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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2008

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                              

(Mark one)

x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2007

OR

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission File Number 0-12699

ACTIVISION, INC.

(Exact name of registrant as specified in its charter)

Delaware

95-4803544

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

incorporation or organization)


3100 Ocean Park Blvd., Santa Monica, CA



90405

(Address of principal executive offices)

(Zip Code)

Registrant’sRegistrant's telephone number, including area code:(310) 255-2000

Securities registered pursuant to Section 12(b) of the Act:

Title of Class

Name of Each Exchange on Which Registered

Preferred Stock Purchase Rights

The NASDAQ Global Select Market

Common Stock, par value $.000001 per share

The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:


None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes oý    No xo

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes o    No xý

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 xý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’sregistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ýx

         

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

Large Accelerated Filer ýx

Accelerated Filer o

Non-accelerated filer Filer o


(Do not check if a smaller reporting company)		Smaller Reporting Company o

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

         

The aggregate market value of the Common Stock of the registrant held by non-affiliates of the registrant on September 30, 200628, 2007 was $3,404,053,450.$4,764,158,372.

         

The number of shares of the registrant’sregistrant's Common Stock outstanding as of June 7, 2007May 20, 2008 was 283,310,734.296,748,734.

Documents Incorporated by Reference

         

Portions of the registrant’sregistrant's definitive Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K, with respect to the 20072008 Annual Meeting of Shareholders, are incorporated by reference into Part III of this Annual Report.


INDEX



Page No.

PART I. 3

Item 1.

Business

3

PART I.

Item 1A.

Risk Factors		12

Item 1.

Business

3

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

23

26

Item 2.

Properties

27

Item 2.

3.

Properties

Legal Proceedings

24

27

Item 3.

Legal Proceedings

24

Item 4.

Submission of Matters to a Vote of Security Holders

25

30


PART II. 



31

PART II.

Item 5.

Market for Registrant’sRegistrant's Common Equity, Related StockholderShareholder Matters, and Issuer Purchases of Equity Securities

26

31

Item 6.

Selected Consolidated Financial Data

31

35

Item 7.

Management’s

Management's Discussion and Analysis of Financial Condition and Results of Operations

32

36

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

68

74

Item 8.

Consolidated Financial Statements and Supplementary Data

69

75

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Disclosures

69

76

Item 9A.

Controls and Procedures

69

76

Item 9B.

Other Information

77


PART III. 

Item 9B.


Other Information

71


78

PART III.

Item 10.

Directors, Executive Officers, and Corporate Governance

72

78

Item 11.

Executive Compensation

78

Item 11.

Executive Compensation

72

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

72

78

Item 13.

Certain Relationships and Related Transactions, and Director Independence

72

78

Item 14.

Principal Accountant Fees and Services

72

78


PART IV. 



79

PART IV.

Item 15.

Exhibits and Financial Statement Schedule

73

79


SIGNATURES



87

SIGNATURES


CERTIFICATION


82

CERTIFICATION



2


PART I

        

This Annual Report on Form 10-K contains, or incorporates by reference, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, (1) projections of revenues, expenses, income or loss, earnings or loss per share, cash flow projections or other financial items; (2) statements of our plans and objectives, including those relating to product releases; (3) statements of future economic performance; and (4) statements of assumptions underlying such statements. We generally use words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “forecast”, “future”, “intend”, “may”, “plan”, “positioned”, “potential”, “project”, “scheduled”, “set to”, “subject to”, “upcoming”"anticipate," "believe," "could," "would," "estimate," "expect," "forecast," "future," "intend," "may," "outlook," "plan," "positioned," "potential," "project," "remain," "scheduled," "set to," "subject to," "to be," "upcoming," "will," and other similar expressions to help identify forward-looking statements. These forward-looking statements are subject to business and economic risk, reflect management’smanagement's current expectations, estimates and projections about our business, and are inherently uncertain and difficult to predict. Our actual results could differ materially. The forward-looking statements contained herein speak only as of the date on which they were first made, and we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this Annual Report.Report on Form 10-K was initially filed with the SEC. Risks and uncertainties that may affect our future results include, but are not limited to, those discussed under the heading “Risk Factors”,"Risk Factors," included in Part I.I, Item 1A. AllExcept where the context otherwise requires, all references to “we”, “us”, “our”, “Activision”"we," "us," "our," "Activision" or “the Company”"the Company" in the following discussion and analysisthis Annual Report on Form 10-K mean Activision, Inc. and its subsidiaries.subsidiaries as of the date of this Annual Report on Form 10-K.

Item 1.    BUSINESS
          BUSINESS

(a)General

(a)   General

Activision, Inc. (“Activision,” the “Company,” or “we”) is a leading international publisher of interactive entertainment software and peripheral products. We have built a company with a diverse portfolio of products that spans a wide range of categories and target markets and that isare used on a variety of game hardware platforms and operating systems. We have created, licensed, and acquired a group of highly recognizable brands,franchises, which we market to a variety of consumer demographics. Our fiscal 20072008 product portfolio included titles such best-selling products asGuitar Hero III: Legends of Rock, Guitar Hero II for the Microsoft Xbox360, Guitar Hero: Rocks the 80s for the PS2,Call of Duty 4: Modern Warfare, Spider-Man 3 Guitar Hero II,The Game ("Spider-Man 3"), Shrek the Third, TRANSFORMERS: The Game, Enemy Territory: Quake Wars, Tony Hawk’s Project 8, Tony Hawk’s Downhill Jam,  Marvel: Ultimate Alliance, Over the Hedge, and X-Men: The OfficialHawk's Proving Ground, Bee Movie Game,. andSpider-Man: Friend or Foe.

Our products cover diverse game categories including action/adventure, action sports, racing, role-playing, simulation, first-person action, music-based gaming, and strategy. Our target customer base ranges from casual players to game enthusiasts, children to adults, and mass-market consumers to “value”"value" buyers. We currently offer our products primarily in versions that operate on the Sony PlayStation 2 (“PS2”("PS2"), the Sony PlayStation 3 (“PS3”("PS3"), the Nintendo Wii (“Wii)("Wii"), and the Microsoft Xbox 360 (“Xbox360”Xbox360 ("Xbox360") console systems, the Nintendo Game Boy Advance (“GBA”Dual Screen ("NDS"), and the Sony PlayStation Portable (“PSP”), and Nintendo Dual Screen (“NDS”("PSP") hand-held devices, and the personal computer (“PC”("PC"). The installed base for the currentprevious generation of hardware platforms (e.g., the PS2) is significant and the fiscal 2006 release of the Xbox360 and the fiscal 2007 releases of the PS3 and the Wii willhave further expandexpanded the software market. We had a successful and significant presence atTo take advantage of the launchesgrowth of the PS3, the Xbox360, and the Wii with three launch("the next-generation platforms"), during fiscal 2008, we increased our presence on the next-generation platforms through the increased number of new released titles on the next-generation platforms. For example, the number of new released titles for the Wii tripled from 5 releases during fiscal 2007 to 15 releases, and we successfully released several major titles for the PS3, the Xbox360 and/or the Wii—Guitar Hero III: Legends of Rock,Call of Duty 4: Modern Warfare,Spider-Man 3 Marvel: Ultimate Alliance, ,Shrek the Third,TRANSFORMERS: The Game, andTony Hawk’s Project 8, Hawk's Proving Groundand five launch. Some of these titles forare also available on the Wii, Call of Duty 3, Marvel: Ultimate Alliance, World Series of Poker: Tournament of Champions, Rapala Tournament Fishing, and Tony Hawk’s Downhill Jam. PS2. Our plan is to continue to build on oura significant launch presence on the PS3, Wii, and Xbox360 (“the next-generation platforms”)platforms by continuing to expand



the number of titles released on the next generationnext-generation and hand-held platforms while continuing to market to current-generation platformsthe PS2 platform as long as economically attractive given theirits large installed base.

        

Our publishing business involves the development, marketing, and sale of products directly, by license, or through our affiliate label program with certain third-party publishers. Our distribution business consists of operations in Europe that provide logistical and sales services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.

        

We were originally incorporated in California in 1979. In December 1992, we reincorporated in Delaware. In June 2000, we reorganized into theour current holding company organizational structure.

In April 2003, the Board of Directors approved a three-for-two split of our outstanding common shares effected in the form of a 50% stock dividend. The split was paid on June 6, 2003 to shareholders of record as of May 16, 2003. In February 2004, the Board of Directors approved a three-for-two split of our outstanding common shares effected in the form of a 50% stock dividend. The split was paid on March 15, 2004 to shareholders of record as of February 23, 2004. In February 2005, the Board of Directors approved a four-for-three split of our outstanding common shares effected in the form of a 33-1/3% stock dividend. The split was paid March 22, 2005 to shareholders(b)   Business Combinations

        

3


of record as of March 7, 2005. In September 2005, the Board of Directors approved a four-for-three split of our outstanding common shares effected in the form of a 33-1/3% stock dividend. The split was paid October 24, 2005 to shareholders of record as of October 10, 2005. The par value of our common stock was maintained at the pre-split amount of $.000001. All share and per share data have been restated as if the stock splits had occurred as of the earliest period presented.

(b)Business Combinations

We have completed a number of acquisitions of both software development companies and interactive entertainment product distribution companies. In fiscal 2007,2008, we acquired Bizarre Creations Limited, a video game publisher RedOctane Inc.developer focusing on the racing category. Also, in fiscal 2008, we completed the acquisition of DemonWare, Ltd., the publishera provider of the popular Guitar Hero franchise.network middleware technologies for console and PC games. See Note 3 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information regarding the accounting treatment of these and prior acquisitions.

        On December 2, 2007, we and Vivendi S.A. ("Vivendi") (Euronext Paris: VIV) announced the signing of a definitive agreement to combine Vivendi Games, Inc. ("Vivendi Games"), Vivendi's interactive entertainment business which includes Blizzard Entertainment, Inc. with us. If the transaction closes, we will be renamed Activision Blizzard, Inc. ("Activision Blizzard"), and we expect to continue to operate as a public company traded on NASDAQ under the ticker ATVI. While we will be the legal acquirer and the surviving entity in this transaction, Vivendi Games will be deemed to be the accounting acquirer in the transaction treated as a reverse acquisition for accounting purposes. See Note 20 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information regarding the pending business combination with Vivendi Games.

(c)Financial Information About Industry Segments

We have two reportable segments: publishing and distribution. Publishing relates to the development (both internally and externally), marketing and sale of DVD, CD, UMD, online, and cartridge-based interactive entertainment software and peripheral products owned or controlled by us directly, by license, or through our affiliate label program with certain third-party publishers. Distribution primarily refers to logistical and sales services provided by our European distribution subsidiaries to third-party publishers of interactive entertainment software, our own publishing operations and manufacturers of interactive entertainment hardware. See Note 10 of Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for certain financial information regarding reporting segment and geographic areas required by Item 1.

1 of Form 10-K.

(d)Narrative Description of Business

        

Our objective is to be a worldwide leader in the development, publishing, and distribution of quality interactive entertainment software and peripheral products that deliver a highly satisfying consumer entertainment experience. Our business strategy, the key components of our business operations, and the risk factors that could impact our business are detailed below.


Strategy

Create, Acquire, and Maintain Strong Brands. Franchises.We focus development and publishing activities principally on products that are, or have the potential to become, franchise propertiesfranchises with sustainable consumer appeal and brand recognition. It is our experience that these products can then serve as the basis for sequels, prequels, and related new products that can be released over an extended period of time. We believe that the publishing and distribution of products based in large part on franchise propertiesfranchises enhances predictability of revenues and the probability of high unit volume sales and operating profits. We have created a number of successful internally developed intellectual properties such as the Guitar Hero and Call of Duty franchises. We have also entered into a series of strategic relationships with the owners of intellectual property pursuant to which we have acquired the rights to publish products based on franchises such as Marvel Characters,Entertainment, Inc. properties, including Spider-Man and X-Men. We have a multi-year, multi-property publishing agreementagreements with DreamWorks Animation LLC that grantsgrant us the exclusive rights to publish video games based on DreamWorks Animation SKG’sSKG's theatrical release “Shrek 2,”releases, including "Shark Tale," which was released in the second quarter fiscal 2005, "Madagascar," which was released in the first quarter of fiscal 2005, “Shark Tale,” which was released in2006, "Over the second quarter of fiscal 2005, “Madagascar,”Hedge," which was released in the first quarter of fiscal 2006, “Over2007, "Shrek the Hedge,”Third," which was released in the first quarter of fiscal 2007,2008, "Bee Movie," which was released in the third quarter fiscal 2008, and all of their respective forthcoming sequels, including “Shrek the Third,” which was released in May 2007, and “Madagascar 2.”  As part ofsequels. In addition, our agreementmulti-year agreements with DreamWorks Animation we haveLLC grant us the exclusive video game rights to potential futurethree upcoming DreamWorks Animation feature films, in the “Shrek” franchise beyond “Shrek the Third,” upcoming movies, including “Bee Movie” and “Kung"Kung Fu Panda,” as well as other films currently in development, including “Creature Feature”" "Monsters vs Aliens" and “How"How to Train Your Dragon.”" We plan to releaseKung Fu Panda,Monsters vs Aliens, andMadagascar 2 during fiscal 2009 coinciding with each of their respective theatrical releases. We have a strategic alliance with Harrah’sHarrah's Entertainment, Inc. that grants us the exclusive, worldwide interactive rights to develop and publish “World"World Series of Poker”Poker" video games based on the popular World Series of Poker Tournament. We also have a strategic relationship with professional skateboarder Tony Hawk through an exclusive multi-year agreement to develop video games using his name and likeness. Through fiscal 2007, we have released eight successful titles in the Tony Hawk franchise. We also have created a number of successful internally developed intellectual properties such as the True Crime and Call of Duty franchise properties, and GUN. We also have agreements with MGM Interactive and EON Productions Ltd. to develop and publish video games based on the James Bond license and with Hasbro Properties Group (“Hasbro”("Hasbro") to develop and publish video games based on the “Transformers” brand. We plan on releasing our first title under the Hasbro license, Transformers the Game,"Transformers" franchise.

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concurrently with the DreamWorks Pictures and Paramount Pictures Corporation motion picture release, “Transformers,” in July 2007.

Execute Disciplined Product Selection and Development Processes.The success of our publishing business depends, in significant part, on our ability to develop high quality games that will generate high unit volume sales. Our publishing units have implemented a formal control process for the selection, development, production, and quality assurance of our products. We apply this process, which we refer to as the “Greenlight"Greenlight Process,”" to all of our products, whether externally or internally developed. The Greenlight Process includes in-depth reviews of each project at fourseveral important stages of development by a team that includes many of our highest-ranking operating managers and coordination between our sales and marketing personnel and development staff at each step in the process.

        

We develop our products using a combination of our internal development resources and external development resources acting under contract with us. We typically select our external developers based on their track record and expertise in producing products in the same category. One developer will often produce the same game for multiple platforms and will produce sequels to the original game. We believe that selecting and using development resources in this manner allows us to leverage the particular expertise of our internal and external development resources, which we believe adds to the quality of our products.

Create and Maintain Diversity in Product Mix, Platforms, and Markets.We believe that maintaining a diversified mix of products can reduce our operating risks and enhance profitability. Therefore, we develop and publish products spanning a wide range of product categories, including action/adventure, action sports, racing, role-playing, simulation, first-person action, music-based gaming, and strategy. We also develop products designed for target audiences ranging from casual players to game enthusiasts, children to adults, and mass-market consumers to “value”"value" buyers. Presently, we concentrate on developing, publishing, and distributing products that operate on the PS2, PS3, Xbox360, and Wii



console systems, GBA, PSP and NDS hand-held devices, and the PC. We typically offer our products for use on multiple platforms in order to reduce the risks associated with any single platform, leverage our costs over a larger installed hardware base, and increase unit sales.

Continue to Improve Profitability.We continually strive to manage risk and increase our operating leverage and efficiency with the goal of increased profitability. We believe the key factor affecting our future profitability will be the success rate of our product releases. Therefore, our product selection and development process includes, as a significant component, periodic evaluations of the expected commercial success of products under development. Through this process, for titles that we determine to be less promising, corrections are made in the development process or, if necessary, they are discontinued before we incur additional development costs. In addition, we believe our focus on cross platform releases and brandedfranchised products will contribute to improved profitability.

        

We continue to focus on increasing our margins. We have, for example, acquired certain experienced and specialized developers in instances where we can enhance profitability through the elimination of royalty obligations. Additionally, we often rely on independent third-party interactive entertainment software developers to develop some of our software products, thereby taking advantage of specialized independent developers without incurring the fixed overhead obligations associated with increased internally employed staff.

        

Our sales and marketing staff work with our studio resources to increase the visibility of new product launches and to coordinate the timing and promotion of product releases. Our finance and sales and marketing personnel work together to improve inventory management and receivables collections. We have instituted broad, objective-based reward programs that provide incentives to management and staff throughout the organization to produce results that meet our financial objectives.

Grow Through Continued Strategic Acquisitions and Alliances.The interactive entertainment industry has been consolidating, and we believe that success in this industry will be driven in part by the ability to take advantage of scale. Specifically, smaller companies are more capital constrained, enjoy less predictability of revenues and cash flow, lack product diversity and must spread fixed costs over a smaller revenue base. Several industry leaders are emerging that combine the entrepreneurial and creative spirit of the industry with professional management, the ability to access the capital markets, and the ability to maintain favorable relationships with developers, intellectual property owners, and retailers. Through numerous completed acquisitions since 1997, we believe that we have successfully diversified our operations, our channels of distribution, our development talent pool, and our library of titles, and we have emerged as one of the industry’sindustry's leaders. We intend to continue to evaluate the expansion of our resources through acquisitions, strategic relationships, and key license transactions. We intend to continue expanding

5


our intellectual property library through key license transactions and strategic relationships with intellectual property owners and toowners. We will continue to evaluate opportunities to increase our development capacity through the acquisition of or investment in selected experienced software development firms.

Products

        

Products

Historically, we have been best known for our action/adventure, strategy, and simulation products. We have been successful in the superheroes and skateboarding categoriescategory with our release of titles based on the Spider-Man and X-Men properties, as well as the Tony Hawk franchise.properties. We have also been successful in the first person action categories through the Call of Duty original intellectual property, which we plan on continuing as a successful long-term franchise. Call of Duty has achieved over $1 billion life-to-date sales. In fiscal 2007 we successfully entered the music-based gaming genre with the acquisition of the Guitar Hero franchise. This franchise combines interactive software with a hardware peripheral in the form of a guitar and provides us withguitar. In fiscal 2008 the Guitar Hero franchise has set an early leadership position and long-term growth opportunity.industry record, surpassing $1 billion in North America retail sales in



26 months. We have established ourselves as a leader in the “value”"value" software publishing business with products under our Cabela’s,Cabela's, Rapala, World Series of Poker, and Greg Hasting’sHasting's Paintball licenses, as well as with products distributed on behalf of our “value”"value" affiliate label partners. Products published by us in this category are generally developed by third parties, often under contract with us, and are marketed under the Activision Value Publishing name.us. Value software is typically less sophisticated and less complex, both in terms of the development process and consumer gameplay.

Hardware Licenses.Our products currently are being developed or published primarily for the PS2, PS3, Wii, and Xbox360 console systems; PSP and NDS hand-held devices; and PCs. In order to maintain general access to the console systems and hand-held devices marketplace, we have maintained licenses for the PS2, PS3, Wii, and Xbox360 console systems and GBA, PSP, and NDS hand-held devices with the owners of each such platform. Each license allows us to create multiple products for the applicable platform, subject to certain approval rights which are reserved by each licensor. Each license also requires that we pay the licensor a per unit royalty for each unit manufactured. In contrast, we are not required to obtain any license for the development and production of products for PCs.

Intellectual Property Rights.Many of our current and planned releases are based on intellectual property, other character or story rights, and music rights licensed from third parties, as well as a combination of characters, worlds, and concepts derived from our extensive library of titles, and original characters and concepts owned and created by us. When publishing products based on licensed intellectual property rights, we generally seek to capitalize on the name recognition, marketing efforts, and goodwill associated with the underlying property. For intellectual property owned by Activision, we generally attempt to establish such properties as sustainable, long-term game franchises.

        

In acquiring intellectual property rights from third parties, we seek to obtain rights to publish titles across a variety of platforms, to include the ability to produce multiple titles and to retain rights over an extended period of time. In past years, we have been able to enter into a series of long-term or multi-product agreements with owners of various intellectual properties that are well known throughout the world and to create products based on these recognizable characters, story lines, or concepts. These agreements typically provide us with exclusive publishing rights for a specific period of time and, in some cases, for specified platforms and, in other cases, with renewal rights upon the satisfaction of certain conditions. The scope of our licensing activities includes theatrical motion pictures, television shows, animated films and series, comic books, literary works, music, sports personalities and events, and celebrities. We intend to continue expanding relationships with our existing intellectual property partners and to enter into agreements with other intellectual property owners for additional recognizable properties, characters, story lines and concepts. However, we may not be able to maintain or expand our existing relationships or to seek out and sustain new long-term relationships of similar caliber in the future.

Product Development and Support

        

We develop and produce titles using a model in which a core group of creative, production, and technical professionals, in coordination with our marketing and finance departments, have responsibility for the entire development and production process including the supervision and coordination of internal and external resources. This team assembles the necessary creative elements to complete a title using, where appropriate, outside programmers, artists, animators, scriptwriters, musicians and songwriters, sound effects and special effects experts, and sound and video studios. We believe that this model allows us to supplement internal expertise with top quality external resources on an as-needed basis.

        

6


In addition, we often seek out and engage independent third-party developers to create products on our behalf. Such products are sometimes owned by us, and usually we have unlimited rights to commercially exploit these products. In other circumstances, the third-party developer may retain


ownership of the intellectual property and/or technology included in the product and reserve certain exploitation rights. We typically select these independent third-party developers based on their expertise in developing products in a specific category and use the same developer to produce the same game for multiple platforms. Each of our third-party developers is under contract with us for specific or multiple titles. From time to time, we also acquire the license rights to publish and/or distribute software products that are or will be independently created by third-party developers. In such cases, the agreements with such developers provide us with exclusive publishing and/or distribution rights for a specific period of time, often for specified platforms and territories. In either case, we often have the ability to publish and/or distribute sequels, conversions, enhancements, and add-ons to the product initially being produced by the independent developer and we frequently have the right to engage the services of the original developer with regard to the development of such products.

        

In consideration for the services that the independent third-party developer provides, itthe developer receives a royalty generally based on net sales of the product that it has developed. Typically, the developer also receives an advance, which we recoup from the royalties otherwise payable to the developer. The advance generally is paid in “milestone”"milestone" stages. The payment at each stage is tied to the completion and delivery of a detailed performance milestone. Some contracts include minimum guaranteed royalty payments which are recorded as an asset when actually paid and as a liability when incurred, rather than recording the asset and liability upon execution of the contract. Working with an independent developer allows us to reduce our fixed development costs, share development risks with the third-party developer, take advantage of the third-party developer’sdeveloper's expertise in connection with certain categories of products or certain platforms, and gain access to proprietary development technologies.

From time to time, we may make a capital investment and hold a minority interest in a third-party developer in connection with interactive entertainment software products to be developed by such developer for us, which we believe helps to create a closer relationship between us and the developer. We account for those capital investments over which we have the ability to exercise significant influence using the equity method. For those investments over which we do not have the ability to exercise significant influence, we account for our investment using the cost method. There can be no assurance that we will realize long-term benefits from such investments or that we will continue to carry such investments at their current value."Greenlight Process"

        

“Greenlight Process”

We have adopted and implemented a rigorous procedure for the selection, development, production, and quality assurance of our internally and externally produced interactive entertainment software titles. The process, known internally as the “Greenlight"Greenlight Process,”" involves fourseveral phases throughout the development and production phasesand the post-release review of a title, each of which includes a number of specific performance milestones. The four phases of the “Greenlight Process”"Greenlight Process" are the concept, developer selection, prototype, first playable, alpha, and alpha.post-mortem. This procedure is designed to enable us to manage and control production and development budgets and timetables, to identify and address production and technical issues at the earliest opportunity, and to coordinate marketing and quality control strategies throughout the production and development phases, all in an environment that fosters creativity. The post-release review of a title is critical to provide feedback and ideas to our future development. Checks and balances are intended to be provided through the structured interaction of the project team with our creative, technical, marketing, and quality assurance/customer support personnel, as well as our legal, accounting, and finance departments. In order to maintain the competitiveness of our products and to take advantage of increasingly sophisticated technology associated with hardware platforms, our development process includes a significant amount of time for play-testing new products, and extensive product quality evaluations.

Product Support

        

We provide various forms of product support to both our internally and externally developed titles. Our quality assurance personnel are involved throughout the development and production of each title published by us. We subject all such products to extensive testing before release to ensure compatibility with all appropriate hardware systems and configurations and to minimize the number of bugs and other defects found in the products. To support our products after release, we provide online access to our customers on a 24-hour basis as well as telephone operator help lines during regular business



hours. The customer support group tracks customer inquiries and we use this data to help improve the development and production processes.

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Publishing Activities

Marketing

Marketing

Our marketing efforts include online activities (such as the creation of World Wide Web pages to promote specific titles)titles and build user communities around our franchises), public relations, print and broadcast advertising, coordinated in-store and industry promotions (including merchandising and point of purchase displays), participation in cooperative advertising programs, direct response vehicles, and product sampling through demonstration software distributed through the Internet or on compact discs. From time to time, we also receive marketing support from hardware manufacturers and retailers in connection with their own promotional efforts. In addition, certain of our products contain software that enables customers to “electronically register”"electronically register" their purchases with us online.

        

We believe that certain of our franchise propertiesfranchises have loyal and devoted audiences who purchase our sequels as a result of dedication to the property and satisfaction from previous product purchases. We therefore market these sequels both toward the established market as well as broader audiences. In addition, in marketing titles based on licensed properties, we believe that we derive benefits from the continued exploitation of these licensed properties and the marketing and promotional activities of the property owners.

Sales and Distribution

        

North America.Our products are available for sale or rental in thousands of retail outlets domestically. Our North American customers include Best Buy, Blockbuster, Circuit City, GameStop, Target, Toys “R”"R" Us, and Wal-Mart. Our largest customers, Wal-Mart and GameStop, accounted for approximately 22% and 8%, respectively, of consolidated net revenues for the fiscal year ended March 31, 2007. For the fiscal year ended March 31, 2006, our largest customers, Wal-Mart and GameStop, accounted for 22% and 10%, respectively, of consolidated net revenues.

        

In the United States and Canada, our products are sold primarily on a direct basis to mass-market retailers, consumer electronics stores, discount warehouses, and game specialty stores. We believe that a direct relationship with retail accounts results in more effective inventory management, merchandising, and communications than would be possible through indirect relationships. We have implemented electronic data interchange linkages with many of our retailers to facilitate the placing and shipping of orders. We sell our products to a limited number of distributors.

        International.International. Our products are sold internationally on a direct-to-retail basis, through third-party distribution and licensing arrangements, and through our wholly-owned European distribution subsidiaries. We conduct our international publishing activities through offices in the United Kingdom, Germany, France, Italy, Spain, Norway, the Netherlands, Canada, Sweden, Australia, South Korea, and Japan. Whenever practicable, weWe seek to maximize our worldwide revenues and profits by releasing high quality foreign language releases concurrently with English language releases and by continuing to expand the number of direct selling relationships we maintain with key retailers in major territories.

        On a worldwide basis, our largest customers, Wal-Mart and GameStop, accounted for approximately 14% and 13%, respectively, of consolidated net revenues for the fiscal year ended March 31, 2008. For the fiscal year ended March 31, 2007, our largest customers, Wal-Mart and GameStop, accounted for 22% and 8%, respectively, of consolidated net revenues.

Affiliate Labels.In addition to our own products, we distribute a select number of interactive entertainment products that are developed and marketed by other third-party publishers through our “affiliate label”"affiliate label" programs in North America, Europe, and the Asia Pacific region. The distribution of other publishers’publishers' products allows us to increase the efficiencies of our sales force and provides us with the ability to better ensure adequate shelf presence at retail stores for all of the products that we distribute. Distributing other publishers’publishers' titles mitigates the risk associated with a particular title or



titles published by us failing to achieve expectations. Services provided by us under our affiliate label program include order solicitation, in-store marketing, logistics and order fulfillment, sales channel management, as well as other accounting and general administrative functions. Our current affiliate label partners include LucasArts, as well as several affiliate label partners in our “value”"value" business. Each affiliate label relationship is unique and may pertain only to distribution in certain geographic territories such as the North America, Europe, or the Asia Pacific region and may be further limited only to specific titles or titles for specific platforms.

        

See Note 10 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for certain financial information regarding reporting segments and geographic areas required by Item 1.

Distribution

We distribute interactive entertainment hardware and software products in Europe through our European distribution subsidiaries: Centresoft in the United Kingdom; NBG in Germany; and CD Contact in the Benelux

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countries. These subsidiaries act as wholesalers in the distribution of products and also provide packaging and logistical and sales services. They provide services to our publishing operations and to various third-party publishers, including Sony Computer Entertainment (“Sony”("Sony"), Nintendo Co. Ltd. (“Nintendo”("Nintendo"), and Microsoft Corporation (“Microsoft”("Microsoft"). Centresoft is Sony’sSony's exclusive distributor of PlayStation products to the independent channel in the United Kingdom. In the fiscal year ended March 31, 2007,2008, sales for Sony, Nintendo, and Microsoft accounted for approximately 22%29%, 6%5%, and 2%, respectively, of our worldwide distribution net revenues.

        

We entered into the distribution business to obtain distribution capacity in Europe for our own products, while supporting the distribution infrastructure with third-party sales, and to diversify our operations into the European market. Centresoft and our other distribution subsidiaries operate in accordance with strict confidentiality procedures in order to provide independent services to various third-party publishers.

Emerging Technologies

We are actively supporting emerging platforms (wireless devices, digital downloads, and closed and open online networks, and interactive television)networks) by publishing and licensing key brandsfranchises for these emerging platforms. We have published and licensed rights to various brands,franchises, such as Tony Hawk’s Project 8, Tony Hawk’s Downhill Jam, GUN, Activision Anthology, andthe Call of Duty 3 franchise, the Guitar Hero franchise,Tony Hawk's Project 8, andTony Hawk's Downhill Jamfor various hand-held wireless devices. We also develop and optimize many of our titles for consoles that support online play, such as PS2, Xbox Live on the Xbox360, and the Sony PS3 and Nintendo Wii consoles. We believe that more of our brandsfranchises can be successfully published for wireless and online platforms, as well as exploited through other emerging technologies, as they continue to evolve.

        

In addition, we derive revenue from in-game advertising consisting primarily of fixed product placement. We are developing and expanding on dynamic ad serving technology and will continue to focus on attracting third parties to advertise in our video games.

Manufacturing

We prepare a set of master program copies, documentation, and packaging materials for our products for each hardware platform on which the product will be released. We also manufacture separate hardware peripherals, such as the guitar in Guitar Hero. Except with respect to products for use on the Sony, Nintendo, and Microsoft systems, our disk and hardware peripheral's duplication, packaging, printing, manufacturing, warehousing, assembly, and shipping are performed by third-party subcontractors.


        

To maintain protection over their hardware technologies, Sony, Nintendo, and Microsoft generally specify or control the manufacturing and assembly of finished products. We deliver the master materials to the licensor or its approved replicator, which then manufactures finished goods and delivers them to us for distribution under our label. We use the manufacturers who are authorized by Sony, Nintendo, or Microsoft to make the hardware peripheral for Guitar Hero. At the time our product unit orders are filled by the manufacturer, we become responsible for the costs of manufacturing and the applicable per unit royalty on such units, even if the units do not ultimately sell.

        

To date, we have not experienced any material difficulties or delays in the manufacture and assembly of our products or material returns due to product defects.

Competition

The interactive entertainment software industry is intensely competitive and new interactive entertainment software products and platforms are regularly introduced. Our competitors vary in size from small companies with limited resources to very large corporations with significantly greater financial, marketing, and product development resources than we have. Due to their greaterdifferent focuses and allocation of resources, certain of our competitors can spend more money and time on developing and testing products, undertake more extensive marketing campaigns, adopt more aggressive pricing policies, pay higher fees to licensors for desirable motion picture, television, sports and character properties, and pay more to third-party software developers than we can.developers. In addition, competitors with largerlarge product lines and popular titles typically have greater leverage with retailers, distributors, and other customers who may be willing to promote titles with less consumer appeal in return for access to such competitor’scompetitor's most popular titles. We believe that the main competitive factors in the interactive entertainment software industry include: product features and playability; brand name recognition; compatibility of products with popular platforms; access to distribution channels; quality of products; ease of use; price; marketing support; and quality of customer service.

        

We compete primarily with other publishers of personal computer and video game console interactive entertainment software. Significant third-party software competitors currently include, among others: Atari, Inc.;

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Capcom Co. Ltd.; Eidos PLC; Electronic Arts Inc.; Konami Company Ltd.; Midway Games Inc.; Namco Bandai Games Ltd.; Sega Enterprises, Ltd.; Take-Two Interactive Software, Inc.; THQ Inc.; Ubisoft Entertainment; Viacom/MTV; Vivendi Games Publishing; Warner Bro's Interactive; and the Walt Disney Company. In addition, integrated video game console hardware and software companies such as Sony, Nintendo, and Microsoft compete directly with us in the development of software titles for their respective platforms.

Employees

As of March 31, 2007,2008, we had approximately 2,1252,640 employees, including approximately 1,3001,200 in product development, 200500 in North American publishing, 175500 in international publishing, 150170 in operations, corporate finance and administration, and 300270 in European distribution activities.

        

As of March 31, 2007,2008, approximately 340260 of our full-time employees were subject to term employment agreements with us. These agreements generally commit such employees to employment terms of between one and five years from the commencement of their respective agreements. Most of the employees subject to such agreements are executive officers or key members of the product development, sales, or marketing divisions. These individuals perform services for us as executives, directors, producers, associate producers, computer programmers, game designers, sales directors, and marketing product managers. The execution by us of employment agreements with such employees, in our experience, reduces our turnover during the development, production, and distribution phases of our entertainment software products and allows us to plan more effectively for future development and marketing activities.


        

None of our employees are subject to a collective bargaining agreement except for the employees of our German distribution subsidiary who are allowed by German law to belong to an organized labor council. To date, we have not experienced any labor-related work stoppages.

Financial Information about Foreign Geographic Areas

See Item 7 “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" and Note 10 of the Notes to Consolidated Financial Statements included in Item 8.

Available Information

Our website is located athttp://www.activision.com.www.activision.com. Furthermore, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are available free of charge through our website. The information found on our website is not a part of, and is not incorporated by reference into, this or any other report that we file with or furnish to the SEC.

Item 1A.    RISK FACTORS

Our business is subject to many risks and uncertainties, which may affect our future financial performance. If any of the events or circumstances described below occurs, our business and financial performance could be harmed, our actual results could differ materially from our expectations, and the market value of our securities could decline. The risks discussed below are not the only ones we face. Additional risks exist that we do not currently believe to be material, and there may also be other risks that are not currently known to us, that may also harm our business and adversely affect our future financial performance and the market value of our stock.

Risks Factors Relating to the Interactive Entertainment Software Industry and Our Business

We depend on a relatively small number of brandsfranchises for a significant portion of our revenues and profits.

        

A significant portion of our revenues is derived from products based on a relatively small number of popular brandsfranchises each year, and these products are responsible for a disproportionate amount of our profits. In addition, many of these products have substantial production or acquisition costs and marketing budgets. In fiscal 2008, 65% of our consolidated net revenues and 75% of our worldwide publishing net revenues were derived from three franchises and in fiscal 2007, 39% of our consolidated net revenues (andand 52% of our worldwide publishing net revenues) wasrevenues were derived from three brands, which

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accounted for 17%, 13%, and 9% of consolidated net revenues, respectively (and 23%, 18%, and 11% of worldwide publishing net revenues, respectively). In fiscal 2006, 30% of our consolidated net revenues (and 38% of our worldwide publishing net revenues) was derived from three brands, which accounted for 14%, 8%, and 8% of consolidated net revenues, respectively (and 18%, 10%, and 10% of our worldwide publishing net revenues, respectively ). In fiscal 2005, 37% of our consolidated net revenues (and 48% of our worldwide publishing net revenues) was derived from three brands, which accounted for 16%, 11%, and 10% of consolidated net revenues, respectively (and 21%, 14%, and 13% of our worldwide publishing net revenues, respectively).franchises. We expect that a limited number of popular brandsfranchises will continue to produce a disproportionately large amount of our revenues and profits. Due to this dependence on a limited number of brands,franchises, the failure to achieve anticipated results by one or more products based on these brandsfranchises may significantly harm our business and financial results.

Our future success depends on our ability to release popular products.

        

The life of any one console or handheld game product is relatively short and generally involves a relatively high level of sales during the first few months after introduction followed by a rapid decline in sales. Because revenues associated with an initial product launch generally constitute a high percentage of the total revenues associated with the life of a product, delays in product releases or disruptions following the commercial release of one or more new products could have a material adverse effect on our operating results and cause oursuch operating results to be materially different from expectations. It is therefore important for us to be able to continue to develop many high quality new products that are popularly received. We focus our development and publishing activities principally on



products that are, or have the potential to become, franchise brand properties. If we are unable to do this, our business and financial results may be negatively affected.

Our business is “hit”"hit" driven. If we do not deliver “hit”"hit" titles, or if consumers prefer competing products, our sales could suffer.

        

While many new products are regularly introduced, only a relatively small number of “hit”"hit" titles account for a significant portion of net revenue.revenues. Competitors may develop titles that imitate or compete with our “hit”"hit" titles, and take sales away from us or reduce our ability to command premium prices for those titles. Hit products published by our competitors may take a larger share of consumer spending than we anticipate,anticipated, which could cause our product sales to fall below our expectations. If our competitors develop more successful products or offer competitive products at lower price,prices, or if we do not continue to develop consistently high-quality and well received products, our revenue, margins, and profitability will decline.

If we are unable to maintain or acquire licenses to intellectual property, we may publish fewer “hit”"hit" titles and our revenue may decline.

        

ManySome of our products are based on intellectual property and other character or story rights acquired or licensed from third parties. These license and distribution agreements are limited in scope and time, and we may not be able to renew key licenses when they expire or to include new products in existing licenses. The loss of a significant number of our intellectual property licenses or of our relationships with licensors, or our inability to obtain additional licenses of significant commercial value could have a material adverse effect on our ability to develop new products and therefore on our business and financial results. Additionally, the failure of intellectual property acquired by us to be popularly received could impact the market acceptance of ourthose products in which the intellectual property is included. Such lack of market acceptance could result in the write-off of the unrecovered portion of acquired intellectual property assets, which could cause material harm to our business and financial results. Furthermore, the competition for these licenses and distribution agreements is often intense. Competition for these licenses may also drive upincrease the advances, guarantees, and royalties that we must pay to the licensor, which could increase our costs.licensor.

Our business is highly dependent on the success, timely release and availability of new video game platforms, on the continued availability of existing video game platforms, as well as our ability to develop commercially successful products for these platforms.

        

We derive most of our revenue from the sale of products for play on video game platforms manufactured by third parties, such as Sony’sSony's PlayStation 2, PlayStation 3 and PlayStation 3, Microsoft’sPortable, Microsoft's Xbox 360 and Nintendo’sNintendo's Wii and DS. The success of our business is driven in large part by the availability of an adequate supply of these video game platforms, our ability to accurately predict which platforms will be successful in the marketplace, and our ability to develop commercially successful products for these platforms. We must make product development decisions and commit significant resources well in advance of the anticipated introduction of a new platform. A new platform for which we

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are developing products may be delayed, may not succeed or may have a shorter life cycle than anticipated. Alternatively, a platform for which we have not devoted significant resources could be more successful than we had initially anticipated, causing us to miss out on a meaningful revenue opportunity. IfAdditionally, if the platforms for which we are developing products are not released when anticipated, are not available in adequate quantities to meet consumer demand, or do not attain wide market acceptance, our revenue willmay suffer, we may be unable to fully recover the investments we have made in developing ourthose products, and our financial performance willmay be harmed.


Transitions in console platforms could have a material impact on the market for interactive entertainment software.

        

In fiscal 2006,2005, Microsoft released the Xbox 360 and, in fiscal 2007,2006, Sony and Nintendo introduced their respective next-generation hardware platforms, the PlayStation 3 and Wii. When new console platforms are announced or introduced into the market, consumers typically reduce their purchases of game console entertainment software products for current console platforms in anticipation of new platforms becoming available. During these periods, sales of our game console entertainment software products may be expected to slow or even decline until new platforms are introduced and achieve wide consumer acceptance. This decline may not be offset by increased sales of products for the new console platforms. As console hardware moves through its life cycle, hardware manufacturers typically enact price reductions and decreasing prices may put downward pressure on our software prices. During platform transitions, we may simultaneously incur costs both in continuing to develop and market new titles for prior-generation video game platforms, which may not sell at premium prices, and also in developing products for next-generation platforms, which will not generate immediate or near-term revenue. As a result, our operating results during platform transitions may be more volatile and more difficult to predict than during other times, whichand such volatility may cause greater fluctuations in our stock price.

We must make significant expenditures to develop products for new platforms which may not be successful or released when anticipated.successful.

        

We must make substantial product development and other investments in a particular platform well in advance of introduction of the platform and we may be required to realign our product portfolio and development efforts in response to market changes. Furthermore, development costs for new console platforms are greater than such costs for current console platforms. If increased costs are not offset by higher revenues and other cost efficiencies, our operating results will suffer and our financial position will be harmed. If the platforms for which we develop new software products or modify existing products are not released on a timely basis or do not attain significant market penetration, or if we develop products for a delayed or unsuccessful platform or cancel development of products in response to market changes, we may not be able to recover in revenues our development costs, which could be significant, and our business and financial results could be significantly harmed.

In addition, we seek to release many of our products in conjunction with specific events, such as the release of a related movie. If we miss these key selling periods due to product delays or delayed introduction of a new platform for which we have developed products, our sales will suffer disproportionately.

If the average price of prior-generation titles continues to decline or if we are unable to sustain launch pricing on next-generation titles, our operating results will suffer.

        

We have experienced a decrease in the average price of our titles for prior-generation platforms. AsWith the transition of the interactive entertainment industry transitions to next-generation video game platforms, we expect there to be fewer prior-generation titles are able to command premium prices, and we expect that even thesethose titles that can do so will be subject to price reductions at an earlier point in their sales cycle than we have seen inwas the case with prior years.platform transitions. We expect the average price of prior-generation titles to continue to decline,be under pressure, which may have a negative effect on our margins and operating results.

        

Our next-generationNext-generation titles for the Xbox360, Sony’sXbox 360, Sony's PlayStation 3 and the Nintendo Wii have been offered at premium retail prices since the launch of such consoles. We expect to continue to price next-generation titles at a premium level, but if we are unable to sustain launch pricing on these next-generation titles we may experience a negative effect on our margins and operating results.

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OurThe interactive entertainment industry is highly competitive and our competitioncompetitors may succeed in narrowing our market share and reducing our sales.

        

We compete primarily with other publishers of personal computerPC and video game console interactive entertainment software and peripherals. OurThose competitors vary in size from small companies with limited resources to very large corporations with significantly greater financial, marketing, and product development resources than we have. In addition,For example, integrated video game console hardware and software companies such as Sony, Nintendo, and Microsoft compete directly with us in the development of software titles



for their respective platforms. Certain of these competitors canmay spend more money and time on developing and testing products, undertake more extensive marketing campaigns, adopt more aggressive pricing policies, pay higher fees to licensors for desirable motion picture, television, sports, music and character properties, and pay more to third-party software developers than we can.do.

        

We also compete with other forms of entertainment and leisure activities. For example, we believe that the overall growth in the use of the Internet and online services by consumers may pose a competitive threat if customers and potential customers spend less of their available time using interactive entertainment software and more using the Internet and online services. A number of software publishers who compete with us have developed and commercialized or are currently developing online games for use by consumers over the Internet. Future increased consumer acceptance and increases in the availability of online games or technological advances in online game software or the Internet could result in a decline in platform-based software and negatively impact sales of our console and handheld products. Direct sales of software over the Internet by competitors could materially adversely affect our distribution business.business as well.

        

Competition in ourthe interactive entertainment industry is intense and we expect new competitors to continue to emerge.

Our platform licensors are our chief competitors and frequently control the manufacturing of and have broad approval rights over our console and handheld video game products.

        

Generally, when we develop interactive entertainment software products for hardware platforms offered by Sony, Nintendo, or Microsoft, the products are manufactured exclusively by that hardware manufacturer or their approved replicator.

        

OurThe agreements with these manufacturers include certain provisions, such as approval rights over all software products and related hardware peripherals and promotional materials and the ability to change the fee they charge for the manufacturing of products, which allow them substantial influence over our coststhe cost and the release schedule of oursuch interactive entertainment software products. In addition, since each of the manufacturers is also a publisher of games for its own hardware platforms and manufactures products for all of its other licensees, a manufacturer may give priority to its own products or those of our competitors in the event of insufficient manufacturing capacity. Accordingly, Sony, Nintendo, or Microsoft could cause unanticipated delays in the release of our products as well as increases to our projected development, manufacturing, marketing, or distribution costs, which could materially harm our business and financial results.

        

In addition, our platform licensors control our ability to provide online game capabilities for our console platform products and in large part establish the financial terms on which these services are offered to consumers. Currently, Microsoft provides online capabilities for the Xbox360Xbox 360 and Sony provides online capabilities for PS2PlayStation 2 and PS3PlayStation 3 products. In each case, compatibility code and/or the consent of the licensor are required for us to include online capabilities in our console products. As these capabilities become more significant, the failure or refusal of our licensors to approve our products may harm our business.business and financial results.

Our platform licensors set the royalty rates and other fees that we must pay to publish games for their platforms, and therefore have significant influence on our costs.

        

We pay a licensing fee to the hardware manufacturer for each copy of a product manufactured for that manufacturer’smanufacturer's game platform. In order to publish products for new hardware platforms, we must take a license from the platform licensor which gives the platform licensor the opportunity to set the fee structure that we must pay in order to publish games for that platform. Similarly, the platform licensors have retained the flexibility to change their fee structures for online gameplay and features for their consoles and the manufacturing of products. The control that platform licensors have over the fee



structures for their platforms and online access makes it difficult for us to predict our costs and profitability in the medium to long term. It is also possible that platform licensors will not renew our existing licenses. Because publishing products for console systems is the largest portion of our business, any increase in fee structures or nonrenewal of licenses wouldcould have a significant negative impact on our business model and profitability.

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We rely on independent third parties to develop some of our software products.

        

We rely on independent third-party interactive entertainment software developers to develop some of our software products. Since we depend on these developers, in the aggregate, we remain subject to the following risks:

    •                  Continuing
    continuing strong demand for developers’developers' resources, combined with the recognition they receive in connection with their work, may cause developers who worked for us in the past either to work for our competitorsa competitor in the future or to renegotiate our agreements with them on terms less favorable for us;



    •                  Limited
    limited financial resources and business expertise and inability to retain skilled personnel may force developers out of business prior to completing our products or require us to fund additional costs; and



    •                  Our
    our competitors may acquire the businesses of key developers or sign them to exclusive development arrangements. In either case, we would not be able to continue to engage such developers’developers' services for our products, except for those that they are contractually obligated to complete development of for us.

        

Increased competition for skilled third-party software developers also has compelled us to agree to make significant advance payments on royalties to game developers. If the products subject to these arrangements do not generate sufficient revenues to recover these royalty advances, we would have to write-off unrecovered portions of these payments, which could cause material harm to our business and financial results. Typically, we pay developers a royalty based on a percentage of net revenues, less agreed upon deductions, but from time to time, we have agreed to pay developers fixed per unit product royalties after royalty advances are fully recouped. To the extent that sales prices of products on which we have agreed to pay a fixed per unit royalty are marked down, our profitability could be adversely affected.

If our products contain defects, our business could be harmed significantly.

        

Software products and hardware peripherals as complex as the ones we publish and distribute may contain undetected errors and defects. This risk is often higher when such products or peripherals are first introduced or when new versions are released. Despite extensive testing priorFailure to release, we cannot be certain thatavoid, or to timely detect and correct, such errors will not be found in new products or releases after shipment, thatdefects could result in loss of, or delay in, market acceptance. This loss or delayacceptance, and could significantly harm our business, financial results, and reputation.

We may permit our customers to return our products and to receive pricing concessions which could reduce our net revenues and results of operations.

        

We are exposed to the risk of product returns and price protection with respect to our distributors and retailers. Return policies allow distributors and retailers to return defective, shelf-worn, and damaged products in accordance with terms granted. Price protection, when granted and applicable, allows customers a credit against amounts they oweowed to us with respect to merchandise unsold by them. We may permit product returns from, or grant price protection to, our customers under certain conditions. TheThese conditions our customers must meet to be granted the right to return products or price protection are, among other things,include compliance with applicable payment terms, delivery to us of weekly inventory and sell-through reports, and consistent participation in the launches of our premium title releases. We may also consider other factors, including the facilitation of slow-moving inventory and other market factors.



When we offer price protection, we offer it with respect to a particular product to all of our retail customers; however,customers (although only those customers who meet the conditions detailed above can avail themselves ofare entitled to such price protection.protection). We also offer a 90-day limited warranty to our end users that our products will be free from manufacturing defects. Although we maintain a reserve for returns and price protection, and although we may place limits on product returns and price protection, we could be forced to accept substantial product returns and provide substantial price protection to maintain our relationships with retailers and our access to distribution channels. Product returns and price protection that exceed our reserves could significantly harm our business and financial results.

Sales of certain titles such as Guitar HeroTM are affected by hardware peripheral availability.

Some of our titles involve aone or more separate hardware peripheral,peripherals, such as the guitar controller inGuitar HeroTM. Typically, we sell such software both in bundles with the hardware peripheral and on a stand-alone basis. ConsumerConsumers may not want to buy such game software if they cannot also buy the hardware peripheral. If we underestimate demand or otherwise are unable to produce sufficient quantities of the hardware peripheral of an acceptable quality or allocate too few peripherals to geographic markets and hardware platforms where demand exceeds supply, we will forego revenue. This may also create greater opportunities for competitors to develop or gain market share with competitive product offerings. If we overestimate demand and make too many peripherals, or allocate too many peripherals to geographic markets and

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hardware platforms where there is insufficient demand, we will incur unrecoverable manufacturing costs for unsold units as well as for unsold game software. In either case, hardware peripheral manufacturing and allocation decisions may negatively affect our financial performance.

There are a        A limited number of manufacturers who are authorized by Sony, Nintendo or Microsoft to make the hardware peripherals forGuitar HeroTM, and the majority of those manufacturers are located in China. Anything that adversely impacts the ability of those manufacturers to produce or otherwise supply the hardware peripheralperipherals for us, including without limitation the revocation of the first partyfirst-party license to produce the hardware, the utilization of such manufacturer’smanufacturer's capacity by one orof our competitors, natural disasters that disrupt manufacturing, transportation or communications, labor shortages, civil unrest or issues generally negatively impacting international companies operating in China, willmay adversely impact our ability to supply those peripherals to the market.

We may face difficulty obtaining access to retail shelf space necessary to market and sell our products effectively.

        

Retailers of our products typically have a limited amount of shelf space and promotional resources, and there is intense competition among consumer interactive entertainment software products for high quality retail shelf space and promotional support from retailers. To the extent that the number of products and platforms increases, competition for shelf space may intensify and may require us to increase our marketing expenditures. Retailers with limited shelf space typically devote the most and highest quality shelf space to those products expected to be best sellers. We cannot be certain that our new products will consistently achieve such “best seller”"best seller" status. Due to increased competition for limited shelf space, retailers and distributors are in an increasingly better position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees, and product return policies. Our products constitute a relatively small percentage of any retailer’sretailer's sales volume. We cannot be certain that retailers will continue to purchase our products or to provide ourthose products with adequate levels of shelf space and promotional support on acceptable terms. A prolonged failure in this regard may significantly harm our business and financial results.


Our sales may decline substantially without warning and in a brief period of time because a majority of our sales are made to a relatively small number of key customers and because we do not have long-term contracts for the sale of our products.

        

In the United States and Canada, we primarily sell our products on a direct basis to mass-market retailers, consumer electronics stores, discount warehouses, and game specialty stores. Our products are sold internationally on a direct-to-retail basis, through third-party distribution and licensing arrangements and through our wholly-owned European distribution subsidiaries. Our sales are made primarily on a purchase order basis without long-term agreements or other forms of commitments. Our largest customers, Wal-Mart and GameStop, accounted for approximately 14% and 13%, respectively, of our consolidated net revenues for the fiscal year ended March 31, 2008 and approximately 22% and 8%, respectively, of our consolidated net revenues for the fiscal year ended March 31, 2007 and approximately 22% and 10% of our consolidated net revenues for the fiscal year ended March 31, 2006.2007. The loss of, or significant reduction in sales to, any of our principal retail customers or distributors could significantly harm our business and financial results. The concentration of sales in a small number of large customers also could make us more vulnerable to collection risk if one or more of these large customers became unable to pay for our products. In addition, having such a large portion of our total net revenue concentrated in a few customers reduces our negotiating leverage with these customers.

We may be burdened with payment defaults and uncollectible accounts if our distributors or retailers cannot honor their existing credit arrangement with us.arrangements.

        

Distributors and retailers in the interactive entertainment software industry have from time to time experienced significant fluctuations in their businesses and a number of them have failed. The insolvency or business failure of any significant retailer or distributor of our products could materially harm our business and financial results. We typically make sales to most of oursuch retailers and some such distributors on unsecured credit, with terms that vary depending upon the customer’scustomer's credit history, solvency, credit limits, and sales history, as well as whether we can obtain sufficient credit insurance. Although, as in the case with most of our customers, we have insolvency risk insurance to protect against our customers’a customer's bankruptcy, insolvency, or liquidation, this insurance contains a significant deductible and a co-payment obligation, and the policy does not cover all instances of non-payment. In addition, although we maintain a reserve for uncollectible receivables, the reserve may not be sufficient in every circumstance. As a result, a payment default by a significant customer could significantly harm our business and financial results.

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We may not be able to maintain our distribution relationships with key vendors and customers.

        

Our CD Contact, NBG, and Centresoft subsidiaries distribute interactive entertainment software and hardware products and provide related services in the Benelux countries, Germany, and the United Kingdom, respectively, and via export in other European countries for a variety of entertainment software publishers, many of which are our competitors, and hardware manufacturers. From time to time, they also maintain exclusive relationships to serve certain retail customers. These services are generally performed subject to limited-term arrangements. Although we expect to use reasonable efforts to retain these vendors and retail customer relationships, we may not be successful in this regard. The cancellation or non-renewal of one or more of these arrangements could significantly harm ouradversely affect business and financial results.

Our business is subject to risks generally associated with the entertainment industry, any of which could significantly harm our operating results.

        

Our business is subject to risks that are generally associated with the entertainment industry, including:including the popularity, price and timing of the release of our games and the platforms on which they are played; economic conditions that adversely affect discretionary consumer spending; changes in consumer demographics; the availability and popularity of other forms of entertainment; and critical



reviews and public tastes and preferences, which may change rapidly and cannot necessarily be predicted. Many of these risks are beyond our control. These risks could negatively impact our business and financial results.

As online functionality becomes an increasingly important feature of our software products, we may need to defer the recognition of an increasing amount of revenue, which may adversely affect the net revenue, net income and earnings per share that we will report under GAAP.

        As online functionality becomes a more important component of gameplay, an increasing number of our online-enabled games may contain a more-than-inconsequential separate service deliverable in addition to the product, and our performance obligations for these games will extend beyond the sale of the games. Vendor-specific objective evidence of fair value does not exist for the online services, as we do not plan to separately charge for this component of online-enabled games. As a result, for certain key titles to be released in the December quarter of fiscal year 2009 and thereafter, we will recognize all of the revenues from the sale of certain online-enabled games for certain platforms ratably over an estimated service period, which we currently estimate to be six months beginning the month after shipment. In addition, we will defer the costs of sales of those titles. This may have an adverse effect on the revenue, net income and earnings per share that we will report for future periods under GAAP. If we are required to recognize a greater portion of the revenue of a sale after shipment, or if we are required to recognize revenue over a longer service period, there may be an adverse effect on our reported net revenue, net income and earnings per share under GAAP.

We are exposed to seasonality in the sale of our products.

        

The interactive entertainment software industry is highly seasonal, with the highest levels of consumer demand occurring during the calendar year end holiday buying season. As a result, our net revenues, gross profits, and operating income have historically been highest during the second half of the calendar year. Our receivables and credit risk are likewise higher during the second half of the calendar year as our customers stock up on our products for the holiday season. Additionally, in a platform transition period, sales of game console software products can be significantly affected by the timeliness of introduction of game console platforms by the manufacturers of those platforms, such as Sony, Nintendo, and Microsoft. The timing of hardware platform introduction is also often tied to holidays and is not within our control. If a hardware platform is released unexpectedly close to the holidays, this would result in a shortened holiday buying season and could negatively impact the sales of our products. Further, delays in development, licensor approvals, or manufacturing can also affect the timing of the release of our products, causing us to miss key selling periods such as the calendar year end holiday buying season.

We may not be able to adequately adjust our cost structure in a timely fashion in response to a sudden decrease in demand.

        

A significant portion of our selling and general and administrative expense is comprised of personnel and facilities. In the event of a significant decline in revenues, we may not be able to exit facilities, reduce personnel, or make other changes to our cost structure without disruption to our operations or without significant termination and exit costs. Management may not be able to implement such actions in a timely manner, if at all, to offset an immediate shortfall in revenues and profit.

If we do not continue to attract and retain key personnel, we will be unable to effectively conduct our business.

        

Our success depends to a significant extent on our ability to identify, hire, and retain skilled personnel. The software industry is characterized by a high level of employee mobility and aggressive recruiting among competitors for personnel with technical, marketing, sales, product development, and management skills. We may not be able to attracthave difficulties in attracting and retainretaining skilled personnel or may incur significant costs in order to do so. If we are unable to attract additional qualified employees or retain the services of key personnel, our business and financial results could be negatively impacted.


Our products are subject to the threat of piracy and unauthorized copying, and inadequate intellectual property laws and other protections could prevent us from enforcing or defending our proprietary technology.technologies. We may also face legal risks arising out of user-generated content.

        

We regard our software as proprietary and rely on a combination of copyright, patent, trademark and trade secret laws, employee and third-party nondisclosure agreements, and other methods to protect our proprietary rights. We own or license various copyrights, patents, and trademarks. We are aware that some unauthorized copying occurs, within the interactive entertainment software industry, and if a significantly greater amount of unauthorized copying of our software products were to occur, it could cause material harm to our business and financial results.

        

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Policing unauthorized use of our products is difficult, and software piracy is a persistent problem, especially in somecertain countries. Further, the laws of some countries where our products are or may be distributed either do not protect our products and intellectual property rights to the same extent as the laws of the United States, or are poorly enforced. Legal protection of our rights may be ineffective in such countries. In addition, though we take steps to make the unauthorized copying and distribution of our products more difficult, as do the manufacturers of consoles on which the majority of our games are played, neither our efforts norand those of the console manufacturers may not be successful in controlling the piracy of our products. Organized pirate operations have been expanding globally. In addition, the proliferation of technology designed to circumvent the protection measures we useused in our products, the availability of broadband access to the Internet, the ability to download pirated copies of our games from various Internet sites and peer-to-peer networks, and the widespread proliferation of Internet cafes using pirated copies of our products, all have contributed to an expansion in piracy. This could have a negative effect on our growth and profitability in the future.

        

Moreover, as we leverage our software products using emerging technologies such as the Internet and online services, and as user-generated content increases, our ability to protect our intellectual property rights and to avoid infringing intellectual property rights of others may diminish. We cannot be certain that existing intellectual property laws will provide adequate protection for our products in connection with these emerging technologies.

Data breaches involving the source code for our products or customer or employee data stored by uswe store could adversely affect our reputation and revenue.

        

We store the source code for our interactive entertainment software products as it is created on multiple electronic devices. In addition, we store customer account information for, and other confidential information relatedwith respect to our customers and employees. A breach of the systems on which such source code, account information (including personally identifiable information) and other sensitive data is stored could lead to piracy of our software or fraudulent activity andresulting in claims and lawsuits against us in connection with data security breaches. If we are subject to data security breaches, we may have a loss in sales or be forced to pay damages or other amounts, which could materially and adversely affect our profitability. In addition, any damage to our reputation resulting from a data breach could have a material adverse impact on oureither revenue and future growth prospects, or increase ourincreased costs by leading toarising from the implementation of additional security measures being required.measures.

We may be subject to intellectual property claims.

        

As the number of interactive entertainment software products increases and the features and content of these products continue to overlap, software developers increasingly may become subject to infringement claims. Many of our products are highly realistic and feature materials that are based on real world examples, which may be the subject of intellectual property infringement claims of others. In addition, our products often utilize complex, cutting edge technology that may become subject to emerging intellectual property rights of others. Although we believe that we make reasonable efforts to ensure that our products do not violate the intellectual property rights of others, it is possible that third



parties still may claim infringement. From time to time, we receive communications from third parties regarding such claims. Existing or future infringement claims against us, whether valid or not, may be time consuming, distracting to management and expensive to defend.

•        Intellectual property litigation or claims could force us to do one or more of the following:

    •                              Cease
    cease selling, incorporating, or using products or services that incorporate the challenged intellectual property;



    •                              Obtain
    obtain a license from the holder of the infringed intellectual property, which if available at all, may not be available on commercially favorable terms; or



    •                              Redesign
    redesign the affected interactive entertainment software products or hardware peripherals, which could cause us to incurresult in additional costs, delay introduction and possibly reduce commercial appeal of ourthe affected products.

        

Any of these actions may cause material harm to our business and financial results.

WeOur products are subject to the rating of our contentratings by the Entertainment Software Rating Board and similar agencies. Failure to obtain our target ratings for our products could negatively impact our sales.

        

The Entertainment Software Rating Board, (the “ESRB”) requires game publishers to provideor ESRB, is a self-regulatory body in the U.S. which provides consumers of interactive entertainment software with ratings information, including information relating to violence, nudity, or sexual content contained in software titles,

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and imposes significant penalties for noncompliance.titles. Certain countries other than the U.S. have also established similar rating systems as prerequisites for product sales in those countries. In some instances, we may be required to modify our products to comply with the requirements of the rating systems, which could delay or disrupt the release of our products,any given product, or we may be prevented from selling themprevent its sale altogether in certain territories. Our software titles receive a rating from theThe relevant ESRB of “Everyone”ratings include "Everyone" (age 6 and older), “Everyone"Everyone 10+”" (age 10 and older), “Teen”"Teen" (age 13 and over), or “Mature”"Mature" (age 17 and over). ManyCertain of our titles have received an “Mature”a "Mature" rating. None of our titles havehas received the “Adults Only”"Adults Only" rating (18 and over). We believe that we comply with rating systems and properly display the ratings and content descriptions received for our titles. If we are unable to obtain the ratings we have targeted for our products as a result of changes in the ESRB’sESRB's ratings standards or for other reasons, including the adoption of legislation in this area, our business and prospects could be negatively affected.

Our business, products, and distribution are subject to increasing regulation of content in key territories. If we do not successfully respond to these regulations, our business may suffer.

        

Legislation is continually being introduced that may affect both the content and the distribution of our products and their distribution.products. For example, privacy laws in the United States and Europe impose various restrictions on ourthe collection and storage of personal information. Those ruleslaws and regulations vary by territory although the Internet recognizes no geographical boundaries.territory. In addition, many foreign countries have laws that permit governmental entities to censor the content and/or advertising of interactive entertainment software. Other countries, such as Germany, prohibit certain types of content.

In the United States, numerous laws have been introduced at the federal and state level which attempt to restrict the content of products such as oursgames or the distribution of such products. For example, recent legislation has been adopted in several states, and proposed at the federal level, that prohibits the sale of certain games (e.g., violent games or those with “M"M (Mature)”" or “AO"AO (Adults Only)”" ratings) to minors. In addition, a number of state legislative bodies in states such as Illinois, California, Michigan, and Washington have introduced various forms of legislation designed to regulate and control sales of video games deemed inappropriate for sales to minors. NewSome argue that there is a link between video games and recent incidentsviolence, which may lead to increased pressure for legislative activity. To date, all themost courts that have ruled on such legislation have ruled in a manner favorable to the interactive entertainment software industry. But in the event such legislation is adopted and enforced, the sales of our products may be


harmed because the products we are able to offer to our customers and the size of the potential market for our products may be limited. We may also be required to modify ourcertain products or alter our marketing strategies to comply with new and possibly inconsistent regulations, which could be costly or delay the release of our products.

If one or more of our titles were found to contain objectionable undisclosed pertinent content, our business could suffer.

        

Throughout the history of ourthe interactive entertainment industry, many video games have been designed to include certain hidden content and gameplay features that are accessible through the use of in-game cheat codes or other technological means that are intended to enhance the gameplay experience. However, in some cases, undisclosed pertinent content or features have been found in other publishers’publishers' interactive entertainment software products. In a few cases, the ESRB has reacted to discoveries of undisclosed pertinent content and features by changing the rating that was originally assigned to the product, requiring the publisher to change the game and/or game packaging and/or fining the publisher. Retailers have on occasion reacted to the discovery of such undisclosed content by removing these games from their shelves, refusing to sell them, and demanding that their publishers accept them as product returns. Likewise, interactive entertainment software consumers have reacted to the revelation of undisclosed content by refusing to purchase such games, demanding refunds for games they have already purchased, refraining from buying other games published by the company whose game contained the objectionable material, and, in at least one occasion, filing a lawsuit against the publisher of the product containing such content.

        

We have implemented preventativepreventive measures designed to reduce the possibility of objectionable undisclosed pertinent content from appearing in the video games we publish. Nonetheless, these preventativepreventive measures are subject to human error, circumvention, overriding, and reasonable resource constraints. If a video game we published were found to contain undisclosed pertinent content, the ESRB could demand that we recall athe game be recalled and change its packaging changed to reflect a revised rating, retailers could refuse to sell it and demand we accept the returnacceptance of returns of any unsold copies or returns from customers, and/or consumers could refuse to buy it, demand that we refund their moneyrefunds or file a lawsuitlawsuits against us. This could have a material negative impact on our operating results and financial condition. In addition, our reputation could be harmed, which could impact sales of our other video games we sell.games. If any of these consequences were to occur, our business and financial performance could be significantly harmed.

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Our products may be subject to legal claims.

        

In prior fiscal years, at least two lawsuits have been filed against numerous video game companies, including against us, by the families of victims who were shot and killed by teenage gunmen in attacks perpetrated at schools. These lawsuits alleged that the video game companies manufactured and/or supplied these teenagers with violent video games, teaching them how to use a gun and causing them to act out in a violent manner. These lawsuits have been dismissed. Similar additional lawsuits may be filed in the future. Although, our general liability insurance carrier agreed to defend us in suchprior lawsuits in the past,of this nature against us, it is uncertain whether theour insurance carrier would do so in the future, or if itsuch insurance carriers would cover all or any amounts for which we might be liable for if such future lawsuits are not decided in our favor. If such future lawsuits are filed and ultimately decided against us and our insurance carrier does not cover the amounts for which we aremay be liable, for, it could have a material adverse effect on our business and financial results. Payment of significant claims by insurance carriers may make such insurance coverage materially more expensive or unavailable in the future, thereby exposing our businessus to additional risk.

Our business is subject to risks and uncertainties of international trade.

        We conduct business throughout the world, and derive a substantial amount of revenue from international trade, particularly from Europe and Australia. Revenues outside of North America have accounted for 39%, 50% and 52% of our consolidated net revenues in fiscal 2008, 2007 and 2006,



respectively. We expect that international revenues will continue to account for a significant portion of total revenues in the future.

        We are subject to risks inherent in foreign trade, including increased tariffs and duties, fluctuations in currency exchange rates, shipping delays, and international political, regulatory and economic developments, all of which may impact our operating margins or make it more difficult, if not impossible, for us to conduct business in foreign markets.

        For example, a deterioration in relations between the U.S. and any country in which we have significant operations or sales could result in the adoption or expansion of trade restrictions that harm our business and operating results, as could the implementation of government regulations in a country in which we have significant operations or sales.

        If government regulations or restrictions prevent us from repatriating internationally derived revenue into the U.S., or a country's tax structure makes repatriation prohibitively expensive, we may not transfer this revenue into the U.S., which could affect our ability to reinvest or utilize such amounts in our business.

        In addition, cultural differences may affect consumer preferences and limit the popularity of titles that are "hits" in the United States. If we do not correctly assess consumer preferences in the countries in our market, our sales and revenue may be lower than expected.

Fluctuations in currency exchange rates may have a negative impact on our business.

        We transact business in various currencies other than the U.S. dollar and have significant international sales and expenses denominated in currencies other than the U.S. dollar, subjecting us to currency exchange rate risks. We have engaged in limited currency hedging activities and, while these hedging activities mitigate some currency exchange rate risks, our reported revenues from international sales and licensing, and thus our results of operations and financial condition would be adversely affected by unfavorable movements in currency exchange rates.

Other Risks Relating to Our Business and Ownership of Our Stock

We seek to manage our business with a view to achieving long-term results, and this could have a negative effect on short-term trading.

        

We focus on creation of shareholder value over time, and we intend to make decisions that will be consistent with this long-term view. As a result, some of our decisions, such as whether to make or discontinue operating investments, manage our balance sheet and capital structure, or pursue or discontinue strategic initiatives, may be in conflict with the objectives of short-term traders. Further, this could adversely affect our quarterly or other short-term results of operations.

We may face limitations on our ability to find suitable acquisition opportunities or to integrate additional acquired businesses.

        

We intend to pursue additional acquisitions of companies, properties, and other assets that can be purchased or licensed on acceptable terms and which we believe can be operated or exploited profitably. Some of these transactions could be material in size and scope. Although we continue to search for additional acquisition opportunities, we may not be successful in identifying suitable acquisitions. As the interactive entertainment software industry continues to consolidate, we face significant competition in seeking and consummating acquisition opportunities. We may not be able to consummate potential acquisitions or an acquisition may not enhance our business or may decrease rather than increase our earnings. In the future, we may issue additional shares of our common stock in connection with one or more acquisitions, which may dilute our existing shareholders. Future acquisitions could also divert substantial management time and result in short-term reductions in earnings or special transaction, ongoing goodwill amortization or other charges.charges . In addition, we cannot



guarantee that we will be able to successfully integrate the businesses that we may acquire into our existing business. Our shareholders may not have the opportunity to review, vote on, or evaluate future acquisitions.

