UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)


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


		For the Quarterly Period Ended ~~December 31, 2006~~September 30, 2007

		OR
	OR

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

For the transition period from to

Commission File Number 001-15839

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.)

3100 Ocean Park Boulevard, Santa Monica, CA		90405
(Address of principal executive offices)		(Zip Code)

(310) 255-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

Large ~~Accelerated Filer~~ x

Accelerated Filer x Accelerated Filer o Non-accelerated filer o

~~Non-accelerated filer~~ o

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

The number of shares of the registrant’s Common Stock outstanding as of ~~June~~November 1, 2007 was ~~283,310,734.~~291,310,208.

ACTIVISION, INC. AND SUBSIDIARIES
INDEX
Cautionary Statement

~~Explanatory Note~~

PART I.
FINANCIAL INFORMATION

Item 1.
Financial Statements

Consolidated Balance Sheets as of ~~December 31, 2006~~September 30, 2007 (Unaudited) and March 31, ~~2006~~2007

Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2007 (Unaudited) and September 30, 2006 (Unaudited) ~~and December 31, 2005, as restated (Unaudited)~~

Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~December 31,~~September 30, 2007 (Unaudited) and September 30, 2006 (Unaudited) ~~and December 31, 2005, as restated (Unaudited)~~

Consolidated Statement of Changes in Shareholders’ Equity for the ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 (Unaudited)

Notes to Consolidated Financial Statements ~~for the three and nine months ended December 31, 2006~~ (Unaudited)

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

Item 3.
Quantitative and Qualitative Disclosures about Market Risk

Item 4.
Controls and Procedures

PART II.
OTHER INFORMATION

Item 1.
Legal Proceedings

Item ~~1A.~~
~~Risk Factors~~4.

Submission of Matters to a Vote of Security Holders

Item 6.
Exhibits

SIGNATURES

~~CERTIFICATION~~EXHIBIT INDEX

CERTIFICATIONS

2

CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q 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”~~“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’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 made, and we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report. Risks and uncertainties that may affect our future results include, but are not limited to, those discussed under the heading “Risk Factors”, included in Part ~~II,~~I, Item ~~1A.~~1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2007. All references to “we”, “us”, “our”, “Activision” or “the Company” in the following discussion and analysis mean Activision, Inc. and its subsidiaries.
3

~~EXPLANATORY NOTE~~
~~Restatement of Consolidated Financial Results~~
We recently completed a voluntary review of our historical stock option granting practices and a restatement of our consolidated financial statements as of and for the fiscal years ended March 31, 2006, 2005 and 2004 and related disclosures and a restatement of our selected consolidated financial data as of and for the fiscal years ended March 31, 2006, 2005, 2004, 2003 and 2002 and our unaudited quarterly financial data for each of the quarters in the fiscal years ended March 31, 2006 and 2005, and for the fiscal quarter ended June 30, 2006. The impacts of the restatement adjustments extend to periods from the fiscal year ended March 31, 1994 through the fiscal quarter ended June 30, 2006.
The restatement reflected the findings of a special subcommittee of independent members of our Board of Directors, which was established in July 2006 to review our historical stock option granting practices (the “Special Subcommittee”). The Special Subcommittee conducted its investigation with the assistance of Munger Tolles & Olson LLP as its independent counsel and Deloitte & Touche USA LLP (“Deloitte”) as forensic accounting experts retained by counsel. The Special Subcommittee found that 3,450 of the option grants reviewed, covering 148,747,202 shares, required measurement date corrections. As a result, we recorded approximately $66.7 million in additional pre-tax ($45.4 million after-tax) non-cash stock-based compensation expense over the thirteen year period from April 1, 1993 through March 31, 2006 in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and $0.6 million in additional pre-tax non-cash stock-based compensation expense during the quarter ended June 30, 2006 in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment”. More than 80% or $55.4 million of the $66.7 million relates to periods through March 31, 2003 and 4% or $2.6 million of the non-cash pre-tax expense relates to the fiscal year ended March 31, 2006. Separately, the restatement reflects an additional $1.7 million pre-tax charge ($1.1 million after-tax) related to recently identified insufficient payroll tax withholdings in fiscal 2005.
This Quarterly Report on Form 10-Q should be read in conjunction with our Amended Annual Report on Form 10-K/A for the year ended March 31, 2006 filed with the SEC on May 25, 2007 and our Amended Quarterly Report on Form 10-Q/A for the three months ended June 30, 2006 filed with the SEC on June 7, 2007. Information regarding the effect of the restatement on our financial position and results of operations is provided in Note 2 of the Notes to Unaudited Consolidated Financial Statements included in Part ~~I, Item 1 of this Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Report.~~
Financial information included in our previously filed reports on Form 10-K and Form 10-Q, the related opinions of our independent registered public accounting firm, and all earnings press releases and similar communications issued by us, for all periods ended on or before June 30, 2006 should not be relied upon and are superseded in their entirety by the information in our amended Annual Report on Form 10-K/A for the year ended March 31, 2006 filed with the SEC on May 25, 2007 and our Amended Quarterly Report on Form 10-Q/A for the three months ended June 30, 2006 and our Quarterly Reports on Form 10-Q for the three months ended September 30, 2006 and the three months ended December 31, 2006 filed with the SEC today.
~~All share and per share information presented in this report has been adjusted to reflect splits and dividends of our common stock.~~

PART I. FINANCIAL INFORMATIONFinancial Information.

Item 1. Financial Statements.Statements

ACTIVISION, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

December 31,
2006

March 31,
2006

(Unaudited)

Assets

Current assets:

Cash and cash equivalents

$
367,910

$
354,331

Short-term investments

437,290

590,629

Accounts receivable, net of allowances of $107,124 and $98,253 at December 31, 2006 and March 31, 2006, respectively

456,589

28,782

Inventories

85,680

61,483

Software development

86,119

40,260

Intellectual property licenses

28,628

4,973

Deferred income taxes

4,266

9,664

Other current assets

17,896

25,933

Total current assets

1,484,378

1,116,055

Software development

15,688

20,359

Intellectual property licenses

64,800

82,073

Property and equipment, net

46,713

45,368

Deferred income taxes

85,552

52,545

Other assets

5,941

1,409

Goodwill

188,398

100,446

Total assets

$
1,891,470

$
1,418,255

Liabilities and Shareholders’ Equity

Current liabilities:

Accounts payable

$
193,875

$
88,994

Accrued expenses

247,581

104,862

Total current liabilities

441,456

193,856

Other liabilities

41,128

1,776

Total liabilities

482,584

195,632

Commitments and contingencies (Note 14)

Shareholders’ equity:

Preferred stock, $.000001 par value, 3,750,000 shares authorized, no shares issued at December 31, 2006 and March 31, 2006

—

—

Series A Junior Preferred stock, $.000001 par value, 1,250,000 shares authorized, no shares issued at December 31, 2006 and March 31, 2006

—

—

Common stock, $.000001 par value, 450,000,000 shares authorized, 282,934,869 and 277,020,898 shares issued and outstanding at December 31, 2006 and March 31, 2006, respectively

—

—

Additional paid-in capital

948,028

867,297

Retained earnings

442,199

341,990

Accumulated other comprehensive income

18,659

16,369

Unearned compensation (Note 1)

—

(3,033
)

Total shareholders’ equity

1,408,886

1,222,623

Total liabilities and shareholders’ equity

$
1,891,470

$
1,418,255

	September 30, 2007 (Unaudited)		March 31, 2007
Assets
Current assets:
Cash and cash equivalents	$	392,529	$	384,409
Short-term investments	569,231		570,440
Accounts receivable, net of allowances of $106,619 and $91,418 at September 30, 2007 and March 31, 2007, respectively	109,725		148,694
Inventories	189,033		91,231
Software development	104,236		107,779
Intellectual property licenses	10,645		27,784
Deferred income taxes	60,032		51,564
Other current assets	31,453		19,332

Total current assets	1,466,884		1,401,233

Software development	40,433		23,143
Intellectual property licenses	71,145		72,490
Property and equipment, net	53,500		46,540
Deferred income taxes	38,252		48,791
Other assets	10,738		6,376
Goodwill	280,248		195,374

Total assets	$	1,961,200	$	1,793,947

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	158,059	$	136,517
Accrued expenses and other liabilities	255,266		204,652

Total current liabilities	413,325		341,169

Other liabilities	18,325		41,246

Total liabilities	431,650		382,415

Commitments and contingencies (Note 12)

Shareholders’ equity:
Preferred stock, $.000001 par value, 3,750,000 shares authorized, no shares issued at September 30, 2007 and March 31, 2007	—		—
Series A Junior Preferred stock, $.000001 par value, 1,250,000 shares authorized, no shares issued at September 30, 2007 and March 31, 2007	—		—
Common stock, $.000001 par value, 450,000,000 shares authorized, 289,072,399 and 283,310,734 shares issued and outstanding at September 30, 2007 and March 31, 2007, respectively	—		—
Additional paid-in capital	1,045,891		963,553
Retained earnings	456,301		427,777
Accumulated other comprehensive income	27,358		20,202

Total shareholders’ equity	1,529,550		1,411,532

Total liabilities and shareholders’ equity	$	1,961,200	$	1,793,947

The accompanying notes are an integral part of these consolidated financial statements.

ACTIVISION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

For the three months ended
December 31,

For the nine months ended
December 31,

2006

2005

2006

2005

As restated(1)

As restated(1)

Net revenues

$
824,259

$
816,242

$
1,200,500

$
1,279,875

Costs and expenses:

Cost of sales – product costs

382,165

367,685

618,162

617,021

Cost of sales – software royalties and amortization

77,449

104,264

106,058

139,267

Cost of sales – intellectual property licenses

23,566

26,376

37,838

55,765

Product development

37,162

53,254

88,395

99,698

Sales and marketing

87,410

156,013

156,139

259,110

General and administrative

43,387

24,757

91,647

67,228

Total costs and expenses

651,139

732,349

1,098,239

1,238,089

Operating income

173,120

83,893

102,261

41,786

Investment income, net

9,724

9,162

26,031

22,840

Income before income tax provision

182,844

93,055

128,292

64,626

Income tax provision

40,024

25,199

28,083

15,247

Net income

$
142,820

$
67,856

$
100,209

$
49,379

Basic earnings per share

$
0.51

$
0.25

$
0.36

$
0.18

Weighted average common shares outstanding

282,512

274,965

280,499

272,089

Diluted earning per share

$
0.46

$
0.23

$
0.33

$
0.17

Weighted average common shares outstanding assuming dilution

307,175

296,205

304,317

293,397

~~(1)~~ ~~See Note 2 “Restatement of Unaudited Consolidated Financial Statements.”~~

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~ACTIVISION, INC. AND SUBSIDIARIES~~
~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~
~~(Unaudited)~~
~~(In thousands)~~

For the nine months ended
December 31,

2006

2005

As restated(1)

Cash flows from operating activities:

Net income

$
100,209

$
49,379

Adjustments to reconcile net income to net cash used in operating activities:

Deferred income taxes

(33,254
)
(6,023
)
Realized gain on short-term investments

(1,823
)
(4,295
)
Depreciation and amortization

13,303

10,228

Amortization and write-offs of capitalized software development costs and intellectual property licenses

77,358

168,351

Stock-based compensation expense

18,433

2,506

Tax benefit of stock options and warrants exercised

11,377

21,269

Excess tax benefit from stock option exercises

(9,012
)
—

Changes in operating assets and liabilities:

Accounts receivable

(416,697
)
(305,305
)
Inventories

(20,573
)
(36,810
)
Software development and intellectual property licenses

(117,636
)
(162,793
)
Other assets

21,128

321

Accounts payable

98,473

104,895

Accrued expenses and other liabilities

133,297

74,345

Net cash used in operating activities

(125,417
)
(83,932
)

Cash flows from investing activities:

Capital expenditures

(13,106
)
(20,174
)
Cash payment to effect business combinations, net of cash acquired

(30,545
)
(7,081
)
Increase in restricted cash

—

(7,500
)
Purchases of short-term investments

(215,721
)
(143,162
)
Proceeds from sales and maturities of short-term investments

361,339

182,504

Net cash provided by investing activities

101,967

4,587

Cash flows from financing activities:

Proceeds from issuance of common stock to employees

18,956

37,850

Excess tax benefit from stock option exercises

9,012

—

Net cash provided by financing activities

27,968

37,850

Effect of exchange rate changes on cash

9,061

(5,044
)

Net increase (decrease) in cash and cash equivalents

13,579

(46,539
)

Cash and cash equivalents at beginning of period

354,331

313,608

Cash and cash equivalents at end of period

$
367,910

$
267,069

~~(1)~~ ~~See Note 2 “Restatement of Unaudited Consolidated Financial Statements.”~~

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~ACTIVISION, INC. AND SUBSIDIARIES~~
~~CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY~~
~~For the Nine Months ended December 31, 2006~~
~~(Unaudited)~~
~~(In thousands)~~

Common Stock

Additional
Paid-In

Retained

Accumulated
Other
Comprehensive

Unearned

Shareholders’

Shares

Amount

Capital

Earnings

Income

Compensation

Equity

Balance, March 31, 2006

277,021

$
—

$
867,297

$
341,990

$
16,369

$
(3,033
)
$
1,222,623

Components of comprehensive income:

Net income

—

—

—

100,209

—

—

100,209

Unrealized loss on short-term investments (net of tax benefit of $0.9 million)

—

—

—

—

(8,693
)
—

(8,693
)
Foreign currency translation adjustment

—

—

—

—

10,983

—

10,983

Total comprehensive income

102,499

Issuance of common stock pursuant to employee stock option and stock purchase plans

3,532

—

18,956

—

—

—

18,956

Issuance of stock to effect business combination

2,382

—

30,000

—

—

—

30,000

Stock based compensation expense related to employee stock options, restricted stock, and employee stock purchases

—

—

23,431

—

—

—

23,431

Tax benefit associated with options and warrants

—

—

11,377

11,377

Reclassification of unearned compensation

—

—

(3,033
)
—

—

3,033

—

Balance, December 31, 2006

282,935

$
—

$
948,028

$
442,199

$
18,659

$
—

$
1,408,886

	For the three months ended September 30,						For the six months ended September 30,
	2007			2006			2007		2006

Net revenues	$	317,746		$	188,172		$	813,201	$	376,241

Costs and expenses:
Cost of sales – product costs	151,996			127,374			369,225		235,997
Cost of sales – software royalties and amortization	38,427			9,348			116,679		28,609
Cost of sales – intellectual property licenses	14,533			4,356			47,012		14,272
Product development	33,085			25,608			65,982		51,233
Sales and marketing	51,868			32,550			120,580		68,729
General and administrative	37,382			26,346			73,176		48,260

Total costs and expenses	327,291			225,582			792,654		447,100

Operating income (loss)	(9,545		)	(37,410		)	20,547		(70,859		)

Investment income, net	12,132			8,032			23,694		16,307

Income (loss) before income tax provision (benefit)	2,587			(29,378		)	44,241		(54,552		)

Income tax provision (benefit)	1,889			(5,076		)	15,717		(11,941		)

Net income (loss)	$	698		$	(24,302	)	$	28,524	$	(42,611	)

Basic earnings (loss) per share	$	0.00		$	(0.09	)	$	0.10	$	(0.15	)

Weighted average common shares outstanding	287,315			280,627			285,450		279,487

Diluted earnings (loss) per share	$	0.00		$	(0.09	)	$	0.09	$	(0.15	)

Weighted average common shares outstanding assuming dilution	313,263			280,627			312,510		279,487

The accompanying notes are an integral part of these consolidated financial statements.

ACTIVISION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(In thousands)

	For the six months ended September 30,
	2007			2006

Cash flows from operating activities:
Net income (loss)	$	28,524		$	(42,611	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Deferred income taxes	(1,327		)	(70,149		)
Realized gain on short-term investments	—			(2		)
Depreciation and amortization	15,885			8,519
Loss on disposal of property and equipment	987			—
Amortization and write-offs of capitalized software development costs and intellectual property licenses (1)	99,560			26,283
Stock-based compensation expense (2)	15,029			10,740
Tax benefit of stock options and warrants exercised	9,199			5,888
Excess tax benefits from stock option exercises	(8,141		)	(4,405		)
Changes in operating assets and liabilities:
Accounts receivable	41,784			(57,194		)
Inventories	(97,802		)	(5,956		)
Software development and intellectual property licenses	(88,775		)	(84,630		)
Other assets	(10,219		)	1,377
Accounts payable	21,666			(11,984		)
Accrued expenses and other liabilities	20,029			54,853

Net cash provided by (used in) operating activities	46,399			(169,271		)

Cash flows from investing activities:
Capital expenditures	(15,253		)	(7,540		)
Proceeds from disposal of property and equipment	135			—
Cash payment to effect business combinations, net of cash acquired	(68,875		)	(30,545		)
Increase in restricted cash	(33,413		)	(12,500		)
Purchases of short-term investments	(378,727		)	(147,278		)
Proceeds from sales and maturities of short-term investments	414,233			180,993

Net cash used in investing activities	(81,900		)	(16,870		)

Cash flows from financing activities:
Proceeds from issuance of common stock to employees	30,262			11,922
Excess tax benefit from stock option exercises	8,141			4,405

Net cash provided by financing activities	38,403			16,327

Effect of exchange rate changes on cash	5,218			5,204

Net increase (decrease) in cash and cash equivalents	8,120			(164,610		)

Cash and cash equivalents at beginning of period	384,409			354,331

Cash and cash equivalents at end of period	$	392,529		$	189,721

(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.

ACTIVISION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Six Months ended September 30, 2007
(Unaudited)
(In thousands)

	Common Stock			Additional Paid-In			Retained		Accumulated Other Comprehensive		Shareholders’
	Shares	Amount		Capital			Earnings		Income		Equity

Balance, March 31, 2007	283,311	$	—	$	963,553		$	427,777	$	20,202	$	1,411,532
Components of comprehensive income:
Net income	—	—		—			28,524		—		28,524
Unrealized appreciation on short-term investments, net of taxes	—	—		—			—		543		543
Foreign currency translation adjustment	—	—		—			—		6,613		6,613
Total comprehensive income											35,680
Issuance of common stock pursuant to employee stock options, employee stock purchase plans and employee bonuses	4,473	—		32,119			—		—		32,119
Issuance of common stock to effect business combination (see Note 4)	1,288	—		24,039			—		—		24,039
Stock based compensation expense related to employee stock options, restricted stock rights, and employee stock purchase plans	—	—		20,044			—		—		20,044
Tax benefit associated with options and warrants	—	—		9,199			—		—		9,199
Employee tender offer (see Note 13)	—	—		(3,063		)	—		—		(3,063		)

Balance, September 30, 2007	289,072	$	—	$	1,045,891		$	456,301	$	27,358	$	1,529,550

The accompanying notes are an integral part of these consolidated financial statements.

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

~~For the Three and Nine Months ended December 31, 2006~~(Unaudited)

~~(Unaudited)~~

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying ~~consolidated financial statements~~Consolidated Financial Statements include the accounts of Activision, Inc. and its subsidiaries (“~~Activision,” the “Company,”~~Activision” or “we”). The information furnished is unaudited and ~~consists~~the adjustments included consist of only normal recurring adjustments that, in the opinion of management, are necessary to provide a fair statement of the results for the interim periods presented. The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in our ~~Amended~~ Annual Report on Form ~~10-K/A~~10-K for the fiscal year ended March 31, ~~2006~~2007 as filed with the Securities and Exchange Commission (“SEC”) on ~~May 25,~~June 14, 2007.

