average common shares outstanding		103,936			102,724

Income (loss) per share:
Basic and diluted — as reported	$	0.03		$	(0.33	)

Basic and diluted — pro forma	$	0.03		$	(0.33	)

The compensation cost under all of our various stock option and long-term incentive plans during the three and nine months ended December 31, 2006 resulted in compensation expense of $2.9 million and $5.7 million respectively (2005 — reduction in expense of $2.1 and $2.9 million, respectively). There was no income tax benefit recognized in the statement of operations for share-based compensation arrangements for the three and nine months ended December 31, 2006 and 2005.

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Option and Long-Term Incentive Plans

The Company has two stock option and long-term incentive plans that permit the grant of stock options and other equity awards to certain employees, officers and non-employee directors for up to 16.0 million shares of common stock.

The shareholders approved an Employees’ and Directors’ Equity Incentive Plan (the “Plan”) that provides for the issue of up to 8.0 million common shares of the Company to eligible employees, directors and service providers of the Company and its affiliates. On July 25, 2003, the Board of Directors increased the number of shares authorized for stock options from 8.0 million to 9.0 million. Of the 9.0 million common shares allocated for issuance, up to a maximum of 250,000 common shares may be issued as discretionary bonuses in accordance with the terms of a share bonus plan. At December 31, 2006, 69,098 common shares were available for grant under the Plan.

With the approval of the 2004 Performance Incentive Plan (the “2004 Plan”), no new awards were granted under the Plan subsequent to the 2004 Annual General Meeting of Shareholders. Any remaining shares available for additional grant purposes under the Plan may be issued under the 2004 Plan. The 2004 Plan provided for the issue of up to an additional 2.0 million common shares of the Company to eligible employees, directors, officers and other eligible persons through the grant of awards and incentives for high levels of individual performance and improved financial performance of the Company. On September 12, 2006, the Company’s shareholders approved an increase of 5.0 million common shares under the 2004 Plan. The 2004 Plan authorizes stock options, share appreciation rights, restricted shares, share bonuses and other forms of awards granted or denominated in the Company’s common shares. The per share exercise price of an option granted under the 2004 Plan generally may not be less than the fair market value of a common share of the Company on the date of grant. The maximum term of an option granted under the 2004 Plan is ten years from the date of grant. At December 31, 2006, 1,978,158 common shares were available for grant under the 2004 Plan.

A summary of option activity under the various plans as of December 31, 2006, and changes during the nine months then ended is presented below:


						Weighted
				Weighted-		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
Options	Shares			Price		Term		Value

Outstanding at April 1, 2006		5,170,104		$	4.19
Granted		—			—
Exercised		(123,633	)		2.87
Forfeited or expired		(16,841	)		8.13

Outstanding at June 30, 2006		5,029,630		$	4.21
Granted		2,100,000			9.68
Exercised		(773,755	)		2.68
Forfeited or expired		(10,998	)		7.16

Outstanding at September 30, 2006		6,344,877		$	6.20
Granted		—			—
Exercised		(199,999	)		4.25
Forfeited or expired		(7,499	)		8.34

Outstanding at December 31, 2006		6,137,379		$	6.26		4.32	$	27,451,502

Outstanding Options as of December 31, 2006, vested or expected to vest in the future		5,830,510		$	6.26		4.11	$	26,078,926

Exercisable at December 31, 2006		3,525,378		$	3.86		0.77	$	24,219,717

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The total intrinsic value of options exercised during the three and nine months ended December 31, 2006 were $1.4 million and $7.4 million, respectively (2005 — $0.3 million and $1.6 million, respectively).

Restricted Share Units. Effective June 27, 2005 the Company, pursuant to the 2004 Plan, entered into restricted share unit agreements with certain employees and directors. During the three and nine months ended December 31, 2006, the Company awarded 64,875 and 1,329,833 restricted share units, respectively, under these agreements (2005 — 158,125 share units and 518,000 share units, respectively).

A summary of the status of the Company’s restricted share units as of December 31, 2006, and changes during the nine months ended December 31, 2006, is presented below:


				Weighted-
				Average
	Number of			Grant Date
	Shares			Fair Value

Outstanding at April 1, 2006		508,667		$	10.18
Granted		352,875			8.96
Vested		(85,766	)		10.60
Forfeited		(4,625	)		10.44

Outstanding at June 30, 2006		771,151		$	9.56
Granted		912,083			9.56
Vested		(27,170	)		10.11
Forfeited		(8,859	)		9.64

Outstanding at September 30, 2006		1,647,205		$	9.56
Granted		64,875			10.41
Vested		(34,545	)		10.07
Forfeited		(9,874	)		9.08

Outstanding at December 31, 2006		1,667,661		$	9.59

The fair values of restricted share units are determined based on the market value of the shares on the date of grant. The weighted-average grant-date fair values of restricted share units granted during the nine months ended December 31, 2006 and 2005 were $9.44 and $10.30, respectively. The total fair value of shares vested during the nine months ended December 31, 2006 and 2005 were $1.5 million and $0.4 million, respectively. Compensation expense recorded for these restricted share units was $1.4 million and $2.8 million during the three and nine months ended December 31, 2006, respectively (2005 — $0.4 million and $1.2 million, respectively). As of December 31, 2006, the total remaining unrecognized compensation cost related to nonvested stock options and restricted share units was $8.4 million and $13.5 million, respectively, which is expected to be recognized over a weighted-average period of 2.6 years and 2.6 years, respectively.

Under the Company’s two stock option and long term incentive plans, the Company withholds shares to satisfy minimum statutory federal, state and local tax withholding obligations arising from the vesting of restricted share units. During the nine months ended December 31, 2006, 48,057 shares were withheld upon the vesting of restricted share units.

The Company becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the stock options and restricted share units when vesting occurs, the restrictions are released and the shares are issued. Restricted share units are forfeited if the employees terminate prior to vesting.

Stock Appreciation Rights. On November 13, 2001, the Board of Directors of the Company resolved that 750,000 options, granted to certain officers of the Company to purchase common shares of the Company, be revised as stock appreciation rights (“SARs”) which entitle the holders to receive cash only and not common shares. The

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

amount of cash received was to be equal to the amount by which the trading price of common shares on the exercise notice date exceeds the SARs’ price of $5.00 multiplied by the number of options exercised. Any twenty-day average trading price of common shares prior to the exercise notice date had to be $6.00 or above in order for the officers to exercise their SARs. These SARs are not considered part of the Employees’ and Directors’ Equity Incentive Plan. Through March 31, 2006, the Company measured compensation expense as the amount by which the market value of common shares exceeded the SARs’ price. The SARs were fully vested prior to the adoption of SFAS No. 123(R). Effective April 1, 2006, upon the adoption of SFAS No. 123(R), the Company measured compensation expense based on the fair value of the SARs determined by using the Black-Scholes option-pricing model. For the three and nine months ended December 31, 2006, the following assumptions were used in the Black-Scholes option-pricing model: Volatility of 41.8%, Risk Free Rate of 5.0%-5.2%, Expected Term of 0.17-1.25 years, and Dividend of 0%. On August 11, 2006, an officer exercised 375,000 SARs and received $1.6 million in cash. The trading price of common shares at the exercise date was $9.27. The Company recorded nil and a reduction of $0.3 million in stock-based compensation expense for the three and nine months ended December 31, 2006, (2005 — reduction of expense of $0.7 million and $1.3 million, respectively), in the unaudited condensed consolidated statements of operations. The Company has no stock-based compensation accrual at December 31, 2006 related to this award (March 31, 2006 — $1.9 million). On September 20, 2006, another officer’s 375,000 fully vested and outstanding SARs were cancelled in exchange for $2.1 million in cash. The Company recorded nil and $0.1 million in stock-based compensation expense for the three and nine months ended December 31, 2006 (2005 — reduction of expense of $0.7 million and $1.3 million, respectively). During the quarter ended December 31, 2006, the $2.1 million cash consideration was paid to the officer and therefore the Company has no stock-based compensation accrual at December 31, 2006 related to this award (March 31, 2006 — $1.9 million).

On February 2, 2004, an officer of the Company was granted 1,000,000 SARs, which entitle the officer to receive cash only, and not common shares. The amount of cash received will be equal to the amount by which the trading price of common shares on the exercise notice date exceeds the SARs’ price of $5.20 multiplied by the number of SARs exercised. The SARs vested one quarter immediately on the award date and one quarter on each of the first, second and third anniversaries of the award date. These SARs are not considered part of the Employees’ and Directors’ Equity Incentive Plan. Applying FIN No. 28 “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans,” the Company is accruing compensation expense over the service period, which is assumed to be the three-year vesting period, using a graded approach. Through March 31, 2006, the Company measured compensation expense as the amount by which the market value of common shares exceeded the SARs’ price. Effective April 1, 2006, upon the adoption of SFAS No. 123(R), the Company measures compensation expense based on the fair value of the SARs which is determined by using the Black-Scholes option-pricing model. For the three and nine months ended December 31, 2006, the following assumptions were used in the Black-Scholes option-pricing model: Volatility of 37.8%, Risk Free Rate of 4.9%, Expected Term of 2.1 years, and Dividend of 0%. At December 31, 2006, the market price of our common shares was $10.73, the weighted average fair value of the SAR was $6.13, and 992,473 of the SARs had vested. Due to the increase in the market price of its common shares, the Company recorded additional stock-based compensation expense in the amount of $0.6 million and $1.3 million in general and administration expenses in the unaudited condensed consolidated statement of operations for the three and nine months ended December 31, 2006 (2005 — reduction in expense of $1.2 million and $1.6 million, respectively). During the year ended March 31, 2005 the officer exercised 150,000 of the vested SARs and the Company paid $0.9 million. The compensation expense amount in the period is calculated by using the fair value of the SAR, multiplied by the remaining 992,473 SARs assumed to have vested under the graded methodology less the 150,000 SARs exercised less the amount previously recorded. At December 31, 2006, the Company has a stock-based compensation accrual in the amount of $5.2 million (March 31, 2006 — $3.9 million) included in accounts payable and accrued liabilities on the condensed consolidated balance sheets relating to these SARs.

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


13.	Segment Information

SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” requires the Company to make certain disclosures about each reportable segment. The Company’s reportable segments are determined based on the distinct nature of their operations and each segment is a strategic business unit that offers different products and services and is managed separately. The Company evaluates performance of each segment using segment profit (loss) as defined below. The Company has two reportable business segments: Motion Pictures and Television.

Motion Pictures consists of the development and production of feature films, acquisition of North American and worldwide distribution rights, North American theatrical, video and television distribution of feature films produced and acquired and worldwide licensing of distribution rights to feature films produced and acquired.

Television consists of the development, production and worldwide distribution of television productions, including television series, television movies and mini-series and non-fiction programming.

As a result of the Company’s sale of the studio facilities on March 15, 2006, the Company no longer discloses its studio operations as a reportable segment.