        

From time to time, we may make a capital investment and hold a minority interest in a third-party developer in connection with interactive entertainment software products to be developed by such developer for us, which we believe helps to create a closer relationship between us and the developer. We account for those capital investments over which we have the ability to exercise significant influence using the equity method. For those investments over which we do not have the ability to exercise significant influence, we account for our investment using the cost method. There can be no assurance that we will realize long-term benefits from such investments or that we will continue to carry such investments at their current value.

Our shareholder rights plan, charter documents, and other agreements may make it more difficult to acquire us without the approval of our Board of Directors.

        

We have adopted a shareholder rights plan under which one right entitlingentitles the holder to purchase one six-hundredths (1/600) of a share of our Series A Junior Preferred Stock, as adjusted on account of stock dividends made since the plan's adoption (as so adjusted, one-hundredths (1/100) of a share), at an exercise price of $6.67 per share, as adjusted on account of stock dividends made since the plan’splan's adoption of our Series A Junior Preferred Stock price at an exercise price of $6.67(as so adjusted, $1.11 per share, subject to adjustment and as adjusted on account of stock dividends made since the plan’s adoption,share) is attached to each outstanding share of common stock. Such shareholder rights only become exercisable if a person or group acquires 15% or more of our common stock (or announces or commences an offer which would result in their owning 15% of the stock) and if such an acquisition occurs, generally each holder of a right may exercise that right for a number of shares of our common stock having a value equal to two times the then-current exercise price of the right (which would currently be $2.22) in lieu of shares of Series A Junior Preferred Stock. This plan therefore makes an acquisition of control in a transaction not approved by our Board of Directors more difficult. OurThe rights plan was amended in connection with the proposed transaction with Vivendi to provide that such transaction will not trigger the rights under the plan and will terminate if and when the transaction is consummated, extinguishing all rights thereunder. However, until such time as the transaction closes the rights plan continues to make it difficult for a company to acquire us without approval of our Board of Directors. In addition, our Amended and Restated By-laws have advance notice provisions for nominations for election of nominees to the Board of Directors which may make it more difficult to acquire control of us. Our long-term

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incentive plans provide, in the discretion of a committee, for acceleration of stock options following a change in control under certain circumstances, which has the effect of making an acquisition of control more expensive. In addition, some of our officers have severance compensation agreements that provide for substantial cash payments and accelerationsor the acceleration of other benefits in the event of a change in control. These agreements and arrangements may also inhibit a change in control.

Limitations on our capacity or ability to issue stock and options may require us to use more cash in our employee compensation packages.

Our amended and restated certificate of incorporation and our option plans limit the number of shares ofHistorically, our stock and the number of stock options that we can issue. To increase these limits, we must seek and obtain approval of our stockholders. If our stockholders do not approve increases in our available stock and option “pool”, our ability to offer stock and stock options to new and existing employees will be limited. This may in turn impair our ability to recruit and retain employees. It may also require us to place greater reliance on cash compensation, which may not be as attractive to existing and prospective employees. Increased use of cash for employee compensation will also reduce the amount of cash available to us for other uses. Each of these consequences could have negative effects on our business and financial results.price has been highly volatile.

        

Our stock price is highly volatile.

The trading price of our common stock has been and could continue to be subject to wide fluctuations in response to many factors, including:

    •                  Quarter
    quarter to quarter variations in our results of operations;



    •                  Our
    our announcements of new products;



    •                  Our competitors’
    our competitors' announcements of new products;



    •                  Our
    our product development or release schedule;



    •                  General
    general conditions in the computer, software, entertainment, media or electronics industries, and in the economy;


      •                  Timing
      the timing of the introduction of new platforms and delays in the actual release of new platforms;



      •                  Hardware manufacturers’
      our hardware manufacturers' announcements of price reductionschanges in hardware platforms;



      •                  Consumer
      consumer spending trends;



      •                  Changes
      the outcome of lawsuits or regulatory investigations in which we are involved;

      •
      changes in earnings estimates or buy/sell recommendations by analysts; and



      •                  Investor
      investor perceptions and expectations regarding our products, plans and strategic position, and those of our competitors and customers.

            

    In addition, the public stock markets may experience extreme price and trading volume volatility, particularly in high technology sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons often unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.

    In our fiscal year 2007, we began recognizing stock-based compensation expense in accordance with Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” related to our employee equity compensation and employee stock purchase programs. The recognition of this expense has a significant impact in lowering our reported net income (or increase our reported net loss).

    Beginning in the fiscal year ended March 31, 2007, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which requires us to recognize compensation expense for all stock-based awards based on estimated fair values. As a result, beginning with our first quarter

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    of fiscal 2007, our operating results contain a charge for stock-based compensation related to the equity-based awards we provide to our employees, as well as stock purchases under our employee stock purchase plans. This expense is in addition to the stock-based compensation expense we have recognized in prior periods related to restricted stock unit grants, acquisitions and other grants. The stock-based compensation charges we incur depend on the number of equity-based awards we grant and the number of shares of common stock we sell under our employee stock purchase plans, as well as a number of estimates and variables such as estimated forfeiture rates, the trading price and volatility of our common stock, the expected term of our options, and interest rates. As a result, our stock-based compensation charges can vary significantly from period to period. Going forward, our adoption of SFAS 123R will continue to significantly lower our reported net income (or increase our reported net loss), which could have an adverse impact on the trading price of our common stock.

    Changes in our tax rates or exposure to additional tax liabilities could adversely affect our operating results and financial condition.

            

    We are subject to income taxes in the United States and in various foreignother jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and, in the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are also required to estimate what our taxes will be in the future.future taxes. Although we currently believe our tax estimates are reasonable, the estimate process is inherently uncertain, and oursuch estimates are not binding on tax authorities. Our effective tax rate could be adversely affected by changes in our business, including the mix of earnings in countries with differing statutory tax rates, changes in theour tax elections, we make, changes in applicable tax laws as well as other factors. Further, our tax determinations are regularly subject to audit by tax authorities and developments in those audits could adversely affect our income tax provision. Should our ultimate tax liability exceed our estimates, our income tax provision and net income could be materially affected.

            

    We are also required to pay taxes other than income taxes, such as payroll, sales, use, value-added, net worth, property, and goods and services taxes, in both the United States and various foreignother jurisdictions. We areTax authorities regularly under examination by tax authorities with respect toexamine these non-income taxes. There can be no assurance that the outcomes from these examinations, changes in our business or changes in applicable tax rules will not have an adverse effect on our operating results and financial condition.

    Our international revenues may be affected by regulatory requirements and barriers, cultural differences and currency fluctuations.

    Our international revenues have accounted for a significant portion of our total revenues. International sales and licensing accounted for 50%, 52% and 50%, respectively, of our consolidated net revenues in fiscal 2007, 2006 and 2005, respectively. We expect that international revenues will continue to account for a significant portion of our total revenues in the future. International sales may be subject to unexpected regulatory requirements, tariffs, and other barriers. Additionally, foreign sales that are made in local currencies may fluctuate. We have and may continue to engage in limited currency hedging activities. While these hedging activities mitigate some foreign currency risk, our reported results of operations and financial condition would be adversely affected by unfavorable foreign currency fluctuations, particularly the Euro, British pound sterling, Australian dollar and Canadian dollar. Currency exchange rate fluctuations had a positive impact on revenues from internal sales and licensing in the fiscal year ended March 31, 2007. In the future, currency exchange rates may have a negative or materially adverse impact on revenues from international sales and licensing and thus on our business and financial results. In addition, cultural differences may affect consumer preferences and limit the popularity of titles that are “hits” in the United States. If we do not correctly assess consumer preferences in the countries in our market, our sales and revenue may be lower than expected.

    Risk Factors Relating to Results of the Special Subcommittee Review of our Stock Option Granting Practices

    SEC investigation and litigation relating to stock options remain pending and may adversely affect our business and results of operations.

            

    Although the special subcommittee of independent members of our Boardboard of Directorsdirectors established in July 2006 to review our historical stock option granting practices, (the “Special Subcommittee”)which we refer to as the special subcommittee, has completed its review of those practices and our stock option grants made in the period between 1992 and 2006, aand although we have made to the SEC Staff an offer of settlement of the SEC's formal investigation by

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    the SEC relating to our stock option granting practices, remains pending, as doeswhich the SEC Staff has indicated it is prepared to recommend to the SEC, and have agreed to a settlement of the derivative litigation against us and certain of our current and former directors and officers. Although weofficers, the settlement with the SEC remains subject to final documentation and then approval by the Commission and the settlement of the derivative litigation remain subject to final court approval. We believe that we have taken appropriate action by restating our financial statements forthrough the fiscal year ended March 31, 2006, as filed in our Amendedamended Annual Report on Form 10-K/A on May 25, 2007, and made appropriate disclosures for matters relating to stock options, options. If, however, the pending settlements are not approved,



    the SEC (orcould institute enforcement action seeking other or additional relief or the court in the derivative actions) may disagreeactions could make findings disagreeing with the findings of the Special Subcommitteespecial subcommittee or with the manner in which we have accounted for and reported, or not reported, the financial impact of past option grant measurement date errors. If so, we may needcould be required to further restate our prior financial statements, further amend our filings with the SEC, or take other actions not currently contemplated. In addition, theseadditional proceedings arewould be likely to result in additional legal expense that may affect our results in future periods, and may also result in diversion of management attention and other resources, as well as fines, penalties, damages and other sanctions.sanctions against the company or individual directors and officers. These eventualities could materially and adversely affect our business and results of operations. We cannot currently predict the ultimate outcome of these proceedings.

    Our investments in auction rate securities are subject to risks that may have an adverse effect on our liquidity.

    We had        As of March 31, 2008, the par value of our investment in auction rate securities was $95.2 million, or approximately 6%, of our cash, cash equivalents and investments, and the fair value of these securities was estimated to be $90.9 million, or $4.3 million below par. The change in fair value was recorded as a material weakness in internal control over financial reporting and cannot assure you that additional material weaknesses will not be identifiedcomponent of comprehensive income (loss) in the future. If our internal control over financial reporting or disclosure controlsconsolidated statement of changes in shareholders' equity, as the decline in fair value is not considered to be "other-than-temporary". The auction rate securities we currently hold are all long term debt obligations secured by student loans, and procedures are not effective, there may be errorsthey carry a "AAA" credit rating—the highest rating given to securities—by a nationally recognized rating agency.

            Liquidity for these auction rate securities is typically provided by an auction process which allows holders to sell their notes and resets the applicable interest rate at pre-determined intervals, usually every 7 to 35 days. Each of the auction rate securities in our financial statements that could require a restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

    Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K. Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal control over financial reporting. In assessing the findings of the Special Subcommittee’s review and the restatement set forth in our Amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2006, our management concluded that there was a material weakness, as defined in the Public Company Accounting Oversight Board’s Auditing Standard No. 2, in our internal control over financial reportinginvestment portfolio as of March 31, 2006. Our management concluded2008 has experienced a failed auction. There is no assurance that this weakness was remediedfuture auctions for these securities will succeed. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers. In the event that there is a failed auction, the indenture governing the security requires the issuer to pay interest at a contractually defined rate that is generally above market rates for other types of similar short-term instruments. The securities for which auctions have failed will continue to earn interest at the contractual rate and be auctioned every 7 to 35 days until the auction succeeds, the issuer calls the securities or they mature. As a result, our ability to liquidate and fully recover the carrying value of our auction rate securities in the near term may be limited or not exist. All of our investments were classified as short-term as of December 31, 2007, because such securities were reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business, however we have classified these securities as non-current investments in our consolidated financial statements as of March 31, 2007 with the adoption of new equity compensation policies and procedures by the Compensation Committee and Nominating/Corporate Governance Committees of our Board of Directors and, accordingly, no longer exists as2008 due to uncertainties of the datetiming of this filing. Seeliquidation.

            If the discussion includedissuers of these auction rate securities are unable to successfully close future auctions, their credit ratings deteriorate and we determine that an "other-than-temporary" decline in Part II, Item 9A of this Annual Report on Form 10-K for the fiscal year ended March 31, 2007 for additional information regarding our internal control over financial reporting.

    Our management does not expect that our internal control over financial reporting will prevent all error or all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controlsfair market value has occurred, we may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements duefuture be required to error or fraud may occur and not be detected.

    As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

    As a result of the delayed filing of certain of our periodic reports,record an impairment charge on these investments. We believe we will be ineligibleable to use Form S-3 or Form S-4 forliquidate our investment without significant loss, and we currently believe these securities are not significantly impaired, primarily due to the government guarantee of a periodsubstantial portion of time. This may adverselythe underlying loans, however, it could take until the final maturity of the underlying notes (up to 39 years) to realize our investments' par value. Based on our other available cash and expected operating cash flows and financing, we do not anticipate the potential lack of liquidity on these investments will affect our ability to engageexecute our current business plan or to consummate the proposed post-closing self tender offer described in certain typesNote 20 of corporate acquisition and capital-raising transactions.

    As a result of our delayed filing of certain of our periodic reports, we will be ineligiblethe Notes to register our securities on Form S-3 or Form S-4 for sale by us or resale by other security holders untilConsolidated Financial Statements included in Item 8. Additionally, we have timely filed all periodic reports underreceived indications from certain lenders that we may borrow against the Securities Exchange Actpar value of 1934 for a period of time. In the meantime, we have the abilitysecurities at competitive rates.

    22


    to use Form S-1 to raise capital or complete acquisitions. The need to use Form S-1, and the inability to use Form S-3 or Form S-4, could increase our transaction costs and adversely affect our ability to engage in certain types of corporate acquisition and capital-raising transactions until we regain our S-3/S-4 eligibility.

    Item 1B.    UNRESOLVED STAFF COMMENTS

            

    None.



    23


    Item 2.    PROPERTIES

            

    Our principal corporate and administrative offices are located in approximately 122,200 square feet of leased space in a building located at 3100 Ocean Park Boulevard, Santa Monica, California 90405. The following is a listing of the principal offices maintained by us on May 31, 2007:

    us:

    		PROPERTY

    		LOCATION

    		SQ FT

    		OWNERSHIP

    		LEASE EXPIRATION

    Corporate Offices

    Santa Monica, CA, USA

    122,200

    Lease

    December 2010


    Product Development & Publishing Facilities (Publishing Segment)




    Activision Canada



    Ontario, Canada



    2,400



    Lease



    October 2012

    Activision Canada

    Barrie, Ontario

    1,900

    Lease

    July 2007

    Beenox, Inc.

    Quebec City, Quebec, Canada

    11,110

    18,500

    Lease

    September 2007August 2008 + January 2010

    China

    Bizarre Creations

    Merseyside, UK

    		24,000LeaseJune 2020
    ChinaShanghai, & Taipei, China

    1,500

    1,400

    Lease

    Month to Month

     + June 2008

    DemonWare

    		Dublin, Ireland11,194LeaseJune 2027
    DemonWareVancouver, BC, Canada400LeaseJune 2008
    Infinity Ward, Inc.

    Encino, CA, USA

    35,300

    Lease

    October 2012

    Luxoflux, Inc.

    Santa Monica, CA, USA

    14,800

    Lease

    January 2009

    Motion Capture Studio

    Los Angeles, CA, USA

    11,500

    Lease

    March 2009

    Neversoft Entertainment, Inc.

    Woodland Hills, CA, USA

    53,300

    Lease

    September 2014

    Raven Studios

    Quality Assurance

    Middleton, WI, USA

    Quebec City, Quebec, Canada

    35,300

    6,200

    Lease

    June 2015

    RedOctane

    Chennai, India

    6,500

    Lease

    July 2008 + May 2009

    August 2008

    Raven Studios

    		Middleton, WI, USA35,300LeaseJune 2015
    RedOctaneChennai, India6,500LeaseJuly 2008 + February 2009
    Shaba Games, Inc.

    San Francisco, CA, USA

    23,300

    Lease

    February 2013

    Toys For Bob, Inc.

    Novato, CA, USA

    9,500

    11,800

    Lease

    July 2007

    October 2012

    Treyarch Corporation

    Santa Monica, CA, USA

    56,200

    Lease

    November 2009

    Vicarious Visions, Inc.

    Menands, NY, USA

    37,100

    Lease

    MayMarch 2016

    Vicarious Visions, Inc.

    Underground

    Foster City, CA, USA

    		24,000LeaseFebruary 2009
    Amsterdam PublishingAmsterdam, the Netherlands4,000LeaseJune 2012
    Australia PublishingSydney, Australia7,300LeaseJune 2012
    France PublishingParis, France5,600LeaseAugust 2016
    Italy PublishingLegnano, Italy4,700LeaseMarch 2013
    Japan PublishingTokyo, Japan2,200LeaseMarch 2009
    Korea PublishingSeoul, South Korea1,700LeaseAugust 2008
    Nordic PublishingStockholm, Sweden3,500LeaseJuly 2010
    RedOctaneMountain View, CA, USA

    3,100

    13,900

    Lease

    June 2007

    October 2012

    Z-Axis, Ltd.

    Spain Publishing

    Foster City, CA, USA

    Madrid, Spain

    24,000

    3,400

    Lease

    FebruaryApril 2009

    Publishing Facilities

    Australia Publishing

    Sydney, Australia

    7,300

    Lease

    July 2007

    France Publishing

    Bezons, France

    3,500

    Lease

    October 2007

    German Publishing

    Burglengenfeld, Germany

    2,200

    Own

    N/A

    Italy Publishing

    Legnano, Italy

    2,700

    Lease

    September 2009

    Japan Publishing

    Tokyo, Japan

    2,200

    Lease

    March 2008

    Korea Publishing

    Seoul, South Korea

    1,700

    Lease

    August 2007

    Nordic Publishing

    Stockholm, Sweden

    1,000

    Lease

    July 2010

    RedOctane

    Sunnyvale, CA, USA

    11,800

    Lease

    March 2008

    Spain Publishing

    Madrid, Spain

    1,000

    Lease

    April 2009

    United Kingdom Publishing

    Stockley Park, UK

    15,000

    Lease

    September 2015

    Value Publishing

    Eden Prairie, MN, USA

    14,000

    Lease

    May 2008


    Distribution Facilities (Distribution Segment)




    German Distribution Facilities



    Burglengenfeld, Germany



    43,100



    Own



    N/A

    German Distribution

    Burglengenfeld, Germany

    40,900

    Own

    N/A

    Netherlands Distribution-offices

    Breda, the Netherlands

    1,000

    Lease

    Month to Month

    Netherlands Distribution-warehouse

    Venlo, the Netherlands

    44,600

    Own

    N/A

    United Kingdom Distribution

    Birmingham, UK

    182,100

    415,000

    Lease

    May 2011-2018

            

    Our publishing operations additionally lease facilities in Arkansas, Canada, Minnesota, New York, and Texas for purposes of sales and branch offices.

    Item 3.    LEGAL PROCEEDINGS

            On February 8, 2008, the Wayne County Employees' Retirement System filed a lawsuit challenging the transactions contemplated by the business combination agreement, dated as of December 1, 2007, among us, a wholly owned subsidiary of ours established in connection with the proposed transaction, Vivendi, S.A., Vivendi Games, Inc., a wholly owned subsidiary of Vivendi, S.A., and VGAC, a wholly owned subsidiary of Vivendi, S.A., and the sole stockholder of Vivendi Games, Inc. The suit is a putative class action filed against the parties to that business combination agreement as well as certain members of our Board of Directors. The plaintiff alleges, among other things, that our directors named therein failed to fulfill their fiduciary duties with regard to the transactions by "surrendering" the negotiating process to "conflicted management," that those breaches were aided and abetted by Vivendi, S.A., and those of its subsidiaries named in the complaint, and that a preliminary proxy



    statement contains certain statements that the plaintiff alleges are false and misleading. The plaintiff seeks an order from the court that, among other things, certifies the case as a class action, enjoins the transaction, requires the defendants to disclose all material information, declares that the transaction is in breach of the directors' fiduciary duties and therefore unlawful and unenforceable, awards the plaintiff and the putative class damages for all profits and special benefits obtained by the defendant in connection with the transaction and tender offer, and awards the plaintiff its cost and expense, including attorney's fees.

            In a ruling on March 12, 2008, the court initially declined to schedule a preliminary injunction hearing or allow broad discovery, pending the Company's filing of a revised preliminary proxy statement in connection with the proposed transactions. The court did order the parties to initiate discovery of core documents, and the Company made an initial production of documents. On March 7, 2008, the Company filed a motion to dismiss the complaint, the grounds for which were detailed in a brief filed on April 30, 2008. On April 30, 2008, the Company also filed a motion to stay discovery in the case pending a ruling on the motion to dismiss. Separately, on March 6, 2008, Vivendi, S.A., and those of its subsidiaries named in the complaint filed a motion to dismiss the sole claim alleged against them.

            On May 8, 2008, the plaintiff filed an amended complaint that, among other things, added allegations relating to a revised preliminary proxy statement filed by the Company on April 30, 2008. That same date, the plaintiff also renewed its motion for expedited proceedings. On May 13, 2008, the Company moved to dismiss the amended complaint. On May 14, 2008, Vivendi and its subsidiaries named in the amended complaint also moved to dismiss. On May 22, 2008, the court scheduled a combined hearing for June 30, 2008 on the plaintiff's motion for a preliminary injunction and the defendants' motions to dismiss, but withheld a ruling on the plaintiff's motion for expedited discovery, pending further briefing. On May 28, 2008, the court ordered that expedited discovery proceed as to certain claims and that final briefing on the motions to be heard on June 30, 2008 be filed with the court on June 27, 2008.

    In July 2006, individuals and/or entities claiming to be our stockholders of the Company have filed derivative lawsuits, purportedly on our behalf, of the Company, against certain current and former members of the Company’sour Board of Directors as well as several of our current and former officers of the Company.officers. Three derivative actions have been filed in Los Angeles Superior Court: Vazquez v. Kotick, et al., ., L.A.S.C. Case No. BC355327 (filed July 12, 2006); Greuer v. Kotick, et al., L.A.S.C. Case No. SC090343 (filed July 12, 2006); and Amalgamated Bank v. Baker, et al., L.A.S.C.

    24


    Case No. BC356454 (filed August 3, 2006). These actions have been consolidated by the court under the caption In re Activision Shareholder Derivative Litigation, L.A.S.C. Master File No. SC090343 (West, J.). TwoFour derivative actions have been filed in the United States District Court for the Central District of California: Pfeiffer v. Kotick, et al., C.D. Cal. Case No. CV06-4771 MRP (JTLx) (filed July 31, 2006); and, Hamian v. Kotick, et al.al., C.D. Cal. Case No. CV06-5375 MRP (JLTx) (filed August 25, 2006) Abdelnur vs. Kotick et al., C.D. Cal. Case No. CV07-3575 AHM (PJWx) (filed June 1, 2007), and Scarborough v. Kotick et al., C.D. Cal. Case No. CV07-4602 SVW (PLAx) (filed July 18, 2007). These actions have also been consolidated, under the caption In re Activision, Inc. Shareholder Derivative Litigation, C.D. Cal. Case No. CV06-4771 MRP (JTLx) (Pfaelzer, J.). The consolidated complaints allege, among other things, purported improprieties in the Company’sour issuance of stock options. Plaintiffs seek various relief on our behalf, of the Company, including damages, restitution of benefits obtained from the alleged misconduct, equitable relief, including an accounting and rescission of option contracts; and various corporate governance reforms. The Company expectsWe expect that defense expenses associated with the matters will be covered by itsour directors and officers insurance, subject to the terms and conditions of the applicable policies.

            On May 24,or about December 4, 2007, we, the Superior Court grantedplaintiffs, and certain of our current and former officers and directors notified the Company’s motion to stay the state action. The court’s order stays the action pending the resolution of motions to dismisscourt in the federal action but is without prejudicethat we had reached agreement in principle to settle the shareholder derivative litigation pending against such current and former directors and officers of ours. On January 17, 2008, the parties amended that agreement to, among other things,



    include the plaintiffs in the state court action as parties thereto. The nonbinding agreement in principle was subject, among other things, to the negotiation of a binding definitive settlement agreement addressing all settlement terms, as well as to further approval by the parties and the court.

            Effective as of May 8, 2008, the parties signed a Stipulation of Settlement with respect to these matters. In entering into the Stipulation of Settlement, neither we nor any of the settling parties has admitted to any party’s right to seek modificationliability or wrongdoing. Under the terms of the stayStipulation of Settlement, which is subject to court approval, we will adopt, implement and/or maintain certain corporate governance and internal control measures, relating principally to the following: board composition, structure and practices, director independence standards, stock ownership and compensation, and education; shareholder proposal evaluation process; nomination procedures for shareholder-nominated directors; shareholder meeting procedures; executive compensation policies and procedures; insider trading controls; and stock option granting procedures. We have agreed to keep these measures in place for a period of three years, subject to certain exceptions. The Stipulation of Settlement also addresses matters relating to the agreements by certain of our current and former directors and officers to reimburse the Company in connection with the receipt of options that required measurement date corrections. In the case of options already exercised, the agreements allowed reimbursement to be made either by cancellation of vested but unexercised options with a value equivalent to the additional exercise price or by payment of additional exercise price. In the case of options not yet exercised, the exercise price to be paid upon a showingfuture exercise of good cause, including a showing that matters may be addressedthose options is increased. In the aggregate, settling defendants have elected to cancel options to acquire approximately 800,000 shares of our common stock and have agreed to increases in the Superior Court withoutexercise prices of approximately 16.1 million options. In addition, the potentialStipulation of Settlement provides for conflictus to pay $10,000,000 to plaintiffs' attorneys for their fees and expenses, subject to court approval of such fees and expenses and subject to our reservation of all rights against our D&O insurance carriers, reinsurers and co-insurers. The Stipulation of Settlement provides that plaintiffs' attorneys will also be entitled to 15% (up to $750,000) of any payment made by our insurance carriers to us in connection with or duplicationthe settlement. We have not reached agreements with our insurers related to the settlement. The stipulation also provides for the forgiveness of the federal court proceedings.approximately $2.3 million in legal fees previously billed to us by former outside corporate counsel.

            The Company filed motions to dismiss in the federal action on June 1, 2007, which will be fully briefed by August 15, 2007. The Company was also informed that, on June 1, 2007, a derivative case, Abdelnur vs. Kotick et al.,Stipulation of Settlement was filed in federal court on May 12, 2008 and was preliminarily approved by the United StatesU.S. District Court for the Central District of California C.D. Case No. CV07-3575 AHM (PJWx), by order dated May 13, 2008 and entered on May 14, 2008. The settlement is subject to final court approval after notice and a hearing at which shareholders will have the same law firmopportunity to object, which is currently scheduled to be held on July 21, 2008. The court will then decide whether to approve the settlement as fair, adequate and in the best interest of our stockholders. While we believe that previously filed the Hamian case, alleging substantiallysettlement meets these criteria, there can be no guarantee that the same claims.settlement will receive the required court approval. If final approval is granted, all claims against all defendants in the litigation will be dismissed with prejudice, and all claims that were or could have been brought by any derivative plaintiff, and all claims that arise from or relate to the matters or occurrences that were or could have been alleged in the federal and state derivative actions, will be fully, finally and forever released. The individual settling defendants make no admission of wrongdoing under the Stipulation of Settlement, and they have denied (and continue to deny) all charges of wrongdoing and liability and each and all of the claims and contentions alleged in the derivative actions.

            

    On July 27,24, 2006, the Companywe received a letter of informal inquiry from the SEC requesting certain documents and information relating to the Company’sour historical stock option grant practices. InThereafter, in early June 2007, the SEC informed the Company that the SEC has issued a formal order of non-public investigation, pursuant to which allowsit subpoenaed documents from us related to the SEC, among other things, to subpoena witnessesinvestigation, and to require the productiontestimony and documents from certain current and former directors, officers and employees of documents.ours. The Company is cooperating withhas made an offer of settlement to the SEC’s investigation, and representatives of the special subcommittee of independent members of our Board of Directors established in July 2006 to review our historical stock option granting practices (the “Special Subcommittee”) and its legal counsel have met with members of the staffStaff of the SEC, on several occasions, in person and by telephone (aswhich the SEC Staff has indicated it is prepared to recommend to the Company’s outside legal counsel), to discuss the progressSEC. The tentative settlement of the Special Subcommittee’sSEC's investigation, and on February 28, 2007which would allege violations of various provisions of the Federal securities laws, is subject to brief the SEC staffagreement on the Special Subcommittee’s findings and recommendations following the substantial completionspecific language of the Special Subcommittee’s investigation. A representative of the U.S. Department of Justice has attended certain of these meetingssettlement



    documents, and requested copies of certain documents that we have providedthen to the staff ofreview and approval by the SEC. At this time,There can be no assurance that a final settlement will be approved. In connection with the proposed settlement, the Company haswould not received any grand jury subpoenasbe required to pay a monetary penalty. Under the proposed settlement, the Company would settle this matter without admitting or written requests fromdenying the Department of Justice.SEC's findings.

    In addition, we are party to other routine claims and suits brought by us and against us in the ordinary course of business, including disputes arising over the ownership of intellectual property rights, contractual claims, employment laws, regulations and relationships, and collection matters. In the opinion of management, after consultation with legal counsel, the outcome of such routine claims and lawsuits will not have a material adverse effect on our business, financial condition, results of operations, or liquidity.

    Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

            None.


    None.

    25


    PART II

    Item 5.    MARKET FOR REGISTRANT’SREGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERSHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

            

    Our common stock is quoted on the NASDAQ National Market under the symbol “ATVI.”"ATVI."

            

    The following table sets forth for the periods indicated the high and low reported sale prices for our common stock. As of June 7, 2007,May 20, 2008, there were approximately 2,4172,045 holders of record of our common stock.

     
    		 High
    		 Low
    Fiscal 2007      
    First Quarter ended June 30, 2006 $15.11 $10.71
    Second Quarter ended September 30, 2006  16.00  10.47
    Third Quarter ended December 31, 2006  18.19  14.22
    Fourth Quarter ended March 31, 2007  19.20  16.05

    Fiscal 2008
     
     
     
     
     
     
    First Quarter ended June 30, 2007 $21.43 $18.16
    Second Quarter ended September 30, 2007  21.91  16.94
    Third Quarter ended December 31, 2007  29.87  18.81
    Fourth Quarter ended March 31, 2008  29.76  25.11

            

     

     

    High

     

    Low

     

    Fiscal 2006

     

     

     

     

     

    First Quarter ended June 30, 2005

     

    $

    13.88

     

    $

    10.64

     

    Second Quarter ended September 30, 2005

     

    17.30

     

    12.07

     

    Third Quarter ended December 31, 2005

     

    18.03

     

    12.94

     

    Fourth Quarter ended March 31, 2006

     

    15.93

     

    11.81

     

     

     

     

     

     

     

    Fiscal 2007

     

     

     

     

     

    First Quarter ended June 30, 2006

     

    $

    15.11

     

    $

    10.71

     

    Second Quarter ended September 30, 2006

     

    16.00

     

    10.47

     

    Third Quarter ended December 31, 2006

     

    18.19

     

    14.22

     

    Fourth Quarter ended March 31, 2007

     

    19.20

     

    16.05

     

    On June 7, 2007,May 20, 2008, the last reported sales price of our common stock was $18.46.

    26$32.68.



    Stock Performance Graph

            

    This performance graph shall not be deemed “filed”"filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Activision, Inc. under the Exchange Act or the Securities Act of 1933, as amended or the Exchange Act.amended.

            

    The graph below compares the cumulative 5-year total return of holders of Activision, Inc.’s's common stock with the cumulative total returns of the NASDAQ Composite index and the RDG Technology Composite index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from March 31, 20022003 to March 31, 2007.2008. We have never paid cash dividends on our common stock and have no present plans to do so.

    COMPARISON OF 5 YEARYEARS CUMULATIVE TOTAL RETURN*

    Among Activision, Inc., The NASDAQ Composite Index
    And The RDG Technology Composite Index

    * $100
    $100 invested on 3/31/02March 31, 2003 in stock or index-including reinvestment of dividends.


    Fiscal year ending March 31.

    31,

     
    		 2003
    		 2004
    		 2005
    		 2006
    		 2007
    		 2008
    Activision, Inc. 100.00 246.33 307.27 381.73 524.29 755.99
    NASDAQ Composite 100.00 151.01 152.38 181.06 189.63 177.49
    RDG Technology Composite 100.00 149.02 144.21 170.59 175.88 168.47

     

     

    3/02

     

    3/03

     

    3/04

     

    3/05

     

    3/06

     

    3/07

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Activision, Inc.

     

    100.00

     

    48.44

     

    119.33

     

    148.84

     

    184.91

     

    253.97

     

    NASDAQ Composite

     

    100.00

     

    72.11

     

    109.76

     

    111.26

     

    132.74

     

    139.65

     

    RDG Technology Composite

     

    100.00

     

    66.96

     

    99.40

     

    95.82

     

    112.91

     

    117.27

     

    The stock price performance included in this graph is not necessarily indicative of future stock price performance.

    Cash Dividends

            

    27


    Cash Dividends

    We paid no cash dividends in our fiscal years 20072008 or 20062007 nor do we anticipate paying any cash dividends at any time in the foreseeable future. We expect that earnings will be retained for the continued growth and development of the business. Future dividends, if any, will depend upon our earnings, financial condition, cash requirements, future prospects, and other factors deemed relevant by our Board of Directors.


    Stock Splits

    In April 2003, the Board of Directors approved a three-for-two split of our outstanding common shares effected in the form of a 50% stock dividend. The split was paid on June 6, 2003 to shareholders of record as of May 16, 2003. In February 2004, the Board of Directors approved a second three-for-two split of our outstanding common shares effected in the form of a 50% stock dividend. The split was paid on March 15, 2004 to shareholders of record as of February 23, 2004. In February 2005, the Board of Directors approved a four-for-three split of our outstanding common shares effected in the form of a 33-1/3%331/3% stock dividend. The split was paid on March 22, 2005 to shareholders of record as of March 7, 2005. In September 2005, the Board of Directors approved a four-for-three split of our outstanding common shares effected in the form of a 33-1/3%331/3% stock dividend. The split was paid October 24, 2005 to shareholders of record as of October 10, 2005. The par value of our common stock was maintained at the pre-split amount of $.000001. All share and per share data have been restated as if the stock splits had occurred as of the earliest period presented.

            

    On March 7, 2005, in connection with our March 22, 2005 stock split, all shares of common stock held as treasury stock were formally cancelled and restored to the status of authorized but unissued shares of common stock.

    Buyback Program

            

    During fiscal 2003, our Board of Directors authorized a buyback program under which we can repurchase up to $350.0 million of our common stock. Under the program, shares may be purchased as determined by management, from time to time and within certain guidelines, in the open market or in privately negotiated transactions, including privately negotiated structured stock repurchase transactions and through transactions in the options markets. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time or from time to time without prior notice.

            

    Under the buyback program, we did not repurchase any shares of our common stock in the fiscal years ended March 31, 2008, 2007, 2006 or 2005. We repurchased approximately 3.4 million shares of our common stock for $12.4 million in the fiscal year ended March 31, 2004. In addition, approximately 3.1 million shares of common stock were acquired in the fiscal year ended March 31, 2004 as a result of the settlement of $10.0 million of structured stock repurchase transactions entered into in fiscal 2003. As of March 31, 2007,2008, we had no outstanding structured stock repurchase transactions. Structured stock repurchase transactions are settled in cash or stock based on the market price of our common stock on the date of the settlement. Upon settlement, we either have our capital investment returned with a premium or receive shares of our common stock, depending, respectively, on whether the market price of our common stock is above or below a pre-determined price agreed in connection with each such transaction.

    Shareholders’Shareholders' Rights Plan

    On April 18, 2000, our Board of Directors approved a shareholders rights plan (the “Rights Plan”"Rights Plan."). Under the Rights Plan, each common shareholder at the close of business on April 19, 2000 received a dividend of one right for each share of common stock held. Each right represents the right to purchase one six-hundredths (1/600)(1/600) of a share, as adjusted on account of stock dividends made since the plan’splan's adoption, of our Series A Junior Preferred Stock at an exercise price of $6.67, as adjusted on account of stock dividends made since the plan’splan's adoption. Initially, the rights are represented by our common stock certificates and are neither exercisable nor traded separately from our common stock. The rights will only become exercisable if a person or group acquires 15% or more of the common stock of Activision, or announces or commences a tender or exchange offer which would result in the bidder’sbidder's beneficial ownership of 15% or more of our common stock.


            

    28


    In the event that any person or group acquires 15% or more of our outstanding common stock, each holder of a right (other than such person or members of such group) will thereafter have the right to receive upon exercise of such right, in lieu of shares of Series A Junior Preferred Stock, the number of shares of common stock of Activision having a value equal to two times the then current exercise price of the right. If we are acquired in a merger or other business combination transaction after a person has acquired 15% or more of our common stock, each holder of a right will thereafter have the right to receive upon exercise of such right a number of the acquiring company’scompany's common shares having a market value equal to two times the then current exercise price of the right. For persons who, as of the close of business on April 18, 2000, beneficially own 15% or more of the common stock of Activision, the Rights Plan “grandfathers”"grandfathers" their current level of ownership, so long as they do not purchase additional shares in excess of certain limitations.

            

    We may redeem the rights for $0.01 per right at any time until the first public announcement of the acquisition of beneficial ownership of 15% of our common stock. At any time after a person has acquired 15% or more (but before any person has acquired more than 50%) of our common stock, we may exchange all or part of the rights for shares of common stock at an exchange ratio of one share of common stock per right. The rights expire on April 18, 2010.

            We amended the Rights Plan concurrent with the execution of the business combination agreement with Vivendi (see Note 20 of the Notes to Consolidated Financial Statements included in Item 8) to provide that (a) the Rights Plan will not be triggered by the business combination agreement or the transaction and (b) the Rights Plan will terminate upon the completion of the transaction and all rights existing under the Rights Plan will be extinguished.

    29


    Securities Authorized for Issuance Underunder Equity Compensation Plans

            

    Information for our equity compensation plans in effect as of March 31, 20072008 is as follows (amounts in thousands, except per share amounts):

    Plan Category
    		 (a)
    Number of securities
    to be issued upon
    exercise of
    outstanding options,
    warrants and rights
    		 (b)
    Weighted-average
    exercise price of
    outstanding
    options, warrants
    and rights
    		 (c)
    Number of securities
    remaining available for
    future issuance under
    equity compensation
    plans (excluding
    securities reflected in
    column (a))
    Equity compensation plans approved by security holders 40,871 $12.68 16,118
    Equity compensation plans not approved by security holders 9,581 $2.46 —
      
    		    
     Total 50,452    16,118

            

    Plan Category

     

    (a)
    Number of securities
    to be issued upon
    exercise of
    outstanding options,
    warrants and rights

     

    (b)
    Weighted-average
    exercise price of
    outstanding
    options, warrants
    and rights

     

    (c)
    Number of securities
    remaining available for
    future issuance under
    equity compensation
    plans (excluding
    securities reflected in
    column (a))

     

    Equity compensation plans approved by security holders

     

    27,060

     

    $

    9.36

     

    9,619

     

    Equity compensation plans not approved by security holders

     

    23,304

     

    $

    4.53

     

    256

     

    Total

     

    50,364

     

     

     

    9,875

     

    See Note 14 of the Notes to Consolidated Financial Statements included in Item 8 for the material features of each equity compensation plan that was adopted without security holder approval.



    30


    Item 6.    SELECTED CONSOLIDATED FINANCIAL DATA

            

    The following table summarizes certain selected consolidated financial data, which should be read in conjunction with our Consolidated Financial Statements and Notes thereto and with Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. The selected consolidated financial data presented below as of and for each of the fiscal years in the five-year period ended March 31, 20072008 are derived from our consolidated financial statements except basic and diluted earnings per share and basic and diluted weighted average shares outstanding which have been restated for the effect of our stock splits.Consolidated Financial Statements. The Consolidated Balance Sheets as of March 31, 20072008 and 20062007 and the Consolidated Statements of Operations and Consolidated Statements of Cash Flows for each of the fiscal years in the three-year period ended March 31, 2007,2008, and the report thereon, are included elsewhere in this Form 10-K (in(amounts in thousands, except per share data).

     

     

    For the fiscal years ended March 31,

     

     

     

    2007

     

    2006

     

    2005

     

    2004

     

    2003

     

     

     

     

     

     

     

     

     

     

     

     

     

    Statement of Operations Data:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Net revenues

     

    $

    1,513,012

     

    $

    1,468,000

     

    $

    1,405,857

     

    $

    947,656

     

    $

    864,116

     

    Cost of sales – product costs

     

    799,587

     

    734,874

     

    658,949

     

    475,541

     

    440,977

     

    Cost of sales – intellectual property licenses and software royalties and amortization

     

    178,478

     

    205,488

     

    185,997

     

    91,606

     

    124,196

     

    Income from operations

     

    73,147

     

    15,226

     

    179,608

     

    104,537

     

    84,691

     

    Income before income tax provision

     

    109,825

     

    45,856

     

    192,700

     

    110,712

     

    93,251

     

    Net income

     

    85,787

     

    40,251

     

    135,057

     

    74,098

     

    59,003

     

    Basic earnings per share (1)

     

    0.31

     

    0.15

     

    0.54

     

    0.31

     

    0.23

     

    Diluted earnings per share (1)

     

    0.28

     

    0.14

     

    0.49

     

    0.29

     

    0.21

     

    Basic weighted average common shares outstanding (1)

     

    281,114

     

    273,177

     

    250,023

     

    236,887

     

    256,639

     

    Diluted weighted average common shares outstanding (1)

     

    305,339

     

    294,002

     

    277,712

     

    258,350

     

    277,620

     

     

     

     

     

     

     

     

     

     

     

     

     

    Net Cash Provided By (Used In):

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Operating activities

     

    27,162

     

    86,007

     

    215,309

     

    67,403

     

    90,975

     

    Investing activities

     

    (35,242

    )

    (85,796

    )

    (143,896

    )

    (170,155

    )

    (301,547

    )

    Financing activities

     

    27,968

     

    45,088

     

    72,654

     

    117,569

     

    64,090

     

     

     

    As of March 31,

     

     

     

    2007

     

    2006

     

    2005

     

    2004

     

    2003

     

     

     

     

     

     

     

     

     

     

     

     

     

    Balance Sheet Data:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Working capital

     

    $

    1,060,064

     

    $

    922,199

     

    $

    913,819

     

    $

    675,796

     

    $

    422,500

     

    Cash, cash equivalents and short-term investments

     

    954,849

     

    944,960

     

    840,864

     

    587,649

     

    406,954

     

    Capitalized software development and intellectual property licenses

     

    231,196

     

    147,665

     

    127,340

     

    135,201

     

    107,921

     

    Goodwill

     

    195,374

     

    100,446

     

    91,661

     

    76,493

     

    68,019

     

    Total assets

     

    1,793,947

     

    1,418,255

     

    1,305,919

     

    966,220

     

    703,070

     

    Long-term debt

     

    —

     

    —

     

    —

     

    —

     

    2,671

     

    Shareholders’ equity

     

    1,411,532

     

    1,222,623

     

    1,097,274

     

    830,141

     

    595,994

     

     
    		 For the fiscal years ended March 31,
    		 
     
    		 2008
    		 2007
    		 2006
    		 2005
    		 2004
    		 
    Statement of Operations Data:                

    Net revenues
     
    $
    2,898,136
     
    $
    1,513,012
     
    $
    1,468,000
     
    $
    1,405,857
     
    $
    947,656
     
    Cost of sales—product costs  1,240,605  799,587  734,874  658,949  475,541 
    Cost of sales—intellectual property licenses and software royalties and amortization  404,830  178,478  205,488  185,997  91,606 
    Income from operations  479,614  73,147  15,226  179,608  104,537 
    Income before income tax provision  530,868  109,825  45,856  192,700  110,712 
    Net income  344,883  85,787  40,251  135,057  74,098 
    Basic earnings per share(1)  1.19  0.31  0.15  0.54  0.31 
    Diluted earnings per share(1)  1.10  0.28  0.14  0.49  0.29 
    Basic weighted average common shares outstanding(1)  288,957  281,114  273,177  250,023  236,887 
    Diluted weighted average common shares outstanding(1)  314,731  305,339  294,002  277,712  258,350 

    Net Cash Provided By (Used In):
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     

    Operating activities
     
     
    573,500
     
     
    27,162
     
     
    86,007
     
     
    215,309
     
     
    67,403
     
    Investing activities  326,291  (35,242) (85,796) (143,896) (170,155)
    Financing activities  105,163  27,968  45,088  72,654  117,569 
     
    		 As of March 31,
     
    		 2008
    		 2007
    		 2006
    		 2005
    		 2004
    Balance Sheet Data:               

    Working capital
     
    $
    1,423,324
     
    $
    1,060,064
     
    $
    922,199
     
    $
    913,819
     
    $
    675,796
    Cash, cash equivalents and short-term investments  1,449,212  954,849  944,960  840,864  587,649
    Capitalized software development and intellectual property licenses  193,337  231,196  147,665  127,340  135,201
    Long-term investments  91,215  —  —  —  —
    Goodwill  279,161  195,374  100,446  91,661  76,493
    Total assets  2,530,673  1,793,947  1,418,255  1,305,919  966,220
    Shareholders' equity  1,947,892  1,411,532  1,222,623  1,097,274  830,141

    (1)
    (1)Consolidated financial information for fiscal years 2005-20022005 and 2004 has been restated for the effect of our four-for-three stock split effected in the form of a 33-1/3%331/3% stock dividend to shareholders of record as of October 10, 2005, paid October 24, 2005.

    31


    Item 7.         MANAGEMENT’S    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    Overview

    Our Business

    We are a leading international publisher of interactive entertainment software products. We have built a company with a diverse portfolio of products that spans a wide range of categories and target markets and that are used on a variety of game hardware platforms and operating systems. We have created, licensed, and acquired a group of highly recognizable brands,franchises, which we market to a variety of consumer demographics. Our fiscal 20072008 product portfolio includes titles such asOverGuitar Hero III: Legends of Rock,Guitar Hero II for the Hedge, X-Men: The Official Game, Marvel: Ultimate Alliance, Tony Hawk’s Project 8, Tony Hawk’s Downhill Jam, Microsoft Xbox360, Guitar Hero: Rocks the 80s for the PS2,Call of Duty 4: Modern Warfare, Spider-Man 3 The Game ("Spider-Man 3"), Shrek the Third, TRANSFORMERS: The Game, Enemy Territory: Quake Wars, Tony Hawk's Proving Ground, Bee Movie Game,andGuitar Hero 2.Spider-Man: Friend or Foe.

    Our products cover diverse game categories including action/adventure, action sports, racing, role-playing, simulation, first-person action, music-based gaming, and strategy. Our target customer base ranges from casual players to game enthusiasts, children to adults, and mass-market consumers to “value”"value" buyers. We currently offer our products primarily in versions that operate on the Sony PlayStation 2 (“PS2”("PS2"), the Sony PlayStation 3 (“PS3”("PS3"), the Nintendo Wii (“Wii”("Wii"), and the Microsoft Xbox360 (“Xbox360”("Xbox360") console systems, the Nintendo Game Boy Advance (“GBA”), the Nintendo Dual Screen (“NDS”("NDS"), and the Sony PlayStation Portable (“PSP”("PSP") hand-held devices, and the personal computer (“PC”("PC"). The installed base for the previous generation of hardware platforms (e.g., PS2, Xbox)the PS2) is significant and the fiscal 2006 release of the Xbox360 and the fiscal 2007 releases of the PS3 and the Wii willhave further expandexpanded the software market. DuringTo take advantage of the third quarter of fiscal 2007, we had a successful and significant presence at the launchesgrowth of the PS3, the Xbox360, and the Wii with three launch("the next-generation platforms"), during fiscal 2008, we increased our presence on the next-generation platforms through the increased number of new released titles on the next-generation platforms. For example, the number of new released titles for the Wii tripled from 5 releases during fiscal 2007 to 15 releases, and we successfully released several major titles for the PS3, the Xbox360 and/or the Wii—Guitar Hero III: Legends of Rock,Call of Duty 4: Modern Warfare,Spider-Man 3 Marvel: Ultimate Alliance, ,Shrek the Third,TRANSFORMERS: The Game, andTony Hawk’s Project 8, Hawk's Proving Groundand five launch. Some of these titles forare also available on the Wii, Call of Duty 3, Marvel: Ultimate Alliance, World Series of Poker: Tournament of Champions, Rapala Tournament Fishing, and Tony Hawk’s Downhill Jam. PS2. Our plan is to continue to build on oura significant launch presence on the PS3, the Wii, and the Xbox360 (“("the next-generation platforms”platforms") by continuing to expand the number of titles released on the next generationnext-generation and hand-held platforms while continuing to market to current-generation platformsthe PS2 platform as long as economically attractive given theirits large installed base.

            

    Our publishing business involves the development, marketing, and sale of products directly, by license, or through our affiliate label program with certain third partythird-party publishers. In North America, we primarily sell our products on a direct basis to mass-market retailers, consumer electronics stores, discount warehouses, and game specialty stores. We conduct our international publishing activities through offices in the United Kingdom (“UK”("UK"), Germany, France, Italy, Spain, the Netherlands, Norway, Sweden, Australia, Scandinavia, Canada, South Korea, and Japan. Our products are sold internationally on a direct-to-retail basis, through third partythird-party distribution and licensing arrangements, and through our wholly owned European distribution subsidiaries. Our distribution business consists of operations located in the UK, the Netherlands, and Germany that provide logistical and sales services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.

            

    Our profitability is directly affected by the mix of revenues from our publishing and distribution businesses. Operating margins realized from our publishing business are typically substantially higher than margins realized from our distribution business. Operating margins in our publishing business are affected by our ability to release highly successful or “hit”"hit" titles. Though many of these titles have substantial production or acquisition costs and marketing budgets, once a title recoups these costs,



    incremental net revenues directly and positively impact our operating margin. Operating margins in our distribution business are affected by the mix of hardware and software sales, with software typically producing higher margins than hardware.

    Our Focus

            

    With respect to future game development, we will continue to focus on our “big propositions,”"big propositions" products that are backed by strong brandsfranchises and high quality development, for which we will provide significant marketing support.

            We have focused on establishing and maintaining relationships with talented and experienced software development and publishing teams. In June 2006, we acquired RedOctane, Inc. ("RedOctane"), the publisher of the popular Guitar Hero franchise. The Guitar Hero franchise has set an industry record, surpassing $1 billion in North America retail sales in 26 months, according to The NPD Group, which is a provider of consumer and retail market research information for a wide range of industries.Guitar Hero III: Legends of Rock was the number one best-selling game in dollars in the U.S. and Europe for fiscal 2008, according to The NPD Group, Charttrack and Gfk. We plan on continuing to build on this franchise by investing in the future development of Guitar Hero titles across a variety of platforms. We have also been successful in the first person action categories through the Call of Duty original franchise, which we plan on continuing as a successful long-term franchise. Call of Duty has achieved over $1 billion life-to-date net revenues in fiscal 2008.Call of Duty 4: Modern Warfare ended the fiscal year as the number two best-selling game worldwide in dollars, according to The NPD Group, Charttrack and Gfk. In September 2007, we acquired U.K.-based video game developer Bizarre Creations Limited ("Bizarre Creations"), a leader in the racing category. With more than 10 years of experience in the racing genre, Bizarre Creations developed the innovative multi-million unit selling franchise, Project Gotham Racing for Microsoft, a critically-acclaimed series for the Xbox and Xbox360. Bizarre Creations and its games have won numerous industry awards including: Best Racing Game forProject Gotham Racing 2 from the British Academy of Film and Television Arts (BAFTA); the Industry Grand Prix Award from Develop; MCV's UK Development Team 2006 award; Best Racing/Driving Game from IGN; Game of the Year from OXM and Gamespy forProject Gotham Racing 3; and IGN's Best Xbox Live Arcade ("XBLA") Game forGeometry Wars: Retro Evolved. Bizarre Creations will play a role in our growth strategy as we develop new intellectual property for the racing segment, expand our development capability and capacity for other genres and utilize Bizarre Creations' proprietary development technology. We also have development agreements with other top-level, third-party developers such as id Software, Inc., Splash Damage, Ltd., and Next Level Games.

    Our fiscal 20072008 releases have includedinclude well-established brands,franchises, which are backed by high-profile intellectual property and/or highly anticipated motion picture releases. For example, we have a long-term relationship with Marvel Entertainment, Inc. through an exclusive licensing agreement for the Spider-Man and X-Men franchises through 2017. This agreement grants us the exclusive, worldwide rights to develop and publish video games based on Marvel’sMarvel's comic book and movie franchisesfranchises: Spider-Man and X-Men. In addition, we have an agreement with Spider-Man Merchandising, LP which grants us exclusive, worldwide rights to publish video games based on subsequent Spider-Man feature films through 2017. Through March 31, 2007,2008, games based on the Spider-Man and X-Men franchises have generated approximately $852.7 million$1.1 billion in net revenues worldwide. Under this agreement, in the

    32


    first quarter of fiscal 2007 we released the video game,X-Men: The Official Game, coinciding with the theatrical release of “X-Men:X-Men: The Last Stand.”Stand. In the third quarter of fiscal 2007, we releasedMarvel: Ultimate Allianceacross multiple platformsandSpider-Man: Battle for New York on the NDS and the GBA. In addition, through our licensing agreement with the first quarter fiscal 2008, we releasedSpider-Man Merchandising, LP, we developed and published video games3 based on Columbia Pictures/Marvel Entertainment, Inc.’s's feature film “Spider-Man"Spider-Man 3,”" which was released in May 2007. Our agreement with Spider-Man Merchandising, LP grants us exclusive worldwide publishing rights to publish entertainment software products based on subsequent Spider-Man movie sequelsWe also releasedSpider-Man: Friend or new television series through 2017.Foe in the third quarter fiscal 2008.


    We also have an exclusive licensing agreement with professional skateboarder Tony Hawk. The agreement grants us exclusive rights to develop and publish video games through 2015 using Tony Hawk’sHawk's name and likeness. Through March 31, 2007,2008, we have released eight successfulnine titles in the Tony Hawk franchise with cumulative net revenues of $1.2$1.3 billion, including the two fiscal 20072008 third quarter releases, release,Tony Hawk’s Project 8, Hawk's Proving Ground,which was released on the PSP, Xbox360,PS3, the PS2, and PS3, and Tony Hawk’s Downhill Jam which was released on the Wii, NDS, and GBA. According to the NPD Group, which is a provider of consumer and retail market research information for a wide range of industries, for the eighth consecutive year the Tony Hawk franchise had a top 10 best-selling gamein the U.S. for the month of December. We will continue to build on the highly successful Tony Hawk franchise with future releases currently in development for multiple platforms.

    We continue to develop a number of original intellectual properties internally. For example, in the third quarter of fiscal 2007 we released Call of Duty 3 on the PS2, PS3, Xbox, Xbox360 and the Wii. According to the NPD Group, Call of Duty 3 was the #3 best-selling console game in the U.S. Call of Duty 3 was the sixth release based upon this original intellectual property following two PC exclusive titles, Call of Duty and Call of Duty: United Offensive, as well as multi-platform releases of Call of Duty: Finest Hour, Call of Duty: Big Red One, and Call of Duty 2. We expect to continue to develop a variety of games on multiple platforms based on this original intellectual property as well as continue to invest in developing other original intellectual properties.NDS.

    We have continued our focus on establishing and maintaining relationships with talented and experienced software development and publishing teams. In June 2006, we acquired RedOctane, Inc. (“RedOctane”), the publisher of the popular Guitar Hero franchise. In the third quarter of fiscal 2007 we released Guitar Hero 2 on the PS2, which according to the NPD Group was the #1 game in dollars for the U.S. for the month of December and the #2 game overall for the third quarter of fiscal 2007. We have also developed Guitar Hero 2 for the Xbox360 and plan on continuing to build on this franchise by investing in future development of Guitar Hero titles across a variety of platforms. We also have development agreements with other top-level, third-party developers such as id Software, Inc., Splash Damage, Ltd., and Traveller’s Tales.

    We will also continue to evaluate and exploit emerging brandsfranchises that we believe have potential to become successful game franchises. For example, we have a multi-year, multi-property, publishing agreementagreements with DreamWorks Animation LLC that grantsgrant us the exclusive rights to publish video games based on DreamWorks Animation SKG’sSKG's theatrical release “Shrek 2,”releases, including "Shark Tale," which was released in the second quarter fiscal 2005, "Madagascar," which was released in the first quarter of fiscal 2005, “Shark Tale,” which was released in2006, "Over the second quarter of fiscal 2005, “Madagascar,”Hedge," which was released in the first quarter of fiscal 2006, “Over2007, "Shrek the Hedge,”Third," which was released in the first quarter of fiscal 2007,2008, "Bee Movie," which was released in the third quarter fiscal 2008, and all of their respective sequels. In addition, our multi-year agreementagreements with DreamWorks Animation LLC also grantsgrant us the exclusive video game rights to fourthree upcoming DreamWorks Animation feature films, as well as potential future films in the “Shrek” franchise beyond the “Shrek the Third.”

    including "Kung Fu Panda," "Monsters vs Aliens" and "How to Train Your Dragon." We plan to releaseKung Fu Panda,Monsters vs Aliens, andMadagascar 2 during fiscal 2009.

    Additionally, we have a strategic alliance with Harrah’sHarrah's Entertainment, Inc. that grants us the exclusive, worldwide interactive rights to develop and publish “World"World Series of Poker”Poker" video games based on the popular World Series of Poker Tournament. In the second quarter of fiscal 2006, we released our first title under this alliance,World Series of Poker,which became the number one poker title of calendar year 2005. Further building on this franchise, in the second quarter of fiscal 2007, we released our second title under this alliance,World Series of Poker: Tournament of Champions. Additionally, we released our third title under this alliance,World Series of Poker: Battle for the Bracelet in the second quarter fiscal 2008.

    We also continue to build on our portfolio of licensed intellectual property. In February 2006, we signed an agreement with Hasbro Properties Group granting us the exclusive global rights (excluding Japan) to develop console, hand-held, and PC games based on Hasbro’s “Transformers” brand.Hasbro's "Transformers" franchise. We anticipate releasing thereleased our first "Transformers" game,TRANSFORMERS: The Game, in late June 2007 concurrently with the early July 2007 movie release of the live action “Transformers”"Transformers" film from DreamWorks Pictures and Paramount Pictures. In April 2006, we signed an agreement with MGM Interactive and EON Productions Ltd. granting us the exclusive rights to develop and publish interactive entertainmentvideo games based on the James Bond license through 2014. We plan to release our first James Bond title,Quantum of Solace, during fiscal 2009.

    In MayApril 2006, we signed a multi-year agreement with Mattel, Inc. which grants us the exclusive,

    33


    worldwide distribution rights to newfor the catalog of video games on all platforms based on Mattel, Inc.’s 's Barbie brand. In franchise on all platforms. Through the third quarter of fiscal 2006,2007, we distributed six Barbie titles:Barbie inand the 12 Dancing Princesses, The Barbie Diaries: High School Mystery, Barbie Fashion Show, Barbie Horse Adventures: Mystery Ride, Barbie and the Magic of Pegasus,andBarbie as the Princess and the Pauper. Based on the success of this distribution, we signed multi-year license agreements with Mattel, Inc. in January 2007 which grant us the exclusive worldwide rights to develop and publish new video games based on Mattel Inc.'sBarbie andHot Wheels franchises on all platforms. In the second quarter fiscal 2008, we releasedHot Wheels: Beat That!. In September 2006, we entered into a distribution agreement with MTV Networks Kids and Family Group’sGroup's Nickelodeon, a division of Viacom Inc., to be the exclusive distributor of three new Nick Jr. PC CD-ROM titles, published by Nickelodeon and based on the top preschool series on commercial television,Dora The Explorer, The Backyardigans,andGo, Diego, Go!.


            

    We are utilizing these developer relationships, new intellectual property acquisitions, new original intellectual property creations, and our existing library of intellectual property to further focus our game development on product lines that will deliver significant, lasting, and recurring revenues and operating profits.

    Business Combination

            On December 2, 2007, we and Vivendi S.A. ("Vivendi") announced an agreement to combine Vivendi Games, Inc. ("Vivendi Games,") Vivendi's interactive entertainment business which includes Blizzard Entertainment, Inc., the creator ofWorld of Warcraft, a massively multi-player online role-playing game ("MMORPG") franchise, with us. If the transaction closes, we will be renamed Activision Blizzard, Inc. ("Activision Blizzard") and we expect to continue to operate as a public company traded on NASDAQ under the ticker ATVI.

            All information included in this report reflects only Activision's results, and does not reflect any impact of the proposed combination. The forward-looking comments in this Management's Discussion & Analysis of Financial Condition and Results of Operations are prepared on an Activision standalone basis, without considering any potential impacts of the proposed business combination with Vivendi Games.

    Critical Accounting Policies and Estimates

            

    We have identified the policies below as critical to our business operations and the understanding of our financial results. The impact and any associated risks related to these policies on our business operations isare discussed throughout Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion onof the application of these and other accounting policies, see Note 1 toof the Notes to Consolidated Financial Statements included in Item 8. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

    Revenue Recognition.We recognize revenue from the sale of our products upon the transfer of title and risk of loss to our customers.customers, and once any performance obligations have been completed. Certain products are sold to customers with a street date (i.e., a(the earliest date on whichthese products are made widely availablemay be sold by retailers). For these products we recognize revenue no earlier thanon the later of the street date or the sale date. Revenue from product sales is recognized after deducting the estimated allowance for returns and price protection. With respect to license agreements that provide customers the right to make multiple copies in exchange for guaranteed amounts, revenue is recognized upon delivery of such copies.a master copy. Per copy royalties on sales that exceed the guarantee are recognized as earned.

            Some of our software products provide limited online features at no additional cost to the consumer. Generally, we consider such features to be incidental to the overall product offering and an inconsequential deliverable. Accordingly, we do not defer any revenue related to products containing these limited online features. In instances where online features or additional functionality is considered a substantive deliverable in addition to the software product, we take this into account when applying our revenue recognition policy. This evaluation is performed for each software product when it is released. We determined that one of our software titles,Enemy Territory: Quake Wars (which is primarily an online multiplayer PC game), contains online functionality that constitutes a more-than-inconsequential separate service deliverable in addition to the product, principally because of its importance to game play. As such, our performance obligations for this title extend beyond the sale of the game, which is unique compared to other previously released titles. Vendor-specific objective



    evidence of fair value ("VSOE") does not exist for the online functionality, as we do not separately charge for this component of the title. As a result, we are recognizing all of the revenue from the sale of this title ratably over an estimated service period, which is currently estimated to be six months beginning the month after shipment. In addition, we are deferring the costs of sales for this title. Cost of sales includes: manufacturing costs, software royalties and amortization, and intellectual property licenses. Overall, online play functionality is still an emerging area for us.

            We continue to monitor the development of online functionality (together with online transactions, such as electronics downloads of titles or product add-ons) and its significance to our products. Based on our current assessment of obligations with respect to the online functionality for certain of our fiscal 2009 titles on certain platforms, we expect that certain fiscal 2009 titles will contain online functionality that constitutes a more-than-inconsequential separate service deliverable in addition to the product, and that our performance obligations for these fiscal 2009 titles will extend beyond the sale of the game. VSOE of fair value does not exist for these online features, as we do not plan to separately charge for this component of these fiscal 2009 titles. As a result, we expect to recognize all of the revenue from the sale of these fiscal 2009 titles ratably over an estimated service period, which is currently estimated to be six months beginning the month after shipment. In addition, we expect to defer the costs of sales of these fiscal 2009 titles. We anticipate that, in fiscal 2009, we will likely defer approximately $350.0 million in net revenues and $150.0 million in costs of sales from the sale of these fiscal 2009 titles into fiscal 2010. Since most of these fiscal 2009 titles are planned to release in the third quarter fiscal 2009, we expect that a majority of revenues and costs of sales for these products will be deferred in the third quarter fiscal 2009, and recognized later in the calendar year 2009. However, the actual amount of revenues and costs of sales deferred will vary significantly depending upon the timing of the release of these fiscal 2009 titles and the sales volume of such products.

            With respect to on-lineonline transactions, such as electronic downloads of titles or product add-ons, revenue is recognized when the fee is paid by the on-lineonline customer to purchase online content and we are notified by the online retailer that the product has been downloaded. In addition, in order to recognize revenue for both product sales and licensing transactions, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable. Revenue recognition also determines the timing of certain expenses, including “cost of sales – intellectual property licenses” and “cost of sales – software royalties and amortization.”

    Sales incentives or other consideration given by us to our customers areis accounted for in accordance with the Financial Accounting Standards Board’sBoard's Emerging Issues Task Force (“EITF”("EITF") Issue 01-9, “AccountingAccounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)Vendor's Products).” In accordance with EITF Issue 01-9, sales incentives and other consideration that are considered adjustments of the selling price of our products, such as rebates and product placement fees, are reflected as reductions of revenue. Sales incentives and other consideration that represent costs incurred by us for assets or services received, such as the appearance of our products in a customer’scustomer's national circular ad,advertisement, are reflected as sales and marketing expenses.

    Allowances for Returns, Price Protection, Doubtful Accounts, and Inventory Obsolescence.In determining the appropriate unit shipments to our customers, we benchmark our titles using historical and industry data.    We closely monitor and analyze the historical performance of our various titles, the performance of products released by other publishers and the anticipated timing of other releases in order to assess future demands of current and upcoming titles. Initial volumes shipped upon title launch and subsequent reorders are evaluated to ensure that quantities are sufficient to meet the demands from the retail markets but at the same time, are controlled to prevent excess inventory in the channel. We benchmark our units to be shipped to our customers using historical and industry data.

            

    We may permit product returns from, or grant price protection to, our customers under certain conditions. In general, price protection refers to the circumstances when we elect to decrease the wholesale price of a product by a certain amount and, when granted and applicable, allows customers a credit against amounts owed by such customers to us with respect to open and/or future invoices. The conditions our customers must meet to be granted the right to return products or price protection are,



    among other things, compliance with applicable payment terms and consistent delivery to us of inventory and sell-through reports. We may also consider other factors, including the facilitation of

    34


    slow-moving inventory and other market factors. Management must make estimates of potential future product returns and price protection related to current period product revenue. We estimate the amount of future returns and price protection for current period product revenue utilizing historical experience and information regarding inventory levels and the demand and acceptance of our products by the end consumer. The following factors are used to estimate the amount of future returns and price protection for a particular title: historical performance of titles in similar genres, historical performance of the hardware platform, historical performance of the brand,franchise, console hardware life cycle, Activisionour sales force and retail customer feedback, industry pricing, weeks of on-hand retail channel inventory, absolute quantity of on-hand retail channel inventory, our warehouse on-hand inventory levels, the title’stitle's recent sell-through history (if available), marketing trade programs, and competing titles. The relative importance of these factors varies among titles depending upon, among other items, genre, platform, seasonality, and sales strategy. Significant management judgments and estimates must be made and used in connection with establishing the allowance for returns and price protection in any accounting period. Based upon historical experience we believe our estimates are reasonable. However, actual returns and price protection could vary materially from our allowance estimates due to a number of reasons including, among others, a lack of consumer acceptance of a title, the release in the same period of a similarly themed title by a competitor, or technological obsolescence due to the emergence of new hardware platforms. Material differences may result in the amount and timing of our revenue for any period if factors or market conditions change or if management makes different judgments or utilizes different estimates in determining the allowances for returns and price protection. For example, a 1% change in our March 31, 20072008 allowance for returns and price protection would impact net revenues by $0.9$1.3 million.

            

    Similarly, management must make estimates of the uncollectibility of our accounts receivable. In estimating the allowance for doubtful accounts, we analyze the age of current outstanding account balances, historical bad debts, customer concentrations, customer creditworthiness, current economic trends, and changes in our customers’customers' payment terms and their economic condition, as well as whether we can obtain sufficient credit insurance. Any significant changes in any of these criteria would affect management’smanagement's estimates in establishing our allowance for doubtful accounts.

            

    We value inventory at the lower of cost or market. We regularly review inventory quantities on hand and in the retail channel and record a provision for excess or obsolete inventory based on the future expected demand for our products. Significant changes in demand for our products would impact management’smanagement's estimates in establishing our inventory provision.

    Software Development Costs. Costs and Intellectual Property Licenses.Software development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products.

    We account for software development costs in accordance with Statement of Financial Accounting Standard (“SFAS”)Standards No. 86, “AccountingAccounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.”Marketed. Software development costs are capitalized once the technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses both technical design documentation and game design documentation. Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established. For products where proven technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product basis. Prior to a product’sproduct's release, we expense, as part of “cost"cost of sales — sales—software royalties and amortization,”" capitalized costs when we believe such amounts are not recoverable. Capitalized costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation. Amounts related



    to software development which are not capitalized are charged immediately to product development expense. We evaluate the future recoverability of capitalized amounts on a quarterly basis. The recoverability of capitalized software development costs is evaluated based on the expected performance of the specific products for which the costs relate. Criteria used to evaluate expected product performance include:  historical performance of comparable products using comparable technology; orders for the product prior to its release; and estimated performance of a sequel product based on the performance of the product on which the sequel is based.

            

    Commencing upon product release, capitalized software development costs are amortized to “cost"cost of sales — sales—software royalties and amortization”amortization" based on the ratio of current revenues to total projected revenues for the specific product, generally resulting in an amortization period of six months or less. For products that have been released in prior periods, we evaluate the future recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.

            

    Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established, as well as in the ongoing assessment of the recoverability of capitalized costs. In evaluating

    35


    the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additional costs to be incurred. If revised forecasted or actual product sales are less than and/or revised forecasted or actual costs are greater than the original forecasted amounts utilized in the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment charge.

    Intellectual Property Licenses. Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology, music or other intellectual property or proprietary rights in the development of our products. Depending upon the agreement with the rights holder, we may obtain the rights to use acquired intellectual property in multiple products over multiple years, or alternatively, for a single product. Prior to the related product's release, we expense, as part of "cost of sales—intellectual property licenses," capitalized intellectual property costs when we believe such amounts are not recoverable. Capitalized intellectual property costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation.