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~~SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise 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. 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’s release, we expense, as part of “cost of 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 of sales —– software royalties and amortization” based on the ratio of current revenues to total projected revenues, 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 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, 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.

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

~~For the Three and Nine Months ended December 31, 2006~~(Unaudited)

~~(Unaudited)~~

We evaluate the future recoverability of capitalized intellectual property licenses on a quarterly basis. The recoverability of capitalized intellectual property license costs is evaluated based on the expected performance of the specific products in which the licensed trademark or copyright is to be used. 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’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, 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’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.

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 which~~these products ~~are made widely available~~may be sold by retailers). For these products we recognize revenue ~~no earlier than~~on 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.

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

in addition to the software product, the company contemplates such when determining the appropriate revenue recognition. This evaluation is performed for each software product when it is released. We determined that one of our software titles released this quarter, 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 prior 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 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. As we move forward, we will monitor this developing functionality and its significance for our products. Our assessment of our obligations with respect to this functionality and the resulting accounting may change in the future.

With respect to ~~on-line~~online transactions, such as electronic downloads of titles or product add-ons, revenue is recognized when the fee is paid by the ~~on-line~~online 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.”~~

~~ACTIVISION, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Months ended December 31, 2006~~

~~(Unaudited)~~

Sales incentives or other consideration given by us to our customers is accounted for in accordance with the Financial Accounting Standards Board’s Emerging Issues Task Force (“EITF”) Issue 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the 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’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 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;~~genres, historical performance of the hardware ~~platform;~~platform, historical performance of the ~~brand;~~brand, console hardware life ~~cycle;~~cycle, Activision sales force and retail customer ~~feedback;~~feedback, industry ~~pricing;~~pricing, weeks of on-hand retail channel ~~inventory;~~inventory, absolute

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

quantity of on-hand retail channel ~~inventory;~~inventory, our warehouse on-hand inventory ~~levels;~~levels, the title’s recent sell-through history (if available);, marketing trade ~~programs;~~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 ~~December 31, 2006~~September 30, 2007 allowance for returns and price protection would impact net revenues by ~~$1.1~~$1.0 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’ 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’s estimates in establishing our allowance for doubtful accounts.

~~ACTIVISION, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Months ended December 31, 2006~~

~~(Unaudited)~~

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’s estimates in establishing our inventory provision.

Stock-Based Compensation Expense

On April 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based ~~Payment”~~Payment,” (“SFAS 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 related to the Employee Stock Purchase Plan (“employee stock purchases”), based on estimated fair values. SFAS No. 123R supersedes our previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). In March 2005, the ~~SEC~~Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS No. 123R. We have applied the provisions of SAB 107 in our adoption of SFAS No. 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 three and nine months ended December 31, 2006 reflect the impact of SFAS 123R. In 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. Stock-based compensation expense recognized under SFAS 123R for the three and nine months ended December 31, 2006 was $7.7 million and $18.4 million, respectively. See Note 15 for additional information.

~~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. Prior to the adoption 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,~~Stock-based compensation expense ~~was recorded~~recognized under SFAS No. 123R 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’s exercise price. For the three and ~~nine~~six months ended ~~December 31, 2005, we recognized $322,000~~September 30, 2007 was $6.9 million and ~~$2.5~~$15.0 million, respectively ~~in stock-based compensation expense related to employee stock options~~ and ~~restricted stock, under APB 25.~~for the three and six months ended September 30, 2006 was $4.9 million and $10.7 million, respectively. See ~~Notes 2 and 15~~Note 13 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~~Statement of Operations for the three and ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007, included 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~~Stock-based compensation expense recognized in the

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Consolidated Statement of Operations ~~for the three and nine months ended December 31, 2006~~ 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.

~~ACTIVISION, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For~~We estimate the ~~Three and Nine Months ended December 31, 2006~~

~~(Unaudited)~~

Asvalue of ~~April 1, 2005, we changed our method~~employee stock options on the date of ~~valuation for share-based awards to~~grant using 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.~~model. For additional information, see Note ~~15.~~13. Our determination of fair value of share-based payment awards on 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 term of the awards, and actual and projected employee stock option exercise behaviors.

~~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 three and nine months ended December 31, 2006, we recorded expenses related to these shares of approximately $292,000 and $642,000, respectively, 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 $1.1 million of the $4.8 million total fair value, with the remainder to be recognized over a weighted-average period of 3.12 years.

2.~~Restatement of Unaudited Consolidated Financial Statements~~

We recently completed a voluntary review of our historical stock option granting practices and a restatement of our consolidated financial statements as of and for the fiscal years ended March 31, 2006, 2005 and 2004 and related disclosures and a restatement of our selected consolidated financial data as of and for the fiscal years ended March 31, 2006, 2005, 2004, 2003 and 2002 and our unaudited quarterly financial data for each of the quarters in the fiscal years ended March 31, 2006 and 2005, and the fiscal quarter ended June 30, 2006. The impacts of the restatement adjustments extend to periods from the fiscal year ended March 31, 1994 through the fiscal quarter ended June 30, 2006.

The restatement reflects the findings of a special subcommittee of independent members of our Board of Directors, which was established in July 2006 to review our historical stock option granting practices (the “Special Subcommittee”). The Special Subcommittee conducted its investigation with the assistance of Munger Tolles & Olson LLP as its independent counsel and Deloitte & Touche USA LLP (“Deloitte”) as forensic accounting experts retained by counsel. The Special Subcommittee found that 3,450 of the option grants reviewed, covering 148,747,202 shares, required measurement date corrections. As a result, we recorded approximately $66.7 million in additional pre-tax ($45.4 million after-tax) non-cash stock-based compensation expense over the thirteen year period from April 1, 1993 through March 31, 2006 in accordance with APB 25, and $0.6 million in additional pre-tax non-cash stock-based compensation expense during the quarter ended June 30, 2006 in accordance with SFAS 123R. More than 80% or $55.4 million of the $66.7 million relates to periods through March 31, 2003 and 4% or $2.6 million of the non-

~~ACTIVISION, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Months ended December 31, 2006~~

~~(Unaudited)~~

cash pre-tax expense relates to the fiscal year ended March 31, 2006. Separately, the restatement reflected an additional $1.7 million pre-tax charge ($1.1 million after-tax) related to recently identified insufficient payroll tax withholdings in fiscal 2005. Additional information regarding the restatement is available with the Company’s Amended Annual Report on Form 10-K/A for the period ending March 31, 2006.

The following table summarizes additional pre-tax stock-based compensation expense and related tax adjustments resulting from the review of our equity award practices for the three and nine months ended December 31, 2005 (in thousands):

For the three months
ended

For the nine months
ended

December 31, 2005

December 31, 2005

Net income, as previously reported

$
67,945

$
51,118

Additional compensation expense resulting from improper measurement dates for stock option grants (1)

174

2,286

Tax related effects

(85
)
(547
)

Total effect on net income

89

1,739

Net income, as restated

$
67,856

$
49,379

~~(1) Also includes an immaterial amount of interest expense related to our $1.7 million charge for insufficient payroll tax withholdings in fiscal 2005.~~

~~The following tables reflect the impact of the additional non-cash charges for stock-based compensation expense and related tax effects on:~~

~~Certain Tax Consequences~~: Certain stock options were granted with an exercise price lower than the fair market value on the actual measurement dates, with vesting occurring after December 31, 2004, which resulted in nonqualified deferred compensation for purposes of Section 409A of the Internal Revenue Code. Section 409A subjects the option holders to additional income tax, penalties and interest on the value of the options deferred and, in certain cases, exercised each year. We do not have any tax liability associated with Section 409A. For options that have already been exercised by non-executive officer employees, that are subject to Section 409A consequences, the Company has elected to participate in the Internal Revenue Service program described in IRS Announcement 2007-18 pursuant to which the Company was able to pay the Section 409A taxes on behalf of its non-executive officer employees, and has incurred $7.3 million in additional pre-tax compensation expense in the fiscal quarter ended March 31, 2007, in absorbing these related costs on behalf of these employees. With respect to unexercised options subject to Section 409A held by such current and former non-executive officer employees, the Company on or about June 7, 2007 is commencing an offer to amend the exercise price of these options to eliminate their 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, in an amount equal to the difference between the original exercise price of each amended option and the amended exercise price of each amended option. This will likely result in additional future compensation expense to the Company once these actions occur.

· ~~the Consolidated Statements of Operations for the three and nine months ended December 31, 2005 (Unaudited).~~

· ~~the Consolidated Statement of Cash Flows for the nine months ended December 31, 2005 (Unaudited).~~

· ~~the pro forma information required by SFAS No. 123 for the three and nine months ended December 31, 2005 (Unaudited).~~

~~ACTIVISION, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Months ended December 31, 2006~~

~~(Unaudited)~~

~~Consolidated Statement of Operations (Unaudited)~~

For the three months ended December 31, 2005

(in thousands, except per share data)

As previously
reported

Adjustments

As restated

Net revenues

$
816,242

$
—

$
816,242

Costs and expenses:

Cost of sales – product costs

367,685

—

367,685

Cost of sales – software royalties and amortization

104,264

—

104,264

Cost of sales – intellectual property licenses

26,376

—

26,376

Product development

53,139

115

53,254

Sales and marketing

155,999

14

156,013

General and administrative

24,712

45

24,757

Total costs and expenses

732,175

174

732,349

Operating income

84,067

(174
)
83,893

Investment income, net

9,162

—

9,162

Income before income tax provision

93,229

(174
)
93,055

Income tax provision

25,284

(85
)
25,199

Net income

$
67,945

$
(89
)
$
67,856

Basic earnings per share

$
0.25

$
—

$
0.25

Weighted average common shares outstanding

274,965

—

274,965

Diluted earnings per share

$
0.23

$
—

$
0.23

Weighted average common shares outstanding assuming dilution

298,752

(2,547
)
296,205

~~ACTIVISION, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Months ended December 31, 2006~~

~~(Unaudited)~~

~~Consolidated Statement of Operations (Unaudited)~~

For the nine months ended December 31, 2005

(in thousands, except per share data)

As previously
reported

Adjustments

As restated

Net revenues

$
1,279,875

$
—

$
1,279,875

Costs and expenses:

Cost of sales – product costs

617,021

—

617,021

Cost of sales – software royalties and amortization

139,267

—

139,267

Cost of sales – intellectual property licenses

55,765

—

55,765

Product development

99,013

685

99,698

Sales and marketing

258,957

153

259,110

General and administrative

65,780

1,448

67,228

Total costs and expenses

1,235,803

2,286

1,238,089

Operating income

44,072

(2,286
)
41,786

Investment income, net

22,840

—

22,840

Income before income tax provision

66,912

(2,286
)
64,626

Income tax provision

15,794

(547
)
15,247

Net income

$
51,118

$
(1,739
)
$
49,379

Basic earnings per share

$
0.19

$
(0.01
)
$
0.18

Weighted average common shares outstanding

272,089

—

272,089

Diluted earnings per share

$
0.17

$
—

$
0.17

Weighted average common shares outstanding assuming dilution

295,963

(2,566
)
293,397

~~ACTIVISION, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Months ended December 31, 2006~~

~~(Unaudited)~~

~~Consolidated Statement of Cash Flows (Unaudited)~~

For the nine months ended December 31, 2005

(in thousands)

As previously
reported

Adjustments

As restated

Cash flows from operating activities:

Net income

$
51,118

$
(1,739
)
$
49,379

Adjustments to reconcile net loss to net cash used in operating activities:

Deferred income taxes

(10,819
)
4,796

(6,023
)
Realized gain on sale of short term investments

(4,295
)
—

(4,295
)
Depreciation and amortization

10,228

—

10,228

Amortization of capitalized software development costs and intellectual property licenses

168,351

—

168,351

Stock-based compensation expense

292

2,214

2,506

Tax benefit of stock options and warrants exercised

26,612

(5,343
)
21,269

Changes in operating assets and liabilities (net of effects of acquisitions):

Accounts receivable

(305,305
)
—

(305,305
)
Inventories

(36,810
)
—

(36,810
)
Software development and intellectual property licenses

(162,793
)
—

(162,793
)
Other assets

321

—

321

Accounts payable

104,895

—

104,895

Accrued expenses and other liabilities

74,273

72

74,345

Net cash used in operating activities

(83,932
)
—

(83,932
)

Cash flows from investing activities:

Capital expenditures

(20,174
)
—

(20,174
)
Cash payments to effect business combinations, net of cash acquired

(7,081
)
—

(7,081
)
Increase in restricted cash

(7,500
)
—

(7,500
)
Purchases of short-term investments

(143,162
)
—

(143,162
)
Proceeds from sales and maturities of short-term investments

182,504

—

182,504

Net cash provided by investing activities

4,587

—

4,587

Cash flows from financing activities:

Proceeds from issuance of common stock to employees

37,850

—

37,850

Net cash provided by financing activities

37,850

—

37,850

Effect of exchange rate changes on cash

(5,044
)
—

(5,044
)

Net decrease in cash and cash equivalents

(46,539
)
—

(46,539
)

Cash and cash equivalents at beginning of period

313,608

—

313,608

Cash and cash equivalents at end of period

$
267,069

$
—

$
267,069

~~ACTIVISION, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Months ended December 31, 2006~~

~~(Unaudited)~~

Pro forma information regarding net income and net income per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock purchase plan and employee stock option plans under the fair value method of SFAS No. 123. The impact of the restatements on the pro forma information is as follows (in thousands, except per share data):

For the three months ended December 31, 2005

(in thousands, except per share data)

As previously
reported

Adjustments

As restated

Net income, as reported

$
67,945

$
(89
)
$
67,856

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

—

72

72

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

(4,841
)
619

(4,222
)

Pro forma net income

$
63,104

$
602

$
63,706

Earnings per share

Basic – as reported

$
0.25

$
—

$
0.25

Basic – pro forma

$
0.23

$
—

$
0.23

Diluted – as reported

$
0.23

$
—

$
0.23

Diluted – pro forma

$
0.21

$
0.01

$
0.22

For the nine months ended December 31, 2005

(in thousands, except per share data)

As previously
reported

Adjustments

As restated

Net income, as reported

$
51,118

$
(1,739
)
$
49,379

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

—

1,695

1,695

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

(11,517
)
(671
)
(12,188
)

Pro forma net income

$
39,601

$
(715
)
$
38,886

Earnings per share

Basic – as reported

$
0.19

$
(0.01
)
$
0.18

Basic – pro forma

$
0.15

$
(0.01
)
$
0.14

Diluted – as reported

$
0.17

$
—

$
0.17

Diluted – pro forma

$
0.13

$
—

$
0.13

~~ACTIVISION, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Months ended December 31, 2006~~

~~(Unaudited)~~

3. Acquisitions

~~RedOctane, Inc.~~Bizarre Creations

On ~~June 6, 2006,~~September 26, 2007, we ~~completed our acquisition of~~acquired 100% of ~~RedOctane, Inc.~~Bizarre Creations Limited (“~~RedOctane”~~Bizarre Creations”) for an aggregate ~~accounting~~ purchase price of ~~$99.9 million, including transaction costs, consisting of: $30.9~~$67.4 million in cash; 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 other liabilities.cash. In addition, inin the event ~~the adjusted net income~~that certain financial performance measures of ~~the~~Bizarre Creations’ business over a certain period of time (currently estimated to be 5 years from fiscal 2008) exceeds specified target levels, ~~by certain amounts, certain~~the former shareholders of ~~RedOctane~~Bizarre Creations will be entitled to an additional amount of up to ~~$51.0~~$40 million payable in shares of ~~Activision~~our common stock. The contingent consideration will be recorded as an ~~additional element of~~addition to the purchase price if ~~those contingencies~~the specified target levels are ~~achieved.~~met. Based in ~~Sunnyvale, California, RedOctane~~the United Kingdom (“UK”), Bizarre Creations is a ~~publisher,~~video game developer ~~and distributor of interactive entertainment software, hardware and accessories. RedOctane offers its interactive entertainment products in versions that operate~~focusing on the ~~Sony PlayStation 2 (“PS2”),~~racing category with its multi-million unit selling franchise Project Gotham Racing, a series for the Microsoft Xbox (“Xbox”), and the ~~personal computer~~Microsoft Xbox360 (“~~PC”~~Xbox360”), platforms. Bizarre Creations has also developed and ~~its leading product offering is~~ ~~Guitar Hero~~owns the Geometry Wars intellectual property. We expect that Bizarre Creations will play a role in our growth strategy as we develop intellectual property for the ~~PS2. RedOctane also designs, manufactures,~~racing segment, expand our development capability and ~~markets high quality video game peripherals~~capacity for other genres 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.~~utilize Bizarre Creations’ proprietary development technology.

The results of operations of ~~RedOctane~~Bizarre Creations 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~~consolidated statements of ~~Operations~~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 the estimated ~~lives ranging from 0.6~~useful life in proportion to ~~1.6 years.~~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 ~~non-deductible~~amortized over 15 years for tax purposes.

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Preliminary Purchase Price Allocation

We accounted for this acquisition in accordance with SFAS No. 141, “Business ~~Combinations.”~~Combinations” (“SFAS No. 141”). SFAS No. 141 addresses financial accounting and reporting for business combinations, requiring that the purchase method be used to account and report for all business combinations. The purchase price for the ~~RedOctane~~Bizarre Creations transaction was preliminarily 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

Current assets	$	4,352
Property and equipment, net	2,203
Goodwill	55,833
Trademark, acquired contracts and other intangibles	9,500
Deferred tax liability	(1,876		)
Other liabilities	(2,639		)
Total consideration	$	67,373

~~ACTIVISION, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Months ended December 31, 2006~~

~~(Unaudited)~~

Purchased Intangible Assets

The following table presents details of the purchased finite-lived intangible assets acquired in the ~~RedOctane~~Bizarre Creations acquisition (in thousands):

Estimated
Useful

Life

(in years)

Amount

Finite-lived intangibles:

Trademark

1.3

$
1,000

Other intangibles

0.6-1.6

15,700

Total finite-lived intangibles

$
16,700

	Estimated Useful Life (in years)	Amount
Finite-lived intangibles:
Trademark	8	$	1,100
Acquired contracts	0.5	2,800
Other intangibles	1 - 5	5,600

Total finite-lived intangibles		$	9,500

The following tables present details of our total purchased finite-lived intangible assets as of ~~December 31, 2006~~September 30, 2007 (in thousands):

Gross

Accumulated
Amortization

Net

Trademark

$
1,000

$
520

$
480

Other intangibles

15,700

9,121

6,579

Total

$
16,700

$
9,641

$
7,059

	Gross		Accumulated Amortization		Net

Trademark	$	1,100	$	—	$	1,100
Acquired contracts	2,800		—		2,800
Other intangibles	5,600		—		5,600

Total	$	9,500	$	—	$	9,500

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The estimated future amortization expense of purchased finite-lived intangible assets as of ~~December 31, 2006~~September 30, 2007 is as follows (in thousands):

Fiscal year ending March 31,

Amount

2007 (remaining three months)

$
2,061

2008

4,998

2009

—

2010

—

2011

—

Thereafter

—

Total

$
7,059

Fiscal year ending March 31,	Amount
2008 (remaining six months)	$	3,500
2009	700
2010	1,153
2011	1,538
2012	1,538
Thereafter	1,071

Total	$	9,500

DemonWare

On May 11, 2007, Activision completed its acquisition of DemonWare, Ltd., a provider of network middleware technologies for console and personal computer (“PC”) games headquartered in Dublin, Ireland. The acquisition is expected to enable Activision 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 expected to be immaterial to fiscal 2008 earnings per share and cash flow. Additionally, pro forma consolidated statements of operations for this acquisition are not shown, as they would not differ materially from reported results.