Segmented information by business unit is as follows:


	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	December 31,		December 31,		December 31,		December 31,
	2006		2005		2006		2005
	(Amounts in thousands)

Segment revenues
Motion Pictures	$	221,592	$	203,314	$	573,376	$	518,579
Television		32,939		25,999		71,780		114,551

	$	254,531	$	229,313	$	645,156	$	633,130

Direct operating expenses
Motion Pictures	$	81,282	$	86,520	$	212,784	$	214,658
Television		29,639		23,608		61,405		103,694

	$	110,921	$	110,128	$	274,189	$	318,352

Distribution and marketing
Motion Pictures	$	93,691	$	98,897	$	289,348	$	288,685
Television		2,112		589		6,846		1,970

	$	95,803	$	99,486	$	296,194	$	290,655

General and administration
Motion Pictures	$	8,493	$	6,758	$	21,685	$	19,178
Television		1,021		243		2,071		468

	$	9,514	$	7,001	$	23,756	$	19,646

Segment profit (loss)
Motion Pictures	$	38,126	$	11,139	$	49,559	$	(3,942	)
Television		167		1,559		1,458		8,419

	$	38,293	$	12,698	$	51,017	$	4,477

Acquisition of investment in films and television programs
Motion Pictures	$	41,518	$	31,952	$	141,381	$	114,796
Television		40,978		25,829		105,186		100,396

	$	82,496	$	57,781	$	246,567	$	215,192

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Purchases of property and equipment amounted to $4.2 million and $7.7 million for the three and nine months ending December 31, 2006, respectively, and $2.0 million and $4.2 million for the three and nine months ending December 31, 2005, respectively, all primarily pertaining to the corporate headquarters.

Segment profit (loss) is defined as segment revenue less segment direct operating, distribution and marketing, and general and administration expenses. The reconciliation of total segment profit (loss) to the Company’s income (loss) before income taxes is as follows:


	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	December 31,			December 31,			December 31,			December 31,
	2006			2005			2006			2005
	(Amounts in thousands)

Company’s total segment profit	$	38,293		$	12,698		$	51,017		$	4,477
Less:
Corporate general and administration		(13,833	)		(5,886	)		(40,551	)		(25,583	)
Depreciation		(824	)		(416	)		(1,949	)		(1,348	)
Interest expense		(4,601	)		(4,698	)		(14,181	)		(13,954	)
Interest rate swaps mark-to-market		—			—			—			(123	)
Interest income		2,906			1,046			7,753			2,962
Equity interests		(425	)		(44	)		(802	)		(98	)

Income (loss) Before Income Taxes	$	21,516		$	2,700		$	1,287		$	(33,667	)

The following table sets forth significant assets as broken down by segment and other unallocated assets as of December 31, 2006 and March 31, 2006:


	December 31, 2006						March 31, 2006
	Motion						Motion
	Pictures		Television		Total		Pictures		Television		Total
	(Amounts in thousands)

Significant assets by segment
Accounts receivable	$	76,221	$	40,819	$	117,040	$	155,318	$	27,341	$	182,659
Investment in films and television programs		420,994		114,458		535,452		368,932		48,818		417,750
Goodwill		178,685		19,120		197,805		179,847		5,270		185,117

	$	675,900	$	174,397	$	850,297	$	704,097	$	81,429	$	785,526

Other unallocated assets						307,354						267,723

Total assets					$	1,157,651					$	1,053,249


14.	Commitments & Contingencies

The Company is from time to time involved in various claims, legal proceedings and complaints arising in the ordinary course of business. The Company does not believe that adverse decisions in any such pending or threatened proceedings, or any amount which the Company might be required to pay by reason thereof, would have a material adverse effect on the financial condition or future results of the Company. The Company has provided an accrual for estimated losses under the above matters as of December 31, 2006, in accordance with SFAS No. 5, “Accounting for Contingencies.”

The Company has entered into an agreement to guarantee a production loan limited to $27 million, for the production of a television series produced by a third party. The fair value of this guarantee was not significant due to remote likelihood of default by the third party, and the underlying collateral retained by the Company.

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


15.	Consolidating Financial Information

In October 2004, the Company sold $150.0 million of the 2.9375% Notes, through its wholly owned U.S. subsidiary Lions Gate Entertainment Inc. (the “Issuer”). The 2.9375% Notes, by their terms, are fully and unconditionally guaranteed by the Company. On February 4, 2005, the Company filed a registration statement on Form S-3 to register the resale of the 2.9375% Notes and common shares issuable on conversion of the 2.9375% Notes. On March 3, 2005, the registration statement was declared effective by the SEC.

In February 2005, the Company sold $175.0 million of the 3.625% Notes, through the Issuer. The 3.625% Notes, by their terms, are fully and unconditionally guaranteed by the Company. On March 29, 2005, and as amended April 6, 2005, the Company filed a registration statement on Form S-3 to register the resale of the 3.625% Notes and common shares issuable on conversion of the 3.625% Notes. On April 13, 2005, the registration statement was declared effective by the SEC.

The following tables present condensed consolidating financial information as of December 31, 2006 and March 31, 2006 and for the nine months ended December 31, 2006 and 2005 for (1) the Company, on a stand-alone basis, (2) the Issuer, on a stand-alone basis, (3) the non-guarantor subsidiaries of the Company (including the subsidiaries of the Issuer) on a combined basis (collectively, the “Other Subsidiaries”) and (4) the Company on a consolidated basis.

BALANCE SHEET


	As of December 31, 2006
	Lions Gate			Lions Gate
	Entertainment			Entertainment			Other			Consolidating			Lions Gate
	Corp.			Inc.			Subsidiaries			Adjustments			Consolidated
	(Amounts in thousands)

ASSETS
Cash and cash equivalents	$	1,991		$	—		$	37,482		$	—		$	39,473
Restricted cash		—			2,196			7,774			—			9,970
Investments — auction rate securities		—			206,643			—			—			206,643
Investments — equity securities		—			14,080			—			—			14,080
Accounts receivable, net		287			434			116,319			—			117,040
Investment in films and television programs		—			6,632			528,820			—			535,452
Property and equipment		—			13,319			—			—			13,319
Goodwill		—			—			197,805			—			197,805
Other assets		38			11,986			11,845			—			23,869
Investment in subsidiaries		276,915			525,233			—			(802,148	)		—

	$	279,231		$	780,523		$	900,045		$	(802,148	)	$	1,157,651


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY)
Accounts payable and accrued liabilities	$	489		$	25,886		$	142,016		$	—		$	168,391
Participation and residuals		—			—			170,710			—			170,710
Film obligations		—			5,000			189,359			—			194,359
Subordinated notes		—			325,000			—			—			325,000
Deferred revenue		—			—			81,184			—			81,184
Intercompany payables (receivables)		(229,250	)		365,335			(37,443	)		(98,642	)		—
Intercompany equity		289,985			93,217			335,089			(718,291	)		—
Shareholders’ equity (deficiency)		218,007			(33,915	)		19,130			14,785			218,007

	$	279,231		$	780,523		$	900,045		$	(802,148	)	$	1,157,651

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

STATEMENT OF OPERATIONS


	Nine Months Ended December 31, 2006
	Lions Gate			Lions Gate
	Entertainment			Entertainment			Other			Consolidating			Lions Gate
	Corp.			Inc.			Subsidiaries			Adjustments			Consolidated
	(Amounts in thousands)

Revenues	$	—		$	12,199		$	636,564		$	(3,607	)	$	645,156
EXPENSES:
Direct operating		—			—			274,189			—			274,189
Distribution and marketing		86			539			295,569			—			296,194
General and administration		1,233			39,306			23,768			—			64,307
Depreciation		—			25			1,924			—			1,949

Total expenses		1,319			39,870			595,450			—			636,639

OPERATING INCOME (LOSS)		(1,319	)		(27,671	)		41,114			(3,607	)		8,517

Other Expense (Income):
Interest expense		116			13,897			168			—			14,181
Interest income		(136	)		(8,001	)		384			—			(7,753	)

Total other expenses		(20	)		5,896			552			—			6,428

INCOME (LOSS) BEFORE EQUITY INTERESTS AND INCOME TAXES		(1,299	)		(33,567	)		40,562			(3,607	)		2,089
Equity interests		3,485			40,542			(801	)		(44,028	)		(802	)

INCOME (LOSS) BEFORE INCOME TAXES		2,186			6,975			39,761			(47,635	)		1,287
Income tax provision (benefit)		(273	)		611			(1,510	)		—			(1,172	)

NET INCOME (LOSS)	$	2,459		$	6,364		$	41,271		$	(47,635	)	$	2,459

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

STATEMENT OF CASH FLOWS


	Nine Months Ended December 31, 2006
	Lions Gate			Lions Gate
	Entertainment			Entertainment			Other			Consolidating			Lions Gate
	Corp.			Inc.			Subsidiaries			Adjustments			Consolidated
	(Amounts in thousands)

NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES	$	(9,328	)	$	79,248		$	(6,275	)	$	2,060		$	65,705

INVESTING ACTIVITIES:
Purchases of investments — auction rate securities		—			(575,789	)		—			—			(575,789	)
Sales of investments — auction rate securities		—			536,226			—			—			536,226
Acquisition of Redbus, net of cash acquired		—			(45	)		—			45			—
Acquisition of Debmar, net of cash acquired		—			(24,740	)		603			—			(24,137	)
Funding of joint venture — FEARnet		—			(5,000	)		—			—			(5,000	)
Purchases of property and equipment		—			(5,264	)		(2,473	)		—			(7,737	)

NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES		—			(74,612	)		(1,870	)		45			(76,437	)

FINANCING ACTIVITIES:
Issuance of common shares		3,235			—			—			45			3,280

NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES		3,235			—			—			45			3,280
NET CHANGE IN CASH AND CASH EQUIVALENTS		(6,093	)		4,636			(8,145	)		2,150			(7,452	)

FOREIGN EXCHANGE EFFECT ON CASH		1,365			1,611			(1,155	)		(1,874	)		(53	)
CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD		6,370			—			40,446			162			46,978

CASH AND CASH EQUIVALENTS — END OF PERIOD	$	1,642		$	6,247		$	31,146		$	438		$	39,473

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

BALANCE SHEET


	As of March 31, 2006
	Lions Gate			Lions Gate
	Entertainment			Entertainment			Other			Consolidating			Lions Gate
	Corp.			Inc.			Subsidiaries			Adjustments			Consolidated
	(Amounts in thousands)

ASSETS
Cash and cash equivalents	$	6,541		$	—		$	40,437		$	—		$	46,978
Restricted cash		—			—			820			—			820
Investments — auction rate preferreds and municipal bonds		—			167,081			—			—			167,081
Investments — equity securities		—			14,921			—			—			14,921
Accounts receivable, net		299			829			181,531			—			182,659
Investment in films and television programs		—			5,245			412,505			—			417,750
Property and equipment		—			7,131			87			—			7,218
Goodwill		—			—			185,117			—			185,117
Other assets		27			16,377			14,301			—			30,705
Investment in subsidiaries		228,573			312,011			—			(540,584	)		—

	$	235,440		$	523,595		$	834,798		$	(540,584	)	$	1,053,249


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY)
Accounts payable and accrued liabilities	$	742		$	4,087		$	183,964		$	—		$	188,793
Unpresented bank drafts		—			14,772			—			—			14,772
Participation and residuals		—			—			164,326			—			164,326
Film obligations		—			—			120,661			—			120,661
Subordinated notes		—			385,000			—			—			385,000
Deferred revenue		—			—			30,427			—			30,427
Intercompany payables (receivables)		(168,726	)		188,859			(5,927	)		(14,206	)		—
Intercompany equity		254,154			93,217			329,948			(677,319	)		—
Shareholders’ equity (deficiency)		149,270			(162,340	)		11,399			150,941			149,270