            Commencing upon the related product's release, capitalized intellectual property license costs are amortized to "cost of sales—intellectual property licenses" based on the ratio of current revenues for the specific product to total projected revenues for all products in which the licensed property will be utilized. As intellectual property license contracts may extend for multiple years, the amortization of capitalized intellectual property license costs relating to such contracts may extend beyond one year.

    We evaluate the future recoverability of capitalized software development costs and intellectual property licenses on a quarterly basis. TheFor products that have been released in prior periods, the primary evaluation criterion is actual title performance. For products that are scheduled to be released in future periods, the recoverability of capitalized intellectual property licensesoftware development costs is evaluated based on the expected performance of the specific products to which the costs relate or in which the licensed trademark or copyright is to be used. Criteria used to evaluate expected product performance include: historical performance of comparable products developed with comparable technology; orders for the product prior to its release; and for any sequel product, estimated performance based on the performance of the product on which the sequel is based. As many of our intellectual property licenses extend for multiple products over multiple years, we also assess the recoverability of capitalized intellectual property license costs based on certain qualitative factors, such as the success of other products and/or entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical releases or television series based on the intellectual property, and the rights holder’sholder's continued promotion and exploitation of the intellectual property. Prior to the related product’s release, we expense, as part of “cost of sales — intellectual property licenses,” capitalized intellectual property costs when we believe such amounts are not recoverable. Capitalized intellectual property costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation. Criteria used to evaluate expected product performance include: historical performance of comparable products using comparable technology; orders for the product prior to its release; and estimated performance of a sequel product based on the performance of the product on which the sequel is based.

            

    Commencing upon the related product’s release, capitalized intellectual property license costs are amortized to “cost of sales — intellectual property licenses” based on the ratio of current revenues for the specific product to total projected revenues for all products in which the licensed property will be utilized. As intellectual property license contracts may extend for multiple years, the amortization of capitalized intellectual property license costs relating to such contracts may extend beyond one year. For intellectual property included in products that have been released and unreleased products, we evaluate the future recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.

    Significant management judgments and estimates are utilized in the assessment of the recoverability of capitalized costs. In evaluating the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additional costs to be incurred. If revised forecasted or actual product sales are less than, and/or revised forecasted or actual costs are greater than, the original forecasted amounts utilized in the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment charge. Additionally, as noted above, as many of our intellectual property licenses extend for multiple products over multiple years, we also assess the recoverability of capitalized intellectual property license costs based on certain qualitative factors such as the success of other products and/or entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical releases or television series based on the intellectual property and the rights holder’sholder's continued promotion and exploitation of the intellectual property. Material differences may result in the amount and timing of charges for any period if management makes different judgments or utilizes different estimates in evaluating these qualitative factors.

            Stock-based Compensation Expense.Stock-Based Compensation. On April 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“Share-Based Payment, ("SFAS 123R”No. 123R"), which requires



    the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock options and employee stock purchases relatedmade pursuant to the Employee Stock Purchase Plan (“employee stock purchases”), based on estimated fair values. SFAS 123R supersedes our previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123R. We have applied the provisions of SAB 107 in our adoption of SFAS 123R.

    We adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of April 1, 2006, the first day of our fiscal year 2007. The Company’s Consolidated Financial Statements as of and for the fiscal year ended March 31, 2007 reflect the impact of SFAS 123R. In

    36


    accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. See Note 14 for additional information.

    In November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” (“FSP 123R-3”). We have elected not to adopt the alternative transition method provided in the FSP 123R-3 for calculating the tax effects of stock-based compensation pursuant to SFAS 123R. We followed paragraph 81 of SFAS No. 123R to calculate the initial pool of excess tax benefits and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123R.

    SFAS 123R requires companies to estimate the fair value of share-based payment awards on the measurement date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statement of Operations. Stock-based compensation expense recognized under SFAS No. 123R for the fiscalyears ended March 31, 2008, and 2007 was $53.6 million, and $25.5 million, respectively. See Note 14 of the Notes to Consolidated Financial Statements included in Item 8 for additional information.

            We estimate the value of employee stock options on the date of grant using a binomial-lattice model. The fair value of a share-based payment as of the grant date estimated in accordance with this option pricing model depends upon our future stock price as well as assumptions concerning expected volatility, risk-free interest rate, and risk-adjusted stock return, and measures of employees' forfeiture, exercise, and post-vesting termination behavior. Statistical methods were used to estimate employee rank specific termination rates. These termination rates, in turn, were used to model the number of options that are expected to vest and employees' post-vesting termination behavior. Employee rank specific estimates of expected time-to-exercise ("ETTE") were used to reflect employee exercise behavior. ETTE was estimated by using statistical procedures to first estimate the conditional probability of exercise occurring during each time period, conditional on the option surviving to that time period and then using those probabilities to estimate ETTE. The model was calibrated by adjusting parameters controlling exercise and post-vesting termination behavior so that the measures output by the model matched values of these measures that were estimated from historical data. The weighted-average estimated value of employee stock options granted during the years ended March 31, 2008 and 2007 was $9.21 and $5.86, respectively, per share using the binomial-lattice model with the following weighted-average assumptions:

     
    		 Employee and Director Options
    For the years ended March 31,
    		 
     
    		 2008
    		 2007
    		 
    Expected life (in years) 5.41 4.87 
    Risk free interest rate 4.70%4.99%
    Volatility 51%54%
    Dividend yield — — 

            To estimate volatility for the binomial-lattice model, we use methods or capabilities that are discussed in SFAS No. 123R and SAB No. 107. These methods included the implied volatility method, which is based upon the volatilities for exchange-traded options with respect to our stock, to estimate short-term volatility, the historical method which is based upon the annualized standard deviation of the instantaneous returns on Activision's stock during the option's contractual term, to estimate long-term volatility and a statistical model to estimate the transition or "mean reversion" from short-term volatility to long-term volatility. Based on these methods, for options granted during the year ended March 31, 2008, the expected stock price volatility ranged from 34% to 53%, with a weighted-average volatility of 51%. For options granted during the year ended March 31, 2007, the expected stock price volatility ranged from 38% to 56%, with a weighted average volatility of 54%.

            As was $25.5 million. Priorthe case for volatility, the risk-free rate is assumed to change during the option's contractual period. As required by a binomial-lattice model, the risk-free rate reflects the interest from one time period to the adoptionnext (the "forward rate") as opposed to the interest rate from the grant date to the given time period (the "spot rate.") Since we do not currently pay dividends and do not currently expect to pay them in the future, we have assumed that the dividend yield is zero.

            The expected life of SFAS 123R, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under APB 25, compensation expense was recorded for the issuance ofemployee stock options and other stock-based compensation based onrepresents the intrinsic value ofweighted-average period the stock options are expected to remain outstanding and other stock-based compensationis, as required by SFAS No. 123R, output by the binomial-lattice model. The expected life of employee stock options depends on the date of grant or measurement date. Under the intrinsic value method, compensation expense was recorded on the measurement date only if the current market priceall of the underlying stock exceeded



    assumptions and calibration of our model. The binomial-lattice model assumes that employees will exercise options when the stock optionprice equals or other stock-based award’sexceeds an exercise price. Forboundary. The exercise boundary is not constant but continually declines as one approaches the fiscal years ended March 31, 2006 and 2005, we recognized $3.1 million and $3.4 million, respectively, in stock-based compensation expense related to employee stock options and restricted stock, under APB 25. See Note 14 to the Consolidated Financial Statements for additional information.

    Stock-based compensation expense recognized during the period is based on the valueoption's expiration date. The exact placement of the portionexercise boundary depends on all of share-based payment awardsthe model inputs as well as the measures that is ultimately expectedwere used to vest duringcalibrate the period.model to estimated measures of employees' exercise and termination behavior.

            Stock-based compensation expense recognized in our Consolidated Statements of Operations for the fiscal year ended March 31, 2007 includes compensation expense for share-based payment awards granted prior to, but not yet vested as of, April 1, 2006 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123, and compensation expense for the share-based payment awards granted subsequent to April 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. As stock-based compensation expense recognized in the Consolidated StatementsStatement of Operations for the fiscal year ended March 31, 2007 is based on awards ultimately expected to vest itand has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

            If factors change and we employ different assumptions in the application of SFAS No. 123R in future periods, the compensation expense that we record under SFAS No. 123R may differ significantly from what we have recorded in the current period.

    As        Income Taxes.    We record a tax provision for the anticipated tax consequences of April 1, 2005, we changed ourthe reported results of operations. In accordance with Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We record a valuation for share-based awardsallowance to a binomial-lattice model from the Black-Scholes option-pricing model (“Black-Scholes model”) which was used for options granted prior to April 1, 2005 for FAS 123 fair value disclosures. For additional information, see Note 14reduce deferred tax assets to the amount that is believed more likely than not to be realized. Effective at the beginning of fiscal 2008, we adopted Financial Interpretation No. ("FIN") 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. Further information may be found in Note 12 of the Notes to Consolidated Financial Statements. Our determinationStatements included in Item 8.

            Management believes it is more likely than not that forecasted income, including income that may be generated as a result of fair value of share-based payment awards oncertain tax planning strategies, together with the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the termtax effects of the awards,deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax assets. In the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of FIN 48 and actualother complex tax laws. Resolution of these uncertainties in a manner inconsistent with management's expectations could have a material impact on our financial condition and projected employee stock option exercise behaviors.

    37operating results.



    Selected Consolidated Statements of Operations Data

            

    The following table sets forth certain Consolidated Statements of Operations data for the periods indicated as a percentage of consolidated net revenues and also breaks down net revenues by territory, business segment, and platform, as well as operating income by business segment (in(amounts in thousands):

     
    		 For the fiscal years ended March 31,
    		 
     
    		 2008
    		 2007
    		 2006
    		 
    Net revenues $2,898,136 100%$1,513,012 100%$1,468,000 100%
    Costs and expenses:                
     Cost of sales—product costs  1,240,605 43  799,587 52  734,874 50 
     Cost of sales—software royalties and amortization  294,279 10  132,353 9  147,822 10 
     Cost of sales—intellectual property licenses  110,551 4  46,125 3  57,666 4 
     Product development  269,535 9  133,073 9  132,651 9 
     Sales and marketing  308,143 10  196,213 13  283,395 19 
     General and administrative  195,409 7  132,514 9  96,366 7 
      
    		 
    		 
    		 
    		 
    		 
    		 
      Total costs and expenses  2,418,522 83  1,439,865 95  1,452,774 99 
      
    		 
    		 
    		 
    		 
    		 
    		 
    Income from operations  479,614 17  73,147 5  15,226 1 
    Investment income, net  51,254 1  36,678 2  30,630 2 
      
    		 
    		 
    		 
    		 
    		 
    		 
     Income before income tax provision  530,868 18  109,825 7  45,856 3 
    Income tax provision  185,985 6  24,038 1  5,605 — 
      
    		 
    		 
    		 
    		 
    		 
    		 
    Net income $344,883 12%$85,787 6%$40,251 3%
      
    		 
    		 
    		 
    		 
    		 
    		 
    Net Revenues by Territory:                
     North America $1,761,753 61%$753,376 50%$710,040 48%
     Europe  1,037,257 36  718,973 47  717,494 49 
     Other  99,126 3  40,663 3  40,466 3 
      
    		 
    		 
    		 
    		 
    		 
    		 
     Total net revenues $2,898,136 100%$1,513,012 100%$1,468,000 100%
      
    		 
    		 
    		 
    		 
    		 
    		 

    Net Revenues by Segment/Platform Mix:
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     Publishing:                
      Console $2,129,799 73%$886,795 59%$812,345 55%
      Hand-held  219,299 8  153,357 10  158,861 11 
      PC  156,068 5  78,886 5  183,457 13 
      
    		 
    		 
    		 
    		 
    		 
    		 
      Total publishing net revenues  2,505,166 86  1,119,038 74  1,154,663 79 
      
    		 
    		 
    		 
    		 
    		 
    		 
     Distribution:                
      Console  268,794 9  238,662 16  196,413 13 
      Hand-held  94,918 4  122,293 8  76,973 5 
      PC  29,258 1  33,019 2  39,951 3 
      
    		 
    		 
    		 
    		 
    		 
    		 
      Total distribution net revenues  392,970 14  393,974 26  313,337 21 
      
    		 
    		 
    		 
    		 
    		 
    		 
      Total net revenues $2,898,136 100%$1,513,012 100%$1,468,000 100%
      
    		 
    		 
    		 
    		 
    		 
    		 
    Operating Income (Loss) by Segment:                
      Publishing $461,718 16%$64,076 4%$(6,715)—%
      Distribution  17,896 1  9,071 1  21,941 1 
      
    		 
    		 
    		 
    		 
    		 
    		 
      Total operating income $479,614 17%$73,147 5%$15,226 1%
      
    		 
    		 
    		 
    		 
    		 
    		 

     

     

    Fiscal Year ended March 31,

     

     

     

    2007

     

    2006

     

    2005

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Net revenues

     

    $

    1,513,012

     

    100

    %

    $

    1,468,000

     

    100

    %

    $

    1,405,857

     

    100

    %

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Costs and expenses:

     

     

     

     

     

     

     

     

     

     

     

     

     

    Cost of sales – product costs

     

    799,587

     

    52

     

    734,874

     

    50

     

    658,949

     

    47

     

    Cost of sales – software royalties and amortization

     

    132,353

     

    9

     

    147,822

     

    10

     

    123,800

     

    9

     

    Cost of sales – intellectual property licenses

     

    46,125

     

    3

     

    57,666

     

    4

     

    62,197

     

    5

     

    Product development

     

    133,073

     

    9

     

    132,651

     

    9

     

    87,776

     

    6

     

    Sales and marketing

     

    196,213

     

    13

     

    283,395

     

    19

     

    230,299

     

    16

     

    General and administrative

     

    132,514

     

    9

     

    96,366

     

    7

     

    63,228

     

    4

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total costs and expenses

     

    1,439,865

     

    95

     

    1,452,774

     

    99

     

    1,226,249

     

    87

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Income from operations

     

    73,147

     

    5

     

    15,226

     

    1

     

    179,608

     

    13

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Investment income, net

     

    36,678

     

    2

     

    30,630

     

    2

     

    13,092

     

    1

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Income before income tax provision

     

    109,825

     

    7

     

    45,856

     

    3

     

    192,700

     

    14

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Income tax provision

     

    24,038

     

    1

     

    5,605

     

    —

     

    57,643

     

    4

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Net income

     

    $

    85,787

     

    6

    %

    $

    40,251

     

    3

    %

    $

    135,057

     

    10

    %

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Net Revenues by Territory:

     

     

     

     

     

     

     

     

     

     

     

     

     

    North America

     

    $

    753,376

     

    50

    %

    $

    710,040

     

    48

    %

    $

    696,325

     

    50

    %

    Europe

     

    718,973

     

    47

     

    717,494

     

    49

     

    675,074

     

    48

     

    Other

     

    40,663

     

    3

     

    40,466

     

    3

     

    34,458

     

    2

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total net revenues

     

    $

    1,513,012

     

    100

    %

    $

    1,468,000

     

    100

    %

    $

    1,405,857

     

    100

    %

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Net Revenues by Segment/Platform Mix:

     

     

     

     

     

     

     

     

     

     

     

     

     

    Publishing:

     

     

     

     

     

     

     

     

     

     

     

     

     

    Console

     

    $

    886,795

     

    59

    %

    $

    812,345

     

    55

    %

    $

    713,947

     

    51

    %

    Hand-held

     

    153,357

     

    10

     

    158,861

     

    11

     

    138,695

     

    10

     

    PC

     

    78,886

     

    5

     

    183,457

     

    13

     

    220,087

     

    15

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total publishing net revenues

     

    1,119,038

     

    74

     

    1,154,663

     

    79

     

    1,072,729

     

    76

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Distribution:

     

     

     

     

     

     

     

     

     

     

     

     

     

    Console

     

    238,662

     

    16

     

    196,413

     

    13

     

    256,452

     

    18

     

    Hand-held

     

    122,293

     

    8

     

    76,973

     

    5

     

    23,282

     

    2

     

    PC

     

    33,019

     

    2

     

    39,951

     

    3

     

    53,394

     

    4

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total distribution net revenues

     

    393,974

     

    26

     

    313,337

     

    21

     

    333,128

     

    24

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total net revenues

     

    $

    1,513,012

     

    100

    %

    $

    1,468,000

     

    100

    %

    $

    1,405,857

     

    100

    %

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Operating Income (Loss) by Segment:

     

     

     

     

     

     

     

     

     

     

     

     

     

    Publishing

     

    $

    64,076

     

    4

    %

    $

    (6,715

    )

    —

    %

    $

    155,863

     

    11

    %

    Distribution

     

    9,071

     

    1

     

    21,941

     

    1

     

    23,745

     

    2

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total operating income

     

    $

    73,147

     

    5

    %

    $

    15,226

     

    1

    %

    $

    179,608

     

    13

    %

    38


    Results of Operations – Operations—Fiscal Years Ended March 31, 20072008 and 20062007

    Net Revenues

            

    Net Revenues

    We primarily derive revenue from sales of packaged interactive software games designed for play on video game consoles (such as the PS2, PS3, Xbox360, and Wii), PCs, and hand-held game devices (such as the GBA, NDS, and PSP). We also derive revenue from our distribution business in Europe that provides logistical and sales services to third-party publishers of interactive entertainment software, our own publishing operations and third-party manufacturers of interactive entertainment hardware.

            The following table details our consolidated net revenues by business segment and our publishing net revenues by territory for the years ended March 31, 2008 and 2007 (amounts in thousands):

     
    		 For the fiscal years ended March 31,
    		  
    		  
    		 
     
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
     
    		 2008
    		 2007
    		 
    Publishing net revenues            
      North America $1,761,753 $753,376 $1,008,377 134%
      
    		 
    		 
    		 
    		 
      Europe  644,287  324,999  319,288 98%
      Other  99,126  40,663  58,463 144%
      
    		 
    		 
    		 
    		 
     Total international  743,413  365,662  377,751 103%
      
    		 
    		 
    		 
    		 
    Total publishing net revenues  2,505,166  1,119,038  1,386,128 124%
    Distribution net revenues  392,970  393,974  (1,004)0%
      
    		 
    		 
    		 
    		 
    Consolidated net revenues $2,898,136 $1,513,012 $1,385,124 92%
      
    		 
    		 
    		 
    		 

            Consolidated net revenues increased 92% from $1,513.0 million for the fiscal year ended March 31, 2007 to $2,898.1 million for the fiscal year ended March 31, 2008.

            In the second quarter fiscal 2008, we determined to recognize all of the net revenues from the sale of one of our titles,Enemy Territory: Quake Wars (which is primarily an online multiplayer PC game), on a deferred basis—straight-line over an estimated service period, which we estimate to be six months beginning the month after shipment. There is no impact to consolidated net revenues for the year ended March 31, 2008.

            Overall, the increase in consolidated net revenues for the fiscal year ended March 31, 2008, was driven by the following:

      •
      Our total publishing net revenues increased substantially by $1,386.1 million year over year. This is due to the strong performance of titles released during fiscal 2008 in each territory. During fiscal 2008, in the U.S., we grew our market share by 7.2 percent to a record 17.3 percent, were the number one console and handheld software publisher in dollars, and had three top-10 best-selling titles overall in dollars, according to The NPD Group. In particular,Guitar Hero III: Legends of Rock, was the number one best-selling game in the U.S. and Europe in dollars for fiscal 2008, according to The NPD Group, Charttrack, and Gfk.Call of Duty 4: Modern Warfare ended the fiscal year as the number two best-selling game worldwide in dollars, according to The NPD Group, Charttrack and Gfk. We have expanded our presence on the next-generation platforms through the increased number of premium priced titles released on those platforms. This has further increased our publishing net revenues as the installed base of the next-generation platforms continues to expand. Other major worldwide releases contributing to the results wereSpider-Man 3,Shrek the Third, Bee Movie Game as well as our new licensed intellectual propertyTRANSFORMERS: The Game.Spider Man 3 andTRANSFORMERS: The Game were the number one and number two best-selling movie based games in dollars worldwide for fiscal 2008, according to The NPD Group, Charttrack and Gfk. In fiscal 2007, our

        major releases includedCall of Duty 3, Guitar Hero 2, Marvel: Ultimate Alliance, Tony Hawk's Project 8, Over the Hedge, X-Men: Official Game, Shrek Smash N' Crash, Tony Hawk's Downhill Jam,World Series of Poker Tournament of Champions, Pimp My Ride, and titles for our Cabela's History Channel and Barbie franchises.

      •
      Changes in foreign exchange rates from a year over year strengthening of the Great Britain Pound ("GBP"), Euro ("EUR") and Australian Dollar ("AUD") in relation to the United States Dollar ("USD") increased reported net revenues by approximately $87.7 million for the year ended March 31, 2008. Excluding the impact of changing foreign currency rates, our consolidated net revenues increased 86% compared to prior year.

            In fiscal 2009, we plan to publishGuitar Hero: On Tour for the NDS;Guitar Hero: Aerosmith,Guitar Hero: Metallica, andGuitar Hero IV across multiple platforms. We plan to releaseCall of Duty 5, and continue to expand our licensed titles such asKung Fu Panda, Madagascar: Escape 2 Africa,Monsters vs. Aliens, Marvel Ultimate Alliance 2, our first James Bond title,Quantum of Solace, and several other titles. We also expect to increase our titles across multiple platforms to take advantage of the expected growth of different hardware platforms in fiscal 2009. As a result, we anticipate net revenues will increase in fiscal 2009 in comparison to the record net revenues achieved in fiscal 2008. However, such increases may be offset by the impact of revenue deferral described below.

            When we plan our fiscal 2009 titles releases, we continue to monitor the development of online functionality (together with online transactions, such as electronics downloads of titles or product add-ons) and its significance to our products. Based on our current assessment of obligations with respect to the online functionality for certain of our fiscal 2009 titles on certain platforms, we expect that certain fiscal 2009 titles will contain online functionality that constitutes a more-than-inconsequential separate service deliverable in addition to the product, and that our performance obligations for these fiscal 2009 titles will extend beyond the sale of the game. Vendor specific objective evidence of fair value does not exist for these online features, as we do not plan to separately charge for this component of these fiscal 2009 titles. As a result, we expect to recognize all of the revenue from the sale of these fiscal 2009 titles ratably over an estimated service period, which is currently estimated to be six months beginning the month after shipment. In addition, we expect to defer the costs of sales of these fiscal 2009 titles. We anticipate that, in fiscal 2009, we will likely defer approximately $350.0 million in net revenues and $150.0 million in costs of sales from the sale of these fiscal 2009 titles into fiscal 2010. Since most of these fiscal 2009 titles are planned to release in the third quarter fiscal 2009, we expect that a majority of revenues and costs of sales for these products will be deferred in the third quarter fiscal 2009, and recognized later in the calendar year 2009. However, the actual amount of revenues and costs of sales deferred will vary significantly depending upon the timing of the release of these fiscal 2009 titles and the sales volume of such products.

    North America Publishing Net Revenues (amounts in thousands)

    March 31,
    2008
    		 % of
    Consolidated
    Net Revenues
    		 March 31,
    2007
    		 % of
    Consolidated
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $1,761,753 61%$753,376 50%$1,008,377 134%

            North America publishing net revenues increased 134% from $753.4 million for the year ended March 31, 2007 to $1,761.8 million for the year ended March 31, 2008. The main revenue drivers for the year ended March 31, 2008 wereGuitar Hero III:Legends of Rock andCall of Duty 4: Modern Warfare.Guitar Hero III: Legends of Rock, was the number one best-selling game in dollars in the U.S. for fiscal 2008, according to The NPD Group.Call of Duty 4: Modern Warfare ended the fiscal 2008 as the number three best-selling game in dollars in the U.S., according to The NPD Group. Other key revenue contributors during the year includeGuitar Hero II for the Xbox360,Spider-Man 3,Shrek the Third, and our new licensed intellectual propertyTRANSFORMERS: The Game.


            North America publishing net revenues increased as a percentage of consolidated net revenues from 50% for the year ended March 31, 2007 to 61% for the year ended March 31, 2008. The increases in the percentages of total consolidated net revenues were a result of the stronger growth in net revenues for the publishing segment than that of the distribution segment during the year.

    International Publishing Net Revenues (amounts in thousands)

    March 31,
    2008
    		 % of
    Consolidated
    Net Revenues
    		 March 31,
    2007
    		 % of
    Consolidated
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $743,413 26%$365,662 24%$377,751 103%

            International publishing net revenues increased by 103% from $365.7 million for the year ended March 31, 2007 to $743.4 million for the year ended March 31, 2008. The increase in international publishing net revenues was primarily due to the increase in the number of titles released internationally in fiscal 2008, and the success ofGuitar Hero III:Legends of Rock andCall of Duty 4: Modern Warfare. We also grew our European market share from 4.8 percent to 7.4 percent during fiscal 2008, according to Charttrack and Gfk.

            International publishing net revenues were further increased by a year over year strengthening of the EUR, AUD, and GBP in relation to the USD of approximately $63.0 million for the year ended March 31, 2008 as compared to the year ended March 31, 2007. Excluding the impact of changing foreign currency rates, our international publishing net revenues increased 86% year over year. As a percentage of consolidated net revenues, international publishing net revenues increased slightly from 24% for the year ended March 31, 2007 to 26% for the year ended March 31, 2008. The slight increase in the percentage of total consolidated net revenues was a result of the stronger growth in net revenues for the publishing segment than that of the distribution segment during the year.

    Publishing Net Revenues by Platform

            Publishing net revenues increased 124% from $1,119.0 million for the year ended March 31, 2007 to $2,505.2 million for the year ended March 31, 2008. The following table details our publishing net revenues by platform and as a percentage of total publishing net revenues for the years ended March 31, 2008 and 2007 (amounts in thousands):

     
    		 Year Ended
    March 31,
    2008
    		 % of
    Publishing
    Net Revs
    		 Year Ended
    March 31,
    2007
    		 % of
    Publishing
    Net Revs
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    Publishing Net Revenues                
     PC $156,068 6%$78,886 7%$77,182 98%
      
    		 
    		 
    		 
    		 
    		 
    		 
     Console                
      Sony PlayStation 3  313,123 13% 53,842 5% 259,281 482%
      Sony PlayStation 2  716,922 29% 500,927 45% 215,995 43%
      Microsoft Xbox360  785,476 31% 200,394 18% 585,082 292%
      Nintendo Wii  309,867 12% 54,636 5% 255,231 467%
      Other  4,411 —% 76,996 7% (72,585)(94)%
      
    		 
    		 
    		 
    		 
    		 
    		 
    Total console  2,129,799 85% 886,795 80% 1,243,004 140%
      
    		 
    		 
    		 
    		 
    		 
    		 
    Hand-held  219,299 9% 153,357 13% 65,942 43%
      
    		 
    		 
    		 
    		 
    		 
    		 
    Total publishing net revenues $2,505,166 100%$1,119,038 100%$1,386,128 124%
      
    		 
    		 
    		 
    		 
    		 
    		 

    Personal Computer Net Revenues (amounts in thousands)

    March 31,
    2008
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $156,068 6%$78,886 7%$77,182 98%

            Net revenues from sales of titles for the PC increased 98% from $78.9 million for the year ended March 31, 2007 to $156.1 million for the year ended March 31, 2008. The increases were primarily due to the strong performance of our fiscal 2008 PC release ofCall of Duty 4: Modern Warfare. For fiscal 2008,Call of Duty 4: Modern Warfare was the number one PC title in dollars worldwide, according to The NPD Group, Charttrack and Gfk. The increase also resulted from an increased number of titles, both mainline titles and value titles, released on the PC. This compares to fiscal 2007 where net revenues were primarily derived from catalog sales ofCall of Duty 2,Quake 4 andThe Movies, as well as revenues from our European affiliate title LucasArts'Lego Star Wars II: The Original Trilogy.

            We plan to release several key titles on the PC in fiscal 2009, however, we anticipate net revenues from the PC to be partially offset by the impact of revenue deferral as previously discussed.

    Sony PlayStation 3 Net Revenues (amounts in thousands)

    March 31,
    2008
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $313,123 13%$53,842 5%$259,281 482%

            The PS3 was released in North America in November 2006 and in Europe in March 2007. With more than a full year for the installed base of the PS3 to expand, and our increased number of titles available on the PS3, net revenues from sales of titles for the PS3 increased 482% from $53.8 million, or 5% of publishing net revenues for the year ended March 31, 2007 to $313.1 million, or 13% of publishing net revenues for the year ended March 31, 2008. The increase was primarily attributable to the success ofCall of Duty 4: Modern Warfare, which was the number one best-selling title in dollars on the PS3, according to The NPD Group. Further, the increased number of titles available on the PS3 has increased our revenues from this platform. We released eight titles on the PS3 during fiscal 2008 as compared to three titles for fiscal 2007. During fiscal 2008, we releasedGuitar Hero III: Legends of Rock,Call of Duty 4: Modern Warfare,Spider-Man 3,TRANSFORMERS: The Game,Tony Hawk's Proving Ground,Soldier of Fortune: Payback,History Channel: Battle for the Pacific, and our European affiliate title LucasArts'Lego Star Wars: The Complete Saga on the PS3. This compares to the third quarter fiscal 2007 releases ofCall of Duty 3,Marvel:Ultimate Alliance andTony Hawk's Project 8.

            Over the last twelve months, Sony has cut prices and introduced lower priced models of the PS3 hardware. These price reductions have grown the installed base of the PS3, which combined with our strong slate of titles led to a significant increase in net revenues on the PS3 platform. We expect net revenues from sales of titles for the PS3 to continue to increase as we plan to increase our releases on the PS3 to take advantage of the expected growth of the hardware installed base, however, we anticipate such increase will be partially offset by the impact of revenue deferral as previously discussed.

    Sony PlayStation 2 Net Revenues (amounts in thousands)

    March 31,
    2008
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $716,922 29%$500,927 45%$215,995 43%

            In general, there was an overall decline in industry sales of titles for the PS2 as more consumers migrated to the next-generation platforms as compared to the prior year. However, net revenues from sales of our titles for the PS2 increased 43% from $500.9 million for the year ended March 31, 2007 to $716.9 million for the year ended March 31, 2008. The key titles impacting the fiscal 2008 results wereGuitar Hero III: Legends of Rock,Spider-Man: Friend or Foe,Bee Movie Game, Tony Hawk's Proving Ground,Guitar Hero: Rocks the 80s,Spider-Man 3,Shrek the Third, andTRANSFORMERS: The Game and the continued momentum for our fiscal 2007 third quarter titles. This compares to the titles released in fiscal 2007 such asCall of Duty 3, the number three title overall in dollars for the third quarter fiscal 2007, according to The NPD Group, andGuitar Hero II (game and accessories), the number one best-selling title in dollars on the PS2 platform for the third quarter fiscal 2007 per The NPD Group. Also, in fiscal 2007, we releasedMarvel: Ultimate Alliance, Over the Hedge, Tony Hawk's Project 8, X-Men: The Official Game, Shrek Smash N' Crash Racing and our European affiliate title, LucasArts'Star Wars Lego 2. As a percentage of publishing net revenues, net revenues from the PS2 decreased from 45% for the year ended March 31, 2007 to 29% for the year ended March 31, 2008. This was mainly attributable to the growth of net revenues from the next-generation platforms at a faster pace than revenues from the PS2.

            Although we expect net revenues from sales of titles for the PS2 to decline over time as consumers transition to the next-generation platforms, we expect significant net revenues for the PS2 for fiscal 2009 as we plan to develop and release many of our key titles on this platform.

    Microsoft Xbox360 Net Revenues (amounts in thousands)

    March 31,
    2008
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $785,476 31%$200,394 18%$585,082 292%

            Net revenues from sales of titles for the Xbox360 increased 292% from $200.4 million for the year ended March 31, 2007 to $785.5 million for the year ended March 31, 2008. As a percentage of publishing net revenues, net revenues from sales of titles for the Xbox360 increased from 18% for the year ended March 31, 2007 to 31% for the year ended March 31, 2008. These increases are due to the growing installed base for the Xbox360, as well as an increase in the number of new titles we released. In fiscal 2008, we released seventeen titles for this platform, and the key revenue drivers wereGuitar Hero III: Legends of Rock which was the number one best-selling game in dollars in the U.S. and Europe, andCall of Duty 4: Modern Warfare which was the number two best-selling game in dollars worldwide, according to The NPD Group, Charttrack, and Gfk. Other major titles released on the Xbox360 in fiscal 2008 such asTony Hawk's Proving Ground,Guitar Hero II, Spider-Man 3, andTRANSFORMERS: The Game also contributed to the increase in revenues. This compares to our fiscal 2007 releases of ten titles for this platform, three of which,Call of Duty 3, Tony Hawk's Project 8 andMarvel: Ultimate Alliance ranked among the top ten Xbox360 titles during the third quarter fiscal 2007, according to The NPD Group.

            In August 2007, Microsoft announced a reduction of the retail price of the Xbox360 by $50 in the U.S. market and by EUR 50 in European markets. These price reductions have grown the installed base of the Xbox360, which combined with our strong slate of titles led to a significant increase in net revenues on the Xbox360 platform. We expect net revenues from sales of titles for the Xbox360 to continue to increase as we plan several key releases on the Xbox360 to take advantage of the expected growth of the hardware installed base, however, we anticipate such increase will be partially offset by the impact of revenue deferral as previously discussed.


    Nintendo Wii Net Revenues (amounts in thousands)

    March 31,
    2008
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $309,867 12%$54,636 5%$255,231 467%

            The Wii was released in November 2006 and quickly gained strong consumer acceptance due to its innovative controller and mass market appeal. With more than a full year of expanding the installed base of the Wii and our increased number of new titles on the Wii, net revenues from the sales of titles for the Wii increased to $309.9 million for the year ended March 31, 2008 from $54.6 million for the year ended March 31, 2007. As a percentage of publishing net revenues, net revenues from the sales of titles for the Wii increased from 5% to 12% year over year. We released the first version of Guitar Hero for the Wii,Guitar Hero III: Legends of Rock in the third quarter fiscal 2008 which was the main contributor to our net revenues on the platform and the primary reason for the increase in net revenues from sales of Wii titles for the year ended March 31, 2008. Further, we have released fourteen other Wii titles during fiscal 2008 as compared to five Wii titles released during fiscal 2007. Some of the titles we released during fiscal 2008 wereBee Movie Game,Spider-Man: Friend or Foe,Tony Hawk's Proving Ground,Dancing with Stars,Barbie Island Princess,Cabela's: Big Game Hunter 2008 and, in Europe our affiliate LucasArt's titles,Thrillville: Off the Rails, andLego Star Wars: The Complete Saga. This compares to the five titles concurrently released with the release of the Wii in November 2006,Call of Duty 3,Marvel: Ultimate Alliance,World Series of Poker: Tournament of Champions,Rapala Tournament Fishing, andTony Hawk's Downhill Jam.

            We expect net revenues from sales of titles for the Wii to continue to increase as we plan key releases on the Wii for the expected growth of the hardware installed base, however, we anticipate such increase will be partially offset by the impact of revenue deferral as previously discussed.

    Hand-held Net Revenues (amounts in thousands)

    March 31,
    2008
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $219,299 9%$153,357 13%$65,942 43%

            Net revenues from sales of titles for the hand-held platforms increased 43% from $153.4 million for the year ended March 31, 2007 to $219.3 million for the year ended March 31, 2008. During fiscal 2008, we have released more "big proposition" titles which contributed to the increase in net revenues. The increase in net revenues was primarily due to the releases ofBee Movie Game,Call of Duty 4: Modern Warfare,Spider-Man: Friend or Foe,Shrek: Ogres and Donkeys, TRANSFORMERS: The Game on the PSP,TRANSFORMERS: Decepticon andTRANSFORMERS: Autobots exclusively on the NDS, and our European releases of two LucasArts' titles,Thrillville: Off the Rails, andLego Star Wars: The Complete Saga. This compares to the fiscal 2007 releases ofTony Hawk's Downhill Jam,Over the Hedge: Hammy Goes Nuts!,Barbie and the 12 Dancing Princesses,Marvel: Ultimate Alliance,Spider-Man: Battle for New York,Over the Hedge,X-Men: The Official Game,World Series of Poker: Tournament of Champions andRapala Trophies and our European affiliate title, LucasArts'Lego Star Wars II: The Original Trilogy. As a percentage of publishing net revenues, net revenues from hand-held platforms decreased from 13% for the year ended March 31, 2007 to 9% for the year ended March 31, 2008. This was mainly attributable to the growth of net revenues from the Guitar Hero titles on the next-generation platforms and the Guitar Hero titles were not yet available on the hand-held platforms during fiscal 2008. Our first Guitar Hero title on the hand-held platform will be released in fiscal 2009.

            With the installed base of the NDS and PSP continuing to increase and our increasing presence on hand-held platform, such asGuitar Hero: On Tour, and several other titles, we expect fiscal 2009 hand-held net revenues to continue to increase year over year.


    Overall

            The platform mix of our future publishing net revenues will likely be impacted by a number of factors, including the ability of hardware manufacturers to continue to increase their installed hardware base for the next-generation platforms, as well as the performance of key product releases from our product release schedule. According to The NPD Group, we were the number one console and handheld software publisher in dollars for fiscal 2008. Additionally,Guitar Hero III: Legends of Rock, was the number one best-selling game in dollars in the U.S. and Europe for fiscal 2008, according to The NPD Group, Charttrack, and Gfk.Call of Duty 4: Modern Warfare ended the fiscal year as the number two best-selling game worldwide in units, with sell-through of more than 9 million units to date, according to The NPD Group, Charttrack and Gfk. In fiscal 2008, both the Guitar Hero and Call of Duty franchises surpassed a billion dollars in life to date net revenues.

            A significant portion of our revenues and profits are derived from a relatively small number of popular titles and franchises each year, so revenues and profits are significantly affected by our ability to release highly successful "hit" titles. For example, for the year ended March 31, 2008, 65% of our consolidated net revenues and 75% of publishing net revenues were derived from net revenues from three franchises. This revenue concentration reflects an industry wide trend, with market share of the top 10 titles of calendar year 2007 doubling versus a year ago, according to The NPD Group. For fiscal 2008, we published three top-10 best-selling titles in dollars overall, according to The NPD Group. Though many of our titles have substantial production or acquisition costs and marketing budgets, once a title recoups these costs, incremental net revenues directly and positively impact operating profits resulting in a disproportionate amount of operating income being derived from these select titles. We expect that a limited number of titles and franchises will continue to produce a disproportionately large amount of our net revenues and profits.

            Three key factors that could affect future publishing and distribution net revenues performance are console hardware pricing, software pricing, and transitions in console platforms. As console hardware moves through its life cycle, hardware manufacturers typically enact price reductions. Reductions in the price of console hardware typically result in an increase in the installed base of hardware owned by consumers. Historically, we have also seen that lower console hardware prices put downward pressure on software pricing. However, we expect console software launch pricing for the next-generation platforms to hold at current levels as a result of the strong consumer acceptance of these price points that has occurred since the launch of the next-generation platforms and the greater product capability and entertainment value of next generation titles. We continue to expect software launch pricing on the PS2 to hold at $39.99 for top titles on this platform.

    Distribution Net Revenues (amounts in thousands)

    March 31,
    2008
    		 % of
    Consolidated
    Net Revenues
    		 March 31,
    2007
    		 % of
    Consolidated
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $392,970 14%$393,974 26%$(1,004)0%

            Distribution net revenues for the year ended March 31, 2008 decreased slightly from $394.0 million to $393.0 million year over year. Foreign exchange rates increased reported distribution net revenues by approximately $24.7 million for the year ended March 31, 2008. Excluding the impact of the changing foreign currency rates, our distribution net revenues decreased $25.7 million or 7% year over year. The decrease in absolute dollars of distribution net revenues for the year ended March 31, 2008 was primarily due to the effect of the termination of a significant customer, which outweighed the beneficial effect of foreign currency rates. Distribution net revenues as a percentage of consolidated net revenues decreased from 26% for the year ended March 31, 2007 to 14% for the year ended March 31, 2008, primarily due to the significant increase in publishing net revenues.


            The mix of distribution net revenues between hardware and software sales varied slightly year over year with approximately 26% of distribution net revenues from hardware sales for the year ended March 31, 2008 as compared to 17% for the year ended March 31, 2007. The mix of future distribution net revenues will be driven by a number of factors including the occurrence of further hardware price reductions instituted by hardware manufacturers, and our ability to establish and maintain distribution agreements with hardware manufacturers, third-party software publishers and retail customers. For fiscal 2009, we expect distribution net revenues to decrease in absolute dollars due to the full year effect of the termination of the significant customer when compared to fiscal 2008.

    Costs and Expenses

    Cost of Sales—Product Costs (amounts in thousands)

    March 31,
    2008
    		 % of
    Consolidated
    Net Revenues
    		 March 31,
    2007
    		 % of
    Consolidated
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $1,240,605 43%$799,587 52%$441,018 55%

            "Cost of sales—product costs" increased 55% from $799.6 million for the year ended March 31, 2007 to $1,240.6 million for the year ended March 31, 2008. "Cost of sales—product costs" increased as a result of the revenue growth in our publishing businesses. "Cost of sales—product costs" as a percentage of consolidated net revenues decreased from 52% for the year ended March 31, 2007 to 43% for year ended March 31, 2008. The decrease in "cost of sales—product costs" as a percentage of consolidated net revenues was partially due to a higher percentage of net revenues for fiscal 2008 as compared to fiscal 2007, relating to our publishing business which in general carries a lower percentage "cost of sales—product costs" than our distribution business. Net revenues from our publishing business was 86% of total net revenues for the year ended March 31, 2008 as compared to 74% for the year ended March 31, 2007. As we increase our presence on the next-generation platforms, publishing net revenues during fiscal 2008 included a larger mix of next-generation product sales which carries lower product costs than the other console platforms.

            We expect "cost of sales—product costs" as a percentage of consolidated net revenues for fiscal 2009 to be about in line with fiscal 2008.

    Cost of Sales—Software Royalties and Amortization (amounts in thousands)

    March 31,
    2008
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $294,279 12%$132,353 12%$161,926 122%

            "Cost of sales—software royalties and amortization" as a percentage of publishing net revenues for the year ended March 31, 2008 remained constant from the prior fiscal year at 12%. In absolute dollars, "cost of sales—software royalties and amortization" increased from $132.4 million for the year ended March 31, 2007 to $294.3 million for the year ended March 31, 2008. The increase was the result of a larger slate of titles released leading to an increase in net revenues during fiscal 2008 when compared to fiscal 2007.

            For fiscal 2009, we expect "costs of sales—software royalties and amortization" as a percentage of publishing net revenues to be about in line with fiscal 2008 levels.


    Cost of Sales—Intellectual Property Licenses (amounts in thousands)

    March 31,
    2008
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $110,551 4%$46,125 4%$64,426 140%

            "Cost of sales—intellectual property licenses" increased in absolute dollars from $46.1 million for the year ended March 31, 2007 to $110.6 million for the year ended March 31, 2008 and remained constant as a percentage of publishing net revenues over the last fiscal year. This was primarily the result of the increase in net revenues and a larger movie slate with higher overall intellectual property costs, offset on a percentage of publishing net revenues by the larger growth of net revenues from titles of our wholly owned intellectual properties, such asGuitar Hero III: Legends of Rock andCall of Duty 4: Modern Warfare, which do not have significant intellectual property costs.

            For fiscal 2009, we expect "costs of sales—intellectual property licenses" as a percentage of publishing net revenues to be about in line with fiscal 2008 levels.

    Product Development (amounts in thousands)

    March 31,
    2008
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $269,535 11%$133,073 12%$136,462 103%

            Product development expenses of $269.5 million and $133.1 million represented 11% and 12% of publishing net revenues for the years ended March 31, 2008 and 2007, respectively. The increase in product development expenses primarily resulted from costs incurred during fiscal 2008 to support the greater number of new titles in development, the more technologically advanced nature of those titles, the development costs of those titles that have not yet reached technological feasibility, and exceptional title performance during fiscal 2008 leading to increased costs for studio performance incentive plans.

            For fiscal 2009, we expect product development expenses as a percentage of publishing net revenues to be about in line with fiscal 2008 levels.

    Sales and Marketing (amounts in thousands)

    March 31,
    2008
    		 % of
    Consolidated
    Net Revenue
    		 March 31,
    2007
    		 % of
    Consolidated
    Net Revenue
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $308,143 10%$196,213 13%$111,930 57%

            Sales and marketing expenses of $308.1 million and $196.2 million represented 10% and 13% of consolidated net revenues for the years ended March 31, 2008 and 2007, respectively. The increases in absolute dollars were a result of higher spending associated with several larger and successful releases particularly in the third quarter fiscal 2008 and the movie-based releases in the first quarter fiscal 2008, and several marketing programs conducted in the fourth quarter fiscal 2008. As a result of the success of our title releases, our consolidated net revenues increased by a higher percentage than sales and marketing expenses which led to the decrease of sales and marketing expenses as a percentage of consolidated net revenues.

            For fiscal 2009, we expect sales and marketing expenses as a percentage of consolidated net revenues to increase when compared to fiscal 2008 levels because of the effect of revenue deferral as previously discussed and the expected spending increases on sales and marketing to grow market share internationally and to support a larger slate of titles planned in fiscal 2009.


    General and Administrative (amounts in thousands)

    March 31,
    2008
    		 % of
    Consolidated
    Net Revenues
    		 March 31,
    2007
    		 % of
    Consolidated
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $195,409 7%$132,514 9%$62,895 47%

            General and administrative expenses of $195.4 million and $132.5 million represented 7% and 9% of consolidated net revenues for the years ended March 31, 2008 and 2007, respectively. Expenses were higher than prior year primarily due to an increase in headcount related costs due to the expansion of RedOctane to support the growth of the Guitar Hero titles, increased bonus accruals due to strong financial performances of the Company, costs related to Activision's pending merger with Vivendi Games, the consolidation and related amortization of intangibles related to DemonWare and Bizarre Creations (acquired in May 2007 and September 2007, respectively) included in our results of operations, and the impact of changes in foreign currency rates.

            For fiscal 2009, we expect general and administrative expenses as a percentage of consolidated net revenues to increase when compared to fiscal 2008 levels because of the effect of revenue deferral as previously discussed although the expenses are expected to be about in line with fiscal 2008.

    Operating Income (amounts in thousands)

     
    		 March 31,
    2008
    		 % of
    Segment/
    Consolidated
    Net Revs
    		 March 31,
    2007
    		 % of
    Segment/
    Consolidated
    Net Revs
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    Publishing $461,718 18%$64,076 6%$397,642 621%
    Distribution  17,896 5% 9,071 2% 8,825 97%
      
    		   
    		   
    		   
     Consolidated $479,614 17%$73,147 5%$406,467 556%
      
    		   
    		   
    		   

            Publishing operating income for the year ended March 31, 2008 increased $397.6 million from $64.1 million for fiscal 2007 to $461.7 million for fiscal 2008. The increase was primarily due to:

      •
      The strong performance of our fiscal 2008 titles, leading to the substantial growth in our publishing segment which in general has a higher operating margin than our distribution segment.

      •
      Cost control relative to significant growth in net revenues.

            Distribution operating income for the year ended March 31, 2008 increased over the last fiscal year, from $9.1 million to $17.9 million. The results from the distribution business have improved primarily due to the effect of foreign currency rates, higher operating margin as a result of the termination of a significant customer that generated limited operating income, and the strong performance of Activision titles for the year ended March 31, 2008.

    Investment Income, Net (amounts in thousands)

    March 31,
    2008
    		 % of
    Consolidated
    Net Revenues
    		 March 31,
    2007
    		 % of
    Consolidated
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $51,254 2%$36,678 2%$14,576 40%

            Investment income, net for the year ended March 31, 2008 was $51.3 million as compared to $36.7 million for the year ended March 31, 2007. The increase was primarily due to higher yields earned on our increasing portfolio of investments and cash equivalents, and a net realized gain in the fourth quarter fiscal 2008 of $1.1 million on the sale of investments.


    Provision for Income Taxes (amounts in thousands)

    March 31,
    2008
    		 % of
    Pre Tax
    Income
    		 March 31,
    2007
    		 % of
    Pre Tax
    Income
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $185,985 35%$24,038 22%$161,947 674%

            The income tax provision of $186.0 million for the year ended March 31, 2008 reflects our effective income tax rate of 35%. While our effective income tax rate for the year equals our statutory rate there are certain items that would normally generate a variance between the two rates. Those items are the federal and state research and development tax credits and the impact of foreign tax rate differentials partially offset by state taxes. However, the net effect for the year is approximately zero.

            The aforementioned effective income tax rate for the year ended March 31, 2008 of 35% differs from our effective income tax rate of 22% for the year ended March 31, 2007 due to an increase in pretax income for fiscal 2008 versus the pretax income for fiscal 2007, without a corresponding increase in the benefit of book/tax differences. The lower effective income tax rate in fiscal 2007 was also due to the reversal of valuation allowance.

    Net Income

            Net income for the year ended March 31, 2008 was $344.9 million or $1.10 per diluted earnings per share, as compared to net income of $85.8 million or $0.28 per diluted earnings per share for the year ended March 31, 2007.

    Results of Operations—Fiscal Years Ended March 31, 2007 and 2006

    Net Revenues

    The following table details our consolidated net revenues by business segment and our publishing net revenues by territory for the years ended March 31, 2007 and 2006 (in(amounts in thousands):

     
    		 For the fiscal years ended March 31,
    		  
    		  
    		 
     
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
     
    		 2007
    		 2006
    		 
    Publishing net revenues            
      North America $753,376 $710,040 $43,336 6%
      
    		 
    		 
    		 
    		 
      Europe  324,999  404,157  (79,158)(20)%
      Other  40,663  40,466  197 —%
      
    		 
    		 
    		 
    		 
     Total international  365,662  444,623  (78,961)(18)%
      
    		 
    		 
    		 
    		 
    Total publishing net revenues  1,119,038  1,154,663  (35,625)(3)%
    Distribution net revenues  393,974  313,337  (80,637)26%
      
    		 
    		 
    		 
    		 
    Consolidated net revenues $1,513,012 $1,468,000 $45,012 3%
      
    		 
    		 
    		 
    		 

            

     

     

    For the fiscal years ended
    March 31,

     

    Increase/

     

    Percent

     

     

     

    2007

     

    2006

     

    (Decrease)

     

    Change

     

    Publishing net revenues

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    North America

     

    $

    753,376

     

    $

    710,040

     

    $

    43,336

     

    6

    %

     

     

     

     

     

     

     

     

     

     

    Europe

     

    324,999

     

    404,157

     

    (79,158

    )

    (20

    )%

    Other

     

    40,663

     

    40,466

     

    197

     

    0

    %

     

     

     

     

     

     

     

     

     

     

    Total international

     

    365,662

     

    444,623

     

    (78,961

    )

    (18

    )%

     

     

     

     

     

     

     

     

     

     

    Total publishing net revenues

     

    1,119,038

     

    1,154,663

     

    (35,625

    )

    (3

    )%

     

     

     

     

     

     

     

     

     

     

    Distribution net revenues

     

    393,974

     

    313,337

     

    80,637

     

    26

    %

     

     

     

     

     

     

     

     

     

     

    Consolidated net revenues

     

    $

    1,513,012

     

    $

    1,468,000

     

    $

    45,012

     

    3

    %

    Consolidated net revenues increased 3% from $1,468.0 million for the fiscal year ended March 31, 2006 to $1,513.0 million for the fiscal year ended March 31, 2007. ThisThe increase in consolidated net revenues for fiscal 2007 was driven by the following:

      •
      •Strong performance of our North American publishing unit led to a year over year increase in net revenues of $43.3 million or 6%. In the third quarter of fiscal 2007, we released a focused but high quality slate of titles, which resulted in strong consumer demand for our new releases in the third quarter, continuing reorders in the fourth quarter and strong price realization. In fiscal 2007, our major releases includedCall of Duty 3, Guitar Hero 2, Marvel: Ultimate Alliance, Tony Hawk’sHawk's Project 8, Over the Hedge, X-Men: Official Game, Shrek Smash N’N' Crash, Tony Hawk’sHawk's Downhill Jam,Series of Poker Tournament of Champions, Pimp My Ride, and titles for our Cabela’s,Cabela's History Channel and new Barbie franchises. franchises. In fiscal 2006, we released the following

        major releases:Doom 3for the Xbox,Madagascar, Fantastic Four, Ultimate Spider-Man, X-Men Legends II, THAW, Call of Duty 2, Call of Duty 2: Big Red One, GUN, True Crime: New York City, Quake 4, Shrek SuperSlam, The Movies, Cabela’sCabela's Dangerous Hunts 2,andWorld Series of Poker.

      •
      An increase in net revenues from our distribution business due to a stronger release schedule for certain third-party publishers, higher revenues from hardware sales related to the launch of PS3 and Nintendo Wii, as well as ongoing sales of NDS and PSP, and the addition of a significant new customer in the second quarter of fiscal 2007.



      •
      Impact of the year over year strengthening of the Great Britain Pound (“GBP”("GBP"), Euro (“EUR”("EUR") and Australian Dollar (“AUD”("AUD") in relation to the United States Dollar (“USD”("USD"). Foreign exchange rates increased reported net revenues by approximately $51.6 million or 4% for the year ended March 31, 2007. Excluding the impact of changing foreign currency rates, our consolidated net revenues remained about in line with prior year.

    Partially offset by:

      •
      •A decrease in publishing net revenues from our European publishing operations primarily due to a more focused slate in fiscal 2007, and a decrease in our affiliate business as only one title, LucasArts’ LucasArts'Star Wars

      39


    Lego 2 was released in 2007, whereas two strong affiliate titles, LucasArts’ LucasArts'Star Wars: Episode III Revenge of the Sithand LucasArts'LucasArts’Star Wars Battlefront II, were released in fiscal 2006.

    In fiscal 2008, we plan to leverage our traditional core franchises, such as Spiderman, Shrek, Call of Duty and Tony Hawk, and extend our market leadership in the music-based gaming genre with Guitar Hero. In addition, we expect strong market growth as the next generation consoles gain critical mass. As a result, we anticipate revenues will increase in fiscal 2008 in comparison to the record net revenues achieved in fiscal 2007.

    North America Publishing Net Revenues (in(amounts in thousands)

    March 31,

     

    % of
    Consolidated

     

    March 31,

     

    % of
    Consolidated

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    753,376

     

    50

    %

    $

    710,040

     

    48

    %

    $

    43,336

     

    6

    %

    March 31,
    2007
    		 % of
    Consolidated
    Net Revenues
    		 March 31,
    2006
    		 % of
    Consolidated
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $753,376 50%$710,040 48%$43,336 6%

    North America publishing net revenues increased 6% from $710.0 million for the year ended March 31, 2006 to $753.4 million for the year ended March 31, 2007. Although the company released fewer titles in fiscal 2007, the high quality slate drove strong consumer demand and enabled the company to maintain pricing and record lower provisions for returns and price protection than in fiscal 2006. Net revenues were impacted by strong performances fromGuitar Hero 2, Call of Duty 3, Marvel: Ultimate Alliance andTony Hawk’sHawk's Project 8. North America publishing net revenues increased as a percentage of consolidated net revenues from 48% for the year ended March 31, 2006 to 50% for the year ended March 31, 2007. The increase in the percentage of consolidated net revenues is due to a combination of strong performance in North America and a decrease in our international publishing net revenues due to a smaller slate and a decrease in the number of affiliate titles in Europe released in fiscal 2007.

    International Publishing Net Revenues (in(amounts in thousands)

    March 31,

     

    % of
    Consolidated

     

    March 31,

     

    % of
    Consolidated

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    365,662

     

    24

    %

    $

    444,623

     

    30

    %

    $

    (78,961

    )

    (18

    )%

    March 31,
    2007
    		 % of
    Consolidated
    Net Revenues
    		 March 31,
    2006
    		 % of
    Consolidated
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $365,662 24%$444,623 30%$(78,961)(18)%

    International publishing net revenues decreased by 18% from $444.6 million for the year ended March 31, 2006 to $365.7 million for the year ended March 31, 2007. Additionally, international publishing net revenues as a percentage of consolidated net revenues decreased from 30% for the year ended March 31, 2006 to 24% for the year ended March 31, 2007. The decrease in international publishing net revenues was primarily due to the decrease in the number of titles released internationally in fiscal 2007. Additionally, in Europe, our net revenues were impacted by a decrease in revenues from our affiliate titles. Fiscal 2006 included the successful LucasArts’LucasArts' titles,Star Wars:



    Revenge of the SithandStar Wars Battlefront II,while fiscal 2007 included one major affiliate label release, LucasArts’ LucasArts'Lego Star Wars II: The Original Trilogy. The decrease in international publishing net revenues was partially offset by a year over year strengthening of the EUR and the GBP in relation to the USD, which increased reported net revenues for fiscal 2007 by approximately $24.2 million. Excluding the impact of changing foreign currency rates, our international publishing net revenues decreased 23% year over year.

    40


    Publishing Net Revenues by Platform

            

    Publishing net revenues decreased 3% from $1,154.7 million for the year ended March 31, 2006 to $1,119.0 million for the year ended March 31, 2007. The following table details our publishing net revenues by platform and as a percentage of total publishing net revenues for the years ended March 31, 2007 and 2006 (in(amounts in thousands):

     
    		 Year Ended
    March 31,
    2007
    		 % of
    Publishing
    Net Revs
    		 Year Ended
    March 31,
    2006
    		 % of
    Publishing
    Net Revs
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    Publishing Net Revenues                
    PC $78,886 7%$183,457 16%$(104,571)(57)%
      
    		 
    		 
    		 
    		 
    		 
    		 
    Console                
     Sony PlayStation 3  53,842 5% — —% 53,842 n/a 
     Sony PlayStation 2  500,927 45% 422,239 36% 78,688 19%
     Microsoft Xbox360  200,394 18% 102,809 9% 97,585 95%
     Microsoft Xbox  54,232 5% 205,864 18% (151,632)(74)%
     Nintendo Wii  54,636 5% — —% 54,636 n/a 
     Nintendo GameCube  22,761 2% 80,964 7% (58,203)(72)%
     Other  3 —% 469 —% (466)(99)%
      
    		 
    		 
    		 
    		 
    		 
    		 
    Total console  886,795 80% 812,345 70% 74,450 9%
      
    		 
    		 
    		 
    		 
    		 
    		 
    Hand-held                
     Game Boy Advance  48,478 4% 79,738 7% (31,260)(39)%
     PlayStation Portable  49,931 4% 52,016 5% (2,085)(4)%
     Nintendo Dual Screen  54,948 5% 27,107 2% 27,841 103%
      
    		 
    		 
    		 
    		 
    		 
    		 
    Total hand-held  153,357 13% 158,861 14% (5,504)(3)%
      
    		 
    		 
    		 
    		 
    		 
    		 
    Total publishing net revenues $1,119,038 100%$1,154,663 100%$(35,625)(3)%
      
    		 
    		 
    		 
    		 
    		 
    		 

     

     

    Year Ended

     

    % of

     

    Year Ended

     

    % of

     

     

     

     

     

     

     

    March 31,

     

    Publishing

     

    March 31,

     

    Publishing

     

    Increase/

     

    Percent

     

     

     

    2007

     

    Net Revs

     

    2006

     

    Net Revs

     

    (Decrease)

     

    Change

     

    Publishing Net Revenues

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    PC

     

    $

    78,886

     

    7

    %

    $

    183,457

     

    16

    %

    $

    (104,571

    )

    (57

    )%

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Console

     

     

     

     

     

     

     

     

     

     

     

     

     

    Sony PlayStation 3

     

    53,842

     

    5

    %

    —

     

    —

    %

    53,842

     

    n/a

     

    Sony PlayStation 2

     

    500,927

     

    45

    %

    422,239

     

    36

    %

    78,688

     

    19

    %

    Microsoft Xbox360

     

    200,394

     

    18

    %

    102,809

     

    9

    %

    97,585

     

    95

    %

    Microsoft Xbox

     

    54,232

     

    5

    %

    205,864

     

    18

    %

    (151,632

    )

    (74

    )%

    Nintendo Wii

     

    54,636

     

    5

    %

    —

     

    —

    %

    54,636

     

    n/a

     

    Nintendo GameCube

     

    22,761

     

    2

    %

    80,964

     

    7

    %

    (58,203

    )

    (72

    )%

    Other

     

    3

     

    —

    %

    469

     

    —

    %

    (466

    )

    (99

    )%

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total console

     

    886,795

     

    80

    %

    812,345

     

    70

    %

    74,450

     

    9

    %

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Hand-held

     

     

     

     

     

     

     

     

     

     

     

     

     

    Game Boy Advance

     

    48,478

     

    4

    %

    79,738

     

    7

    %

    (31,260

    )

    (39

    )%

    PlayStation Portable

     

    49,931

     

    4

    %

    52,016

     

    5

    %

    (2,085

    )

    (4

    )%

    Nintendo Dual Screen

     

    54,948

     

    5

    %

    27,107

     

    2

    %

    27,841

     

    103

    %

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total hand-held

     

    153,357

     

    13

    %

    158,861

     

    14

    %

    (5,504

    )

    (3

    )%

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total publishing net revenues

     

    $

    1,119,038

     

    100

    %

    $

    1,154,663

     

    100

    %

    $

    (35,625

    )

    (3

    )%

    Personal Computer Net Revenues (in(amounts in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    78,886

     

    7

    %

    $

    183,457

     

    16

    %

    $

    (104,571

    )

    (57

    )%

    March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2006
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $78,886 7%$183,457 16%$(104,571)(57)%

    Net revenues from sales of titles for the PC decreased 57% from $183.5 million and 16% of publishing net revenues for the year ended March 31, 2006 to $78.9 million and 7% of publishing net revenues for the year ended March 31, 2007. The decreases were primarily due to the strong performance of our fiscal 2006 PC releases, as well as a decrease in the number of titles released for the PC during fiscal 2007 as compared to fiscal 2006. In fiscal 2006, we released the highly successful PC title,Call of Duty 2, which was ranked by NPD Funworld as the number two best selling PC title in the United States for the third quarter of fiscal 2006, as well asQuake 4,The Movies, andDoom 3: Resurrection of Evil. This compares to fiscal 2007 where net revenues were primarily derived from catalog sales ofCall of Duty 2,Quake 4 andThe Movies, as well as revenues from our European affiliate title LucasArts’ LucasArts'Lego Star Wars II: The Original Trilogy.

    41



    We expect fiscal 2008 PC publishing net revenues to increase due to the release of Enemy Territory: Quake Wars, and Call of Duty 4, as well as PC releases of large scale movie titles (Spider Man the Movie 3, Shrek the Third and Transformers). Quake and Call of Duty had no PC releases in the fiscal 2007 base period and should attract a significant audience on the PC platform in fiscal 2008.

    Sony PlayStation 3 Net Revenues (in(amounts in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    53,842

     

    5

    %

    $

    —

     

    —

    %

    $

    53,842

     

    n/a

     

    March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2006
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    $53,842 5%$— —%$53,842 n/a

    The PS3 was released in November 2006 in North America and in March 2007 in Europe. Consistent with our goal of having a significant presence at the launch of each new platform, we released three titles concurrently with the hardware releases:Call of Duty 3, Marvel: Ultimate Alliance, andTony Hawk’sHawk's Project 8. All of these titles were released at premium retail pricing (i.e. $59.99 in the United States).

    We expect net revenues from sales of titles for the PS3 to increase as the installed base of hardware grows.

    Sony PlayStation 2 Net Revenues (in(amounts in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    500,927

     

    45

    %

    $

    422,239

     

    36

    %

    $

    78,688

     

    19

    %

    March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2006
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $500,927 45%$422,239 36%$78,688 19%

    Net revenues from sales of titles for the PS2 increased 19% from $422.2 million for the year ended March 31, 2006 to $500.9 million for the year ended March 31, 2007. Although we released a fewer number of major titles for the PS2 in fiscal 2007, the strong performance of these releases, particularly the PS2 exclusive title Guitar Hero 2, resulted in higher net revenues in absolute dollars and as a percentage of publishing net revenues. The key titles impacting the fiscal 2007 results wereCall of Duty 3, the #3 title overall for the third quarter of fiscal 2007, according to NPD Funworld, andGuitar Hero 2(game (game and accessories), the #1 best selling title on the PS2 platform for the third quarter of fiscal 2007 per NPD Funworld. In addition, we releasedMarvel: Ultimate Alliance, Over the Hedge, Tony Hawk’sHawk's Project 8, X-Men: The Official Game, Shrek Smash N’N' Crash Racingand our European affiliate title, LucasArts’ LucasArts'Star Wars Lego 2. This compares to fiscal 2006 where we released the PS2 titlesCall of Duty 2: Big Red One, Tony Hawk’sHawk's American Wasteland, Shrek SuperSlam, GUN, True Crime: New York City, Madagascar, Fantastic Four, X-Men Legends 2, Ultimate Spidermanand two affiliate titles in Europe,, LucasArts’ LucasArts'Star Wars: Revenge of the SithandStar Wars Battlefront II.

    Although we expect net revenues from sales of titles for the PS2 to decline over time as consumers transition to next generation platforms, we continue to expect significant net revenues for PS2 for fiscal 2008 as we plan to develop and release many of our key titles on this platform.

    42


    Microsoft Xbox360 Net Revenues (in(amounts in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    200,394

     

    18

    %

    $

    102,809

     

    9

    %

    $

    97,585

     

    95

    %

    March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2006
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $200,394 18%$102,809 9%$97,585 95%

    Net revenues from sales of titles for the Xbox360 increased 95% from $102.8 million for the year ended March 31, 2006 to $200.4 million for the year ended March 31, 2007. As a percentage of publishing net revenues, net revenues from sales of titles for the Xbox360 doubled from 9% for the year ended March 31, 2006 to 18% for the year ended March 31, 2007. These increases are due to the growing installed base for the Xbox360, as well as an increase in the number of titles released. In fiscal 2007, we released ten titles for this platform, and according to NPD Funworld, three of our titles,Call of Duty 3, Tony Hawk’sHawk's Project 8andMarvel: Ultimate Alliance ranked among the top ten Xbox 360 titles during the third quarter of fiscal 2007. In fiscal 2006, we released four titles concurrently with the November 2005 launch of the Xbox360 hardware,Call of Duty 2, THAW, Quake 4,andGUN,and we experienced strong sales for these four titles although limited by hardware availability.


    We expect net revenues from sales of titles for the XBox360 to significantly increase in the upcoming fiscal year due to the growing installed base and our strong slate of Xbox360 titles.

    Microsoft Xbox Net Revenues (in(amounts in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    54,232

     

    5

    %

    $

    205,864

     

    18

    %

    $

    (151,632

    )

    (74

    )%

    March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2006
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $54,232 5%$205,864 18%$(151,632)(74)%

    Net revenues from sales of titles for the Xbox decreased 74% from $205.9 million for the year ended March 31, 2006 to $54.2 million for the year ended March 31, 2007. As a percentage of publishing net revenues, net revenues from sales of titles for the Xbox decreased from 18% for the year ended March 31, 2006 to 5% for the year ended March 31, 2007. These decreases were primarily attributable to a slowdown in sales for the Xbox as customers upgrade to the Xbox360, and the reduction in the number of titles released by us for this platform. In fiscal 2007 we released five major titles for Xbox:Call of Duty 3, Tony Hawk’sHawk's Project 8, Marvel: Ultimate Alliance, Over the HedgeandX-Men: The Official Game. In fiscal 2006, we released our largest slate includingCall of Duty: Big Red One, Tony Hawk’sHawk's American Wasteland, GUN, Ultimate Spiderman, X-Men Legends 2, True Crime: New York City, Shrek: SuperSlam, Madagascar, Fantastic Fourand the Xbox exclusive, Doom 3.

    We expect our fiscal 2008 net revenues from sales of titles for the Xbox to decrease as consumers transition to next generation platforms and as we stop developing new titles for this platform.

    Nintendo Wii Net Revenues (in(amounts in thousands)

    March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2006
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $54,636 5%$— —%$54,636 n/a%

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    54,636

     

    5

    %

    $

    —

     

    —

    %

    $

    54,636

     

    n/a

     

    The Nintendo Wii was released in November 2006. Consistent with our goal of having a significant presence at the launch of each next generation platform, we released five titles concurrently with the release of Wii;

    43


    Call of Duty 3, Marvel: Ultimate Alliance, World Series of Poker: Tournament of Champions, Rapala Tournament Fishing, andTony Hawk’sHawk's Downhill Jam.With the strong consumer demand for the platform, our five releases performed well, three of which were top ten Wii titles in the third quarter of fiscal 2007, according to NPD Funworld:Call of Duty 3, Marvel Ultimate Alliance and Tony Hawk’sHawk's Downhill Jam.

    We expect net revenues from sales of titles for the Wii to significantly increase with the growth of the installed base and an increase in the number of titles on our slate for fiscal 2008. Due to its mass market appeal, we believe that the Wii will provide a significant opportunity for us in the upcoming fiscal years.

    Nintendo GameCube Net Revenues (in(amounts in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    22,761

     

    2

    %

    $

    80,964

     

    7

    %

    $

    (58,203

    )

    (72

    )%

    March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2006
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $22,761 2%$80,964 7%$(58,203)(72)%

    Net revenues from sales of titles for the Nintendo GameCube decreased 72% from $81.0 million for the year ended March 31, 2006 to $22.8 million for the year ended March 31, 2007. The decrease in absolute dollars and as a percentage of publishing net revenues reflects a decrease in the number of new releases in fiscal 2007 compared to fiscal 2006 and a significant slowdown in sales on the GameCube platform as customers transition to the next generation platforms. In fiscal 2006, we released nine major titles:Madagascar, Tony Hawk’sHawk's American Wasteland, Ultimate Spiderman, Fantastic Four, Call of Duty: Big Red One, True Crime: New York City, GUN, Shrek Super SlamandX-Men Legends 2.This compares to fiscal 2007 when we released four titles:Over the Hedge, X-Men: The Official Game, Shrek Smash N’N' Crash Racing,andour European affiliate title,Star Wars Lego 2.