4.~~Cash, Cash Equivalents, and Short-Term Investments~~

Short-term investments generally consist of investments with maturities between three and thirty months. Investments with maturities beyond one year may be classified as short-term if they are liquid and represent the investment of cash that is available for current operations. All of our short-term investments are classified as available-for-sale and are carried at fair market value with unrealized appreciation (depreciation) reported as a separate component of accumulated other comprehensive income (loss) in 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~~

~~For the Three and Nine Months ended December 31, 2006~~

~~(Unaudited)~~

~~The following table summarizes our investments in securities as of December 31, 2006 (amounts in thousands):~~

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Cash and cash equivalents:

Cash and time deposits

$
257,084

$
—

$
—

$
257,084

Money market instruments

96,605

—

—

96,605

Commercial paper

14,229

—

(8
)
14,221

Cash and cash equivalents

367,918

—

(8
)
367,910

Short-term investments:

U.S. agency issues

231,511

6

(1,579
)
229,938

Corporate bonds

92,126

5

(216
)
91,915

Commercial paper

44,257

—

(50
)
44,207

Mortgage-backed securities

42,789

—

(322
)
42,467

Asset-backed securities

11,289

3

(20
)
11,272

Certificate of deposit

9,997

—

(6
)
9,991

Restricted cash

7,500

—

—

7,500

Short-term investments

439,469

14

(2,193
)
437,290

Cash, cash equivalents and short-term investments

$
807,387

$
14

$
(2,201
)
$
805,200

~~The following table summarizes the contractual maturities of our investments in debt securities as of December 31, 2006 (amounts in thousands):~~

Amortized
Cost

Fair
Value

Due in one year or less

$
308,320

$
307,005

Due after one year through two years

56,875

56,731

Due after two years through three years

4,022

4,014

Due in three years or more

12,906

12,531

382,123

380,281

Asset and mortgage-backed securities

54,078

53,739

Certificate of deposit

9,997

9,991

Total

$
446,198

$
444,011

For the three and nine months ended December 31, 2006, there were no gross realized losses and gross realized gains of $1.8 million on the sale of short-term investments. For the three months ended December 31, 2005, there were no gross realized gains and $2,000 of gross realized losses on the sale or maturity of short-term investments. For the nine months ended December 31, 2005, there were $1.3 million of gross realized gains and $2,000 of gross realized losses on the sale or maturity of short-term investments.

~~In accordance with EITF 03-1, “~~~~The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,”~~ ~~the fair value of investments in an unrealized loss position for which an other-than-~~

~~ACTIVISION, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Months ended December 31, 2006~~

~~(Unaudited)~~

temporary impairment has not been recognized was $430.7 million and $672.4 million at December 31, 2006 and March 31, 2006, respectively, with related gross unrealized losses of $2.2 million and $5.5 million, respectively. At December 31, 2006, the gross unrealized losses were comprised mostly of unrealized losses on U.S. agency issues, corporate bonds, and mortgage-backed securities, with $1.8 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.

Our investment portfolio consists of government and corporate securities with effective maturities of less than 30 months. The longer the term or holding period of the securities, the more susceptible they are to changes in market rates of interest, yields on bonds, and market price volatility. Investments are reviewed periodically to identify possible impairment. When evaluating the investments, we review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in market value. 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. We expect to realize the full value of all of these investments upon maturity or sale.

5.3. Inventories

Inventories are valued at the lower of cost (first-in, first-out) or market. Our inventories consist of the following (amounts in thousands):

December 31, 2006

March 31, 2006

Finished goods

$
81,652

$
58,876

Purchased parts and components

4,028

2,607

$
85,680

$
61,483

	September 30, 2007		March 31, 2007
Finished goods	$	151,584	$	89,048
Purchased parts and components	37,449		2,183

	$	189,033	$	91,231

6.4. Goodwill ~~and Other Intangible Assets~~

The changes in the carrying amount of goodwill for the ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 are as follows (amounts in thousands):

Publishing

Distribution

Total

Balance as of March 31, 2006

$
95,094

$
5,352

$
100,446

Goodwill acquired during the period

87,257

—

87,257

Adjustment to prior period purchase allocation

51

—

51

Effect of foreign currency exchange rates

(5
)
649

644

Balance as of December 31, 2006

$
182,397

$
6,001

$
188,398

	Publishing			Distribution		Total

Balance as of March 31, 2007	$	189,342		$	6,032	$	195,374
Goodwill acquired during the period	58,609			—		58,609
Issuance of contingent consideration	25,703			—		25,703
Adjustment-prior period purchase allocation	(127		)	—		(127		)
Effect of foreign currency exchange rates	474			215		689
Balance as of September 30, 2007	$	274,001		$	6,247	$	280,248

Goodwill acquired during the period represents goodwill related to the acquisition of RedOctane of $87.0 million and goodwill related to the acquisition of a recently acquired South Korean publishing company of $253,000.14

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

~~For~~(Unaudited)

Goodwill acquired during the ~~Three~~period represents goodwill of $55.8 million and ~~Nine Months ended December 31, 2006~~$2.8 million related to the acquisitions of Bizarre Creations and DemonWare, respectively. See Note 2 for additional information. Issuance of contingent consideration consists of additional purchase consideration related to the acquisition of RedOctane Inc. and Vicarious Visions Inc. for $22.6 million and $3.1 million, respectively, which was paid in shares of our common stock. Additional contingent purchase consideration of $3.1 million related to the acquisition of Vicarious Visions Inc. was earned on June 30, 2007 as a result of the achievement of certain sell through targets released during the second quarter of fiscal 2008. As a result, shares of our common stock with an aggregate value of $1.4 million were issued to the former stockholders of Vicarious Visions Inc. with the remaining $1.7 million accrued as of September 30, 2007.

~~(Unaudited)~~

7.5. Income Taxes

The income tax provision of ~~$40.0 million and $28.1~~$1.9 million for the three months ended September 30, 2007 reflects our effective income tax rate for the quarter of 73.0%, and ~~nine~~the income tax provision of $15.7 million for the six months ended September 30~~December 31,~~, 2007 reflects our estimated effective income tax rate of 35.5% for the six months ended September 30, 2007. Due to our relatively small net income before tax provision for the three months ended September 30, 2007, small changes in discrete items resulted in a large effect on our effective income tax rate for the quarter ended September 30, 2007. The significant items that generated the variance between our effective rate for the three months ended September 30, 2007 and our statutory rate of 35% were federal and state research and development tax credits, the impact of foreign tax rate differentials, and the federal deduction for domestic production activities, partially offset by state taxes and the impact of a decrease in the tax benefit of deferred tax assets on the books of our UK affiliates due to the enactment of a decrease in the UK statutory tax rate.

The aforementioned effective income tax rate for the quarter of 73.0% differs from our effective income tax rate of 17.3% for the three months ended September 30, 2006 due to an increase in anticipated pretax income for fiscal 2008 determined at September 30, 2007 versus the anticipated pretax income for fiscal 2007 determined at September 30, 2006, without a corresponding increase in the benefit of book/tax differences, in addition to the impact of a decrease in the tax benefit of deferred tax assets on the books of our UK affiliates due to the recent enactment of a decrease in the UK statutory tax rate.

The income tax benefit of $5.1 million for the three months ended September 30, 2006 reflects our effective income tax rate for the quarter of 17.3%, which differs from our effective tax rate of 21.9%~~. This is lower than prior~~ for the year ~~as a result~~ended March 31, 2007 due to (1) an increase in the federal research and development credit for the full year ended March 31, 2007 over the amount originally anticipated for the year at September 30, 2006 due to the Congressional reinstatement of ~~improved profitability leading to utilization~~the federal R&D credit in quarter ended December 31, 2006; and (2) the elimination of ~~net operating loss carry forwards and in turn a reduction in~~the valuation ~~allowances related to federal and state~~allowance for research and development tax credits, partially offset by the nondeductible portion of annual cash bonuses determined in the three months ended March 31, 2007 under Section 162(m), and the establishment of tax ~~reserves.~~reserves for these credits and other deferred tax assets. The significant items that generated the variance between our effective rate and our statutory rate of 35% for the three months ended September 30, 2006 were ~~federal and state~~ research and development tax credits ~~and the impact of foreign tax rate differentials, offset by~~for 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.

The income tax expense of $25.2 million for the three months ended December 31, 2005 reflects our effective income tax rate for the quarter of 27.1%, which differs from our effective tax rate of 12.2% for the year ended March 31, 2006 primarily due to an increase in federal and state research and development credits for the full year ended March 31, 2006 over the amounts originally anticipated for the year. The significant items that generated the variance between our effective rate and our federal statutory rate of 35% were research and development tax creditspurposes, and the impact of foreign tax rate differentials, partially offset by state taxes.

We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation of FASB Statement No. 109 (“SFAS 109”) on April 1, 2007. As a result of the implementation of FIN 48, we recognized no material adjustment in the liability 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. The liability for unrecognized tax benefits was unchanged during the three months ended September 30, 2007.

In addition, consistent with the provisions of FIN 48, we reclassified $15.6 million of income tax liabilities from current to non-current liabilities because payment of cash is not anticipated within one year of the

8.ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

balance sheet date. These non-current income tax liabilities are recorded in Other Liabilities in the Consolidated Balance Sheets.

We recognize interest and penalties related to uncertain tax positions in income tax expense. As of April 1, 2007, we had approximately $296,000 of accrued interest related to uncertain tax positions. There were no material changes to the accrued interest expense related to estimated obligations for unrecognized tax benefits net of federal benefit during the three months ended September 30, 2007.

The tax years 2002 through 2007 remain open to examination by the major taxing jurisdictions to which we are subject, including U.S. and non-U.S. locations. We are currently under audit by the Internal Revenue Service and the California Franchise Tax Board, and it is possible that the current portion of our unrecognized tax benefits will significantly decrease within the next twelve months.

6. Software Development Costs and Intellectual Property Licenses

As of ~~December 31, 2006,~~September 30, 2007, capitalized software development costs included ~~$77.7~~$102.5 million of internally developed software costs and ~~$24.1~~$42.2 million of payments made to third-party software developers. As of March 31, ~~2006,~~2007, capitalized software development costs included ~~$45.0~~$94.3 million of internally developed software costs and ~~$15.6~~$36.6 million of payments made to third-party software developers. Capitalized intellectual property licenses were ~~$93.4~~$81.8 million and ~~$87.0~~$100.3 million as of ~~December 31, 2006~~September 30, 2007 and March 31, ~~2006,~~2007, respectively. Amortization and write-offs of capitalized software development costs and intellectual property licenses were ~~$79.2~~$101.7 million and ~~$168.4~~$26.3 million for the ~~nine~~six months ended ~~December 31,~~September 30, 2007 and 2006, ~~and 2005,~~ respectively.

9.7. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)

Comprehensive Income (Loss)

The components of comprehensive income (loss) for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2007 and 2006 ~~and 2005~~ were as follows (amounts in thousands):

Three months ended December 31,

Nine months ended December 31,

2006

2005

2006

2005

As restated

As restated

Net income

$
142,820

$
67,856

$
100,209

$
49,379

Other comprehensive income (loss):

Foreign currency translation adjustment

4,742

(937
)
10,983

(6,925
)
Unrealized appreciation (depreciation) on short-term investments

1,342

(1,432
)
(8,693
)
(2,172
)

Other comprehensive income (loss)

6,084

(2,369
)
2,290

(9,097
)

Comprehensive income

$
148,904

$
65,487

$
102,499

$
40,282

	Three months ended September 30,					Six months ended September 30,
	2007		2006			2007		2006

Net income (loss)	$	698	$	(24,302	)	$	28,524	$	(42,611	)

Other comprehensive income (loss):
Foreign currency translation adjustment	3,891		2,663			6,613		6,241
Unrealized appreciation (depreciation) on short-term investments, net of taxes	950		8,447			543		(10,035		)

Other comprehensive income (loss)	4,841		11,110			7,156		(3,794		)

Comprehensive income (loss)	$	5,539	$	(13,192	)	$	35,680	$	(46,405	)

2216

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
~~For the Three and Nine Months ended December 31, 2006~~

(Unaudited)

Accumulated Other Comprehensive Income (Loss)

For the ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 the components of accumulated other comprehensive income (loss) were as follows (amounts in thousands):

Unrealized

Accumulated

Appreciation

Other

Foreign

(Depreciation)

Comprehensive

Currency

on Investments

Income

Balance, March 31, 2006

$
9,013

$
7,356

$
16,369

Other comprehensive income (loss)

10,983

(8,693
)
2,290

Balance, December 31, 2006

$
19,996

$
(1,337
)
$
18,659

			Unrealized			Accumulated
			Appreciation			Other
	Foreign		(Depreciation)			Comprehensive
	Currency		on Investments			Income

Balance, March 31, 2007	$	21,070	$	(868	)	$	20,202
Other comprehensive income	6,613		543			7,156

Balance, September 30, 2007	$	27,683	$	(325	)	$	27,358

~~Comprehensive~~Other comprehensive income is presented net of ~~taxes~~tax benefits of ~~$0.9~~$0.3 million related to unrealized ~~depreciation~~appreciation on ~~investments.~~the Company’s investments for the six months ended September 30, 2007. Income taxes were not provided for foreign currency translation items as these are considered indefinite investments in non-U.S. subsidiaries.

~~10.~~8. Investment Income, Net

Investment income, net is comprised of the following (amounts in thousands):

Three months ended December 31,

Nine months ended December 31,

2006

2005

2006

2005

Interest income

$
7,917

$
6,299

$
24,286

$
18,743

Interest expense

(16
)
(85
)
(80
)
(198
)
Net realized gain on investments

1,823

2,948

1,825

4,295

Investment income, net

$
9,724

$
9,162

$
26,031

$
22,840

	Three months ended September 30,					Six months ended September 30,
	2007			2006		2007			2006
Interest income	$	12,169		$	8,013	$	23,755		$	16,369
Interest expense	(37		)	19		(61		)	(64		)
Net realized gain on investments	—			—		—			2

Investment income, net	$	12,132		$	8,032	$	23,694		$	16,307

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
~~For the Three and Nine Months ended December 31, 2006~~

(Unaudited)

~~11.~~9. Supplemental Cash Flow Information

Non-cash ~~operating,~~ investing and financing activities and supplemental cash flow information is as follows (amounts in thousands):

Nine months ended December 31,

2006

2005

Non-cash operating, investing and financing activities:

Subsidiaries acquired with common stock

$
30,000

$
2,793

Change in unrealized appreciation (depreciation) on short-term investments, net of taxes

(8,693
)
2,172

Common stock payable related to acquisition

39,000

—

Capitalization of stock option expense, net of amortization

4,996

—

Adjustment - prior period purchase allocation

51

—

Supplemental cash flow information:

Cash paid for income taxes

$
3,040

$
4,469

Cash received for interest, net

23,691

16,956

	Six months ended September 30,
	2007			2006
Non-cash investing and financing activities:
Subsidiaries acquired with common stock	$	—		$	30,000
Change in unrealized appreciation (depreciation) on short-term investments, net of taxes	543			(10,035		)
Common stock issued related to acquisition	24,039			—
Common stock issuable related to acquisition	—			39,000
Common stock issued related to employee bonuses	1,857			—
Adjustment - prior period purchase allocation	(127		)	46

Supplemental cash flow information:
Cash paid for income taxes	$	2,806		$	5,456
Cash paid for interest	42			63

~~12.~~10. Operations by Reportable Segments and Geographic Area

Based upon our organizational structure, 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, either directly, by license or through our affiliate label program with certain third-party publishers. 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. We conduct our international publishing activities through offices in the United Kingdom (“UK”), Germany, France, Italy, Spain, Australia, Sweden, the Netherlands, Canada, South Korea, and Japan where products are sold on a direct-to-retail basis and through third-party distribution and licensing arrangements and through our wholly owned distribution subsidiaries.

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” in our ~~Amended~~ Annual Report on Form ~~10-K/A~~10-K for the year ended March 31, ~~2006.~~2007. Revenue derived from sales between segments is eliminated in consolidation.

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
~~For the Three and Nine Months ended December 31, 2006~~

(Unaudited)

Information on the reportable segments for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2007 and 2006 ~~and 2005~~ is as follows (amounts in thousands):

Three months ended December 31, 2006

Publishing

Distribution

Total

Total segment revenues

$
649,797

$
174,462

$
824,259

Revenues from sales between segments

(43,937
)
43,937

—

Revenues from external customers

$
605,860

$
218,399

$
824,259

Operating income

$
160,628

$
12,492

$
173,120

Total assets

$
1,667,103

$
224,367

$
1,891,470

	Three months ended December 31, 2005
	Publishing			Distribution		Total		Three months ended September 30, 2007
	As restated			As restated		As restated		Publishing			Distribution		Total

Total segment revenues	$	667,500		$	148,742	$	816,242	$	253,759		$	63,987	$	317,746
Revenues from sales between segments	(87,652		)	87,652		—		(20,509		)	20,509		—

Revenues from external customers	$	579,848		$	236,394	$	816,242	$	233,250		$	84,496	$	317,746

Operating income	$	65,534		$	18,359	$	83,893
Operating income (loss)								$	(9,667	)	$	122	$	(9,545	)

Total assets	$	1,392,523		$	197,592	$	1,590,115	$	1,808,494		$	152,706	$	1,961,200

	Nine months ended December 31, 2006							Three months ended September 30, 2006
	Publishing			Distribution		Total		Publishing			Distribution			Total

Total segment revenues	$	909,963		$	290,537	$	1,200,500	$	125,404		$	62,768		$	188,172
Revenues from sales between segments	(63,288		)	63,288		—		(12,922		)	12,922			—

Revenues from external customers	$	846,675		$	353,825	$	1,200,500	$	112,482		$	75,690		$	188,172

Operating income	$	92,503		$	9,758	$	102,261
Operating loss								$	(36,607	)	$	(803	)	$	(37,410	)

Total assets	$	1,667,103		$	224,367	$	1,891,470	$	1,429,824		$	103,205		$	1,533,029

	Six months ended September 30, 2007
	Publishing			Distribution		Total

Total segment revenues	$	682,981		$	130,220	$	813,201
Revenues from sales between segments	(43,356		)	43,356		—

Revenues from external customers	$	639,625		$	173,576	$	813,201

Operating income	$	19,449		$	1,098	$	20,547

Total assets	$	1,808,494		$	152,706	$	1,961,200

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
~~For the Three and Nine Months ended December 31, 2006~~

(Unaudited)

Nine months ended December 31, 2005

Publishing

Distribution

Total

As restated

As restated

As restated

Total segment revenues

$
1,028,458

$
251,417

$
1,279,875

Revenues from sales between segments

(124,530
)
124,530

—

Revenues from external customers

$
903,928

$
375,947

$
1,279,875

Operating income

$
21,932

$
19,854

$
41,786

Total assets

$
1,392,523

$
197,592

$
1,590,115

	Six months ended September 30, 2006
	Publishing			Distribution			Total

Total segment revenues	$	260,166		$	116,075		$	376,241
Revenues from sales between segments	(19,352		)	19,352			—

Revenues from external customers	$	240,814		$	135,427		$	376,241

Operating loss	$	(68,125	)	$	(2,734	)	$	(70,859	)

Total assets	$	1,429,824		$	103,205		$	1,533,029

Geographic information for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2007 and 2006 ~~and 2005~~ is based on the location of the selling entity. Revenues from external customers by geographic region were as follows (amounts in thousands):

Three months ended December 31,

Nine months ended December 31,

2006

2005

2006

2005

North America

$
463,388

$
402,314

$
637,251

$
626,538

Europe

345,969

397,356

535,556

622,035

Other

14,902

16,572

27,693

31,302

Total

$
824,259

$
816,242

$
1,200,500

$
1,279,875

	Three months ended September 30,				Six months ended September 30,
	2007		2006		2007		2006

North America	$	161,804	$	74,249	$	471,340	$	173,863
Europe	146,525		107,775		316,539		189,588
Other	9,417		6,148		25,322		12,790

Total	$	317,746	$	188,172	$	813,201	$	376,241

Revenues by platform were as follows (amounts in thousands):

Three months ended December 31,

Nine months ended December 31,

2006

2005

2006

2005

Console

$
647,585

$
575,094

$
884,035

$
893,417

Hand-held

128,386

111,186

219,757

203,879

PC

48,288

129,962

96,708

182,579

Total

$
824,259

$
816,242

$
1,200,500

$
1,279,875

	Three months ended September 30,				Six months ended September 30,
	2007		2006		2007		2006

Console	$	240,484	$	117,473	$	642,358	$	236,450
Hand-held	57,740		46,574		133,472		91,371
PC	19,522		24,125		37,371		48,420

Total	$	317,746	$	188,172	$	813,201	$	376,241

We had two customers that accounted for 14% and 9% of consolidated net revenues for the three months ended September 30, 2007, respectively and 18% and 13% of consolidated net revenues for the six months ended September 30, 2007, respectively. These customers accounted for 13% and 5% of consolidated accounts receivable, gross at September 30, 2007, respectively. These customers were customers of both our publishing and distribution businesses. We had one customer that accounted for ~~21%~~23% and ~~22%~~25% of consolidated net revenues for the three and ~~nine~~six month periods ended ~~December 31,~~September 30, 2006, respectively, and ~~29%~~19% of consolidated gross accounts receivable at ~~December 31,~~September 30, 2006. This customer was a customer of both our publishing and distribution businesses. As of and for the three and nine months ended December 31, 2005, this same customer accounted for 21% and 22% of consolidated net revenues, respectively, and 25% of consolidated gross accounts receivable.