	$	235,440		$	523,595		$	834,798		$	(540,584	)	$	1,053,249

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

STATEMENT OF OPERATIONS


	Nine Months Ended December 31, 2005
	Lions Gate			Lions Gate
	Entertainment			Entertainment			Other			Consolidating			Lions Gate
	Corp.			Inc.			Subsidiaries			Adjustments			Consolidated
	(Amounts in thousands)

Revenues	$	513		$	964		$	632,098		$	(445	)	$	633,130
EXPENSES:
Direct operating		—			—			318,352			—			318,352
Distribution and marketing		—			275			290,380			—			290,655
General and administration		1,407			24,180			20,087			(445	)		45,229
Depreciation		—			71			1,277			—			1,348

Total expenses		1,407			24,526			630,096			(445	)		655,584

OPERATING INCOME (LOSS)		(894	)		(23,562	)		2,002			—			(22,454	)

Other Expenses (Income):
Interest expense		1			13,861			92			—			13,954
Interest rate swaps mark-to-market		—			123			—			—			123
Interest income		—			(2,863	)		(99	)		—			(2,962	)

Total other expenses (income), net		1			11,121			(7	)		—			11,115

INCOME (LOSS) BEFORE EQUITY INTERESTS AND INCOME TAXES		(895	)		(34,683	)		2,009			—			(33,569	)
Equity interests		(31,863	)		(11,584	)		(98	)		43,447			(98	)

INCOME (LOSS) BEFORE INCOME TAXES		(32,758	)		(46,267	)		1,911			43,447			(33,667	)
Income tax provision		25			310			(95	)		—			240

NET INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS		(32,783	)		(46,577	)		2,006			43,447			(33,907	)
Income (loss) from discontinued operations, net of tax of $579		—			—			1,124			—			1,124

NET INCOME (LOSS)	$	(32,783	)	$	(46,577	)	$	3,130		$	43,447		$	(32,783	)

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

STATEMENT OF CASH FLOWS


	Nine Months Ended December 31, 2005
	Lions Gate		Lions Gate
	Entertainment		Entertainment			Other			Consolidating		Lions Gate
	Corp.		Inc.			Subsidiaries			Adjustments		Consolidated
	(Amounts in thousands)

NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES — CONTINUING OPERATIONS	$	2,250	$	(15,636	)	$	70,511		$	—	$	57,125
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES — DISCONTINUED OPERATIONS		—		—			1,808			—		1,808

NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES		2,250		(15,636	)		72,319			—		58,933

INVESTING ACTIVITIES:
Purchases of investments — auction rate preferreds and municipal bonds		—		(163,400	)		—			—		(163,400	)
Purchases of investments — equity securities		—		(3,470	)		—			—		(3,470	)
Sales of investments — auction rate preferreds		—		82,500			—			—		82,500
Cash received from sale of investment		—		—			2,945			—		2,945
Acquisition of Redbus, net of cash acquired		—		(27,122	)		—			—		(27,122	)
Purchases of property and equipment		—		(4,133	)		(40	)		—		(4,173	)

NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES — CONTINUING OPERATIONS		—		(115,625	)		2,905			—		(112,720	)
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES — DISCONTINUED OPERATIONS		—		—			114			—		114

NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES		—		(115,625	)		3,019			—		(112,606	)

FINANCING ACTIVITIES:
Issuance of common shares		779		—			—			—		779
Financing fees		—		(240	)		—			—		(240	)
Repayment of subordinated notes		—		—			(5,000	)		—		(5,000	)

NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES — CONTINUING OPERATIONS		779		(240	)		(5,000	)		—		(4,461	)
NET CASH FLOWS USED IN FINANCING ACTIVITIES — DISCONTINUED OPERATIONS		—		—			(2,523	)		—		(2,523	)

NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES		779		(240	)		(7,523	)		—		(6,984	)

LIONS GATE ENTERTAINMENT CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Nine Months Ended December 31, 2005

Lions Gate
Lions Gate

Entertainment
Entertainment
Other
Consolidating
Lions Gate

Corp. Inc. Subsidiaries Adjustments Consolidated

(Amounts in thousands)

NET CHANGE IN CASH AND CASH EQUIVALENTS
3,029 (131,501 ) 67,815 — (60,657 )

FOREIGN EXCHANGE EFFECT ON CASH — CONTINUING OPERATIONS
(3,045 ) 1,829 (558 ) — (1,774 )

FOREIGN EXCHANGE EFFECT ON CASH — DISCONTINUED OPERATIONS
— — 140 — 140

FOREIGN EXCHANGE EFFECT ON CASH
(3,045 ) 1,829 (418 ) — (1,634 )

CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD
943 106,356 5,540 — 112,839

CASH AND CASH EQUIVALENTS — END OF PERIOD
$ 927 $ (23,316 ) $ 72,937 $ — $ 50,548


16.	Subsequent Events

On February 1, 2007, the Company announced that its wholly-owned subsidiary, Lionsgate Australia Pty Ltd, intends to make a takeover offer for all of the ordinary shares issued in the Australian Securities Exchange listed Magna Pacific (Holdings) Limited, an independent DVD distributor in Australia and New Zealand. The offer price is approximately US$0.25 per share, or a total of approximately US$27,000,000 if all of the outstanding shares are acquired (including shares already owned by the Company).


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations.*

Overview

Lions Gate Entertainment Corp. (“Lionsgate,” the “Company,” “we,” “us” or “our”) is a diversified independent producer and distributor of motion pictures, television programming, home entertainment, family entertainment, video-on-demand and music content. We release approximately 15 to 18 motion pictures theatrically per year. Our theatrical releases include films we produce in-house and films we acquire from third parties. We also have produced approximately 97 hours of television programming on average each of the last three years. Our disciplined approach to production, acquisition and distribution is designed to maximize our profit by balancing our financial risks against the probability of commercial success of each project. We currently distribute our library of more than 10,000 motion picture titles and television episodes and programs directly to retailers, video rental stores, and pay and free television channels in the U.S., UK and Ireland and indirectly to other international markets through third parties. We own a minority interest in CinemaNow, Inc. (“CinemaNow”), an internet video-on-demand provider. We also own a minority interest in Maple Pictures Corp. (“Maple Pictures”), a Canadian film and television distributor based in Toronto, Canada. We have distribution agreements with Maple Pictures through which we distribute our library and other titles in Canada.

Our revenues are derived from the following business segments:


	•	Motion Pictures, which includes Theatrical, Home Entertainment, Television and International Distribution. Theatrical revenues are derived from the theatrical release of motion pictures in the United States which are distributed to theatrical exhibitors on a picture by picture basis. The financial terms that we negotiate with our theatrical exhibitors generally provide that we receive a percentage of the box office results and are negotiated on a picture by picture basis. Home entertainment revenues are derived primarily from the sale of video and DVD releases of our own productions and acquired films, including theatrical releases and direct-to-video releases, to retail stores. In addition, we have revenue sharing arrangements with certain rental stores which generally provide that in exchange for a nominal or no upfront sales price we share in the rental revenues generated by each such store on a title by title basis. Television revenues are primarily derived from the licensing of our productions and acquired films to the domestic cable, free and pay television markets. International revenues include revenues from our UK subsidiary and from the licensing of our productions and acquired films to international markets on a territory-by-territory basis. Our revenues are derived from the United States, Canada and other foreign countries; none of the foreign countries individually comprised greater than 10% of total revenue.

	•	Television Productions, which includes the licensing to domestic and international markets of one-hour and half-hour drama series, television movies and mini-series and non-fiction programming and revenues from the sale of television production movies or series in other media including home entertainment.

	•	Studio Facilities, which included Lions Gate Studios and the leased facility Eagle Creek Studios, and which derived revenue from rental of sound stages, production offices, construction mills, storage facilities and lighting equipment to film and television producers. We sold our studio facilities located in Vancouver, British Columbia on March 15, 2006. Studio facilities previously comprised the Company’s studio facilities reporting segment. Therefore, the Company is not reporting this segment in fiscal 2007. Total revenues and expenses of the Studio Facilities are reported net within discontinued operations in the statements of operations for all periods prior to the sale.

Our primary operating expenses include the following:


	•	Direct Operating Expenses, which include amortization of production or acquisition costs, participation and residual expenses and provision for doubtful accounts. Participations costs represent contingent consideration payable based on the performance of the film to parties associated with the film, including producers, writers, directors or actors, etc. Residuals represent amounts payable to various unions or “guilds” such as the Screen Actors Guild, Directors Guild of America, Writers Guild of America, based on the performance of the film in certain ancillary markets or based on the individual’s (i.e. actor, director, writer) salary level in the television market.


	•	Distribution and Marketing Expenses, which primarily include the costs of theatrical “prints and advertising” and of video and DVD duplication and marketing. Theatrical print and advertising represent the costs of the theatrical prints delivered to theatrical exhibitors and advertising includes the advertising and marketing cost associated with the theatrical release of the picture. Video and DVD duplication represent the cost of the video and DVD product and the manufacturing costs associated with creating the physical products. Video and DVD marketing costs represent the cost of advertising the product at or near the time of its release or special promotional advertising.

	•	General and Administration Expenses, which include salaries and other overhead.

Recent Developments

4.875% Notes Conversion. On December 15, 2006, in response to our optional redemption notice, all of the noteholders of the 4.875% Notes voluntarily elected to convert their notes into the Company’s common shares. A total of $60 million of principal was converted into 11,105,664 common shares at a conversion price of $5.40 per share. In connection with this conversion, the principal amount net of the unamortized portion of the financing costs associated with the original conversion of the 4.875% Notes of approximately $2.1 million was recorded as an increase to common shares. The shares issued pursuant to the conversion were previously reserved for such issuance pursuant to the conversion.

Debmar. On July 3, 2006, the Company acquired all of the capital stock of Debmar-Mercury LLC (“Debmar”), an independent distributor of film and television packages. Consideration for the Debmar acquisition was $27.5 million, comprised of a combination of $24.5 million in cash paid on July 3, 2006 and up to $3.0 million in common shares of the Company to be issued on January 1, 2008 if there are no breaches requiring indemnification by the seller of certain representations and warranties made by the seller. An additional $0.2 million has been incurred in acquisition costs. The $3.0 million of shares to be issued has been recorded as part of the purchase consideration and reflected as a liability. If no incremental liabilities become known by January 1, 2008 then the shares will be issued and the $3.0 million will be reclassified to equity. The purchase price may be adjusted for the payment of additional consideration contingent on the financial performance of Debmar for the five-year period ending June 30, 2011. The Debmar acquisition provides the Company with the rights to distribute certain television properties, such as the television series South Park, and provides the Company with an experienced management team to further enhance its capacity to syndicate its own and others television programming and feature film packages.

Image. During the year ended March 31, 2006, the Company purchased in the open market 1,150,000 common shares of Image for $3.5 million in cash, representing an average cost per share of $3.02. Also during the year ended March 31, 2006, the Company completed a negotiated exchange with certain shareholders of Image in which the Company exchanged 1,104,004 of its common shares (at $10.45 per share) in return for 2,883,996

common shares of Image (at $4.00 per share). The cost on an exchanged basis of the additional 2,883,996 common shares of Image is $11.5 million. As of December 31, 2006 and March 31, 2006, the Company held 4,033,996 common shares of Image acquired at an average cost per share of $3.72; the shares held by the Company represent approximately 18.7% of Image’s outstanding common shares as of January 31, 2007. The closing price of Image’s common shares on December 31, 2006 was $3.49 per common share (March 31, 2006 — $3.70 per common share). As a result, the Company had unrealized losses of $0.9 million and $0.1 million on its investment in Image common shares as of December 31, 2006 and March 31, 2006, respectively. The Company has reported the increase in the unrealized loss of $0.8 million as other comprehensive loss in the consolidated statement of shareholder’s equity for the nine months ended December 31, 2006.