    We expect net revenues for the GameCube to significantly decreaseHand-held Net Revenues (amounts in fiscal 2008. Net revenues will be generated from catalog sales only, as we will no longer develop titles for this platform.thousands)

    Hand-held (in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    153,357

     

    13

    %

    $

    158,861

     

    14

    %

    $

    (5,504

    )

    (3

    )%

    March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2006
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $153,357 13%$158,861 14%$(5,504)(3)%

    Net revenues from sales of titles for the hand-held platforms decreased 3% from $158.9 million for the year ended March 31, 2006 to $153.4 million for the year ended March 31, 2007. Hand-held net revenues as a percentage of publishing net revenues decreased slightly from 14% to 13%. Within the hand-held platforms, net revenues for the GBA platform decreased 39%, from $79.7 million for the prior fiscal year, to $48.5 million for fiscal 2007, PSP decreased by 4%, from $52.0 million to $49.9 million, and net revenues for the NDS doubled from $27.1 million for fiscal 2006 to $54.9 million for the current year. The decrease in net revenues for GBA is primarily related to slower GBA sales due to wider acceptance of the NDS platform. The net revenue increase for NDS reflects the strong performance of our key fiscal 2007 titles which includesOver the Hedge, Tony Hawk’sHawk's Downhill Jam, X-Men: The Official Game, Spider-Man: Battle for New Yorkand LucasArts’LucasArts'Star Wars Lego 2 in Europe, as the platform continued to gain consumer acceptance and market share. PSP net revenues for fiscal 2007 were slightly lower than the previous year. In fiscal 2006, we released a stronger PSP slate and our titles performed well with the consumer excitement for the March 2005 North America platform launch, and the September 2005 European platform launch. The 2006 slate includedTony Hawk’sHawk's Underground 2, Spider-Man: The Movie 2, X-Men Legends 2, World Series of Poker, and two affiliate titles in Europe. Our key releases in fiscal 2007 werewere Marvel: Ultimate Alliance, Tony Hawk’sHawk's Project 8, Call of Duty: Roads to Victory,and one European affiliate title, LucasArts’ LucasArts'Star Wars Lego 2.

    With the installed base of the NDS and PSP continuing to increase, we expect that fiscal 2008 hand-held net revenues to continue to increase year over year.

    44


    Overall

    The platform mix of our future publishing net revenues will likely be impacted by a number of factors, including the ability of hardware manufacturers to continue to increase their installed hardware base for the next-generation platforms, as well as the performance of key product releases from our product release schedule. We expect that net revenues from console titles will continue to represent the largest component of our publishing net revenues with Xbox 360 having the largest percentage of that business in fiscal 2008 due to its large installed hardware base and our strong slate of titles. We expect significant growth in net revenues from PS3 and Wii next-generation console systems and a decrease in the percentage of PS2 business in fiscal 2008. With the installed base of the NDS and PSP platforms continuing to increase, we also expect to see a continued increase in our hand-held business in line with the growth in the installed base. Our net revenues from PC titles will be primarily driven by our product release schedule.

    A significant portion of our revenues and profits are derived from a relatively small number of popular titles and brands each year and revenues and profits are significantly affected by our ability to release highly successful “hit” titles. For example, for the year ended March 31, 2007, 29% of our consolidated net revenues and 39% of worldwide publishing net revenues were derived from net revenues from our Call of Duty 3, Guitar Hero 2, and Marvel:  Ultimate Alliance titles. Though many of these titles have substantial production or acquisition costs and marketing budgets, once a title recoups these costs, incremental net revenues directly and positively impact operating profits resulting in a disproportionate amount of operating income being derived from these select titles. We expect that a limited number of titles and brands will continue to produce a disproportionately large amount of our net revenues and profits.

    Three key factors that could affect future publishing and distribution net revenue performance are console hardware pricing, software pricing, and transitions in console platforms.  As console hardware moves through its life cycle, hardware manufacturers typically enact price reductions.  Reductions in the price of console hardware typically result in an increase in the installed base of hardware owned by consumers.  Historically, we have seen that lower console hardware prices put downward pressure on software pricing.  However, we expect console software launch pricing for the Xbox360 and PS3 to hold at current levels as a result of the strong consumer acceptance of these price points that has occurred since the launch of the next generation platforms and the greater product capability and value of next generation titles. We continue to expect software pricing on PS2 to hold at $39.99 with continued momentum on this platform. We will not be launching any new NGC or Xbox title in fiscal year 2008.

    Distribution Net Revenues (in(amounts in thousands)

    March 31,
    2007
    		 % of
    Consolidated
    Net Revenues
    		 March 31,
    2006
    		 % of
    Consolidated
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $393,974 26%$313,337 21%$80,637 26%

            

    March 31,

     

    % of
    Consolidated

     

    March 31,

     

    % of
    Consolidated

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    393,974

     

    26

    %

    $

    313,337

     

    21

    %

    $

    80,637

     

    26

    %

    Distribution net revenues for the year ended March 31, 2007 increased 26% from the prior fiscal year, from $313.3 million to $394.0 million. Foreign exchange rates increased reported distribution net revenues by approximately $27.3 million for the year ended March 31, 2007. Excluding the impact of the changing foreign currency rates, our distribution net revenues increased $53.3 million or 17% year over year. This year over year increase was primarily due to the strong releases for certain third-party publishers, increased hardware sales primarily related to the launch of two new platforms in fiscal 2007, the PS3 and the Nintendo Wii, as well as ongoing sales of NDS and PSP hardware, and the addition of a new customer in the second quarter of fiscal 2007.

            

    The mix of distribution net revenues between hardware and software sales varied year over year with approximately 17% of distribution net revenues from hardware sales in the year ended March 31, 2007 as compared to 20% in the prior fiscal year. Fiscal 2007 results included the hardware releases of the Nintendo Wii in November 2006 and the PS3 in late March 2007. Fiscal 2006 included the release of the PSP in Europe in the second quarter and the Xbox360 in November 2005. The mix of future distribution net revenues will be driven by a number of factors including the occurrence of further hardware price reductions instituted by hardware manufacturers, and our ability to establish and maintain distribution agreements with hardware manufacturers, third-party software publishers and retail customers.

    45


    We expect our fiscal 2008 distribution net revenues to decrease in absolute dollars and as a percentage of consolidated net revenues when compared with fiscal 2007 primarily due to the loss of a customer at the end of fiscal 2007 and strong growth of our publishing business.

    Costs and Expenses

    Cost of Sales – Sales—Product Costs (in(amounts in thousands)

    March 31,
    2007
    		 % of
    Consolidated
    Net Revenues
    		 March 31,
    2006
    		 % of
    Consolidated
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $799,587 52%$734,874 50%$64,713 9%

            

     

     

    % of

     

     

     

    % of

     

     

     

     

     

    March 31,

     

    Consolidated

     

    March 31,

     

    Consolidated

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    799,587

     

    52

    %

    $

    734,874

     

    50

    %

    $

    64,713

     

    9

    %

    “Cost"Cost of sales – sales—product costs”costs" represented 52% and 50% of consolidated net revenues for the years ended March 31, 2007 and 2006, respectively. In absolute dollars, “cost"cost of sales — sales—product costs”costs" increased 9% from $734.9 million for the year ended March 31, 2006 to $799.6 million for the year



    ended March 31, 2007. The primary factors affecting the increase in “cost"cost of sales – sales—product costs”costs" in absolute dollars and as a percentage of consolidated net revenues were:

      •
      An increase in consolidated net revenues of 3% from $1,468.0 million for the year ended March 31, 2006 to $1,513.0 million for the year ended March 31, 2007.



      •
      A higher percentage of our business relating to distribution which carries higher product costs than our publishing business.



      •
      Higher net revenues from products for console platforms in absolute dollars and as a percentage of publishing net revenues from $812.3 million and 70% of publishing net revenues in fiscal 2006 to $886.8 million and 80% of publishing net revenues in fiscal 2007. Console products have higher costs of sales – sales—product costs associated with them than PC products, due to the royalty payments to hardware manufacturers.

    Partially offset by:

      •
      Non-recurring write-downs of inventory costs recorded in fiscal 2006 in the amount of $14.5 million due to the high level of inventory for certain titles which, due to weaker market conditions and a slow down in re-orders caused by the console transition.

    We expect cost of sales — product costs as a percentage of net revenues to decrease in fiscal 2008 as compared to fiscal 2007 primarily due to a larger proportion of our business being derived from the publishing segment in fiscal 2008.

    Cost of Sales – Sales—Software Royalties and Amortization (in(amounts in thousands)

    March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2006
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $132,353 12%$147,822 13%$(15,469)(10)%

            

     

     

    % of

     

     

     

    % of

     

     

     

     

     

    March 31,

     

    Publishing

     

    March 31,

     

    Publishing

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    132,353

     

    12

    %

    $

    147,822

     

    13

    %

    $

    (15,469

    )

    (10

    )%

    “Cost"Cost of sales – sales—software royalties and amortization”amortization" for the year ended March 31, 2007 decreased as a percentage of publishing net revenues from the prior fiscal year, from 13% to 12%. In absolute dollars, “cost"cost of sales

    46


    – sales—software royalties and amortization”amortization" for the year ended March 31, 2007 also decreased from the prior fiscal year, from $147.8 million to $132.4 million. The decreases were mainly due to:

      •
      A decrease in the number of titles released in fiscal 2007 as compared to the prior year when we had the largest slate of new releases in our history. A decrease in amortization of software development costs from internally developed games, was partially offset by increases in royalties for games developed by third party developers.



      •
      Non-recurring costs recorded in fiscal 2006 totaling $12.6 million, related to impairment charges for a title in development in 2006, and recoverability write-offs related to released titles.

    We expect “costs of sales – software royalties and amortization” to increase in fiscal 2008 in proportion to the expected increase in publishing net revenues.

    Cost of Sales – Sales—Intellectual Property Licenses (in(amounts in thousands)

     

     

    % of

     

     

     

    % of

     

     

     

     

     

    March 31,

     

    Publishing

     

    March 31,

     

    Publishing

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    46,125

     

    4

    %

    $

    57,666

     

    5

    %

    $

    (11,541

    )

    (20

    )%

    March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2006
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $46,125 4%$57,666 5%$(11,541)(20)%

    “Cost        "Cost of sales – sales—intellectual property licenses”licenses" for the year ended March 31, 2007 decreased in absolute dollars and as a percentage of publishing net revenues over the same period last year, from $57.7 million to $46.1 million and from 5% to 4%, respectively. The decreases in both absolute dollars and as a percentage of publishing net revenues were due mainly to a decrease in the number of titles with associated intellectual property in fiscal 2007 compared to fiscal 2006. In fiscal 2007, we released the following titles with associated intellectual property:Marvel: Ultimate Alliance, Over the Hedge, X-Men: Official Game, Guitar Hero 1 and 2, Tony Hawk’sHawk's Project 8andTony Hawk’sHawk's Downhill Jam. In fiscal 2006, we released the following titles with associated intellectual property:Doom 3for the Xbox,Madagascar, Fantastic Four, Ultimate Spider-Man, X-Men Legends II, THAW, Quake IV,andShrek SuperSlam.


    We expect intellectual property licenses to increase in absolute dollars and as a percentage of publishing net revenues in fiscal 2008 as a result of our planned title slate which includes several key releases with licensed intellectual property such as Spider-Man: The Movie 3, Transformers, Shrek the Third, and Bee Movie.

    Product Development (in(amounts in thousands)

    March 31,
    2007
    		 % of
    Publishing
    Net Revenues
    		 March 31,
    2006
    		 % of
    Publishing
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $133,073 12%$132,651 11%$422 —%

            

     

     

    % of

     

     

     

    % of

     

     

     

     

     

    March 31,

     

    Publishing

     

    March 31,

     

    Publishing

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    133,073

     

    12

    %

    $

    132,651

     

    11

    %

    $

    422

     

    —

    %

    Product development expenses of $133.1 million and $132.7 million represented 12% and 11% of publishing net revenues for the years ended March 31, 2007 and 2006, respectively. TheThe increases in both absolute dollars and as a percentage of net revenues was primarily generated by:

      •
      Increased costs incurred to fund more product development capacity at certain studios as well as the addition of Red Octane.

      47



    •
    Increases in product development expenses of $4.8 million in fiscal 2007 related to stock-based compensation expense as a result of the implementation of SFAS No. 123R.



    •
    Compensation provided to employees in fiscal 2007 to cure tax penalties related to previously-exercised stock options.

    Partially offset by:

      •
      Product cancellation charges of $11.4 million, including termination fees, incurred during fiscal 2006. Given the market conditions, the lower than expected performance of some of our third quarter fiscal 2006 releases, and risks associated with console transition, we performed a thorough review of the then pending product slate. To better align opportunities associated with the next-generation console platforms with income potential and risks associated with certain titles in development, we canceled development of certain titles and permanently removed them from our future title slate. There were no product cancellation charges during fiscal 2007.



      •
      The implementation during fiscal 2007 of certain cost control initiatives including sharing technologies and tools across multiple platforms and studios, increasing our development schedules to facilitate a longer pre-production phase and more predictable workflow times, and outsourcing certain areas of game development to lower cost service providers.

    Sales and Marketing (in(amounts in thousands)

    March 31,
    2007
    		 % of
    Consolidated
    Net Revenue
    		 March 31,
    2006
    		 % of
    Consolidated
    Net Revenue
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $196,213 13%$283,395 19%$(87,182)(31)%

            

     

     

    % of

     

     

     

    % of

     

     

     

     

     

    March 31,

     

    Consolidated

     

    March 31,

     

    Consolidated

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenue

     

    2006

     

    Net Revenue

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    196,213

     

    13

    %

    $

    283,395

     

    19

    %

    $

    (87,182

    )

    (31

    )%

    Sales and marketing expenses of $196.2 million and $283.4 million represented 13% and 19% of consolidated net revenues for the years ended March 31, 2007 and 2006, respectively. TheThe decrease in both absolute dollars and as a percentage of net revenues was a result of the implementation of a more targeted media program which worked more efficiently helped by the overall strength and high quality of our fiscal 2007 title slate. We also released fewer titles in fiscal 2007 compared to fiscal 2006, wherewhen we had the largest slate of new releases in our history. The decreases were partially offset by expenses of $5.1 million in fiscal 2007 related to stock-based compensation expense as a result of the implementation of SFAS No. 123R, as well as sales and marketing expenses associated with the acquisition of the Guitar Hero franchise.

    General and Administrative (in(amounts in thousands)

    March 31,
    2007
    		 % of
    Consolidated
    Net Revenues
    		 March 31,
    2006
    		 % of
    Consolidated
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $132,514 9%$96,366 7%$36,148 38%

            

     

     

    % of

     

     

     

    % of

     

     

     

     

     

    March 31,

     

    Consolidated

     

    March 31,

     

    Consolidated

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    132,514

     

    9

    %

    $

    96,366

     

    7

    %

    $

    36,148

     

    38

    %

    General and administrative expenses of $132.5 million and $96.4 million represented 9% and 7% of consolidated net revenues for the years ended March 31, 2007 and 2006, respectively. The increases were primarily due to increased legal expenses and professional fees relating primarily to our internal review of historical stock option granting practices, the consolidation of RedOctane into our results of operations, amortization of intangible assets related to the RedOctane acquisition, and stock-based compensation expense of $10.0 million in fiscal 2007 as a result of the implementation of SFAS No. 123R. These increases were partially offset by the benefits of our cost optimization program launched in the fourth quarter of fiscal 2006 and gains on foreign currency.

    48


    Operating Income (amounts in thousands) (in thousands)

     
    		 March 31,
    2007
    		 % of
    Segment
    Net Revenues
    		 March 31,
    2006
    		 % of
    Segment
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    Publishing $64,076 6%$(6,715)(1)%$70,791 1,054%
    Distribution  9,071 2% 21,941 7% (12,870)(59)%
      
    		 
    		 
    		 
    		 
    		 
    		 
     Consolidated $73,147 5%$15,226 1%$57,921 380%
      
    		   
    		   
    		   

            

     

     

     

     

    % of

     

     

     

    % of

     

     

     

     

     

     

     

    March 31,

     

    Segment

     

    March 31,

     

    Segment

     

    Increase/

     

    Percent

     

     

     

    2007

     

    Net Revs

     

    2006

     

    Net Revs

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Publishing

     

    $

    64,076

     

    6

    %

    $

    (6,715

    )

    (1

    )%

    $

    70,791

     

    1054

    %

    Distribution

     

    9,071

     

    2

    %

    21,941

     

    7

    %

    (12,870

    )

    (59

    )%

    Consolidated

     

    $

    73,147

     

    5

    %

    $

    15,226

     

    1

    %

    $

    57,921

     

    380

    %

    Publishing operating income for the year ended March 31, 2007 increased $70.8 million from the same period last year, from an operating loss of $6.7 million to operating income of $64.1 million. The increase iswas primarily due to:

      •
      The strong performance of our fiscal 2007 titles.



      •
      A decrease in provision for returns and price protection in fiscal 2007 from 18% of consolidated net revenues in fiscal 2006 compared to 9% of consolidated net revenues in fiscal 2007, primarily due to improved market conditions and stronger sell through of our 2007 title releases.



      •
      A significant decrease in sales and marketing spending as a result of improved efficiency in executing our marketing programs.



      •
      The implementation of certain cost control initiatives resulting in decreased product development and general and administrative expenses (excluding expenses related to our internal review of historical stock option granting practices and expenses relating to the informal SEC inquiry and derivative litigation).



      •
      Fiscal 2006 results included cancellation, impairment, and earn-out recoverability charges totaling $24.0 million. See additional description of charges incurred in the cost of sales – sales—software royalties and amortization and the product development discussions.



      •
      Fiscal 2006 results also included write-downs of inventory costs of $14.5 million. See additional description in the cost of sales – sales—product costs discussion.

    Partially offset by:

      •
      Stock-based compensation expenses of $22.4 million for the year ended March 31, 2007 as a result of the implementation of SFAS No. 123R.



      •
      Legal and other professional fees of $26.9 million associated with our internal review of historical stock option granting practices, including expenses relating to the informal SEC inquiry and derivative litigation.



      •
      Amortization of intangible assets related to the RedOctane acquisition of $11.7 million.

            

    Distribution operating income for the year ended March 31, 2007 decreased over the same period last year, from $21.9 million to $9.1 million. The decrease in operating income in 2007 was primarily due to increased business from large mass-market customers for which we earn smaller margins, an



    increase in hardware sales which carries a lower margin than software, and higher reserves for inventory obsolescence.

    49


    Investment Income, Net (amounts in thousands) (in thousands)

    March 31,
    2007
    		 % of
    Consolidated
    Net Revenues
    		 March 31,
    2006
    		 % of
    Consolidated
    Net Revenues
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $36,678 2%$30,630 2%$6,048 20%

            

     

     

    % of

     

     

     

    % of

     

     

     

     

     

    March 31,

     

    Consolidated

     

    March 31,

     

    Consolidated

     

    Increase/

     

    Percent

     

    2007

     

    Net Revenues

     

    2006

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    36,678

     

    2

    %

    $

    30,630

     

    2

    %

    $

    6,048

     

    20

    %

    Investment income, net for the year ended March 31, 2007 was $36.7 million as compared to $30.6 million for the year ended March 31, 2006. The increase was primarily due to higher yields earned on our short term investments and cash equivalents, and a realized gain in the third quarter of fiscal 2007 of $1.8 million on the sale of an investment in common stock.

    Provision for Income Taxes (amounts in thousands) (in thousands)

    March 31,
    2007
    		 % of
    Pre Tax
    Income
    		 March 31,
    2006
    		 % of
    Pre Tax
    Income
    		 Increase/
    (Decrease)
    		 Percent
    Change
    		 
    $24,038 22%$5,605 12%$18,433 329%

            

     

     

    % of

     

     

     

    % of

     

     

     

     

     

    March 31,

     

    Pre Tax

     

    March 31,

     

    Pre Tax

     

    Increase/

     

    Percent

     

    2007

     

    Income

     

    2006

     

    Income

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    24,038

     

    22

    %

    $

    5,605

     

    12

    %

    $

    18,433

     

    329

    %

    The income tax provision of $24.0 million for the year ended March 31, 2007 reflects our effective income tax rate of 22%. This is higher than prior years as a result of an increase in pretax income for the year ended March 31, 2007, versus the amount of pretax income for the year ended March 31, 2006, without a corresponding increase in the benefit of book/tax differences. The significant items that generated the variance between our effective rate and our statutory rate of 35% were research and development tax credits, the impact of foreign tax rate differentials, and the elimination of the valuation allowance for research and development tax credits, partially offset by state taxes and the establishment of tax reserves for these credits and other deferred tax assets. The realization of deferred tax assets depends primarily on the generation of future taxable income. We believe that it is more likely than not that we will generate taxable income sufficient to realize the benefit of net deferred tax assets recognized.

    Net Income

            

    Net Income

    Net income for the year ended March 31, 2007 was $85.8 million or $0.28 per diluted share, as compared to $40.3 million or $0.14 per diluted share for the year ended March 31, 2006.

    Results of Operations – Fiscal Years Ended March 31, 2006 and 2005

    Net Revenues

    We primarily derive revenue from sales of packaged interactive software games designed for play on video game consoles (such as the PS2, Xbox, Xbox360, and GameCube), PCs, and hand-held game devices (such as the GBA, NDS, and PSP). We also derive revenue from our distribution business in Europe that provides logistical and sales services to third-party publishers of interactive entertainment software, our own publishing operations and third-party manufacturers of interactive entertainment hardware.

    50


    The following table details our consolidated net revenues by business segment and our publishing net revenues by territory for the years ended March 31, 2006 and 2005 (in thousands):

     

     

    For the years ended March 31,

     

    Increase/

     

    Percent

     

     

     

    2006

     

    2005

     

    (Decrease)

     

    Change

     

    Publishing net revenues

     

     

     

     

     

     

     

     

     

    North America

     

    $

    710,040

     

    $

    696,325

     

    $

    13,715

     

    2

    %

    Europe

     

    404,157

     

    341,946

     

    62,211

     

    18

    %

    Other

     

    40,466

     

    34,458

     

    6,008

     

    17

    %

    Total international

     

    444,623

     

    376,404

     

    68,219

     

    18

    %

    Total publishing net revenues

     

    1,154,663

     

    1,072,729

     

    81,934

     

    8

    %

    Distribution net revenues

     

    313,337

     

    333,128

     

    (19,791

    )

    (6

    )%

    Consolidated net revenues

     

    $

    1,468,000

     

    $

    1,405,857

     

    $

    62,143

     

    4

    %

    Consolidated net revenues increased 4% from $1,405.9 million for the year ended March 31, 2005 to $1,468.0 million for the year ended March 31, 2006. This increase in consolidated net revenues was solely generated by our publishing business and was driven by the following:

    •                  An increase year over year in the number of titles released. Our fiscal 2006 launch schedule included the largest slate of new releases in our history. In fiscal 2006, we released seventeen major titles including the following major releases: Doom 3 for the Xbox, Madagascar, Fantastic Four, Ultimate Spider-Man, X-Men Legends II, THAW, Call of Duty 2, Call of Duty 2: Big Red One, GUN, True Crime: New York City, Quake 4, Shrek SuperSlam, The Movies, Cabela’s Dangerous Hunts 2, and World Series of Poker. In addition, four of these titles, Call of Duty 2, THAW, Quake 4, and GUN, were released concurrently with the release of the Xbox360 platform at a premium retail price of $59.99. This compares to fourteen titles in fiscal 2005, which included the following major releases: Spider-Man 2, Call of Duty: Finest Hour, Tony Hawk’s Underground 2 (“THUG 2”), Shrek 2, X-Men Legends, Doom 3, Lemony Snicket’s A Series of Unfortunate Events, Shark Tale, Cabela’s Big Game Hunter 2005, and Rome: Total War. Additionally in fiscal 2006, we achieved our goal of increasing the number of million and multi-million unit selling titles.

    •                  An increase in our hand-held platform presence growing publishing hand-held revenues by $20.2 million or 15% from $138.7 million for the year ended March 31, 2005 to $158.9 million for the year ended March 31, 2006. This was driven by an increase in the number of hand-held titles released combined with titles being released across more hand-held platforms with the fiscal 2005 introductions of the PSP and NDS.

    Partially offset by:

    •                  An increase in provision for return and price protection throughout fiscal 2006 from 12% of net revenues in fiscal 2005 to 18% of net revenues in fiscal 2006, due to challenging market conditions and the ongoing console transition.

    •                  A decrease in net revenues from our distribution business due mostly to the effect of year over year weakening of the Euro (“EUR”) and Great Britain Pound (“GBP”) in relation to the United States Dollar (“USD”). Foreign exchange rates decreased reported distribution net revenues by approximately $14.9 million for the year ended March 31, 2006. Excluding the impact of changing foreign currency rates, our distribution net revenues decreased 1% year over year.

    North America Publishing Net Revenues (in thousands)

    March 31,

     

    % of
    Consolidated

     

    March 31,

     

    % of
    Consolidated

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenues

     

    2005

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    710,040

     

    48

    %

    $

    696,325

     

    50

    %

    $

    13,715

     

    2

    %

    North America publishing net revenues increased 2% from $696.3 million for the year ended March 31, 2005 to $710.0 million for the year ended March 31, 2006. The increase reflects our largest slate of releases in company history and expansion of our hand-held presence with products for PSP, NDS, and GBA. This was offset by weaker market conditions resulting in higher provisions for returns and price protection. North America publishing net

    51


    revenues decreased as a percentage of consolidated net revenues from 50% for year ended March 31, 2005 to 48% for the year ended March 31, 2006. The decrease is due to a larger increase in our international publishing net revenues due to successful expansion efforts into new territories and the strong performance of our affiliate titles in Europe.

    International Publishing Net Revenues (in thousands)

    March 31,

     

    % of
    Consolidated

     

    March 31,

     

    % of
    Consolidated

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenues

     

    2005

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    444,623

     

    30

    %

    $

    376,404

     

    27

    %

    $

    68,219

     

    18

    %

    International publishing net revenues increased by 18% from $376.4 million for the year ended March 31, 2005 to $444.6 million for the year ended March 31, 2006. Additionally, international publishing net revenues as a percentage of consolidated net revenues increased from 27% for the year ended March 31, 2005 to 30% for the year ended March 31, 2006. The increases were due mainly to our successful expansion efforts into new territories combined with strong performance from our affiliate label products which included the successful LucasArts’ titles, Star Wars: Revenge of the Sith and Star Wars Battlefront II. The increase in international publishing net revenues was partially offset by a weakening of the EUR and the GBP in relation to the USD of approximately $14.5 million. Excluding the impact of changing foreign currency rates, our international publishing net revenues increased 22% year over year.

    Publishing Net Revenues by Platform

    Publishing net revenues increased 8% from $1,072.7 million for the year ended March 31, 2005 to $1,154.7 million for the year ended March 31, 2006. The following table details our publishing net revenues by platform and as a percentage of total publishing net revenues for the years ended March 31, 2006 and 2005 (in thousands):

     

     

    Year Ended

     

    % of

     

    Year Ended

     

    % of

     

     

     

     

     

     

     

    March 31,

     

    Publishing

     

    March 31,

     

    Publishing

     

    Increase/

     

    Percent

     

     

     

    2006

     

    Net Revs

     

    2005

     

    Net Revs

     

    (Decrease)

     

    Change

     

    Publishing Net Revenues

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    PC

     

    $

    183,457

     

    16

    %

    $

    220,087

     

    21

    %

    $

    (36,630

    )

    (17

    )%

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Console

     

     

     

     

     

     

     

     

     

     

     

     

     

    Sony PlayStation 2

     

    422,239

     

    36

    %

    417,310

     

    39

    %

    4,929

     

    1

    %

    Microsoft Xbox

     

    205,864

     

    18

    %

    196,894

     

    18

    %

    8,970

     

    5

    %

    Microsoft Xbox360

     

    102,809

     

    9

    %

    —

     

    —

    %

    102,809

     

    —

    %

    Nintendo GameCube

     

    80,964

     

    7

    %

    96,936

     

    9

    %

    (15,972

    )

    (16

    )%

    Other

     

    469

     

    —

    %

    2,807

     

    —

    %

    (2,338

    )

    (83

    )%

    Total console

     

    812,345

     

    70

    %

    713,947

     

    66

    %

    98,398

     

    14

    %

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Hand-held

     

     

     

     

     

     

     

     

     

     

     

     

     

    Game Boy Advance

     

    79,738

     

    7

    %

    101,796

     

    9

    %

    (22,058

    )

    (22

    )%

    PlayStation Portable

     

    52,016

     

    5

    %

    19,200

     

    2

    %

    32,816

     

    171

    %

    Nintendo Dual Screen

     

    27,107

     

    2

    %

    17,699

     

    2

    %

    9,408

     

    53

    %

    Total hand-held

     

    158,861

     

    14

    %

    138,695

     

    13

    %

    20,166

     

    15

    %

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total publishing net revenues

     

    $

    1,154,663

     

    100

    %

    $

    1,072,729

     

    100

    %

    $

    81,934

     

    8

    %

    Personal Computer Net Revenues (in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenues

     

    2005

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    183,457

     

    16

    %

    $

    220,087

     

    21

    %

    $

    (36,630

    )

    (17

    )%

    Net revenues from sales of titles for the PC decreased 17% from $220.1 million and 21% of publishing net revenues for the year ended March 31, 2005 to $183.5 million and 16% of publishing net revenues for the year ended

    52


    March 31, 2006. The decrease in both absolute dollars and as a percentage of publishing revenue was due to the slate of PC titles released in fiscal 2005 in comparison to fiscal 2006. In fiscal 2005, we released the highly successful PC titles Doom 3 and Rome: Total War and also had strong continued sell through of our catalog title, Call of Duty. Although we had strong sales from our fiscal 2006 PC titles, Call of Duty 2, The Movies, and Quake 4, in fiscal 2005, according to NPD Funworld, we were the only publisher to have three top-ten PC titles for calendar year 2004.

    Sony PlayStation 2 Net Revenues (in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenues

     

    2005

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    422,239

     

    36

    %

    $

    417,310

     

    39

    %

    $

    4,929

     

    1

    %

    Net revenues from sales of titles for the PS2 increased 1% from $417.3 million for the year ended March 31, 2005 to $422.2 million for the year ended March 31, 2006. The slight increase was primarily due to an increase in the number of major titles released for the PS2 from seven major titles in fiscal 2005 to nine major titles in fiscal 2006. This increase was offset by an increase in the provision for returns and price protection on new releases due to weaker market conditions. In addition, Madagascar, which was our fifth best selling PS2 title for fiscal 2006 in terms of units sold, was released at a lower initial retail pricing point of $39.99 compared to $49.99 for comparable children’s titles in fiscal 2005. As a percentage of publishing net revenues, net revenues from sales of titles for the PS2 decreased from 39% for the year ended March 31, 2005 to 36% for the year ended March 31, 2006. The decrease is due to a change in our platform revenue mix due to the introduction of the Xbox360.

    Microsoft Xbox Net Revenues (in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenues

     

    2005

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    205,864

     

    18

    %

    $

    196,894

     

    18

    %

    $

    8,970

     

    5

    %

    Net revenues from sales of titles for the Xbox increased 5% from $196.9 million for the year ended March 31, 2005 to $205.9 million for the year ended March 31, 2006 and held steady as a percentage of publishing net revenues at 18%. The increase was primarily attributable to the strong performance of our first quarter fiscal 2006 Xbox exclusive release of Doom 3 which had no comparable Xbox exclusive title released in fiscal 2005. This increase was offset by increased provisions for returns and price protection in anticipation of quicker required pricing actions as a result of the introduction of the Xbox360, which is expected to result in a gradual slowdown in sales for the Xbox as customers upgrade or anticipate upgrading to the next-generation platform.

    Microsoft Xbox360 Net Revenues (in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenues

     

    2005

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    102,809

     

    9

    %

    $

    —

     

    —

    %

    $

    102,809

     

    —

    %

    The Xbox360 was released in November 2005 and was the first of the next-generation hardware to be released. Consistent with our goal of having a significant presence at the launch of each new platform, we released four titles concurrently with the release of the Xbox360, Call of Duty 2, THAW, Quake 4, and GUN. All of these titles were released at premium retail pricing of $59.99. Although limited by hardware availability in fiscal 2006, we experienced strong sales of these four titles, and, according to NPD Funworld, Call of Duty 2 was the number one title on the Xbox360 and had the highest attach rate of any console launch in video game history.

    53


    Nintendo GameCube Net Revenues (in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenues

     

    2005

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    80,964

     

    7

    %

    $

    96,936

     

    9

    %

    $

    (15,972

    )

    (16

    )%

    Net revenues from sales of titles for the Nintendo GameCube decreased 16% from $96.9 million for the year ended March 31, 2005 to $81.0 million for the year ended March 31, 2006. Despite an increase in the number of titles released for the GameCube from seven major titles for the year ended March 31, 2005 to nine major titles for the year ended March 31, 2006, the releases in fiscal 2006, which included GUN, Call of Duty 2: Big Red One, THAW, and True Crime: New York City, were less geared toward the demographics of the GameCube audience as compared to our fiscal 2005 title releases, which included Spider-Man 2 and Shrek 2. Additionally, Madagascar, which was our top selling title on the GameCube in fiscal 2006,was released at a lower initial retail pricing of $39.99 as compared to Spider-Man 2 and Shrek 2, which were both released at an initial retail price of $49.99. Madagascar was our top selling title on the GameCube for fiscal 2006 and although it performed strongly, it compares to fiscal 2005 where our top two selling titles on the GameCube were Spider-Man 2 and Shrek 2, each of which outperformed Madagascar.

    Hand-held (in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenues

     

    2005

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    158,861

     

    14

    %

    $

    138,695

     

    13

    %

    $

    20,166

     

    15

    %

    Net revenues from sales of titles for the hand-held for the year ended March 31, 2006 increased 15% from the prior fiscal year, from $138.7 million to $158.9 million. Additionally, hand-held net revenues as a percentage of publishing net revenues increased from 13% for the year ended March 31, 2005 to 14% for the year ended March 31, 2006. The increases were due to the worldwide introductions of the NDS and PSP hand-held platforms in late fiscal 2005 and the continued growth of their installed base throughout fiscal 2006, which resulted in hand-held titles being sold across more platforms. In addition, compared to the other hand-held platforms, titles for the PSP have a higher retail pricing point of $49.99. The major titles driving hand-held net revenues in fiscal 2006 were Madagascar, Madagascar: Operation Penguin, Fantastic Four, Ultimate Spider-Man, and Shrek SuperSlam for the GBA; Madagascar, Ultimate Spider-Man, Tony Hawk’s American Sk8land, and Shrek SuperSlam for the NDS; and THUG 2, Spider-Man 2, X-Men Legends II, and LucasArts’ Star Wars Battlefront II for the PSP. This compares to fiscal 2005 where the main titles driving hand-held net revenues were Shrek 2, Spider-Man 2, and DreamWorks’ Shark Tale for the GBA; Spider-Man 2 for the NDS; and THUG 2 and Spider-Man 2 for the PSP.

    Distribution Net Revenues (in thousands)

    March 31,

     

    % of
    Consolidated

     

    March 31,

     

    % of
    Consolidated

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenues

     

    2005

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    313,337

     

    21

    %

    $

    333,128

     

    24

    %

    $

    (19,791

    )

    (6

    )%

    Distribution net revenues for the year ended March 31, 2006 decreased 6% from the prior fiscal year, from $333.1 million to $313.3 million. Foreign exchange rates decreased reported distribution net revenues by approximately $14.9 million for the year ended March 31, 2006. Excluding the impact of the changing foreign currency rates, our distribution net revenues decreased $4.9 million or 1% year over year. The remaining year over year decrease was primarily due to the termination of relationships with unprofitable publishers and stronger third-party releases in fiscal 2005.

    The mix of distribution net revenues between hardware and software sales varied year over year with approximately 20% of distribution net revenues from hardware sales in the year ended March 31, 2006 as compared to 13% in the prior fiscal year. This was mainly attributed to the release of the PSP in Europe in the second quarter of

    54


    fiscal 2006 and the release of the Xbox360 in November 2005. In both fiscal years, hardware sales were principally comprised of sales of console hardware.

    Costs and Expenses

    Cost of Sales – Product Costs (in thousands)

    March 31,

     

    % of
    Consolidated

     

    March 31,

     

    % of
    Consolidated

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenues

     

    2005

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    734,874

     

    50

    %

    $

    658,949

     

    47

    %

    $

    75,925

     

    12

    %

    Cost of sales – product costs represented 50% and 47% of consolidated net revenues for the years ended March 31, 2006 and 2005, respectively. In absolute dollars, cost of sales – product costs increased 12% from $658.9 million for the year ended March 31, 2005 to $734.9 million for the year ended March 31, 2006. The primary factors affecting the increase in cost of sales – product costs in absolute dollars and as a percentage of consolidated net revenues were:

    •                  Volume growth in our European territories of LucasArts’ Star Wars: Episode III Revenge of the Sith, and Star Wars Battlefront II. LucasArts’ titles are part of our affiliate label program and carry a significantly higher product cost than Activision developed titles.

    •                  Write-downs of inventory costs for certain titles in fiscal 2006 in the amount of $14.5 million due to the high level of inventory for certain titles at the end of our third quarter of fiscal 2006. At the end of the third quarter of fiscal 2006 we reviewed the levels of inventory and determined that, due to lower than expected re-orders caused by weaker market conditions and the ongoing console transition, we anticipated that certain titles in our inventory would likely be sold below its original cost.

    •                  A decrease in our PC net revenues as a percentage of publishing net revenues from 21% in fiscal 2005 to 16% in fiscal 2006. Products for PC typically have lower costs of sales – product costs associated with them as they do not require royalty payments to hardware manufacturers.

    •                  An increase in provision for returns and price protection throughout fiscal 2006 from 12% of net revenues in fiscal 2005 compared to 18% of net revenues in fiscal 2006, due to challenging market conditions and the ongoing console transition.

    •                  An increase in consolidated net revenues of 4% from $1,405.9 million for the year ended March 31, 2005 to $1,468.0 million for the year ended March 31, 2006.

    •                  Reduced pricing on a number of catalog titles as well as new releases in our kids genre.

    Cost of Sales –Software Royalties and Amortization (in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenues

     

    2005

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    147,822

     

    13

    %

    $

    123,800

     

    12

    %

    $

    24,022

     

    19

    %

    Cost of sales – software royalties and amortization for the year ended March 31, 2006 increased as a percentage of publishing net revenues from the prior fiscal year, from 12% to 13%. In absolute dollars, cost of sales – software royalties and amortization for the year ended March 31, 2006 also increased from the prior fiscal year, from $123.8 million to $147.8 million. The increases in cost of sales – software royalties and amortization in both absolute dollars and as a percentage of publishing net revenues were mainly due to:

    •                  Impairment charges and recoverability write-offs of $12.6 million in fiscal 2006. We performed a detailed review of capitalized costs for released titles and determined that expected future revenues, given the change

    55


    in market conditions, on certain titles would not support the remaining capitalized software balance on these titles. As a result, we incurred a $3.8 million recoverability charge on these titles in fiscal 2006. In addition, we reviewed future recoverability of capitalized amounts on titles in development and determined that one of our titles, to be released in fiscal 2007, was unlikely to fully recover capitalized costs given the change in expectations as a result of weaker market conditions and uncertainty involved in the console transition and, as a result, took an impairment charge of $8.8 million on this title.

    •                  Overall continued increases in costs to develop titles for additional platforms, particularly those titles released for the more technologically advanced next-generation console platforms.

    Cost of Sales – Intellectual Property Licenses (in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenues

     

    2005

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    57,666

     

    5

    %

    $

    62,197

     

    6

    %

    $

    (4,531

    )

    (7

    )%

    Cost of sales – intellectual property licenses for the year ended March 31, 2006 decreased in absolute dollars and as a percentage of publishing net revenues over the same period last year, from $62.2 million to $57.7 and from 6% to 5%, respectively. The decreases in both absolute dollars and as a percentage of publishing net revenues were due mainly to a one-time benefit related to the settlement of an intellectual property claim in the second quarter of fiscal 2006. The number of titles with associated intellectual property remained relatively flat year over year. In fiscal 2006, we released the following titles with associated intellectual property: Doom 3 for the Xbox, Madagascar, Fantastic Four, Ultimate Spider-Man, X-Men Legends II, THAW, Quake IV, and Shrek SuperSlam. In fiscal 2005 we released the following titles with associated intellectual property: Spider-Man 2, Shrek 2, Shark Tale, X-Men Legends, THUG 2, Lemony Snicket’s A Series of Unfortunate Events, and Doom 3.

    Product Development (in thousands)

    March 31,

     

    % of
    Publishing

     

    March 31,

     

    % of
    Publishing

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenues

     

    2005

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    132,651

     

    11

    %

    $

    87,776

     

    8

    %

    44,875

     

    51

    %

    Product development expenses for the year ended March 31, 2006 increased as a percentage of publishing net revenues from the prior fiscal year, from 8% to 11%. In absolute dollars, product development expenses for the year ended March 31, 2006 also increased from the prior fiscal year, from $87.8 million to $132.7 million. The increase in product development expenses both in absolute dollars and as a percentage of publishing net revenues was due to:

    •                  Increased development, quality assurance, and outside developer costs as a result of the development of more technologically advanced titles across more platforms.

    •                  Product cancellation charges of $11.4 million, including termination fees, incurred during fiscal 2006. Given the market conditions, the lower than expected performance of some of our third quarter fiscal 2006 releases, and risks associated with console transition, we performed a thorough review of our upcoming product slate. To better align opportunities associated with the next-generation console platforms with income potential and risks associated with certain titles in development, we canceled development of certain titles and permanently removed them from our future title slate.

    •                  Increased costs in fiscal 2006 related to the full year operation of three recently acquired studios, Vicarious Visions, Inc., Toys for Bob, Inc., and Beenox, Inc., as well as costs incurred to fund more product development capacity at certain studios.

    56


    Sales and Marketing (in thousands)

    March 31,

     

    % of
    Consolidated

     

    March 31,

     

    % of
    Consolidated

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenue

     

    2005

     

    Net Revenue

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    283,395

     

    19

    %

    $

    230,299

     

    16

    %

    53,096

     

    23

    %

    Sales and marketing expenses of $283.4 million and $230.3 million represented 19% and 16% of consolidated net revenues for the years ended March 31, 2006 and 2005, respectively. The increases in both absolute dollars and as a percentage of net revenues was primarily generated by our publishing business as a result of significant marketing programs including television and in-theatre ad campaigns and in-store promotions to support our biggest product release slate in company history. The increase in sales and marketing investment as a percentage of net revenues was a result of additional sales and marketing investment during the key holiday season which did not provide the revenue increase that was anticipated at the time that the marketing costs were incurred.

    General and Administrative (in thousands)

    March 31,

     

    % of
    Consolidated

     

    March 31,

     

    % of
    Consolidated

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenues

     

    2005

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    96,366

     

    7

    %

    $

    63,228

     

    4

    %

    33,138

     

    52

    %

    General and administrative expenses for the year ended March 31, 2006 increased $33.1 million over the same period last year, from $63.2 million to $96.4 million.  As a percentage of consolidated net revenues, general and administrative expenses increased from 4% to 7%. The increases were primarily due to an increase in personnel costs including costs related to European territory expansion, separation and severance costs associated with a less than 7% reduction in workforce in the fourth quarter of fiscal 2006, increased bad debt write-offs, an increase in foreign currency transaction losses, and increased legal costs.

    Operating Income (in thousands)

     

     

     

     

    % of

     

     

     

    % of

     

     

     

     

     

     

     

    March 31,

     

    Segment

     

    March 31,

     

    Segment

     

    Increase/

     

    Percent

     

     

     

    2006

     

    Net Revs

     

    2005

     

    Net Revs

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Publishing

     

    $

    (6,715

    )

    (1

    )%

    $

    155,863

     

    15

    %

    $

    (162,578

    )

    (104

    )%

    Distribution

     

    21,941

     

    7

    %

    23,745

     

    7

    %

    (1,804

    )

    (8

    )%

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Consolidated

     

    $

    15,226

     

    1

    %

    $

    179,608

     

    13

    %

    $

    (164,382

    )

    (92

    )%

    Publishing operating income for the year ended March 31, 2006 decreased $162.6 million from the same period last year, from $155.9 million to an operating loss of $6.7 million. The decrease is primarily due to:

    •                  Increased sales and marketing spending to support our large title release slate.

    •                  An increase in provision for returns and price protection throughout fiscal 2006 from 12% of net revenues in fiscal 2005 compared to 18% of net revenues in fiscal 2006, due to challenging market conditions and the ongoing console transition.

    •                  Cancellation, impairment, and earn-out recoverability charges totaling $24.0 million taken in fiscal 2006. See additional description of charges incurred in the cost of sales – software royalties and amortization and the product development discussions.

    57


    •                  Write-downs of inventory costs of $14.5 million taken during fiscal 2006. See additional description in the cost of sales – product costs discussion.

    Distribution operating income for the year ended March 31, 2006 decreased over the same period last year, from $23.7 million to $21.9 million. The decrease was primarily due to the impact of changes in foreign currency rates on distribution operating income of approximately $1.4 million. Excluding the impact of changes in foreign currency rates, distribution operating income for the year ended March 31, 2006 decreased approximately $0.4 million or 2% from the same period last year.

    Investment Income, Net (in thousands)

    March 31,

     

    % of
    Consolidated

     

    March 31,

     

    % of
    Consolidated

     

    Increase/

     

    Percent

     

    2006

     

    Net Revenues

     

    2005

     

    Net Revenues

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    30,630

     

    2

    %

    $

    13,092

     

    1

    %

    $

    17,538

     

    134

    %

    Investment income, net for the year ended March 31, 2006 was $30.6 million as compared to $13.1 million for the year ended March 31, 2005. The increase was primarily due to higher invested balances combined with rising yields, a realized gain in the first quarter of fiscal 2006 of $1.3 million on the sale of an investment in common stock, and a realized gain of $2.9 million on the sale of a cost basis investment during the year ended March 31, 2006 as compared to 2005.

    Provision for Income Taxes (in thousands)

     

     

    % of

     

     

     

    % of

     

     

     

     

     

    March 31,

     

    Pre Tax

     

    March 31,

     

    Pre Tax

     

    Increase/

     

    Percent

     

    2006

     

    Income

     

    2005

     

    Income

     

    (Decrease)

     

    Change

     

     

     

     

     

     

     

     

     

     

     

     

     

    $

    5,605

     

    12

    %

    $

    57,643

     

    30

    %

    $

    (52,038

    )

    (90

    )%

    The income tax provision of $5.6 million for the year ended March 31, 2006 reflects our effective income tax rate of 12%, which differs from our effective rate of 30% for the year ended March 31, 2005, due to an increase in federal research and development credit for the year ended March 31, 2006, over the amount generated for the year ended March 31, 2005, and a decrease in pretax income for the year ended March 31, 2006, versus the amount of pretax income for the year ended March 31, 2005, without a corresponding decrease in the benefit of book/tax. The significant items that generated the variance between our effective rate and our statutory rate of 35% were research and development tax credits and the impact of foreign tax rate differentials, partially offset by an increase in our deferred tax asset valuation allowance and state taxes. The realization of deferred tax assets depends primarily on the generation of future taxable income. We believe that it is more likely than not that we will generate taxable income sufficient to realize the benefit of net deferred tax assets recognized.

    Net Income

    Net income for the year ended March 31, 2006 was $40.3 million or $0.14 per diluted share, as compared to $135.1 million or $0.49 per diluted share for the year ended March 31, 2005.

    58


    Selected Quarterly Operating Results

            

    Our quarterly operating results have in the past varied significantly and will likely vary significantly in the future, depending on numerous factors, several of which are not under our control. See Item 1A - “Risk1A—"Risk Factors.”" Our business also has experienced and is expected to continue to experience significant seasonality, largely due to consumer buying patterns and our product release schedule focusing on those patterns. Net revenues typically are significantly higher during the fourth calendar quarter, primarily due to the increased demand for consumer software during the year-end holiday buying season. Accordingly, we believe that period to period comparisons of our operating results are not necessarily meaningful and should not be relied upon as indications of future performance.

            

    The following table is a comparative breakdown of our unaudited quarterly results for the immediately preceding eight quarters (amounts in thousands, except per share data):

     

     

    For the quarters ended

     

     

     

    March 31,
    2007

     

    Dec. 31,
    2006

     

    Sept. 30,
    2006

     

    June 30,
    2006

     

    March 31,
    2006

     

    Dec. 31,
    2005

     

    Sept. 30,
    2005

     

    June 30,
    2005

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Net revenues

     

    $

    312,512

     

    $

    824,259

     

    $

    188,172

     

    $

    188,069

     

    $

    188,125

     

    $

    816,242

     

    $

    222,540

     

    $

    241,093

     

    Cost of sales

     

    216,007

     

    483,180

     

    141,078

     

    137,800

     

    128,309

     

    498,325

     

    141,458

     

    172,270

     

    Operating income (loss)

     

    (29,114

    )

    173,120

     

    (37,410

    )

    (33,449

    )

    (26,560

    )

    83,893

     

    (27,788

    )

    (14,319

    )

    Net income (loss)

     

    (14,422

    )

    142,820

     

    (24,302

    )

    (18,309

    )

    (9,128

    )

    67,856

     

    (14,230

    )

    (4,247

    )

    Basic earnings (loss) per share (1)

     

    (0.05

    )

    0.51

     

    (0.09

    )

    (0.07

    )

    (0.03

    )

    0.25

     

    (0.05

    )

    (0.02

    )

    Diluted earnings (loss) per share (1)

     

    (0.05

    )

    0.46

     

    (0.09

    )

    (0.07

    )

    (0.03

    )

    0.23

     

    (0.05

    )

    (0.02

    )

     
    		 For the quarters ended
    		 
     
    		 March 31,
    2008
    		 Dec. 31,
    2007
    		 Sept. 30,
    2007
    		 June 30,
    2007
    		 March 31,
    2007
    		 Dec. 31,
    2006
    		 Sept. 30,
    2006
    		 June 30,
    2006
    		 
    Net revenues $602,451 $1,482,484 $317,746 $495,455 $312,512 $824,259 $188,172 $188,069 
    Cost of sales  350,229  762,290  204,956  327,960  216,007  483,180  141,078  137,800 
    Operating income (loss)  54,533  404,534  (9,545) 30,092  (29,114) 173,120  (37,410) (33,449)
    Net income (loss)  44,163  272,196  698  27,826  (14,422) 142,820  (24,302) (18,309)
    Basic earnings (loss) per share  0.15  0.93  0.00  0.10  (0.05) 0.51  (0.09) (0.07)
    Diluted earnings (loss) per share  0.14  0.86  0.00  0.09  (0.05) 0.46  (0.09) (0.07)

    (1)                                  Consolidated financial information has been restated for the effect of our four-for-three stock split effected in the form of a 33-1/3% stock dividend to shareholders of record as of October 10, 2005, paid October 24, 2005.

    59


    Liquidity and Capital Resources

    Sources of Liquidity

     
    		 As of and for the
    years ended March 31,
    		  
    		 
     
    		 Increase/
    (Decrease)
    		 
     
    		 2008
    		 2007
    		 
     
    		 (amounts in thousands)

    		 
    Cash and cash equivalents $1,396,250 $384,409 $1,011,841 
    Short-term investments  52,962  570,440  (517,478)
      
    		 
    		 
    		 
      $1,449,212 $954,849 $494,363 
      
    		 
    		 
    		 

    Percentage of total assets
     
     
    57
    %
     
    53
    %
     
     
     

    Cash flows provided by operating activities
     
    $
    573,500
     
    $
    27,162
     
    $
    546,338
     
    Cash flows provided by (used in) investing activities  326,291  (35,242) 361,533 
    Cash flows provided by financing activities  105,163  27,968  77,195 

            

     

     

    As of and for the
    year ended March 31,

     

    Increase/

     

    (in thousands)

     

    2007

     

    2006

     

    (Decrease)

     

    Cash and cash equivalents

     

    $

    384,409

     

    $

    354,331

     

    $

    30,078

     

    Short-term investments

     

    570,440

     

    590,629

     

    (20,189

    )

     

     

     

     

     

     

     

     

     

     

    $

    954,849

     

    $

    944,960

     

    $

    9,889

     

     

     

     

     

     

     

     

     

    Percentage of total assets

     

    53

    %

    67

    %

     

     

     

     

     

     

     

     

     

     

    Cash flows provided by operating activities

     

    $

    27,162

     

    $

    86,007

     

    $

    (58,845

    )

    Cash flows used in investing activities

     

    (35,242

    )

    (85,796

    )

    50,554

     

    Cash flows provided by financing activities

     

    27,968

     

    45,088

     

    (17,120

    )

    As of March 31, 2007,2008, our primary source of liquidity is comprised of $384.4$1,396.3 million of cash and cash equivalents and $570.4$53.0 million of short-term investments. Over the last two years, our primary sources of liquidity have included cash on hand at the beginning of the year and cash flows generated from continuing operations. We have also generated cash flows from the issuance of our common stock to employees through the exercise of options, which is described in more detail below in “Cash"Cash Flows from Financing Activities.”" We have not utilized debt financing as a significant source of cash flows. However, we do have available at certain of our international locations credit facilities, which are described below in “Credit"Credit Facilities,”" that can be utilized if needed.

            Following the closing of our proposed business combination with Vivendi Games, Inc. (see Note 20 of the Notes to Consolidated Financial Statements included in Item 8), Activision Blizzard, Inc. ("Activision Blizzard") will commence a cash tender offer for up to 146.5 million of its shares at $27.50 per share. If the tender offer is fully subscribed, the aggregate consideration will be approximately $4.028 billion. Under the terms of the business combination agreement ("BCA"), we and Vivendi S.A. ("Vivendi") have agreed the purchase of the shares tendered in the tender offer will be funded as follows: (a) the first $2.928 billion of the aggregate consideration will be funded by Activision Blizzard with proceeds from the share purchase described in Note 20 of the Notes to Consolidated Financial Statements included in Item 8, available cash on hand and, if necessary, borrowings made under one or more new credit facilities; (b) if the aggregate consideration is more than $2.928 billion, Vivendi has agreed to purchase from Activision Blizzard, at a purchase price of $27.50 per share, additional newly issued shares of Activision Blizzard common stock in an amount equal to the lesser of (x) $700.0 million and (y) the excess of the aggregate consideration over $2.928 billion, which amount will be used to fund the amount of the aggregate consideration that is in excess of $2.928 billion; and (c) if the aggregate consideration exceeds $3.628 billion, Activision Blizzard will fund the additional amount of the aggregate consideration that is in excess of $3.628 billion (up to the maximum aggregate consideration of $4.028 billion) through borrowings made under the new credit facilities issued by Vivendi (see below and Note 21 of the Notes to Consolidated Financial Statements included in Item 8.)

            On April 29, 2008, we, acting on behalf of Activision Blizzard, entered into a senior unsecured credit agreement (the "Credit Agreement") with Vivendi. Borrowings under the Credit Agreement cannot be effected until the consummation of the transactions contemplated by the business combination agreement described above (the "Transactions.") After the closing of the Transactions, among other things, the Company's name will be changed to Activision Blizzard.

            After the closing of the Transactions, the Credit Agreement will provide Activision Blizzard with (i) a term loan credit facility (the "Tranche A Facility") in an aggregate amount of up to $400.0 million to be applied to fund that portion of the post-closing tender offer consideration in excess of



    $3.628 billion as set forth in the BCA, (ii) a term loan credit facility (the "Tranche B Facility") in an aggregate amount of up to $150.0 million to be applied to repay certain indebtedness of Vivendi Games after the closing in accordance with the terms of the BCA, and (iii) a revolving credit facility (the "Revolving Facility," and collectively with the Tranche A Facility and the Tranche B Facility, the "New Credit Facilities") in an aggregate amount of up to $475.0 million to be used after the closing of the Transactions for general corporate purposes. In the event the BCA terminates prior to the closing of the Transactions, the New Credit Facilities will terminate effective on the same date (see Note 21 of the Notes to Consolidated Financial Statements included in Item 8).

    We believe that we have sufficient working capital ($1,060.11,423.3 million at March 31, 2007)2008), as well as proceeds available from our international credit facilities, to finance our operational requirements for at least the next twelve months, including purchases of inventory and equipment, the funding of the development, production, marketing and sale of new products, and the acquisition of intellectual property rights for future products from third parties.parties and the completion of the tender offer in connection with the combination with Vivendi Games.

    Cash Flows from Operating Activities

            

    The primary source of cash flows fromprovided by operating activities typically have included the collection of customer receivables generated by the sale of our products, offset by payments to vendors for the manufacture, distribution, and marketing of our products, third-party developers and intellectual property holders, and our own employees. For the years ended March 31, 2008 and 2007, cash flows from operating activities were $573.5 million and $27.2 million, respectively. The principal components comprising cash flows from operating activities for the year ended March 31, 2008 included an increase in amounts collected from customers due to increased net revenues, an increase in accounts payable, accrued expenses and other liabilities partially offset by the increase in inventory and accounts receivables. See an analysis of the change in key balance sheet accounts below in "Key Balance Sheet Accounts." We expect that a primary source of future liquidity, both short-term and long-term, will be the result of cash flows from continuing operations.

    A significant operating use of our cash relates to our continued investment in software development and intellectual property licenses. We spent approximately $168.8 million and $166.1 million and $193.9 million infor the years ended March 31, 20072008 and 2006,2007, respectively, in connection with the acquisition of publishing or distribution rights for products being developed by third parties, the execution of new license agreements granting us long-term rights to intellectual property of third parties, as well as the capitalization of product development costs relating to internally developed products. The decrease period over period is primarily due to new agreements with DreamWorks Animation LLC, Marvel Characters which were signed in fiscal 2006, partially offset by increased product development costs related to titles in development and additional intellectual property licenses in fiscal 2007. We expect that we will continue to make significant expenditures relating to our investment in software development and intellectual property licenses. Our future cash commitments relating to these investments are detailed below in “Commitments.”"Commitments." Cash flows from operations are affected by our ability to release highly successful or “hit”"hit" titles. Though many of these titles have substantial production or acquisition costs and marketing expenditures, once a title recoups these costs, incremental net revenues typically will directly and positively impact cash flows.

    For the years ended March 31, 2007 and 2006, cash flows from operating activities were $27.2 million and $86.0 million, respectively. The principal components comprising cash flows from operating activities for the year ended March 31, 2007, included favorable operating results, amortization of capitalized software development costs and intellectual property licenses, increases in payables and accrued liabilities, partially offset by investments in software development and intellectual property licenses and increases in accounts receivables. See an analysis of the

    60


    change in key balance sheet accounts below in “Key Balance Sheet Accounts.”  We expect that a primary source of future liquidity, both short-term and long-term, will be the result of cash flows from continuing operations.

    Cash Flows from Investing Activities

            

    The primary source of cash used in investing activities typically have included capital expenditures, acquisitions of privately held interactive software development companies and publishing companies, and the net effect of purchases and sales/maturities of short-term investment vehicles. The goal of our short-term investments is to maximize return while minimizing risk, maintaining liquidity, coordinating with anticipated working capital needs, and providing for prudent investment diversification.

            

    For the years ended March 31, 20072008 and 2006,2007, cash flows provided by and used in investing activities were $35.2$326.3 million and $85.8$35.2 million, respectively. For the year ended March 31, 2007,2008, cash



    flows used inprovided by investing activities were primarily the result of cash paid for business acquisitions and capital expenditures, purchases of short-term investments, partially offset by proceeds from sales and maturities of investments, as offset by cash paid for business acquisitions, capital expenditures, and purchases of short-term investments. The decreaseincrease in cash flows used inprovided by investing activities versus the prior year was primarily related to our short term investment activityactivities as we had a bigger net proceeds from sales and maturities of investments, particularly in the fourth quarter fiscal 2007 versus net purchases2008 as compared to that of short term investmentsfiscal 2007. Such activities were carried out in fiscal 2006.anticipation of the close of the BCA with Vivendi and the related tender offer (see Note 20 of the Notes to Consolidated Financial Statements included in Item 8), and are part of the reason for the substantial increase in cash and cash equivalents of approximately $1 billion. We have historically financed our acquisitions through the issuance of shares of common stock or a combination of common stock and cash. We

            Due to uncertainties surrounding the timing of liquidation of our auction rate securities, which are comprised of AAA-rated student-loan-backed taxable securities, all our investments in such securities were classified as long-term investments in our consolidated balance sheets as of March 31, 2008. Liquidity for these auction rate securities is typically provided by an auction process which allows holders to sell their notes and resets the applicable interest rate at pre-determined intervals, usually every 7 to 35 days. On an industry-wide basis, many auctions have failed, and there is, as yet, no meaningful secondary market for these instruments. Each of the auction rate securities in our investment portfolio as of March 31, 2008 has experienced a failed auction and there is no assurance that future auctions for these securities will succeed. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers. In the event that there is a failed auction, the indenture governing the security requires the issuer to pay interest at a contractually defined rate that is generally above market rates for other types of similar short-term instruments. The securities for which auctions have failed will continue to evaluateearn interest at the contractual rate and be auctioned every 7 to 35 days until the auction succeeds, the issuer calls the securities or they mature. As a result, our ability to liquidate and fully recover the carrying value of our auction rate securities in the near term may be limited or not exist.

            As there is not yet any meaningful secondary market for these securities, quoted market prices are not available. We estimated the fair market value using valuation models, which take into account both observable market data and non-observable factors, including credit quality, duration, insurance wraps, collateral composition, maximum rate formulas, comparable trading instruments, and likelihood of redemption. Accordingly, we consider the values generated by such valuation models to represent management's best estimate of fair value for the purposes of applying the Statement of Financial Accounting Standards No. 115Accounting for Certain Investments in Debt and Equity Securities.

            The change in fair value of the auction rate securities of $4.3 million was recorded as a component of comprehensive income (loss) in the Consolidated Statement of Changes in Shareholders' Equity for the year ended March 31, 2008, as the decline in fair value is not considered to be "other-than-temporary." We have the intent and ability to hold these securities for a period of time sufficient for a recovery of fair value up to (or beyond) the initial cost of the investment.

            Based on our other available cash and expected operating cash flows and financing, we do not anticipate the potential acquisition candidates aslack of liquidity on these investments will affect our ability to execute our current business plan or to consummate the benefit they bringproposed post-closing tender offer described in Note 20 of the Notes to us.Consolidated Financial Statements included in Item 8. Additionally we have received indications from certain lenders that we may borrow against the par value of the securities at competitive rates.

    Cash Flows from Financing Activities

            

    The primary source of cash provided byfrom financing activities has been transactions involving our common stock, including the issuance of shares of common stock to employees. We have not utilized debt



    financing as a significant source of cash flows. However, we do have available at certain of our international locations, credit facilities, which are described below in “Credit"Credit Facilities,”" that can be utilized if needed.

            

    For the years ended March 31, 20072008 and 2006,2007, cash flows fromprovided by financing activities were $28.0$105.2 million and $45.1$28.0 million, respectively. The increase in cash provided by financing activities for the year ended March 31, 20072008 was the result of the issuance of common stock related to employee stock optionequity incentive and stock purchase plans. The decreaseincrease in cash provided by financing activities fromstock option exercises was primarily due to the prior year is due toperformance of our share price and the release in June 2007 of the suspension of stock option exercises as of November 9, 2006 dueimplemented while we were not current with the filings we are required to our internal review of historical stock option granting practices.make pursuant to the Exchange Act.

            

    During fiscal 2003, our Board of Directors authorized a buyback program under which we can repurchase up to $350.0 million of our common stock. Under the program, shares may be purchased as determined by management and within certain guidelines, from time to time, in the open market or in privately negotiated transactions, including privately negotiated structured stock repurchase transactions and through transactions in the options markets. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time or from time to time without prior notice. As of March 31, 2007,2008, we had approximately $226.2 million available for utilization under the buyback program. We actively manage our capital structure as a component of our overall business strategy. Accordingly, in the future, when we determine that market conditions are appropriate, we may seek to achieve long term value for the shareholders through, among other things, new debt or equity financings or refinancings, share repurchases, and other transactions involving our equity or debt securities.

    61


    Key Balance Sheet Accounts

    Accounts Receivable

     
    		 March 31,
    2008
    		 March 31,
    2007
    		 Increase/
    (Decrease)
     
    		 (amounts in thousands)

    Gross accounts receivable $332,831 $240,112 $92,719
    Net accounts receivable  203,420  148,694  54,726

     

     

     

     

     

     

    Increase/

     

    (amounts in thousands)

     

    March 31, 2007

     

    March 31, 2006

     

    (Decrease)

     

     

     

     

     

     

     

     

     

    Gross accounts receivable

     

    $

    240,112

     

    $

    127,035

     

    $

    113,077

     

    Net accounts receivable

     

    148,694

     

    28,782

     

    119,912

     

    The increase in gross accounts receivable was primarily the result of higher fourth quarter revenues due to:

    •                  The fourth quarter fiscal 2007 European release of the PS3 hardware.

    •                  Late fourth quarter fiscal 2007 European releases of Call of Duty3, Tony Hawk’s Project 8, and Marvel: Ultimate Alliance for the PS3. There were no corresponding new releasesincreased sales volume in the fourth quarter of fiscal 2006.

    •                  Continued strong catalogue performance2008 of our 2006 holiday slate.

    successful titlesCall of Duty 4: Modern Warfare andGuitar Hero III: Legends of Rock leading to higher net revenues for the fourth quarter fiscal 2008 of $602.5 million compared to $312.5 million for the fourth quarter fiscal 2007.

    Reserves for returns, price protection and bad debt decreasedincreased from $98.3 million at March 31, 2006 to $91.4 million at March 31, 2007 whileto $129.4 million at March 31, 2008 whereas reserves as a percentage of gross receivables decreasedincreased from 77%38% to 38%. This decrease was largely due to significant reserves for returns and price protection required39% at March 31, 2006 related2007 and 2008, respectively. This was the result of increases in revenues during the fourth quarter fiscal 2008 as compared to weak market conditions and the uncertainty involved in the ongoing console transition.fourth quarter fiscal 2007. Reserves for returns and price protection are a function of the number of units and pricing of titles in retail inventory, which has been consistently applied. (see description ofAllowances for Returns, Price Protection, Doubtful Accounts, and Inventory Obsolescence in Item 7:Critical Accounting Policies)Policies and Estimates).

    Inventories

    Inventories

     
    		 March 31,
    2008
    		 March 31,
    2007
    		 Increase/
    (Decrease)
     
    		 (amounts in thousands)

    Inventories $146,874 $91,231 $55,643

            

     

     

     

     

     

     

    Increase/

     

    (amounts in thousands)

     

    March 31, 2007

     

    March 31, 2006

     

    (Decrease)

     

     

     

     

     

     

     

     

     

    Inventories

     

    $

    91,231

     

    $

    61,483

     

    $

    29,748

     

    The increase in inventories at March 31, 20072008 compared to March 31, 20062007 is primarily the result of additional inventories associated with RedOctane and the expanding Guitar Hero products, which was acquired in the first quarterfranchise, and larger slate of titles when compared to fiscal 2007 additional PS3 inventory due to the European release of theacross all console late in the fourth quarter of fiscal 2007,platforms and an increase in inventories at our distributioncontinued international business related to the addition of a significant new customer in the second quarter of fiscal 2007.growth.

    Software Development

     
    		 March 31,
    2008
    		 March 31,
    2007
    		 Increase/
    (Decrease)
    		 
     
    		 (amounts in thousands)

    		 
    Software development $109,786 $130,922 $(21,136)

            

     

     

     

     

     

     

    Increase/

     

    (amounts in thousands)

     

    March 31, 2007

     

    March 31, 2006

     

    (Decrease)

     

     

     

     

     

     

     

     

     

    Software development

     

    $

    130,922

     

    $

    60,619

     

    $

    70,303

     

    Software development increaseddecreased from $60.6 million at March 31, 2006 to $130.9 million at March 31, 2007 due to continued investment in software development for titles being developed for release in fiscal 2008, particularly for three significant new games slated for release in the first quarter of fiscal 2008, offset by amortization of software development costs for titles launched in fiscal 2007.

    62


    Intellectual Property Licenses

     

     

     

     

     

     

    Increase/

     

    (amounts in thousands)

     

    March 31, 2007

     

    March 31, 2006

     

    (Decrease)

     

     

     

     

     

     

     

     

     

    Intellectual Property Licenses

     

    $

    100,274

     

    $

    87,046

     

    $

    13,228

     

    Intellectual property licenses increased from $87.0$109.8 million at March 31, 20062008. The decrease in software development was primarily the result of an increase in amortization related to the increase in the number of titles released in fiscal 2008 and stock option expenses for the year ended March 31, 2008, partially offset by our continued investment in Activision's future product slate of titles.

    Intellectual Property Licenses

     
    		 March 31,
    2008
    		 March 31,
    2007
    		 Increase/
    (Decrease)
    		 
     
    		 (amounts in thousands)

    		 
    Intellectual Property Licenses $83,551 $100,274 $(16,723)

            Intellectual property licenses decreased from $100.3 million at March 31, 2007.2007 to $83.6 million at March 31, 2008. The increase in intellectual property licenses was primarily the result of:

    •                  Continued investmentdecrease in intellectual property licenses totaling $23.2 million in fiscal 2007 for license agreements granting us long-term rights to intellectual property of third parties, such as our agreement with MGM Interactive and EON Productions Ltd. to develop and publish interactive entertainment games based onprimarily resulted from the James Bond license.

    Partially offset by:

    •                  $10.0 million of amortization of intellectual property licenses mostly related toupon releases in the first quarter of titles during fiscal 2007.2008.

    Accounts Payable

     
    		 March 31,
    2008
    		 March 31,
    2007
    		 Increase/
    (Decrease)
    		 
     
    		 (amounts in thousands)

    		 
    Accounts payable $129,896 $136,517 $(6,621)

            

     

     

     

     

     

     

    Increase/

     

    (amounts in thousands)

     

    March 31, 2007

     

    March 31, 2006

     

    (Decrease)

     

     

     

     

     

     

     

     

     

    Accounts payable

     

    $

    136,517

     

    $

    88,994

     

    $

    47,523

     

    The increaseslight decrease in accounts payable of $47.5$6.6 million from March 31, 20062007 to March 31, 20072008 primarily reflects amounts due to support the significant launch slate intiming of the first quarterpayment of fiscal 2008 versus no similar launches in the same quarter of fiscal 2007.several items.