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
~~For the Three and Nine Months ended December 31, 2006~~

(Unaudited)

~~13.~~11. Computation of Earnings (Loss) Per Share

The following table sets forth the computations of basic and diluted earnings (loss) per share (amounts in thousands, except per share data):

Three months ended
December 31,

Nine months ended
December 31,

2006

2005

2006

2005

As restated

As restated

Numerator:

Numerator for basic and diluted earnings per share – income available to common shareholders

$
142,820

$
67,856

$
100,209

$
49,379

Denominator:

Denominator for basic earnings per share- weighted average common shares outstanding

282,512

274,965

280,499

272,089

Effect of dilutive securities:

Employee stock options and stock purchase plan

24,025

20,625

23,222

20,713

Warrants to purchase common stock

638

615

596

595

Potential dilutive common shares

24,663

21,240

23,818

21,308

Denominator for diluted earnings per share - weighted average common shares outstanding plus assumed conversions

307,175

296,205

304,317

293,397

Basic earnings per share

$
0.51

$
0.25

$
0.36

$
0.18

Diluted earnings per share

$
0.46

$
0.23

$
0.33

$
0.17

	Three months ended September 30,					Six months ended September 30,
	2007		2006			2007		2006
Numerator:
Numerator for basic and diluted earnings (loss) per share – income (loss) available to common shareholders	$	698	$	(24,302	)	$	28,524	$	(42,611	)

Denominator:
Denominator for basic earnings (loss) per share - weighted-average common shares outstanding	287,315		280,627			285,450		279,487

Effect of dilutive securities:
Employee stock options, employee stock purchase plans, and restricted stock units	23,223		—			23,709		—
Warrants to purchase common stock and other dilutive common stock equivalents	2,725		—			3,351		—
Potential dilutive common shares	25,948		—			27,060		—

Denominator for diluted earnings (loss) per share – weighted-average common shares outstanding assuming dilution	313,263		280,627			312,510		279,487

Basic earnings (loss) per share	$	0.00	$	(0.09	)	$	0.10	$	(0.15	)

Diluted earnings (loss) per share	$	0.00	$	(0.09	)	$	0.09	$	(0.15	)

Options and restricted stock units to purchase ~~6,686,899~~7.0 million and 34.5 million shares of our common stock ~~at exercise prices ranging from $11.68 to $17.21 and options to purchase 9,610,059 shares of common stock at exercise prices ranging from $8.73 to $17.21 were outstanding~~ for the three ~~and nine~~ months ended ~~December 31,~~September 30, 2007 and 2006, respectively, ~~but~~ were not included in the ~~calculation~~calculations of diluted earnings per share because their effect would be antidilutive.

Options and restricted stock units to purchase ~~1,655,812~~4.1 million and 34.0 million shares of our common stock ~~at exercise prices ranging from $14.27 to $17.21 and options to purchase 632,103 shares of common stock at exercise prices ranging from $3.38 to $17.21 were outstanding~~ for the ~~three and nine~~six months ended ~~December 31, 2005,~~September 30, 2007 and 2006, respectively, ~~but~~ were not included in the ~~calculation~~calculations of diluted earnings per share because their effect would be antidilutive.

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
~~For the Three and Nine Months ended December 31, 2006~~

(Unaudited)

~~14.~~12. Commitments and Contingencies

Credit Facilities

We have revolving credit facilities with our Centresoft ~~distribution~~ subsidiary located in the UK (the “UK Facility”) and our NBG ~~distribution~~ subsidiary located in Germany (the “German Facility”). ~~As of December 31, 2006, the~~The UK Facility provided Centresoft with the ability to borrow up to GBP 12.0 million ~~(approximately $23.5~~($24.5 million), including issuing letters of credit, on a revolving basis (including the issuance of letters of credit on its behalf). Furthermore, under the UK Facility, Centresoft provided a GBP 0.6 million (approximately $1.2 million) guarantee for the benefit of our CD Contact distribution subsidiary as of ~~December 31, 2006.~~September 30, 2007. The UK Facility bore interest at LIBOR plus 2.0% as of ~~December 31, 2006,~~September 30, 2007, is collateralized by substantially all of the assets of the subsidiary and expires in January ~~2007.~~2008. The UK Facility also contains various covenants that require the subsidiary to maintain specified financial ratios related to, among others, fixed charges. ~~As of December 31, 2006, we were in compliance with these covenants. No borrowings were outstanding against the UK Facility as of December 31, 2006. As of December 31, 2006, the~~The German Facility provided for revolving loans up to EUR 0.5 million ~~(approximately $0.7~~($0.7 million) ~~and~~as of September 30, 2007, bore interest at a Eurocurrency rate plus 2.5%~~. The German Facility~~, is collateralized by certain of the subsidiary’s property and equipment and has no expiration date. No borrowings were outstanding against the UK Facility and the German Facility as of ~~December 31, 2006.~~September 30, 2007.

As of ~~December 31, 2006,~~September 30, 2007, we maintained a ~~$7.5~~$40.0 million irrevocable standby letter of credit. The standby letter of credit ~~so that we can~~is required by one of our inventory manufacturers to qualify for ~~certain~~ payment terms on our ~~purchases from one of our~~ inventory ~~manufacturers.~~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 ~~that~~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 ~~December 31, 2006,~~September 30, 2007, the $40.0 million deposit ~~in the amount of $7.5 million~~ is included in short-term investments as restricted cash. AsNo borrowings were outstanding as of ~~December 31, 2006, we had no borrowings outstanding against this letter of credit.~~September 30, 2007.

As of ~~December 31, 2006,~~September 30, 2007, our publishing subsidiary located in the UK maintained a EUR 4.0 million ~~(approximately $5.3~~($5.7 million) irrevocable standby letter of credit. The standby letter of credit ~~so that it can qualify for certain payment terms on purchases from~~is required by one of our inventory ~~manufacturers.~~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~~February 2008. No borrowings were outstanding as of September 30, 2007. ~~As of December 31, 2006, we had no borrowing outstanding against this letter of credit.~~

~~ACTIVISION, INC. AND SUBSIDIARIES~~
~~Notes to Consolidated Financial Statements~~
~~For the Three and Nine Months ended December 31, 2006~~
~~(Unaudited)~~

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, and for the rights to intellectual property. Under these agreements, we commit to provide specified payments to a lessor, developer or intellectual property holder, as the case may be, based upon contractual arrangements. The payments to third-party developers are generally conditioned upon the achievement by the developers of contractually specified development milestones. Further, 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. Assuming all contractual provisions are met, the total future minimum commitments for these and other contractual arrangements in place as of ~~December 31, 2006,~~September 30, 2007, are scheduled to be paid as follows (amounts in thousands):

ACTIVISION, INC. AND SUBSIDIARIES

Contractual Obligations

Facility and

Developer

Equipment Leases

and IP

Marketing

Total

Fiscal year ending March 31,

2007 (remaining three months)

$
3,456

$
37,962

$
25

$
41,443

2008

14,069

29,340

40,468

83,877

2009

13,033

28,036

26,496

67,565

2010

11,997

29,586

100

41,683

2011

9,754

30,586

100

40,440

Thereafter

22,959

64,173

—

87,132

Total

$
75,268

$
219,683

$
67,189

$
362,140

Notes to Consolidated Financial Statements

(Unaudited)

	Contractual Obligations(1)
	Facility and		Developer
	Equipment Leases		and IP		Marketing		Total
Fiscal year ending March 31,

2008 (remaining six months)	$	9,268	$	29,080	$	8,741	$	47,089
2009	19,265		55,572		46,015		120,852
2010	17,454		23,036		11,100		51,590
2011	15,045		30,586		13,100		58,731
2012	10,772		16,586		—		27,358
Thereafter	41,879		47,587		—		89,466

Total	$	113,683	$	202,447	$	78,956	$	395,086

(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, the Company had $65.5 million of unrecognized tax benefits.

Compensation Guarantee

In June 2005, we entered into an employment agreement with the President and Chief Executive Officer of Activision Publishing, Inc., a wholly owned subsidiary of the Company and the Company's principal operating subsidiary, containing a guarantee related to his total compensation. The agreement guarantees that, if on May 15, 2010 his total compensation and any severance payments received by him 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~~and consists 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” 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’ equity.

Legal Proceedings

The following describes the material legal proceedings, examinations and other matters in which the Company and its subsidiaries are involved that: (1) were pending as of December 31, 2006; (2) were terminated during the period from December 31, 2006 through June 7, 2007; or (3) are pending as of June 7, 2007. Thus, the description of a matter may include developments that occurred since December 31, 2006, as well as those that occurred during 2006. The matters include legal proceedings relating to the restatement of our consolidated financial statements, such as class action securities lawsuits, shareholder derivative actions and governmental proceedings.

~~ACTIVISION, INC. AND SUBSIDIARIES~~
~~Notes to Consolidated Financial Statements~~
~~For the Three and Nine Months ended December 31, 2006~~
~~(Unaudited)~~

In July 2006, individuals and/or entities claiming to be stockholders of the Company ~~have~~ filed derivative lawsuits, purportedly on behalf of the Company, against certain current and former members of the Company’s Board of Directors as well as several current and former officers of the Company. Three derivative actions have been filed in Los Angeles Superior Court: Vazquez v. Kotick, et ~~al.~~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.). Two 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). 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’s issuance of stock options. Plaintiffs seek various relief on 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

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

expects that defense expenses associated with the matters will be covered by its directors and officers insurance, subject to the terms and conditions of the applicable policies.

On May 24, 2007, the Superior Court granted the Company’s motion to stay the state action. The court’s order stays the action pending the resolution of motions to dismiss in the federal action, but is without prejudice to any party’s right to seek modification of the stay upon a showing of good cause, including a showing that matters may be addressed in the Superior Court without the potential for conflict with or duplication of the federal court proceedings. On July 13, 2007, Plaintiffs filed their second amended complaint, which alleges substantially the same claims as the previous complaints, with new allegations related to Plaintiffs’ standing, recent public facts and additional analyses. The parties are briefing the threshold issues and a hearing on them is scheduled for November 7, 2007.

The Company filed motions to dismiss in the federal action on June 1, ~~2007, which will be fully briefed by August 15,~~ 2007. A hearing on the motions has been continued to December 3, 2007.

The Company was also ~~was~~ informed that, on June 1, 2007, a derivative case, Abdelnur vs. Kotick et al., was filed in the United States District Court for the Central District of California, C.D. Case No. CV07-3575 AHM (PJWx), by the same law firm that previously filed the Hamian case, alleging substantially the same claims. The action has now been consolidated with the existing federal consolidated action and the motions to dismiss filed June 1, 2007 have been deemed to have also been filed in response to the Abdelnurcomplaint.

On July ~~27,~~18, 2007, the Company was informed that another derivative case, Scarborough v. Kotick et al., was filed in the United States District Court for the Central District of California, Case No. CV07-4602 SVW (PLAx), also by the same law firm that previously filed the Hamian case, alleging substantially the same claims. This action has been consolidated with the federal consolidated case. The parties attended a mediation related to the consolidated federal case on November 1, 2007.

On July 24, 2006, the Company received a letter of informal inquiry from the SEC requesting certain documents and information relating to the Company’s historical stock option grant practices. ~~In early June 2007,~~Thereafter, the SEC ~~informed us that the SEC has~~ issued a formal order of non-public investigation, pursuant to which ~~allows~~it has subpoenaed documents from the ~~SEC, among other things,~~Company related to ~~subpoena witnesses~~the investigation, and ~~require~~has subpoenaed testimony and documents from certain current and former directors, officers and employees of the ~~production of documents.~~ Company.

The Company is cooperating with the SEC’s investigation, and representatives of the ~~Special Subcommittee~~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 staff of the SEC on several occasions, in person and by telephone (as has the Company’s outside legal counsel), to discuss the progress of the Special Subcommittee’s investigation and ~~on February 28, 2007~~ to brief the SEC staff on the Special Subcommittee’s findings and ~~recommendations following the substantial completion of the Special Subcommittee’s investigation.~~recommendations. A representative of the U.S. Department of Justice has attended certain of these meetings and requested copies of certain documents that we have provided to the staff of the SEC. At this time, the Company has not received any grand jury subpoenas or written requests from the Department of Justice.

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.

~~15.~~ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

13. ~~Stock~~Stock-Based Compensation and Employee Benefit Plans

~~We have a stock-based compensation program that provides~~

Equity Incentive Plans

On 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. 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 employee~~to create equity ~~incentives. This~~incentives, our equity-based compensation program ~~includes incentive and non-statutory~~currently primarily utilizes a combination of options, restricted stock ~~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 date~~schedules, 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. Under the terms of the 2007 Plan, the exercise price for the options, must be equal to or greater than the closing price per share of our common stock on the date ~~with some options containing performance clauses which would accelerate~~ the ~~vesting into earlier annual periods. Additionally,~~award is granted, as reported on the NASDAQ.

Upon the effective date of the 2007 Plan, we ~~have~~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 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 ~~Employee Stock Purchase Plan (“ESPP”) that allows employees to purchase~~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 ~~85%~~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 ~~fair market value at either the date of enrollment~~award or the ~~date~~actual or constructive transfer to the Company of ~~purchase, whichever is lower. Shares issued as a~~

~~ACTIVISION, INC. AND SUBSIDIARIES~~
~~Notes~~shares already owned, the number of shares equal to ~~Consolidated Financial Statements~~
~~For~~ the ~~Three and Nine Months ended December 31, 2006~~
~~(Unaudited)~~

~~result of stock option exercises and our ESPP are generally issued as new stock issuances.~~withheld or transferred shares. As of ~~December 31, 2006,~~September 30, 2007, we had approximately ~~14.5~~17.7 million shares of our 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”~~2007 Plan. Shares issued in ~~the form of non-qualified stock options, incentive stock options (“ISOs”), stock appreciation rights (“SARs”), restricted stock~~connection with 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~~made under the ~~1991~~2007 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 Planare generally issued as ~~of December 31, 2006.~~new stock issuances.

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 50,000 shares remaining available for grant under the 1998 Plan as of December 31, 2006.

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 39,400 shares remaining available for grant under the 1999 Plan as of December 31, 2006.

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 562,300 shares remaining available for grant under the 2001 Plan as of December 31, 2006.

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 274,400 shares remaining available for grant under the 2002 Plan as of December 31, 2006.

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 number25

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
~~For the Three~~

(Unaudited)

Restricted Stock Units and ~~Nine Months ended December 31, 2006~~
~~(Unaudited)~~Restricted Stock

~~of shares of common~~

We grant restricted 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 December 31, 2006.

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 optionsunits and restricted stock ~~awards~~(collectively referred 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 commonas “restricted stock ~~available for distribution~~rights”) under the ~~2002 Studio Plan is 6,000,000. There were approximately 4,200~~2007 Plans to employees around the world. Restricted stock units entitle the holders thereof to receive shares ~~remaining available for grant under the 2002 Studio Plan as of December 31, 2006.~~

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 8,756,700 shares remaining available for grant under the 2003 Plan as of December 31, 2006.

Under the terms of the plans, the exercise price for Awards issued under the 1991 Plan, 1998 Plan, 1999 Plan, 2001 Plan, 2002 Plan, 2002 Executive Plan, 2002 Studio Plan, and 2003 Plan (collectively, the “Plans”) is determined at the discretion of the Board of Directors (or the Compensation Committee of the Board of Directors, which administers the Plans), and under the terms of the plans, the exercise price for ISOs is not to be less than the fair market value of our common stock at the end of a specified period of time. Restricted stock is issued and outstanding upon grant; however, restricted stock holders are restricted from selling the shares until they vest. Upon vesting of 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 holders’ continued employment with us. If the vesting conditions are not met, unvested restricted stock rights will be forfeited.

During the first quarter of fiscal 2008, we issued restricted stock rights of 8,000 shares to an employee with a total grant date fair value of $163,000. During the second quarter of fiscal 2008, we issued restricted stock rights of 75,333 shares to employees with a total grant ~~and in the case~~date fair value of ~~non-qualified options, the exercise price must exceed or be equal to 85%~~$1,513,000. The value of the ~~fair~~shares is based on the closing market value of our common stock at the date of grant. Options typically become exercisable in installments over a period of three to five years and must be exercised within 10 years of the date of grant. We have recently determined that, for the reasons described in Note 2, certain Awards issued in certain past periods were issued with exercise prices below the fair market valueprice of our common stock on the date of grant. In accordance with SFAS No. 123R, we will recognize compensation expense and increase additional paid in capital related to restricted stock rights over the requisite service period. For the three and six months ended September 30, 2007, we recorded expenses related to total restricted stock rights of approximately $548,000 and $879,000, respectively. For the three and six months ended September 30, 2006, we recorded expenses related to total restricted stock rights of approximately $175,000 and $350,000, respectively. Since the issuance dates, ~~that~~ we have ~~determined~~recognized $2.3 million of the $6.4 million total fair value, with the remainder to be ~~the correct grant and measurement dates for those Awards.~~recognized over a weighted-average period of 1.72 years.

~~Other~~Non-Plan Employee Stock Options

In connection with prior employment agreements between Activision and Robert A. Kotick, Activision’s Chairman and Chief Executive Officer, and Brian G. Kelly, Activision’s 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~~As of September 30, 2007, options to ~~such grants, as of December 31, 2006,~~purchase approximately 8,304,800 ~~options~~shares under such grants were outstanding with a ~~weighted average~~weighted-average exercise price of $1.74.