CinemaNow. At March 31, 2006, the Company had a 30% equity interest on an undiluted basis in CinemaNow, Inc. (“CinemaNow”). The investment in CinemaNow is accounted for using the equity method. The investment in CinemaNow on our consolidated balance sheet was nil at March 31, 2006. In June 2006, the Company purchased $1.0 million Series E Preferred Stock as part of a $20.3 million round of financing secured by CinemaNow. At December 31, 2006, the Company’s equity interest in CinemaNow is 18.8% on a fully diluted basis and 21.1% on an undiluted basis. The investment in CinemaNow on our consolidated balance sheet was $0.3 million as of December 31, 2006.

Redbus. On October 17, 2005, the Company acquired all outstanding shares of Redbus, an independent film distributor located in the United Kingdom. Consideration for the Redbus acquisition was $35.5 million, comprised of a combination of $28.0 million in cash, $6.4 million in Lionsgate common shares and direct transaction costs of $1.1 million. In addition, the Company assumed other obligations (including accounts payable and accrued liabilities and film obligations) of $19.4 million. At the closing of the transaction the Company issued 643,460 common shares to Redbus Group Limited (“RGL”) valued at approximately $5.6 million, or $8.77 per share, and will issue up to an expected additional 94,937 common shares to RGL upon satisfaction of the terms of the escrow agreement to terminate on May 17, 2007. Direct transaction costs are considered liabilities assumed in the acquisition and, as such, are included in the purchase price. Direct transaction costs consist primarily of legal and accounting fees.

The Redbus acquisition was accounted for as a purchase, with the results of operations of Redbus consolidated from October 17, 2005. Goodwill of $27.1 million represents the excess of purchase price over the fair value of the net identifiable tangible and intangible assets acquired.

Lionsgate Studios. On March 15, 2006, the Company sold its studio facilities located in Vancouver, British Columbia.

CRITICAL ACCOUNTING POLICIES

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. As described more fully below, these estimates bear the risk of change due to the inherent uncertainty attached to the estimate. For example, accounting for films and television programs requires the Company to estimate future revenue and expense amounts which, due to the inherent uncertainties involved in making such estimates, are likely to differ to some extent from actual results. For a summary of all of our accounting policies, including the accounting policies discussed below, see note 2 to our March 31, 2006 audited consolidated financial statements.

Generally Accepted Accounting Principles. Our consolidated financial statements have been prepared in accordance with U.S. GAAP.

Accounting for Films and Television Programs. In June 2000, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 00-2 “Accounting by Producers or Distributors of Films” (“SoP 00-2”). SoP 00-2 establishes accounting standards for producers or distributors of films, including changes in revenue recognition, capitalization and amortization of costs of acquiring films and television programs and accounting for exploitation costs, including advertising and marketing expenses.

We capitalize costs of production and acquisition, including financing costs and production overhead, to investment in films and television programs. These costs are amortized to direct operating expenses in accordance

with SoP 00-2. These costs are stated at the lower of unamortized films or television program costs or estimated fair value. These costs for an individual film or television program are amortized and participation and residual costs are accrued in the proportion that current year’s revenues bear to management’s estimates of the ultimate revenue at the beginning of the year expected to be recognized from exploitation, exhibition or sale of such film or television program over a period not to exceed ten years from the date of initial release. For previously released film or television programs acquired as part of a library, ultimate revenue includes estimates over a period not to exceed twenty years from the date of acquisition.

Management regularly reviews and revises when necessary its ultimate revenue and cost estimates, which may result in a change in the rate of amortization of film costs and participations and residuals and/or write-down of all or a portion of the unamortized costs of the film or television program to its estimated fair value. Management estimates the ultimate revenue based on experience with similar titles or title genre, the general public appeal of the cast, actual performance (when available) at the box office or in markets currently being exploited, and other factors such as the quality and acceptance of motion pictures or programs that our competitors release into the marketplace at or near the same time, critical reviews, general economic conditions and other tangible and intangible factors, many of which we do not control and which may change. In the normal course of our business, some films and titles are more successful than anticipated and some are less successful. Accordingly, we update our estimates of ultimate revenue and participation costs based upon the actual results achieved or new information as to anticipated revenue performance such as (for home video revenues) initial orders and demand from retail stores when it becomes available. An increase in the ultimate revenue will generally result in a lower amortization rate while a decrease in the ultimate revenue will generally result in a higher amortization rate and periodically results in an impairment requiring a write down of the film cost to the title’s fair value. These write downs are included in amortization expense within direct operating expenses in our consolidated statements of operations.

Revenue Recognition. Revenue from the sale or licensing of films and television programs is recognized upon meeting all recognition requirements of SoP 00-2. Revenue from the theatrical release of feature films is recognized at the time of exhibition based on the Company’s participation in box office receipts. Revenue from the sale of videocassettes and DVDs in the retail market, net of an allowance for estimated returns and other allowances, is recognized on the later of receipt by the customer or “street date” (when it is available for sale by the customer). Under revenue sharing arrangements, rental revenue is recognized when the Company is entitled to receipts and such receipts are determinable. Revenues from television licensing are recognized when the feature film or television program is available to the licensee for telecast. For television licenses that include separate availability “windows” during the license period, revenue is allocated over the “windows.” Revenue from sales to international territories are recognized when access to the feature film or television program has been granted or delivery has occurred, as required under the sales contract, and the right to exploit the feature film or television program has commenced. For multiple media rights contracts with a fee for a single film or television program where the contract provides for media holdbacks (defined as contractual media release restrictions), the fee is allocated to the various media based on management’s assessment of the relative fair value of the rights to exploit each media and is recognized as each holdback is released. For multiple-title contracts with a fee, the fee is allocated on a title-by-title basis, based on management’s assessment of the relative fair value of each title.

Cash payments received are recorded as deferred revenue until all the conditions of revenue recognition have been met. Long-term, non-interest bearing receivables are discounted to present value.

Reserves. Revenues are recorded net of estimated returns and other allowances. We estimate reserves for video returns based on previous returns and our estimated expected future returns related to current period sales on a title-by-title basis in each of the video businesses. Factors affecting actual returns include limited retail shelf space at various times of the year, success of advertising or other sales promotions, the near term release of competing titles, among other factors. We believe that our estimates have been materially accurate in the past; however, due to the judgment involved in establishing reserves, we may have adjustments to our historical estimates in the future.

We estimate provisions for accounts receivable based on historical experience and relevant facts and information regarding the collectability of the accounts receivable. In performing this evaluation, significant judgments and estimates are involved, including an analysis of specific risks on a customer-by-customer basis for our larger customers and an analysis of the length of time receivables have been past due. The financial condition of

a given customer and its ability to pay may change over time and could result in an increase or decrease to our allowance for doubtful accounts, which, when the impact of such change is material, is disclosed in our discussion on direct operating expenses elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Income Taxes. The Company is subject to federal and state income taxes in the United States, and in several foreign jurisdictions in which we operate. We account for income taxes according to SFAS No. 109, “Accounting for Income Taxes” (SFAS No. 109). SFAS No. 109 requires the recognition of deferred tax assets, net of applicable reserves, related to net operating loss carryforwards and certain temporary differences. The standard requires recognition of a future tax benefit to the extent that realization of such benefit is more likely than not or a valuation allowance is applied. Because of our historical operating losses, we have provided a valuation allowance against our net deferred tax assets. When we have a history of profitable operations sufficient to demonstrate that it is more likely than not that our deferred tax assets will be realized, the valuation allowance will be reversed. However, this assessment of our planned use of our deferred tax assets is an estimate which could change in the future depending upon the generation of taxable income in amounts sufficient to realize our deferred tax assets.

Goodwill. On April 1, 2001, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Goodwill is reviewed annually for impairment within each fiscal year or between the annual tests if an event occurs or circumstances change that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. The Company performs its annual impairment test as of December 31 in each fiscal year. The Company performed its annual impairment test on its goodwill as of December 31, 2005. No goodwill impairment was identified in any of the Company’s reporting units. Determining the fair value of reporting units requires various assumptions and estimates. The estimates of fair value include consideration of the future projected operating results and cash flows of the reporting unit. Such projections could be different than actual results. Should actual results be significantly less than estimates, the value of our goodwill could be impaired in the future.

Business Acquisitions. The Company accounts for its business acquisitions as a purchase, whereby the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair value. The excess of the purchase price over estimated fair value of the net identifiable assets is allocated to goodwill. Determining the fair value of assets and liabilities requires various assumptions and estimates. These estimates and assumptions are refined with adjustments recorded to goodwill as information is gathered and final appraisals are completed over the allocation period allowed under SFAS No. 141. The changes in these estimates could impact the amount of assets, including goodwill and liabilities, ultimately recorded on our balance sheet as a result of an acquisition and could impact our operating results subsequent to such acquisition. We believe that our estimates have been materially accurate in the past.

Recent Accounting Pronouncements

Statement of Financial Accounting Standards No. 123(R). In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123(R)). SFAS No. 123(R) revises SFAS No. 123 and eliminates the alternative to use the intrinsic method of accounting under APB No. 25. SFAS No. 123(R) requires all public companies accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or (c) that may be settled by the issuance of such equity instruments, to account for these types of transactions using a fair-value-based method. Effective April 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment” (SFAS No. 123(R)), using the modified-prospective transition method. Under such transition method, compensation cost recognized in the three and nine months ended December 31, 2006 includes: (a) compensation cost for all stock options granted prior to, but not yet vested as of April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted on or after April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). See note 12 for further discussion of the Company’s stock-based compensation in accordance with SFAS No. 123(R).

FASB Issued Interpretation No. 48. In July 2006, the FASB issued Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of SFAS No. 109”, which prescribes a recognition threshold

and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In particular, this interpretation requires uncertain tax positions to be recognized only if they are “more-likely-than-not” to be upheld based on their technical merits. Additionally, the measurement of the tax position will be based on the largest amount that is determined to have greater than a 50% likelihood of realization upon ultimate settlement. Any resulting cumulative effect of applying the provisions of FIN 48 upon adoption would be reported as an adjustment to the beginning balance of retained earnings in the period of adoption. FIN 48 will be effective beginning fiscal 2007. We have not yet evaluated the impact of this interpretation on the Company’s consolidated financial statements.

Results of Operations

Three Months Ended December 31, 2006 Compared to Three Months Ended December 31, 2005

Consolidated revenues this quarter of $254.5 million increased $25.2 million, or 11.0%, compared to $229.3 million in the prior year’s quarter. Motion pictures revenue of $221.6 million this quarter increased $18.3 million, or 9.0%, compared to $203.3 million in the prior year’s quarter. Television revenues of $32.9 million this quarter increased $6.9 million, or 26.5%, compared to $26.0 million in the prior year’s quarter.