    Accrued Expenses and Other Liabilities

     
    		 March 31,
    2008
    		 March 31,
    2007
    		 Increase/
    (Decrease)
     
    		 (amounts in thousands)

    Accrued expenses and other liabilities $426,175 $204,652 $221,523

            

     

     

     

     

     

     

    Increase/

     

    (amounts in thousands)

     

    March 31, 2007

     

    March 31, 2006

     

    (Decrease)

     

     

     

     

     

     

     

     

     

    Accrued expenses

     

    $

    204,652

     

    $

    104,862

     

    $

    99,790

     

    The increase in accrued expenses and other liabilities was primarily driven by:

      •          Tax reserves recorded in fiscal 2007
      Taxes payable as a result of improved profitability leading to utilization of all of our net operating loss carryforwards.



      •
      Increased annual bonuses as a result of companyour record financial performance.



      •
      Increased royalties payable due to higher percentagenet revenues.

    See Note 9 of products being developed externally.the Notes to Consolidated Financial Statements included in Item 8 for details of accrued expenses and other liabilities.


    Capital Requirements

            For the fiscal year ending March 31, 2009, we anticipate total capital expenditures of approximately $35.6 million. Capital expenditures will be primarily for computer hardware and software purchases and various corporate projects.

    Credit Facilities

            

    We have revolving credit facilities with our Centresoft subsidiary located in the UK (the “UK Facility”"UK Facility") and our NBG subsidiary located in Germany (the “German Facility”"German Facility.").

            The UK Facility provided Centresoft with the ability to borrow up to GBP 12.0 million ($23.623.9 million), including issuing letters of credit, on a revolving basis as of March 31, 2007.2008. Furthermore, under the UK Facility, Centresoft provided a GBP 0.6 million ($1.2 million) guarantee for the benefit of our CD Contact subsidiary as of March 31, 2006.2008. The UK Facility bore interest at LIBOR plus 2.0% as of March 31, 2007,2008, is collateralized by substantially all of the assets of the subsidiary and expires in January 2008.

    63


    March 2009. The UK Facility also contains various covenants that require the subsidiary to maintain specified financial ratios related to, among others, fixed charges. As of March 31, 2006,2008, we were in compliance with these covenants. No borrowings were outstanding against the UK Facility as of March 31, 2006.

            The German Facility provided for revolving loans up to EUR 0.5 million ($0.70.8 million) as of March 31, 2007,2008, bore interest at a Eurocurrency rate plus 2.5%, is collateralized by certain of the subsidiary’ssubsidiary's property and equipment and has no expiration date. No borrowings were outstanding against the German Facility as of March 31, 2007.2008.

            

    As of March 31, 2007,2008, we maintained a $7.5$10.0 million irrevocable standby letter of credit. The standby letter of credit is required by one of our inventory manufacturers to qualify for payment terms on our inventory purchases. Under the terms of this arrangement, we are required to maintain on deposit with the bank a compensating balance, restricted as to use, of not less than the sum of the available amount of the letter of credit plus the aggregate amount of any drawings under the letter of credit that have been honored thereunder but not reimbursed. At March 31, 2007,2008, the $7.5$10.0 million deposit is included in short-term investments as restricted cash. No borrowings were outstanding as of March 31, 2007 or 2006.2008.

            

    As of March 31, 2007,2008, our publishing subsidiary located in the UK maintained a EUR 4.07.0 million ($5.311.0 million) irrevocable standby letter of credit. The standby letter of credit is required by one of our inventory manufacturers to qualify for payment terms on our inventory purchases. The standby letter of credit does not require a compensating balance and is collateralized by substantially all of the assets of the subsidiary and expires in August 2007.February 2009. No borrowings were outstanding as of March 31, 2007 or 2006.2008.

    Commitments

            

    Commitments

    In the normal course of business, we enter into contractual arrangements with third parties for non-cancelable operating lease agreements for our offices, for the development of products, as well as for the rights to intellectual property. Under these agreements, we commit to provide specified payments to a lessor, developer, or intellectual property holder, based upon contractual arrangements. Typically, the payments to third-party developers are conditioned upon the achievement by the developers of contractually specified development milestones. These payments to third-party developers and intellectual property holders typically are deemed to be advances and are recoupable against future royalties earned by the developer or intellectual property holder based on the sale of the related game. Additionally, in connection with certain intellectual property right acquisitions and development agreements, we will commit to spend specified amounts for marketing support for the related game(s) which is to be developed or in which the intellectual property will be utilized. Additionally, we lease certain of our



    facilities and equipment under non-cancelable operating lease agreements. Assuming all contractual provisions are met, the total future minimum commitments for these and other contractual arrangements in place as of March 31, 2007,2008, are scheduled to be paid as follows (amounts in thousands):

     
    		 Contractual Obligations(1)
     
    		 Facility &
    Equipment
    Leases
    		 Developer &
    IP
    		 Marketing
    		 Total
    Fiscal years ending March 31,            
     2009 $19,343 $110,771 $41,401 $171,515
     2010  17,028  31,041  22,100  70,169
     2011  14,553  34,086  13,100  61,739
     2012  10,256  16,586  —  26,842
     2013  8,791  21,586  —  30,377
     Thereafter  31,201  26,001  —  57,202
      
    		 
    		 
    		 
      Total $101,172 $240,071 $76,601 $417,844
      
    		 
    		 
    		 
    (1)
    We have omitted FIN 48 liabilities from this table due to the inherent uncertainty regarding the timing of potential issue resolution. Specifically, either (a) the underlying positions have not been fully enough developed under audit to quantify at this time or, (b) the years relating to the issues for certain jurisdictions are not currently under audit. At the adoption date of April 1, 2007, we had $65.5 million of unrecognized tax benefits. At March 31, 2008, we had $74.2 million of unrecognized tax benefits.

    Off Balance Sheet Arrangements

            

     

     

    Contractual Obligations

     

     

     

    Facility &

     

    Developer

     

     

     

     

     

     

     

    Equipment Leases

     

    & IP

     

    Marketing

     

    Total

     

    Fiscal year ending March 31,

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    2008

     

    $

    14,213

     

    $

    67,836

     

    $

    40,254

     

    $

    122,303

     

    2009

     

    13,131

     

    31,579

     

    30,679

     

    75,389

     

    2010

     

    12,070

     

    29,936

     

    100

     

    42,106

     

    2011

     

    9,854

     

    30,586

     

    13,100

     

    53,540

     

    2012

     

    5,543

     

    16,586

     

    —

     

    22,129

     

    Thereafter

     

    17,783

     

    47,586

     

    —

     

    65,369

     

     

     

     

     

     

     

     

     

     

     

    Total

     

    $

    72,594

     

    $

    224,109

     

    $

    84,133

     

    $

    380,836

     

    64


    As of March 31, 20072008 and 2006,2007, we did not have any relationships with unconsolidated entities or financial parties, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we do not have any off balance sheet arrangements and are not exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.

    Related Parties

    From August 2001 until September 2005, one of the members of our Board of Directors was an individual who is a partner in a law firm that has provided legal services to Activision for more than ten years. For the years ended March 31, 2005 and 2004, the years presented in this Annual Report for which that person was a member of the Board of Directors, the fees we paid to the law firm were an insignificant portion of the law firm’s total revenues. We believe that the fees charged to us by the law firm were competitive with the fees charged by other law firms.

    Financial Disclosure

            

    We maintain internal controlscontrol over financial reporting, which generally include those controls relating to the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. We also are focused on our “disclosure"disclosure controls and procedures,”" which as defined by the Securities and Exchange Commission are generally those controls and procedures designed to ensure that financial and non-financial information required to be disclosed in our reports filed with the Securities and Exchange Commission is reported within the time periods specified in the Securities and Exchange Commission’sCommission's rules and forms, and that such information is communicated to management, including our Chief Executive Officers and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

            

    Our Disclosure Committee, which operates under the Board approved Disclosure Committee Charter and Disclosure Controls & Procedures Policy, includes senior management representatives and assists executive management in its oversight of the accuracy and timeliness of our disclosures, as well as in implementing and evaluating our overall disclosure process. As part of our disclosure process, senior finance and operational representatives from all of our corporate divisions and business units prepare quarterly reports regarding their current quarter operational performance, future trends, subsequent events, internal controls, changes in internal controls, and other accounting and disclosure-relevantdisclosure-



    relevant information. These quarterly reports are reviewed by certain key corporate finance representatives. These corporate finance representatives also conduct quarterly interviews on a rotating basis with the preparers of selected quarterly reports. The results of the quarterly reports and related interviews are reviewed by the Disclosure Committee. Finance representatives also conduct reviews with our senior management team, our internal and external counsel, and other appropriate personnel involved in the disclosure process, as appropriate. Additionally, senior finance and operational representatives provide internal certifications regarding the accuracy of information they provide that is utilized in the preparation of our periodic public reports filed with the Securities and Exchange Commission. Financial results and other financial information also are reviewed with the Audit Committee of the Board of Directors on a quarterly basis. As required by applicable regulatory requirements, the Chief Executive Officers and the Chief Financial Officer review and make various certifications regarding the accuracy of our periodic public reports filed with the Securities and Exchange Commission, our disclosure controls and procedures, and our internal control over financial reporting. With the assistance of the Disclosure Committee, we will continue to assess and monitor our disclosure controls and procedures, and our internal controlscontrol over financial reporting, and will make refinements as necessary.

    Recently Issued Accounting Standards and Laws

    In February 2006,December 2007, the FASB issued Statement No. 155 (“141(R),Business Combinations ("SFAS No. 155”141(R)."), Accounting This Statement provides greater consistency in the accounting and financial reporting of business combinations. It requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for Certain Hybridall assets acquired and liabilities assumed, and requires the acquirer to disclose the nature and financial effect of the business combination. Also in December 2007, the FASB issued Statement No. 160.Non-controlling Interests in Consolidated Financial Instruments – An amendment of FASB Statements No. 133 and 140. ("SFAS No. 155160.") This Statement amends FASBAccounting Research Bulletin No. 51,Consolidated Financial Statements, No. 133, Accounting to establish accounting and reporting standards for Derivative Instrumentsthe non-controlling interest in a subsidiary and Hedging Activities, and No. 140, Accounting for Transfers and Servicingthe deconsolidation of Financial Assets and Extinguishments of Liabilities to resolve issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.”a subsidiary. SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips141(R) and principal-only strips are not subject to the requirements of Statement 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends Statement 140 to eliminate the prohibition on a qualifying

    65


    special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is160 are required to be adopted simultaneously and are effective for all financial instruments acquiredthe first annual reporting period beginning on or issued after the beginning of an entity’s first fiscal year that begins after SeptemberDecember 15, 2006.2008 with earlier adoption being prohibited. We do not expect thatcurrently have any non-controlling interests in our subsidiaries, and accordingly the adoption of SFAS No. 155 will160 is not expected to have a material effectimpact on our financial position or results of operations.

    In March 2006, statements. We are currently evaluating the FASB issued Statement No. 156 (“SFAS No. 156”), Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140. SFAS No. 156 amends Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits either the “amortization method”or the “fair value measurement method,”as subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities; permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective in the first fiscal year that begins after September 15, 2006. We do not expect thatimpact from the adoption of SFAS No. 156 will have a material effect141R on our financial position or results of operations.

    Consolidated Financial Statements.

    In July 2006, the FASB issued Final Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest, and penalties, accounting in interim periods, disclosure, and transition. In addition, FIN 48 excludes income taxes from the scope of SFAS No. 5, Accounting for Contingencies.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  Differences between the amounts recognized in the consolidated balance sheets prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. We are currently evaluating the effect that the adoption of FIN 48 will have on our results of operations and financial position.

    In September 2006, the FASB issued Statement No. 157 (“("SFAS No. 157”157"),Fair Value Measurements.SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies underto other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We do not expect that the2007 for financial assets and liabilities and is effective for fiscal years beginning after November 15, 2008 for non-financial assets and liabilities. The adoption of SFAS No. 157 willis not expected to have a material effect on our financial position or results of operations.

    In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 requires the use of both the “iron curtain” and “rollover” approach in quantifying the materiality of misstatements. SAB 108 also discusses the implications of misstatements uncovered upon the application of SAB 108 in situations when a registrant has historically been using either the iron curtain approach or the rollover approach. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 had no impact on our financial position or results of operations.

    In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS No. 158”). This new standard aims to make it easier for investors, employees, retirees and other parties to understand and assess an employer’s financial position and its ability to fulfill the obligations under its benefit plans. SFAS No. 158 requires employers to fully recognize in their financial statements the obligations associated with single-employer defined benefit pension plans, retiree healthcare plans, and other postretirement plans. Specifically, it requires a company to (1) recognize on its balance sheet an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, (2) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year, and (3) recognize changes in the funded status of a plan through comprehensive income in the year in which the changes occur. The adoption of SFAS No. 158 had no impact on our financial position or results of operations.

    66


    In February 2007, the FASB issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities — Liabilities—Including an amendment of FASB Statement No. 115(“ ("SFAS No. 159”159."). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The provisions of SFAS No. 159 are effective for financial statements issued for fiscal years beginning after November 15, 2007. We are evaluating if we will adoptThe adoption of SFAS No. 159 is not expected to have a material effect on our financial position or results of operations.


            In June 2007, the FASB ratified the Emerging Issues Task Force's ("EITF") consensus conclusion on EITF 07-03,Accounting for Advance Payments for Goods or Services to Be Used in Future Research and whatDevelopment. EITF 07-03 addresses the diversity which exists with respect to the accounting for the non-refundable portion of a payment made by a research and development entity for future research and development activities. Under this conclusion, an entity is required to defer and capitalize non-refundable advance payments made for research and development activities until the related goods are delivered or the related services are performed. EITF 07-03 is effective for interim or annual reporting periods in fiscal years beginning after December 15, 2007 and requires prospective application for new contracts entered into after the effective date. The adoption of EITF 07-03 is not expected to have a material impact the adoption will have on our Consolidated Financial Statements if we adopt.Statements.

            In March 2008, the FASB issued Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133 ("SFAS No. 161.") SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. The guidance in SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We are currently assessing the impact of SFAS No. 161.

    Inflation

            

    Inflation

    Our management currently believes that inflation has not had a material impact on continuing operations.

    67


    Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily include fluctuations in interest rates, foreign currency exchange rates, and market prices. Our market risk sensitive instruments are classified as instruments entered into for purposes “other"other than trading.”" Our views on market risk are not necessarily indicative of actual results that may occur and do not represent the maximum possible gains and losses that may occur, since actual gains and losses will differ from those estimated, based upon actual fluctuations in interest rates, foreign currency exchange rates, market prices, and the timing of transactions.

    Interest Rate Risk

            

    Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We manage our interest rate risk by maintaining an investment portfolio consisting primarily of debt instruments with high credit quality and relatively short average maturities. We also manage our interest rate risk by maintaining sufficient cash and cash equivalent balances such that we are typically able to hold our investments to maturity. As of March 31, 2007,2008, our cash equivalents and short-term investments included debt securities of $652.8$1,171.4 million. Also, as of March 31, 2008, we classified our investments in auction rate securities of $91.2 million as long-term investments (see Note 1 of the Notes to Consolidated Financial Statements included in Item 8 for summary of significant accounting policies.)


            

    The following table presents the amounts and related weighted average interest rates of our investment portfolio as of March 31, 20072008 (amounts in thousands):

     
    		 Average
    Interest Rate
    		 Amortized
    Cost
    		 Fair
    Value
    Cash equivalents:        
     Variable rate 3.09%$1,129,980 $1,129,980

    Short-term investments:
     
     
     
     
     
     
     
     
     Fixed rate 5.21%$41,619 $41,411

    Long-term investments:
     
     
     
     
     
     
     
     
     Variable rate 6.09%$95,538 $91,215

            

     

     

    Average
    Interest Rate

     

    Amortized
    Cost

     

    Fair
    Value

     

    Cash equivalents:

     

     

     

     

     

     

     

    Fixed rate

     

    5.04

    %

    $

    89,863

     

    $

    89,829

     

    Variable rate

     

    5.25

     

    106,986

     

    106,986

     

     

     

     

     

     

     

     

     

    Short-term investments:

     

     

     

     

     

     

     

    Fixed rate

     

    4.89

    %

    $

    564,324

     

    $

    562,940

     

    Our short-term investments generally mature between three months and thirty months.

    Foreign Currency Exchange Rate Risk

            

    We transact business in many different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, particularly EUR, GBP, and AUD. The volatility of EUR, GBP, and AUD (and all other applicable currencies) will be monitored frequently throughout the coming year. When appropriate, we enter into hedging transactions in order to mitigate our risk from foreign currency fluctuations. We will continue to use hedging programs in the future and may use currency forward contracts, currency options, and/or other derivative financial instruments commonly utilized to reduce financial market risks if it is determined that such hedging activities are appropriate to reduce risk. We do not hold or purchase any foreign currency contracts for trading purposes. As of March 31, 2008, we had no outstanding exchange forward contracts. As of March 31, 2007, accrued expenses included approximately $90,000 of pre-tax unrealized losses for the estimated fair value of outstanding foreign currency exchange forward contracts, which was recorded in earnings as the contracts did not qualify as hedging instruments. As of March 31, 2006, we had no outstanding foreign exchange forward contracts.

    Market Price Risk

            

    With regard to the structured stock repurchase transactions described in Note 15 inof the Notes to the Consolidated Financial Statements included in Item 8, at those times when we have structured stock repurchase transactions outstanding, it is possible that at settlement we could take delivery of shares at an effective repurchase price higher than the then market price. As of March 31, 2007,2008, we had no structured stock repurchase transactions outstanding.

    68


    Item 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    Report of Independent Registered Public Accounting Firm

    		F-1


    Consolidated Balance Sheets as of March 31, 20072008 and 2006

    2007



    F-2


    Consolidated Statements of Operations for the Years Ended March 31, 2008, 2007, 2006, and 2005

    2006



    F-3


    Consolidated Statements of Changes in Shareholders’Shareholders' Equity for the Years Ended March 31, 2008, 2007, 2006, and 2005

    2006



    F-4


    Consolidated Statements of Cash Flows for the Years Ended March 31, 2008, 2007, 2006, and 2005

    2006



    F-5


    Notes to Consolidated Financial Statements



    F-6


    Schedule II-ValuationII—Valuation and Qualifying Accounts and Reserves as of March 31, 2008, 2007, 2006, and 2005

    2006



    F-49


    Item 15. Exhibit Index



    E-1

            

    All otherOther financial statement schedules of Activision are omitted because of the absence of conditions under which they are requiredinformation called for is not applicable or because the required information is included elsewhereshown either in the consolidated financial statements or in the notes thereto.

    Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

            None.

    None.

    Item 9A.    CONTROLS AND PROCEDURES

    1) Definition and Limitations of Disclosure Controls and Procedures.

            

    Our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to reasonably assure that: (i)that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’sCommission's rules and forms and (ii) information is accumulated and communicated to management, including our Chief Executive Officers and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports. Inherent limitations to any system of disclosure controls and procedures include, but are not limited to, the possibility of human error and the circumvention or overriding of such controls by one or more persons. In addition, we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, and our system of controls may therefore not achieve its desired objectives under all possible future events.

    2) Evaluation of Disclosure Controls and Procedures.

            

    Our management, with the participation of the Chief Executive Officers and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2007.2008. Based on this controls evaluation, and subject to the limitations described above, the Chief Executive Officers and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported on a timely basis.

    69


    3) Management’sManagement's Report on Internal Control Over Financial Reporting

            

    Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our management, with the participation of our Chief Executive Officers and Chief Financial Officer, conducted an evaluation of the effectiveness, as of March 31, 2007,2008, of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”("COSO") in Internal Control – Control—Integrated Framework. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of March 31, 2007.2008.

            

    Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.


            

    Our assessment of theThe effectiveness of our internal control over financial reporting as of March 31, 20072008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in this annual report on Form 10-K.

    4) Changes in Internal Control Over Financial Reporting

            

    There werehave not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the lastmost recent fiscal quarter of this period covered by this report that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting related to the remediation of the previously identified material weakness as discussed below within the Remediation of the Material Weakness.

    5) Remediation of the Material Weakness.

    During the quarter ended March 31, 2007, we made the following changes that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

    New policies and procedures for our stock option grant practices were approved on November 21, 2006 by the Joint Compensation and Nominating and Governance Committee of our Board, and became effective January 1, 2007. Our new option granting policies and procedures are designed to ensure internal control surrounding the pricing and modification of option grants is adequate, and also provide the Compensation Committee with the full ability to review and approve all grants prior to pricing on a date set on or after the date of the Compensation Committee action. Some of the highlights of the new option granting process are:

    •                  All proposed grants during the month are verified so as to comply with pre-approved grant guidelines and other financial and legal requirements by the seventh day of the following month. For these purposes, a team of legal, human resources and finance personnel (“Cross Functional Team”) has been established to review each proposed grant for compliance with documentation and procedures. No grant is issued until such compliance is established and the grant is approved by the Compensation Committee.

    •                  The Compensation Committee meets at least quarterly, to review and approve all documented and verified proposed grants submitted by the Cross Functional Team. All grants approved by the Compensation Committee are effective, and priced based on the closing price of our stock, on a date set by the Compensation Committee that is on or after the date of Compensation Committee action. Details of the grant (including the exercise price) are communicated to the grantees promptly following approval and pricing.

    •                  All new hire offer letters and employee renewal agreements provide that all grants and terms of grants are subject to approval by the Compensation Committee.

    •                  Stock option data is entered into Equity Edge, our stock option tracking software, promptly (and only) after grant approval is received from the Compensation Committee.

    70


    In addition, we have realigned certain internal responsibilities related to the granting and reporting of stock options. In this regard, the employment contract of our former head of human resources, which expired on March 31, 2007, was not renewed; a new head of human resources is being recruited and, in the interim, responsibilities for stock option granting and reporting have been reassigned. To further enhance our corporate governance practices, we have established and filled a position of principal compliance officer, with a reporting line directly to the Nominating and Governance Committee, and are reviewing the configuration of the Compensation Committee of the Board.

    In addition, consistent with the recommendations of the Special Subcommittee, we have disengaged from our prior outside corporate counsel and have engaged new outside corporate counsel.

    Finally, Board meetings include more senior executives and human resources, finance and legal personnel have received additional training on options and compliance issues.

    Management evaluated the design and operation of these new controls and concluded that these controls were in place, designed and operating effectively as of March 31, 2007. Management has concluded that the additional controls described above have remediated our previously disclosed material weakness in our internal control over financial reporting.

    Item 9B.    OTHER INFORMATION

            

    None.


    71


    PART III

    Item 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

            

    The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our 20072008 Annual Meeting of Shareholders, entitled “Proposal"Proposal 1—Election of Directors,” “Executive" "Executive Officers and Key Employees,” “Section" "Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate" "Corporate Governance Matters—Code of Ethics for Senior Executive and Senior Financial Officers”Officers" and “Corporate"Corporate Governance Matters—Board of Directors and Committees—Audit Committee”Committee" to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K.

    Item 11.    EXECUTIVE COMPENSATION

            

    The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our 20072008 Annual Meeting of Shareholders, entitled “Executive"Executive Compensation,” “Director Compensation”" "Director Compensation" and “Compensation"Compensation Committee Report”Report" to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K.

    Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

            

    The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our 20072008 Annual Meeting of Shareholders, entitled “Equity"Equity Compensation Plan Information”Information" and “Security"Security Ownership of Certain Beneficial Owners and Management”Management" to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K.

    Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

            

    The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our 20072008 Annual Meeting of Shareholders, entitled “Certain"Certain Relationships and Related Transactions”Transactions" and “Corporate"Corporate Governance Matters—Board of Directors and Committees—Director Independence”Independence" to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K.

    Item 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

            

    The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our 20072008 Annual Meeting of Shareholders, entitled “Independent"Independent Registered Public Accounting Firm’s Fees”Firm's Fees" to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K.


    72


    PART IV

    Item 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSCHEDULE

      (a)
      1.  Financial StatementsSee Item 8.—Consolidated Financial Statements and Supplementary Data for index to Financial Statements and Financial Statement Schedule on page 75 herein.

      2.
      Financial Statement ScheduleThe following financial statement schedule of Activision, Inc. for the fiscal years ended March 31, 2008, 2007, and 2006 is filed as part of this report and should be read in conjunction with the consolidated financial statements of Activision, Inc.:

    Schedule II—Valuation and Qualifying Accounts


      Other financial statement schedules are omitted because the information called for is not applicable or is shown either in the consolidated financial statements or the notes thereto.

      3.
      Exhibits Required by Item 601 of Regulation S-K

    (a)


      2.1  

    1.


    Financial Statements See Item 8. — Consolidated Financial Statements
    Business Combination Agreement, dated as of December 1, 2007, by and Supplementary Data Index for Financial Statementsamong Activision, Inc., Sego Merger Corporation, Vivendi S.A., VGAC LLC and Schedule on page 62 herein.

    Vivendi Games, Inc. (incorporated by reference to Exhibit 2.1 of Activision's Form 8-K, filed December 6, 2007).


      3.1


    2.

    Financial Statement Schedule The following financial statement schedule of Activision, Inc. for the fiscal years ended March 31, 2007, 2006, and 2005 is filed as part of this report and should be read in conjunction with the Consolidated Financial Statements of Activision, Inc.:

    Schedule II — Valuation and Qualifying Accounts and Reserves

    Other financial statement schedules are omitted because the information called for is not required or is shown either in the Consolidated Financial Statements or the notes thereto.

    3.

    Exhibits Required by Item 601 of Regulation S-K

    Exhibit
    Number

    Exhibit

    3.1

    Amended and Restated Certificate of Incorporation of Activision Holdings, dated June 9, 2000 (incorporated by reference to Exhibit 2.5 of Activision’sActivision's Form 8-K, filed June 16, 2000).


      3.2


    3.2


    Certificate of Amendment of Amended and Restated Certificate of Incorporation of Activision Holdings dated as of June 9, 2000 (incorporated by reference to Exhibit 2.7 of Activision’sActivision's Form 8-K, filed June 16, 2000).


      3.3


    3.3


    Certificate of Designation of Series A Junior Preferred Stock of Activision, Inc. dated as of December 27, 2001 (incorporated by reference to Exhibit 3.4 of Activision’sActivision's Form 10-Q for the quarter ended December 31, 2001).


      3.4


    3.4


    Certificate of Amendment of Amended and Restated Certificate of Incorporation, as amended, of Activision, Inc., dated as of April 4, 2005 (incorporated by reference to Exhibit 3.1 of Activision’sActivision's Form 8-K, filed April 5, 2005).


      3.5


    3.5


    Certificate of Designation of Series A Junior Preferred Stock of Activision, Inc. dated August 4, 2005 (incorporated by reference to Exhibit 3.1 of Activision’sActivision's Form 8-K, filed August 5, 2005).


      3.6


    3.6

    Second
    Third Amended and Restated BylawsBy-Laws of Activision, Inc., dated September 15, 200527, 2007 (incorporated by reference to Exhibit 3.1 of Activision’s3.6 to Activision's Registration Statement on Form 8-K,S-8, Registration No. 333-146431, filed September 19, 2005)October 1, 2007).

    73



    4.1



    Rights Agreement dated as of April 18, 2000, between Activision. Inc. and Continental Stock Transfer & Trust Company, which includes as exhibits the form of Right Certificates as Exhibit A, the Summary of Rights to Purchase Series A Junior Preferred Stock as Exhibit B and the form of Certificate of Designation of Series A Junior Preferred Stock of Activision as Exhibit C, (incorporated by reference to Activision’sActivision's Registration Statement on Form 8-A, Registration No. 001-15839, filed April 19, 2000).


      4.2



    Amendment No. 1 to the Rights Agreement, dated as of December 1, 2007, by and between Activision, Inc. and Continental Stock Transfer & Trust Company, as rights agent (incorporated by reference to Exhibit 4.1 of Activision's Form 8-K, filed December 6, 2007).


    10.1



    Activision, Inc. 1991 Stock Option and Stock Award Plan, as amended (incorporated by reference to Exhibit 10.1 of Activision’sActivision's Form 10-K for the year ended March 31, 2002).




    10.2

    Amendment to the 1991 Stock Option and Stock Award Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.1 of Activision's Current Report on Form 8-K filed September 20, 2006).


    10.3


    10.2


    Activision, Inc. 1998 Incentive Plan, as amended (incorporated by reference to Exhibit 10.4 of Activision’sActivision's Form 10-Q for the quarter ended September 30, 2001).


    10.4



    Amendment to the 1998 Incentive Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.2 of Activision's Current Report on Form 8-K filed September 20, 2006).

    10.3


    10.5



    Activision, Inc. 1999 Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2002).


    10.6



    Amendment to the 1999 Incentive Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.3 of Activision's Current Report on Form 8-K filed September 20, 2006).

    10.4


    10.7



    Activision, Inc. 2001 Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2002).


    10.8



    Amendment to the 2001 Incentive Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.4 of Activision's Current Report on Form 8-K filed September 20, 2006).

    10.5


    10.9



    Activision, Inc. 2002 Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2003).


    10.10



    Amendment to the 2002 Incentive Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.5 of Activision's Current Report on Form 8-K filed September 20, 2006).

    10.6


    10.11



    Activision, Inc. 2002 Executive Incentive Plan (incorporated by reference to Exhibit 4.1 of Activision’sActivision's Form S-8, Registration No. 333-100114 filed September 26, 2002).


    10.12



    Amendment to the 2002 Executive Incentive Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.6 of Activision's Current Report on Form 8-K filed September 20, 2006).

    10.7


    10.13



    Activision, Inc. 2002 Studio Employee Retention Incentive Plan (incorporated by reference to Exhibit 4.1 of Activision’sActivision's Form S-8, Registration No. 333-103323 filed February 19, 2003).


    10.14



    Amendment to the 2002 Studio Employee Retention Incentive Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.7 of Activision's Current Report on Form 8-K filed September 20, 2006).

    10.8


    10.15



    Activision, Inc. SecondThird Amended and Restated 2002 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.110.2 of Activision’sActivision's Current Report on Form 8-K filed March 8, 2005)October 23, 2006).


    10.16


    10.9


    Activision, Inc. 2002 Second Amended and Restated 2002 Employee Stock Purchase Plan for International Employees (incorporated by reference to Exhibit 10.210.1 of Activision’sActivision's Current Report on Form 8-K filed March 8, 2005)October 23, 2006).


    10.17



    Activision, Inc. Sub-Plan to the Second Amended And Restated 2002 Employee Stock Purchase Plan for International Employees for Eligible Employees in the European Economic Area.

    10.10


    10.18



    Australian Addendum to the Activision, Inc. Sub-Plan to the Second Amended And Restated 2002 Employee Stock Purchase Plan for International Employees for Eligible Employees.



    10.19

    Activision, Inc. Amended and Restated 2003 Incentive Plan effective as of July 26, 2005 (incorporated by reference to Exhibit 10.1 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2005).

    74


    10.11


    10.20



    Amendment to the 2003 Executive Incentive Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.9 of Activision's Current Report on Form 8-K filed September 20, 2006).


    10.21

    Activision, Inc. 2007 Incentive Plan (incorporated by reference to Exhibit 99.1 to Activision's Registration Statement on Form S-8, Registration No. 333-146431, filed October 1, 2007).

    10.22

    Australian Addendum to the Activision, Inc. 2007 Incentive Plan.

    10.23

    Form of Stock Option Certificate for grants to persons other than non-employee directors issued pursuant to the Activision, Inc. 1998 Incentive Plan of Activision, Inc. (adopted May 24, 2005) (incorporated by reference to Exhibit 10.1 of Activision’sActivision's Form 8-K, filed May 31, 2005).


    10.24


    10.12


    Form of Stock Option Certificate for grants to persons other than non-employee directors issued pursuant the Activision, Inc. 1999 Incentive Plan of Activision, Inc. (adopted May 24, 2005) (incorporated by reference to Exhibit 10.2 of Activision’sActivision's Form 8-K, filed May 31, 2005).


    10.25


    10.13


    Form of Stock Option Agreement for grants to persons other than non-employee directors issued pursuant the Activision, Inc. 2001 Incentive Plan of Activision, Inc. (adopted May 24, 2005) (incorporated by reference to Exhibit 10.3 of Activision’sActivision's Form 8-K, filed May 31, 2005).


    10.26


    10.14


    Form of Stock Option Agreement for grants to persons other than non-employee directors issued pursuant the Activision, Inc. 2002 Executive Incentive Plan of Activision, Inc. (adopted May 24, 2005) (incorporated by reference to Exhibit 10.4 of Activision’sActivision's Form 8-K, filed May 31, 2005).


    10.27


    10.15


    Form of Executive Stock Option Agreement for grants to Robert Kotick or Brian Kelly issued pursuant the Activision, Inc. 2003 Incentive Plan of Activision, Inc. (adopted May 2005) (incorporated by reference to Exhibit 10.40 of Activision’sActivision's Form 10-K for the year ended March 31, 2005).


    10.28


    10.16


    Form of Non-Executive Stock Option Agreement for grants to non-executivespersons other than Robert Kotick or Brian Kelly and non-employee directors issued pursuant the Activision, Inc. 2003 Incentive Plan of Activision, Inc. (adopted May 2005) (incorporated by reference to Exhibit 10.41 of Activision’sActivision's Form 10-K for the year ended March 31, 2005).


    10.29


    10.17


    Form of Non-Employee Director Stock Option Agreement for grants to non-employee directors issued pursuant the Activision, Inc. 2003 Incentive Plan (incorporated by reference to Exhibit 10.17 of Activision, Inc. (adopted May 2005)Activision's Form 10-K for the year ended March 31, 2007).


    10.30


    10.18


    Notice of Share Option Award for grants to persons other than non-employee directors issued pursuant to the Activision, Inc. 2003 Incentive Plan (incorporated by reference to Exhibit 10.18 of Activision, Inc. (adopted June 13,Activision's Form 10-K for the year ended March 31, 2007).


    10.31


    10.19


    Notice of Share Option Award for grants to non-employee directors issued pursuant to the Activision, Inc. 2003 Incentive Plan (incorporated by reference to Exhibit 10.19 of Activision, Inc. (adopted June 13,Activision's Form 10-K for the year ended March 31, 2007).


    10.32


    10.20


    Notice of Restricted Share Award for grants to persons other than non-employee directors issued pursuant to the Activision, Inc. 2003 Incentive Plan (incorporated by reference to Exhibit 10.20 of Activision, Inc. (adopted June 13,Activision's Form 10-K for the year ended March 31, 2007).

    75


    10.21


    10.33



    Notice of Restricted Share Unit Award for grants to persons other than non-employee directors issued pursuant to the Activision, Inc. 2003 Incentive Plan of Activision, Inc. (adopted June 13, 2007).

    10.22

    Amended and Restated Employment Agreement, dated May 22, 2000, between Activision, Inc. and Robert A. Kotick (incorporated by reference to Exhibit 10.110.21 of Activision’sActivision's Form 10-K for the year ended March 31, 2007).




    10.34

    Notice of Stock Option Award for grants to persons other than non-employee directors pursuant to the Activision, Inc. 2007 Incentive Plan (incorporated by reference to Exhibit 10.9 of Activision's Form 10-Q for the quarter ended September 30, 2000)December 31, 2007).


    10.35


    10.23

    Amendment, dated July 22, 2002,
    Notice of Stock Option Award for grants to Employment Agreement dated May 22, 2000 betweennon-employee directors pursuant to the Activision, Inc. and Robert A. Kotick2007 Incentive Plan (incorporated by reference to Exhibit 10.110.10 of Activision’sActivision's Form 10-Q for the quarter ended September 30, 2002)December 31, 2007).


    10.36


    10.24

    Amendment, dated December 29, 2006,
    Notice of Restricted Share Award for grants to Employment Agreement dated May 22, 2000 betweenpersons other than non-employee directors issued pursuant to the Activision, Inc. and Robert A. Kotick2007 Incentive Plan (incorporated by reference to Exhibit 10.110.11 of Activision’s Form 8-K filed January 8, 2007).

    10.25

    Stock Option Agreement, dated May 22, 2000, between Activision, Inc. and Robert A. Kotick (incorporated by reference to Exhibit 10.2 of Activision’s Form 10-Q for the quarter ending September 30, 2000).

    10.26

    Amended and Restated Employment Agreement, dated May 22, 2000, between Activision, Inc. and Brian G. Kelly (incorporated by reference to Exhibit 10.3 of Activision’s Form 10-Q for the quarter ending September 30, 2000).

    10.27

    Amendment, dated July 22, 2002, to Employment Agreement dated May 22, 2000 between Activision, Inc. and Brian G. Kelly (incorporated by reference to Exhibit 10.2 of Activision’sActivision's Form 10-Q for the quarter ended September 30, 2002)December 31, 2007).


    10.37


    10.28

    Amendment, dated December 29, 2006,
    Notice of Restricted Share Unit Award for grants to Employment Agreement dated May 22, 2000 betweenpersons other than non-employee directors issued pursuant to the Activision, Inc. and Brian G. Kelly2007 Incentive Plan (incorporated by reference to Exhibit 10.110.12 of Activision’sActivision's Form 8-K filed January 8,10-Q for the quarter ended December 31, 2007).


    10.38



    Notice of Restricted Share Unit Award for grants to non-employee directors upon their initial election to the board or upon their tenth continuous year of service on the board issued pursuant to the Activision, Inc. 2007 Incentive Plan (incorporated by reference to Exhibit 10.13 of Activision's Form 10-Q for the quarter ended December 31, 2007).

    10.29


    10.39



    Notice of Restricted Share Unit Award for grants to non-employee directors upon their reelection to the board (other than in connection with 10 years of continuous service) issued pursuant to the Activision, Inc. 2007 Incentive Plan (incorporated by reference to Exhibit 10.14 of Activision's Form 10-Q for the quarter ended December 31, 2007).


    10.40

    Employment Agreement, dated July 22, 2002, between Ronald Doornink and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.6 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2002).


    10.41


    10.30


    Amendment, dated February 27, 2003, to Employment Agreement dated July 22, 2002 between Activision Publishing, Inc. and Ronald Doornink (incorporated by reference to Exhibit 10.34 of Activision’sActivision's Form 10-K for the year ended March 31, 2005).

    76


    10.31


    10.42



    Amendment, dated June 1, 2004, to Employment Agreement dated July 22, 2002, between Activision Publishing, Inc. and Ronald Doornink (incorporated by reference to Exhibit 10.5 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2004).


    10.43


    10.32


    Amendment, dated June 15, 2005, to Employment Agreement dated July 22, 2002 between Activision Publishing, Inc. and Ronald Doornink (incorporated by reference to Exhibit 10.5 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2005).


    10.44


    10.33


    Amendment, dated June 4, 2007, to Employment agreement,Agreement dated November 20,July 22, 2002 between Activision Publishing, Inc. and George RoseRonald Doornink (incorporated by reference to Exhibit 10.1 of Activision’sActivision's Form 10-Q for the quarter ended December 31, 2002)June 30, 2007).


    10.45


    10.34

    Amendment, dated March 30, 2005, to the Employment Agreement dated November 20, 2002 between Activision Publishing, Inc. and George Rose (incorporated by reference to Exhibit 10.51 of Activision’s Form 10-K for the year ended March 31, 2005).

    10.35

    Employment Agreement, dated May 10, 2005, between Charles J. Huebner and Activision Publishing, Inc (incorporated by reference to Exhibit 10.1 of Activision’s Form 10-Q for the quarter ended December 31, 2005).

    10.36

    Amendment, dated March 30, 2007, to Employment Agreement dated May 10, 2005 between Charles J. Huebner and Activision Publishing, Inc.

    10.37


    Employment Agreement, dated June 15, 2005, between Michael Griffith and Activision Publishing, Inc (incorporated by reference to Exhibit 10.2 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2005).


    10.46



    Amendment to Employment Agreement, dated as of December 1, 2007, by and between Activision, Inc. and Michael Griffith (incorporated by reference to Exhibit 10.7 of Activision's Form 8-K, filed December 6, 2007).

    10.38


    10.47



    Stock Option Agreement, dated June 15, 2005, between Michael Griffith and Activision, Inc. (incorporated by reference to Exhibit 10.3 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2005).



    10.48


    10.39


    Restricted Stock Agreement, dated June 15, 2005, between Michael Griffith and Activision, Inc. (incorporated by reference to Exhibit 10.4 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2005).


    10.49


    10.40


    Employment Agreement, dated September 9, 2005, between Thomas Tippl and Activision Publishing, Inc (incorporated by reference to Exhibit 10.1 of Activision’sActivision's Form 10-Q for the quarter ended September 30, 2005).


    10.50


    10.41


    Stock Option Agreement, dated October 3, 2005, between Thomas Tippl and Activision, Inc. (incorporated by reference to Exhibit 10.2 of Activision’sActivision's Form 10-Q for the quarter ended September 30, 2005).

    77


    10.42


    10.51



    Restricted Stock Agreement, dated October 3, 2005, between Thomas Tippl and Activision, Inc. (incorporated by reference to Exhibit 10.3 of Activision’sActivision's Form 10-Q for the quarter ended September 30, 2005).


    10.52


    10.43


    Employment Agreement, dated September 18, 2006, between Brian Hodous and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.2 of Activision’sActivision's Form 10-Q for the quarter ended December 31, 2006).


    10.53


    10.44


    Letter Agreement, dated September 6, 2006, between Brian Hodous and Activision, Inc.

    (incorporated by reference to Exhibit 10.44 of Activision's Form 10-K for the year ended March 31, 2007).


    10.54


    10.45

    Stock
    Notice of Share Option Agreement,Award to, dated as of November 3, 2006, between Activision andto Brian Hodous.

    Hodous (incorporated by reference to Exhibit 10.45 of Activision's Form 10-K for the year ended March 31, 2007).


    10.55


    10.46


    Notice of Restricted Stock Agreement,Award, dated as of November 3, 2006, between Activision andto Brian Hodous.

    Hodous (incorporated by reference to Exhibit 10.46 of Activision's Form 10-K for the year ended March 31, 2007).


    10.56


    10.47


    Notice of Restricted Stock Agreement,Award, dated as of November 3, 2006, between Activision andto Brian Hodous.

    Hodous (incorporated by reference to Exhibit 10.47 of Activision's Form 10-K for the year ended March 31, 2007).


    10.57


    10.48


    Employment Agreement, dated October 1, 2006, between Robin Kaminsky and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.3 of Activision’sActivision's Form 10-Q for the quarter ended December 31, 2006).


    10.58



    Notice of Share Option Award to Robin Kaminsky, dated as of October 19, 2006 (incorporated by reference to Exhibit 10.2 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.49


    10.59



    Notice of Share Option Award to Robin Kaminsky, dated as of October 19, 2006 (incorporated by reference to Exhibit 10.3 of Activision's Form 10-Q for the quarter ended September 30, 2007).


    10.60

    Notice of Restricted Stock Award to Robin Kaminsky, dated as of October 19, 2006 (incorporated by reference to Exhibit 10.4 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.61

    Notice of Restricted Stock Award to Robin Kaminsky, dated as of October 19, 2006, between Activision and Robin Kaminsky (incorporated by reference to Exhibit 10.5 of Activision's Form 10-Q for the quarter ended September 30, 2007).



    10.62

    Employment Agreement, dated September 11, 2007, between George Rose and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.7 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.63

    Notice of Share Option Award to George Rose, dated September 28, 2007 (incorporated by reference to Exhibit 10.12 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.64

    Notice of Restricted Share Unit Award to George Rose, dated September 28, 2007 (incorporated by reference to Exhibit 10.13 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.65

    Employment Agreement, dated September 12, 2007, between Ann Weiser and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.8 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.66

    Notice of Share Option Award to Ann Weiser, dated September 28, 2007 (incorporated by reference to Exhibit 10.14 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.67

    Notice of Restricted Share Unit Award to Ann Weiser, dated September 28, 2007 (incorporated by reference to Exhibit 10.15 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.68

    Amended and Restated Employment Agreement, dated as of December 1, 2007, by and between Activision, Inc. and Robert A. Kotick (incorporated by reference to Exhibit 10.3 of Activision's Form 8-K, filed December 6, 2007).

    10.69

    Replacement Bonus Agreement, dated as of December 1, 2007, by and between Activision, Inc. and Robert A. Kotick (incorporated by reference to Exhibit 10.5 of Activision's Form 8-K, filed December 6, 2007).

    10.70

    Stock Option Agreement, dated May 22, 2000, between Activision, Inc. and Robert A. Kotick (incorporated by reference to Exhibit 10.2 of Activision's Form 10-Q for the quarter ending September 30, 2000).

    10.71

    Notice of Stock Option Award to Robert A. Kotick, dated December 5, 2007.

    10.72

    Amended and Restated Employment Agreement, dated as of December 1, 2007, by and between Activision, Inc. and Brian G. Kelly (incorporated by reference to Exhibit 10.4 of Activision's Form 8-K, filed December 6, 2007).

    10.73

    Replacement Bonus Agreement, dated as of December 1, 2007, by and between Activision, Inc. and Brian G. Kelly (incorporated by reference to Exhibit 10.6 of Activision's Form 8-K, filed December 6, 2007).

    10.74

    Stock Option Agreement, dated May 22, 2000, between Activision, Inc. and Brian G. Kelly (incorporated by reference to Exhibit 10.4 of Activision's Form 10-Q for the quarter ending September 30, 2000).

    10.75

    PlayStation 2 CD-ROM/DVD-ROM Licensed Publisher Agreement, dated as of April 1, 2000, between Sony Computer Entertainment America Inc. and Activision, Inc. (incorporated by reference to Exhibit 10.9 of Activision’sActivision's Form S-3, Registration No. 333-101271, filed January 14, 2003).*



    10.76


    10.50


    Letter regarding Modification of Territory for PlayStation 2 CD-ROM/DVD-ROM Licensed Publisher Agreement, dated as of June 11, 2004, from Sony Computer Entertainment America Inc. to Activision, Inc.

    (incorporated by reference to Exhibit 10.50 of Activision's Form 10-K for the year ended March 31, 2007).


    10.77


    10.51


    PlayStation 2 Licensed Publisher Agreement, dated as of March 23, 2001, between Sony Computer Entertainment Europe Limited and Activision UK Limited (incorporated by reference to Exhibit 10.10 of Activision’sActivision's Form S-3, Registration No. 333-101271, filed January 14, 2003).*


    10.78


    10.52


    PlayStation Portable (“PSP”("PSP") Licensed PSP Publisher Agreement, dated September 15, 2004, between Sony Computer Entertainment America Inc. and Activision, Inc. (incorporated by reference to Exhibit 10.46 of Activision’sActivision's Form 10-K for the year ended March 31, 2005).*

    78


    10.53


    10.79



    PlayStation Portable (“PSP”("PSP") Licensed PSP Publisher Agreement, dated September 27, 2005, between Sony Computer Entertainment Europe Limited and Activision UK Limited (incorporated by reference to Exhibit 10.60 of Activision’sActivision's Form 10-K for year ended March 31, 2006).*


    10.80


    10.54


    Global PlayStation 3 Format Licensed Publisher Agreement, dated March 5, 2007, between Sony Computer Entertainment America, Inc. and Activision. Inc.*

    10.55

    First Renewal License Agreement for the Game Boy Advance Video Game System (EEA, Australia, and New Zealand), dated September 14, 2004, between Nintendo Co., Ltd. and Activision, Inc.Inc (incorporated by reference to Exhibit 10.4410.54 of Activision’sActivision's Form 10-K for the year ended March 31, 2005)2007).*


    10.81


    10.56

    First Addendum to First Renewal License Agreement for the Game Boy Advance Video Game System (EEA, Australia and New Zealand), dated June 20, 2006, between Nintendo Co., Ltd. and Activision, Inc.

    10.57

    Confidential License Agreement for Nintendo GameCube (Western Hemisphere), dated as of November 9, 2001, between Nintendo of America Inc. and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.1 of Activision’s Form S-3, Registration No. 333-101271, filed January 14, 2003).*

    10.58

    First Amendment to the Confidential License Agreement for Nintendo GameCube (Western Hemisphere), dated November 9, 2004, between Nintendo of America, Inc. and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.45 of Activision’s Form 10-K for the year ended March 31, 2005).

    10.59

    First Renewal License Agreement for the Nintendo GameCube System (EEA), dated June 20, 2006, between Nintendo, Co., Ltd. and Activision, Inc.*

    10.60


    Confidential License Agreement for the Nintendo DS (Western Hemisphere), dated as of October 11, 2004, between Nintendo Co., Ltd. and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.4210.8 of Activision’sActivision's Form 10-K10-Q for the yearquarter ended March 31, 2005)September 30, 2007).*


    10.82



    First Amendment to Confidential License Agreement for Nintendo DS (Western Hemisphere), dated as of July 16, 2007, between Nintendo Co., Ltd. and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.6 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.61


    10.83



    License Agreement for the Nintendo DS System (EEA, Australia and New Zealand), dated June 20, 2006, between Nintendo Co., Ltd. and Activision, Inc.*

    10.62

    Microsoft Corporation Xbox Publisher License Agreement, dated as of July 18, 2001, between Microsoft Corporation and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.510.61 of Activision’sActivision's Form S-3, Registration No. 333-101271, filed January 14, 2003)10-K for the year ended March 31, 2007).*

    79


    10.63


    10.84


    Amendment to Microsoft Corporation Xbox Publisher
    Confidential License Agreement for the Wii Console (Western Hemisphere), dated asSeptember 12, 2007, between Nintendo of April 19, 2002, between Microsoft Licensing,America, Inc. and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.610.9 of Activision’sActivision's Form S-3, Registration No. 333-101271, filed January 14, 2003)10-Q for the quarter ended September 30, 2007).*


    10.85


    10.64

    Xbox Live Distribution Amendment to
    Confidential License Agreement for the Xbox Publisher Licensing Agreement,Wii Console (EEA, Australia and New Zealand), dated as of October 28, 2002,December 3, 2007, between Microsoft Licensing,Nintendo Co., Ltd., Activision, Inc. and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.710.8 of Activision’sActivision's Form S-3, Registration No. 333-101271, filed January 14, 2003)10-Q for the quarter ended December 31, 2007).*


    10.86


    10.65

    Amendment to the Xbox Publisher Licensing Agreement, dated as of March 1, 2005, between Microsoft Licensing, GP, and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.47 of Activision’s Form 10-K for the year ended March 31, 2005).*

    10.66


    Microsoft Corporation Xbox 360 Publisher License Agreement, dated as of October 25, 2005, between Microsoft Licensing, GP and Activision Publishing, Inc (incorporated by reference to Exhibit 10.4 of Activision’sActivision's Form 10-Q for the quarter ended December 31, 2005).*


    10.87


    10.67


    Xbox 360 Disc Program Addendum to the Xbox 360 Publisher License Agreement, dated as of December 15, 2005, between Microsoft Licensing, GP and Activision Publishing, Inc (incorporated by reference to Exhibit 10.5 of Activision’sActivision's Form 10-Q for the quarter ended December 31, 2005).*




    10.88


    10.68


    Amendment to the Xbox 360 Publisher Licensing Agreement (Platinum/Classic Hits Program), dated as of October 1, 2006, by and between Microsoft Licensing, GP and Activision, Inc. (incorporated by reference to Exhibit 10.68 of Activision's Form 10-K for the year ended March 31, 2007).*


    10.89


    10.69


    Xbox Live Server Platform Addendum to the Xbox 360 Publisher Licensing Agreement, dated as of February 6, 2007, by and between Microsoft Licensing, GP and Activision Publishing, Inc.

    (incorporated by reference to Exhibit 10.69 of Activision's Form 10-K for the year ended March 31, 2007).


    10.90


    10.70


    Chart of Compensation Paid to Non-Employee Directors (incorporated by reference to Exhibit 10.610.10 of Activision’sActivision's Form 10-Q for the quarter ended December 31, 2005)September 30, 2007).


    10.91



    Voting and Lock-Up Agreement, dated as of December 1, 2007, by and among Activision, Inc., Vivendi S.A. and Robert A. Kotick (incorporated by reference to Exhibit 10.1 of Activision's Form 8-K, filed December 6, 2007).

    14.1


    10.92



    Voting and Lock-Up Agreement, dated as of December 1, 2007, by and among Activision, Inc., Vivendi S.A. and Brian G. Kelly (incorporated by reference to Exhibit 10.2 of Activision's Form 8-K, filed December 6, 2007).


    14.1

    Code of Ethics for Senior Executive and Senior Financial Officers (incorporated by reference to Exhibit 14.1 of Activision’sActivision's Form 10-K for the year ended March 31, 2004).


    21.1


    21.1


    Principal subsidiaries of Activision.


    23.1


    23.1


    Consent of Independent Registered Public Accounting Firm.

    80



    31.1



    Certification of Robert A. Kotick pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


    31.2


    31.2


    Certification of Michael Griffith pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


    31.3


    31.3


    Certification of Thomas Tippl pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


    32.1


    32.1


    Certification of Robert A. Kotick pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


    32.2


    32.2


    Certification of Michael Griffith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


    32.3


    32.3


    Certification of Thomas Tippl pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


    99.1

    Risk Factors from Preliminary Proxy Statement Filed by Activision on April 30, 2008.

    99.2

    Stipulation of Settlement, dated May 8, 2008 in In re Activision, Inc. Shareholder Derivative Litigation.

    99.3

    Order Preliminarily Approving Derivative Settlement and Providing for Notice, dated May 13, 2008 in In re Activision, Inc. Shareholder Derivative Litigation.

    *
    Portions omitted pursuant to a request for confidential treatment.


    SIGNATURES

            

    81


    SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    Date: June 14, 2007

    ACTIVISION, INC.

    By:

    Date: May 30, 2008

    /s/Michael Griffith

    Michael Griffith


    ACTIVISION, INC.


    By:


    /s/      MICHAEL GRIFFITH      
    Michael Griffith
    President and Chief Executive Officer,


    Activision Publishing, Inc.


    (Principal Executive Officer)


            

    Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

    By:

    		/s/  ROBERT A. KOTICK      
    (Robert A. Kotick

    Kotick)

    Chairman, Chief Executive Officer,

    June 14, 2007

    (Robert A. Kotick)

    Activision, Inc., and Director

    May 30, 2008


    By:


    By:


    /s/  Brian    BRIAN G. KellyKELLY      

    Co-Chairman and Director

    June 14, 2007

    (Brian G. Kelly)



    Co-Chairman and Director



    May 30, 2008


    By:


    By:


    /s/      MICHAEL GRIFFITH      

    (Michael GriffithGriffith)



    President and Chief Executive Officer of

    June 14, 2007

    (Michael Griffith)

    Activision Publishing, Inc. and Principal

    Executive Officer of Activision, Inc.



    May 30, 2008


    By:



    /s/      THOMAS TIPPL      
    (Thomas Tippl)


    By:

    /s/ Thomas Tippl


    Chief Financial Officer of Activision

    June 14, 2007

    (Thomas Tippl)

    Publishing, Inc. and Principal Financial and

    Accounting Officer of Activision, Inc.



    May 30, 2008


    By:


    By:


    /s/  Robert    ROBERT J. CortiCORTI      

    Director

    June 14, 2007

    (Robert J. Corti)



    Director



    May 30, 2008


    By:



    /s/      RONALD DOORNINK      
    (Ronald Doornink)



    Director

    May 30, 2008


    By:



    /s/  Ronald Doornink

    Director

    June 14, 2007

    (Ronald Doornink)

    By:

    /s/ BarbaraBARBARA S. IsgurISGUR      

    Director

    June 14, 2007

    (Barbara S. Isgur)



    Director



    May 30, 2008



    By:


    By:


    /s/  Robert    ROBERT J. MorgadoMORGADO      

    Director

    June 14, 2007

    (Robert J. Morgado)



    Director



    May 30, 2008


    By:


    By:


    /s/  Peter    PETER J. NolanNOLAN      

    Director

    June 14, 2007

    (Peter J. Nolan)



    Director



    May 30, 2008


    By:


    By:


    /s/  Richard Sarnoff

    Director

    June 14, 2007

    RICHARD SARNOFF      

    (Richard Sarnoff)



    Director



    May 30, 2008

    82


    Report of Independent Registered Public Accounting Firm

    To the Board of Directors and Shareholders of Activision, Inc.:

    We have completed integrated audits of Activision, Inc.’s consolidated financial statements and of its internal control over financial reporting as of March 31, 2007, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

    Consolidated financial statements and financial statement schedule

    In our opinion, the consolidated financial statements listed in the index appearing under Item 8, present fairly, in all material respects, the financial position of Activision, Inc. and its subsidiaries at March 31, 20072008 and 2006,2007, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 20072008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 8 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidatedfinancial statements. TheseAlso in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2008, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, are the responsibilityfor maintaining effective internal control over financial reporting and for its assessment of the Company’s management.effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinionopinions on these financial statements, andon the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includesincluded examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.

            

    As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in fiscal 2007.

    Internal control over As discussed in Note 12 to the consolidated financial reporting

    Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, thatstatements, the Company maintained effective internal control over financial reporting as of March 31, 2007 based on criteria establishedchanged the manner in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated,which it accounts for uncertain tax positions in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.fiscal 2008.

            

    A company’scompany's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable

    F-1


    assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’scompany's assets that could have a material effect on the financial statements.

            

    Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

    PricewaterhouseCoopers LLP


    Los Angeles, California
    May 30, 2008


    June 14, 2007

    F-2


    Part II. Financial Information.

    Item 8. Financial Statements.

    ACTIVISION, INC. AND SUBSIDIARIES

    CONSOLIDATED BALANCE SHEETS



    (InAmounts in thousands, except share data)

     

     

    As of March 31,

     

     

     

    2007

     

    2006

     

    Assets

     

     

     

     

     

     

     

     

     

     

     

    Current assets:

     

     

     

     

     

    Cash and cash equivalents

     

    $

    384,409

     

    $

    354,331

     

    Short-term investments

     

    570,440

     

    590,629

     

    Accounts receivable, net of allowances of $91,418 and $98,253 at March 31, 2007 and 2006, respectively

     

    148,694

     

    28,782

     

    Inventories

     

    91,231

     

    61,483

     

    Software development

     

    107,779

     

    40,260

     

    Intellectual property licenses

     

    27,784

     

    4,973

     

    Deferred income taxes

     

    51,564

     

    9,664

     

    Other current assets

     

    19,332

     

    25,933

     

     

     

     

     

     

     

    Total current assets

     

    1,401,233

     

    1,116,055

     

     

     

     

     

     

     

    Software development

     

    23,143

     

    20,359

     

    Intellectual property licenses

     

    72,490

     

    82,073

     

    Property and equipment, net

     

    46,540

     

    45,368

     

    Deferred income taxes

     

    48,791

     

    52,545

     

    Other assets

     

    6,376

     

    1,409

     

    Goodwill

     

    195,374

     

    100,446

     

     

     

     

     

     

     

    Total assets

     

    $

    1,793,947

     

    $

    1,418,255

     

     

     

     

     

     

     

    Liabilities and Shareholders’ Equity

     

     

     

     

     

     

     

     

     

     

     

    Current liabilities:

     

     

     

     

     

    Accounts payable

     

    $

    136,517

     

    $

    88,994

     

    Accrued expenses

     

    204,652

     

    104,862

     

     

     

     

     

     

     

    Total current liabilities

     

    341,169

     

    193,856

     

     

     

     

     

     

     

    Other liabilities

     

    41,246

     

    1,776

     

     

     

     

     

     

     

    Total liabilities

     

    382,415

     

    195,632

     

     

     

     

     

     

     

    Commitments and contingencies (Note 13)

     

     

     

     

     

     

     

     

     

     

     

    Shareholders’ equity:

     

     

     

     

     

    Preferred stock, $.000001 par value, 3,750,000 shares authorized, no shares issued at March 31, 2007 and 2006

     

    —

     

    —

     

    Series A Junior Preferred stock, $.000001 par value, 1,250,000 shares authorized, no shares issued at March 31, 2007 and 2006

     

    —

     

    —

     

    Common stock, $.000001 par value and 450,000,000 shares authorized, 283,310,734 and 277,020,898 shares issued and outstanding at March 31, 2007 and 2006, respectively

     

    —

     

    —

     

    Additional paid-in capital

     

    963,553

     

    867,297

     

    Retained earnings

     

    427,777

     

    341,990

     

    Accumulated other comprehensive income

     

    20,202

     

    16,369

     

    Unearned compensation

     

    —

     

    (3,033

    )

     

     

     

     

     

     

    Total shareholders’ equity

     

    1,411,532

     

    1,222,623

     

    Total liabilities and shareholders’ equity

     

    $

    1,793,947

     

    $

    1,418,255

     

     
    		 As of March 31,
     
    		 2008
    		 2007
    Assets      
     Current assets:      
      Cash and cash equivalents $1,396,250 $384,409
      Short-term investments  52,962  570,440
      Accounts receivable, net of allowances of $129,411 and $91,418 at March 31, 2008 and 2007, respectively  203,420  148,694
      Inventories  146,874  91,231
      Software development  96,182  107,779
      Intellectual property licenses  18,661  27,784
      Deferred income taxes  41,242  51,564
      Other current assets  23,804  19,332
      
    		 
       Total current assets  1,979,395  1,401,233
     Long-term investments  91,215  —
     Software development  13,604  23,143
     Intellectual property licenses  64,890  72,490
     Property and equipment, net  54,528  46,540
     Deferred income taxes  32,825  48,791
     Other assets  15,055  6,376
     Goodwill  279,161  195,374
      
    		 
       Total assets $2,530,673 $1,793,947
      
    		 
    Liabilities and Shareholders' Equity      
     Current liabilities:      
      Accounts payable $129,896 $136,517
      Accrued expenses and other liabilities  426,175  204,652
      
    		 
       Total current liabilities  556,071  341,169
     Other liabilities  26,710  41,246
      
    		 
       Total liabilities  582,781  382,415
     Commitments and contingencies (Note 13)      
     Shareholders' equity:      
      Preferred stock, $.000001 par value, 3,750,000 shares authorized, no shares issued at March 31, 2008 and 2007  —  —
      Series A Junior Preferred stock, $.000001 par value, 1,250,000 shares authorized, no shares issued at March 31, 2008 and 2007  —  —
      Common stock, $.000001 par value and 450,000,000 shares authorized, 294,651,325 and 283,310,734 shares issued and outstanding at March 31, 2008 and 2007, respectively  —  —
      Additional paid-in capital  1,148,880  963,553
      Retained earnings  772,660  427,777
      Accumulated other comprehensive income  26,352  20,202
      
    		 
       Total shareholders' equity  1,947,892  1,411,532
      
    		 
       Total liabilities and shareholders' equity $2,530,673 $1,793,947
      
    		 

    The accompanying notes are an integral part of these consolidated financial statements.


    F-3


    ACTIVISION, INC. AND SUBSIDIARIES



    CONSOLIDATED STATEMENTS OF OPERATIONS



    (InAmounts in thousands, except per share data)

     

     

    For the fiscal years ended March 31,

     

     

     

    2007

     

    2006

     

    2005

     

     

     

     

     

     

     

     

     

    Net revenues

     

    $

    1,513,012

     

    $

    1,468,000

     

    $

    1,405,857

     

     

     

     

     

     

     

     

     

    Costs and expenses:

     

     

     

     

     

     

     

    Cost of sales – product costs

     

    799,587

     

    734,874

     

    658,949

     

    Cost of sales – software royalties and amortization

     

    132,353

     

    147,822

     

    123,800

     

    Cost of sales – intellectual property licenses

     

    46,125

     

    57,666

     

    62,197

     

    Product development

     

    133,073

     

    132,651

     

    87,776

     

    Sales and marketing

     

    196,213

     

    283,395

     

    230,299

     

    General and administrative

     

    132,514

     

    96,366

     

    63,228

     

     

     

     

     

     

     

     

     

    Total costs and expenses

     

    1,439,865

     

    1,452,774

     

    1,226,249

     

     

     

     

     

     

     

     

     

    Income from operations

     

    73,147

     

    15,226

     

    179,608

     

     

     

     

     

     

     

     

     

    Investment income, net

     

    36,678

     

    30,630

     

    13,092

     

     

     

     

     

     

     

     

     

    Income before income tax provision

     

    109,825

     

    45,856

     

    192,700

     

     

     

     

     

     

     

     

     

    Income tax provision

     

    24,038

     

    5,605

     

    57,643

     

     

     

     

     

     

     

     

     

    Net income

     

    $

    85,787

     

    $

    40,251

     

    $

    135,057

     

     

     

     

     

     

     

     

     

    Basic earnings per share

     

    $

    0.31

     

    $

    0.15

     

    $

    0.54

     

     

     

     

     

     

     

     

     

    Weighted average common shares outstanding

     

    281,114

     

    273,177

     

    250,023

     

     

     

     

     

     

     

     

     

    Diluted earnings per share

     

    $

    0.28

     

    $

    0.14

     

    $

    0.49

     

    Weighted average common shares outstanding – assuming dilution

     

    305,339

     

    294,002

     

    277,712

     

     
    		 For the fiscal years ended March 31,
     
    		 2008
    		 2007
    		 2006
    Net revenues $2,898,136 $1,513,012 $1,468,000
    Costs and expenses:         
     Cost of sales—product costs  1,240,605  799,587  734,874
     Cost of sales—software royalties and amortization  294,279  132,353  147,822
     Cost of sales—intellectual property licenses  110,551  46,125  57,666
     Product development  269,535  133,073  132,651
     Sales and marketing  308,143  196,213  283,395
     General and administrative  195,409  132,514  96,366
      
    		 
    		 
      Total costs and expenses  2,418,522  1,439,865  1,452,774
      
    		 
    		 
    Income from operations  479,614  73,147  15,226
    Investment income, net  51,254  36,678  30,630
      
    		 
    		 
      Income before income tax provision  530,868  109,825  45,856
    Income tax provision  185,985  24,038  5,605
      
    		 
    		 
    Net income $344,883 $85,787 $40,251
      
    		 
    		 
    Basic earnings per share $1.19 $0.31 $0.15
      
    		 
    		 
    Weighted average common shares outstanding  288,957  281,114  273,177
      
    		 
    		 
    Diluted earnings per share $1.10 $0.28 $0.14
      
    		 
    		 
    Weighted average common shares outstanding—assuming dilution  314,731  305,339  294,002
      
    		 
    		 

    The accompanying notes are an integral part of these consolidated financial statements.