We additionally have approximately 9,500 options outstanding to employees as of December 31, 2006, 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 the~~Activision, 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 eligible employees during two six-month offering periods that commence each April 1 and October 1 (the

~~ACTIVISION, INC. AND SUBSIDIARIES~~
~~Notes to Consolidated Financial Statements~~
~~For the Three and Nine Months ended December 31, 2006~~
~~(Unaudited)~~

~~“Offering~~ “Offering Period”). Common stock is purchased by the ~~Amended 2002 Purchase Plans~~ESPP participants at a price per share generally equal to 85% of the lower of the fair market value of ~~the~~our common stock on the first day of the Offering Period and the fair market value of ~~the~~our 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 ~~September 30, 2006, the most recent purchase date,~~June 13, 2007, employees purchased ~~178,638~~228,242 shares of our common stock at a purchase price of ~~$11.7215~~$12.835 per share. On September 28, 2007, the most recent purchase date, employees purchased 126,008 shares of our common stock at a purchase price of $16.099 per share. As of September 30, 2007, we had approximately 1.2 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.

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 ~~their~~the fair market value of our common stock at the date of grant. No third-party warrants were granted during the quarters or six months ended ~~December 31, 2006~~September 30, 2007 and ~~2005.~~2006. As of ~~December 31,~~September 30, 2007 and 2006, ~~and 2005,~~respectively, third-party warrants to purchase 919,800 and 936,000 shares of our common stock were outstanding with a ~~weighted average~~weighted-average exercise price of $4.59 and $4.54 per ~~share.~~share, respectively.

In accordance with EITF 96-18, 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. ~~For the quarter ended December~~As of March 31, 2006, ~~and 2005, there was no amortization related to~~capitalized amounts of third-party warrants ~~and no remaining unamortized expense.~~had been fully amortized.

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, ~~and~~up 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 ~~$293,600~~$278,020 and ~~$1,037,800~~$867,600 during the three and ~~nine~~six months ended ~~December 31, 2006,~~September 30, 2007, respectively. Our matching contributions to the plan were approximately ~~$342,400~~$284,500 and ~~$918,400~~$744,200 during the three and ~~nine~~six months ended ~~December 31, 2005,~~September 30, 2006, respectively.

~~Restricted Stock~~

~~ACTIVISION, INC. AND SUBSIDIARIES~~
~~Notes to Consolidated Financial Statements~~
~~For the Three and Nine Months ended December 31, 2006~~
~~(Unaudited)~~

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 three and nine months ended December 31, 2006, we recorded expenses related to these shares of approximately $292,000 and $642,000, respectively, which was included as a component of share-based compensation expense within “General and administrative” on the accompanying Consolidated Statements of Operations. Since the issuance dates, we have recognized $1.1 million of the $4.8 million total fair value, with the remainder to be recognized over a weighted-average period of 3.12 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 three and nine months ended December 31, 2006 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 following table sets forth the total stock-based compensation expense resulting from stock options, restricted stock ~~awards,~~rights, and ~~the~~ ESPP included in our Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2007 and 2006 (in thousands) ~~in accordance with SFAS 123R:~~:

Three Months Ended
December 31, 2006

Nine Months Ended
December 31, 2006

Cost of sales - software royalties and amortization

$
1,836

$
1,872

Product development

1,394

4,064

Sales and marketing

1,559

3,488

General and administrative

2,904

9,009

Stock-based compensation expense before income taxes

7,693

18,433

Income tax benefit

(3,008
)
(7,207
)

Total stock-based compensation expense after income taxes

$
4,685

$
11,226

	Three Months Ended September 30, 2007			Six Months Ended September 30, 2007
Cost of sales - software royalties and amortization	$	248		$	2,093
Product development	2,414			3,921
Sales and marketing	1,868			3,639
General and administrative	2,339			5,376

Stock-based compensation expense before income taxes	6,869			15,029
Income tax benefit	(2,686		)	(5,876		)

Total stock-based compensation expense after income taxes	$	4,183		$	9,153

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
~~For the Three and Nine Months ended December 31, 2006~~

(Unaudited)

	Three Months Ended September 30, 2006			Six Months Ended September 30, 2006
Cost of sales - software royalties and amortization	$	—		$	36
Product development	991			2,670
Sales and marketing	889			1,929
General and administrative	3,011			6,105

Stock-based compensation expense before income taxes	4,891			10,740
Income tax benefit	(1,912		)	(4,199		)

Total stock-based compensation expense after income taxes	$	2,979		$	6,541

Additionally, stock option expenses are capitalized in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed” as discussed in Note 1. For the three months ended December 31, 2006 stock-based compensation costs in the amount of $2.3 million were capitalized and $1.8 million of capitalized stock-based compensation costs were amortized. The following table summarizes stock option expense included in our Consolidated Balance Sheets as a component of software development (in thousands):

Software
Development

Balance, March 31, 2006

$
—

Stock based compensation expense capitalized during period

6,868

Amortization of capitalized stock-based compensation expense

(1,872
)
Balance, December 31, 2006

$
4,996

	Software Development
Balance, March 31, 2007	$	6,566
Stock-based compensation expense capitalized during period	8,141
Amortization of capitalized stock-based compensation expense	(2,093		)
Balance, September 30, 2007	$	12,614

Net cash proceeds from the exercise of stock options were ~~$7.0~~$19.1 million and ~~$19.0~~$30.3 million for the three and ~~nine~~six months ended ~~December 31, 2006,~~September 30, 2007, respectively. Net cash proceeds from the exercise of stock options were ~~$10.5~~$7.1 million and ~~$37.9~~$11.9 million for the three and ~~nine~~six months ended ~~December 31, 2005, respectively. Income tax benefit from stock option exercises was $5.5 million and $11.4 million for the three and nine months ended December 31,~~September 30, 2006, respectively. Income tax benefit from stock option exercises was ~~$9.7~~$8.8 million and ~~$21.3~~$9.2 million for the three and ~~nine~~six months ended ~~December 31, 2005,~~September 30, 2007, respectively. Income tax benefit from stock option exercises was $3.1 million and $5.9 million for the three and six months ended September 30, 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 123R, we applied SFAS 123, amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (SFAS 148), which allowed companies to apply the existing accounting rules under APB 25 and related Interpretations. As a result of our options investigation, we determined that there were options granted where the exercise price was set at a price lower than the market price on the actual date of grant. According to APB 25, a non-cash stock-based compensation expense should be 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 to be amortized over the vesting period of the associated option. As such, we have restated prior periods (see Note 2 to the Consolidated Financial Statements) to properly account for these options. As required by SFAS 148 prior to the adoption of SFAS 123R, we provided pro forma net income (loss) and pro forma net income (loss) per common share disclosures for stock-based awards, as if the fair-value-based method defined in SFAS 123 had been applied.

~~ACTIVISION, INC. AND SUBSIDIARIES~~
~~Notes to Consolidated Financial Statements~~
~~For the Three and Nine Months ended December 31, 2006~~
~~(Unaudited)~~

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 123 to stock-based compensation during the three and nine months ended December 31, 2005 (in thousands, except per share amounts):

Three Months Ended
December 31, 2005

Nine Months Ended
December 31, 2005

As restated

As restated

Net income, as reported

$
67,856

$
49,379

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

72

1,695

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

(4,222
)
(12,188
)

Pro forma net income

$
63,706

$
38,886

Earnings per share

Basic - as reported

$
0.25

$
0.18

Basic - pro forma

$
0.23

$
0.14

Diluted - as reported

$
0.23

$
0.17

Diluted - pro forma

$
0.22

$
0.13

In addition, included in net income, as reported, is $175,000 and $292,000 for the three and nine months ended December 31, 2005, respectively, related to 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 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’s contractual term.

Consistent with SFAS No. 123R, ~~we have attempted to reflect~~data input into our model reflects expected future changes ~~in model inputs~~ during the option’s contractual term. The inputs required by our ~~binomial-lattice~~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’ forfeiture, exercise, and post-vesting termination behavior. Statistical methods were used to estimate ~~employee type~~termination rates for specific ~~termination rates.~~types of employees. These termination rates, in turn, were used to model the number of options that are expected to vest and post-vesting

~~ACTIVISION, INC. AND SUBSIDIARIES~~
~~Notes to Consolidated Financial Statements~~
~~For the Three and Nine Months ended December 31, 2006~~
~~(Unaudited)~~

termination behavior. ~~Employee type specific~~Employee-type-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

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

that time period. These 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 three months ended ~~December 31,~~September 30, 2007 and 2006 was $8.16 and ~~2005 was $7.44 and $6.38~~$5.66 per share, respectively, using the binomial-lattice model with the following weighted-average assumptions:

Employee and Director Options
and Warrants

Employee Stock
Purchase Plan

Three Months Ended

Three Months Ended

December
31, 2006

December
31, 2005

December
31, 2006

December
31, 2005

Expected term (in years)

5.76

4.97

0.5

0.5

Risk-free interest rate

4.70
%
4.64
%
4.74
%
4.08
%
Volatility

53.10
%
49.02
%
44.34
%
43.02
%
Dividend yield

—

—

—

—

Weighted-average fair value at grant date

$
7.44

$
6.38
(1)
$
3.89

$
4.04

													Employee and Director Options and Warrants						Employee Stock Purchase Plan
	Nine Months Ended						Nine Months Ended						Three Months Ended						Three Months Ended
	December 31, 2006			December 31, 2005			December 31, 2006			December 31, 2005			September 30, 2007			September 30, 2006			September 30, 2007			September 30, 2006
Expected term (in years)	4.80			4.79			0.5			0.5			5.41			5.67			0.5			0.5
Risk-free interest rate	5.00		%	4.63		%	4.74		%	4.08		%	4.81		%	5.00		%	5.07		%	4.68		%
Volatility	54.19		%	46.96		%	44.34		%	43.02		%	50.83		%	54.60		%	34.58		%	41.40		%
Dividend yield	—			—			—			—			—			—			—			—
Weighted-average fair value at grant date	$	5.68		$	5.06	(1)	$	3.89		$	4.04		$	8.16		$	5.66		$	4.58		$	3.55

													Six Months Ended						Six Months Ended
													September 30, 2007			September 30, 2006			September 30, 2007			September 30, 2006
Expected term (in years)													5.43			4.67			0.5			0.5
Risk-free interest rate													4.81		%	5.04		%	5.07		%	4.68		%
Volatility													50.90		%	54.33		%	34.58		%	41.40		%
Dividend yield													—			—			—			—
Weighted-average fair value at grant date													$	8.26		$	5.44		$	4.58		$	3.55

~~(1) As restated.~~

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 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’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 three months ended September 30, 2007, the expected stock price volatility ranged from 45.56% to 51.95%, with a weighted-average volatility of 50.83% for options granted during the quarter ended ~~December 31,~~September 30, 2007. For options granted during the three months ended September 30, 2006, the expected stock price volatility ranged from ~~44.20%~~50.70% to ~~56.10%~~55.84%, with a ~~weighted average~~weighted-average volatility of ~~53.10%~~54.60% for ~~options granted during the quarter ended December 31, 2006. For~~ options granted during the three months ended ~~December 31, 2005, the expected stock price volatility ranged from 37% to 64%, with a weighted average volatility of 49%.~~September 30, 2006.

As iswas the case for volatility, the risk-free rate is assumed to change during the option’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”) as opposed to the interest rate from the grant date to the given time period (“spot 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.

~~ACTIVISION, INC. AND SUBSIDIARIES~~
~~Notes to Consolidated Financial Statements~~
~~For the Three and Nine Months ended December 31, 2006~~
~~(Unaudited)~~

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

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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’s expiration 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’ exercise and termination behavior.

~~As stock-based~~

Stock-based compensation expense recognized in the Consolidated Statement of Operations ~~for the three and nine months ended December 31, 2006~~ 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. ~~Forfeitures were estimated based on historical experience.~~

Accuracy of Fair Value Estimates

The Company uses third-party analyses to assist in developing the assumptions used in the ~~binomial-lattice~~binomial lattice model, including model inputs and measures of 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 107 using an option-pricing model, the estimates that are produced by this model may not 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.

~~ACTIVISION, INC. AND SUBSIDIARIES~~
~~Notes to Consolidated Financial Statements~~
~~For the Three and Nine Months ended December 31, 2006~~
~~(Unaudited)~~

Stock option activity for the ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 is as follows (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	8,270		18.92
Exercised	(3,682	)	6.88
Forfeited	(1,174	)	10.75

Outstanding at September 30, 2007	52,843		$	9.03	6.08	$	663,699

Exercisable at September 30, 2007	32,346		$	5.27	4.45	$	527,808

Shares

Weighted-
Average
Exercise Price

Weighted-
Average
Remaining
Contractual
Term

Aggregate
Intrinsic Value

Outstanding at March 31, 2006

48,337

$
6.20

Granted

5,796

13.57

Exercised

(3,353
)
5.03

Forfeiture

(1,650
)
8.21

Outstanding at December 31, 2006

49,130

$
7.08

6.18

$
497,692

Exercisable at December 31, 2006

30,402

$
4.45

4.85

$
368,064

ACTIVISION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 our ~~third~~second quarter of fiscal ~~2007~~2008 and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options on ~~December 31, 2006.~~September 30, 2007. This amount changes based on the fair market value of our common stock. Total intrinsic value of options ~~actually~~ exercised ~~was $15.3~~is $34.3 million and ~~$32.0~~$46.4 million for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2007, respectively. Total intrinsic value of options exercised is $9.0 million and $16.7 million for the three and six months ended September 30, 2006, respectively.

As of ~~December 31, 2006, $38.3~~September 30, 2007, $69.7 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of ~~1.64~~1.8 years.

~~ACTIVISION, INC. AND SUBSIDIARIES~~
~~Notes~~

On June 8, 2007, with respect to ~~Consolidated Financial Statements~~
~~For~~unexercised options subject to Section 409A of the ~~Three~~Internal Revenue Code held by employees who are not executive officers, Activision commenced an offer to amend the exercise price of these options to eliminate the grantee’s Section 409A tax liability consistent with Internal Revenue Service guidance. Pursuant to the offer, which closed on July 6, 2007, the Company will make a cash payment in January 2008 to employees who have accepted the offer, totaling approximately $4.1 million, which represents the difference between the original exercise price of each amended option and ~~Nine Months ended December 31, 2006~~
~~(Unaudited)~~

the amended exercise price of each amended option. The ~~following table summarizes information about~~offer with respect to all ~~employee and director stock~~eligible options ~~outstanding~~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 million, created as a result of ~~December 31, 2006 (share amounts in thousands):~~cash payments that become payable pursuant to the terms of the offer, was recognized as compensation expense at the expiration of the offer period on July 6, 2007.

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

3.36

$
1.05

665

$
1.05

$1.72 to $1.75

8,202

2.22

1.75

8,202

1.75

$1.76 to $3.52

5,357

5.33

3.34

4,699

3.34

$3.54 to $5.00

5,712

5.99

4.04

5,099

4.07

$5.08 to $5.74

4,959

5.61

5.72

4,292

5.72

$5.79 to $7.73

6,607

6.21

7.12

5,800

7.09

$7.75 to $11.10

5,535

7.86

9.78

861

8.80

$11.15 to $13.08

4,930

8.57

12.31

476

12.02

$13.13 to $14.33

4,935

9.25

13.65

61

13.90

$14.37 to $17.21

2,228

9.08

15.36

247

15.49

49,130

6.18

$
7.08

30,402

$
4.45

~~16.~~14. Impact of Recently Issued Accounting Standards ~~and Laws~~

~~On February 16, 2006, the FASB issued Statement No. 155 (“SFAS No. 155”),~~ ~~Accounting for Certain Hybrid Financial Instruments – An amendment of FASB Statements No. 133 and 140.~~ ~~SFAS No. 155 amends FASB Statements No. 133,~~ ~~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 Beneficial Interests in Securitized Financial Assets.” 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. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We do not expect that the adoption of SFAS No. 155 will have a material effect on our financial position or results of operations.

~~On March 17, 2006,~~ ~~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;

~~ACTIVISION, INC. AND SUBSIDIARIES~~
~~Notes to Consolidated Financial Statements~~
~~For the Three and Nine Months ended December 31, 2006~~
~~(Unaudited)~~

~~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 that the adoption of SFAS No. 156 will have a material effect on our financial position or results of operations.

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.

On September ~~20,~~ 2006, the FASB issued Statement No. 157 (“SFAS No. 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 ~~under~~to 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 the adoption of SFAS No. 157 will 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. We are currently evaluating the effect that the adoption of SAB 108 will have on our results of operations and financial position.

~~On September 29, 2006,~~February 2007, the FASB issued Statement No. ~~158,~~159, ~~Employers’ Accounting~~The Fair Value Option for ~~Defined Benefit Pension~~Financial Assets and ~~Other Postretirement Plans,~~Financial Liabilities — Including an amendment of FASB ~~Statements~~Statement No. ~~87, 88, 106, and 132(R)~~ 115(“ (“SFAS No. ~~158”~~159”). 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~~159 permits entities to ~~fully recognize~~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 ~~their~~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 adopt the ~~obligations associated~~fair value option of SFAS No. 159 and what impact the adoption will have on our Consolidated Financial Statements if we adopt.

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 Development”. EITF 07-03 addresses the diversity which exists with ~~single-employer defined benefit pension plans, retiree healthcare plans, and other postretirement plans. Specifically, it requires a company~~respect to ~~(1) recognize on its balance sheet an asset~~the accounting 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~~non-refundable portion of a ~~plan through comprehensive income~~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 ~~year in which the changes occur.~~effective date. We do not expect ~~that~~ the adoption of ~~SFAS No. 158 will~~EITF 07-03 to have ~~an effect~~a material impact on our ~~financial position or results of operations as we do not maintain any single-employer defined benefit pension plans, retiree healthcare plans, and other postretirement plans.~~Consolidated Financial Statements.

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

~~Stock Option Practices and Restatement of Consolidated Financial Statements~~

We recently completed a voluntary review of our historical stock option granting practices and a restatement of our consolidated financial statements as of and for the fiscal years ended March 31, 2006, 2005 and 2004 and related disclosures and a restatement of our selected consolidated financial data as of and for the fiscal years ended March 31, 2006, 2005, 2004, 2003 and 2002 and our unaudited quarterly financial data for each of the quarters in the fiscal years ended March 31, 2006 and 2005, and for the fiscal quarter ended June 30, 2006. The impacts of the restatement adjustments extend to periods from the fiscal year ended March 31, 1994 through the fiscal quarter ended June 30, 2006.

The restatement reflected the findings of a special subcommittee of independent members of our Board of Directors, which was established in July 2006 to review our historical stock option granting practices (the “Special Subcommittee”). The Special Subcommittee conducted its investigation with the assistance of Munger Tolles & Olson LLP as its independent counsel and Deloitte & Touche USA LLP (“Deloitte”) as forensic accounting experts retained by counsel. The Special Subcommittee found that 3,450 of the option grants reviewed, covering 148,747,202 shares, required measurement date corrections. As a result, we recorded approximately $66.7 million in additional pre-tax ($45.4 million after-tax) non-cash stock-based compensation expense over the thirteen year period from April 1, 1993 through March 31, 2006 in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and $0.6 million in additional pre-tax non-cash stock-based compensation expense during the quarter ended June 30, 2006 in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment”. More than 80%, or $55.4 million of the $66.7 million, relates to periods through March 31, 2003 and 4% or $2.6 million of the non-cash pre-tax expense relates to the fiscal year ended March 31, 2006. Separately, the restatement reflected an additional $1.7 million pre-tax charge ($1.1 million after-tax) related to recently identified insufficient payroll tax withholdings in fiscal 2005.