Motion Pictures Revenue

The increase in motion pictures revenue this quarter was mainly attributable to increases in television and international revenue, offset by decreases in video and theatrical revenue. The following table sets forth the components of revenue for the motion pictures reporting segment for the three-month periods ended December 31, 2006 and 2005:


	Three Months		Three Months
	Ended		Ended
	December 31,		December 31,		Increase (Decrease)
	2006		2005		Amount			Percent
	(Amounts in millions)

Motion Pictures
Theatrical	$	46.0	$	49.9	$	(3.9	)		(7.8	)%
Video		113.6		115.9		(2.3	)		(2.0	)%
Television		31.2		20.2		11.0			54.5	%
International		27.6		14.5		13.1			90.3	%
Other		3.2		2.8		0.4			14.3	%

	$	221.6	$	203.3	$	18.3			9.0	%

The following table sets forth the titles contributing significant motion pictures revenue for the three-month periods ended December 31, 2006 and 2005:


Three Months Ended December 31,
2006		2005
	Theatrical and Video		Theatrical and Video
Title	Release Date	Title	Release Date


Theatrical:		Theatrical:
Employee of the Month	October 2006	In The Mix	November 2005
Saw 3	October 2006	Saw 2	October 2005
		Waiting	October 2005

Video:		Video:
Akeelah and the Bee	August 2006	Barbie and the Magic of Pegasus	September 2005
An American Haunting	October 2006	Care Bears Big Wish	October 2005
Reservoir Dogs — Special	October 2006	Crash	September 2005
Saw 2	February 2006	High Tension	October 2005
See No Evil	November 2006	It’s a Wonderful Life	Promotional Release
The Descent	December 2006	Saw	February 2005
		The Devil’s Rejects	November 2005


Television: Hostel Madea’s Family Reunion The Punisher		Television: Beyond the Sea Diary of a Mad Black Woman Saw

International: Crank Saw 2 Saw 3 The Lost City		International: Happy Endings Saw 2

Theatrical revenue of $46.0 million decreased $3.9 million or 7.8% in this quarter as compared to the prior year’s quarter due to the performance during the quarter of the theatrical releases listed in the above table. In this quarter, the titles listed in the above table as contributing significant theatrical revenue in the current quarter represented approximately 98% of total theatrical revenue. In the prior year’s quarter, the titles listed in the above table as contributing significant theatrical revenue in the prior year’s quarter represented approximately 96% of total theatrical revenue.

Video revenue of $113.6 million decreased $2.3 million or 2.0% in this quarter as compared to the prior year’s quarter. The decrease is due to a decrease in revenue contributed by titles that individually make up less than 2% of total video revenue as compared to the prior year’s quarter, which was partially offset by revenue generated from the titles listed in the above table. In the current quarter $65.5 million, or 58%, of total video revenue was contributed by titles that individually make up less than 2% of total video revenue, and in the prior quarter this amounted to $76.1 million or 66% of total video revenue. The titles listed above as contributing significant video revenue in the current quarter represented individually between 2% to 16% of total video revenue and in the aggregate 42% or $48.1 million of total video revenue for the quarter. In the prior year’s quarter, the titles listed above as contributing significant video revenue represented individually between 2% to 13% of total video revenue and in the aggregate 34% or $39.8 million of total video revenue for the quarter.

Television revenue included in motion pictures revenue of $31.2 million in this quarter increased $11.0 million, or 54.5%, compared to the prior year’s quarter. The increase is due to more theatrical titles with television windows opening in the current quarter as compared to the prior year’s quarter. In this quarter, the titles listed above as contributing significant television revenue in the quarter represented individually between 12% to 37% of total

television revenue and in the aggregate 77% of total television revenue for the quarter. In the prior year’s quarter the titles listed above as contributing significant television revenue in the prior year’s quarter represented individually between 7% to 44% of total television revenue and in the aggregate 62% of total television revenue for the quarter.

International revenue of $27.6 million increased $13.1 million or 90.3% in this quarter as compared to the prior year’s quarter. Lions Gate UK, established from the acquisition of Redbus in fiscal 2006, contributed $12.0 million, or 43.5% of international revenue, which included revenues from Saw III, Hard Candy and Dirty Dancing: Havana Nights, compared to $1.2 million in the prior year’s quarter or 8.3%. In this quarter, the titles listed in the table above as contributing significant international revenue in the quarter, which does not include revenue generated from Lions Gate UK, represented individually between 6% to 9% of total international revenue and in the aggregate 28% of total international revenue for the quarter. In the prior year’s quarter the titles listed in the table above as contributing significant revenue in the prior year’s quarter represented individually between 16% to 21% of total international revenue and in the aggregate 37% of total international revenue for the quarter.

Television Revenue

The following table sets forth the components of revenue that make up television production revenue for the three-month periods ended December 31, 2006 and 2005:


	Three Months		Three Months
	Ended		Ended
	December 31,		December 31,		Increase (Decrease)
	2006		2005		Amount			Percent
	(Amounts in millions)

Television Production
Domestic series licensing	$	15.2	$	18.0	$	(2.8	)		(15.6	)%
International and other		2.0		4.2		(2.2	)		(52.4	)%
Television movies and miniseries		12.8		3.1		9.7			312.9	%
Video releases of television production		2.4		0.3		2.1			700.0	%
Other		0.5		0.4		0.1			25.0	%

	$	32.9	$	26.0	$	6.9			26.5	%

The following table sets forth the number of television episodes delivered in the three months ended December 31, 2006 and 2005, respectively:


	Three Months		Three Months
	Ended		Ended
	December 31,		December 31,
	2006		2005

Domestic Series Licensing
One Hour Series		11		17
Half Hour Series		3		—

		14		17

Television revenue of $32.9 million in this quarter increased by $6.9 million, or 26.5%, compared to $26.0 million in the prior year’s quarter, due primarily to higher revenue from television movies and miniseries offset by lower domestic series licensing revenue and lower international and other revenue. Television movies and miniseries revenue increased this quarter mainly due to the delivery of The Lost Room miniseries, as compared to the delivery of Three Wise Guys movie in the prior quarter. Domestic series licensing for the current quarter includes $4.7 million of revenue from the July 3, 2006 acquisition of Debmar. Domestic series deliveries of one-hour drama series in this quarter included 3 hour episodes of Dirty Dancing Reality TV Series, 8 hour episodes of Wildfire Season 3, and 3 half-hour episodes of I Pity the Fool. In the prior year’s quarter, domestic series deliveries of one-hour drama series included Wildfire, Missing and The Dead Zone.

Direct Operating Expenses

The following table sets forth direct operating expenses by segment for the three months ended December 31, 2006 and 2005:


	Three Months Ended									Three Months Ended
	December 31, 2006									December 31, 2005
	Motion									Motion
	Pictures			Television			Total			Pictures			Television			Total
	(Amounts in millions)

Direct operating expenses
Amortization of films and television programs	$	35.4		$	25.6		$	61.0		$	33.9		$	23.0		$	56.9
Participation and residual expense		47.6			3.6			51.2			48.0			—			48.0
Amortization of acquired intangible assets		0.2			—			0.2			0.5			—			0.5
Other expenses		(1.9	)		0.4			(1.5	)		4.1			0.6			4.7

	$	81.3		$	29.6		$	110.9		$	86.5		$	23.6		$	110.1

Direct operating expenses as a percentage of segment revenues		36.7	%		89.9	%		43.6	%		42.6	%		90.8	%		48.0	%

Direct operating expenses include amortization, participation and residual expenses and other expenses. Direct operating expenses of the motion pictures segment of $81.3 million for this quarter were 36.7% of motion pictures revenue, compared to $86.5 million, or 42.6% of motion pictures revenue for the prior year’s quarter. The decrease in direct operating expense of the motion pictures segment in the quarter as a percent of revenue is due to the change in the mix of titles generating revenue compared to prior year’s quarter and the benefit in other expense in the current quarter, as compared to a $4.1 million charge in other expense for the prior year’s quarter. The benefit in other expense in the current period resulted from the collection of accounts receivable previously reserved and foreign exchange gains of $0.5 million, as compared to a charge in other expense for the prior period primarily related to bad debt expense associated with the bankruptcy of a large retail customer. Direct operating expenses of the motion pictures segment included charges for write downs of investment in film costs of $3.3 million and $2.5 million in the current quarter and prior year quarter, respectively, due to the lower than anticipated actual performance or previously expected performance of certain titles. Direct operating expenses of the television segment of $29.6 million for this quarter were 89.9% of television revenue, compared to $23.6 million, or 90.8% of television revenue for the prior year’s quarter. The increase in direct operating expense of the television segment in the quarter is due to the increase in television production revenue in this quarter compared to prior year’s quarter.

Distribution and Marketing Expenses

The following table sets forth distribution and marketing expenses by segment for the three months ended December 31, 2006 and 2005:


	Three Months Ended						Three Months Ended
	December 31, 2006						December 31, 2005
	Motion						Motion
	Pictures		Television		Total		Pictures		Television		Total
	(Amounts in millions)

Distribution and marketing expenses
Theatrical	$	32.7	$	—	$	32.7	$	44.9	$	—	$	44.9
Home Entertainment		49.3		0.4		49.7		48.0		0.3		48.3
Television		0.2		1.2		1.4		1.0		—		1.0
International		9.9		0.5		10.4		2.1		0.3		2.4
Other		1.6		—		1.6		2.9		—		2.9

	$	93.7	$	2.1	$	95.8	$	98.9	$	0.6	$	99.5

The majority of distribution and marketing expenses relate to the motion pictures segment. Theatrical prints and advertising (“P&A”) in the motion pictures segment in this quarter of $32.7 million decreased $12.2 million, or 27.2%, compared to $44.9 million in the prior year’s quarter. Domestic theatrical P&A from the motion pictures segment in this quarter included P&A incurred on the release of titles such as Employee of the Month and Saw III, which combined accounted for 89% of the total theatrical P&A. Theatrical P&A in the prior year’s quarter included P&A incurred on the release of titles such as Saw II, In the Mix and Waiting, representing approximately 95% of total theatrical P&A.

Video distribution and marketing costs on motion pictures and television product in this quarter of $49.7 million increased $1.4 million, or 2.9%, compared to $48.3 million in the prior year’s quarter. Video distribution and marketing costs as a percentage of video revenues was 43.7% and 41.6% in the current quarter and prior year’s quarter, respectively. This increase is mainly due to the significant releases in the quarter noted in the table above and the timing of the video releases in the current quarter compared to the prior year’s quarter.

International distribution and marketing expenses in this quarter includes $7.2 million of distribution and marketing costs from Lions Gate UK as a result of the acquisition of Redbus, compared to $0.7 million in the prior year’s quarter. Distribution and marketing expenses of the television segment includes $1.1 million from the July 3, 2006 acquisition of Debmar in the current quarter.

General and Administrative Expenses

The following table sets forth general and administrative expenses by segment for the three months ended December 31, 2006 and 2005:


	Three Months		Three Months
	Ended		Ended
	December 31,		December 31,		Increase (Decrease)
	2006		2005		Amount		Percent
	(Amounts in millions)

General and Administrative Expenses
Motion Pictures	$	8.5	$	6.8	$	1.7		25.0	%
Television		1.0		0.2		0.8		400.0	%
Corporate		13.8		5.9		7.9		133.9	%

	$	23.3	$	12.9	$	10.4		80.6	%

The increase in general and administrative expenses is primarily due to corporate general and administration expenses of $13.8 million which increased by $7.9 million or 133.9% compared to $5.9 million in the prior year’s quarter. The increase in corporate general and administrative expenses is primarily due to an increase in stock based

compensation of approximately $4.8 million, an increase in salaries and related expenses of approximately $2.5 million, and an increase in professional fees of $1.6, offset by a decrease in other general overhead costs. Compensation from our restricted share units amounted to $1.2 million and $0.4 million for the three months ended December 31, 2006 and 2005, respectively. In addition, due to the adoption of SFAS No. 123(R) we recorded additional compensation expense related to our stock options amounting to $0.9 million in the three months ended December 31, 2006 with no comparable expense in the prior quarter. We incurred additional costs of $0.6 million recorded in the three months ended December 31, 2006 compared to a benefit of $2.6 million recorded in the three months ended December 31, 2005 related to stock appreciation rights which are revalued each reporting period. In this quarter, $1.3 million of production overhead was capitalized compared to $1.2 million in the prior year’s quarter. The increase in general and administrative expenses of the motion pictures segment of $1.7 million or 25.0% is primarily due to general and administrative costs associated with Lions Gate UK. The increase in general and administrative expenses of the television segment is primarily due to the July 3, 2006 acquisition of Debmar.