    F-4


    ACTIVISION, INC. AND SUBSIDIARIES



    CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’SHAREHOLDERS' EQUITY



    For the fiscal years ended March 31, 2008, 2007, 2006, and 20052006

    (Amounts in thousands)

     

     

    Common Stock

     

    Additional
    Paid-In

     

    Retained

     

    Treasury Stock

     

    Accumulated
    Other
    Comprehensive

     

    Unearned

     

    Shareholders’

     

    (In thousands)

     

    Shares

     

    Amount

     

    Capital

     

    Earnings

     

    Shares

     

    Amount

     

    Income (Loss)

     

    Compensation

     

    Equity

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Balance, March 31, 2004

     

    296,669

     

    $

    —

     

    $

    797,626

     

    $

    166,682

     

    (52,525

    )

    $

    (144,128

    )

    $

    9,961

     

    $

    —

     

    $

    830,141

     

    Components of comprehensive income:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Net income for the year

     

    —

     

    —

     

    —

     

    135,057

     

    —

     

    —

     

    —

     

    —

     

    135,057

     

    Unrealized depreciation on short-term investments

     

    —

     

    —

     

    —

     

    —

     

    —

     

    —

     

    (3,317

    )

    —

     

    (3,317

    )

    Foreign currency translation adjustment

     

    —

     

    —

     

    —

     

    —

     

    —

     

    —

     

    4,974

     

    —

     

    4,974

     

    Total comprehensive income

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    —

     

    136,714

     

    Issuance of common stock to employees

     

    22,255

     

    —

     

    68,192

     

    —

     

    —

     

    —

     

    —

     

    —

     

    68,192

     

    Issuance of common stock pursuant to warrants and common stock warrants

     

    1,497

     

    —

     

    4,462

     

    —

     

    —

     

    —

     

    —

     

    —

     

    4,462

     

    Stock-based compensation

     

    —

     

    —

     

    3,368

     

    —

     

    —

     

    —

     

    —

     

    —

     

    3,368

     

    Tax benefit attributable to employee stock options and common stock warrants

     

    —

     

    —

     

    53,206

     

    —

     

    —

     

    —

     

    —

     

    —

     

    53,206

     

    Issuance of common stock to effect business combinations

     

    145

     

    —

     

    1,191

     

    —

     

    —

     

    —

     

    —

     

    —

     

    1,191

     

    Retirement of treasury shares

     

    (52,525

    )

    —

     

    (144,128

    )

    —

     

    52,525

     

    144,128

     

    —

     

    —

     

    —

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Balance, March 31, 2005

     

    268,041

     

    —

     

    783,917

     

    301,739

     

    —

     

    —

     

    11,618

     

    —

     

    1,097,274

     

    Components of comprehensive income:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Net income for the year

     

    —

     

    —

     

    —

     

    40,251

     

    —

     

    —

     

    —

     

    —

     

    40,251

     

    Unrealized appreciation on short-term investments

     

    —

     

    —

     

    —

     

    —

     

    —

     

    —

     

    10,576

     

    —

     

    10,576

     

    Foreign currency translation adjustment

     

    —

     

    —

     

    —

     

    —

     

    —

     

    —

     

    (5,825

    )

    —

     

    (5,825

    )

    Total comprehensive income

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    —

     

    45,002

     

    Issuance of common stock to employees

     

    8,782

     

    —

     

    45,188

     

    —

     

    —

     

    —

     

    —

     

    —

     

    45,188

     

    Stock-based compensation

     

    —

     

    —

     

    2,632

     

    —

     

    —

     

    —

     

    —

     

    —

     

    2,632

     

    Restricted stock grant

     

    —

     

    —

     

    3,500

     

    —

     

    —

     

    —

     

    —

     

    (3,500

    )

    —

     

    Cash distribution for fractional shares

     

    (7

    )

    —

     

    (100

    )

    —

     

    —

     

    —

     

    —

     

    —

     

    (100

    )

    Amortization of unearned compensation

     

    —

     

    —

     

    —

     

    —

     

    —

     

    —

     

    —

     

    467

     

    467

     

    Tax benefit attributable to employee stock options and common stock warrants

     

    —

     

    —

     

    29,367

     

    —

     

    —

     

    —

     

    —

     

    —

     

    29,367

     

    Issuance of common stock to effect business combinations

     

    205

     

    —

     

    2,793

     

    —

     

    —

     

    —

     

    —

     

    —

     

    2,793

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Balance, March 31, 2006

     

    277,021

     

    —

     

    867,297

     

    341,990

     

    —

     

    —

     

    16,369

     

    (3,033

    )

    1,222,623

     

    Components of comprehensive income:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Net income for the year

     

    —

     

    —

     

    —

     

    85,787

     

    —

     

    —

     

    —

     

    —

     

    85,787

     

    Unrealized depreciation, net of tax on short-term investments

     

    —

     

    —

     

    —

     

    —

     

    —

     

    —

     

    (8,224

    )

    —

     

    (8,224

    )

    Foreign currency translation adjustment

     

    —

     

    —

     

    —

     

    —

     

    —

     

    —

     

    12,057

     

    —

     

    12,057

     

    Total comprehensive income

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    —

     

    89,620

     

    Issuance of common stock to employees

     

    3,532

     

    —

     

    18,956

     

    —

     

    —

     

    —

     

    —

     

    —

     

    18,956

     

    Stock-based compensation

     

    —

     

     

     

    32,077

     

    —

     

    —

     

    —

     

    —

     

    —

     

    32,077

     

    Tax benefit attributable to employee stock options and common stock warrants

     

    —

     

    —

     

    11,338

     

    —

     

    —

     

    —

     

    —

     

    —

     

    11,338

     

    Issuance of common stock to effect business combinations

     

    2,758

     

    —

     

    36,918

     

    —

     

    —

     

    —

     

    —

     

    —

     

    36,918

     

    Reclassification of unearned compensation

     

    —

     

    —

     

    (3,033

    )

    —

     

    —

     

    —

     

    —

     

    3,033

     

    —

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Balance, March 31, 2007

     

    283,311

     

    $

    —

     

    $

    963,553

     

    $

    427,777

     

    —

     

    $

    —

     

    $

    20,202

     

    $

    —

     

    $

    1,411,532

     

     
    		 Common Stock
    		  
    		  
    		 Accumulated
    Other
    Comprehensive
    Income (Loss)
    		  
    		  
    		 
     
    		 Additional
    Paid-In
    Capital
    		 Retained
    Earnings
    		 Unearned
    Compensation
    		 Shareholders'
    Equity
    		 
     
    		 Shares
    		 Amount
    		 
    Balance, March 31, 2005 268,041 $— $783,917 $301,739 $11,618 $— $1,097,274 
    Components of comprehensive income:                     
     Net income for the year —  —  —  40,251  —  —  40,251 
     Unrealized appreciation on short-term investments, net of taxes —  —  —  —  10,576  —  10,576 
     Foreign currency translation adjustment —  —  —  —  (5,825) —  (5,825)
                       
    		 
      Total comprehensive income                   45,002 
    Issuance of common stock to employees 8,782  —  45,188  —  —  —  45,188 
    Stock-based compensation —  —  2,632  —  —  —  2,632 
    Restricted stock grant —  —  3,500  —  —  (3,500) — 
    Cash distribution for fractional shares (7) —  (100) —  —  —  (100)
    Amortization of unearned compensation —  —  —  —  —  467  467 
    Tax benefit attributable to employee stock options and common stock warrants —  —  29,367  —  —  —  29,367 
    Issuance of common stock to effect business combinations 205  —  2,793  —  —  —  2,793 
      
    		 
    		 
    		 
    		 
    		 
    		 
    		 
    Balance, March 31, 2006 277,021  —  867,297  341,990  16,369  (3,033) 1,222,623 
    Components of comprehensive income:                     
     Net income for the year —  —  —  85,787  —  —  85,787 
     Unrealized depreciation on short-term investments, net of taxes —  —  —  —  (8,224) —  (8,224)
     Foreign currency translation adjustment —  —  —  —  12,057  —  12,057 
                       
    		 
      Total comprehensive income                   89,620 
    Issuance of common stock to employees 3,532  —  18,956  —  —  —  18,956 
    Stock-based compensation —  —  32,077  —  —  —  32,077 
    Tax benefit attributable to employee stock options and common stock warrants —  —  11,338  —  —  —  11,338 
    Issuance of common stock to effect business combinations 2,758  —  36,918  —  —  —  36,918 
    Reclassification of unearned compensation —  —  (3,033) —  —  3,033  — 
      
    		 
    		 
    		 
    		 
    		 
    		 
    		 
    Balance, March 31, 2007 283,311  —  963,553  427,777  20,202  —  1,411,532 
    Components of comprehensive income:                     
     Net income for the year —  —  —  344,883  —  —  344,883 
     Unrealized depreciation on investments, net of taxes —  —  —  —  (1,896) —  (1,896)
     Foreign currency translation adjustment —  —  —  —  8,046  —  8,046 
                       
    		 
      Total comprehensive income                   351,033 
    Issuance of common stock pursuant to employee stock options, restricted stock rights, employee stock purchase plans and employee bonuses 9,954  —  49,869  —  —  —  49,869 
    Stock-based compensation expense related to employee stock options, restricted stock rights, and employee stock purchase plans —  —  55,322  —  —  —  55,322 
    Tax benefit associated with employee stock options —  —  57,335  —  —  —  57,335 
    Issuance of common stock to effect business combinations (see note 8) 1,386  —  25,864  —  —  —  25,864 
    Employee tender offer (see note 14) —  —  (3,063) —  —  —  (3,063)
      
    		 
    		 
    		 
    		 
    		 
    		 
    		 
    Balance, March 31, 2008 294,651 $— $1,148,880 $772,660 $26,352 $— $1,947,892 
      
    		 
    		 
    		 
    		 
    		 
    		 
    		 

    The accompanying notes are an integral part of these consolidated financial statements.


    F-5


    ACTIVISION, INC. AND SUBSIDIARIES

    CONSOLIDATED STATEMENTS OF CASH FLOWS

    (Amounts in thousands)

    (In thousands)

     

     

    For the fiscal years ended March 31,

     

     

     

    2007

     

    2006

     

    2005

     

    Cash flows from operating activities:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Net income

     

    $

    85,787

     

    $

    40,251

     

    $

    135,057

     

    Adjustments to reconcile net income to net cash provided by operating activities:

     

     

     

     

     

     

     

    Deferred income taxes

     

    (44,092

    )

    (28,453

    )

    (674

    )

    Depreciation and amortization

     

    30,155

     

    14,634

     

    10,702

     

    Realized gain on sale of short term investments

     

    (1,823

    )

    (4,297

    )

    (471

    )

    Amortization and write-offs of capitalized software development costs and intellectual property licenses

     

    91,456

     

    173,602

     

    134,799

     

    Amortization of stock compensation expenses

     

    25,522

     

    3,099

     

    3,368

     

    Tax benefit of stock options and warrants exercised

     

    11,338

     

    29,367

     

    53,206

     

    Excess tax benefit from stock option exercises

     

    (9,012

    )

    —

     

    —

     

    Change in operating assets and liabilities (net of effects of acquisitions):

     

     

     

     

     

     

     

    Accounts receivable, net

     

    (108,802

    )

    80,405

     

    (46,527

    )

    Inventories

     

    (26,124

    )

    (13,465

    )

    (21,591

    )

    Software development and intellectual property licenses

     

    (166,138

    )

    (193,927

    )

    (126,938

    )

    Other assets

     

    7,294

     

    (2,038

    )

    1,543

     

    Accounts payable

     

    41,115

     

    (19,985

    )

    35,413

     

    Accrued expenses and other liabilities

     

    90,486

     

    6,814

     

    37,422

     

     

     

     

     

     

     

     

     

    Net cash provided by operating activities

     

    27,162

     

    86,007

     

    215,309

     

     

     

     

     

     

     

     

     

    Cash flows from investing activities:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Cash used in business acquisitions (net of cash acquired)

     

    (30,545

    )

    (6,890

    )

    (21,382

    )

    Capital expenditures

     

    (17,935

    )

    (30,406

    )

    (14,941

    )

    Increase in restricted cash

     

    —

     

    (7,500

    )

    —

     

    Purchase of short-term investments

     

    (479,533

    )

    (242,568

    )

    (868,723

    )

    Proceeds from sales and maturities of short-term investments

     

    492,771

     

    201,568

     

    761,150

     

     

     

     

     

     

     

     

     

    Net cash used in investing activities

     

    (35,242

    )

    (85,796

    )

    (143,896

    )

     

     

     

     

     

     

     

     

    Cash flows from financing activities:

     

     

     

     

     

     

     

    Proceeds from issuance of common stock to employees and common stock pursuant to warrants

     

    18,956

     

    45,088

     

    72,654

     

    Excess tax benefit from stock option exercises

     

    9,012

     

    —

     

    —

     

     

     

     

     

     

     

     

     

    Net cash provided by financing activities

     

    27,968

     

    45,088

     

    72,654

     

     

     

     

     

     

     

     

     

    Effect of exchange rate changes on cash

     

    10,190

     

    (4,576

    )

    4,421

     

     

     

     

     

     

     

     

     

    Net increase in cash and cash equivalents

     

    30,078

     

    40,723

     

    148,488

     

     

     

     

     

     

     

     

     

    Cash and cash equivalents at beginning of period

     

    354,331

     

    313,608

     

    165,120

     

     

     

     

     

     

     

     

     

    Cash and cash equivalents at end of period

     

    $

    384,409

     

    $

    354,331

     

    $

    313,608

     

     
    		 For the fiscal years ended March 31,
    		 
     
    		 2008
    		 2007
    		 2006
    		 
    Cash flows from operating activities:          
     Net income $344,883 $85,787 $40,251 
     Adjustments to reconcile net income to net cash provided by operating activities:          
      Deferred income taxes  24,550  (44,092) (28,453)
      Depreciation and amortization  34,128  30,155  14,634 
      Loss on disposal of property and equipment  1,522  —  — 
      Realized gain on sale of short term investments  (1,103) (1,823) (4,297)
      Amortization and write-offs of capitalized software development costs and intellectual property licenses(1)  209,419  91,456  173,602 
      Stock-based compensation expense(2)  53,565  25,522  3,099 
      Tax benefit of stock options and warrants exercised  57,335  11,338  29,367 
      Excess tax benefits from stock option exercises  (57,151) (9,012) — 
     Change in operating assets and liabilities (net of effects of acquisitions):          
      Accounts receivable, net  (52,416) (108,802) 80,405 
      Inventories  (55,643) (26,124) (13,465)
      Software development and intellectual property licenses  (168,768) (166,138) (193,927)
      Other assets  (11,816) 7,294  (2,038)
      Accounts payable  (6,497) 41,115  (19,985)
      Accrued expenses and other liabilities  201,492  90,486  6,814 
      
    		 
    		 
    		 
      Net cash provided by operating activities  573,500  27,162  86,007 
      
    		 
    		 
    		 
    Cash flows from investing activities:          
     Cash used in business acquisitions (net of cash acquired)  (68,797) (30,545) (6,890)
     Capital expenditures  (29,400) (17,935) (30,406)
     Proceeds from disposal of property and equipment  243  —  — 
     Increase in restricted cash  (4,050) —  (7,500)
     Purchase of investments  (556,643) (479,533) (242,568)
     Proceeds from sales and maturities of investments  984,938  492,771  201,568 
      
    		 
    		 
    		 
     Net cash provided by (used in) investing activities  326,291  (35,242) (85,796)
      
    		 
    		 
    		 
    Cash flows from financing activities:          
     Proceeds from issuance of common stock to employees and common stock pursuant to warrants  48,012  18,956  45,088 
     Excess tax benefits from stock option exercises  57,151  9,012  — 
      
    		 
    		 
    		 
     Net cash provided by financing activities  105,163  27,968  45,088 
      
    		 
    		 
    		 
    Effect of exchange rate changes on cash  6,887  10,190  (4,576)
      
    		 
    		 
    		 
    Net increase in cash and cash equivalents  1,011,841  30,078  40,723 
    Cash and cash equivalents at beginning of period  384,409  354,331  313,608 
      
    		 
    		 
    		 
    Cash and cash equivalents at end of period $1,396,250 $384,409 $354,331 
      
    		 
    		 
    		 
    (1)
    Excludes amortization of stock-based compensation expense.

    (2)
    Includes the net effects of capitalization and amortization of stock-based compensation expense.

    The accompanying notes are an integral part of these consolidated financial statements.


    F-6


    ACTIVISION, INC. AND SUBSIDIARIES



    Notes to Consolidated Financial Statements

    For the year ended March 31, 2007

    1.Summary of Significant Accounting Policies

    Business

            

    Business

    Activision, Inc. (“("Activision,”" the “Company,”"Company," or “we”"we") is a leading international publisher of interactive entertainment software and peripheral products. We have built a company with a diverse portfolio of products that spans a wide range of categories and target markets and that is used on a variety of game hardware platforms and operating systems. We have created, licensed, and acquired a group of highly recognizable brands,franchises, which we market to a variety of consumer demographics. Our products cover diverse game categories including action/adventure, action sports, racing, role-playing, simulation, first-person action, music-based gaming and strategy. Our target customer base ranges from casual players to game enthusiasts, children to adults, and mass-market consumers to “value”"value" buyers. We currently offer our products primarily in versions that operate on the Sony PlayStation 2 (“PS2”("PS2"), Sony PlayStation 3 (“PS3”("PS3"), Nintendo Wii (“Wii”("Wii"), and Microsoft Xbox 360 (“Xbox360”("Xbox360") console systems, Nintendo Game Boy Advance (“GBA”), Sony PlayStation Portable (“PSP”("PSP"), and Nintendo Dual Screen (“NDS”("NDS") hand-held devices, and the personal computer (“PC”("PC"). In prior years, we have also offered our products on the Sony PlayStation (“PS1”("PS1"), Microsoft Xbox (“Xbox”("Xbox"), Nintendo GameCube (“NGC”("NGC"), Nintendo Game Boy Advance ("GBA"), and Nintendo 64 (“N64”("N64") console systems, and the Nintendo Game Boy Color (“GBC”("GBC") hand-held device.

            

    Our publishing business involves the development, marketing, and sale of products directly, by license, or through our affiliate label program with certain third-party publishers. Our distribution business consists of operations in Europe that provide logistical and sales services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.

            

    We maintain operations in the United States, Canada, the United Kingdom (“UK”("UK"), Germany, France, Italy, Spain, Japan, Australia, Sweden, South Korea, Norway, and the Netherlands. In fiscal year 2007, international2008, operations outside of North America contributed approximately 50%39% of consolidated net revenues.

    Principles of Consolidation

            

    The consolidated financial statements include the accounts of Activision, Inc., a Delaware corporation, and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

    Cash, Cash Equivalents, and Short-term Investments

            

    Cash and cash equivalents include cash, money markets, and short-term investments with original maturities of not more than 90 days.

            

    Short-term investments generally mature between three and thirty months. Investments with maturities beyond one year may be classified as short-term based on their liquid nature and because such securities represent the investment of cash that is available for current operations. All other investments that are not classified as short-term are classified as long-term investments. All of our short-term investments are classified as available-for-sale and are carried at fair market value with unrealized appreciation (depreciation) reported, net of taxes, as a component of accumulated other comprehensive income (loss) in shareholders’shareholders' equity. The specific identification method is used to determine the cost of securities disposed with realized gains and losses reflected in investment income, net.


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    1. Summary of Significant Accounting Policies (Continued)

    Restricted Cash – Cash—Compensating Balances

            

    As of March 31, 2007 and 2006, weWe maintained a $7.5 millionan irrevocable standby letter of credit.credit in the amount of a $10.0 million as of March 31, 2008 and $7.5 million as of March 31, 2007. The standby letter of credit is required by one of our inventory manufacturers to qualify for payment terms on our inventory purchases. Under the terms of this arrangement, we are required to maintain on deposit with the issuing bank a compensating balance, restricted as to use, of not less than the sum of the available amount of the letter of credit plus the aggregate amount of any drawings under the letter of credit that have been honored thereunder but not reimbursed. At March 31, 2008 and 2007, $11.6 million and 2006, the $7.5 million, depositrespectively, of restricted cash is included in short-term investments, as restricted cash.most of which is related to that standby letter of credit.

    F-7


    Concentration of Credit Risk

            

    Financial instruments which potentially subject us to concentration of credit risk consist principally of temporary cash investments and accounts receivable. We place our temporary cash investments with financial institutions. At various times during the fiscal years ended March 31, 2008, 2007, 2006, and 2005,2006, we had deposits in excess of the Federal Deposit Insurance Corporation (“FDIC”("FDIC") limit at these financial institutions.

            

    Our customer base includes retail outlets and distributors, including mass-market retailers, consumer electronics stores, discount warehouses, and game specialty stores in the United States and countries worldwide. We perform ongoing credit evaluations of our customers and maintain allowances for potential credit losses. We generally do not require collateral or other security from our customers. We had two customers, Wal-Mart and GameStop, that accounted for 22%14% and 8%13% of consolidated net revenues for the fiscal year ended March 31, 20072008 and 26%17% and 6%10% of consolidated gross accounts receivable at March 31, 2007.2008, respectively. These customers were customers of both our publishing and distribution businesses. We had two customers, Wal-Mart and Gamestop, that accounted for 22% and 10%8% of consolidated net revenues for the year ended March 31, 20062007 and 43%26% and 4%6% of consolidated gross accounts receivable at March 31, 2006.2007, respectively. For the fiscal year ended March 31, 2005,2006, our two largest customer,customers, Wal-Mart and GameStop, accounted for 23%22% and 10% of consolidated net revenues.revenues, respectively.

    Financial Instruments

            

    Financial Instruments

    The estimated fair values of financial instruments have been determined using available market information and valuation methodologies described below. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

            

    The carrying amounts of cashCash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximatehave been recorded at the fair value due to their short-term nature. Short-term investments are carried at fair value with fair values being estimated based on quoted market prices. Long-term investments are comprised of AAA-rated student loan backed taxable auction rate securities. On an industry-wide basis, many auctions have failed, including those for our auction rate securities, and as of yet, a meaningful secondary market for these instruments has not emerged. As a result, quoted market prices are not available, and we estimated the fair market value using valuation models, which take into account both


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    1. Summary of Significant Accounting Policies (Continued)


    observable market data and non-observable factors including credit quality, duration, insurance wraps, collateral composition, maximum rate formulas, comparable trading instruments, and likelihood of redemption. Accordingly, we consider the values generated by such valuation models to represent management's best estimate of fair value for the purposes of applying the Statement of Financial Accounting Standards No. 115Accounting for Certain Investments in Debt and Equity Securities.

    We account for derivative instruments in accordance with Statement of Financial Accounting Standard (“SFAS”Standards ("SFAS") No. 133, “AccountingAccounting for Derivative Instruments and Hedging Activities”, SFAS No. 138, “AccountingAccounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133”133 and SFAS No. 149, “AmendmentAmendment of Statement 133 on Derivative Instruments and Hedging Activities.”Activities. SFAS No. 133, 138, and 149 require that all derivatives, including foreign exchange contracts, be recognized in the balance sheet in other current assets or accrued expensesliabilities at their fair value.

            

    We utilize forward contracts in order to reduce financial market risks. These instruments are used to hedge foreign currency exposures of underlying assets or liabilities. Our accounting policies for these instruments are based on whether they meet the criteria for designation as hedging transactions. Changes in fair value of derivatives that are designated as cash flow hedges, are highly effective, and qualify as hedging instruments, are recorded in other comprehensive income until the underlying hedged item is recognized in earnings within the financial statement line item consistent with the hedged item.earnings. Any ineffective portion of a derivativederivative's change in fair value is immediately recognized in earnings. Changes in fair value of derivatives that do not qualify as hedging instruments are recorded in earnings. The fair value of foreign currency contracts is estimated based on the spot rate of the various hedged currencies as of the end of the period. As of March 31, 2008, we had no outstanding foreign exchange forward contracts. As of March 31, 2007, accrued expenses included approximately $90,000 of pre-tax unrealized losses for the estimated fair value of outstanding foreign currency exchange forward contracts, which was recorded in earnings as the contracts did not qualify as hedging instruments. As of March 31, 2006, we had no outstanding foreign exchange forward contracts.

    Equity Investments

    From time to time, we may make a capital investment and hold a minority interest in a third-party developer in connection with entertainment software products to be developed by such developer for us. We account for those capital investments over which we have the ability to exercise significant influence using the equity method. For

    F-8


    those investments over which we do not have the ability to exercise significant influence, we account for our investment using the cost method.

    Software Development Costs and Intellectual Property Licenses

            

    Software development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products.

    We account for software development costs in accordance with Statement of Financial Accounting Standards No. 86, “AccountingAccounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.”Marketed. Software development costs are capitalized once the technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses both technical design documentation and game design documentation. Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established. For products where proven technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product basis. Prior to a product’sproduct's release, we expense, as part of “cost"cost of sales – sales—software royalties and amortization,”" capitalized costs when we believe such amounts are not recoverable. Capitalized costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation. Amounts related to software development which are not capitalized are charged immediately to product development expense. We evaluate the future recoverability of capitalized amounts on a quarterly basis. The recoverability of capitalized software development costs is evaluated based on the expected performance of the specific products for which the costs relate.Criteria used to evaluate expected product performance include: historical performance of comparable products using comparable technology; orders for the product prior to its release; and estimated performance of a sequel product based on the performance of the product on which the sequel is based.

            

    Commencing upon product release, capitalized software development costs are amortized to “cost"cost of sales – sales—software royalties and amortization”amortization" based on the ratio of current revenues to total projected revenues for the specific product, generally resulting in an amortization period of six months or less. For products that have been released in prior periods, we evaluate the future recoverability


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    1. Summary of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.Significant Accounting Policies (Continued)

            

    Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established, as well as in the ongoing assessment of the recoverability of capitalized costs. In evaluating the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additional costs to be incurred. If revised forecasted or actual product sales are less than, and/or revised forecasted or actual costs are greater than, the original forecasted amounts utilized in the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment charge.

    Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology, music or other intellectual property or proprietary rights in the development of our products. Depending upon the agreement with the rights holder, we may obtain the rights to use acquired intellectual property in multiple products over multiple years, or alternatively, for a single product. Prior to the related product's release, we expense, as part of "cost of sales—intellectual property licenses," capitalized intellectual property costs when we believe such amounts are not recoverable. Capitalized intellectual property costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation.

            Commencing upon the related product's release, capitalized intellectual property license costs are amortized to "cost of sales—intellectual property licenses" based on the ratio of current revenues for the specific product to total projected revenues for all products in which the licensed property will be utilized. As intellectual property license contracts may extend for multiple years, the amortization of capitalized intellectual property license costs relating to such contracts may extend beyond one year.

    We evaluate the future recoverability of capitalized software development costs and intellectual property licenses on a quarterly basis. TheFor products that have been released in prior periods, the primary evaluation criterion is actual title performance. For products that are scheduled to be released in future periods, recoverability of capitalized intellectual property license costs is evaluated based on the expected performance of the specific products to which the costs relate or in which the licensed trademark or copyright is to be used. AsCriteria used to evaluate expected product performance include: historical performance of comparable products developed with comparable technology; orders for the product prior to its release; and, for any sequel product, estimated performance based on the performance of the product on which the sequel is based. Further, as many of our intellectual property licenses extend for multiple products over multiple years, we also assess the recoverability of capitalized intellectual property license costs based on certain qualitative factors, such as the success of other products and/or entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical releases or television series based on the intellectual property, and the rights holder’sholder's continued promotion and exploitation of the intellectual property. Prior to the related product’s release, we expense, as part of “cost of sales – intellectual property licenses,” capitalized intellectual property costs when we believe such amounts are not recoverable. Capitalized intellectual property costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation. Criteria used to evaluate expected product performance include: historical performance of comparable products using comparable technology; orders for the

            

    F-9


    product prior to its release; and estimated performance of a sequel product based on the performance of the product on which the sequel is based.

    Commencing upon the related product’s release, capitalized intellectual property license costs are amortized to “cost of sales – intellectual property licenses” based on the ratio of current revenues for the specific product to total projected revenues for all products in which the licensed property will be utilized. As intellectual property license contracts may extend for multiple years, the amortization of capitalized intellectual property license costs relating to such contracts may extend beyond one year. For intellectual property included in products that have been released, we evaluate the future recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.

    Significant management judgments and estimates are utilized in the assessment of the recoverability of capitalized costs. In evaluating the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additional costs to be incurred. If revised forecasted or actual product sales are less than, and/or revised forecasted or actual costs are greater than, the original forecasted amounts utilized in the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment charge. Additionally, as noted above, as many of our intellectual property licenses extend for multiple products over multiple years, we also assess the recoverability of capitalized intellectual property license costs based on certain qualitative factors such as the success of other products and/or entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical releases or television series based on the intellectual property and the rights holder’sholder's continued promotion and exploitation of the intellectual property. Material differences may result in the amount and timing of charges for any period if management makes different judgments or utilizes different estimates in evaluating these qualitative factors.

    Inventories

            

    Inventories are valued at the lower of cost (first-in, first-out) or market.


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    1. Summary of Significant Accounting Policies (Continued)

    Property and Equipment

            

    Property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the shorter of the estimated useful lives or the lease term: buildings, 25 to 33 years; computer equipment, office furniture and other equipment, 2 to 5 years; leasehold improvements, through the life of the lease. When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed and any resulting gains or losses are recognized in current operations.

    Goodwill and Other Intangible Assets

    Goodwill

    We account for goodwill using the provisions of Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets. ("SFAS No. 142, “Goodwill and Other Intangibles.” SFAS No. 142 addresses financial accounting and reporting requirements for acquired goodwill and other intangible assets.142.") Under SFAS No. 142, goodwill is deemed to have an indefinite useful life and shouldis not be amortized but rather tested at least annually for impairment.impairment at the reporting unit level. An impairment loss should beis recognized if the carrying amount of goodwill is not recoverable and its carrying amount exceeds its fair value. Our impairment tests as of March 31, 2008, 2007, 2006, and 20052006 did not indicate that goodwill was impaired. Our reporting units are determined based on the guidance provided by SFAS No. 142 and EITF Issue D-101 "Clarification of Reporting Unit Guidance in Paragraph 30 of SFAS No. 142," and at March 31, 2008 consisted of our publishing and distribution operating segments. In accordance with SFAS No. 142, we have not amortized goodwill during the fiscal years ended March 31, 2008, 2007, 2006, and 2005.2006. SFAS No. 142 also requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long Lived Assets ("SFAS No. 144") when events or circumstances indicate that the carrying value may not be recoverable. The Company determined there was no impairment of intangible assets for the years ended March 31, 2008, 2007, and 2006.

    Revenue Recognition

    We recognize revenue from the sale of our products upon the transfer of title and risk of loss to our customers.customers, and once any performance obligations have been completed. Certain products are sold to customers with a street date (i.e., a(the earliest date on whichthese products are made widely availablemay be sold by retailers). For these products we recognize revenue no earlier thanon the later of the street date or the sale date. Revenue from product sales is recognized after deducting the estimated allowance for returns and price protection. With respect to license agreements that provide customers the right to make multiple copies in exchange for guaranteed amounts, revenue is recognized upon delivery of such copies.a master copy. Per copy royalties on sales that exceed the guarantee are recognized as earned. Some of our software products provide limited online features at no additional cost to the consumer. Generally, we consider such features to be incidental to the overall product offering and an inconsequential deliverable. Accordingly, we do not defer any revenue related to products containing these limited online features. In instances where online features or additional functionality is considered a substantive deliverable in addition to the software product, we take this into account when applying our revenue recognition policy. This evaluation is performed for each software product when it is released. In fiscal 2008, we determined that one of our software titles,Enemy Territory: Quake Wars (which is primarily an online multiplayer personal computer ("PC") game), contains online functionality that constitutes a more-than-inconsequential separate service deliverable in addition to the product, principally because of its importance to game play. As such, our performance obligations for this title extend beyond the sale


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    1. Summary of Significant Accounting Policies (Continued)


    of the game, which is unique compared to other previously released titles. Vendor-specific objective evidence of fair value ("VSOE") does not exist for the online functionality, as we do not separately charge for this component of the title. As a result, we are recognizing all of the revenue from the sale of this title ratably over an estimated service period, which is currently estimated to be six months beginning the month after shipment. In addition, we are deferring the costs of sales for this title, which includes: manufacturing costs, software royalties and amortization, and intellectual property licenses. Overall, online play functionality is still an emerging area for us. As we move forward, we will monitor this developing functionality and its significance for our products.

    With respect to on-lineonline transactions, such as electronic downloads of titles or product add-ons, revenue is recognized when the fee is paid by the on-lineonline customer to purchase online content and we are notified by the

    F-10


    online retailer that the product has been downloaded. In addition, in order to recognize revenue for both product sales and licensing transactions, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable. Revenue recognition also determines the timing of certain expenses, including “cost of sales – intellectual property licenses” and “cost of sales – software royalties and amortization.”

    Sales incentives or other consideration given by us to our customers areis accounted for in accordance with the Financial Accounting Standards Board’sBoard's Emerging Issues Task Force (“EITF”("EITF") Issue 01-9, “AccountingAccounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)Vendor's Products).” In accordance with EITF Issue 01-9, sales incentives and other consideration that are considered adjustments of the selling price of our products, such as rebates and product placement fees, are reflected as reductions of revenue. Sales incentives and other consideration that represent costs incurred by us for assets or services received, such as the appearance of our products in a customer’scustomer's national circular ad, are reflected as sales and marketing expenses.

    Allowances for Returns, Price Protection, Doubtful Accounts, and Inventory Obsolescence

    In determining the appropriate unit shipments to our customers, we benchmark our titles using historical and industry data.        We closely monitor and analyze the historical performance of our various titles, the performance of products released by other publishers, and the anticipated timing of other releases in order to assess future demands of current and upcoming titles. Initial volumes shipped upon title launch and subsequent reorders are evaluated to ensure that quantities are sufficient to meet the demands from the retail markets, but at the same time are controlled to prevent excess inventory in the channel. We benchmark units to be shipped to our customers using historical and industry data.

            

    We may permit product returns from, or grant price protection to, our customers under certain conditions. In general, price protection refers to the circumstances when we elect to decrease the wholesale price of a product by a certain amount and, when granted and applicable, allows customers a credit against amounts owed by such customers to us with respect to open and/or future invoices. The conditions our customers must meet to be granted the right to return products or price protection are, among other things, compliance with applicable payment terms, and consistent delivery to us of inventory and sell-through reports. We may also consider other factors, including the facilitation of slow-moving inventory and other market factors. Management must make estimates of potential future product returns and price protection related to current period product revenue. We estimate the amount of future returns and price protection for current period product revenue utilizing historical experience and information regarding inventory levels and the demand and acceptance of our products by the end consumer. The following factors are used to estimate the amount of future returns and price protection for a particular title: historical performance of titles in similar genres; historical performance of the hardware platform; historical performance of the brand;franchise; console hardware life cycle; Activision sales force and retail customer feedback; industry pricing; weeks of on-hand retail


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    1. Summary of Significant Accounting Policies (Continued)


    channel inventory; absolute quantity of on-hand retail channel inventory; our warehouse on-hand inventory levels; the title’stitle's recent sell-through history (if available); marketing trade programs; and competing titles. The relative importance of these factors varies among titles depending upon, among other items, genre, platform, seasonality, and sales strategy. Significant management judgments and estimates must be made and used in connection with establishing the allowance for returns and price protection in any accounting period. Based upon historical experience we believe our estimates are reasonable. However, actual returns and price protection could vary materially from our allowance estimates due to a number of reasons including, among others, a lack of consumer acceptance of a title, the release in the same period of a similarly themed title by a competitor, or technological obsolescence due to the emergence of new hardware platforms. Material differences may result in the amount and timing of our revenue for any period if factors or market conditions change or if management makes different judgments or utilizes different estimates in determining the allowances for returns and price protection. For example, a 1% change in our March 31, 20072008 allowance for returns and price protection would impact net revenues by $0.9$1.3 million.

            

    Similarly, management must make estimates of the uncollectibility of our accounts receivable. In estimating the allowance for doubtful accounts, we analyze the age of current outstanding account balances, historical bad debts, customer concentrations, customer creditworthiness, current economic trends, and changes in our customers’customers' payment terms and their economic condition, as well as whether we can obtain sufficient credit insurance. Any significant changes in any of these criteria would affect management’smanagement's estimates in establishing our allowance for doubtful accounts.

            

    We value inventory at the lower of cost or market. We regularly review inventory quantities on hand and in the retail channel and record a provision for excess or obsolete inventory based on the future expected demand for

    F-11


    our products. Significant changes in demand for our products would impact management’smanagement's estimates in establishing our inventory provision.

    Shipping and Handling

            

    Shipping and handling costs, which consist primarily of packaging and transportation charges incurred to move finished goods to customers, are included in cost"cost of sales – sales—product costs."

    Advertising Expenses

            

    Advertising Expenses

    We expense advertising as incurred, except for production costs associated with media advertising which are deferred and charged to expense the first time the related ad is run. Advertising expenses for the fiscal years ended March 31, 2008, 2007, 2006, and 20052006 were approximately $180.3 million, $98.4 million, $192.6 million, and $150.7$192.6 million, respectively, and are included in sales and marketing expense in the Consolidated Statements of Operations.

    Investment Income, Net

    Investment income, net is comprised of the following, (amounts in thousands):

     

     

    For the fiscal years ended March 31,

     

     

     

    2007

     

    2006

     

    2005

     

    Interest income

     

    $

    34,952

     

    $

    26,595

     

    $

    12,898

     

    Interest expense

     

    (97

    )

    (262

    )

    (277

    )

    Net realized gain on investments

     

    1,823

     

    4,297

     

    471

     

     

     

     

     

     

     

     

     

    Investment income, net

     

    $

    36,678

     

    $

    30,630

     

    $

    13,092

     

    Income Taxes

    We account for income taxes using Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes ("SFAS No. 109, “Accounting for Income Taxes.”109.") Under SFAS No. 109, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    1. Summary of Significant Accounting Policies (Continued)


    income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

    Foreign Currency Translation

            

    The functional currencies of our foreign subsidiaries are their local currencies. All assets and liabilities of our foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the end of the period, and revenue and expenses are translated at weighted average exchange rates during the period. The resulting translation adjustments are reflected as a component of accumulated other comprehensive income (loss) in shareholders’shareholders' equity.

    Comprehensive Income

            

    Comprehensive income includes net income, unrealized appreciation (depreciation) on short-term and long-term investments and foreign currency translation adjustments, and, if applicable, the effective portion of gains or losses on cash flow hedges that are presented as a component of accumulated other comprehensive income (loss) in shareholders’ equity.adjustments.

    Estimates

            

    F-12


    Estimates

    The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

    Earnings Per Common Share

            

    Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for all periods. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding, increased by common stock equivalents. Common stock equivalents are calculated using the treasury stock method and represent incremental shares issuable upon exercise of our outstanding options and warrants and, if applicable in the period, conversion of our convertible debt.warrants. However, potential common shares are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded.

    Stock-Based Compensation

    On April 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“Share-Based Payment ("SFAS 123R”No. 123R"), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases relatedmade pursuant to the Employee Stock Purchase Plan (“("employee stock purchases”purchases,"), based on estimated fair values. SFAS No. 123R supersedes our previous accounting under Accounting Principles Board Opinion No. 25, “AccountingAccounting for Stock Issued to Employees” (“Employees ("APB 25”No. 25."). In March 2005, the SEC issued Staff Accounting Bulletin No. 107, (“Share- Based Payment ("SAB 107”No. 107") relating to SFAS No. 123R. We have applied the provisions of SAB No. 107 in our adoption of SFAS No. 123R.


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    1. Summary of Significant Accounting Policies (Continued)

            

    We adopted SFAS No. 123R using the modified prospective transition method, which requires the application of the accounting standard as of April 1, 2006, the first day of our fiscal year 2007. The Company’sTherefore, commencing from our fiscal 2007, the Company's Consolidated Financial Statements as of and for the fiscal year ended March 31, 2007 reflect the impact of SFAS No. 123R. In accordance with the modified prospective transition method, the Company’sThe Company's Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.No. 123R in accordance with the modified prospective transition method. See Note 14 for additional information.

    In November 2005, the Financial Accounting Standards Board (“FASB”("FASB") issued FASB Staff Position (“FSP”("FSP") No. FAS 123(R)-3, “TransitionTransition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” (“Awards ("FSP 123R-3”No. 123R-3."). We have elected not to adopt the alternative transition method provided in the FSP No. 123R-3 for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123R. We followed paragraph 81 of SFAS No. 123R to calculate the initial pool (“("APIC pool”pool") of excess tax benefits and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123R.

    SFAS No. 123R requires companies to estimate the fair value of share-based payment awards on the measurement date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statement of Operations. Stock-based compensation expense recognized under SFAS No. 123R for the fiscal yearyears ended March 31, 2008 and March 31, 2007 was $53.6 million and $25.5 million.million, respectively. Prior to the adoption of SFAS No. 123R, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB No. 25 as allowed under Statement of Financial Accounting Standards No. 123, “AccountingAccounting for Stock-Based Compensation” (“Compensation ("SFAS 123”No. 123."). Under APB No. 25, compensation expense was recorded for the issuance of stock options and other stock-based compensation based on the intrinsic value of the stock options and other stock-based compensation on the date of grant or measurement date. Under the intrinsic value method, compensation expense was recorded on the measurement date only if the current market price of the underlying stock exceeded the stock option or other stock-based award’saward's exercise price. For the fiscal yearsyear ended March 31, 2006, and 2005, we recognized $3.1 million and $3.4

    F-13


    million, respectively, in stock-based compensation expense related to employee stock options and restricted stock, under APB No. 25. See Note 14 for additional information.

            

    Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in our Consolidated Statements of Operations for the fiscal year ended March 31, 20072008 includes compensation expense for share-based payment awards granted prior to, but not yet vested as of, April 1, 2006 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123, and compensation expense for the share-based payment awards granted subsequent to April 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. As stock-based compensation expense recognized in the Consolidated Statements of Operations for the fiscal year ended March 31, 20072008 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    2. Investment Income, Net

            Investment income, net is comprised of the following, (amounts in thousands):

     
    		 For the fiscal
    years ended March 31,
    		 
     
    		 2008
    		 2007
    		 2006
    		 
    Interest income $50,289 $34,952 $26,595 
    Interest expense  (138) (97) (262)
    Net realized gain on investments  1,103  1,823  4,297 
      
    		 
    		 
    		 
    Investment income, net $51,254 $36,678 $30,630 
      
    		 
    		 
    		 

    3. Acquisitions

    AsBizarre Creations

            On September 26, 2007, we acquired 100% of April 1, 2005,Bizarre Creations Limited ("Bizarre Creations") for an aggregate purchase price of $67.4 million in cash. In addition, in the event that certain financial performance measures of Bizarre Creations' business over a certain period of time (currently estimated to be 5 years from fiscal 2008) exceed specified target levels, the former shareholders of Bizarre Creations will be entitled to an additional amount of up to $40.0 million payable in shares of our common stock. The contingent consideration will be recorded as an addition to the purchase price if the specified target levels are met. Based in the United Kingdom (the "UK,") Bizarre Creations is a video game developer focusing on the racing category with its multi-million unit selling franchise Project Gotham Racing, a series for the Microsoft Xbox and the Microsoft Xbox360 platforms. Bizarre Creations has also developed and owns the Geometry Wars intellectual property. We expect that Bizarre Creations will play a role in our growth strategy as we changeddevelop intellectual property for the racing genre, expand our methoddevelopment capability and capacity for other genres and utilize Bizarre Creations' proprietary development technology.

            The results of valuation for share-based awards to a binomial-lattice model fromoperations of Bizarre Creations and the Black-Scholes option-pricing model (“Black-Scholes model”) which was used for options granted prior to April 1, 2005 for FAS 123estimated fair value disclosures. For additional information, see Note 14. Our determinationmarket values of fair value of share-based payment awards onthe acquired assets and liabilities have been included in our Consolidated Financial Statements since the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a numberacquisition. Pro forma consolidated statements of highly complex and subjective variables. These variables include, butoperations for this acquisition are not limited to our expected stock price volatilityshown, as they would not differ materially from reported results. The acquired finite-lived intangible assets are being amortized over the termestimated useful lives in proportion to the economic benefits consumed, which for some intangible assets are approximated by using the straight-line method. Goodwill has been included in the publishing segment of our business and is amortized over 15 years for tax purposes.


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    3. Acquisitions (Continued)

    Purchase Price Allocation

            The purchase price for the Bizarre Creations transaction was allocated to assets acquired and liabilities assumed as set forth below (amounts in thousands):

    Current assets $4,352 
    Property and equipment, net  2,203 
    Goodwill  55,833 
    Trademark, acquired contracts and acquired technologies  9,500 
    Deferred tax liability  (1,876)
    Other liabilities  (2,639)
      
    		 
     Total consideration $67,373 
      
    		 

    Purchased Intangible Assets

            The following table presents the components of the awards,purchased finite-lived intangible assets acquired in the Bizarre Creations acquisition (amounts in thousands):

     
    		 Estimated
    Useful
    Life
    (in years)
    		 Amount
    Finite-lived intangibles:     
    Trademark 8 $1,100
    Acquired contracts 0.5  2,800
    Acquired technologies 1 - 5  5,600
        
    Total finite-lived intangibles   $9,500
        

            The following table presents the gross and actualnet balances, and projected employee stock option exercise behaviors.

    2.Stock Splits

    In February 2005,accumulated amortization of the Board of Directors approved a four-for-three splitcomponents of our outstanding common shares effectedpurchased finite-lived intangible assets acquired in the form of a 33-1/3% stock dividend. The split was paid March 22, 2005 to shareholders of recordBizarre Creations acquisition as of March 7, 2005. In September 2005, the Board of Directors approved a four-for-three split of our outstanding common shares effected31, 2008 (amounts in the form of a 33-1/3% stock dividend. The split was paid October 24, 2005thousands):

     
    		 Gross
    		 Accumulated
    Amortization
    		 Effect
    of foreign
    currency rates
    		 Net
    Trademark $1,100 $— $(27)$1,073
    Acquired contracts  2,800  (2,767) (33) —
    Acquired technologies  5,600  (690) (130) 4,780
      
    		 
    		 
    		 
     Total $9,500 $(3,457)$(190)$5,853
      
    		 
    		 
    		 

    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to shareholders of record as of October 10, 2005. The par value of our common stock was maintained at the pre-split amount of $.000001. The Consolidated Financial Statements (Continued)

    3. Acquisitions (Continued)

            The estimated future amortization expense of our purchased finite-lived intangible assets acquired in the Bizarre Creations acquisition as of March 31, 2008 is as follows (amounts in thousands):

    Fiscal years ending March 31,
    		 Amount
    2009 $683
    2010  1,125
    2011  1,500
    2012  1,125
    2013  750
    Thereafter  670
      
    Total $5,853
      

    DemonWare

            On May 11, 2007, we completed our acquisition of DemonWare, Ltd., a provider of network middleware technologies for console and Notes thereto, including allPC games headquartered in Dublin, Ireland. We expect the acquisition to enable us to gain efficiencies related to online game development and to position us to take advantage of the growth in online gameplay that is expected to be driven by the next-generation consoles. The acquisition is immaterial to fiscal 2008 earnings per share and per share data,cash flow.

    RedOctane, Inc.

            On June 6, 2006, we completed our acquisition of 100% of RedOctane, Inc. ("RedOctane") for an aggregate accounting purchase price of $99.9 million, including transaction costs, consisting of $30.9 million in cash and 2,382,077 shares of Activision common stock valued at approximately $30.0 million based upon prevailing market prices which was issued on the closing date, and $39.0 million payable in Activision common stock within two years of the closing date, which is recorded in accrued expenses and other liabilities at March 31, 2008 and in other liabilities at March 31, 2007. In addition, in the event the net income of the business over a certain period of time exceeds specified target levels by certain amounts, certain former shareholders of RedOctane will be entitled to an additional amount of up to $51.0 million payable in shares of Activision common stock. The contingent consideration will be recorded as an additional element of the purchase price if those contingencies are achieved. We issued part of the contingent considerations in fiscal 2008 as the contingency was achieved (see Note 8 for additional information.) Based in Sunnyvale, California, RedOctane is a publisher, developer, and distributor of interactive entertainment software, hardware and accessories. RedOctane offers its interactive entertainment products in versions that operate on the PS2, Xbox 360, and PC, and its leading software product offering is Guitar Hero. RedOctane also designs, manufactures, and markets high quality video game peripherals and accessories.

            The results of operations of RedOctane and the estimated fair market values of the acquired assets and liabilities have been restatedincluded in the Consolidated Financial Statements since the date of acquisition. The acquired, finite-lived intangible assets are being amortized over estimated lives ranging from 0.6 to 1.6 years. Goodwill has been included in the publishing segment of our business and is non-deductible for tax purposes.


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    3. Acquisitions (Continued)

    Purchase Price Allocation

            The purchase price for the RedOctane transaction was allocated to assets acquired and liabilities assumed as ifset forth below (amounts in thousands):

    Current assets $17,530 
    Property and equipment, net  207 
    Other assets  1,033 
    Goodwill  87,004 
    Trademark and other intangibles  16,700 
    Deferred tax liability  (6,496)
    Other liabilities  (16,033)
      
    		 
     Total consideration $99,945 
      
    		 

    Purchased Intangible Assets

            The following table presents the stock splits had occurred ascomponents of the earliest period presented.purchased finite-lived intangible assets acquired in the RedOctane acquisition (amounts in thousands):

     
    		 Estimated
    Useful Life
    (in years)
    		 Amount
    Finite-lived intangibles:     
    Trademark 1.3 $1,000
    Development-related intangibles 0.6-1.6  15,700
        
    Total finite-lived intangibles   $16,700
        

            At March 31, 2008, the purchased finite-lived intangible assets acquired in the RedOctane acquisition were fully amortized. At March 31, 2007, the net purchased finite-lived intangible assets were $5.0 million which were included in other current assets.

            

    On March 7, 2005, in connection with our March 22, 2005 stock split, all shares of common stock held as treasury stock were formally cancelled and restored to the status of authorized but unissued shares of common stock.

    3.Acquisitions

    During the three years ended March 31, 2007,2008, we separately completed the acquisition of fourother three privately held interactive software development companies. We accounted for these acquisitions in accordance with SFAS No. 141, “Business Combinations.” SFAS No. 141which addresses financial accounting and reporting for business combinations, requiring that the purchase method be used to account and report for all business combinations. These acquisitions have further enabled us to implement our multi-platform development strategy by bolstering our internal product development capabilities for console systems and personal computers and strengthening our position in the first-person action, action/adventure, music-based gaming and action sports game categories. A significant portion of the purchase price for all of these acquisitions was assigned to goodwill as the primary asset that we acquired in each of the transactions was an assembled workforce with proven technical and design talent with a history of high quality product creation. Pro forma Consolidated Statements of Operations for all of these acquisitions in aggregate are not shown, as they would not differ materially from each year's reported results.


    ACTIVISION, INC. AND SUBSIDIARIES

    RedOctane, Inc.

    On June 6, 2006, we completed our acquisition of 100% of RedOctane, Inc. (“RedOctane”) for an aggregate accounting purchase price of $99.9 million, including transaction costs, consisting of $30.9 million in cash and 2,382,077 shares of Activision common stock valued at approximately $30.0 million based upon prevailing market prices which was issued on the closing date, and $39.0 million payable in Activision common stock

    F-14


    within two years of the closing date, which is recorded in other liabilities. In addition, in the event the net income of the business over a certain period of time exceeds specified target levels by certain amounts, certain former shareholders of RedOctane will be entitledNotes to an additional amount of up to $51.0 million payable in shares of Activision common stock. The contingent consideration will be recorded as an additional element of the purchase price if those contingencies are achieved. Based in Sunnyvale, California, RedOctane is a publisher, developer, and distributor of interactive entertainment software, hardware and accessories. RedOctane offers its interactive entertainment products in versions that operate on the PS2, Xbox 360, and PC, and its leading software product offering is Guitar Hero. RedOctane also designs, manufactures, and markets high quality video game peripherals and accessories. This acquisition provides Activision with an early leadership position in music-based gaming, which we expect will be one of the fastest growing genres in the coming years.

    The results of operations of RedOctane and the estimated fair market values of the acquired assets and liabilities have been included in the Consolidated Financial Statements since the date of acquisition. Pro forma Consolidated Statements of Operations for this acquisition are not shown, as they would not differ materially from reported results. The acquired, finite-lived intangible assets are being amortized over estimated lives ranging from 0.6 to 1.6 years. Goodwill has been included in the publishing segment of our business(Continued)

    4. Cash, Cash Equivalents, Short-Term and is non-deductible for tax purposes.Long-Term Investments

            

    Purchase Price Allocation

    The purchase price for the RedOctane transaction was allocated to assets acquired and liabilities assumed as set forth below (in thousands):

    Current assets

     

    $

    17,530

     

    Property and equipment, net

     

    207

     

    Other assets

     

    1,033

     

    Goodwill

     

    87,004

     

    Trademark and other intangibles

     

    16,700

     

    Deferred tax liability

     

    (6,496

    )

    Other liabilities

     

    (16,033

    )

    Total consideration

     

    $

    99,945

     

    Purchased Intangible Assets

    The following table presents details of the purchased finite-lived intangible assets acquired in the RedOctane acquisition (in thousands):

     

     

    Estimated
    Useful

     

     

     

     

     

    Life

     

     

     

     

     

    (in years)

     

    Amount

     

    Finite-lived intangibles:

     

     

     

     

     

    Trademark

     

    1.3

     

    $

    1,000

     

    Development-related intangibles

     

    0.6-1.6

     

    15,700

     

     

     

     

     

     

     

    Total finite-lived intangibles

     

     

     

    $

    16,700

     

    F-15


    The following tables present details ofsummarizes our total purchased finite-lived intangible assets which are included in other current assetscash, cash equivalents, short-term and long-term investments as of March 31, 2007 (in2008 (amounts in thousands):

     
    		 Amortized
    Cost
    		 Gross
    Unrealized
    Gains
    		 Gross
    Unrealized
    Losses
    		 Fair
    Value
    Cash and cash equivalents:            
     Cash and time deposits $266,270 $— $— $266,270
     Money market instruments  1,129,980  —  —  1,129,980
      
    		 
    		 
    		 
     Cash and cash equivalents  1,396,250  —  —  1,396,250
      
    		 
    		 
    		 
    Short-term investments:            
     U.S. agency issues  7,168  45  —  7,213
     Corporate bonds  17,031  71  —  17,102
     Mortgage-backed securities  11,927  5  (332) 11,600
     Commercial paper  5,493  3  —  5,496
     Restricted cash  11,551  —  —  11,551
      
    		 
    		 
    		 
     Short-term investments  53,170  124  (332) 52,962
      
    		 
    		 
    		 
    Cash, cash equivalents and short-term investments $1,449,420 $124 $(332)$1,449,212
      
    		 
    		 
    		 
    Long-term investments:            
     Taxable auction rate notes  95,538  —  (4,323) 91,215
      
    		 
    		 
    		 
      $95,538 $— $(4,323)$91,215
      
    		 
    		 
    		 
    Total cash, cash equivalent, short-term and long-term investments $1,544,958 $124 $(4,655)$1,540,427
      
    		 
    		 
    		 

     

     

    Gross

     

    Accumulated
    Amortization

     

    Net

     

    Trademark

     

    $

    1,000

     

    $

    660

     

    $

    340

     

    Other intangibles

     

    15,700

     

    11,042

     

    4,658

     

     

     

     

     

     

     

     

     

    Total

     

    $

    16,700

     

    $

    11,702

     

    $

    4,998

     

    ACTIVISION, INC. AND SUBSIDIARIES

    The estimated future amortization expense of purchased, finite-lived intangible assets as of March 31, 2007 is as follows (in thousands):Notes to Consolidated Financial Statements (Continued)

    Fiscal year ending March 31,

     

    Amount

     

    2008

     

    $

    4,998

     

    2009

     

    —

     

    2010

     

    —

     

    2011

     

    —

     

    Thereafter

     

    —

     

     

     

     

     

    Total

     

    $

    4,998

     

    4.Cash, Cash Equivalents, Short-Term and Short-TermLong-Term Investments (Continued)

            

    The following table summarizes our cash, cash equivalents, and short-term investments as of March 31, 2007 (amounts in thousands):

     
    		 Amortized
    Cost
    		 Gross
    Unrealized
    Gains
    		 Gross
    Unrealized
    Losses
    		 Fair
    Value
    Cash and cash equivalents:            
     Cash and time deposits $187,594 $— $— $187,594
     Commercial paper  86,776  —  (34) 86,742
     Money market instruments  106,986  —  —  106,986
     Corporate bonds  3,087  —  —  3,087
      
    		 
    		 
    		 
     Cash and cash equivalents  384,443  —  (34) 384,409
      
    		 
    		 
    		 
    Short-term investments:            
     U.S. agency issues  191,840  8  (1,011) 190,837
     Corporate bonds  103,006  39  (148) 102,897
     Mortgage-backed securities  33,142  —  (199) 32,943
     Taxable auction rate notes  114,698  —  —  114,698
     Asset-backed securities  7,754  2  (7) 7,749
     Commercial paper  92,018  —  (67) 91,951
     Certificate of deposit  21,866  2  (3) 21,865
     Restricted cash  7,500  —  —  7,500
      
    		 
    		 
    		 
     Short-term investments  571,824  51  (1,435) 570,440
      
    		 
    		 
    		 
     Cash, cash equivalents and short-term investments $956,267 $51 $(1,469)$954,849
      
    		 
    		 
    		 

    F-16


    The following table summarizes our cash, cash equivalents, and short-term investments as of March 31, 2006 (amounts in thousands):

     

     

    Amortized
    Cost

     

    Gross
    Unrealized
    Gains

     

    Gross
    Unrealized
    Losses

     

    Fair
    Value

     

    Cash and cash equivalents:

     

     

     

     

     

     

     

     

     

    Cash and time deposits

     

    $

    162,403

     

    $

    —

     

    $

    —

     

    $

    162,403

     

    Commercial paper

     

    141,086

     

    4

     

    (155

    )

    140,935

     

    Money market instruments

     

    37,560

     

    —

     

    —

     

    37,560

     

    U.S. agency issues

     

    13,436

     

    —

     

    (3

    )

    13,433

     

     

     

     

     

     

     

     

     

     

     

    Cash and cash equivalents

     

    354,485

     

    4

     

    (158

    )

    354,331

     

     

     

     

     

     

     

     

     

     

     

    Short-term investments:

     

     

     

     

     

     

     

     

     

    U.S. agency issues

     

    259,055

     

    —

     

    (3,444

    )

    255,611

     

    Corporate bonds

     

    171,207

     

    1

     

    (1,376

    )

    169,832

     

    Mortgage-backed securities

     

    55,139

     

    —

     

    (459

    )

    54,680

     

    Common stock

     

    47,868

     

    12,880

     

    —

     

    60,748

     

    Asset-backed securities

     

    16,866

     

    —

     

    (47

    )

    16,819

     

    Commercial paper

     

    15,016

     

    —

     

    (26

    )

    14,990

     

    Certificate of deposit

     

    10,468

     

    —

     

    (19

    )

    10,449

     

    Restricted cash

     

    7,500

     

    —

     

    —

     

    7,500

     

     

     

     

     

     

     

     

     

     

     

    Short-term investments

     

    583,119

     

    12,881

     

    (5,371

    )

    590,629

     

     

     

     

     

     

     

     

     

     

     

    Cash, cash equivalents and short-term investments

     

    $

    937,604

     

    $

    12,885

     

    $

    (5,529

    )

    $

    944,960

     

    Auction rate securities are securities that are structured with short-term reset dates of generally less than 90 days but with maturities in excess of 90 days. At the end of the reset period, investors can sell or continue to hold the securities at par. These securities are classified in the table below based on their legal stated maturity dates.

    The following table summarizes the final maturities of our investments in securities as of March 31, 2007 (amounts in thousands):

     

     

    Amortized
    Cost

     

    Fair
    Value

     

    Due after one year or less

     

    $

    378,929

     

    $

    378,105

     

    Due after one year through two years

     

    83,333

     

    83,251

     

    Due after two years through three years

     

    14,465

     

    14,158

     

     

     

    476,727

     

    475,514

     

     

     

     

     

     

     

    Auction rate notes

     

    114,698

     

    114,698

     

    Certificate of deposit

     

    21,866

     

    21,865

     

    Asset/mortgage backed securities

     

    40,896

     

    40,692

     

     

     

     

     

     

     

    Total investments in securities

     

    $

    654,187

     

    $

    652,769

     

    For the years ended March 31, 2007, 2006, and 2005 net realized gains on investments consisted of $1.8 million, $4.3 million, and $471,000 of gross realized gains, respectively, and no gross realized losses.

    F-17


    In accordance with EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” the fair value and FSP SFAS No. 115-1 and SFAS No. 124-1,The Meaning of investments in an unrealized loss position for which an other-than-temporary impairment has not been recognized was $496.2 millionOther-Than-Temporary Impairment and $672.4 million at March 31, 2007 and 2006, respectively, with related gross unrealized losses of $1.5 million and $5.5 million, respectively. At March 31, 2007, the gross unrealized losses were comprised mostly of unrealized losses on U.S. agency issues, corporate bonds, and mortgage-backed securities with $1.1 million of unrealized loss being in a continuous unrealized loss position for twelve months or greater. At March 31, 2006, the gross unrealized losses were comprised mostly of unrealized losses on U.S. agency issues, corporate bonds, and mortgage-backed securities with $3.9 million of unrealized loss being in a continuous unrealized loss position for twelve months or greater.

    The Company’s investment portfolio usually consists of government and corporate securities with effective maturities less than 30 months. The longer the term of the securities, the more susceptible they areIts Application to changes in market rates of interest and yields on bonds.Certain Investments investments are reviewed periodically to identify possible impairment. When evaluating the investments, the Company reviews factors such as the length of time and extent to which fair value has been below the cost basis, the financial condition of the issuer, and the Company’sCompany's ability and intent to hold the investment for a period of time which may be an amount of time sufficient forto recover the anticipated recovery in market value. The Company hasfollowing table illustrates the gross unrealized losses on securities available-for-sale and the fair value of those securities, aggregated by investment category as of March 31, 2008. The table also illustrates the length of time that they have been in a continuous unrealized loss position as of March 31, 2008 (amounts in thousands):

     
    		 Less than 12 months
    		 12 months or more
    		 Total
     
    		 Unrealized
    Losses
    		 Fair Value
    		 Unrealized
    Losses
    		 Fair Value
    		 Unrealized
    Losses
    		 Fair Value
    Taxable auction rate notes $(4,323)$91,215 $— $— $(4,323)$91,215
    Mortgage-backed securities  (2) 1,890  (330) 5,322  (332) 7,212
      
    		 
    		 
    		 
    		 
    		 
    Total temporarily impaired securities $(4,325)$93,105 $(330)$5,322 $(4,655)$98,427
      
    		 
    		 
    		 
    		 
    		 

    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    4. Cash, Cash Equivalents, Short-Term and Long-Term Investments (Continued)

            Our investment portfolio usually consists of government and corporate securities with effective maturities of less than 30 months, except for auction rate securities classified as long-term investments as of March 31, 2008 that have stated maturities of up to 39 years. The $4.7 million gross unrealized losses on securities available-for-sale represents 0.3% of total investments and cash and cash equivalents at amortized cost. These unrealized losses consist primarily of individual securities with unrealized losses of less than 10% of each security's amortized cost. The unrealized loss position of approximately $0.3 million of more than 12 months relates to a mortgage-backed security with a decline of approximately 6% of amortized cost.

            Based upon our analysis of the impaired securities, which includes consideration of the status of debt servicing, the financial condition of the issuer, and our intent and ability to hold the securities until they mature or recover their costs, we have concluded that the gross unrealized losses of $4.7 million at March 31, 2008 were temporary in nature. We have the intent and ability to hold these securities for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the initial cost of the investment. The Company expectsWe expect to realize the full value of all of these investments upon maturity or sale. However, facts and circumstances may change which could result in a decline in fair value considered to be other-than-temporary in the future.

            The following table illustrates the gross unrealized losses on securities available-for-sale and the fair value of those securities, aggregated by investment category as of March 31, 2007. The table also illustrates the length of time that they have been in a continuous unrealized loss position as of March 31, 2007 (amounts in thousands):

     
    		 Less than 12 months
    		 12 months or more
    		 Total
     
    		 Unrealized
    Losses
    		 Fair Value
    		 Unrealized
    Losses
    		 Fair Value
    		 Unrealized
    Losses
    		 Fair Value
    U.S. agency issues $(23)$17,146 $(988)$162,505 $(1,011)$179,651
    Corporate bonds  (123) 57,285  (25) 12,796  (148) 70,081
    Commercial paper  (100) 178,694  —  —  (100) 178,694
    Taxable auction rate notes  —  10,006  —  —  —  10,006
    Mortgage-backed securities  (126) 19,994  (80) 18,784  (206) 38,778
    Asset-backed securities  —  —  —  64  —  64
    Certificate of deposit  (4) 18,936  —  —  (4) 18,936
      
    		 
    		 
    		 
    		 
    		 
    Total temporarily impaired securities $(376)$302,061 $(1,093)$194,149 $(1,469)$496,210
      
    		 
    		 
    		 
    		 
    		 

            The increase from March 31, 2007 to March 31, 2008 in the total unrealized losses is predominantly due to the taxable auction rate notes category and relates primarily to the recent failed auctions. All of our investments in auction rate securities were classified as long-term investments at March 31, 2008 due to the recent failed auctions and uncertainties of the timing of liquidation. Our investments in auction rate securities are all backed by higher education student loans.


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    4. Cash, Cash Equivalents, Short-Term and Long-Term Investments (Continued)

            The following table summarizes the contractually stated maturities of our investments in corporate bonds, commercial paper, and U.S. agency issues as of March 31, 2008 (amounts in thousands):

     
    		 Amortized
    Cost
    		 Fair
    Value
    Due after one year or less $26,615 $26,669
    Due after one year through two years  3,077  3,142
    Due after two years through three years  —  —
      
    		 
      $29,692 $29,811
      
    		 

            For the years ended March 31, 2008, 2007, and 2006 gross realized gains on investments were $1.5 million, $1.8 million, and $4.3 million, respectively. Gross realized losses were $0.4 million for the year ended March 31, 2008, and zero for the years ended March 31, 2007 and 2006. The proceeds from the sale of available-for-sale securities were $193.0 million, $4.0 million, and $27.4 million for the years ended March 31, 2008, 2007, and 2006, respectively.

    5.Software Development Costs and Intellectual Property Licenses

            

    As of March 31, 2008, capitalized software development costs included $97.8 million of internally developed software costs and $12.0 million of payments made to third-party software developers. As of March 31, 2007, capitalized software development costs included $94.3 million of internally developed software costs and $36.6 million of payments made to third-party software developers. As of March 31, 2006, capitalized software development costs included $45.0 million of internally developed software costs and $15.6 million of payments made to third-party software developers. Capitalized intellectual property licenses were $100.3$83.6 million and $87.0$100.3 million as of March 31, 20072008 and 2006,2007, respectively. Amortization and write-offs of capitalized software development costs and intellectual property licenses, including capitalizatedcapitalized stock-based compensation expense, was $220.3 million, $94.0 million, $173.6 million, and $134.8$173.6 million for the years ended March 31, 2008, 2007, 2006, and 2005,2006, respectively.

    6. InventoriesInventories

            

    Our inventories consistconsisted of the following (amounts in thousands):

     
    		 As of March 31,
     
    		 2008
    		 2007
    Finished goods $144,549 $89,048
    Purchased parts and components  2,325  2,183
      
    		 
      $146,874 $91,231
      
    		 

     

     

    As of March 31,

     

     

     

    2007

     

    2006

     

     

     

     

     

     

     

    Finished goods

     

    $

    89,048

     

    $

    58,876

     

    Purchased parts and components

     

    2,183

     

    2,607

     

     

     

     

     

     

     

     

     

    $

    91,231

     

    $

    61,483

     

    ACTIVISION, INC. AND SUBSIDIARIES

    For the year ended March 31, 2006, we had write downs of inventory costs for certain titles in the amount of $14.5 million.Notes to Consolidated Financial Statements (Continued)

    F-18


    7.Property and Equipment, Net

            

    Property and equipment, net was comprised of the following (amounts in thousands):

     
    		 As of March 31,
    		 
     
    		 2008
    		 2007
    		 
    Land $722 $612 
    Buildings  5,818  4,915 
    Leasehold improvements  25,895  19,816 
    Computer equipment  74,700  61,382 
    Office furniture and other equipment  25,439  19,879 
      
    		 
    		 
     Total cost of property and equipment  132,574  106,604 
    Less accumulated depreciation  (78,046) (60,064)
      
    		 
    		 
     Property and equipment, net $54,528 $46,540 
      
    		 
    		 

            

     

     

    As of March 31,

     

     

     

    2007

     

    2006

     

     

     

     

     

     

     

    Land

     

    $

    612

     

    $

    557

     

    Buildings

     

    4,915

     

    4,463

     

    Leasehold improvements

     

    19,816

     

    18,904

     

    Computer equipment

     

    61,382

     

    50,795

     

    Office furniture and other equipment

     

    19,879

     

    18,480

     

     

     

     

     

     

     

    Total cost of property and equipment

     

    106,604

     

    93,199

     

     

     

     

     

     

     

    Less accumulated depreciation

     

    (60,064

    )

    (47,831

    )

     

     

     

     

     

     

    Property and equipment, net

     

    $

    46,540

     

    $

    45,368

     

    Depreciation expense for the years ended March 31, 2008, 2007, and 2006 and 2005 was $23.3 million, $17.8 million, $14.2 million, and $10.6$14.2 million, respectively.

    8. GoodwillGoodwill

            

    The changes in the carrying amount of goodwill were as follows (amounts in thousands):

     
    		 Publishing
    		 Distribution
    		 Total
    		 
    Balance as of March 31, 2006 $95,094 $5,352 $100,446 
     Goodwill acquired during the year  87,257  —  87,257 
     Issuance of contingent consideration  6,918  —  6,918 
     Adjustment-prior period purchase allocation  51  —  51 
     Effect of foreign currency exchange rates  22  680  702 
      
    		 
    		 
    		 
    Balance as of March 31, 2007  189,342  6,032  195,374 
      
    		 
    		 
    		 
     Goodwill acquired during the year  58,609  —  58,609 
     Issuance of contingent consideration  25,864  —  25,864 
     Adjustment-prior period purchase allocation  (318) —  (318)
     Effect of foreign currency exchange rates  (430) 62  (368)
      
    		 
    		 
    		 
    Balance as of March 31, 2008 $273,067 $6,094 $279,161 
      
    		 
    		 
    		 

            Goodwill acquired during the year represents goodwill of $55.8 million and $2.8 million related to the acquisitions of Bizarre Creations and DemonWare, respectively. See Note 3 for additional information. Issuance of contingent consideration consists of additional purchase consideration related to the acquisition of RedOctane Inc. and Vicarious Visions Inc. for $22.7 million and $3.1 million, respectively, which was paid in shares of our common stock.

     

     

    Publishing

     

    Distribution

     

    Total

     

    Balance as of March 31, 2005

     

    $

    85,899

     

    $

    5,762

     

    $

    91,661

     

     

     

     

     

     

     

     

     

    Goodwill acquired during the year

     

    6,459

     

    —

     

    6,459

     

    Issuance of contingent consideration

     

    2,793

     

    —

     

    2,793

     

    Adjustment-prior period purchase allocation

     

    (260

    )

    —

     

    (260

    )

    Effect of foreign currency exchange rates

     

    203

     

    (410

    )

    (207

    )

     

     

     

     

     

     

     

     

    Balance as of March 31, 2006

     

    95,094

     

    5,352

     

    100,446

     

     

     

     

     

     

     

     

     

    Goodwill acquired during the year

     

    87,257

     

    —

     

    87,257

     

    Issuance of contingent consideration

     

    6,918

     

    —

     

    6,918

     

    Adjustment-prior period purchase allocation

     

    51

     

    —

     

    51

     

    Effect of foreign currency exchange rates

     

    22

     

    680

     

    702

     

     

     

     

     

     

     

     

     

    Balance as of March 31, 2007

     

    $

    189,342

     

    $

    6,032

     

    $

    195,374

     


    ACTIVISION, INC. AND SUBSIDIARIES

    F-19


    Notes to Consolidated Financial Statements (Continued)

    9.Accrued Expenses and Other Liabilities

            

    Accrued expenses were comprised of the following (amounts in thousands):

     

    As of March 31,

     

     

    2007

     

    2006

     
    		 As of March 31,

     

     

     

     

     
    		 2008
    		 2007

    Accrued royalties payable

     

    $

    21,583

     

    $

    8,961

     

    		Accrued royalties payable $43,894 $21,583

    Accrued selling and marketing costs

     

    23,909

     

    24,637

     

    		Accrued selling and marketing costs 51,174 23,909

    Affiliate label program payable

     

    1,846

     

    1,121

     

    Common stock payable—RedOctaneCommon stock payable—RedOctane 39,000 —

    Income tax payable

     

    55,530

     

    2,253

     

    		Income tax payable 83,953 55,530

    Accrued payroll related costs

     

    63,249

     

    33,434

     

    		Accrued payroll related costs 125,279 63,249

    Accrued customer payments

     

    2,088

     

    5,077

     

    Accrued professional and legal costs

     

    9,494

     

    11,568

     

    		Accrued professional and legal costs 49,827 9,494

    Other

     

    26,953

     

    17,811

     

    		Other 33,048 30,887

     

     

     

     

     

    		  
    		 

    Total accrued expenses

     

    $

    204,652

     

    $

    104,862

     

    Total accrued expenses $426,175 $204,652
     
    		 

    10.Operations by Reportable Segments and Geographic Area

            

    We operate two business segments: (i) publishing of interactive entertainment software and peripherals and (ii) distribution of interactive entertainment software and hardware products.