For the three months
ended

For the nine months
ended

(in thousands)

December 31, 2005

December 31, 2005

Net income, as previously reported

$
67,945

$
51,118

Additional compensation expense resulting from improper measurement dates for stock option grants (1)

174

2,286

Tax related effects

(85
)
(547
)

Total effect on net income

89

1,739

Net income, as restated

$
67,856

$
49,379

~~(1) Also includes an immaterial amount of interest expense related to our $1.7 million charge for insufficient payroll tax withholdings in fiscal 2005.~~

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, which we market to a variety of consumer demographics. Our fiscal ~~2007~~2008 product portfolio includes titles such as ~~Over~~Guitar Hero II for the ~~Hedge, X-Men:~~Microsoft Xbox360, Spider-Man 3 The ~~Official~~ Game ~~Marvel: Ultimate Alliance, Tony Hawk’s Project 8, Tony Hawk’s Downhill Jam,~~(“Spider-Man 3”), Shrek the Third, TRANSFORMERS: The Game, Enemy Territory: Quake Wars, Call of Duty 3, 4: Modern Warfare, Tony Hawk’s Proving Ground, Bee Movie Game, Spider-Man: Friend or Foe, andGuitar Hero 2.III.

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” buyers. We currently offer our products primarily in versions that operate on the Sony PlayStation 2 (“PS2”), the Sony PlayStation 3 (“PS3”), the Nintendo ~~GameCube (“GameCube”), the Nintendo~~ Wii (“Wii”~~), the Microsoft Xbox (“Xbox”~~), and the Microsoft Xbox360 (“Xbox360”) console systems, the Nintendo Game Boy Advance (“GBA”), the Nintendo Dual Screen (“NDS”), and the Sony PlayStation Portable (“PSP”) hand-held devices, and the personal computer (“PC”). The installed base for the ~~current~~previous generation of hardware platforms (e.g., PS2, Microsoft Xbox) is significant and the fiscal 2006 release of the Xbox360 and the fiscal 2007 ~~third quarter~~ releases of the PS3 ~~in Japan and North America,~~ and the Wii will further expand the software market. During the third quarter of fiscal 2007, we had a successful and significant presence at the launches of the PS3 and the Wii with three launch titles for the PS3, Call of Duty 3, Marvel: Ultimate Alliance,and Tony Hawk’s Project 8,and five launch titles for 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.In the first quarter of fiscal 2008, we had strong releases of Guitar Hero II for the Xbox360, and multi platform releases of Spider-Man 3, Shrek the Third, and TRANSFORMERS: The Game in North America. In the second quarter of fiscal 2008, we continued the strong momentum of Guitar Hero II and released Guitar Hero: Rocks the 80s for the PS2. Further, we released TRANSFORMERS: The Game in Europe in the second quarter of fiscal 2008. Our plan is to continue to build on ~~our~~a significant ~~launch~~ presence on the PS3, Wii, and Xbox360 (“the next-generation platforms”) by continuing to expand the number of titles released on the next generation and hand-held platforms while continuing to market to ~~current-generation platforms~~the PS2 platform as long as economically attractive given their 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~~third-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”), Germany, France, Italy, Spain, the Netherlands, Sweden, Australia, ~~Scandinavia,~~ Canada, South Korea, and Japan. 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 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” 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,” products that are backed by strong brands and high quality development, for which we will provide significant marketing support.

Our fiscal ~~2007~~2008 releases ~~have included~~include well-established brands, 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 rights to develop and publish video games based on Marvel’s comic book ~~franchises~~and movie franchises; Spider-Man and X-Men. Through ~~December 31, 2006,~~September 30, 2007, games based on the Spider-Man and X-Men franchises have generated approximately ~~$850 million~~$1.0 billion in net revenues worldwide. Under this agreement, in the first quarter of fiscal 2007 we released the video game, X-Men: The Official Game, coinciding with the theatrical release of “X-Men: The Last Stand.” In the third quarter of fiscal 2007, we released Marvel: Ultimate Allianceacross multiple platformsand Spider-Man: Battle for New York on the NDS and GBA. In ~~addition, through our licensing agreement with~~ the first quarter of fiscal 2008 we released Spider-Man ~~Merchandising, LP, we developed and published video games~~3 based on Columbia Pictures/Marvel Entertainment, Inc.’s feature film “Spider-Man 3,” which was released in May ~~2007.~~ ~~We also have an~~2007 through our licensing agreement with Spider-Man Merchandising, LP. Our agreement with Spider-Man Merchandising, LP ~~for the~~grants us exclusive worldwide publishing rights to publish entertainment software products based on subsequent Spider-Man movie sequels or new television series through 2017.

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’s name and likeness. Through ~~December 31, 2006,~~September 30, 2007, we have released ~~nine~~eight successful titles in the Tony Hawk franchise with cumulative net revenues of $1.2 billion, including the two fiscal 2007 third quarter releases, Tony Hawk’s Project 8,which was released on the PSP, Xbox360, PS2, and PS3, and Tony Hawk’s Downhill Jamwhich 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 in 2007 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~~2008 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,~~ Tony Hawk’s Proving Ground~~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..

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 IIon 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 are also currently developing~~In the first quarter of fiscal 2008 we released Guitar Hero 2 IIfor the ~~Xbox360 and~~Xbox360. Additionally, further strengthening the Guitar Hero franchise, in the second quarter of fiscal 2008, we released our first expansion pack, Guitar Hero: Rocks the 80s on the PS2. We plan on continuing to build on this franchise by investing in future development of Guitar Hero titles across a variety of platforms. In September 2007, we acquired U.K.-based video game developer Bizarre Creations, a leader in the racing category. With more than 10 years experience in the racing genre, Bizarre Creations was the developer of the innovative multi-million unit selling franchise, Project Gotham Racing, a critically-acclaimed series for the Xbox and Xbox360. Bizarre Creations and its games have won numerous industry awards including: Best Racing Game for Project Gotham Racing 2 from the prestigious 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 for Project Gotham Racing 3; and IGN’s Best XBLA Game for Geometry Wars: Retro Evolved. Bizarre Creations will play role in our growth strategy as we develop 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., ~~Edge of Reality, Ltd.,~~ Splash Damage, Ltd., and ~~Traveller’s Tales.~~Next Level Games.

We will also continue to evaluate and exploit emerging brands that we believe have potential to become successful game franchises. For example, we have a multi-year, multi-property, publishing agreement

with DreamWorks Animation LLC that ~~grants~~granted us the exclusive rights to publish video games based on DreamWorks Animation SKG’s theatrical release “Shrek 2,” which was released in the first quarter of fiscal 2005, “Shark Tale,” which was released in the second quarter of fiscal 2005, “Madagascar,” which was released in the first quarter of fiscal 2006, “Over the Hedge,” which was released in the first quarter of fiscal 2007, “Shrek the Third” which was released in the first quarter of fiscal 2008, and all of their respective sequels. In addition, our multi-year agreement with DreamWorks Animation ~~SKG~~LLC also grants us the exclusive video game rights to ~~four~~the recently released The Bee Movie and three upcoming feature films, including Kung Fu Panda, Monsters vs Aliens as well as potential future films in the “Shrek” franchise beyond “Shrek the ~~“Shrek the Third.~~Third.”

Additionally, we have a strategic alliance with Harrah’s Entertainment, Inc. that grants us the exclusive, worldwide interactive rights to develop and publish “World Series of 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 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. Further, we released our third title under this alliance, World Series of Poker: Battle for the Bracelet in the second quarter of 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. We ~~anticipate releasing the~~had a strong initial release of our first game in late June 2007 concurrently with the early July 2007 movie release of the live action “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 entertainment games based on the James Bond license through 2014. In ~~May~~April 2006, we signed a multi-year agreement with Mattel, Inc. which grants us the exclusive worldwide distribution rights ~~to new~~for the catalog of video games ~~on all platforms~~ based on Mattel, Inc.’s Barbie ~~brand.~~ brand on all platforms. In the third quarter of fiscal ~~2006,~~2007, we distributed six Barbie titles: Barbie in the 12 Dancing Princesses, The Barbie Diaries: High School Mystery, Barbie Fashion Show, Barbie Horse Adventures: Mystery Ride, Barbie and the Magic of Pegasus,and Barbie 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.’s Barbie and Hot Wheels brands on all platforms. In the second quarter of fiscal 2008, we released Hot Wheels: Beat That!. In September 2006, we entered into a distribution agreement with MTV Networks Kids and Family Group’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,and Go, 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.

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 is discussed throughout Management’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 on the application of these and other accounting policies, see Note 1 to the Notes to Consolidated Financial Statements included in Item 1. The preparation of financial statements in conformity with ~~United States~~ 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 (the earliest date ~~that~~these products ~~are made widely available for sale~~may be sold by retailers). For these products we recognize revenue ~~no earlier than~~on 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, the company contemplates such when determining the appropriate revenue recognition. This evaluation is performed for each software product when it is released. We determined that one of our software titles released this quarter, 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 prior 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 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. As we move forward, we will monitor this developing functionality and its significance for our products. Our assessment of our obligations with respect to this functionality and the resulting accounting may change in the future.

With respect to online transactions, such as electronic downloads of titles or product add-ons, revenue is recognized when the fee is paid by the ~~on-line~~online customer to purchase ~~on-line~~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.~~

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.

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, console hardware life cycle, Activision 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’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 ~~December 31, 2006~~September 30, 2007 allowance for returns and price protection would impact net revenues by ~~$1.1~~$1.0 million.

demand for our products. Significant changes in demand for our products would impact management’s estimates in establishing our inventory provision.

Software Development Costs.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”) No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise 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. 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’s release, we expense, as part of “cost of 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 of sales — software royalties and amortization” based on the ratio of current revenues to total projected revenues, 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.

Intellectual Property Licenses. Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology, 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.

We evaluate the future recoverability of capitalized intellectual property licenses on a quarterly basis. The recoverability of capitalized intellectual property license costs is evaluated based on the expected performance of the specific products in which the licensed trademark or copyright is to be used. 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’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.

Stock-based Compensation ~~Expense.~~ Expense

On April 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based ~~Payment”~~Payment,” (“SFAS 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 related to the Employee Stock Purchase Plan based on estimated fair values. Stock-based compensation expense recognized under SFAS No. 123R for the three and ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 was ~~$7.7~~$6.9 million and ~~$18.4~~$15.0 million, ~~respectively. Stock-based compensation expense under Accounting Principles Board Opinion No. 25, “Accounting~~respectively and for ~~Stock Issued to Employees” (“APB 25”) related to employee stock options, restricted stock, and employee stock purchases recognized during~~ the three and ~~nine~~six months ended ~~December 31, 2005~~September 30, 2006 was ~~$322,000~~$4.9 million and ~~$2.5~~$10.7 million, respectively. See Note 1513 to the ~~Consolidated Financial Statements~~consolidated financial statements for additional information.

~~As of April 1, 2005, the~~

The Company ~~began estimating~~estimates 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 123. The fair value of a share-based payment as of the grant date estimated by an option pricing model depends upon our future stock price ~~and~~as well as assumptions concerning expected volatility, risk-free interest rate, and risk-adjusted stock return, as well as measures of employees’ forfeiture, exercise, and post-vesting termination behavior. Statistical methods were used to estimate employee type 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 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. These probabilities were 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 three ~~and nine~~

months ended ~~December 31, 2006~~September 30, 2007 was ~~$7.44 and $5.68~~$8.16 per share using the binomial-lattice model with the following weighted-average assumptions:

Three Months Ended
December 31, 2006

Nine Months Ended
December 31, 2006

Expected volatility

53.10
%
54.19
%
Risk-free interest rate

4.70
%
5.00
%
Expected dividends

—

—

	Three Months Ended September 30, 2007		Six Months Ended September 30, 2007
Expected volatility	50.83	%	50.90	%
Risk-free interest rate	4.81	%	4.81	%
Expected dividends	—		—

To estimate volatility for the binomial-lattice model, we use methods or capabilities that are discussed in SFAS No. 123R and Staff Accounting Bulletin No. ~~107.~~107 (“SAB 107”). These methods included the implied volatility method ~~which uses~~based upon the ~~market price of traded~~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’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 three months ended ~~December 31,~~September 30, 2007, the expected stock price volatility ranged from 45.56% to 51.95%, with a weighted-average volatility of 50.83% for options granted during the quarter ended September 30, 2007. For options granted during the three months ended September 30, 2006, the expected stock price volatility ranged from ~~44.20%~~50.70% to ~~56.10%~~55.84%, with a ~~weighted average~~weighted-average volatility of ~~53.10%. For~~54.60% for options granted during the three months ended ~~December 31, 2005, the expected stock price volatility ranged from 37% to 64%, with a weighted average volatility of 49%.~~September 30, 2006.

As was the 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 next (“forward rate”) as opposed to the interest rate from the grant date to the given time period (“spot rate”). Since we do not currently pay dividends and ~~are~~do not ~~expected~~currently expect 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, 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. The binomial-lattice model assumes that employees will exercise 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’s expiration date. The exact placement of the exercise boundary depends on all of the model inputs as well as the measures that were used to calibrate the model to estimated measures of employees’ exercise and termination behavior.

~~As stock-based~~

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.

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 total net revenues and also breaks down net revenues by territory, business segment and platform, as well as operating income (loss) by business segment as a percentage of segment net revenues (amounts in thousands):

Three Months Ended December 31,

Nine Months Ended December 31,

2006

2005

2006

2005

As restated

As restated

As restated

As restated

Net revenues

$
824,259

100
%
$
816,242

100
%
$
1,200,500

100
%
$
1,279,875

100
%

Costs and expenses:

Cost of sales — product costs

382,165

46

367,685

45

618,162

52

617,021

48

Cost of sales — software royalties and amortization

77,449

9

104,264

13

106,058

9

139,267

11

Cost of sales — intellectual property licenses

23,566

3

26,376

3

37,838

3

55,765

5

Product development

37,162

5

53,254

7

88,395

7

99,698

8

Sales and marketing

87,410

11

156,013

19

156,139

13

259,110

20

General and administrative

43,387

5

24,757

3

91,647

8

67,228

5

Total costs and expenses

651,139

79

732,349

90

1,098,239

92

1,238,089

97

Operating income

173,120

21

83,893

10

102,261

8

41,786

3

Investment income, net

9,724

1

9,162

1

26,031

2

22,840

2

Income before income tax provision

182,844

22

93,055

11

128,292

10

64,626

5

Income tax provision

40,024

5

25,199

3

28,083

2

15,247

1

Net income

$
142,820

17
%
$
67,856

8
%
$
100,209

8
%
$
49,379

4
%

Net Revenues by Territory:

North America

$
463,388

56
%
$
402,314

49
%
$
637,251

53
%
$
626,538

49
%
Europe

345,969

42

397,356

49

535,556

45

622,035

49

Other

14,902

2

16,572

2

27,693

2

31,302

2

Total net revenues

$
824,259

100
%
$
816,242

100
%
$
1,200,500

100
%
$
1,279,875

100
%

Net Revenues by Segment/Platform Mix Publishing:

Console

$
545,070

66
%
$
479,686

59
%
$
719,395

60
%
$
730,073

57
%
Hand-held

71,339

9

74,032

9

121,125

10

143,650

11

PC

33,388

4

113,782

14

69,443

6

154,735

12

Total publishing net revenues

649,797

79

667,500

82

909,963

76

1,028,458

80

Distribution:

Console

102,515

12

95,408

12

164,640

14

163,344

13

Hand-held

57,047

7

37,154

4

98,632

8

60,229

5

PC

14,900

2

16,180

2

27,265

2

27,844

2

Total distribution net revenues

174,462

21

148,742

18

290,537

24

251,417

20

Total net revenues

$
824,259

100
%
$
816,242

100
%
$
1,200,500

100
%
$
1,279,875

100
%

Operating Income by Segment and as a percentage of segment net revenues:

Publishing

$
160,628

25
%
$
65,534

10
%
$
92,503

10
%
$
21,932

2
%
Distribution

12,492

7

18,359

12

9,758

3

19,854

8

Total operating income

$
173,120

21
%
$
83,893

10
%
$
102,261

8
%
$
41,786

3
%

	Three Months Ended September 30,										Six Months Ended September 30,
	2007					2006					2007				2006

Net revenues	$	317,746		100	%	$	188,172		100	%	$	813,201	100	%	$	376,241		100	%

Costs and expenses:
Cost of sales – product costs	151,996			48		127,374			68		369,225		45		235,997			63
Cost of sales – software royalties and amortization	38,427			12		9,348			5		116,679		14		28,609			7
Cost of sales – intellectual property licenses	14,533			5		4,356			2		47,012		6		14,272			4
Product development	33,085			10		25,608			14		65,982		8		51,233			14
Sales and marketing	51,868			16		32,550			17		120,580		15		68,729			18
General and administrative	37,382			12		26,346			14		73,176		9		48,260			13

Total costs and expenses	327,291			103		225,582			120		792,654		97		447,100			119

Operating income (loss)	(9,545		)	(3	)	(37,410		)	(20	)	20,547		3		(70,859		)	(19	)

Investment income, net	12,132			4		8,032			4		23,694		3		16,307			5

Income (loss) before income tax provision (benefit)	2,587			1		(29,378		)	(16	)	44,241		6		(54,552		)	(14	)

Income tax provision (benefit)	1,889			1		(5,076		)	(3	)	15,717		2		(11,941		)	(3	)

Net income (loss)	$	698		0	%	$	(24,302	)	(13	)%	$	28,524	4	%	$	(42,611	)	(11	)%

Net Revenues by Territory:
North America	$	161,804		51	%	$	74,249		40	%	$	471,340	58	%	$	173,863		46	%
Europe	146,525			46		107,775			57		316,539		39		189,588			51
Other	9,417			3		6,148			3		25,322		3		12,790			3

Total net revenues	$	317,746		100	%	$	188,172		100	%	$	813,201	100	%	$	376,241		100	%

Net Revenues by Segment/Platform Mix Publishing:
Console	$	200,159		63	%	$	84,136		45	%	$	558,932	69	%	$	174,325		46	%
Hand-held	39,070			12		23,202			12		95,686		12		49,786			13
PC	14,530			5		18,066			10		28,363		3		36,055			10
Total publishing net revenues	253,759			80		125,404			67		682,981		84		260,166			69

Distribution:
Console	40,325			13		33,337			18		83,426		10		62,125			17
Hand-held	18,670			6		23,372			12		37,786		5		41,585			11
PC	4,992			1		6,059			3		9,008		1		12,365			3

Total distribution net revenues	63,987			20		62,768			33		130,220		16		116,075			31

Total net revenues	$	317,746		100	%	$	188,172		100	%	$	813,201	100	%	$	376,241		100	%

Operating Income (Loss) by Segment and as a Percentage of Total Net Revenues:
Publishing	$	(9,667	)	(3	)%	$	(36,607	)	(19	)%	$	19,449	3	%	$	(68,125	)	(18	)%
Distribution	122			0		(803		)	(1	)	1,098		0		(2,734		)	(1	)

Total operating income (loss)	$	(9,545	)	(3	)%	$	(37,410	)	(20	)%	$	20,547	3	%	$	(70,859	)	(19	)%

5040

Results of Operations —– Three and ~~Nine~~Six Months Ended ~~December 31,~~September 30, 2007 and 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 PS3, PS2, Xbox360, ~~Xbox, Wii,~~ and ~~GameCube)~~Wii), PCs, and hand-held game devices (such as the GBA, NDS, and PSP). We also derive revenue from our distribution business in Europe, which provides logistical and sales services to third-party publishers of interactive entertainment software, to our own publishing operations, and to 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 three months ended ~~December 31,~~September 30, 2007 and 2006 ~~and 2005~~ (in thousands):

Three Months Ended December 31,

Increase/

Percent

2006

2005

(Decrease)

Change

Publishing Net Revenues

North America

$
463,388

$
402,314

$
61,074

15
%
Europe

171,507

248,614

(77,107
)
(31
)%
Asia-Pacific

14,902

16,572

(1,670
)
(10
)%
Total international

186,409

265,186

(78,777
)
(30
)%
Total publishing net revenues

649,797

667,500

(17,703
)
(3
)%
Distribution net revenues

174,462

148,742

25,720

17
%
Consolidated net revenues

$
824,259

$
816,242

$
8,017

1
%

	Three Months Ended September 30,				Increase/		Percent
	2007		2006		(Decrease)		Change
Publishing Net Revenues
North America	$	161,804	$	74,249	$	87,555	118	%
Europe	82,538		45,007		37,531		83	%
Other	9,417		6,148		3,269		53	%
Total International	91,955		51,155		40,800		80	%
Total Publishing Net Revenues	253,759		125,404		128,355		102	%
Distribution Net Revenues	63,987		62,768		1,219		2	%
Consolidated Net Revenues	$	317,746	$	188,172	$	129,574	69	%

Consolidated net revenues increased 1%69% from ~~$816.2~~$188.2 million for the three months ended ~~December 31, 2005~~September 30, 2006 to ~~$824.3~~$317.7 million for the three months ended ~~December 31, 2006. This~~September 30, 2007.