Depreciation and Other Expenses (Income)

Depreciation of $0.8 million this quarter increased $0.4 million, or 100% from $0.4 million in the prior year’s quarter.

Interest expense of $4.6 million this quarter decreased $0.1 million, or 2.1%, from prior year’s quarter of $4.7 million.

Interest and other income of $2.9 million for the quarter ended December 31, 2006, compared to $1.0 million in the prior year’s quarter. Interest and other income this quarter was earned on the cash balance and available-for-sale investments held during the three months ended December 31, 2006 which were higher than in the prior year’s quarter.

Equity interests of negative $0.4 million in this quarter includes the equity interest in the loss of Maple Pictures consisting of 10% of the loss of Maple Pictures and the equity interest in the loss of CinemaNow consisting of 18.8% of the loss of CinemaNow. Equity interests of nil in the prior year’s quarter includes the equity interest in the loss of Maple Pictures consisting of 10% of the losses of Maple Pictures.

The Company had an income tax provision of $1.1 million or 4.9% of income before income taxes in the three months ended December 31, 2006, compared to a benefit of $0.2 million in the three months ended December 31, 2005. The tax provision reflected in the current quarter is attributable to non-cash federal deferred income tax expense associated with the use of certain pre-acquisition net operating loss carry-forwards, and state income taxes. The Company’s actual annual effective tax rate will differ from the statutory federal rate as a result of several factors, including changes in the valuation allowance against net deferred tax assets, non-temporary differences, foreign income taxed at different rates, state and local income taxes and the utilization of acquired net operating losses.

Income before discontinued operations for the three months ended December 31, 2006 and 2005, respectively, was $20.5 million and $2.9 million, or basic earnings per common share from continuing operations of $0.19 and $0.03, respectively, on 107.6 million and 103.9 million weighted average common shares outstanding, respectively. Diluted earnings per common share from continuing operations for the three months ended December 31, 2006 and 2005, respectively, was $0.17 and $0.03 on 144.6 million and 107.2 million adjusted weighted average common shares outstanding, respectively.

Income from discontinued operations for the three months ended December 31, 2006 and 2005, respectively, was nil and $0.2 million, or basic earnings per common share from discontinued operations of nil and nil, respectively, on 107.6 million and 103.9 million weighted average common shares outstanding, respectively. Diluted earnings per common share from discontinued operations for the three months ended December 31, 2005 was nil on 107.2 million adjusted weighted average common shares outstanding.

Net income for the three months ended December 31, 2006 was $20.5 million, or basic net income per common share of $0.19 on 107.6 million weighted average shares outstanding. This compares to net income for the three months ended December 31, 2005 of $3.1 million or basic net income per common share from continuing operations of $0.03 on 103.9 million weighted average common shares outstanding. Diluted net income per

common share for the three months ended December 31, 2006 and 2005, respectively, was $0.17 and $0.03 on 144.6 million and 107.2 million adjusted weighted average common shares outstanding, respectively.

Nine Months Ended December 31, 2006 Compared to Nine Months Ended December 31, 2005

Consolidated revenues for the nine months ended December 31, 2006 of $645.2 million increased $12.1 million, or 1.9%, compared to $633.1 million for the nine months ended December 31, 2005. Motion pictures revenue of $573.4 million for the current nine-month period increased $54.8 million, or 10.6%, compared to $518.6 million in the prior year’s nine-month period. Television revenue of $71.8 million in the current nine-month period decreased $42.7 million or 37.3% compared to $114.5 million in the prior nine-month period.

Motion Pictures Revenue

The increase in motion pictures revenue this period was primarily due to the theatrical and video performance of theatrical releases during this period. The following table sets forth the components of revenue for the motion pictures reporting segment for the nine-month periods ended December 31, 2006 and 2005:


	Nine Months		Nine Months
	Ended		Ended
	December 31,		December 31,		Increase (Decrease)
	2006		2005		Amount			Percent
	(Amounts in millions)

Motion Pictures
Theatrical	$	85.0	$	91.0	$	(6.0	)		(6.6	)%
Video		343.4		333.2		10.2			3.1	%
Television		79.4		54.9		24.5			44.6	%
International		60.3		34.4		25.9			75.3	%
Other		5.3		5.1		0.2			3.9	%

	$	573.4	$	518.6	$	54.8			10.6	%

The following table sets forth the titles contributing significant motion pictures revenue for the nine-month periods ended December 31, 2006 and 2005:


Nine Months Ended December 31,
2006		2005
	Theatrical and Video		Theatrical and Video
Title	Release Date	Title	Release Date


Theatrical:		Theatrical:
Akeelah and the Bee	April 2006	Crash	May 2005
Crank	September 2006	Lord of War	September 2005
Employee of the Month	October 2006	Saw 2	October 2005
Saw 3	October 2006	The Devil’s Rejects	July 2005
See No Evil	May 2006	Waiting	October 2005
The Descent	August 2006



Video:		Video:
Akeelah and the Bee	August 2006	Alone in the Dark	May 2005
An American Haunting	October 2006	Barbie and the Magic of Pegasus	September 2005
Crash	September 2005	Beyond the Sea	June 2005
Lord of War	January 2006	Crash	September 2005
Madea Goes to Jail	June 2006	Diary of a Mad Black Woman	June 2005
Madea’s Family Reunion — Feature	June 2006	Saw	February 2005
Saw 2	February 2006	The Devil’s Rejects	November 2005
See No Evil	November 2006
The Descent	December 2006
Waiting	February 2006
Why Did I Get Married	June 2006


Television: Hostel Lord of War Madea’s Family Reunion Saw 2 The Devil’s Rejects The Punisher Waiting		Television: Diary of a Mad Black Woman Open Water Saw The Cookout The Punisher
International: Crank Hard Candy Saw 2 Saw 3 The Lost City		International: Dirty Dancing: Havana Nights Happy Endings Hotel Rwanda Saw Saw 2 The Devil’s Rejects

Theatrical revenue of $85.0 million decreased $6.0 million or 6.6% in this period as compared to the prior year’s period due to the performance during the period of the theatrical releases listed in the above table. In this period, the titles listed in the above table as contributing significant theatrical revenue in the period represented individually between 7% to 39% of total theatrical revenue and in the aggregate 93% of total theatrical revenue. In the prior year’s period, the titles listed in the above table as contributing significant theatrical revenue in the prior year’s period represented individually between 7% to 41% of total theatrical revenue and in the aggregate 88% of total theatrical revenue.

Video revenue of $343.4 million increased $10.2 million or 3.1% in this period as compared to the prior year’s period. The increase is driven by the revenue generated from the titles in the above table offset by a decrease in revenue from titles that individually contribute less than 2% of revenue. In this period, the titles listed above as contributing significant video revenue in the period represented individually between 2% to 10% of total video revenue and in the aggregate 44% or $151.3 million of total video revenue for the period. In the prior year’s period the titles listed above as contributing significant video revenue in the prior year’s period represented individually between 2% to 12% of total video revenue and in the aggregate 39% or $131.3 million of total video revenue for the period. In the current period, $192.1 million or 56% of total video revenue was contributed by titles which make up less than 2% of total video revenue and in the prior period, this amounted to $201.9 million or 61% of total video revenue.

Television revenue included in motion pictures revenue of $79.4 million in this period increased $24.5 million, or 44.6%, compared to the prior year’s period. The increase is due to more successful theatrical titles with television windows opening in the current nine months as compared to the prior nine months. In this period, the titles listed above as contributing significant television revenue in the period represented individually between 5% to 16% of total television revenue and in the aggregate 68% of total television revenue for the period. In the prior year’s period the titles listed above as contributing significant television revenue in the prior year’s period represented individually between 4% to 21% of total television revenue and in the aggregate 64% of total television revenue for the period.

International revenue of $60.3 million increased $25.9 million or 75.3% in this period as compared to the prior year’s period. Lions Gate UK, established from the acquisition of Redbus in fiscal 2006, contributed $24.0 million of international revenue or 39.8%, which included significant revenues from An American Haunting, Dirty Dancing: Havana Nights, Hard Candy, Revolver and Saw III, compared to the prior year’s contribution of $1.2 million or 3.5%. In this period, the titles listed in the table above as contributing significant international revenue in the period represented individually between 3% to 11% of total international revenue and in the aggregate 26% of total international revenue for the period. In the prior year’s period the titles listed above as contributing significant revenue in the prior year’s period represented individually between 7% to 11% of total international revenue and in the aggregate 52% of total international revenue for the period.

Television Revenue

The following table sets forth the components of revenue that make up television revenue for the nine-month periods ended December 31, 2006 and 2005:


	Nine Months		Nine Months
	Ended		Ended
	December 31,		December 31,		Increase (Decrease)
	2006		2005		Amount			Percent
	(Amounts in millions)

Television Production
Domestic series licensing	$	47.2	$	91.4	$	(44.2	)		(48.4	)%
International and other		3.9		14.7		(10.8	)		(73.5	)%
Television movies and miniseries		12.9		5.6		7.3			130.4	%
Video releases of television production		7.1		1.9		5.2			273.7	%
Other		0.7		0.9		(0.2	)		(22.2	)%

	$	71.8	$	114.5	$	(42.7	)		(37.3	)%

The following table sets forth the number of television episodes delivered in the nine months ended December 31, 2006 and 2005, respectively:


	Nine Months		Nine Months
	Ended		Ended
	December 31,		December 31,
	2006		2005

Domestic Series Licensing
One Hour Series		17		68
Half Hour Series		31		10

		48		78

Television revenue of $71.8 million in this period decreased by $42.7 million, or 37.3%, compared to $114.5 million in the prior year’s period, due primarily to lower domestic series licensing revenue. Domestic series licensing for the current nine-month period includes $9.0 million of revenue from the July 3, 2006 acquisition of Debmar. Domestic series deliveries of one-hour drama series in this period included 8 one-hour episodes of Dirty Dancing Reality TV Series, 1 one-hour episode of Wildfire Season 2, 8 one-hour episodes of Wildfire Season 3, 12 half-hour episodes of Weeds Season 2, 13 half-hour episodes of Lovespring and 6 half-hour episodes of I Pity the Fool. In the prior year’s period, domestic series deliveries of one-hour drama series included The Cut, Wildfire, Missing and Dead Zone and of the half-hour drama series Weeds. International television production revenue decreased by $11.1 million mainly due to decreases in international revenue from Dead Zone and 1-800 Missing in the current period as compared to the prior year’s period. Television movies and miniseries revenue increased this period mainly due to the delivery of The Lost Room miniseries, as compared to the delivery of Three Wise Guys movie in the prior period.

