High returns of Shrek 2 put a dent in Dreamworks' figures

The company posted a net loss of $3.7m (�2.04m), or 4 cents a share, for the three months to June, compared with a $146.1m second-quarter profit in 2004.

The US animation studio had warned last month it could be facing even worse losses of 7-9 cents per share.

A strong showing from its latest film Madagascar helped deliver a better than expected performance, Dreamworks said.

"To date, Madagascar has performed very well, achieving more than $432 million in worldwide box office, reaching over $242 million internationally," chief executive Jeffrey Katzenberg said.

The large number of unsold DVDs returned by shops meant revenues sank to $35.4m during the three months, from $300.3m last year.

In-store competition

Some analysts have blamed the fall in sales reflects a shift in the DVD market.

While overall sales have risen, studios are releasing more titles which are now having to compete for shelf space in stores.

As a result, instead of reducing the price of films in sales, shops are now quicker to return unsold goods to the studios.

Mr Katzenberg added that the company was continuing to analyse changes in the home video market.

However, he said, despite the slide in sales Shrek 2 remained "one of the best-selling home video releases of all time".

Looking ahead the group said it still expects to bring in earnings of 80-90 cents per share.

Dreamworks said it had high hopes for the DVD release of Madagascar in November, a move that could provide a strong boost in the lucrative Christmas period.

Meanwhile, it hoped the "strong fan base" of plasticine characters Wallace and Gromit would provide a strong box office draw for its October release of Wallace & Gromit : Curse of the Were-Rabbit.