Commencing with this fiscal quarter, we have determined that for one of our titles released this quarter, Enemy Territory: Quake Wars (which is primarily an online multiplayer PC game), that all of the net revenue from the sale of this title will be recognized on a deferred basis — straight-line over an estimated service period, which we estimate to be six months beginning in the month after shipment. As a result, $8.9 million of net revenues was not included for the three months ended September 30, 2007. We do not anticipate any material amounts to be deferred from fiscal year 2008 into fiscal year 2009. Further, we do not anticipate deferrals for any other titles in fiscal year 2008.

Overall, the increase of consolidated net revenues for the three months ended September 30, 2007, was primarily the result of the following:

·• ~~Strong performance~~Our total publishing net revenues increased by $128.4 million. This was primarily due to the worldwide release of ~~our~~Guitar Hero: Rocks the 80s for PS2, and the Europe release of TRANSFORMERS: The Game in the second quarter of fiscal 2008. Further, the continued momentum from Guitar Hero II, and the North American ~~publishing business led~~and Asian release of TRANSFORMERS: The Game late in the first quarter of fiscal 2008 contributed to anthe increase ~~of 15%~~ in ~~North American~~overall publishing net revenues. Our fiscal 2007 third quarter benefited from additional net revenues of $73.5 million associated with the releases of launch titles for the PS3 and the Wii next generation console platforms, while experiencing only a small corresponding combined decrease of $11.4 million on the respective current generation console platforms, the PS2 and the GameCube. In addition, in the third quarter of fiscal 2007, we released a focused but very high quality slate of titles, which helped to spur consumer demand for our new releases. In North America, net revenues were impacted by strong performances from the new releases of ~~Call of Duty 3,~~~~Guitar Hero 2, Tony Hawk’s Project 8, Marvel: Ultimate Alliance,~~ ~~and the addition of the Barbie franchise~~. ~~According~~This compares to the ~~NPD Group,~~release of an affiliate title, LucasArts’ ~~Guitar Hero 2~~ Lego Star Wars II: The Original Trilogy~~was the #1 game~~ in ~~dollars for the U.S. for the month of December 2006 and the #2 game overall for the third quarter of fiscal 2007, and~~ ~~Call of Duty 3~~ ~~was the #3 best-selling console game in the U.S. for the third quarter of fiscal 2007.~~

· An increase in net revenues from our distribution business resulting from a stronger release schedule for certain third-party publishers, increased hardware sales due to strong sales of NDS, PSP and Xbox360 hardware platforms, and the addition of a significant new customerEurope in the second quarter of fiscal 2007.

·• AInternational net revenues were impacted by a year over year strengthening of the Euro (“EUR”), Australian Dollar (“AUD”), and Great Britain Pound (“GBP”~~), Euro (“EUR”), and Australian Dollar (“AUD”~~) in relation to the United States Dollar (“USD”). Foreign exchange rates increased reported consolidated net revenues by approximately ~~$29.7~~$12.5 million for the three months ended ~~December 31, 2006.~~September 30, 2007. Excluding the impact of changing foreign currency rates, our consolidated net revenues ~~decreased 3%~~increased 62% year over year.

~~Partially offset by:~~

· Consistent with our ongoing plan to have a more focused slate of titles throughout fiscal 2007 due to the console transition we had fewer title releases in the third quarter of fiscal 2007. In the third quarter of fiscal 2007, we had five major mainline releases: ~~Call of Duty 3, Guitar Hero 2, Tony Hawk’s Project 8, Tony Hawk’s Downhill Jam, Marvel: Ultimate Alliance~~ ~~as well as additional platform specific and value titles.~~ ~~In the third quarter of fiscal 2006, we had a significantly larger number of new releases with the following major releases:~~ ~~Tony Hawk’s American Wasteland, Call of Duty 2, Call of Duty 2: Big Red One, GUN, True Crime: New York City, Quake 4, Shrek SuperSlam, The Movies,~~ ~~the PSP release of~~ ~~X-Men Legends II,~~ ~~and, in our international territories,~~ ~~Ultimate Spider-Man,~~ ~~and~~ ~~X-Men Legends II.~~41

· A decrease in publishing net revenues from our European publishing operations. Our European publishing operations had a stronger third quarter fiscal 2006 base period than North America publishing due to the strength of our European affiliate business in that period as well as the third quarter fiscal 2006 European releases of ~~Ultimate Spider-Man~~ ~~and~~ ~~X-Men Legends,~~ which were released in North America in the second quarter of fiscal 2006. Additionally our European publishing operations did not benefit from the release of the PS3, which was only released in Japan and North America. As a result of the delayed release of the PS3 in Europe, we also delayed our European releases of all PS3 titles as well as certain PSP titles.

The following table details our consolidated net revenues by business segment and our publishing net revenues by territory for the ~~nine~~six months ended ~~December 31,~~September 30, 2007 and 2006 ~~and 2005~~ (in thousands):

Nine Months Ended December 31,

Increase/

Percent

2006

2005

(Decrease)

Change

Publishing Net Revenues

North America

$
637,251

$
626,538

$
10,713

2
%
Europe

245,019

370,618

(125,599
)
(34
)%
Other

27,693

31,302

(3,609
)
(12
)%
Total international

272,712

401,920

(129,208
)
(32
)%
Total publishing net revenues

909,963

1,028,458

(118,495
)
(12
)%
Distribution net revenues

290,537

251,417

39,120

16
%
Consolidated net revenues

$
1,200,500

$
1,279,875

$
(79,375
)
(6
)%

	Six Months Ended September 30,				Increase/		Percent
	2007		2006		(Decrease)		Change
Publishing Net Revenues
North America	$	471,340	$	173,863	$	297,477	171	%
Europe	186,319		73,513		112,806		153	%
Other	25,322		12,790		12,532		98	%
Total International	211,641		86,303		125,338		145	%
Total Publishing Net Revenues	682,981		260,166		422,815		163	%
Distribution Net Revenues	130,220		116,075		14,145		12	%
Consolidated Net Revenues	$	813,201	$	376,241	$	436,960	116	%

Consolidated net revenues ~~decreased 6%~~increased 116% from ~~$1,279.9~~$376.2 million for the ~~nine~~six months ended ~~December 31, 2005~~September 30, 2006 to ~~$1,200.5~~$813.2 million for the ~~nine~~six months ended ~~December 31, 2006. The decrease was due~~September 30, 2007.

· ~~A decrease~~month after shipment. As a result, $8.9 million of ~~$129.2 million in~~ net revenues for our international publishing operations. Our international publishing operations did not benefit from additional net revenues from the release of the PS3, which was only released in Japan and North America, and as a result was not ~~able to fully~~

~~compensate~~included for the ~~more focused slate~~six months ended September 30, 2007. We do not anticipate any material amounts to be deferred from fiscal year 2008 into fiscal year 2009. Further, we do not anticipate deferrals for any other titles in fiscal ~~2007. Additionally, in Europe, our net revenues were impacted by a decline in affiliate business due to~~year 2008.

Overall, the ~~number~~increase of ~~affiliate releases. Prior year European~~consolidated net revenues, for the ~~nine~~six months ended ~~December 31, 2005 were largely impacted by~~September 30, 2007, was primarily the ~~affiliate releases of LucasArts’~~ ~~Star Wars: Episode III Revenge~~result of the ~~Sith~~ following:

• Our overall publishing net revenues increased by $422.8 million. This was primarily attributable to the successful worldwide release of titles for the first six months of fiscal 2008, such as, Guitar Hero II for Xbox360, Guitar Hero: Rocks the 80s for PS2, Spider-Man 3, TRANSFORMERS: The Game, and ~~LucasArts’~~ ~~Star Wars Battlefront II~~Shrek the Third. ~~Although we experienced strong performance from~~The continued momentum of Guitar Hero II for PS2 which was released in the ~~one major~~third quarter of fiscal 2007 further contributed to the increase in consolidated net revenues. This compares to the releases in the first six months of fiscal 2007 of Over the Hedge, X-Men: The Official Game, and the release of an affiliate ~~label release -~~title, LucasArts’ Lego Star Wars II: The Original Trilogy ~~the base period, with two major affiliate label releases, was stronger.~~in Europe.

~~Partially offset by:~~

·• ~~An increase in~~International net revenues ~~from our distribution business resulting from~~were impacted by a stronger release schedule for certain third-party publishers in the first nine months of fiscal 2007, increased hardware sales due to continued sales of NDS, PSP, and Xbox360 hardware platforms, and the addition of a significant new customer in the second quarter of fiscal 2007.

· Strong performance of our North America publishing business led by strong consumer demand for our fiscal third quarter 2007 title releases and the benefit of additional revenues of $73.5 million associated with the releases of the PS3 and the Wii with only a small corresponding combined decrease of $11.4 million on the respective current generation console platforms, the PS2 and the GameCube.

· A year over year strengthening of the ~~EUR, AUD,~~Euro (“EUR”), Australian Dollar (“AUD”), and ~~GBP~~Great Britain Pound (“GBP”) in relation to the USD. Foreign exchange rates increased reported consolidated net revenues by approximately ~~$32.6~~$27.6 million for the ~~nine~~six months ended ~~December 31, 2006.~~September 30, 2007. Excluding the impact of changing foreign currency rates, our consolidated net revenues ~~decreased 9%~~increased 109% year over year.

North America Publishing Net Revenues (in thousands)

% of
Consolidated

% of
Consolidated

December 31,
2006

Net
Revenues

December 31,
2005

Net
Revenues

Increase/
(Decrease)

Percent
Change

Three Months Ended

$
463,388

56
%
$
402,314

49
%
$
61,074

15
%
Nine Months Ended

637,251

53
%
626,538

49
%
10,713

2
%

September 30,
2007

% of Consolidated
Net
Revenues

September 30,
2006

% of Consolidated
Net
Revenues

Increase/
(Decrease)

Percent
Change

Three Months Ended

$
161,804

51
%
$
74,249

40
%
$
87,555

118
%
Six Months Ended

471,340

58
%
173,863

46
%
297,477

171
%
42

North America publishing net revenues increased ~~15%~~118% from ~~$402.3~~$74.2 million for the three months ended ~~December 31, 2005~~September 30, 2006 to ~~$463.4~~$161.8 million for the three months ended ~~December 31, 2006.~~September 30, 2007. The increase was primarily attributable to the releases of Guitar Hero: Rocks the 80s on the PS2 in the second quarter of fiscal 2008, and continued strong momentum from our key title releases, Guitar Hero II for the Xbox360 and TRANSFORMERS: The Game in the first quarter of fiscal 2008, and Guitar Hero II for the PS2 released in the third quarter of fiscal 2007. There were no major releases in North America in the second quarter of fiscal 2007.

For the ~~nine~~six months ended ~~December 31, 2006,~~September 30, 2007, North America publishing net revenues were ~~$637.3~~$471.3 million, an increase of 2%171% from ~~$626.5~~$173.9 million for the ~~nine~~six months ended ~~December 31, 2005.~~September 30, 2006. The ~~increases in~~increase was mainly due to the strong performance of several key titles, Guitar Hero II for the Xbox360, Spider-Man 3, Shrekthe Third, and TRANSFORMERS: The Game. Publishing net revenues were further increased by the strong momentum of Guitar Hero IIfor ~~both~~ the ~~quarter and nine months ended December 31, 2006 were due to strong consumer demand for our fiscal 2007 third quarter releases. Despite a decrease in the number of titles~~PS2 released compared to the third quarter of fiscal 2006, where we had the biggest title release slate in our history, North American publishing benefited from significant additional net revenues associated with the releases of the PS3 and the Wii next generation console platforms. In addition, in the third quarter of fiscal ~~2007,~~2007.This compares to the six months ended September 30, 2006 when we released ~~a focused but very high quality slate of titles which helped spur consumer demand. In North America, net revenues were impacted by strong performances from~~ ~~Marvel: Ultimate Alliance, Call of Duty 3,~~Over the Hedge ~~Guitar Hero 2, Tony Hawk’s Project 8,~~ and ~~the addition of the Barbie franchise~~X-Men: The Official Game.

According to the NPD Group, ~~for the third quarter of fiscal 2007,~~ we ~~were the only publisher with four~~have three of the top 1110 titles in ~~the U.S.,~~ ~~Guitar Hero 2, Call of Duty 3, Marvel: Ultimate Alliance,~~ ~~and~~ ~~Tony Hawk’s Project 8,~~ ~~with~~ ~~Call of Duty 3~~ ~~being the #3 best selling console game in the U.S. over that same period. In addition,~~ ~~Guitar Hero 2~~ ~~was the number #1 game in dollars for~~ the U.S. for the ~~month~~quarter ended September 30, 2007, Guitar Hero II, Guitar Hero: Rocks the 80s, and TRANSFORMERS: The Game which is also the #1 action title. TRANSFORMERS: Decepticon and TRANSFORMERS: Autobots were ranked the #1 third party NDS titles for the second quarter of ~~December~~fiscal 2008. The Guitar Hero franchise is the #1 best-selling franchise in the U.S. for the calendar year 2007 to date, and the ~~#2 game overall~~#3 franchise in the U.S. for the ~~third~~ quarter ~~of fiscal~~ended September 30, 2007, according to the NPD Group. ~~For the~~

nine months ended December 31, 2006, the increase in North America publishing net revenues experienced in the third quarter of fiscal 2007 was partially offset by the impact of having fewer title releases in the first six months of fiscal 2007 as compared to the first six months of fiscal 2006, and reduced pricing on current generation catalog titles as a result of the console transition.

North America publishing net revenues also increased as a percentage of consolidated net revenues from ~~49% for both the three~~40% and ~~nine months ended December 31, 2005, to 56% and 53%~~46% for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2006, respectively, to 51% and 58% for the three and six months ended September 30, 2007, respectively. The increases in the percentages of total consolidated net revenues are a result of the stronger net revenue growth ~~within North America~~for the publishing ~~and a significant decline in net revenues generated from our international publishing operations~~segment than that of the distribution segment during the same period.

International Publishing Net Revenues (in thousands)

% of
Consolidated

% of
Consolidated

December 31,
2006

Net
Revenues

December 31,
2005

Net
Revenues

Increase/
(Decrease)

Percent
Change

Three Months Ended

$
186,409

23
%
$
265,186

33
%
$
(78,777
)
(30
)%
Nine Months Ended

272,712

23
%
401,920

31
%
(129,208
)
(32
)%

	September 30, 2007		% of Consolidated Net Revenues		September 30, 2006		% of Consolidated Net Revenues		Increase/ (Decrease)		Percent Change

Three Months Ended	$	91,955	29	%	$	51,155	27	%	$	40,800	80	%
Six Months Ended	211,641		26	%	86,303		23	%	125,338		145	%

International publishing net revenues ~~decreased~~increased by ~~30%~~80% from ~~$265.2~~$51.2 million for the three months ended ~~December 31, 2005,~~September 30, 2006, to ~~$186.4~~$92.0 million for the three months ended ~~December 31, 2006. When compared to~~September 30, 2007. $8.9 million of net revenues was not included as of result of deferring net revenues for the three months ended ~~December 31, 2005,~~September 30, 2007. Our international publishing operations recorded an increase of net revenue of 80%, mainly resulting from the ~~decrease~~release of TRANSFORMERS: The Game in ~~net revenues reflects a decrease~~Europe in the number of new releases, reduced pricing on current-generation catalog titles due to the console transition to the next-generation console systems, and a decrease in net revenues from our European affiliate label program. ~~In the third~~second quarter of fiscal ~~2006, we released thirteen titles~~2008, concurrent with the movie release dates in those geographies, and the continued momentum from the release of TRANSFORMERS: The Game in Asia late in the first quarter of fiscal 2008, which outperformed our ~~international territories~~fiscal 2007 second quarter releases of Over the Hedge in several European countries and ~~one~~an affiliate title, LucasArts’ Lego Star Wars ~~Battlefront II.~~II: The Original Trilogy ~~This compares to the third quarter of fiscal 2007 where we released eight titles:~~ ~~Call of Duty 3, Marvel: Ultimate Alliance~~, ~~Tony Hawk’s Project 8, Tony Hawk’s Downhill Jam, Guitar Hero 2, Over the Hedge: Hammy Goes Nuts!, Shrek Smash N’ Crash,~~ ~~and~~ ~~Spider-Man: Battle for New York.~~ ~~We did not have any affiliate title releases~~ in ~~the third quarter of fiscal 2007~~. ~~The decrease was partially offset~~Europe. International publishing net revenues were further increased by a quarter over quarter strengthening of the EUR, AUD, and GBP in relation to the USD ~~for our international publishing business~~ of approximately ~~$14.4~~$7.8 million for the three months ended ~~December 31, 2006~~September 30, 2007 as compared to the three months ended ~~December 31, 2005.~~September 30, 2006. Excluding the impact of changing foreign currency rates, our international publishing net revenues ~~decreased 35%~~increased 64% year over year. As a percentage of consolidated net revenues, international publishing net revenues ~~decreased~~increased from ~~33% at December 31, 2005~~27% for the three months ended September 30, 2006 to ~~23% at December 31, 2006.~~29% for the three months ended September 30, 2007. The ~~decrease as a percentage~~increases in the percentages of total consolidated net revenues ~~is primarily due to~~are a result of the ~~significant increase in~~stronger net revenue growth for the publishing segment than that of the distribution ~~net revenues and North American publishing net revenues while international publishing net revenues decreased over~~segment during the same period.