Direct Operating Expenses

The following table sets forth direct operating expenses by segment for the nine months ended December 31, 2006 and 2005:


	Nine Months Ended									Nine Months Ended
	December 31, 2006									December 31, 2005
	Motion									Motion
	Pictures			Television			Total			Pictures			Television			Total
	(Amounts in millions)

Direct operating expenses
Amortization of films and television programs	$	91.1		$	51.9		$	143.0		$	88.6		$	102.8		$	191.4
Participation and residual expense		122.9			9.3			132.2			118.0			0.2			118.2
Amortization of acquired intangible assets		0.7			—			0.7			1.8			—			1.8
Other expenses		(1.9	)		0.2			(1.7	)		6.3			0.7			7.0

	$	212.8		$	61.4		$	274.2		$	214.7		$	103.7		$	318.4

Direct operating expenses as a percentage of segment revenues		37.1	%		85.6	%		42.5	%		41.4	%		90.5	%		50.3	%

Direct operating expenses include amortization, participation and residual expenses and other expenses. Direct operating expenses of the motion pictures segment of $212.8 million for this period were 37.1% of motion pictures revenue, compared to $214.7 million, or 41.4% of motion pictures revenue for the prior year’s period. The decrease in direct operating expense of the motion pictures segment in the current period as a percent of revenue is due to the mix of titles generating revenue in the current period, lower write downs of investment in film costs, the benefit in other expense in the current period as compared to an other expense charge of $6.3 million in the prior period. The benefit in other expense in the current period resulted from the collection of accounts receivable previously reserved and foreign exchange gains of $0.9 million, as compared to a charge in other expense for the prior period primarily related to bad debt expense associated with the bankruptcy of a large retail customer. Direct operating expenses of the motion pictures segment included charges for write downs of investment in film costs of $4.6 million and $9.2 million in the current period and prior year period respectively due to the lower than anticipated actual performance or previously expected performance of certain titles. Approximately 32.1% of the prior year write down related to the poor performance of the theatrical release of one title. Direct operating expenses of the television segment of $61.4 million for this period were 85.6% of television revenue, compared to $103.7 million, or 90.5% of television revenue for the prior year’s period. The decrease in direct operating expense of the television segment in the current period is due to changes in the mix of titles generating revenues including the successful Weeds television series.

Distribution and Marketing Expenses

The following table sets forth distribution and marketing expenses by segment for the nine months ended December 31, 2006 and 2005:


	Nine Months Ended						Nine Months Ended
	December 31, 2006						December 31, 2005
	Motion						Motion
	Pictures		Television		Total		Pictures		Television		Total
	(Amounts in millions)

Distribution and marketing expenses
Theatrical	$	125.9	$	0.7	$	126.6	$	145.4	$	0.1	$	145.5
Home Entertainment		131.9		2.0		133.9		132.7		1.3		134.0
Television		0.8		2.5		3.3		1.7		0.1		1.8
International		29.4		1.6		31.0		5.4		0.5		5.9
Other		1.4		—		1.4		3.5		—		3.5

	$	289.4	$	6.8	$	296.2	$	288.7	$	2.0	$	290.7

The majority of distribution and marketing expenses relate to the motion pictures segment. Theatrical P&A in the motion pictures segment in this period of $125.9 million decreased $19.5 million, or 13.4%, compared to $145.4 million in the prior year’s period. Theatrical P&A in the motion pictures segment in this period included $116.8 million incurred on titles such as Saw III, Employee of the Month, The Descent, Crank, Akeelah & the Bee and See No Evil, domestically. Theatrical P&A in the motion pictures segment in the prior year’s period included $134.6 million on the release of titles such as Saw II, Crash, Lord of War, In the Mix, The Devil’s Rejects, High Tension, Rize, Undiscovered and Waiting. High Tension, In the Mix, Undiscovered and Rize represented $44.7 million of theatrical P&A in the prior year’s period and did not generate significant theatrical revenues.

Video distribution and marketing costs on motion pictures and television product in this period of $133.9 million decreased $0.1 million, or 0.1%, compared to $134.0 million in the prior year’s period. Video distribution and marketing costs as a percentage of video revenues was 39.0% and 40.0% in the current period and prior year’s period respectively. The decrease of video distribution and marketing costs as a percent of video revenue is mainly due to the timing of releases of home entertainment titles in the current period compared to the prior year’s period.

International distribution and marketing expenses in the current period includes $22.6 million of distribution and marketing costs from Lions Gate UK as a result of the acquisition of Redbus, compared to $0.7 million in the prior year’s period. Distribution and marketing expenses in the current period from the television segment included $2.4 million from the July 3, 2006 acquisition of Debmar.

General and Administrative Expenses

The following table sets forth general and administrative expenses by segment for the nine months ended December 31, 2006 and 2005:


	Nine Months		Nine Months
	Ended		Ended
	December 31,		December 31,		Increase (Decrease)
	2006		2005		Amount		Percent
	(Amounts in millions)

General and Administrative Expenses
Motion Pictures	$	21.7	$	19.2	$	2.5		13.0	%
Television		2.1		0.4		1.7		425.0	%
Corporate		40.5		25.6		14.9		58.2	%

	$	64.3	$	45.2	$	19.1		42.3	%

The increase in general and administrative expenses is primarily due to corporate general and administration expenses of $40.5 million which increased by $14.9 million or 58.2% compared to $25.6 million in the prior year’s period. The increase in corporate general and administrative expenses is primarily due to an increase in stock based compensation of approximately $8.4 million, an increase in salaries and related expenses of approximately $4.4 million, and an increase in professional fees of $2.1 million. Compensation from our restricted share units amounted to $2.6 million and $1.2 million for the nine months ended December 31, 2006 and 2005, respectively. In addition, due to the adoption of SFAS No. 123(R) we recorded additional compensation expense related to our stock options amounting to $1.8 million in the nine months ended December 31, 2006 with no comparable expense in the prior period. We also incurred additional costs of $1.1 million recorded in the nine months ended December 31, 2006 compared to a benefit of $4.1 million recorded in the nine months ended December 31, 2005 related to stock appreciation rights which are revalued each reporting period. In this period, $4.2 million of production overhead was capitalized compared to $3.5 million in the prior year’s period. The increase in general and administrative expenses of the motion pictures segment of $2.5 million or 13.0% is primarily due to general and administrative costs associated with Lions Gate UK. The increase in general and administrative expenses of the television segment is primarily due to the July 3, 2006 acquisition of Debmar.

Depreciation and Other Expenses (Income)

Depreciation of $1.9 million this period increased $0.6 million, or 46.2%, from $1.3 million in the prior year’s period.

Interest expense of $14.2 million this period increased $0.2 million, or 1.4%, from the prior year’s period of $14.0 million.

Interest rate swaps did not meet the criteria of effective hedges and therefore a fair valuation gain of $0.1 million was recorded in the nine months ended December 31, 2005. The $100 million interest rate swap the Company had entered into commencing January 2003 ended September 30, 2005. The CDN$20 million interest rate swap a subsidiary of the Company had entered into commencing September 2003 and ending September 2008 was terminated on March 15, 2006 in connection with the repayment of the remaining balances of the mortgages payable on the studio facilities.

Interest and other income of $7.8 million for the nine months ended December 31, 2006 increased compared to $3.0 million in the prior year’s period. Interest and other income this quarter was earned on the cash balance and available-for-sale investments held during the nine months ended December 31, 2006, which were higher than in the prior year’s period.

Equity interests of negative $0.8 million in this period include the equity interest in the loss of Maple Pictures consisting of 10% of the loss of Maple Pictures and the equity interest in the loss of CinemaNow consisting of 18.8% of the loss of CinemaNow. Equity interests of negative $0.1 million in the prior year’s period includes the equity interest in the loss of Maple Pictures consisting of 10% of the losses of Maple Pictures.

The Company had an income tax benefit of $1.2 million or 91.1% of income before income taxes in the nine months ended December 31, 2006, compared to a provision of $0.2 million in the nine months ended December 31, 2005. The tax benefit reflected in the current period is primarily attributable to foreign losses benefited to the extent of existing deferred tax liabilities in the local jurisdiction and the receipt of refunds of foreign and state taxes paid in previous years, offset by U.S. federal and state taxes. The Company’s actual annual effective tax rate will differ from the statutory federal rate as a result of several factors, including changes in the valuation allowance against net deferred tax assets, non-temporary differences, foreign income taxed at different rates, state and local income taxes and the utilization of acquired net operating losses.

Income before discontinued operations for the nine months ended December 31, 2006 was $2.5 million, or basic earnings per common share from continuing operations of $0.02 on 105.6 million weighted average common shares outstanding. This compares to a loss before discontinued operations for the nine months ended December 31, 2005 of $33.9 million, or basic loss per common share from continuing operations of $0.33 on 102.7 million weighted average common shares outstanding. Diluted earnings per common share from continuing operations for the nine months ended December 31, 2006 was $0.02 on 108.4 million adjusted weighted average common shares outstanding.

Income from discontinued operations for the nine months ended December 31, 2006 and 2005, respectively, was nil and $1.1 million, or basic earnings per common share from discontinued operations of nil and $0.01, respectively, on 105.6 million and 102.7 million weighted average common shares outstanding, respectively. Diluted earnings per common share from discontinued operations for the nine months ended December 31, 2005 was $0.01 on 102.7 million adjusted weighted average common shares outstanding.

Net income for the nine months ended December 31, 2006 was $2.5 million, or basic net income per common share of $0.02 on 105.6 million weighted average shares outstanding. This compares to a net loss for the nine months ended December 31, 2005 of $32.8 million or basic net loss per common share from continuing operations of $0.32 on 102.7 million weighted average common shares outstanding. Diluted net income per common share for the nine months ended December 31, 2006 was $0.02 on 108.4 million adjusted weighted average common shares outstanding.

Liquidity and Capital Resources

Our liquidity and capital resources are provided principally through cash generated from operations, issuance of subordinated notes and our credit facility.

Convertible Senior Subordinated Notes. In December 2003, Lions Gate Entertainment Inc. sold $60.0 million of 4.875% Notes that mature on December 15, 2010. We received $57.0 million of net proceeds, after paying

placement agents’ fees. Offering expenses were $0.7 million. The 4.875% Notes were convertible, at the option of the holder, at any time before the close of business on the business day immediately preceding the maturity date of the 4.875% Notes, unless previously redeemed, into our common shares at a conversion rate of 185.0944 shares per $1,000 principal amount of the 4.875% Notes, which is equal to a conversion price of approximately $5.40 per share. On December 15, 2006, pursuant to our optional redemption, all of the noteholders voluntarily elected to convert their notes into the Company’s common shares pursuant to the indenture. A total of $60 million of principal was converted into 11,105,664 common shares at a conversion price of $5.40 per share. In connection with this conversion, the principal amount net of the unamortized portion of the financing costs associated with the original conversion of the 4.875% Notes of approximately $2.1 million was recorded as an increase to common shares. The shares issued pursuant to the conversion were previously reserved for such conversion.