            

    Publishing refers to the development, marketing, and sale of products directly, by license or through our affiliate label program with certain third-party publishers. In the United States, we primarily sell our products on a direct basis to mass-market retailers, consumer electronics stores, discount warehouses, and game specialty stores. We conduct our international publishing activities through offices in the UK, Germany, France, Italy, Spain, the Netherlands, Norway, Australia, Sweden, Canada, South Korea and Japan. Our products are sold internationally on a direct-to-retail basis and through third-party distribution and licensing arrangements and through our wholly-owned distribution subsidiaries located in the UK, the Netherlands, and Germany.

            

    Distribution refers to our operations in the UK, the Netherlands, and Germany that provide logistical and sales services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.

            

    Resources are allocated to each of these segments using information on their respective net revenues and operating profits before interest and taxes.

    The accounting policies of these segments are the same as those described in the Summary of Significant Accounting Policies. Transactions between segments are eliminated in consolidation.

            

    F-20


    Information on the reportable segments for the three years ended March 31, 20072008 is as follows (amounts in thousands):

     
    		 For the year ended March 31, 2008
    		 
     
    		 Publishing
    		 Distribution
    		 Total
    		 
    Total segment revenues $2,645,494 $392,970 $3,038,464 
    Revenue from sales between segments  (140,328) —  (140,328)
      
    		 
    		 
    		 
    Revenues from external customers $2,505,166 $392,970 $2,898,136 
      
    		 
    		 
    		 
    Operating income $461,718 $17,896 $479,614 
      
    		 
    		 
    		 
    Total assets $2,371,661 $159,012 $2,530,673 
      
    		 
    		 
    		 

    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    10. Operations by Reportable Segments and Geographic Area (Continued)

     
    		 For the year ended March 31, 2007
    		 
     
    		 Publishing
    		 Distribution
    		 Total
    		 
    Total segment revenues $1,199,764 $393,974 $1,593,738 
    Revenue from sales between segments  (80,726) —  (80,726)
      
    		 
    		 
    		 
    Revenues from external customers $1,119,038 $393,974 $1,513,012 
      
    		 
    		 
    		 
    Operating income $64,076 $9,071 $73,147 
      
    		 
    		 
    		 
    Total assets $1,618,195 $175,752 $1,793,947 
      
    		 
    		 
    		 
     
    		 For the year ended March 31, 2006
    		 
     
    		 Publishing
    		 Distribution
    		 Total
    		 
    Total segment revenues $1,286,294 $313,337 $1,599,631 
    Revenue from sales between segments  (131,631) —  (131,631)
      
    		 
    		 
    		 
    Revenues from external customers $1,154,663 $313,337 $1,468,000 
      
    		 
    		 
    		 
    Operating income (loss) $(6,715)$21,941 $15,226 
      
    		 
    		 
    		 
    Total assets $1,293,014 $125,241 $1,418,255 
      
    		 
    		 
    		 

            

     

     

    For the year ended March 31, 2007

     

     

     

    Publishing

     

    Distribution

     

    Total

     

     

     

     

     

     

     

     

     

    Total segment revenues

     

    $

    1,119,038

     

    $

    393,974

     

    $

    1,513,012

     

    Revenue from sales between segments

     

    (80,726

    )

    80,726

     

    —

     

     

     

     

     

     

     

     

     

    Revenues from external customers

     

    $

    1,038,312

     

    $

    474,700

     

    $

    1,513,012

     

     

     

     

     

     

     

     

     

    Operating income

     

    $

    64,076

     

    $

    9,071

     

    $

    73,147

     

     

     

     

     

     

     

     

     

    Total assets

     

    $

    1,618,195

     

    $

    175,752

     

    $

    1,793,947

     

     

     

    For the year ended March 31, 2006

     

     

     

    Publishing

     

    Distribution

     

    Total

     

     

     

     

     

     

     

     

     

    Total segment revenues

     

    $

    1,154,663

     

    $

    313,337

     

    $

    1,468,000

     

    Revenue from sales between segments

     

    (131,631

    )

    131,631

     

    —

     

     

     

     

     

     

     

     

     

    Revenues from external customers

     

    $

    1,023,032

     

    $

    444,968

     

    $

    1,468,000

     

     

     

     

     

     

     

     

     

    Operating income (loss)

     

    $

    (6,715

    )

    $

    21,941

     

    $

    15,226

     

     

     

     

     

     

     

     

     

    Total assets

     

    $

    1,293,014

     

    $

    125,241

     

    $

    1,418,255

     

     

     

    For the year ended March 31, 2005

     

     

     

    Publishing

     

    Distribution

     

    Total

     

     

     

     

     

     

     

     

     

    Total segment revenues

     

    $

    1,072,729

     

    $

    333,128

     

    $

    1,405,857

     

    Revenue from sales between segments

     

    (111,676

    )

    111,676

     

    —

     

     

     

     

     

     

     

     

     

    Revenues from external customers

     

    $

    961,053

     

    $

    444,804

     

    $

    1,405,857

     

     

     

     

     

     

     

     

     

    Operating income

     

    $

    155,863

     

    $

    23,745

     

    $

    179,608

     

     

     

     

     

     

     

     

     

    Total assets

     

    $

    1,173,866

     

    $

    132,053

     

    $

    1,305,919

     

    F-21


    Geographic information is based on the location of the selling entity. Revenues from external customers by geographic region were as follows (amounts in thousands):

     
    		 For the years ended March 31,
     
    		 2008
    		 2007
    		 2006
    North America $1,761,753 $753,376 $710,040
    Europe  1,037,257  718,973  717,494
    Other  99,126  40,663  40,466
      
    		 
    		 
    Total $2,898,136 $1,513,012 $1,468,000
      
    		 
    		 

            

     

     

    For the years ended March 31,

     

     

     

    2007

     

    2006

     

    2005

     

     

     

     

     

     

     

     

     

    North America

     

    $

    753,376

     

    $

    710,040

     

    $

    696,325

     

    Europe

     

    718,973

     

    717,494

     

    675,074

     

    Other

     

    40,663

     

    40,466

     

    34,458

     

     

     

     

     

     

     

     

     

    Total

     

    $

    1,513,012

     

    $

    1,468,000

     

    $

    1,405,857

     

    Revenues by platform were as follows (amounts in thousands):

     
    		 For the years ended March 31,
     
    		 2008
    		 2007
    		 2006
    Console $2,398,593 $1,125,457 $1,008,758
    Hand-held  314,217  275,650  235,834
    PC  185,326  111,905  223,408
      
    		 
    		 
    Total $2,898,136 $1,513,012 $1,468,000
      
    		 
    		 

            

     

     

    For the years ended March 31,

     

     

     

    2007

     

    2006

     

    2005

     

     

     

     

     

     

     

     

     

    Console

     

    $

    1,125,457

     

    $

    1,008,758

     

    $

    970,399

     

    Hand-held

     

    275,650

     

    235,834

     

    161,977

     

    PC

     

    111,905

     

    223,408

     

    273,481

     

     

     

     

     

     

     

     

     

    Total

     

    $

    1,513,012

     

    $

    1,468,000

     

    $

    1,405,857

     

    A significant portion of our revenues is derived from products based on a relatively small number of popular brandsfranchises each year. In fiscal 2008, 65% of our consolidated net revenues and 75% of worldwide publishing net revenues were derived from three franchises. In fiscal 2007, 39% of our consolidated net revenues (52%and 52% of worldwide publishing net revenues) wasrevenues were derived from three brands, which accounted for 17%, 13%, and 9% of consolidated net revenues (23%, 18%, and 11% of worldwide publishing net revenues).franchises. In fiscal 2006, 30% of our consolidated net revenues (38%and 38% of worldwide publishing net revenues) wasrevenues were derived from three brands, whichfranchises.


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    10. Operations by Reportable Segments and Geographic Area (Continued)

            We had two customers, Wal-Mart and GameStop, that accounted for 14%, 8%, and 13% of consolidated net revenues for the fiscal year ended March 31, 2008 and 17% and 10% of consolidated gross accounts receivable at March 31, 2008, respectively. These customers were customers of both our publishing and distribution businesses. We had two customers, Wal-Mart and Gamestop, that accounted for 22% and 8% of consolidated net revenues (18%, 10%,for the year ended March 31, 2007 and 10%26% and 6% of worldwide publishing net revenues). Inconsolidated gross accounts receivable at March 31, 2007, respectively. For the fiscal 2005, 37% ofyear ended March 31, 2006, our consolidated net revenues (48% of worldwide publishing net revenues) was derived from three brands, whichtwo largest customers, Wal-Mart and GameStop, accounted for 16%, 11%,22% and 10% of consolidated net revenues, (21%, 14%, and 13% of worldwide publishing net revenues).respectively.

    F-22


    11.Computation of Earnings Per Share

            

    The following table sets forth the computations of basic and diluted earnings per share (amounts in thousands, except per share data):

     
    		 For the years ended March 31,
     
    		 2008
    		 2007
    		 2006
    Numerator:         
     Numerator for basic and diluted earnings per share—income available to common shareholders $344,883 $85,787 $40,251
      
    		 
    		 
    Denominator:         
     Denominator for basic earnings per share—weighted average common shares outstanding  288,957  281,114  273,177
     Effect of dilutive securities:         
      Employee stock options and stock purchase plan  25,062  23,611  20,232
      Warrants to purchase common stock  712  614  593
      
    		 
    		 
      Potential dilutive common shares  25,774  24,225  20,825
      
    		 
    		 
     Denominator for diluted earnings per share—weighted average common shares outstanding plus assumed conversions  314,731  305,339  294,002
      
    		 
    		 
    Basic earnings per share $1.19 $0.31 $0.15
      
    		 
    		 
    Diluted earnings per share $1.10 $0.28 $0.14
      
    		 
    		 

            

     

     

    For the years ended March 31,

     

     

     

    2007

     

    2006

     

    2005

     

    Numerator:

     

     

     

     

     

     

     

    Numerator for basic and diluted earnings per share - income available to common shareholders

     

    $

    85,787

     

    $

    40,251

     

    $

    135,057

     

     

     

     

     

     

     

     

     

    Denominator:

     

     

     

     

     

     

     

    Denominator for basic earnings per share - weighted average common shares outstanding

     

    281,114

     

    273,177

     

    250,023

     

     

     

     

     

     

     

     

     

    Effect of dilutive securities:

     

     

     

     

     

     

     

    Employee stock options and stock purchase plan

     

    23,611

     

    20,232

     

    26,398

     

    Warrants to purchase common stock

     

    614

     

    593

     

    1,291

     

    Potential dilutive common shares

     

    24,225

     

    20,825

     

    27,689

     

     

     

     

     

     

     

     

     

    Denominator for diluted earnings per share - weighted average common shares outstanding plus assumed conversions

     

    305,339

     

    294,002

     

    277,712

     

     

     

     

     

     

     

     

     

    Basic earnings per share

     

    $

    0.31

     

    $

    0.15

     

    $

    0.54

     

     

     

     

     

     

     

     

     

    Diluted earnings per share

     

    $

    0.28

     

    $

    0.14

     

    $

    0.49

     

    Options to purchase approximately 7.1 million, 7.9 million, 993,000, and 243,0001.0 million shares of common stock for the years ended March 31, 2008, 2007, 2006, and 2005,2006, respectively, were not included in the calculation of diluted earnings per share because their effect would be antidilutive.


    ACTIVISION, INC. AND SUBSIDIARIES

    F-23


    Notes to Consolidated Financial Statements (Continued)

    12.Income Taxes

            

    Domestic and foreign income before income taxes and details of the income tax provision are as follows (amounts in thousands):

     
    		 For the years ended March 31,
    		 
     
    		 2008
    		 2007
    		 2006
    		 
    Income (loss) before income taxes:          
     Domestic $463,792 $99,210 $52,321 
     Foreign  67,076  10,615  (6,465)
      
    		 
    		 
    		 
      $530,868 $109,825 $45,856 
      
    		 
    		 
    		 
    Income tax expense (benefit):          
     Current:          
      Federal $87,126 $34,342 $— 
      State  8,659  15,325  308 
      Foreign  9,820  3,842  4,383 
      
    		 
    		 
    		 
      Total current  105,605  53,509  4,691 
      
    		 
    		 
    		 
     Deferred:          
      Federal  11,040  (17,074) (11,095)
      State  5,873  (19,608) (7,266)
      Foreign  6,132  (4,127) (10,092)
      
    		 
    		 
    		 
      Total deferred  23,045  (40,809) (28,453)
      
    		 
    		 
    		 
    Add back benefit credited to additional paid-in capital:          
     Tax benefit related to stock option and warrant exercises  57,335  11,338  29,367 
      
    		 
    		 
    		 
    Income tax provision $185,985 $24,038 $5,605 
      
    		 
    		 
    		 

            

     

     

    For the years ended March 31,

     

     

     

    2007

     

    2006

     

    2005

     

     

     

     

     

     

     

     

     

    Income (loss) before income taxes:

     

     

     

     

     

     

     

    Domestic

     

    $

    99,210

     

    $

    52,321

     

    $

    169,572

     

    Foreign

     

    10,615

     

    (6,465

    )

    23,128

     

     

     

    $

    109,825

     

    $

    45,856

     

    $

    192,700

     

     

     

     

     

     

     

     

     

    Income tax expense (benefit):

     

     

     

     

     

     

     

    Current:

     

     

     

     

     

     

     

    Federal

     

    $

    34,342

     

    $

    —

     

    $

    (355

    )

    State

     

    15,325

     

    308

     

    342

     

    Foreign

     

    3,842

     

    4,383

     

    5,126

     

     

     

     

     

     

     

     

     

    Total current

     

    53,509

     

    4,691

     

    5,113

     

     

     

     

     

     

     

     

     

    Deferred:

     

     

     

     

     

     

     

    Federal

     

    (17,074

    )

    (11,095

    )

    4,346

     

    State

     

    (19,608

    )

    (7,266

    )

    (2,863

    )

    Foreign

     

    (4,127

    )

    (10,092

    )

    (2,159

    )

     

     

     

     

     

     

     

     

    Total deferred

     

    (40,809

    )

    (28,453

    )

    (676

    )

     

     

     

     

     

     

     

     

    Add back benefit credited to additional paid-in capital:

     

     

     

     

     

     

     

    Tax benefit related to stock option and warrant exercises

     

    11,338

     

    29,367

     

    53,206

     

    Income tax provision

     

    $

    24,038

     

    $

    5,605

     

    $

    57,643

     

    F-24


    The items accounting for the difference between income taxes computed at the U.S. federal statutory income tax rate and the income tax provision for each of the years are as follows:

     
    		 For the years ended March 31,
    		 
     
    		 2008
    		 2007
    		 2006
    		 
    Federal income tax provision at statutory rate 35.0%35.0%35.0%
    State taxes, net of federal benefit 3.6 4.1 4.3 
    Research and development credits (3.8)(8.5)(36.2)
    Decremental effect of foreign tax rates (0.6)(3.6)(10.5)
    Increase (decrease) in valuation allowance — (26.6)18.0 
    Increase (decrease) in tax reserves 1.1 18.8 (2.2)
    Other (0.3)2.7 3.8 
      
    		 
    		 
    		 
      35.0%21.9%12.2%
      
    		 
    		 
    		 

    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    12. Income Taxes (Continued)

            

     

     

    For the years ended March 31,

     

     

     

    2007

     

    2006

     

    2005

     

     

     

     

     

     

     

     

     

    Federal income tax provision at statutory rate

     

    35.0

    %

    35.0

    %

    35.0

    %

    State taxes, net of federal benefit

     

    4.1

     

    4.3

     

    2.8

     

    Research and development credits

     

    (8.5

    )

    (36.2

    )

    (6.6

    )

    Decremental effect of foreign tax rates

     

    (3.6

    )

    (10.5

    )

    (2.4

    )

    Increase (decrease) in valuation allowance

     

    (26.6

    )

    18.0

     

    3.2

     

    Increase (decrease) in tax reserves

     

    18.8

     

    (2.2

    )

     (0.9

    )

    Other

     

    2.7

     

    3.8

     

    (1.2

    )

     

     

     

     

     

     

     

     

     

     

    21.9%

     

    12.2

    %

    29.9

    %

    Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities for accounting purposes and the amounts used for income tax purposes. The components of the net deferred tax asset and liabilityassets are as follows (amounts in thousands):

     

     

    As of March 31,

     

     

     

    2007

     

    2006

     

     

     

     

     

     

     

    Deferred asset:

     

     

     

     

     

    Allowance for doubtful accounts

     

    $

    369

     

    $

    739

     

    Allowance for sales returns

     

    14,094

     

    16,200

     

    Inventory reserve

     

    1,507

     

    2,474

     

    Vacation and bonus reserve

     

    5,996

     

    4,993

     

    Amortization and depreciation

     

    1,566

     

    3,970

     

    Tax credit carryforwards

     

    89,014

     

    74,488

     

    Net operating loss carryforwards

     

    29,822

     

    13,770

     

    Stock-based compensation

     

    11,879

     

    3,272

     

    Other

     

    8,958

     

    6,209

     

     

     

     

     

     

     

    Deferred asset

     

    163,205

     

    126,115

     

    Valuation allowance

     

    (382

    )

    (35,555

    )

     

     

     

     

     

     

    Net deferred asset

     

    162,823

     

    90,560

     

     

     

     

     

     

     

    Deferred liability:

     

     

     

     

     

    Capitalized development expenses

     

    50,159

     

    22,537

     

    State taxes

     

    12,309

     

    5,814

     

     

     

     

     

     

     

    Deferred liability

     

    62,468

     

    28,351

     

     

     

     

     

     

     

    Net deferred asset

     

    $

    100,355

     

    $

    62,209

     

     
    		 As of March 31,
    		 
     
    		 2008
    		 2007
    		 
    Deferred tax assets:       
     Allowance for doubtful accounts $421 $369 
     Allowance for sales returns and price protection  18,835  14,094 
     Inventory reserve  894  1,507 
     Accrued payroll related costs  12,732  5,996 
     Accrued professional and legal costs  17,913  2,901 
     Amortization and depreciation  5,293  1,566 
     Tax credit carryforwards  25,619  89,014 
     Net operating loss carryforwards  1,740  29,822 
     Stock-based compensation  30,058  11,879 
     Other  15,394  6,057 
      
    		 
    		 
    Deferred tax assets  128,899  163,205 
    Valuation allowance  (382) (382)
      
    		 
    		 
    Deferred tax assets, net of valuation allowance  128,517  162,823 
      
    		 
    		 
    Deferred tax liabilities:       
     Capitalized development expenses  43,766  50,159 
     State taxes  10,684  12,309 
      
    		 
    		 
    Deferred tax liabilities  54,450  62,468 
      
    		 
    		 
    Net deferred tax assets $74,067 $100,355 
      
    		 
    		 

            

    F-25


    The tax benefits associated with certain net operating loss carryforwards relate to employee stock options. For the year ended March 31, 2006, pursuant to SFAS No. 109, deferred tax assets for net operating losses did not include $30.9 million relating to these items which will be credited to additional paid-in capital when realized. For the year ended March 31, 2007, $30.9 million relating to these items was realized and included in deferred tax assets for net operating losses; however, a reserve was established for this amount, as well as a reserve of $20.6 million for tax credits and foreign taxes. These reserves were established because the tax positions are subject to certain assumptions of the relevant legislative and judicial history that may or may not be accepted by the tax authorities.

    As of March 31, 2007,2008, our available federal net operating loss carryforward of approximately $34.9$1.0 million is subject to certain limitations as defined under Section 382 of the Internal Revenue Code. The net operating loss carryforwards will begin to expire between 2022 and 2026.in 2023. We have various state net operating loss carryforwards totaling $17.6$14.4 million which are not subject to limitations under Section 382 of the Internal Revenue Code.Code and will begin to expire in 2013. We have tax credit carryforwards of $52.5$0.8 million and $36.5$24.6 million for federal and state purposes, respectively, which begin to expire in fiscal year 2008.2016.

            

    At March 31, 2007, our deferred income tax asset for tax credit carryforwards and net operating loss carryforwards was reduced by a valuation allowance of $0.4 million, as compared to $35.6 million in the prior fiscal year. In management’s judgment, based on the utilization of domestic net operating loss carryforwards in the current fiscal year, it was determined to be more likely than not that the tax credit carryforwards would ultimately be utilized, and consequently, the valuation allowance relating to tax credit carryforwards was reversed.

    Realization of the deferred tax assets is dependent upon the continued generation of sufficient taxable income prior to expiration of tax credits and loss carryforwards. Although realization is not assured, management believes it is more likely than not that the net carrying value of the deferred tax assetassets will be realized.

            

    Cumulative undistributed earnings of foreign subsidiaries for which no deferred taxes have been provided approximated $97.5$168.1 million at March 31, 2007.2008. Deferred income taxes on these earnings have not been provided as these amounts are considered to be permanent in duration.


    ACTIVISION, INC. AND SUBSIDIARIES

    On October 22, 2004,Notes to Consolidated Financial Statements (Continued)

    12. Income Taxes (Continued)

            We adopted the Presidentprovisions of the United States signed the American Jobs Creation Act of 2004 (the “Act”) which contains a number of tax law modifications with accounting implications. For companies that pay U.S. income taxes on manufacturing activities in the U.S., the Act provides a deduction from taxable income equal to a stipulated percentage of qualified income from domestic production activities. The manufacturing deduction provided by the Act replaces the extraterritorial income (“ETI”) deduction currently in place. We currently derive benefits from the ETI exclusion which was repealed by the Act. Our exclusion for fiscal 2006 and 2007 will be limited to 75% and 45% of the otherwise allowable exclusion and no exclusion will be available in fiscal 2008 and thereafter. The Act also creates a temporary incentive for U.S. multinationals to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations (“Homeland Investment Act”). The deduction is subject to a number of limitations. The Act also provides for other changes in tax law that will affect a variety of taxpayers. On December 21, 2004, the Financial Accounting Standards Board (“FASB”Interpretation No. 48Accounting for Uncertainty in Income Taxes ("FIN 48") issued two FASB Staff Positions (“FSP”) regardingan interpretation of SFAS No. 109 on April 1, 2007. Implementation of FIN 48 did not result in a material adjustment to the accounting implicationsliability for unrecognized income tax benefits. At the adoption date of April 1, 2007, we had $65.5 million of unrecognized tax benefits, of which $26.2 million would affect our effective tax rate if recognized. As of March 31, 2008, we had approximately $74.2 million in total unrecognized tax benefits of which $30.0 million would affect our effective tax rate if recognized. A reconciliation of the Actbeginning and ending amount of unrecognized tax benefits is as follows (amounts in thousands):-

    Unrecognized tax benefits balance at April 1, 2007 $65,472 
    Gross increase for tax positions of prior years  3,370 
    Gross decrease for tax positions of prior years  (697)
    Gross increase for tax positions of current year  6,032 
    Gross decrease for tax positions of current year  — 
    Settlements  — 
    Lapse of statute of limitations  — 
      
    		 
    Unrecognized tax benefits balance at March 31, 2008 $74,177 
      
    		 

            In addition, consistent with the provisions of FIN 48, we reclassified $23.5 million of income tax liabilities from current to non-current liabilities because payment of cash or settlement is not anticipated within one year of the balance sheet date. These non-current income tax liabilities are recorded in other liabilities in the Consolidated Balance Sheets as of March 31, 2008.

            We recognize interest and penalties related to (1)uncertain tax positions in income tax expense. As of March 31, 2008, we had approximately $609,000 of accrued interest related to uncertain tax positions. For the deduction for qualified domestic production activitiesyear ended March 31, 2008, we recorded $69,000 of interest expense related to uncertain tax positions.

            The tax years 2002 through 2007 remain open to examination by the major taxing jurisdictions to which we are subject, including United States of America ("U.S.") and (2)non-U.S. locations. We are currently under audit by the one-time tax benefit forInternal Revenue Service and the repatriation of foreign earnings. The FASB determinedCalifornia Franchise Tax Board, and it is reasonably possible that the deduction for qualified domestic production activities should be accounted for as a special deduction under FASB Statement No. 109, Accounting for Income Taxes. The FASB also confirmed, that upon deciding that some amountcurrent portion of earningsour unrecognized tax benefits will be repatriated, a company must record in that periodsignificantly decrease within the associated tax liability. The guidance innext twelve months due to the FSPs apply to financial statements for periods ending after the date the Act was enacted. We have evaluated the Act and have concluded that we will not repatriate foreign earnings under the Homeland Investment Act Provisions.outcome of these audits.

    F-26


    13.Commitments and Contingencies

    Credit Facilities

            

    Credit Facilities

    We have revolving credit facilities with our Centresoft subsidiary located in the UK (the “UK Facility”"UK Facility") and our NBG subsidiary located in Germany (the “German Facility”"German Facility."). The UK Facility provided Centresoft with the ability to borrow up to Great British Pounds (“GBP”("GBP") 12.0 million ($23.623.9 million) and GBP 12.0 million ($21.0 million,23.6 million), including issuing letters of credit, on a revolving basis as of March 31, 20072008 and 2006,2007, respectively. Furthermore, under the UK Facility, Centresoft provided a GBP 0.6 million ($1.2 million) and a GBP 0.6 million ($1.01.2 million) guarantee for the benefit of our CD Contact subsidiary as of March 31, 20072008 and 2006,2007, respectively. The UK Facility bore interest at LIBOR plus 2.0% as of March 31, 20072008 and 2006,2007, is collateralized by substantially all


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    13. Commitments and Contingencies (Continued)


    of the assets of the subsidiary and expires in January 2008.March 2009. The UK Facility also contains various covenants that require the subsidiary to maintain specified financial ratios related to, among others, fixed charges. As of March 31, 20072008 and 2006,2007, we were in compliance with these covenants. No borrowings were outstanding against the UK Facility as of March 31, 20072008 or 2006.2007. The German Facility provided for revolving loans up to EUR 0.5 million ($0.8 million) as of March 31, 2008 and EUR 0.5 million ($0.7 million) as of March 31, 2007, and EUR 0.5 million ($0.6 million) as of March 31, 2006, bore interest at a Eurocurrency rate plus 2.5%, is collateralized by certain of the subsidiary’ssubsidiary's property and equipment and has no expiration date. No borrowings were outstanding against the German Facility as of March 31, 20072008 or 2006.2007.

            

    As of March 31, 20072008 and 2006,2007, we maintained a $10.0 million and $7.5 million irrevocable standby letter of credit.credit, respectively. The standby letter of credit is required by one of our inventory manufacturers to qualify for payment terms on our inventory purchases. Under the terms of this arrangement, we are required to maintain on deposit with the bank a compensating balance, restricted as to use, of not less than the sum of the available amount of the letter of credit plus the aggregate amount of any drawings under the letter of credit that have been honored thereunder but not reimbursed. At March 31, 2008 and 2007, the $10.0 million and 2006, the $7.5 million deposit is included in short-term investments as restricted cash.cash, respectively. No borrowings were outstanding as of March 31, 20072008 or 2006.2007.

            

    As of March 31, 2008 and 2007, our publishing subsidiary located in the UK maintained a EUR 4.07.0 million ($11.0 million) and EUR $4.0 million ($5.3 million) irrevocable standby letter of credit. As of March 31, 2006, our publishing subsidiary located in the UK maintained a EUR 2.5 million ($3.0 million) irrevocable standby letter of credit.credit, respectively. The standby letter of credit is required by one of our inventory manufacturers to qualify for payment terms on our inventory purchases. The standby letter of credit does not require a compensating balance and is collateralized by substantially all of the assets of the subsidiary and expires in August 2007.February 2009. No borrowings were outstanding as of March 31, 20072008 or 2006.2007.

    Commitments

            

    Commitments

    In the normal course of business, we enter into contractual arrangements with third parties for non-cancelable operating lease agreements for our offices, for the development of products, as well as for the rights to intellectual property. Under these agreements, we commit to provide specified payments to a lessor, developer, or intellectual property holder, based upon contractual arrangements. Typically, the payments to third-party developers are conditioned upon the achievement by the developers of contractually specified development milestones. These payments to third-party developers and intellectual property holders typically are deemed to be advances and are recoupable against future royalties earned by the developer or intellectual property holder based on the sale of the related game. Additionally, in connection with certain intellectual property rightrights acquisitions and development agreements, we will commit to spend specified amounts for marketing support for the related game(s) which is to be developed or in which the intellectual property will be utilized.

            

    F-27


    Additionally, we lease certain of our facilities and equipment under non-cancelable operating lease agreements. Assuming all contractual provisions are met, the total future minimum commitments for


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    13. Commitments and Contingencies (Continued)


    these and other contractual arrangements in place as of March 31, 2007,2008, are scheduled to be paid as follows (amounts in thousands):

     
    		 Contractual Obligations(1)
     
    		 Facility &
    Equipment
    Leases
    		 Developer and
    IP
    		 Marketing
    		 Total
    Fiscal years ending March 31,            
     
    2009
     
    $
    19,343
     
    $
    110,771
     
    $
    41,401
     
    $
    171,515
     2010  17,028  31,041  22,100  70,169
     2011  14,553  34,086  13,100  61,739
     2012  10,256  16,586  —  26,842
     2013  8,791  21,586  —  30,377
     Thereafter  31,201  26,001  —  57,202
      
    		 
    		 
    		 
      
    Total
     
    $
    101,172
     
    $
    240,071
     
    $
    76,601
     
    $
    417,844
      
    		 
    		 
    		 
    (1)
    We have omitted FIN 48 liabilities from this table due to the inherent uncertainty regarding the timing of potential issue resolution. Specifically, either (a) the underlying positions have not been fully enough developed under audit to quantify at this time or, (b) the years relating to the issues for certain jurisdictions are not currently under audit. At the adoption date of April 1, 2007, we had $65.5 million of unrecognized tax benefits. At March 31, 2008, we had $74.2 million of unrecognized tax benefits.

            

     

     

    Contractual Obligations

     

     

     

    Facility &

     

    Developer

     

     

     

     

     

     

     

    Equipment Leases

     

    and IP

     

    Marketing

     

    Total

     

     

     

     

     

     

     

     

     

     

     

    Fiscal year ending March 31,

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    2008

     

    $

    14,213

     

    $

    67,836

     

    $

    40,254

     

    $

    122,303

     

    2009

     

    13,131

     

    31,579

     

    30,679

     

    75,389

     

    2010

     

    12,070

     

    29,936

     

    100

     

    42,106

     

    2011

     

    9,854

     

    30,586

     

    13,100

     

    53,540

     

    2012

     

    5,543

     

    16,586

     

    —

     

    22,129

     

    Thereafter

     

    17,783

     

    47,586

     

    —

     

    65,369

     

     

     

     

     

     

     

     

     

     

     

    Total

     

    $

    72,594

     

    $

    224,109

     

    $

    84,133

     

    $

    380,836

     

    Facilities rent expense for the years ended March 31, 2008, 2007, 2006, and 20052006 was approximately $18.3 million, $14.8 million, $14.2 million, and $10.6$14.2 million, respectively.

    Compensation Guarantee

            

    In June 2005, we entered into an employment agreement with the President and Chief Executive Officer of Activision Publishing, Inc. containing a guarantee related to total compensation. The agreement guarantees that in the event that on May 15, 2010 total compensation has not exceeded $20.0 million, we will make a payment for the amount of the shortfall. The $20.0 million guarantee will be recognized as compensation expense over the term of the employment agreement comprising of salary payments, bonus payments, restricted stock expense, stock option expense, and an accrual for any anticipated remaining portion of the guarantee. The remaining portion of the guarantee is accrued over the term of the agreement in “Other liabilities”"Other liabilities" and will remain accrued until the end of the employment agreement at which point it will be used to make a payment for any shortfall or reclassified into shareholders’shareholders' equity.

    Legal Proceedings

            On February 8, 2008, the Wayne County Employees' Retirement System filed a lawsuit challenging the transactions contemplated by the business combination agreement, dated as of December 1, 2007, among us, a wholly owned subsidiary of ours established in connection with the proposed transaction, Vivendi, S.A., Vivendi Games, Inc., a wholly owned subsidiary of Vivendi, S.A., and VGAC, a wholly


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    13. Commitments and Contingencies (Continued)


    owned subsidiary of Vivendi, S.A., and the sole stockholder of Vivendi Games, Inc. The suit is a putative class action filed against the parties to that business combination agreement as well as certain members of our Board of Directors. The plaintiff alleges, among other things, that our directors named therein failed to fulfill their fiduciary duties with regard to the transactions by "surrendering" the negotiating process to "conflicted management," that those breaches were aided and abetted by Vivendi, S.A., and those of its subsidiaries named in the complaint, and that a preliminary proxy statement contains certain statements that the plaintiff alleges are false and misleading. The plaintiff seeks an order from the court that, among other things, certifies the case as a class action, enjoins the transaction, requires the defendants to disclose all material information, declares that the transaction is in breach of the directors' fiduciary duties and therefore unlawful and unenforceable, awards the plaintiff and the putative class damages for all profits and special benefits obtained by the defendant in connection with the transaction and tender offer, and awards the plaintiff its cost and expense, including attorney's fees.

            In a ruling on March 12, 2008, the court initially declined to schedule a preliminary injunction hearing or allow broad discovery, pending the Company's filing of a revised preliminary proxy statement in connection with the proposed transactions. The court did order the parties to initiate discovery of core documents, and the Company made an initial production of documents. On March 7, 2008, the Company filed a motion to dismiss the complaint, the grounds for which were detailed in a brief filed on April 30, 2008. On April 30, 2008, the Company also filed a motion to stay discovery in the case pending a ruling on the motion to dismiss. Separately, on March 6, 2008, Vivendi, S.A., and those of its subsidiaries named in the complaint filed a motion to dismiss the sole claim alleged against them.

            On May 8, 2008, the plaintiff filed an amended complaint that, among other things, added allegations relating to a revised preliminary proxy statement filed by the Company on April 30, 2008. That same date, the plaintiff also renewed its motion for expedited proceedings. On May 13, 2008, the Company moved to dismiss the amended complaint. On May 14, 2008, Vivendi and its subsidiaries named in the amended complaint also moved to dismiss. On May 22, 2008, the court scheduled a combined hearing for June 30, 2008 on the plaintiff's motion for a preliminary injunction and the defendants' motions to dismiss, but withheld a ruling on the plaintiff's motion for expedited discovery, pending further briefing. On May 28, 2008, the court ordered that expedited discovery proceed as to certain claims and that final briefing on the motions to be heard on June 30, 2008 be filed with the court on June 27, 2008. The Company intends to defend itself vigorously, and no amounts have been recorded in the Company's consolidated financial statements as of March 31, 2008.

    In July 2006, individuals and/or entities claiming to be our stockholders of the Company have filed derivative lawsuits, purportedly on our behalf, of the Company, against certain current and former members of the Company’sour Board of Directors as well as several of our current and former officers of the Company.officers. Three derivative actions have been filed in Los Angeles Superior Court: Vazquez v. Kotick, et al., ., L.A.S.C. Case No. BC355327 (filed July 12, 2006); Greuer v. Kotick, et al., L.A.S.C. Case No. SC090343 (filed July 12, 2006); and Amalgamated Bank v. Baker, et al., L.A.S.C. Case No. BC356454 (filed August 3, 2006). These actions have been consolidated by the court under the caption In re Activision Shareholder Derivative Litigation, L.A.S.C. Master File No. SC090343 (West, J.). TwoFour derivative actions have been filed in the United States District Court for the Central District of California: Pfeiffer v. Kotick, et al., C.D. Cal. Case No. CV06-4771 MRP (JTLx) (filed July 31, 2006); and, Hamian v. Kotick, et al.al., C.D. Cal. Case No. CV06-5375 MRP (JLTx) (filed August 25, 2006) Abdelnur vs. Kotick et al., C.D. Cal. Case


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    13. Commitments and Contingencies (Continued)


    No. CV07-3575 AHM (PJWx) (filed June 1, 2007), and Scarborough v. Kotick et al., C.D. Cal. Case No. CV07-4602 SVW (PLAx) (filed July 18, 2007). These actions have also been consolidated, under the caption In re Activision, Inc. Shareholder Derivative Litigation, C.D. Cal. Case No. CV06-4771 MRP (JTLx) (Pfaelzer, J.). The consolidated complaints allege, among other things, purported improprieties in the Company’sour issuance of stock options. Plaintiffs seek various relief on our behalf, of the Company, including damages, restitution of benefits obtained from the alleged misconduct, equitable relief, including an accounting and rescission of option contracts; and various corporate governance reforms. The Company expectsWe expect that defense expenses associated with the matters will be covered by itsour directors and officers insurance, subject to the terms and conditions of the applicable policies.

            On May

    F-28


    24,or about December 4, 2007, we, the Superior Court grantedplaintiffs, and certain of our current and former officers and directors notified the Company’s motion to stay the state action. The court’s order stays the action pending the resolution of motions to dismisscourt in the federal action but is without prejudicethat we had reached agreement in principle to settle the shareholder derivative litigation pending against such current and former directors and officers of ours. On January 17, 2008, the parties amended that agreement to, among other things, include the plaintiffs in the state court action as parties thereto. The nonbinding agreement in principle was subject, among other things, to the negotiation of a binding definitive settlement agreement addressing all settlement terms, as well as to further approval by the parties and the court.

            Effective as of May 8, 2008, the parties signed a Stipulation of Settlement with respect to these matters. In entering into the Stipulation of Settlement, neither we nor any of the settling parties has admitted to any party’s rightliability or wrongdoing. Under the terms of the Stipulation of Settlement, which is subject to seekcourt approval, we will adopt, implement and/or maintain certain corporate governance and internal control measures, relating principally to the following: board composition, structure and practices, director independence standards, stock ownership and compensation, and education; shareholder proposal evaluation process; nomination procedures for shareholder-nominated directors; shareholder meeting procedures; executive compensation policies and procedures; insider trading controls; and stock option granting procedures. We have agreed to keep these measures in place for a period of three years, subject to certain exceptions. The Stipulation of Settlement also addresses matters relating to the agreements by certain of our current and former directors and officers to reimburse the Company in connection with the receipt of options that required measurement date corrections. In the case of options already exercised, the agreements allowed reimbursement to be made either by cancellation of vested but unexercised options with a value equivalent to the additional exercise price or by payment of additional exercise price. In the case of options not yet exercised, the exercise price to be paid upon future exercise of those options is increased. In the aggregate, settling defendants have elected to cancel options to acquire approximately 800,000 shares of our common stock and have agreed to increases in the exercise prices of approximately 16.1 million options. The modification of these options did not result in any incremental compensation expense. In addition, the stay upon a showingStipulation of good cause, including a showing that matters may be addressed in the Superior Court without the potentialSettlement provides for conflict with or duplicationus to pay $10,000,000 to plaintiffs' attorneys for their fees and expenses, subject to court approval of such fees and expenses and subject to our reservation of all rights against our D&O insurance carriers, reinsurers and co-insurers. In anticipation of the federal court proceedings.settlement, the Company had recorded a legal expense accrual of approximately $10.0 million as a probable and reasonable estimate in its consolidated financial statements as of March 31, 2008. The Company filed motionsStipulation of Settlement provides that plaintiffs' attorneys will also be entitled to dismiss15% (up to $750,000) of any payment made by our insurance carriers to us in connection with the federal action on June 1, 2007, which will be fully briefedsettlement. We have not reached agreements with our insurers related to the settlement. The stipulation also provides for the forgiveness of approximately $2.3 million in legal fees previously billed to us by August 15, 2007.former outside corporate counsel.


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    13. Commitments and Contingencies (Continued)

            The Company was also informed that, on June 1, 2007, a derivative case, Abdelnur vs. Kotick et al.,Stipulation of Settlement was filed in federal court on May 12, 2008 and was preliminarily approved by the United StatesU.S. District Court for the Central District of California C.D. Case No. CV07-3575 AHM (PJWx), by order dated May 13, 2008 and entered on May 14, 2008. The settlement is subject to final court approval after notice and a hearing at which shareholders will have the same law firmopportunity to object, which is currently scheduled to be held on July 21, 2008. The court will then decide whether to approve the settlement as fair, adequate and in the best interest of our stockholders. While we believe that previously filed the Hamian case, alleging substantiallysettlement meets these criteria, there can be no guarantee that the same claims.settlement will receive the required court approval. If final approval is granted, all claims against all defendants in the litigation will be dismissed with prejudice, and all claims that were or could have been brought by any derivative plaintiff, and all claims that arise from or relate to the matters or occurrences that were or could have been alleged in the federal and state derivative actions, will be fully, finally and forever released. The individual settling defendants make no admission of wrongdoing under the Stipulation of Settlement, and they have denied (and continue to deny) all charges of wrongdoing and liability and each and all of the claims and contentions alleged in the derivative actions.

            

    On July 27,24, 2006, the Companywe received a letter of informal inquiry from the SEC requesting certain documents and information relating to the Company’sour historical stock option grant practices. InThereafter, in early June 2007, the SEC informed the Company that the SEC has issued a formal order of non-public investigation, pursuant to which allowsit subpoenaed documents from us related to the SEC, among other things, to subpoena witnessesinvestigation, and require the productiontestimony and documents from certain current and former directors, officers and employees of documents.ours. The Company is cooperating withhas made an offer of settlement to the SEC’s investigation, and representatives of the special subcommittee of independent members of our Board of Directors established in July 2006 to review our historical stock option granting practices (the “Special Subcommittee”) and its legal counsel have met with members of the staffStaff of the SEC, on several occasions, in person and by telephone (aswhich the SEC Staff has indicated it is prepared to recommend to the Company’s outside legal counsel), to discuss the progressSEC. The tentative settlement of the Special Subcommittee’sSEC's investigation, and on February 28, 2007which would allege violations of various provisions of the Federal securities laws, is subject to brief the SEC staffagreement on the Special Subcommittee’s findings and recommendations following the substantial completionspecific language of the Special Subcommittee’s investigation. A representative of the U.S. Department of Justice has attended certain of these meetingssettlement documents, and requested copies of certain documents that we have providedthen to the staff ofreview and approval by the SEC. At this time,There can be no assurance that a final settlement will be approved. In connection with the proposed settlement, the Company haswould not received any grand jury subpoenasbe required to pay a monetary penalty. Under the proposed settlement, the Company would settle this matter without admitting or written requests fromdenying the Department of Justice.

    SEC's findings.

    In addition, we are party to other routine claims and suits brought by us and against us in the ordinary course of business, including disputes arising over the ownership of intellectual property rights, contractual claims, employment laws, regulations and relationships, and collection matters. In the opinion of management, after consultation with legal counsel, the outcome of such routine claims and lawsuits will not have a material adverse effect on our business, financial condition, results of operations, or liquidity.

    14. Stock-Based Compensation and Employee Benefit Plans

    Equity Incentive Plans

            

    We have a stock-based compensation program that providesOn July 30, 2007, our Board of Directors adopted the Activision 2007 Incentive Plan (the "2007 Plan,") subject to shareholder approval, and reserved 15,000,000 shares for issuance thereunder and, on September 27, 2007, the 2007 Plan was approved by our shareholders and became effective.

            Upon the effective date of the 2007 Plan, we ceased to make awards under the following equity incentive plans (collectively, the "Rolled-Up Plans"), although such plans will remain in effect and continue to govern outstanding awards: (i) Activision, Inc. 1998 Incentive Plan, as amended; (ii) Activision, Inc. 1999 Incentive Plan, as amended; (iii) Activision, Inc. 2001 Incentive Plan, as amended; (iv) Activision, Inc. 2002 Incentive Plan, as amended; (v) Activision, Inc. 2002 Executive


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    14. Stock-Based Compensation and Employee Benefit Plans (Continued)


    Incentive Plan, as amended; (vi) Activision, Inc. 2002 Studio Employee Retention Incentive Plan, as amended; and (vii) Activision, Inc. 2003 Incentive Plan, as amended. The number of shares available for issuance under the 2007 Plan was increased by an additional 2,685,577 shares of our common stock to reflect the shares reserved for issuance but not subject to outstanding awards under the Rolled-Up Plans at the time the 2007 Plan became effective. Additionally, the number of shares of our common stock reserved for issuance under the 2007 Plan may be further increased from time to time by: (i) the number of shares relating to awards outstanding under any Rolled-Up Plan that: (a) expire, or are forfeited, terminated or cancelled, without the issuance of shares; (b) are settled in cash in lieu of shares; or (c) are exchanged, prior to the issuance of shares of our common stock, for awards not involving our common stock; and (ii) if the exercise price of any option outstanding under any Rolled-Up Plan is, or the tax withholding requirements with respect to any award outstanding under any Rolled-Up Plan are, satisfied by withholding shares otherwise then deliverable in respect of the award or the actual or constructive transfer to us shares already owned, the number of shares equal to the withheld or transferred shares. As of March 31, 2008, we had approximately 16.1 million shares of our common stock reserved for future issuance under the 2007 Plan. Shares issued in connection with awards made under the 2007 Plan are generally issued as new stock issuances.

            The 2007 Plan authorizes the Compensation Committee of our Board of Directors to provide equity-based compensation in the form of stock options, share appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other performance- or value-based awards structured by the Compensation Committee within parameters set forth in the 2007 Plan, including custom awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of our common stock, or factors that may influence the value of our common stock or that are valued based on our performance or the performance of any of our subsidiaries or business units or other factors designated by the Compensation Committee, as well as incentive bonuses, for the purpose of providing incentives and rewards for superior performance to the directors, officers, employees of, and consultants to, Activision and its subsidiaries.

            While the Compensation Committee has broad discretion in creating employeeto create equity incentives. Thisincentives, our equity-based compensation program includes incentive and non-statutory stockcurrently primarily utilizes a combination of options and restricted stock units. Such awards granted under various plans, the majority of which are stockholder approved. Stock options are generally have time-based vesting on each annual anniversary of the grant dateschedules, vesting annually over periods of three to five years, or vest in their entirety on an anniversary of date of grant, subject to possible earlier vesting if certain performance measures are met, and all such awards which are options generally expire ten years from the grant date, with some options containing performance clauses which would accelerate the vesting into earlier annual periods. Additionally, we have an Employee Stock Purchase Plan (“ESPP”) that allows employees to purchase shares of common stock at 85% of the fair market value at either the date of enrollment or the date of purchase, whichever is lower. Shares issued as a result of stock option exercises and our ESPP are generally issued as new stock issuances. As of March 31, 2007, we had approximately 11.2 million shares of common stock reserved for future issuance under our stock option plans and ESPP.

    Stock Incentive Plans

    We sponsor several stock option plans for the benefit of officers, employees, consultants, and others.

    On February 28, 1992, the shareholders of Activision approved the Activision 1991 Stock Option and Stock Award Plan, as amended, (the “1991 Plan”) which permits the granting of “Awards” in the form of non-qualified stock options, incentive stock options (“ISOs”), stock appreciation rights (“SARs”), restricted stock awards, deferred stock awards, and other common stock-based awards to directors, officers, employees, consultants, and others. The total number of shares of common stock available for distribution under the 1991 Plan is 45,400,000. The 1991 Plan requires available shares to consist in whole or in part of authorized and unissued shares or treasury shares. There were no shares remaining available for grant under the 1991 Plan as of March 31, 2007.

    F-29


    On September 23, 1998, the shareholders of Activision approved the Activision 1998 Incentive Plan, as amended (the “1998 Plan”). The 1998 Plan permits the granting of “Awards” in the form of non-qualified stock options, ISOs, SARs, restricted stock awards, deferred stock awards, and other common stock-based awards to directors, officers, employees, consultants, and others. The total number of shares of common stock available for distribution under the 1998 Plan is 18,000,000. The 1998 Plan requires available shares to consist in whole or in part of authorized and unissued shares or treasury shares. There were approximately 56,300 shares remaining available for grant under the 1998 Plan as of March 31, 2007.

    On April 26, 1999, the Board of Directors approved the Activision 1999 Incentive Plan, as amended (the “1999 Plan”). The 1999 Plan permits the granting of “Awards” in the form of non-qualified stock options, ISOs, SARs, restricted stock awards, deferred share awards, and other common stock-based awards to directors, officers, employees, consultants, and others. The total number of shares of common stock available for distribution under the 1999 Plan is 30,000,000. The 1999 Plan requires available shares to consist in whole or in part of authorized and unissued shares or treasury shares. There were approximately 84,500 shares remaining available for grant under the 1999 Plan as of March 31, 2007.

    On August 23, 2001, the shareholders of Activision approved the Activision 2001 Incentive Plan, as amended (the “2001 Plan”). The 2001 Plan permits the granting of “Awards” in the form of non-qualified stock options, ISOs, SARs, restricted stock awards, deferred stock awards, and other common stock-based awards to directors, officers, employees, consultants, and others. The total number of shares of common stock available for distribution under the 2001 Plan is 9,000,000. The 2001 Plan requires available shares to consist in whole or in part of authorized and unissued shares or treasury shares. There were approximately 158,300 shares remaining available for grant under the 2001 Plan as of March 31, 2007.

    On April 4, 2002, the Board of Directors approved the Activision 2002 Incentive Plan (the “2002 Plan”). The 2002 Plan permits the granting of “Awards” in the form of non-qualified stock options, ISOs, SARs, restricted stock awards, deferred share awards, and other common stock-based awards to officers (other than executive officers), employees, consultants, advisors, and others. The 2002 Plan requires available shares to consist in whole or in part of authorized and unissued shares or treasury shares. The total number of shares of common stock available for distribution under the 2002 Plan is 17,400,000. There were approximately 167,600 shares remaining available for grant under the 2002 Plan as of March 31, 2007.

    On September 19, 2002, the shareholders of Activision approved the Activision 2002 Executive Incentive Plan (the “2002 Executive Plan”). The 2002 Executive Plan permits the granting of “Awards” in the form of non-qualified stock options, ISOs, SARs, restricted stock awards, deferred share awards, and other common stock-based awards to officers, employees, directors, consultants, and advisors. The total number of shares of common stock available for distribution under the 2002 Executive Plan is 10,000,000. The 2002 Executive Plan requires available shares to consist in whole or in part of authorized and unissued shares or treasury shares. There were approximately 488,700 shares remaining available for grant under the 2002 Executive Plan as of March 31, 2007.

    On December 16, 2002, the Board of Directors approved the Activision 2002 Studio Employee Retention Incentive Plan, as amended (the “2002 Studio Plan”). The 2002 Studio Plan permits the granting of “Awards” in the form of non-qualified stock options and restricted stock awards to key studio employees (other than executive officers) of Activision, its subsidiaries and affiliates, and to contractors and others. The 2002 Studio Plan requires available shares to consist in whole or in part of authorized and unissued shares or treasury shares. The total number of shares of common stock available for distribution under the 2002 Studio Plan is 6,000,000. There were approximately 4,200 shares remaining available for grant under the 2002 Studio Plan as of March 31, 2007.

    On April 29, 2003, our Board of Directors approved the Activision 2003 Incentive Plan (the “2003 Plan”). On September 15, 2005, the shareholders of Activision approved the 2003 Plan. The 2003 Plan permits the granting of “Awards” in the form of non-qualified stock options, SARs, restricted stock awards, deferred stock awards, and other common stock-based awards to directors, officers, employees, consultants, and others. The 2003 Plan requires available shares to consist in whole or in part of authorized and unissued shares or treasury shares. The total number of shares of common stock available for distribution under the 2003 Plan is 24,000,000. There were approximately 8,915,300 shares remaining available for grant under the 2003 Plan as of March 31, 2007.

    F-30


    date. Under the terms of the plans,2007 Plan, the exercise price for Awards issuedoptions must be equal to or greater than the closing price per share of our common stock on the date the award is granted, as reported on the NASDAQ.

            In February 2008, we discovered that, due to an error, the record date for our September 27, 2007 annual meeting was not in technical compliance with Delaware law or our bylaws, which require such record date to be not more than sixty (60) nor less than ten days (10) before the date of such meeting. In connection with the business combination (see Note 20), Vivendi has agreed to re-approve and ratify all actions and proposals approved by our shareholders at such meeting, and to vote against any actions and proposals not approved by our shareholders at such meeting, by written consent of the shareholders as permitted under our bylaws promptly after the closing of the transaction. If the transaction is not consummated for any reason, we intend to have such actions and proposals ratified at a special meeting of our shareholders called for such purpose or at our next annual stockholder meeting. We have determined that options and restricted stock rights granted under the 19912007 Plan 1998 Plan, 1999 Plan, 2001 Plan, 2002 Plan, 2002 Executive Plan, 2002 Studio Plan,have


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    14. Stock-Based Compensation and 2003 Plan (collectively,Employee Benefit Plans (Continued)


    met the “Plans”) is determined atdefinition of a grant date in accordance with SFAS No. 123(R), as we have the discretionability and intent to grant options and restricted stock rights under the Roll-Up Plans in view of the Board of Directors (ortechnical non-compliance described above. Further, we have also established a mutual understanding with the Compensation Committee of the Board of Directors, which administers the Plans), and underemployees as to the terms of these grants. Accordingly, stock-based compensation has been recorded for these options and restricted stock rights grants.

    Restricted Stock Units and Restricted Stock

            We grant restricted stock units and restricted stock (collectively referred to as "restricted stock rights") under the plans,2007 Plan to employees around the exercise price for ISOs is notworld. Restricted stock units entitle the holders thereof to be less than the fair market valuereceive shares of our common stock at the dateend of grant,a specified period of time. Restricted stock is issued and inoutstanding upon grant; however, restricted stock holders are restricted from selling the caseshares until they vest. Upon vesting of non-qualified options,restricted stock rights, we may withhold shares otherwise deliverable to satisfy tax withholding requirements. Restricted stock rights are subject to forfeiture and transfer restrictions. Vesting for restricted stock rights is based upon the exercise price must exceed orholders' continued employment with us. If the vesting conditions are not met, unvested restricted stock rights will be equalforfeited.

            The following table summarizes our restricted stock rights activity for the fiscal year ended March 31, 2008:

     
    		 Restricted Stock
    Rights
    		 Weighted-
    Average Grant
    Date Fair Value
    Balance as of March 31, 2007 333,475 $14.28
    Activity for the fiscal year ended March 31, 2008:     
     Granted 576,718  21.53
     Vested (23,195) 15.57
     Forfeited (10,150) 20.75
      
    		   

    Balance as of March 31, 2008
     
    876,848
     
    $
    18.97
      
    		   

            As of March 31, 2008, $9.1 million of total unrecognized compensation cost related to 85% of the fair market value of our commonrestricted stock at the date of grant. Options typically become exercisable in installmentsrights is expected to be recognized over a weighted-average period of three to five years and must be exercised within 10 years of the date of grant.  We have recently determined that certain Awards issued in certain past periods were issued with exercise prices below the fair market value of our common stock on the dates that we have determined to be the correct grant and measurement dates for those Awards.1.64 years.

    OtherNon-Plan Employee Stock Options

            

    In connection with prior employment agreements between Activisionthe Company and Robert A. Kotick, Activision’sour Chairman and Chief Executive Officer, and Brian G. Kelly, Activision’sour Co-Chairman, Mr. Kotick and Mr. Kelly were granted options to purchase our common stock. The Board of Directors approved the granting of these options. Relating to such grants, asAs of March 31, 2007,2008, options to purchase approximately 8,304,800 optionsshares under such grants were outstanding with a weighted averageweighted-average exercise price of $1.74.$2.05.

    We additionally have approximately 9,500 options outstanding to employees as of March 31, 2007, with a weighted average exercise price of $3.48. The Board of Directors approved the granting of these options. Such options have terms similar to those options granted under the Plans.

    Employee Stock Purchase Plan

            

    On April 11,Effective October 1, 2005, the Board of Directors approved the Activision, Inc. Third Amended and Restated 2002 Employee Stock Purchase Plan and on February 11, 2003 the Board approved theActivision, Inc. Second Amended and Restated 2002 Employee Stock Purchase Plan for International Employees (together, the “2002 Employee Stock Purchase Plan”"ESPP"). Under the 2002 Employee Stock Purchase Plan,ESPP, up to an aggregate of 4,000,000 shares of our common stock may be purchased by


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    14. Stock-Based Compensation and Employee Benefit Plans (Continued)


    eligible employees during two six-month offering periods that commence each April 1 and October 1 (the “Offering Period”"Offering Period"). Common stock is purchased by the Amended 2002 Purchase PlansESPP participants at a price per share generally equal to 85% of the lower of the fair market value of theour common stock on the first day of the Offering Period and the fair market value of theour common stock on the purchase date (the last day of the Offering Period). Employees may purchase shares having a value not exceeding 15% of their gross compensation during an Offering Period and are limited to a maximum of $10,000 in value for any two purchases within the same calendar year. On June 13, 2007, the most recent purchase date, employees purchased 228,337228,242 shares of our common stock at a purchase price of $12.8350$12.835 per share. On September 28, 2007, employees purchased 126,008 shares of our common stock at a purchase price of $16.099 per share. On March 31, 2008, the most recent purchase date employees purchased 208,311 shares of our common stock at a purchase price of $18.862. As of March 31, 2008, we had approximately 1.0 million shares of our common stock reserved for future issuance under the ESPP. Shares issued in connection with purchases made under the ESPP are generally issued as new stock issuances.

    Non-Employee Warrants

            

    Non-Employee Warrants

    In prior years, we have granted stock warrants to third parties in connection with the development of software and the acquisition of licensing rights for intellectual property. The warrants generally vest upon grant and are exercisable over the term of the warrant. The exercise price of third-party warrants is generally greater than or equal to theirthe fair market value of our common stock at the date of grant. No third-party warrants were granted during the years ended March 31, 2007, 2006,2008 and 2005.2007. As of March 31, 2008 and 2007, and 2006,respectively, third-party warrants to purchase 919,800 and 936,000 shares of our common stock were outstanding with a weighted averageweighted-average exercise price of $4.59 and $4.54 per share.share, respectively.

    In accordance with EITFthe Financial Accounting Standards Board's Emerging Issues Task Force ("EITF") Issue 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in conjunction with Selling Goods or Services, we measure the fair value of the securities on the measurement date. The fair value of each warrant is capitalized and amortized to expense when the related product is released and the related revenue is recognized. Additionally, as more fully described in Note 1, the recoverability of capitalized software development costs and intellectual property licenses is evaluated on a quarterly basis with amounts determined as not recoverable being charged to expense. In connection with the evaluation of capitalized software development costs and intellectual property licenses, any capitalized amounts for related third-party warrants are additionally reviewed for recoverability with amounts determined as not recoverable being amortized to expense. As of March 31, 2006, capitalized amounts of third-party warrants had beenwere fully amortized and there was no amortization related to third-party warrants for the fiscal year ended March 31, 2007. For the fiscal years ended March 31, 2006 and 2005, $0.5 and $1.6 million, respectively was amortized and included in cost of sales - software royalties and amortization and/or cost of sales - intellectual property licenses.amortized.

    F-31


    Employee Retirement Plan

            

    We have a retirement plan covering substantially all of our eligible employees. The retirement plan is qualified in accordance with Section 401(k) of the Internal Revenue Code. Under the plan, employees may defer up to the lesser of 92% of their pre-tax salary, andup to the maximum amount allowed by law. We contribute an amount equal to 20% of each dollar contributed by a participant. Our matching contributions to the plan were approximately $1.8 million, $1.5 million, and $1.3 million and $905,000 for the years ended March 31, 2008, 2007 and 2006, respectively.


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    14. Stock-Based Compensation and 2005, respectively.Employee Benefit Plans (Continued)

            

    Restricted Stock

    In June 2005, we issued the rights to 155,763 shares of restricted stock to an employee. Additionally, in October 2005 we issued the rights to 96,712 shares of restricted stock to an employee. These shares all vest over a five-year period and remain subject to forfeiture if vesting conditions are not met. In accordance with APB 25, we recognized unearned compensation in connection with the grant of restricted shares equal to the fair value of our common stock on the date of grant. The fair value of these shares when issued was approximately $12.84 and $15.51 per share, respectively, and resulted in a total increase in “Additional paid-in capital” and “Unearned compensation” of $2.0 million and $1.5 million on the respective balance sheets at the times of grant. Prior to the adoption of SFAS 123R, we reduced unearned compensation and recognized compensation expense over the vesting periods. Upon adoption of SFAS 123R, unearned compensation was reclassified against additional paid in capital and we will increase additional paid in capital and recognize compensation expense over the respective remaining vesting periods. Additionally, in the third quarter of fiscal 2007 we issued the rights to an aggregate of 81,000 shares of restricted stock to various employees. These shares vest over two and three year periods (with some subject to vesting acceleration clauses if the holder achieves certain performance objectives) and remain subject to forfeiture if vesting conditions are not met. In accordance with SFAS 123R we will recognize compensation expense and increase additional paid in capital related to these restricted stock shares over the requisite service period. For the year ended March 31, 2007, we recorded expenses related to these shares of approximately $981,000, which was included as a component of stock-based compensation expense within “General and administrative” on the accompanying Consolidated Statements of Operations. Since the issuance dates, we have recognized $1.4 million of the $4.8 million total fair value, with the remainder to be recognized over a weighted-average period of 2.88 years.

    On April 1, 2006, we adopted the provisions of SFAS 123R, requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected to use the modified prospective transition method as permitted by SFAS 123R and therefore have not restated our financial results for prior periods. Under this transition method, stock-based compensation expense for the year ended March 31, 2007 includes compensation expense for all stock-based compensation awards 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 123. Stock-based compensation expense for all stock-based compensation awards granted subsequent to April 1, 2006 was based on the grant-date fair value, estimated in accordance with the provisions of SFAS 123R.

    The effect of adopting SFAS 123R in the year ended March 31, 2007 was as follows:

    (in thousands except per share data)

     

    For the year ended
    March 31, 2007

     

    Additional pre-tax stock-based compensation

     

    $

    21,436

     

    Additional stock-based compensation, net of tax

     

    13,055

     

    Cash flows from operations

     

    (9,012

    )

    Cash flows from financing activities

     

    9,012

     

    Effect on earnings per share:

     

     

     

    Basic

     

    $

    (0.05

    )

    Diluted

     

    $

    (0.04

    )

    The following table sets forth the total stock-based compensation expense (amounts in thousands) resulting from stock options, restricted stock awards,rights, and the ESPP included in our Consolidated Statements of Operations (in thousands) in accordance with SFAS No. 123R for the fiscal years ended March 31, 2008 and March 31, 2007, and APB No. 25 for the fiscal year ended March 31, 2007, and APB 25 for the fiscal years ended March 31, 2006 and 2005:2006:

     
    		 For the years ended March 31,
    		 
     
    		 2008
    		 2007
    		 2006
    		 
    Cost of sales—software royalties and amortization $10,898 $2,503 $— 
    Product development  17,610  5,728  869 
    Sales and marketing  6,833  5,267  175 
    General and administrative  18,224  12,024  2,055 
      
    		 
    		 
    		 
    Stock-based compensation expense before income taxes  53,565  25,522  3,099 
    Income tax benefit  (20,944) (9,979) (1,208)
      
    		 
    		 
    		 
    Total stock-based compensation expense, net of income tax benefit $32,621 $15,543 $1,891 
      
    		 
    		 
    		 

     

     

    For the year ended March 31,

     

     

     

    2007

     

    2006

     

    2005

     

     

     

     

     

     

     

     

     

    Cost of sales - software royalties and amortization

     

    $

    2,503

     

    $

    —

     

    $

    —

     

    Product development

     

    5,728

     

    869

     

    1,233

     

    Sales and marketing

     

    5,267

     

    175

     

    241

     

    General and administrative

     

    12,024

     

    2,055

     

    1,894

     

     

     

     

     

     

     

     

     

    Stock-based compensation expense before income taxes

     

    25,522

     

    3,099

     

    3,368

     

    Income tax benefit

     

    (9,979

    )

    (1,208

    )

    (1,310

    )

     

     

     

     

     

     

     

     

    Total stock-based compensation expense after income taxes

     

    $

    15,543

     

    $

    1,891

     

    $

    2,058

     

    F-32


    Additionally, stock option expenses are capitalized in accordance with SFAS No. 86, “AccountingAccounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”Marketed as discussed in Note 1. For the year ended March 31, 2007,2008, stock-based compensation costs in the amount of $9.1$13.7 million were capitalized and $2.5$10.9 million of capitalized stock-based compensation costs were amortized. The following table summarizes stock –basedstock-based compensation included in our Consolidated Balance Sheets as a component of software development (in(amounts in thousands):

     

    Software
    Development

     

    		 Software
    Development
    		 

     

     

     

    Balance, March 31, 2006

     

    $

    —

     

    Balance as of March 31, 2006 $— 

    Stock-based compensation expense capitalized during period

     

    9,069

     

    		 9,069 

    Amortization of capitalized stock-based compensation expense

     

    (2,503

    )

    		 (2,503)

    Balance, March 31, 2007

     

    $

    6,566

     

     
    		 
    Balance as of March 31, 2007 6,566 
    Stock-based compensation expense capitalized during period 13,690 
    Amortization of capitalized stock-based compensation expense (10,898)
     
    		 
    Balance as of March 31, 2008 $9,358 
     
    		 

            

    Net cash proceeds from the exercise of stock options were $48.0 million, $19.0 million, $45.1 million, and $72.7$45.1 million for the years ended March 31, 2008, 2007, 2006, and 2005,2006, respectively. Income tax benefit from stock option exercises was $57.3 million, $11.3 million, $29.4 million, and $53.2$29.4 million for the years ended March 31, 2008, 2007, 2006, and 2005,2006, respectively. In accordance with SFAS No. 123R, we present excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows.

    Prior to the adoption of SFAS No. 123R, we applied SFAS No. 123, amended by SFAS No. 148, “AccountingAccounting for Stock-Based Compensation – Compensation—Transition and Disclosure” (“Disclosure ("SFAS 148”No. 148"), which allowed companies to apply the existing accounting rules under APB No. 25 and related Interpretations. According to APB No. 25, a non-cash stock-based compensation expense is recognized for any options granted where the exercise price is lower than the market price on the actual date of grant. This expense is then amortized over the vesting period of the associated option. As required by SFAS No. 148, prior to the adoption of SFAS No. 123R, we provided pro forma net income and pro forma


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    14. Stock-Based Compensation and Employee Benefit Plans (Continued)


    net income per common share disclosures for stock-based awards, as if the fair-value-based method defined in SFAS No. 123 had been applied.

            

    F-33


    The following table illustrates the effect on net income after tax and net earnings per common share as if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation during the yearsyear ended March 31, 2006 and 2005 (in(amounts in thousands, except per share amounts):

     

     

    For the years ended March 31,

     

     

     

    2006

     

    2005

     

    Net income, as reported

     

    $

    40,251

     

    $

    135,057

     

    Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

     

    1,589

     

    2,313

     

    Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

     

    (16,175

    )

    (14,233

    )

     

     

     

     

     

     

    Pro forma net income

     

    $

    25,665

     

    $

    123,137

     

     

     

     

     

     

     

    Earnings per share

     

     

     

     

     

     

     

     

     

     

     

    Basic - as reported

     

    $

    0.15

     

    $

    0.54

     

    Basic - pro forma

     

    $

    0.09

     

    $

    0.49

     

     

     

     

     

     

     

    Diluted - as reported

     

    $

    0.14

     

    $

    0.49

     

    Diluted - pro forma

     

    $

    0.09

     

    $

    0.44

     

     
    		 For the year ended
    March 31, 2006
    		 
    Net income, as reported $40,251 
    Add: Stock-based employee compensation expense included in reported net income, net of related tax effects  1,589 
    Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects  (16,175)
      
    		 
     Pro forma net income $25,665 
      
    		 

    Earnings per share
     
     
     
     
     
    Basic—as reported
     
    $
    0.15
     
      
    		 
     Basic—pro forma $0.09 
      
    		 
     
    Diluted—as reported
     
    $
    0.14
     
      
    		 
     Diluted—pro forma $0.09 
      
    		 

            

    In the table above, stock-based compensation has been tax effected using our effective tax rate which differs from our statutory rate. Additionally, included in fiscal year 2006 net income, as reported, is $467,000 of amortization of unearned compensation related to restricted stock.

            

    As of April 1, 2005, the Company began estimating the value of employee stock options on the date of grant using a binomial-lattice model. Prior to April 1, 2005 the value of each employee stock option was estimated on the date of grant using the Black-Scholes model for the purpose of the pro forma financial information in accordance with SFAS No. 123.

            

    Our employee stock options have features that differentiate them from exchange-traded options. These features include lack of transferability, early exercise, vesting restrictions, pre- and post-vesting termination provisions, blackout dates, and time-varying inputs. In addition, some of the options have non-traditional features, such as accelerated vesting upon the satisfaction of certain performance conditions that must be reflected in the valuation. A binomial-lattice model was selected because it is better able to explicitly address these features than closed-form models such as the Black-Scholes model, and is able to reflect expected future changes in model inputs, including changes in volatility, during the option’soption's contractual term.