In October 2004, Lions Gate Entertainment Inc. sold $150.0 million of 2.9375% Notes that mature on October 15, 2024. We received $146.0 million of net proceeds after paying placement agents’ fees. Offering expenses were $0.7 million. The 2.9375% Notes are convertible at the option of the holder, at any time prior to maturity, upon satisfaction of certain conversion contingencies, into our common shares at a conversion rate of 86.9565 shares per $1,000 principal amount of the 2.9375% Notes, which is equal to a conversion price of approximately $11.50 per share, subject to adjustment upon certain events. From October 15, 2009 to October 14, 2010, Lions Gate Entertainment Inc. may redeem the 2.9375% Notes at 100.839%; from October 15, 2010 to October 14, 2011, Lions Gate Entertainment Inc. may redeem the 2.9375% Notes at 100.420%; and thereafter at 100%.

In February 2005, Lions Gate Entertainment Inc. sold $175.0 million 3.625% Notes that mature on March 15, 2025. We received $170.2 million of net proceeds after paying placement agents’ fees. Offering expenses were approximately $0.6 million. The 3.625% Notes are convertible at the option of the holder, at any time prior to maturity into our common shares at a conversion rate of 70.0133 shares per $1,000 principal amount of the 3.625% Notes, which is equal to a conversion price of approximately $14.28 per share, subject to adjustment upon certain events. Lions Gate Entertainment Inc. may redeem the 3.625% Notes at its option on or after March 15, 2012 at 100% of their principal amount plus accrued and unpaid interest.

Credit Facility. At December 31, 2006, the Company had a $215 million revolving line of credit, of which $10 million is available for borrowing by Lionsgate UK in either U.S. dollars or British pounds sterling. At December 31, 2006, the Company had no borrowings (March 31, 2006 — nil) under the credit facility. The credit facility expires December 31, 2008 and bears interest at 2.75% over the “Adjusted LIBOR” or the “Canadian Bankers Acceptance” rate (as defined in the credit facility), or 1.75% over the U.S. or Canadian prime rates. The availability of funds under the credit facility is limited by the borrowing base. Amounts available under the credit facility are also limited by outstanding letters of credit which amounted to $0.3 million at December 31, 2006. At December 31, 2006 there was $214.7 million available under the credit facility. The Company is required to pay a monthly commitment fee of 0.50% per annum on the total credit facility of $215 million less the amount drawn. Right, title and interest in and to all personal property of Lions Gate Entertainment Corp. and Lions Gate Entertainment Inc. is pledged as security for the credit facility. The credit facility is senior to the Company’s film obligations and subordinated notes. The credit facility restricts the Company from paying cash dividends on its common shares.

Filmed Entertainment Backlog. Backlog represents the amount of future revenue not yet recorded from executed contracts for the licensing of films and television product for television exhibition and in international markets. Backlog, which now includes the backlog from Debmar Mercury of approximately $66.9 million, at December 31, 2006 and March 31, 2006 is $347.4 million and $143.9 million, respectively.

Cash Flows Provided by Operating Activities. Cash flows provided by operating activities for the nine months ended December 31, 2006 were $65.7 million compared to cash flows provided by operating activities in the nine months ended December 31, 2005 of $58.9 million. The increase in cash provided by operating activities was primarily due to the increase in income from continuing operations as compared to the prior period and the decrease in accounts receivable and an increase in deferred revenue. This increase was offset by lower amortization of film and television programs, decrease in accounts payable and accrued expenses, and a lower increase in participation and residuals, as compared to the prior period.

Cash Flows Used in Investing Activities. Cash flows used in investing activities of $76.4 million for the nine months ended December 31, 2006 consisted of net purchases of $39.6 million of investments available-for-sale, $7.7 million for purchases of property and equipment, $24.1 million for the acquisition of Debmar, net of cash acquired and $5.0 million for the investment in FEARnet. Cash flows used in investing activities of $112.6 million in the nine months ended December 31, 2005 included the acquisition of a net $84.4 million of investments available-for-sale, cash received from the sale of our investment in Christal Distribution of $2.9 million, less $4.2 million for purchases of property and equipment and $27.1 million for the acquisition of Redbus, net of cash acquired.

Cash Flows Provided by/Used in Financing Activities. Cash flows provided by financing activities of $3.3 million in the nine months ended December 31, 2006 consisted of cash received from the issuance of common shares. Cash flows used in financing activities of $7.0 million in the nine months ended December 31, 2005 were primarily for repayment of a promissory note and mortgages payable.

Anticipated Cash Requirements. The nature of our business is such that significant initial expenditures are required to produce, acquire, distribute and market films and television programs, while revenues from these films and television programs are earned over an extended period of time after their completion or acquisition. We believe that cash flow from operations, cash on hand, investments available-for-sale, credit facility availability, tax shelter and production financing available will be adequate to meet known operational cash requirements for the foreseeable future, including the funding of future film and television production, film rights acquisitions and theatrical and video release schedules. We monitor our cash flow liquidity, availability, fixed charge coverage, capital base, film spending and leverage ratios with the long-term goal of maintaining our credit worthiness.

Our current financing strategy is to fund operations and to leverage investment in films and television programs through our cash flow from operations, our credit facility, single-purpose production financing, government incentive programs, film funds, and distribution commitments. In addition, we may acquire businesses or assets, including individual films or libraries, that are complementary to our business. Any such transaction could be financed through our cash flow from operations, credit facilities, equity or debt financing.

Future commitments under contractual obligations as of December 31, 2006 are as follows:


	Year Ended March 31,
	2007		2008		2009		2010		2011		Thereafter		Total
	(Amounts in thousands)

Minimum guarantees and production obligations initially incurred for a term of more than one year(1)	$	508	$	66,614	$	12,985	$	—	$	29,975	$	14,989	$	125,071
Subordinated notes		—		—		—		—		—		325,000		325,000
Operating leases and other material contractual obligations		1,024		8,116		10,066		4,012		4,118		2,551		29,887
Employment and consulting contracts		5,660		19,388		9,252		5,795		4,076		501		44,672
Purchase obligations(2)		17,517		40,761		13,400		2,900		2,900		—		77,478
Distribution and marketing commitments		824		56,004		30,700		—		—		—		87,528
Interest payments on Subordinated notes		2,688		10,750		10,750		10,750		10,750		146,094		191,782

	$	28,221	$	201,633	$	87,153	$	23,457	$	51,819	$	489,135	$	881,418


(1)		Minimum guarantees and production obligations initially incurred for a term of more than one year represent film obligations recorded on the balance sheet as of December 31, 2006.

(2)		Purchase obligations represent contractual commitments for minimum guarantees and production obligations related to the purchase of film rights for future delivery, future film production and development obligations. Amounts due during the three months ending March 31, 2007 are expected to be paid through cash generated from operations or from the available borrowing capacity from our revolving credit facility. Includes future interest payments on film obligations and film production loans.


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk.*

Currency and Interest Rate Risk Management

Market risks relating to our operations result primarily from changes in interest rates and changes in foreign currency exchange rates. Our exposure to interest rate risk results from the financial debt instruments that arise from transactions entered into during the normal course of business. As part of our overall risk management program, we evaluate and manage our exposure to changes in interest rates and currency exchange risks on an ongoing basis. Hedges and derivative financial instruments will be used in the future in order to manage our interest rate and currency exposure. We have no intention of entering into financial derivative contracts, other than to hedge a specific financial risk.

Currency Rate Risk. We incur certain operating and production costs in foreign currencies and are subject to market risks resulting from fluctuations in foreign currency exchange rates. Our principal currency exposure is between Canadian and U.S. dollars. The Company enters into forward foreign exchange contracts to hedge foreign currency exposures on future production expenses denominated in Canadian dollars. As of December 31, 2006, we had outstanding contracts to sell US$5.0 million in exchange for CDN$5.5 million over a period of five weeks at a weighted average exchange rate of CDN$1.1105. Changes in the fair value representing an unrealized fair value loss on foreign exchange contracts outstanding during the three and nine months ended December 31, 2006 amounted to $0.2 million and $0.2 million, respectively, and are included in accumulated other comprehensive loss, a separate component of shareholders’ equity. During the three and nine months ended December 31, 2006, we completed foreign exchange contracts denominated in Canadian dollars. The net losses resulting from the completed contracts were $0.2 million and $0.1 million, respectively. These contracts are entered into with a major financial institution as counterparty. We are exposed to credit loss in the event of nonperformance by the counterparty, which is limited to the cost of replacing the contracts, at current market rates. We do not require collateral or other security to support these contracts.

Interest Rate Risk. Our principal risk with respect to our debt is interest rate risk. We currently have minimal exposure to cash flow risk due to changes in market interest rates related to our outstanding debt and other financing obligations. Our credit facility has a nil balance at December 31, 2006. Other financing obligations subject to variable interest rates include $76.7 million owed to film production entities on delivery of titles.

The table below presents repayments and related weighted average interest rates for our interest-bearing debt and other obligations as of December 31, 2006.


	Year Ended March 31,
	2007		2008		2009		2010		2011		Thereafter		Total
	(Amounts in thousands)

Bank Loans:
Variable(1)	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Film Obligations — Film productions:
Variable(2)		11,401		65,317		—		—		—		—		76,718
Subordinated notes:
Fixed(3)		—		—		—		—		—		—		—
Fixed(4)		—		—		—		—		—		150,000		150,000
Fixed(5)		—		—		—		—		—		175,000		175,000

	$	11,401	$	65,317	$	—	$	—	$	—	$	325,000	$	401,718


(1)		Revolving credit facility, which expires December 31, 2008. At December 31, 2006, the Company had no borrowings under this facility.

(2)		Amounts owed to film production entities on delivery of titles. The film production entities incurred average variable interest rates at December 31, 2006 of U.S. prime minus 3.79%.

(3)		4.875% Notes with fixed interest rate equal to 4.875%. On October 18, 2006, the Company announced its intention to redeem the 4.875% Notes on the optional redemption date of December 15, 2006 at 100% of their


		principle amount, plus accrued and unpaid interest, if any. As of December 31, 2006, the notes were 100% converted.

(4)		2.9375% Notes with fixed interest rate equal to 2.9375%.

(5)		3.625% Notes with fixed interest rate equal to 3.625%.


Item 4.	*Controls and Procedures.*

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods.

As of December 31, 2006, the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were effective as of December 31, 2006.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d) of the Exchange Act, the Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, also evaluated whether any changes occurred to the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such control. Based on that evaluation, there has been no such change during the period covered by this report.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

None


Item 1A.	*Risk Factors.*

None


Item 2.	*Unregistered Sales of Equity Securities and Use of Proceeds.*

None


Item 3.	*Defaults Upon Senior Securities.*

None


Item 4.	*Submission of Matters to a Vote of Security Holders.*

None


Item 5.	*Other Information.*

None


Item		Page

PART I — FINANCIAL INFORMATION
1.	Financial Statements		3
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
3.	Quantitative and Qualitative Disclosures About Market Risk		52
4.	Controls and Procedures		53
PART II — OTHER INFORMATION
1.	Legal Proceedings		53
1A.	Risk Factors.		53
2.	Unregistered Sales of Equity Securities and Use of Proceeds		53
3.	Defaults Upon Senior Securities		53
4.	Submissions of Matters to a Vote of Security Holders		53
5.	Other Information		53
6.	Exhibits		54
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1


Exhibit
Number			Description of Documents

	3	.1(1)	Articles
	3	.2(2)	Notice of Articles
	3	.3(1)	Vertical Short Form Amalgamation Application
	3	.4(1)	Certificate of Amalgamation
	31	.1	Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1	Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(1)		Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2005 as filed on June 29, 2005.

(2)		Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006 as filed on June 14, 2006.


10.	Comprehensive Income (Loss)