            

    Consistent with SFAS No. 123R, we have attempted to reflect expected future changes in model inputs during the option’soption's contractual term. The inputs required by our binomial-lattice model include expected volatility, risk-free interest rate, risk-adjusted stock return, dividend yield, contractual term, and vesting schedule, as well as measures of employees’employees' forfeiture, exercise, and post-vesting


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    14. Stock-Based Compensation and Employee Benefit Plans (Continued)


    termination behavior. Statistical methods were used to estimate employee typerank- specific termination rates. These termination rates, in turn, were used to model the number of options that are expected to vest and post-vesting termination behavior. Employee type specificrank-specific estimates of Expected Time-To-Exercise (“ETTE”("ETTE") were used to reflect employee exercise behavior. ETTE was estimated by using statistical procedures to first estimate the conditional probability of exercise occurring during each time period, conditional on the option surviving to that time period. Theseperiod and then using those probabilities are then used to estimate ETTE. The model was calibrated by adjusting parameters controlling exercise and post-vesting termination behavior so that the measures output by the model matched values of these measures that were estimated from historical data. The weighted-average estimated value of employee stock options granted during the years ended March 31, 2008, 2007, and 2006 was $9.21, $5.86, and 2005 was $5.86, $5.09 and $3.06 per share, respectively, using the binomial-lattice model with the following weighted-average assumptions:

     
    		 Employee and Director
    Options and Warrants
    		 Employee Stock
    Purchase Plan
    		 
     
    		 For the years ended March 31,
    		 For the years ended March 31,
    		 
     
    		 2008
    		 2007
    		 2006
    		 2008
    		 2007
    		 2006
    		 
    Expected life (in years)  5.41  4.87  4.85  0.5  0.5  0.5 
    Risk free interest rate  4.70% 4.99% 5.17% 4.61% 4.71% 3.05%
    Volatility  51% 54% 48% 38% 43% 42%
    Dividend yield  —  —  —  —  —  — 
    Weighted-average fair value at grant date $9.21 $5.86 $5.09 $5.49 $3.72 $3.11 

            

    F-34


     

     

    Employee and Director
    Options and Warrants

     

    Employee Stock
    Purchase Plan

     

     

     

    For the year ended March 31,

     

    For the year ended March 31,

     

     

     

    2007

     

    2006

     

    2005

     

    2007

     

    2006

     

    2005

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Expected life (in years)

     

    4.87

     

    4.85

     

    3.20

     

    0.5

     

    0.5

     

    0.5

     

    Risk free interest rate

     

    4.99

    %

    5.17

    %

    3.25

    %

    4.71

    %

    3.05

    %

    2.66

    %

    Volatility

     

    54

    %

    48

    %

    48

    %

    43

    %

    42

    %

    46

    %

    Dividend yield

     

    —

     

    —

     

    —

     

    —

     

    —

     

    —

     

    Weighted-average fair value at grant date

     

    $

    5.86

     

    $

    5.09

     

    $

    3.06

     

    $

    3.72

     

    $

    3.11

     

    $

    1.59

     

    To estimate volatility for the binomial-lattice model, we use methods or capabilities that are discussed in SFAS No. 123R and SAB No. 107. These methods includedinclude the implied volatility method based upon the volatilities for exchange-traded options on our stock to estimate short-term volatility, the historical method (annualized standard deviation of the instantaneous returns on Activision’sActivision's stock) during the option’soption's contractual term to estimate long-term volatility and a statistical model to estimate the transition or “mean reversion”"mean reversion" from short-term volatility to long-term volatility. Based on these methods, for options granted during the year ended March 31, 2008, the expected stock price volatility ranged from 34% to 53%, with a weighted-average volatility of 51%. For options granted during the year ended March 31, 2007, the expected stock price volatility ranged from 38% to 56%, with a weighted-averageweighted average volatility of 54%. For options granted during the year ended March 31, 2006, the expected stock price volatility ranged from 40% to 55%, with a weighted average volatility of 48%. For options granted during the year ended March 31, 2005, the expected stock price volatility ranged from 45% to 48%, with a weighted average volatility of 48%.

            

    As is the case for volatility, the risk-free rate is assumed to change during the option’soption's contractual term. Consistent with the calculation required by a binomial lattice model, the risk-free rate reflects the interest from one time period to the next (“("forward rate”rate") as opposed to the interest rate from the grant date to the given time period (“("spot rate”rate."). Since we do not currently pay dividends and are not expected to pay them in the future, we have assumed that the dividend yield is zero.

            

    The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is, as required by SFAS No. 123R, an output by the binomial-lattice model. The expected life of employee stock options depends on all of the underlying assumptions and calibration of our model. A binomial-lattice model can be viewed as assuming that employees will exercise their options when the stock price equals or exceeds an exercise boundary. The exercise boundary is not constant but continually declines as one approaches the option’soption's expiration


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    14. Stock-Based Compensation and Employee Benefit Plans (Continued)


    date. The exact placement of the exercise boundary depends on all of the model inputs as well as the measures that are used to calibrate the model to estimated measures of employees’employees' exercise and termination behavior.

            

    As stock-based compensation expense recognized in the Consolidated Statement of Operations for the year ended March 31, 20072008 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.

    Accuracy of Fair Value Estimates

            

    The Company uses third-party analyses to assist in developingWe developed the assumptions used in the binomial-lattice model, including model inputs and measures of employees’employees' exercise and post-vesting termination behavior. However, we are ultimately responsible for the assumptions used to estimate the fair value of our share-based payment awards.

    Our ability to accurately estimate the fair value of share-based payment awards as of the grant date depends upon the accuracy of the model and our ability to accurately forecast model inputs as long as ten years into the future. These inputs include, but are not limited to, expected stock price volatility, risk-free rate, dividend yield, and employee termination rates. Although the fair value of employee stock options is determined in accordance with SFAS No. 123R and SAB No. 107 using an option-pricing model, the estimates that are produced by this model may not

    F-35


    be indicative of the fair value observed between a willing buyer/willing seller. Unfortunately, it is difficult to determine if this is the case, because markets do not currently exist that permit the active trading of employee stock option and other share-based instruments.

            

    Stock option activity for the yearsyear ended March 31, 2007, 2006, and 20052008 is as follows (in(amounts in thousands, except per share amounts):

     
    		 Shares
    		 Weighted-Average
    Exercise Price
    		 Weighted-Average
    Remaining Contractual Term
    		 Aggregate
    Intrinsic Value
    Outstanding at March 31, 2007 49,429 $7.18     
    Granted 11,457  20.52     
    Exercised (9,918) 6.53     
    Forfeited (2,313) 9.48     
      
    		        
    Outstanding at March 31, 2008 48,655 $10.67 5.94 $809,420
      
    		        
    Exercisable at March 31, 2008 26,816 $5.98 3.93 $572,001
    Vested and expected to vest at March 31, 2008 45,469 $10.20 5.12 $778,006

            

     

     

    2007

     

    2006

     

    2005

     

     

     

    Shares

     

    Wtd Avg
    Ex Price

     

    Shares

     

    Wtd Avg
    Ex Price

     

    Shares

     

    Wtd Avg
    Ex Price

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Outstanding at beginning of year

     

    48,337

     

    $

    6.20

     

    48,772

     

    $

    4.84

     

    65,135

     

    $

    3.71

     

    Granted

     

    6,361

     

    13.91

     

    8,728

     

    12.66

     

    7,501

     

    8.82

     

    Exercised

     

    (3,352

    )

    5.03

     

    (8,108

    )

    4.81

     

    (22,167

    )

    2.90

     

    Forfeited

     

    (1,917

    )

    8.61

     

    (1,055

    )

    7.35

     

    (1,697

    )

    4.47

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Outstanding at end of year

     

    49,429

     

    $

    7.18

     

    48,337

     

    $

    6.20

     

    48,772

     

    $

    4.84

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Exercisable at end of year

     

    31,291

     

    $

    4.60

     

    27,126

     

    $

    4.17

     

    25,180

     

    $

    3.92

     

    The following table shows the weighted-average remaining contractual term and aggregate intrinsic value for options outstanding and options exercisable at March 31, 2007 (amounts in thousands):

     

     

    Weighted-Average
    Remaining
    Contractual
    Term

     

    Aggregate
    Intrinsic Value

     

    Outstanding at March 31, 2007

     

    5.97

     

    $

    581,459

     

     

     

     

     

     

     

    Exercisable at March 31, 2007

     

    4.69

     

    $

    448,621

     

    The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between our closing stock price on the last trading day of the period and the exercise price, times the number of shares for options where the exercise price is below the closing stock price) that would have been received by the option holders had all option holders exercised their options on that date. This amount changes based on the fair market value of our stock. Total intrinsic value of options actually exercised was $165.4 million, $32.0 million, $77.9 million, and $198.0$77.9 million for the years ended March 31, 2008, 2007, 2006, and 2005,2006, respectively.

            

    As of March 31, 2007, $34.02008, $70.0 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 1.611.59 years.


    ACTIVISION, INC. AND SUBSIDIARIES

    F-36


    Notes to Consolidated Financial Statements (Continued)

    The following table summarizes information about all employee14. Stock-Based Compensation and director stock options outstanding as of March 31, 2007 (share amounts in thousands):Employee Benefit Plans (Continued)

            

     

     

    Outstanding Options

     

    Exercisable Options

     

     

     

    Shares

     

    Remaining
    Wtd. Avg.
    Contractual
    Life
    (in years)

     

    Wtd. Avg.
    Exercise
    Price

     

    Shares

     

    Wtd. Avg.
    Exercise
    Price

     

     

     

     

     

     

     

     

     

     

     

     

     

    Range of exercise prices:

     

     

     

     

     

     

     

     

     

     

     

    $1.00 to $1.08

     

    665

     

    3.11

     

    $

    1.05

     

    665

     

    $

    1.05

     

    $1.72 to $1.75

     

    8,202

     

    1.95

     

    1.75

     

    8,202

     

    1.75

     

    $1.76 to $3.53

     

    5,354

     

    5.09

     

    3.34

     

    4,714

     

    3.34

     

    $3.54 to $5.00

     

    5,696

     

    5.74

     

    4.04

     

    5,185

     

    4.07

     

    $5.08 to $5.74

     

    4,959

     

    5.36

     

    5.72

     

    4,292

     

    5.72

     

    $5.79 to $7.73

     

    6,605

     

    5.96

     

    7.12

     

    6,032

     

    7.10

     

    $7.75 to $11.10

     

    5,440

     

    7.61

     

    9.77

     

    1,009

     

    8.99

     

    $11.15 to $13.61

     

    8,959

     

    8.65

     

    12.90

     

    779

     

    12.14

     

    $13.62 to $17.21

     

    3,388

     

    8.97

     

    15.24

     

    413

     

    15.06

     

    $18.43 to $18.43

     

    161

     

    9.80

     

    18.43

     

    —

     

    —

     

     

     

    49,429

     

    5.97

     

    $

    7.18

     

    31,291

     

    $

    4.60

     

    On June 8, 2007, consistent with Internal Revenue Service guidance, the Company commenced an offer to amend the exercise price of unexercised options subject to Section 409A of the Internal Revenue Code held by employees who were not executive officers, in order to eliminate those employees' Section 409A tax liability. Pursuant to the offer, which closed on July 6, 2007, we made a cash payment in January 2008 to the employees who accepted the offer, totaling approximately $4.1 million, which represents the difference between the original exercise price of each amended option and the amended exercise price of each amended option. The offer with respect to all eligible options is considered a modification of those options for financial reporting purposes. Pursuant to the accounting standards in effect under SFAS No. 123R, the incremental fair value of approximately $1.0 million and the remaining portion of approximately $3.1 million, created as a result of the cash payment that become payable pursuant to the terms of the offer, were recognized as compensation expense and equity, respectively, at the expiration of the offer period on July 6, 2007.

    15.Capital Transactions

    Buyback Program

            

    Buyback Program

    During fiscal 2003, our Board of Directors authorized a buyback program under which we can repurchase up to $350.0 million of our common stock. Under the program, shares may be purchased as determined by management, from time to time and within certain guidelines, in the open market or in privately negotiated transactions, including privately negotiated structured stock repurchase transactions and through transactions in the options markets. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time or from time to time without prior notice.

            

    Under the buyback program, we did not repurchase any shares of our common stock in the years ended March 31, 2008, 2007 March 31, 2006 and March 31, 2005.2006. As of March 31, 2007, we had no outstanding structured stock repurchase transactions. Structured stock repurchase transactions are settled in cash or stock-based on the market price of our common stock on the date of the settlement. Upon settlement, we either have our capital investment returned with a premium or receive shares of our common stock, depending, respectively, on whether the market price of our common stock is above or below a pre-determined price agreed in connection with each such transaction. These transactions are recorded in shareholders’ equity in the accompanying Consolidated Balance Sheets. As of March 31, 2007,2008, we had approximately $226.2 million available for utilization under the buyback program and no outstanding stock repurchase transactions.

    F-37


    Shareholders’Shareholders' Rights Plan

    On April 18, 2000, our Board of Directors approved a shareholders rights plan (the “Rights Plan”"Rights Plan."). Under the Rights Plan, each common shareholder at the close of business on April 19, 2000, received a dividend of one right for each share of common stock held. Each right represents the right to purchase one-six hundredths (1/600)(1/600) of a share, as adjusted on account of stock dividends made since the plan’splan's adoption, of our Series A Junior Preferred Stock at an exercise price of $6.67 per share, as adjusted on account of stock dividends made since the plan’splan's adoption. Initially, the rights are represented by our common stock certificates and are neither exercisable nor traded separately from our common stock. The rights will only become exercisable if a person or group acquires 15% or more of the common stock of Activision, or announces or commences a tender or exchange offer which would result in the bidder’sbidder's beneficial ownership of 15% or more of our common stock.

            

    In the event that any person or group acquires 15% or more of our outstanding common stock each holder of a right (other than such person or members of such group) will thereafter have the right to receive upon exercise of such right, in lieu of shares of Series A Junior Preferred Stock, the number of shares of common stock of Activision having a value equal to two times the then current exercise price of the right. If we are acquired in a merger or other business combination transaction after a person has acquired 15% or more of our common stock, each holder of a right will thereafter have the


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    15. Capital Transactions (Continued)


    right to receive upon exercise of such right a number of the acquiring company’scompany's common shares having a market value equal to two times the then current exercise price of the right. For persons who, as of the close of business on April 18, 2000, beneficially own 15% or more of the common stock of Activision, the Rights Plan “grandfathers”"grandfathers" their current level of ownership, so long as they do not purchase additional shares in excess of certain limitations.

            

    We may redeem the rights for $.01 per right at any time until the first public announcement of the acquisition of beneficial ownership of 15% of our common stock. At any time after a person has acquired 15% or more (but before any person has acquired more than 50%) of our common stock, we may exchange all or part of the rights for shares of common stock at an exchange ratio of one share of common stock per right. The rights expire on April 18, 2010.

            We have amended the Rights Plan concurrent with the execution of the business combination agreement with Vivendi (see Note 20) to provide that (a) the Rights Plan will not be triggered by the business combination agreement or the transaction and (b) the Rights Plan will terminate upon the completion of the transaction and all rights existing under the Rights Plan will be extinguished.

    16.Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)

            

    The components of comprehensive income (loss) for the yearyears ended March 31, 2008, 2007, 2006, and 20052006 were as follows (amounts in thousands):

     
    		 March 31,
    2008
    		 March 31,
    2007
    		 March 31,
    2006
    		 
    Net income $344,883 $85,787 $40,251 
     Other comprehensive income (loss):          
     Unrealized appreciation (depreciation) on investments, net of taxes  (1,896) (8,224) 10,576 
     Foreign currency translation adjustment  8,046  12,057  (5,825)
      
    		 
    		 
    		 
    Other comprehensive income  6,150  3,833  4,751 
      
    		 
    		 
    		 
    Comprehensive income $351,033 $89,620 $45,002 
      
    		 
    		 
    		 

            

     

     

    March 31,

     

    March 31,

     

    March 31,

     

     

     

    2007

     

    2006

     

    2005

     

     

     

     

     

     

     

     

     

    Net income

     

    $

    85,787

     

    $

    40,251

     

    $

    135,057

     

     

     

     

     

     

     

     

     

    Other comprehensive income (loss):

     

     

     

     

     

     

     

    Unrealized appreciation (depreciation) on investments, net of taxes

     

    (8,224

    )

    10,576

     

    (3,317

    )

    Foreign currency translation adjustment

     

    12,057

     

    (5,825

    )

    4,974

     

     

     

     

     

     

     

     

     

    Other comprehensive income

     

    3,833

     

    4,751

     

    1,657

     

     

     

     

     

     

     

     

     

    Comprehensive income

     

    $

    89,620

     

    $

    45,002

     

    $

    136,714

     

    F-38


    The components of accumulated other comprehensive income (loss) for the yearsyear ended March 31, 2007 and 20062008 were as follows (amounts in thousands):

     
    		 Foreign Currency
    		 Unrealized
    Appreciation
    (Depreciation)
    on Investments
    		 Accumulated
    Other
    Comprehensive
    Income (Loss)
    Balance, March 31, 2007 $21,070 $(868)$20,202
    Other comprehensive income (loss)  8,046  (1,896) 6,150
      
    		 
    		 
    Balance, March 31, 2008 $29,116 $(2,764)$26,352
      
    		 
    		 

            

     

     

    Foreign Currency

     

    Unrealized
    Appreciation
    (Depreciation) on
    Investments

     

    Accumulated Other
    Comprehensive
    Income (Loss)

     

     

     

     

     

     

     

     

     

    Balance, March 31, 2006

     

    $

    9,013

     

    $

    7,356

     

    $

    16,369

     

    Other comprehensive income (loss)

     

    12,057

     

    (8,224

    )

    3,833

     

     

     

     

     

     

     

     

     

    Balance, March 31, 2007

     

    $

    21,070

     

    $

    (868

    )

    $

    20,202

     

    Comprehensive income is presented net of taxes of $0.6$1.2 million related to net unrealized depreciation on investments.investments for the year ended March 31, 2008. Income taxes were not provided for foreign currency translation items as these are considered indefinite investments in non-U.S. subsidiaries.


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    17. Supplemental Cash Flow Information

            

    Non-cash investing and financing activities and supplemental cash flow information are as follows (amounts in thousands):

     
    		 For the years ended March 31,
    		 
     
    		 2008
    		 2007
    		 2006
    		 
    Non-cash investing and financing activities:          
     Common Stock issued related to acquisitions $25,864 $36,918 $2,793 
     Common Stock related to employee bonuses  1,857  —  — 
     Change in unrealized appreciation (depreciation) on investments, net of taxes  (1,896) (8,224) 10,576 
     Common stock payable, related to acquisition  —  39,000  — 
     Adjustment-prior period purchase allocation  (318) 51  (260)

    Supplemental cash flow information:
     
     
     
     
     
     
     
     
     
     
     Cash paid for income taxes $48,393 $3,677 $4,698 
     Cash paid for interest  108  100  263 

     

     

    For the years ended March 31,

     

     

     

    2007

     

    2006

     

    2005

     

     

     

     

     

     

     

     

     

    Non-cash investing and financing activities:

     

     

     

     

     

     

     

    Subsidiaries acquired with common stock

     

    $

    30,000

     

    $

    2,793

     

    $

    1,191

     

    Change in unrealized appreciation (depreciation) on investments

     

    (8,224

    )

    10,576

     

    (3,317

    )

    Common stock payable, related to acquisition

     

    39,000

     

    —

     

    —

     

    Adjustment-prior period purchase allocation

     

    51

     

    (260

    )

    (2,384

    )

     

     

     

     

     

     

     

     

    Supplemental cash flow information:

     

     

     

     

     

     

     

    Cash paid for income taxes

     

    $

    3,677

     

    $

    4,698

     

    $

    12,178

     

    Cash received for interest, net

     

    35,345

     

    25,912

     

    10,543

     

    F-39


    18. Quarterly Financial and Market Information (Unaudited)

     
    		 For the quarters ended
    		  
     
    		 For the
    year ended
     
    		 June 30
    		 Sept. 30
    		 Dec. 31
    		 Mar. 31
     
    		 (Amounts in thousands, except per share data)

    		  
    Fiscal 2008:               
     Net revenues $495,455 $317,746 $1,482,484 $602,451 $2,898,136
     Cost of sales  327,960  204,956  762,290  350,229  1,645,435
     Operating income (loss)  30,092  (9,545) 404,534  54,533  479,614
     Net income  27,826  698  272,196  44,163  344,883
     Basic earnings per share  0.10  0.00  0.93  0.15  1.19
     Diluted earnings per share  0.09  0.00  0.86  0.14  1.10
     
    Common stock price per share:
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
      High  21.43  21.91  29.87  29.76  29.87
      Low  18.16  16.94  18.81  25.11  16.94

    Fiscal 2007:
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     Net revenues $188,069 $188,172 $824,259 $312,512 $1,513,012
     Cost of sales  137,800  141,078  483,180  216,007  978,065
     Operating income (loss)  (33,449) (37,410) 173,120  (29,114) 73,147
     Net income (loss)  (18,309) (24,302) 142,820  (14,422) 85,787
     Basic earnings (loss) per share  (0.07) (0.09) 0.51  (0.05) 0.31
     Diluted earnings (loss) per share  (0.07) (0.09) 0.46  (0.05) 0.28
     
    Common stock price per share:
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
      High  15.11  16.00  18.19  19.20  19.20
      Low  10.71  10.47  14.22  16.05  10.47

    ACTIVISION, INC. AND SUBSIDIARIES

     

     

    For the quarters ended

     

    For the year

     

    (Amounts in thousands, except per share data)

     

    June 30(a)

     

    Sept. 30

     

    Dec. 31

     

    Mar. 31

     

    ended

     

     

     

     

     

     

     

     

     

     

     

     

     

    Fiscal 2007:

     

     

     

     

     

     

     

     

     

     

     

    Net revenues

     

    $

    188,069

     

    $

    188,172

     

    $

    824,259

     

    $

    312,512

     

    $

    1,513,012

     

    Cost of sales

     

    137,800

     

    141,078

     

    483,180

     

    216,007

     

    978,065

     

    Operating income (loss)

     

    (33,449

    )

    (37,410

    )

    173,120

     

    (29,114

    )

    73,147

     

    Net income (loss)

     

    (18,309

    )

    (24,302

    )

    142,820

     

    (14,422

    )

    85,787

     

    Basic earnings (loss) per share

     

    (0.07

    )

    (0.09

    )

    0.51

     

    (0.05

    )

    0.31

     

    Diluted earnings (loss) per share

     

    (0.07

    )

    (0.09

    )

    0.46

     

    (0.05

    )

    0.28

     

     

     

     

     

     

     

     

     

     

     

     

     

    Common stock price per share:

     

     

     

     

     

     

     

     

     

     

     

    High

     

    15.11

     

    16.00

     

    18.19

     

    19.20

     

    19.20

     

    Low

     

    10.71

     

    10.47

     

    14.22

     

    16.05

     

    10.47

     

     

     

     

     

     

     

     

     

     

     

     

     

    Fiscal 2006:

     

     

     

     

     

     

     

     

     

     

     

    Net revenues

     

    $

    241,093

     

    $

    222,540

     

    $

    816,242

     

    $

    188,125

     

    $

    1,468,000

     

    Cost of sales

     

    172,270

     

    141,458

     

    498,325

     

    128,309

     

    940,362

     

    Operating income (loss)

     

    (14,319

    )

    (27,788

    )

    83,893

     

    (26,560

    )

    15,226

     

    Net income (loss)

     

    (4,247

    )

    (14,230

    )

    67,856

     

    (9,128

    )

    40,251

     

    Basic earnings (loss) per share

     

    (0.02

    )

    (0.05

    )

    0.25

     

    (0.03

    )

    0.15

     

    Diluted earnings (loss) per share

     

    (0.02

    )

    (0.05

    )

    0.23

     

    (0.03

    )

    0.14

     

     

     

     

     

     

     

     

     

     

     

     

     

    Common stock price per share:

     

     

     

     

     

     

     

     

     

     

     

    High

     

    13.88

     

    17.30

     

    18.03

     

    15.93

     

    18.03

     

    Low

     

    10.64

     

    12.07

     

    12.94

     

    11.81

     

    10.64

     

    Notes to Consolidated Financial Statements (Continued)

    a)  On June 7, 2007, we filed an Amended Quarterly Report on Form 10-Q/A to restate our unaudited consolidated financial statements as of June 30, 2006 and for the three months ended June 30, 2006 and 2005 and the related disclosures to correct our stock-based compensation expense and related tax effects as discussed in the Form 10-Q/A.

    The following table reflects the impact of the non-cash charges for stock-based compensation expense and related tax effects:

     

     

    For the three months ended June 30, 2006

     

     

     

    As previously reported

     

    Adjustments

     

    As restated

     

    Net revenues

     

    $

    188,069

     

    $

    —

     

    $

    188,069

     

    Cost of sales

     

    137,789

     

    11

     

    137,800

     

    Operating loss

     

    (32,786

    )

    (663

    )

    (33,449

    )

    Net loss

     

    (17,826

    )

    (483

    )

    (18,309

    )

    Basic loss per share

     

    (0.06

    )

    (0.01

    )

    (0.07

    )

    Diluted loss per share

     

    (0.06

    )

    (0.01

    )

    (0.07

    )

    19.Recently Issued Accounting Standards and Laws

    In February 2006,December 2007, the FASB issued Statement No. 155 (“141(R),Business Combinations ("SFAS No. 155”141(R)."), Accounting for Certain Hybrid Financial Instruments – An amendment of FASB Statements No. 133 and 140. SFAS No. 155 amends141(R) provides greater consistency in the accounting and financial reporting of business combinations. It requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose the nature and financial effect of the business combination. Also in December 2007, the FASB Statementsissued Statement No. 133, 160.Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities to resolve issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to BeneficialNon-controlling Interests in SecuritizedConsolidated Financial Assets.” Statements ("SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends Statement 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.160.") SFAS No. 155 is160 Statement amends Accounting Research Bulletin No. 51,Consolidated Financial Statements, to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 141(R) and SFAS No. 160 are required to be adopted simultaneously and are effective for all financial instruments acquiredthe first annual reporting period beginning on or issued after the beginning of an entity’s first fiscal year that begins after SeptemberDecember 15, 2006.2008 with earlier adoption being prohibited. We do not expect thatcurrently have any non-controlling interests in our subsidiaries, and accordingly the adoption of SFAS No. 155 will160 is not expected to have a material effectimpact on our financial position or results of operations.

    In March 2006,statements. We are currently evaluating the FASB issued Statement No. 156 (“SFAS No. 156”), Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140. SFAS No. 156 amends Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset

    F-40


    by entering into a servicing contract in certain situations; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits either the “amortization method”or the “fair value measurement method,”as subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities; permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective in the first fiscal year that begins after September 15, 2006. We do not expect thatimpact from the adoption of SFAS No. 156 will have a material effect141R on our financial position or results of operations.Consolidated Financial Statements.

    In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest, and penalties, accounting in interim periods, disclosure, and transition. In addition, FIN 48 excludes income taxes from the scope of SFAS No. 5, Accounting for Contingencies.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  Differences between the amounts recognized in the consolidated balance sheets prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. We are currently evaluating the effect that the adoption of FIN 48 will have on our results of operations and financial position.

    In September 2006, the FASB issued Statement No. 157 (“("SFAS No. 157”157,"), Fair Value Measurements.SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies underto other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We do not expect that the2007 for financial assets and liabilities and is effective for fiscal years beginning after November 15, 2008 for non-financial assets and liabilities. The adoption of SFAS No. 157 willis not expected to have a material effect on our financial position or results of operations.

    In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 requires the use of both the “iron curtain” and “rollover” approach in quantifying the materiality of misstatements. SAB 108 also discusses the implications of misstatements uncovered upon the application of SAB 108 in situations when a registrant has historically been using either the iron curtain approach or the rollover approach. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 had no impact on our financial position or results of operations.

    In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS No. 158”). This new standard aims to make it easier for investors, employees, retirees and other parties to understand and assess an employer’s financial position and its ability to fulfill the obligations under its benefit plans. SFAS No. 158 requires employers to fully recognize in their financial statements the obligations associated with single-employer defined benefit pension plans, retiree healthcare plans, and other postretirement plans. Specifically, it requires a company to (1) recognize on its balance sheet an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, (2) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year, and (3) recognize changes in the funded status of a plan through comprehensive income in the year in which the changes occur. The adoption of SFAS No. 158 had no impact on our financial position or results of operations.

    In February 2007, the FASB issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities — Liabilities—Including an amendment of FASB Statement No. 115(“ ("SFAS No. 159”159."). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The provisions of SFAS No. 159 are effective for financial statements issued for fiscal years beginning after November 15, 2007. We are evaluating

    F-41


    if we will adoptThe adoption of SFAS No. 159 is not expected to have a material effect on our financial position or results of operations.

            In June 2007, the FASB ratified the Emerging Issues Task Force's ("EITF") consensus conclusion on EITF 07-03,Accounting for Advance Payments for Goods or Services to Be Used in Future Research and whatDevelopment. EITF 07-03 addresses the diversity which exists with respect to the accounting for the non-refundable portion of a payment made by a research and development entity for future research and development activities. Under this conclusion, an entity is required to defer and capitalize non-refundable advance payments made for research and development activities until the related goods are delivered or the related services are performed. EITF 07-03 is effective for interim or annual reporting periods in fiscal years beginning after December 15, 2007 and requires prospective application for new contracts entered into after the effective date. The adoption of EITF 07-03 is not expected to have a material impact the adoption will have on our Consolidated Financial Statements.

            In March 2008, the FASB issued Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133 ("SFAS No. 161") SFAS No. 161 changes


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements if(Continued)

    19. Recently Issued Accounting Standards (Continued)


    the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. The guidance in SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We are currently assessing the impact of SFAS No. 161.

    20. Business Combination Agreement with Vivendi

            On December 2, 2007, we adopt.and Vivendi S.A. ("Vivendi") (Euronext Paris: VIV) announced the signing of a definitive agreement to combine Vivendi Games, Inc. ("Vivendi Games,") Vivendi's interactive entertainment business—which includes Blizzard Entertainment, Inc., the creator ofWorld of Warcraft, a massively multi-player online role-playing game franchise—with us. If the transaction closes, we will be renamed Activision Blizzard, Inc. ("Activision Blizzard"), and we expect to continue to operate as a public company traded on NASDAQ under the ticker ATVI. While we will be the legal acquirer and the surviving entity in this transaction, Vivendi Games will be deemed to be the accounting acquirer in the transaction treated as a reverse acquisition for accounting purposes. As such, our historical financial statements after the close of the merger will be those of Vivendi Games. As Activision will be the deemed accounting acquiree, we are charging to expenses all costs related to the merger as incurred.

            

    20.Subsequent EventsUnder the term of the business combination agreement, we and Vivendi Games will combine our businesses through the merger of a newly formed, wholly owned subsidiary of ours with and into Vivendi Games. As a result of the merger, Vivendi Games, the parent company of Blizzard Entertainment, Inc. and Sierra Entertainment, Inc., will become a wholly owned subsidiary of ours. VGAC LLC, a subsidiary of Vivendi and the sole stockholder of Vivendi Games, will receive approximately 295.3 million newly issued shares of our common stock in the merger, which number is based upon a valuation of Vivendi Games at $8.121 billion and a per share price for our common stock of $27.50.

            

    On May 11, 2007, Activision completedSimultaneously with the merger, Vivendi will purchase from us 62.9 million newly issued shares of our common stock, at $27.50 per share, for an aggregate purchase price of approximately $1.731 billion. Immediately following completion of the merger and share purchase, Vivendi and its acquisition of DemonWare, the leading provider of network middleware technologies for console and PC games headquartered in Dublin, Ireland. The acquisition issubsidiaries are expected to enable Activision to gain efficiencies related to online game development and to position the company to take advantageown approximately 52.2% of the growth in online gameplay thatissued and outstanding shares of Activision Blizzard's common stock on a fully diluted basis.

            After the closing of the transaction, Activision Blizzard will commence a cash tender offer for up to 146.5 million of its shares (representing approximately 50% of the shares of our common stock outstanding immediately prior to the transaction) at $27.50 per share. If the tender offer is fully subscribed, Vivendi and its subsidiaries are expected to be driven by the next-generation consoles.

    On June 8, 2007, with respect to unexercised options subject to Section 409Aown approximately 68.0% of the Internal Revenue Code heldissued and outstanding shares of Activision Blizzard's common stock on a fully diluted basis. Under the terms of the business combination agreement, we and Vivendi have agreed the purchase of the shares tendered in the tender offer will be funded as follows: (a) the first $2.928 billion of the aggregate consideration will be funded by employees who are not executive officers, Activision commenced an offerBlizzard with proceeds from the share purchase described above, available cash on hand and, if necessary, borrowings made under one or more new credit facilities; (b) if the


    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to amend the exerciseConsolidated Financial Statements (Continued)

    20. Business Combination Agreement with Vivendi (Continued)


    aggregate consideration is more than $2.928 billion, Vivendi has agreed to purchase from Activision Blizzard, at a purchase price of these options to eliminate the grantee’s Section 409A tax liability consistent with Internal Revenue Service guidance. Pursuant to the offer, the Company will also make a cash payment in January 2008 to employees who accept the offer,$27.50 per share, additional newly issued shares of Activision Blizzard common stock in an amount equal to the difference betweenlesser of (x) $700 million and (y) the original exercise priceexcess of each amended optionthe aggregate consideration over $2.928 billion, which amount will be used to fund the amount of the aggregate consideration that is in excess of $2.928 billion; and (c) if the amended exercise priceaggregate consideration exceeds $3.628 billion, Activision Blizzard will fund the additional amount of each amended option. The offer with respect to all eligible optionsthe aggregate consideration that is considered a modificationin excess of those options for financial reporting purposes. Pursuant$3.628 billion (up to the accounting standardsmaximum aggregate consideration of $4.028 billion) through borrowings made under the new credit facilities issued by Vivendi (see Note 21).

            All information included in effect under SFAS 123R (revised 2004), the fair valueaccompanying Consolidated Financial Statements and notes to Consolidated Financial Statements in this report reflects only our results, and does not reflect any impact of the modified options (including for this purposeproposed merger.

    21. Senior Unsecured Credit Agreement with Vivendi

            On April 29, 2008, we entered into a senior unsecured credit agreement (the "Credit Agreement") with Vivendi. Borrowings under the cash paymentsCredit Agreement cannot be effected until the consummation of the transactions contemplated by the business combination agreement ("BCA") described in Note 20 above (the "Transactions.") As previously disclosed, after the closing of the Transactions, among other things, the Company's name will be changed to Activision Blizzard.

            After the closing of the Transactions, the Credit Agreement will provide Activision Blizzard with (i) a term loan credit facility (the "Tranche A Facility") in an aggregate amount of up to $400.0 million to be applied to fund that become payable pursuantportion of the post-closing tender offer consideration in excess of $3.628 billion as set forth in the BCA, (ii) a term loan credit facility (the "Tranche B Facility") in an aggregate amount of up to $150.0 million to be applied to repay certain indebtedness of Vivendi Games after the closing in accordance with the terms of the offer)BCA, and (iii) a revolving credit facility (the "Revolving Facility," and collectively with the Tranche A Facility and the Tranche B Facility, the "New Credit Facilities") in an aggregate amount of up to $475.0 million to be used after the closing of the Transactions for general corporate purposes. In the event the BCA terminates prior to the closing of the Transactions, the New Credit Facilities will terminate effective on the same date.

            Subject to execution of customary closing documentation, the Tranche A Facility will be recognized as compensation expense overfunded after the remaining requisite serviceend of the tender offer period, with the fair value created asin a result of cash paymentssingle borrowing that become payable pursuantis limited to the termsamount, if any, of the offer recognized as compensation expense at the expirationaggregate consideration to be paid in respect of the post-closing tender offer period on July 6, 2007. In addition, a portionin excess of $3.628 billion. The Tranche B Facility will be funded after the consummation of the compensation costs associated withTransactions. Borrowings under the original award mayRevolving Facility will be acceleratedsubject to the foregoing conditions and recognizedother customary conditions, such as compensation expense at the expirationtruth of representations and warranties and the absence of default.

            Borrowings under each of the offer period asNew Credit Facilities will bear interest by reference to the "LIBOR" (and under limited circumstances, at Vivendi's election, a result of"Base Rate.") The applicable margin with respect to loans bearing interest with reference to the cash payment.

    F-42LIBOR will be (i) 0.85% per annum for loans under the Tranche A Facility and (ii) 1.20% per annum for loans under the Tranche B Facility and the Revolving Facility, respectively. The applicable margin with respect to loans bearing interest with reference to the Base Rate, if any, will be 1.0% lower than the margin applicable to LIBOR borrowings.



    SCHEDULE II

    ACTIVISION, INC. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements (Continued)

    21. Senior Unsecured Credit Agreement with Vivendi (Continued)

            Any unused amounts under the Revolving Facility will be subject to a commitment fee of 0.42% per annum accruing from and after the closing of the Transactions.

            The Tranche A Facility is payable in full on March 31, 2010. The Tranche B Facility and the Revolving Facility will terminate and be payable in full on March 31, 2011.

            The loans under each of the New Credit Facilities may be prepaid in full or in part at any time, without premium or penalty (subject to customary breakage costs for loans bearing interest by reference to LIBOR), at Activision Blizzard's option.

            The loans under each of the New Credit Facilities are subject to mandatory prepayment in an amount of 100% of the proceeds from (i) asset sales in excess of $30.0 million in the aggregate (subject to customary reinvestment rights) and (ii) issuance of equity (subject to exceptions for issuance of stock to employees and issuances of the proceeds used to fund permitted acquisitions, investments and/or capital expenditures).

            The New Credit Facilities are subject to customary negative covenants, in each case subject to certain exceptions, qualifications and baskets, including limitations on: indebtedness; liens; investments, mergers, consolidations and acquisitions; transactions with affiliates; issuance of preferred stock by subsidiaries; sale and leaseback transactions, restricted payments and certain restrictions with respect to subsidiaries. The limitation on indebtedness provides that Activision Blizzard and its subsidiaries cannot incur consolidated indebtedness, net of unrestricted cash, in excess of $1.5 billion, and that no additional indebtedness may be incurred as long as the ratio of Activision Blizzard's consolidated indebtedness (including the indebtedness to be incurred) minus the amount of unrestricted cash to Activision Blizzard's consolidated earnings before interest, taxes, depreciation and amortization for its most recently ended four quarters would be greater than 1.50 to 1.0. This limitation does not, however, affect Activision Blizzard's ability to borrow under the New Credit Facilities or to incur certain types of limited debt.

            The New Credit Facilities also impose a requirement on Activision Blizzard that the ratio of (i) consolidated indebtedness (net of certain cash) to (ii) the sum of its shareholder's equity plus consolidated indebtedness (net of certain cash) not exceed 20.0% at any time.

            Events of default under the New Credit Facilities include nonpayment, breaches of representations, warranties or covenants, cross-defaults, bankruptcy or insolvency events, and failures to satisfy material judgments, in most events subject to materiality levels, grace periods and other customary exceptions.



    SCHEDULE II


    ACTIVISION, INC. AND SUBSIDIARIES

    VALUATION AND QUALIFYING ACCOUNTS

    (InAmounts in thousands)

    Col. A
    Description

     

    Col. B
    Balance at
    Beginning of
    Period

     

    Col. C
    Additions (A)

     

    Col. D
    Deductions (B)

     

    Col. E
    Balance at End
    of Period

     

    Year ended March 31, 2007

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Allowance for sales returns and price protection

     

    $

    95,150

     

    $

    143,456

     

    $

    (148,963

    )

    $

    89,643

     

     

     

     

     

     

     

     

     

     

     

    Allowance for doubtful accounts

     

    3,103

     

    (1,804

    )

    476

     

    1,775

     

     

     

     

     

     

     

     

     

     

     

    Deferred tax valuation allowance

     

    35,555

     

    —

     

    (35,173

    )

    382

     

     

     

     

     

     

     

     

     

     

     

    Year ended March 31, 2006

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Allowance for sales returns and price protection

     

    $

    67,603

     

    $

    262,555

     

    $

    (235,008

    )

    $

    95,150

     

     

     

     

     

     

     

     

     

     

     

    Allowance for doubtful accounts

     

    1,588

     

    5,149

     

    (3,634

    )

    3,103

     

     

     

     

     

     

     

     

     

     

     

    Deferred tax valuation allowance

     

    25,666

     

    9,943

     

    (54

    )

    35,555

     

     

     

     

     

     

     

     

     

     

     

    Year ended March 31, 2005

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Allowance for sales returns and price protection

     

    $

    44,538

     

    $

    172,156

     

    $

    (149,091

    )

    $

    67,603

     

     

     

     

     

     

     

     

     

     

     

    Allowance for doubtful accounts

     

    2,490

     

    (1,451

    )

    549

     

    1,588

     

     

     

     

     

     

     

     

     

     

     

    Deferred tax valuation allowance

     

    18,857

     

    7,703

     

    (894

    )

    25,666

     

    Col. A
    Description
    		 Col. B
    Balance at
    Beginning of
    Period
    		 Col. C
    Additions(A)
    		 Col. D
    Deductions(B)
    		 Col. E
    Balance at End
    of Period
    Year ended March 31, 2008            
     
    Allowance for sales returns and price protection
     
    $
    89,643
     
    $
    217,695
     
    $
    179,970
     
    $
    127,368
     
    Allowance for doubtful accounts
     
     
    1,775
     
     
    263
     
     
    (5
    )
     
    2,043
     
    Deferred tax valuation allowance
     
     
    382
     
     
    —
     
     
    —
     
     
    382

    Year ended March 31, 2007
     
     
     
     
     
     
     
     
     
     
     
     
     
    Allowance for sales returns and price protection
     
    $
    95,150
     
    $
    143,456
     
    $
    148,963
     
    $
    89,643
     
    Allowance for doubtful accounts
     
     
    3,103
     
     
    (1,804
    )
     
    (476
    )
     
    1,775
     
    Deferred tax valuation allowance
     
     
    35,555
     
     
    —
     
     
    35,173
     
     
    382

    Year ended March 31, 2006
     
     
     
     
     
     
     
     
     
     
     
     
     
    Allowance for sales returns and price protection
     
    $
    67,603
     
    $
    262,555
     
    $
    235,008
     
    $
    95,150
     
    Allowance for doubtful accounts
     
     
    1,588
     
     
    5,149
     
     
    3,634
     
     
    3,103
     
    Deferred tax valuation allowance
     
     
    25,666
     
     
    9,943
     
     
    54
     
     
    35,555

    (A)
    Includes increases in allowance for sales returns, price protection, doubtful accounts, and deferred tax valuation due to normal reserving terms and allowance accounts acquired in conjunction with acquisitions.



    (B)
    Includes actual write-offs of sales returns, price protection, uncollectible accounts receivable, net of recoveries, and foreign currency translation and other adjustments, and deferred taxes.

    F-43


    EXHIBIT INDEX

    		Exhibit
    Number

    		Exhibit

    2.1Business Combination Agreement, dated as of December 1, 2007, by and among Activision, Inc., Sego Merger Corporation, Vivendi S.A., VGAC LLC and Vivendi Games, Inc. (incorporated by reference to Exhibit 2.1 of Activision's Form 8-K, filed December 6, 2007).


    3.7


    3.1


    Amended and Restated Certificate of Incorporation of Activision Holdings, dated June 9, 2000 (incorporated by reference to Exhibit 2.5 of Activision’sActivision's Form 8-K, filed June 16, 2000).


    3.8


    3.2


    Certificate of Amendment of Amended and Restated Certificate of Incorporation of Activision Holdings dated as of June 9, 2000 (incorporated by reference to Exhibit 2.7 of Activision’sActivision's Form 8-K, filed June 16, 2000).


    3.9


    3.3


    Certificate of Designation of Series A Junior Preferred Stock of Activision, Inc. dated as of December 27, 2001 (incorporated by reference to Exhibit 3.4 of Activision’sActivision's Form 10-Q for the quarter ended December 31, 2001).


    3.10


    3.4


    Certificate of Amendment of Amended and Restated Certificate of Incorporation, as amended, of Activision, Inc., dated as of April 4, 2005 (incorporated by reference to Exhibit 3.1 of Activision’sActivision's Form 8-K, filed April 5, 2005).


    3.11


    3.5


    Certificate of Designation of Series A Junior Preferred Stock of Activision, Inc. dated August 4, 2005 (incorporated by reference to Exhibit 3.1 of Activision’sActivision's Form 8-K, filed August 5, 2005).


    3.12


    3.6

    Second
    Third Amended and Restated BylawsBy-Laws of Activision, Inc., dated September 15, 200527, 2007 (incorporated by reference to Exhibit 3.1 of Activision’s3.6 to Activision's Registration Statement on Form 8-K,S-8, Registration No. 333-146431, filed September 19, 2005)October 1, 2007).


    4.1


    4.1


    Rights Agreement dated as of April 18, 2000, between Activision. Inc. and Continental Stock Transfer & Trust Company, which includes as exhibits the form of Right Certificates as Exhibit A, the Summary of Rights to Purchase Series A Junior Preferred Stock as Exhibit B and the form of Certificate of Designation of Series A Junior Preferred Stock of Activision as Exhibit C, (incorporated by reference to Activision’sActivision's Registration Statement on Form 8-A, Registration No. 001-15839, filed April 19, 2000).


    4.2



    Amendment No. 1 to the Rights Agreement, dated as of December 1, 2007, by and between Activision, Inc. and Continental Stock Transfer & Trust Company, as rights agent (incorporated by reference to Exhibit 4.1 of Activision's Form 8-K, filed December 6, 2007).


    10.1



    Activision, Inc. 1991 Stock Option and Stock Award Plan, as amended (incorporated by reference to Exhibit 10.1 of Activision’sActivision's Form 10-K for the year ended March 31, 2002).


    10.2



    Amendment to the 1991 Stock Option and Stock Award Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.1 of Activision's Current Report on Form 8-K filed September 20, 2006).

    10.2


    10.3



    Activision, Inc. 1998 Incentive Plan, as amended (incorporated by reference to Exhibit 10.4 of Activision’sActivision's Form 10-Q for the quarter ended September 30, 2001).


    10.4

    Amendment to the 1998 Incentive Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.2 of Activision's Current Report on Form 8-K filed September 20, 2006).

    E-1



    10.3


    10.5


    ��


    Activision, Inc. 1999 Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2002).


    10.6



    Amendment to the 1999 Incentive Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.3 of Activision's Current Report on Form 8-K filed September 20, 2006).

    10.4


    10.7



    Activision, Inc. 2001 Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2002).


    10.8



    Amendment to the 2001 Incentive Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.4 of Activision's Current Report on Form 8-K filed September 20, 2006).

    10.5


    10.9



    Activision, Inc. 2002 Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2003).


    10.10



    Amendment to the 2002 Incentive Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.5 of Activision's Current Report on Form 8-K filed September 20, 2006).

    10.6


    10.11



    Activision, Inc. 2002 Executive Incentive Plan (incorporated by reference to Exhibit 4.1 of Activision’sActivision's Form S-8, Registration No. 333-100114 filed September 26, 2002).


    10.12



    Amendment to the 2002 Executive Incentive Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.6 of Activision's Current Report on Form 8-K filed September 20, 2006).

    10.7


    10.13



    Activision, Inc. 2002 Studio Employee Retention Incentive Plan (incorporated by reference to Exhibit 4.1 of Activision’sActivision's Form S-8, Registration No. 333-103323 filed February 19, 2003).


    10.14



    Amendment to the 2002 Studio Employee Retention Incentive Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.7 of Activision's Current Report on Form 8-K filed September 20, 2006).

    10.8


    10.15



    Activision, Inc. SecondThird Amended and Restated 2002 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.110.2 of Activision’sActivision's Current Report on Form 8-K filed March 8, 2005)October 23, 2006).


    10.16


    10.9


    Activision, Inc. 2002 Second Amended and Restated 2002 Employee Stock Purchase Plan for International Employees (incorporated by reference to Exhibit 10.210.1 of Activision’sActivision's Current Report on Form 8-K filed March 8, 2005)October 23, 2006).


    10.17



    Activision, Inc. Sub-Plan to the Second Amended And Restated 2002 Employee Stock Purchase Plan for International Employees for Eligible Employees in the European Economic Area.

    10.10


    10.18



    Australian Addendum to the Activision, Inc. Sub-Plan to the Second Amended And Restated 2002 Employee Stock Purchase Plan for International Employees for Eligible Employees.


    10.19

    Activision, Inc. Amended and Restated 2003 Incentive Plan effective as of July 26, 2005 (incorporated by reference to Exhibit 10.1 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2005).



    10.20

    Amendment to the 2003 Executive Incentive Plan, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.9 of Activision's Current Report on Form 8-K filed September 20, 2006).


    10.21



    Activision, Inc. 2007 Incentive Plan (incorporated by reference to Exhibit 99.1 to Activision's Registration Statement on Form S-8, Registration No. 333-146431, filed October 1, 2007).

    10.11


    10.22



    Australian Addendum to the Activision, Inc. 2007 Incentive Plan.


    10.23

    Form of Stock Option Certificate for grants to persons other than non-employee directors issued pursuant to the Activision, Inc. 1998 Incentive Plan of Activision, Inc. (adopted May 24, 2005) (incorporated by reference to Exhibit 10.1 of Activision’sActivision's Form 8-K, filed May 31, 2005).


    10.24


    10.12


    Form of Stock Option Certificate for grants to persons other than non-employee directors issued pursuant the Activision, Inc. 1999 Incentive Plan of Activision, Inc. (adopted May 24, 2005) (incorporated by reference to Exhibit 10.2 of Activision’sActivision's Form 8-K, filed May 31, 2005).


    10.25


    10.13


    Form of Stock Option Agreement for grants to persons other than non-employee directors issued pursuant the Activision, Inc. 2001 Incentive Plan of Activision, Inc. (adopted May 24, 2005) (incorporated by reference to Exhibit 10.3 of Activision’sActivision's Form 8-K, filed May 31, 2005).

    E-2


    10.14


    10.26



    Form of Stock Option Agreement for grants to persons other than non-employee directors issued pursuant the Activision, Inc. 2002 Executive Incentive Plan of Activision, Inc. (adopted May 24, 2005) (incorporated by reference to Exhibit 10.4 of Activision’sActivision's Form 8-K, filed May 31, 2005).


    10.27


    10.15


    Form of Executive Stock Option Agreement for grants to Robert Kotick or Brian Kelly issued pursuant the Activision, Inc. 2003 Incentive Plan of Activision, Inc. (adopted May 2005) (incorporated by reference to Exhibit 10.40 of Activision’sActivision's Form 10-K for the year ended March 31, 2005).


    10.28


    10.16


    Form of Non-Executive Stock Option Agreement for grants to non-executivespersons other than Robert Kotick or Brian Kelly and non-employee directors issued pursuant the Activision, Inc. 2003 Incentive Plan of Activision, Inc. (adopted May 2005) (incorporated by reference to Exhibit 10.41 of Activision’sActivision's Form 10-K for the year ended March 31, 2005).


    10.29


    10.17


    Form of Non-Employee Director Stock Option Agreement for grants to non-employee directors issued pursuant the Activision, Inc. 2003 Incentive Plan (incorporated by reference to Exhibit 10.17 of Activision, Inc. (adopted May 2005)Activision's Form 10-K for the year ended March 31, 2007).


    10.30


    10.18


    Notice of Share Option Award for grants to persons other than non-employee directors issued pursuant to the Activision, Inc. 2003 Incentive Plan (incorporated by reference to Exhibit 10.18 of Activision, Inc. (adopted June 13,Activision's Form 10-K for the year ended March 31, 2007).


    10.31


    10.19


    Notice of Share Option Award for grants to non-employee directors issued pursuant to the Activision, Inc. 2003 Incentive Plan (incorporated by reference to Exhibit 10.19 of Activision, Inc. (adopted June 13,Activision's Form 10-K for the year ended March 31, 2007).


    10.32


    10.20


    Notice of Restricted Share Award for grants to persons other than non-employee directors issued pursuant to the Activision, Inc. 2003 Incentive Plan (incorporated by reference to Exhibit 10.20 of Activision, Inc. (adopted June 13,Activision's Form 10-K for the year ended March 31, 2007).




    10.33


    10.21


    Notice of Restricted Share Unit Award for grants to persons other than non-employee directors issued pursuant to the Activision, Inc. 2003 Incentive Plan of Activision, Inc. (adopted June 13, 2007).

    10.22

    Amended and Restated Employment Agreement, dated May 22, 2000, between Activision, Inc. and Robert A. Kotick (incorporated by reference to Exhibit 10.110.21 of Activision’sActivision's Form 10-K for the year ended March 31, 2007).


    10.34

    Notice of Stock Option Award for grants to persons other than non-employee directors pursuant to the Activision, Inc. 2007 Incentive Plan (incorporated by reference to Exhibit 10.9 of Activision's Form 10-Q for the quarter ended September 30, 2000)December 31, 2007).


    10.35


    10.23

    Amendment, dated July 22, 2002,
    Notice of Stock Option Award for grants to Employment Agreement dated May 22, 2000 betweennon-employee directors pursuant to the Activision, Inc. and Robert A. Kotick2007 Incentive Plan (incorporated by reference to Exhibit 10.110.10 of Activision’sActivision's Form 10-Q for the quarter ended September 30, 2002)December 31, 2007).

    E-3


    10.24


    10.36


    Amendment, dated December 29, 2006,
    Notice of Restricted Share Award for grants to Employment Agreement dated May 22, 2000 betweenpersons other than non-employee directors issued pursuant to the Activision, Inc. and Robert A. Kotick2007 Incentive Plan (incorporated by reference to Exhibit 10.110.11 of Activision’s Form 8-K filed January 8, 2007).

    10.25

    Stock Option Agreement, dated May 22, 2000, between Activision, Inc. and Robert A. Kotick (incorporated by reference to Exhibit 10.2 of Activision’s Form 10-Q for the quarter ending September 30, 2000).

    10.26

    Amended and Restated Employment Agreement, dated May 22, 2000, between Activision, Inc. and Brian G. Kelly (incorporated by reference to Exhibit 10.3 of Activision’s Form 10-Q for the quarter ending September 30, 2000).

    10.27

    Amendment, dated July 22, 2002, to Employment Agreement dated May 22, 2000 between Activision, Inc. and Brian G. Kelly (incorporated by reference to Exhibit 10.2 of Activision’sActivision's Form 10-Q for the quarter ended September 30, 2002)December 31, 2007).


    10.37


    10.28

    Amendment, dated December 29, 2006,
    Notice of Restricted Share Unit Award for grants to Employment Agreement dated May 22, 2000 betweenpersons other than non-employee directors issued pursuant to the Activision, Inc. and Brian G. Kelly2007 Incentive Plan (incorporated by reference to Exhibit 10.110.12 of Activision’sActivision's Form 8-K filed January 8,10-Q for the quarter ended December 31, 2007).


    10.38



    Notice of Restricted Share Unit Award for grants to non-employee directors upon their initial election to the board or upon their tenth continuous year of service on the board issued pursuant to the Activision, Inc. 2007 Incentive Plan (incorporated by reference to Exhibit 10.13 of Activision's Form 10-Q for the quarter ended December 31, 2007).

    10.29


    10.39



    Notice of Restricted Share Unit Award for grants to non-employee directors upon their reelection to the board (other than in connection with 10 years of continuous service) issued pursuant to the Activision, Inc. 2007 Incentive Plan (incorporated by reference to Exhibit 10.14 of Activision's Form 10-Q for the quarter ended December 31, 2007).


    10.40

    Employment Agreement, dated July 22, 2002, between Ronald Doornink and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.6 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2002).


    10.41


    10.30


    Amendment, dated February 27, 2003, to Employment Agreement dated July 22, 2002 between Activision Publishing, Inc. and Ronald Doornink (incorporated by reference to Exhibit 10.34 of Activision’sActivision's Form 10-K for the year ended March 31, 2005).


    10.42


    10.31


    Amendment, dated June 1, 2004, to Employment Agreement dated July 22, 2002, between Activision Publishing, Inc. and Ronald Doornink (incorporated by reference to Exhibit 10.5 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2004).


    10.43


    10.32


    Amendment, dated June 15, 2005, to Employment Agreement dated July 22, 2002 between Activision Publishing, Inc. and Ronald Doornink (incorporated by reference to Exhibit 10.5 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2005).


    10.44


    10.33


    Amendment, dated June 4, 2007, to Employment agreement,Agreement dated November 20,July 22, 2002 between Activision Publishing, Inc. and George RoseRonald Doornink (incorporated by reference to Exhibit 10.1 of Activision’sActivision's Form 10-Q for the quarter ended December 31, 2002).

    E-4


    10.34

    Amendment, dated MarchJune 30, 2005, to the Employment Agreement dated November 20, 2002 between Activision Publishing, Inc. and George Rose (incorporated by reference to Exhibit 10.51 of Activision’s Form 10-K for the year ended March 31, 2005)2007).


    10.45


    10.35

    Employment Agreement, dated May 10, 2005, between Charles J. Huebner and Activision Publishing, Inc (incorporated by reference to Exhibit 10.1 of Activision’s Form 10-Q for the quarter ended December 31, 2005).

    10.36

    Amendment, dated March 30, 2007, to Employment Agreement dated May 10, 2005 between Charles J. Huebner and Activision Publishing, Inc.

    10.37


    Employment Agreement, dated June 15, 2005, between Michael Griffith and Activision Publishing, Inc (incorporated by reference to Exhibit 10.2 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2005).



    10.46

    Amendment to Employment Agreement, dated as of December 1, 2007, by and between Activision, Inc. and Michael Griffith (incorporated by reference to Exhibit 10.7 of Activision's Form 8-K, filed December 6, 2007).


    10.47


    10.38


    Stock Option Agreement, dated June 15, 2005, between Michael Griffith and Activision, Inc. (incorporated by reference to Exhibit 10.3 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2005).


    10.48


    10.39


    Restricted Stock Agreement, dated June 15, 2005, between Michael Griffith and Activision, Inc. (incorporated by reference to Exhibit 10.4 of Activision’sActivision's Form 10-Q for the quarter ended June 30, 2005).


    10.49


    10.40


    Employment Agreement, dated September 9, 2005, between Thomas Tippl and Activision Publishing, Inc (incorporated by reference to Exhibit 10.1 of Activision’sActivision's Form 10-Q for the quarter ended September 30, 2005).


    10.50


    10.41


    Stock Option Agreement, dated October 3, 2005, between Thomas Tippl and Activision, Inc. (incorporated by reference to Exhibit 10.2 of Activision’sActivision's Form 10-Q for the quarter ended September 30, 2005).


    10.51


    10.42


    Restricted Stock Agreement, dated October 3, 2005, between Thomas Tippl and Activision, Inc. (incorporated by reference to Exhibit 10.3 of Activision’sActivision's Form 10-Q for the quarter ended September 30, 2005).


    10.52


    10.43


    Employment Agreement, dated September 18, 2006, between Brian Hodous and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.2 of Activision’sActivision's Form 10-Q for the quarter ended December 31, 2006).


    10.53


    10.44


    Letter Agreement, dated September 6, 2006, between Brian Hodous and Activision, Inc.

    (incorporated by reference to Exhibit 10.44 of Activision's Form 10-K for the year ended March 31, 2007).


    10.54


    10.45

    Stock
    Notice of Share Option Agreement,Award to, dated as of November 3, 2006, between Activision andto Brian Hodous.

    Hodous (incorporated by reference to Exhibit 10.45 of Activision's Form 10-K for the year ended March 31, 2007).

    E-5


    10.46


    10.55



    Notice of Restricted Stock Agreement,Award, dated as of November 3, 2006, between Activision andto Brian Hodous.

    Hodous (incorporated by reference to Exhibit 10.46 of Activision's Form 10-K for the year ended March 31, 2007).


    10.56


    10.47


    Notice of Restricted Stock Agreement,Award, dated as of November 3, 2006, between Activision andto Brian Hodous.

    Hodous (incorporated by reference to Exhibit 10.47 of Activision's Form 10-K for the year ended March 31, 2007).


    10.57


    10.48


    Employment Agreement, dated October 1, 2006, between Robin Kaminsky and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.3 of Activision’sActivision's Form 10-Q for the quarter ended December 31, 2006).


    10.58



    Notice of Share Option Award to Robin Kaminsky, dated as of October 19, 2006 (incorporated by reference to Exhibit 10.2 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.49


    10.59



    Notice of Share Option Award to Robin Kaminsky, dated as of October 19, 2006 (incorporated by reference to Exhibit 10.3 of Activision's Form 10-Q for the quarter ended September 30, 2007).




    10.60

    Notice of Restricted Stock Award to Robin Kaminsky, dated as of October 19, 2006 (incorporated by reference to Exhibit 10.4 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.61

    Notice of Restricted Stock Award to Robin Kaminsky, dated as of October 19, 2006, between Activision and Robin Kaminsky (incorporated by reference to Exhibit 10.5 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.62

    Employment Agreement, dated September 11, 2007, between George Rose and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.7 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.63

    Notice of Share Option Award to George Rose, dated September 28, 2007 (incorporated by reference to Exhibit 10.12 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.64

    Notice of Restricted Share Unit Award to George Rose, dated September 28, 2007 (incorporated by reference to Exhibit 10.13 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.65

    Employment Agreement, dated September 12, 2007, between Ann Weiser and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.8 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.66

    Notice of Share Option Award to Ann Weiser, dated September 28, 2007 (incorporated by reference to Exhibit 10.14 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.67

    Notice of Restricted Share Unit Award to Ann Weiser, dated September 28, 2007 (incorporated by reference to Exhibit 10.15 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.68

    Amended and Restated Employment Agreement, dated as of December 1, 2007, by and between Activision, Inc. and Robert A. Kotick (incorporated by reference to Exhibit 10.3 of Activision's Form 8-K, filed December 6, 2007).

    10.69

    Replacement Bonus Agreement, dated as of December 1, 2007, by and between Activision, Inc. and Robert A. Kotick (incorporated by reference to Exhibit 10.5 of Activision's Form 8-K, filed December 6, 2007).

    10.70

    Stock Option Agreement, dated May 22, 2000, between Activision, Inc. and Robert A. Kotick (incorporated by reference to Exhibit 10.2 of Activision's Form 10-Q for the quarter ending September 30, 2000).

    10.71

    Notice of Stock Option Award to Robert A. Kotick, dated December 5, 2007.

    10.72

    Amended and Restated Employment Agreement, dated as of December 1, 2007, by and between Activision, Inc. and Brian G. Kelly (incorporated by reference to Exhibit 10.4 of Activision's Form 8-K, filed December 6, 2007).

    10.73

    Replacement Bonus Agreement, dated as of December 1, 2007, by and between Activision, Inc. and Brian G. Kelly (incorporated by reference to Exhibit 10.6 of Activision's Form 8-K, filed December 6, 2007).

    10.74

    Stock Option Agreement, dated May 22, 2000, between Activision, Inc. and Brian G. Kelly (incorporated by reference to Exhibit 10.4 of Activision's Form 10-Q for the quarter ending September 30, 2000).


    10.75

    PlayStation 2 CD-ROM/DVD-ROM Licensed Publisher Agreement, dated as of April 1, 2000, between Sony Computer Entertainment America Inc. and Activision, Inc. (incorporated by reference to Exhibit 10.9 of Activision’sActivision's Form S-3, Registration No. 333-101271, filed January 14, 2003).*


    10.76


    10.50


    Letter regarding Modification of Territory for PlayStation 2 CD-ROM/DVD-ROM Licensed Publisher Agreement, dated as of June 11, 2004, from Sony Computer Entertainment America Inc. to Activision, Inc.

    (incorporated by reference to Exhibit 10.50 of Activision's Form 10-K for the year ended March 31, 2007).


    10.77


    10.51


    PlayStation 2 Licensed Publisher Agreement, dated as of March 23, 2001, between Sony Computer Entertainment Europe Limited and Activision UK Limited (incorporated by reference to Exhibit 10.10 of Activision’sActivision's Form S-3, Registration No. 333-101271, filed January 14, 2003).*


    10.78


    10.52


    PlayStation Portable (“PSP”("PSP") Licensed PSP Publisher Agreement, dated September 15, 2004, between Sony Computer Entertainment America Inc. and Activision, Inc. (incorporated by reference to Exhibit 10.46 of Activision’sActivision's Form 10-K for the year ended March 31, 2005).*


    10.79


    10.53


    PlayStation Portable (“PSP”("PSP") Licensed PSP Publisher Agreement, dated September 27, 2005, between Sony Computer Entertainment Europe Limited and Activision UK Limited (incorporated by reference to Exhibit 10.60 of Activision’sActivision's Form 10-K for year ended March 31, 2006).*


    10.80


    10.54


    Global PlayStation 3 Format Licensed Publisher Agreement, dated March 5, 2007, between Sony Computer Entertainment America, Inc. and Activision. Inc.*

    10.55

    First Renewal License Agreement for the Game Boy Advance Video Game System (EEA, Australia, and New Zealand), dated September 14, 2004, between Nintendo Co., Ltd. and Activision, Inc.Inc (incorporated by reference to Exhibit 10.4410.54 of Activision’sActivision's Form 10-K for the year ended March 31, 2005)2007).*

    E-6


    10.56

    First Addendum to First Renewal License Agreement for the Game Boy Advance Video Game System (EEA, Australia and New Zealand), dated June 20, 2006, between Nintendo Co., Ltd. and Activision, Inc.


    10.81


    10.57

    Confidential License Agreement for Nintendo GameCube (Western Hemisphere), dated as of November 9, 2001, between Nintendo of America Inc. and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.1 of Activision’s Form S-3, Registration No. 333-101271, filed January 14, 2003).*

    10.58

    First Amendment to the Confidential License Agreement for Nintendo GameCube (Western Hemisphere), dated November 9, 2004, between Nintendo of America, Inc. and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.45 of Activision’s Form 10-K for the year ended March 31, 2005).

    10.59

    First Renewal License Agreement for the Nintendo GameCube System (EEA), dated June 20, 2006, between Nintendo, Co., Ltd. and Activision, Inc.*

    10.60


    Confidential License Agreement for the Nintendo DS (Western Hemisphere), dated as of October 11, 2004, between Nintendo Co., Ltd. and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.4210.8 of Activision’sActivision's Form 10-K10-Q for the yearquarter ended March 31, 2005)September 30, 2007).*


    10.82



    First Amendment to Confidential License Agreement for Nintendo DS (Western Hemisphere), dated as of July 16, 2007, between Nintendo Co., Ltd. and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.6 of Activision's Form 10-Q for the quarter ended September 30, 2007).

    10.61


    10.83



    License Agreement for the Nintendo DS System (EEA, Australia and New Zealand), dated June 20, 2006, between Nintendo Co., Ltd. and Activision, Inc.*

    10.62

    Microsoft Corporation Xbox Publisher License Agreement, dated as of July 18, 2001, between Microsoft Corporation and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.510.61 of Activision’sActivision's Form S-3, Registration No. 333-101271, filed January 14, 2003)10-K for the year ended March 31, 2007).*


    10.84


    10.63

    Amendment to Microsoft Corporation Xbox Publisher
    Confidential License Agreement for the Wii Console (Western Hemisphere), dated asSeptember 12, 2007, between Nintendo of April 19, 2002, between Microsoft Licensing,America, Inc. and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.610.9 of Activision’sActivision's Form S-3, Registration No. 333-101271, filed January 14, 2003)10-Q for the quarter ended September 30, 2007).*


    10.85


    10.64

    Xbox Live Distribution Amendment to
    Confidential License Agreement for the Xbox Publisher Licensing Agreement,Wii Console (EEA, Australia and New Zealand), dated as of October 28, 2002,December 3, 2007, between Microsoft Licensing,Nintendo Co., Ltd., Activision, Inc. and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.710.8 of Activision’sActivision's Form S-3, Registration No. 333-101271, filed January 14, 2003).*

    E-7


    10.65

    Amendment to the Xbox Publisher Licensing Agreement, dated as of March 1, 2005, between Microsoft Licensing, GP, and Activision Publishing, Inc. (incorporated by reference to Exhibit 10.47 of Activision’s Form 10-K10-Q for the yearquarter ended MarchDecember 31, 2005)2007).*




    10.86


    10.66


    Microsoft Corporation Xbox 360 Publisher License Agreement, dated as of October 25, 2005, between Microsoft Licensing, GP and Activision Publishing, Inc (incorporated by reference to Exhibit 10.4 of Activision’sActivision's Form 10-Q for the quarter ended December 31, 2005).*


    10.87


    10.67


    Xbox 360 Disc Program Addendum to the Xbox 360 Publisher License Agreement, dated as of December 15, 2005, between Microsoft Licensing, GP and Activision Publishing, Inc (incorporated by reference to Exhibit 10.5 of Activision’sActivision's Form 10-Q for the quarter ended December 31, 2005).*


    10.88


    10.68


    Amendment to the Xbox 360 Publisher Licensing Agreement (Platinum/Classic Hits Program), dated as of October 1, 2006, by and between Microsoft Licensing, GP and Activision, Inc. (incorporated by reference to Exhibit 10.68 of Activision's Form 10-K for the year ended March 31, 2007).*


    10.89


    10.69


    Xbox Live Server Platform Addendum to the Xbox 360 Publisher Licensing Agreement, dated as of February 6, 2007, by and between Microsoft Licensing, GP and Activision Publishing, Inc.

    (incorporated by reference to Exhibit 10.69 of Activision's Form 10-K for the year ended March 31, 2007).


    10.90


    10.70


    Chart of Compensation Paid to Non-Employee Directors (incorporated by reference to Exhibit 10.610.10 of Activision’sActivision's Form 10-Q for the quarter ended December 31, 2005)September 30, 2007).


    10.91



    Voting and Lock-Up Agreement, dated as of December 1, 2007, by and among Activision, Inc., Vivendi S.A. and Robert A. Kotick (incorporated by reference to Exhibit 10.1 of Activision's Form 8-K, filed December 6, 2007).

    14.1


    10.92



    Voting and Lock-Up Agreement, dated as of December 1, 2007, by and among Activision, Inc., Vivendi S.A. and Brian G. Kelly (incorporated by reference to Exhibit 10.2 of Activision's Form 8-K, filed December 6, 2007).


    14.1

    Code of Ethics for Senior Executive and Senior Financial Officers (incorporated by reference to Exhibit 14.1 of Activision’sActivision's Form 10-K for the year ended March 31, 2004).


    21.1


    21.1


    Principal subsidiaries of Activision.


    23.1


    23.1


    Consent of Independent Registered Public Accounting Firm.


    31.1


    31.1


    Certification of Robert A. Kotick pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


    31.2


    31.2


    Certification of Michael Griffith pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

    E-8



    31.3



    Certification of Thomas Tippl pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


    32.1


    32.1


    Certification of Robert A. Kotick pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


    32.2


    32.2


    Certification of Michael Griffith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



    32.3


    32.3


    Certification of Thomas Tippl pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


    99.1

    Risk Factors from Preliminary Proxy Statement Filed by Activision on April 30, 2008.

    99.2

    Stipulation of Settlement, dated May 8, 2008 in In re Activision, Inc. Shareholder Derivative Litigation.

    99.3

    Order Preliminarily Approving Derivative Settlement and Providing for Notice, dated May 13, 2008 in In re Activision, Inc. Shareholder Derivative Litigation.

    *
    Portions omitted pursuant to a request for confidential treatment.



    QuickLinks

    E-9

    PART I
    PART II
    PART III
    PART IV
    SIGNATURES
    Report of Independent Registered Public Accounting Firm
    ACTIVISION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data)
    ACTIVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data)
    ACTIVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the fiscal years ended March 31, 2008, 2007, and 2006 (Amounts in thousands)
    ACTIVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
    ACTIVISION, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
    ACTIVISION, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (Amounts in thousands)
    EXHIBIT INDEX