International publishing net revenues ~~decreased~~increased from ~~$401.9~~$86.3 million for the ~~nine~~six months ended ~~December 31, 2005~~September 30, 2006 to ~~$272.7~~$211.6 million for the ~~nine~~six months ended ~~December 31, 2006.~~September 30, 2007. $8.9 million of net revenues was not included as of result of deferring net revenues for the six months ended September 30, 2007. The ~~decrease~~significant increase in international publishing net revenues was ~~due~~primarily attributable to our European publishing business which released, Spider-Man 3,Shrek the ~~decrease in the number of titles released internationally from nineteen in the first nine months of fiscal 2006, to fourteen in the first nine months of fiscal 2007.~~ ~~Additionally, in Europe, our net revenues were impacted by a decline in affiliate business due to the timing of affiliate releases. Prior year international net revenues~~Third, Guitar Hero II for the ~~nine months ended December 31, 2005 were largely impacted by the affiliate title~~Xbox360 and TRANSFORMERS: The Game. This compares to releases of ~~LucasArts’~~ ~~Star Wars: Episode III Revenge of~~Over the ~~Sith~~ Hedge, X-Men: The Official Game, and ~~LucasArts’~~ ~~Star Wars Battlefront II~~~~. Although we experienced strong performance from the one major~~an affiliate ~~label release of~~title, LucasArts’ Lego Star Wars II: The Original Trilogy~~it compares to a stronger base period with two major affiliate label releases. The decrease~~ in ~~international~~Europe in the first six months of fiscal 2007. International publishing net revenues was ~~partially offset~~further increased by the year over year strengthening of the EUR, AUD, and GBP in relation to the USD of approximately ~~$15.8~~$17.8 million for the ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 as compared to the ~~nine~~six months ended ~~December 31, 2005.~~September 30, 2006. Excluding the impact of changing foreign currency rates, our international publishing net revenues ~~decreased 36%~~increased 125% year over year. As a percentage of consolidated net revenues, international publishing net revenues ~~decreased~~increased from ~~31% for the nine months ended December 31, 2005 to~~ 23% for the ~~nine~~six months ended ~~December 31, 2006.~~September 30, 2006 to 26% for the six months ended September 30, 2007. The ~~decrease is primarily due to~~increases in the percentage of total consolidated net revenues are a result of the stronger net revenue growth for the publishing segment than that of ~~our~~the distribution ~~business over~~segment during the same period.

Publishing Net Revenues by Platform (in thousands)

The following table details our publishing net revenues by platform and as a percentage of total publishing net revenues for the three months ended ~~December 31,~~September 30, 2007 and 2006 ~~and 2005~~ (in thousands):

Three Months
Ended

% of

Three Months
Ended

% of

December 31,

Publishing

December 31,

Publishing

Increase/

Percent

2006

Net Revs.

2005

Net Revs.

(Decrease)

Change

Publishing Net Revenues

PC

$
33,388

5
%
$
113,782

17
%
$
(80,394
)
(71
)%

Console

Sony PlayStation 3

28,786

4
%
—

—
%
28,786

n/a

Sony PlayStation 2

290,153

45
%
258,233

39
%
31,920

12
%
Microsoft Xbox 360

145,913

22
%
71,456

11
%
74,457

104
%
Microsoft Xbox

32,401

5
%
103,422

15
%
(71,021
)
(69
)%
Nintendo Wii

44,669

7
%
—

—
%
44,669

n/a

Nintendo GameCube

3,152

1
%
46,430

7
%
(43,278
)
(93
)%
Other

(4
)
—
%
145

—
%
(149
)
(103
)%
Total console

545,070

84
%
479,686

72
%
65,384

14
%

Hand-held

71,339

11
%
74,032

11
%
(2,693
)
(4
)%

Total publishing net revenues

$
649,797

100
%
$
667,500

100
%
$
(17,703
)
(3
)%

	Three Months Ended September 30, 2007		% of Publishing Net Revs.		Three Months Ended September 30, 2006		% of Publishing Net Revs.		Increase/ (Decrease)			Percent Change
Publishing Net Revenues

PC	$	14,530	6	%	$	18,066	14	%	$	(3,536	)	(20	)%

Console
Sony PlayStation 3	10,179		4	%	—		—	%	10,179			n/a
Sony PlayStation 2	118,560		47	%	56,044		45	%	62,516			112	%
Microsoft Xbox360	58,088		23	%	18,285		14	%	39,803			218	%
Nintendo Wii	13,115		5	%	—		—	%	13,115			n/a
Other	217		—	%	9,807		8	%	(9,590		)	(98	)%

Total console	200,159		79	%	84,136		67	%	116,023			138	%

Hand-held	39,070		15	%	23,202		19	%	15,868			68	%

Total publishing net revenues	$	253,759	100	%	$	125,404	100	%	$	128,355		102	%

The following table details our publishing net revenues by platform and as a percentage of total publishing net revenues for the ~~nine~~six months ended ~~December 31,~~September 30, 2007 and 2006 ~~and 2005~~ (in thousands):

Nine Months
Ended

% of

Nine Months
Ended

% of

December 31,

Publishing

December 31,

Publishing

Increase/

Percent

2006

Net Revs.

2005

Net Revs.

(Decrease)

Change

Publishing Net Revenues

PC

$
69,443

8
%
$
154,735

15
%
$
(85,292
)
(55
)%

Console

Sony Playstation 3

28,786

3
%
—

—
%
28,786

n/a

Sony PlayStation 2

397,498

44
%
388,375

38
%
9,123

2
%
Microsoft Xbox 360

176,019

19
%
71,456

7
%
104,563

146
%
Microsoft Xbox

52,544

6
%
195,382

19
%
(142,838
)
(73
)%
Nintendo Wii

44,669

5
%
—

—
%
44,669

n/a

Nintendo GameCube

19,882

2
%
74,475

7
%
(54,593
)
(73
)%
Other

(3
)
—
%
385

—
%
(388
)
(101
)%
Total console

719,395

79
%
730,073

71
%
(10,678
)
(1
)%

Hand-held

121,125

13
%
143,650

14
%
(22,525
)
(16
)%

Total publishing net revenues

$
909,963

100
%
$
1,028,458

100
%
$
(118,495
)
(12
)%

	Six Months Ended September 30, 2007		% of Publishing Net Revs.		Six Months Ended September 30, 2006		% of Publishing Net Revs.		Increase/ (Decrease)			Percent Change
Publishing Net Revenues

PC	$	28,363	4	%	$	36,055	14	%	$	(7,692	)	(21	)%

Console
Sony Playstation 3	36,615		5	%	—		—	%	36,615			n/a
Sony PlayStation 2	265,427		39	%	107,345		41	%	158,082			147	%
Microsoft Xbox360	208,693		31	%	30,106		12	%	178,587			593	%
Nintendo Wii	45,814		7	%	—		—	%	45,814			n/a
Other	2,383		—	%	36,874		14	%	(34,491		)	(94	)%

Total console	558,932		82	%	174,325		67	%	384,607			221	%

Hand-held	95,686		14	%	49,786		19	%	45,900			92	%

Total publishing net revenues	$	682,981	100	%	$	260,166	100	%	$	422,815		163	%

Personal Computer Net Revenues (in thousands)

December 31,

% of
Publishing

December 31,

% of
Publishing

Increase/

Percent

2006

Net Revenues

2005

Net Revenues

(Decrease)

Change

Three Months Ended

$
33,388

5
%
$
113,782

17
%
$
(80,394
)
(71
)%
Nine Months Ended

69,443

8
%
154,735

15
%
(85,292
)
(55
)%

	September 30, 2007		% of Publishing Net Revenues		September 30, 2006		% of Publishing Net Revenues		Increase/ (Decrease)			Percent Change

Three Months Ended	$	14,530	6	%	$	18,066	14	%	$	(3,536	)	(20	)%
Six Months Ended	28,363		4	%	36,055		14	%	(7,692		)	(21	)%

Net revenues from sales of titles for the PC decreased 71% from $113.8 million and 17% of publishing net revenues for the three months ended December 31, 2005 to $33.4 million and 5% of publishing net revenues for the three months ended December 31, 2006. The decreases were primarily due to the strong performance of our third quarter fiscal 2006 PC releases as well as a decrease in the number of titles released for the PC during the third quarter of fiscal 2007 as compared to the third quarter of fiscal 2006. During the third quarter of fiscal 2006 we released the highly successful PC title, ~~Call of Duty 2,~~ ~~which was ranked by the NPD Group as the number two best selling PC title in the United States for the quarter, as well as~~ ~~Quake 4,~~ ~~and~~ ~~The Movies~~~~, which was exclusive to the PC~~. ~~For the third quarter of fiscal 2007, we had only one new PC release,~~ ~~Marvel: Ultimate Alliance~~.

Net revenues from sales of titles for the PC decreased ~~55%~~20% from ~~$154.7~~$18.1 million ~~and 15%~~or 14% of publishing net revenues for the ~~nine~~three months ended ~~December 31, 2005~~September 30, 2006 to ~~$69.4~~$14.5 million ~~and 8%~~or 6% of publishing net revenues for the ~~nine~~three months ended ~~December 31, 2006.~~September 30, 2007. $8.9 million of net revenues, or 4% of publishing net revenues, was not included as of result of deferring net revenues for the three months ended September 30, 2007. We released TRANSFORMERS: The Game on the PC in Europe in the second quarter of fiscal 2008. This compares to the release of our European affiliate title, LucasArts’ Lego Star Wars II: The Original Trilogy in the second quarter of fiscal 2007.

Net revenues from sales of titles for the PC decreased 21% from $36.1 million or 14% of publishing net revenues for the six months ended September 30, 2006 to $28.4 million or 4% of publishing net revenues for the six months ended September 30, 2007. $8.9 million of net revenues, or 1% of publishing net revenues, was not included as of result of deferring net revenues for the six months ended September 30, 2007. The decreases were due to a stronger base period ~~which included the third quarter fiscal 2006 releases~~ of ~~Call of Duty 2, Quake IV,~~ ~~and~~ ~~The Movies,~~ ~~as well as thefirst~~

~~quarter fiscal 2006 release of~~ ~~Doom 3: Resurrection of Evil.~~ ~~This compares to the~~our first ~~nine months~~two quarters of fiscal 2007 ~~where net revenues were primarily derived from~~ ~~continued catalog sales~~releases which consisted of ~~Call of Duty 2~~ ~~as well as the releases of~~ ~~Marvel: Ultimate Alliance,~~ The Movies: Stunts and Effects, X-Men: The Official Game, Over the Hedge, and our European affiliate title LucasArts’ Lego Star Wars II: The Original ~~Trilogy.~~Trilogy. This compares to the first six months of fiscal 2008 where net revenues were primarily derived from Spider-Man 3, Shrek the Third, and TRANSFORMERS: The Game.

Sony PlayStation 3 Net Revenues (in thousands)

December 31,

% of
Publishing

December 31,

% of
Publishing

Increase/

Percent

2006

Net Revenues

2005

Net Revenues

(Decrease)

Change

Three Months Ended

$
28,786

4
%
$
—

—
%
$
28,786

n/m

Nine Months Ended

28,786

3
%
—

—
%
28,786

n/m

	September 30, 2007		% of Publishing Net Revenues		September 30, 2006	% of Publishing Net Revenues		Increase/ (Decrease)		Percent Change

Three Months Ended	$	10,179	4	%	—	—	%	$	10,179	n/a
Six Months Ended	36,615		5	%	—	—	%	36,615		n/a

The PS3 was released in North America in November 2006. Consistent with our goal of having a significant presence at2006 and in Europe in March 2007. For the launch of each new platform,three months ended September 30, 2007, we released three titles concurrently withTRANSFORMERS: The Game on PS3 in Europe. For the releasesix months ended September 30, 2007, PS3 net revenues were primarily derived from the worldwide sales of the PS3, Call of Duty Spider-Man3 Marvel: Ultimate Alliance, and Tony Hawk’s Project 8. TRANSFORMERS: The GameAccording to the NPD Group, our three release. These titles were allreleased at premium retail pricing (i.e. $59.99 in the top 10United States).

Over the last six months, Sony has cut prices and introduced lower priced models for the PS3. It is uncertain how these price reductions will impact consumer demand for the platform. However, we expect net revenues from sales of titles in terms of sales for the PS3 to increase as the installed base of hardware grows. We have a robust slate of titles for the third quarterPS3 and expect net revenues from this platform to represent a larger proportion of total publishing net revenues for the remainder of fiscal 2007 with Call of Duty 3 being the #3 title overall.2008.

Sony PlayStation 2 Net Revenues (in thousands)

December 31,

% of
Publishing

December 31,

% of
Publishing

Increase/

Percent

2006

Net Revenues

2005

Net Revenues

(Decrease)

Change

Three Months Ended

$
290,153

45
%
$
258,233

39
%
$
31,920

12
%
Nine Months Ended

397,498

44
%
388,375

38
%
9,123

2
%

	September 30, 2007		% of Publishing Net Revenues		September 30, 2006		% of Publishing Net Revenues		Increase/ (Decrease)		Percent Change

Three Months Ended	$	118,560	47	%	$	56,044	45	%	$	62,516	112	%
Six Months Ended	265,427		39	%	107,345		41	%	158,082		147	%

Net revenues from sales of titles and accessories (primarily consisting of hardware associated with Guitar Hero II) for the PS2 increased ~~12%~~112% from ~~$258.2~~$56.0 million for the three months ended ~~December 31, 2005~~September 30, 2006 to ~~$290.2~~$118.6 million for the three months ended ~~December 31, 2006.~~September 30, 2007. For the ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 net revenues from sales of titles for the PS2 were ~~$397.5~~$265.4 million, an increase of 2%147% from the ~~nine~~six months ended ~~December 31, 2005.~~September 30, 2006. The strong performance of ~~our third quarter fiscal 2007 title releases more than offset the impact of having a more focused product slate~~TRANSFORMERS: The Game released in Europe and the ~~corresponding~~ release of ~~fewer “big proposition” titles. In particular, our net revenues were driven by~~Guitar Hero: Rocks the 80s in the second quarter of fiscal 2008, and continued strong ~~performances~~sales of~~Call of Duty 3~~ ~~and~~ Guitar Hero 2, II~~as well as a robust~~ for PS2 ~~market in Europe due~~contributed to the ~~delay of~~increase in PS2 net revenues. This compares to the ~~European~~ release of an affiliate label title, LucasArts’ Lego Star Wars II: The Original Trilogy in the ~~PS3 until March 2007~~. ~~According to the NPD Group,~~ ~~Guitar Hero 2~~ ~~was the #1 best selling title on the PS2 platform for the third~~second quarter of fiscal 2007.In For the six months ended September 30, 2007, the increase in absolute dollars is primarily due to continued momentum for our fiscal 2007 third quarter title, Guitar Hero II for PS2 (game and accessories), as well as strong performance of ~~fiscal 2007, we released~~our worldwide releases of ~~Call of Duty~~Spider-Man 3 ~~Marvel: Ultimate Alliance,~~ , Shrek the Third, Tony Hawk’s ~~Project 8,~~Downhill Jam, Guitar ~~Hero 2, Pimp My Ride, Harley-Davidson: Race to~~Hero: Rocks the ~~Rally,~~80s, ~~The History Channel®: Civil War- A Nation Divided,~~ ~~Rapala Tournament Fishing,~~ and ~~Cabela’s African Safari~~TRANSFORMERS: The Game. during the six months ended September 30, 2007. This compares to the ~~third quarter~~releases during the first six months of fiscal ~~2006 where we released~~2007 of our PS2 ~~titles~~versions of ~~Tony Hawk’s American Wasteland, Shrek SuperSlam, Call of Duty 2: Big Red One, GUN,~~~~True Crime: New York City,~~Over the Hedge, X-Men: The Official Game, and ~~Cabela’s Dangerous Hunts 2~~ Lego Star Wars II: The Original Trilogy~~as well as, internationally,~~ ~~Ultimate Spider-Man~~ ~~and~~ ~~X-Men Legends II~~~~. For the nine month period ended December 31, 2006, the increase~~ in ~~net revenues from sales of titles for the PS2 was partially offset by reduced pricing on a number of catalog titles due to the release of the PS3.~~ Europe. As a percentage of publishing net revenues, net revenues from the sale of titles for the PS2 increased from ~~39%~~45% to ~~45%~~47% for the quarters ended ~~December 31, 2005~~September 30, 2006 and ~~2006, respectively, and~~2007, respectively. The increase is the result of the release of Guitar Hero: Rocks the 80s exclusively on the PS2 in the second quarter of fiscal 2008. Net revenues from ~~38% to 44%~~the sale of titles for the ~~nine months ended December 31, 2005 and 2006, respectively. The increases~~PS2 as a percentage of publishing net revenues ~~reflect the~~

~~impact of high consumer demand~~decreased from 41% to 39% for the ~~currently PS2 exclusive title,~~six months ended September 30, 2006 and 2007, respectively. This is due to the strong fiscal 2008 first quarter performance of the Xbox360 platform with the release of Guitar Hero 2, II~~causing~~ for Xbox360, and a ~~higher proportionate increase in~~shift to the next generation PS3 platform of 5% of total publishing net revenues.

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.~~revenues for PS2 for fiscal 2008 as we plan to develop and release many of our key titles on this platform.

Microsoft Xbox360 Net Revenues (in thousands)

December 31,

% of
Publishing

December 31,

% of
Publishing

Increase/

Percent

2006

Net Revenues

2005

Net Revenues

(Decrease)

Change

Three Months Ended

$
145,913

22
%
$
71,456

11
%
$
74,457

104
%
Nine Months Ended

176,019

19
%
71,456

7
%
104,563

146
%

	September 30, 2007		% of Publishing Net Revenues		September 30, 2006		% of Publishing Net Revenues		Increase/ (Decrease)		Percent Change

Three Months Ended	$	58,088	23	%	$	18,285	14	%	$	39,803	218	%
Six Months Ended	208,693		31	%	30,106		12	%	178,587		593	%

The Xbox360, the first of the next-generation hardware, to be released, was released in November 2005. DuringFor the period from the release of the Xbox 360 through the end of the third quarter of fiscalthree months ended September 30, 2007, we have released fourteen Xbox360 titles. The primary contributors to our third quarter fiscal 2007 Xbox360 net revenues were strongfrom sales from our new releases onof titles for the Xbox360 Call of Duty 3, Tony Hawk’s Project 8, Marvel: Ultimate Alliance, The History Channel®: Civil War- A Nation Divided, Rapala Tournament Fishing, Pimp My Ride, and Cabela’s African Safari, as well as continued strong catalog sales of Call of Duty 2 and the European affiliate title, LucasArts’ Lego Star Wars II: The Original Trilogy. Accordingincreased to the NPD Group, during the third quarter of fiscal 2007, we had three of the top ten Xbox360 titles, Call of Duty 3, Tony Hawk’s Project 8, Marvel: Ultimate Alliance, with Call of Duty 3 being the #2 Xbox360 title$58.1 million from $18.3 million for the quarter. For the ninethree months ended December 31, 2006, Xbox 360 net revenues were driven by the first quarter fiscal 2007 launch of X-Men: The Official Game, the second quarter launch of World Series of Poker: Tournament of Champions, as well as the factors discussed for the third quarter of fiscal 2007.

Microsoft Xbox Net Revenues (in thousands)

December 31,

% of
Publishing

December 31,

% of
Publishing

Increase/

Percent

2006

Net Revenues

2005

Net Revenues

(Decrease)

Change

Three Months Ended

$
32,401

5
%
$
103,422

15
%
$
(71,021
)
(69
)%
Nine Months Ended

52,544

6
%
195,382

19
%
(142,838
)
(73
)%

September 30, 2006. Net revenues from sales of titles for the ~~Xbox decreased 69%~~Xbox360 increased from $103.4 million and 15% of publishing net revenues for the three months ended December 31, 2005 to $32.4 million and 5% of publishing net revenues for the three months ended December 31, 2006. For the nine months ended December 31, 2006, net revenues from sales of titles for the Xbox decreased 73% from $195.4 million and 19% of publishing net revenues to $52.5 million and 6% of publishing net revenues. The decreases for both periods in absolute dollars and as a percentage of publishing net revenues were primarily attributable to the slowdown of sales for the Xbox as customers migrate to its successor, the Xbox360, combined with the release of fewer titles on the Xbox platform. For the t~~hird quarter of fiscal 2007 net revenues were mainly comprised of sales from our three Xbox titles releases,~~ ~~Call of Duty 3, Tony Hawk’s Project 8,~~ ~~and~~ ~~Marvel: Ultimate Alliance~~ ~~as well as continued sales of our European affiliate label title, LucasArts’~~ ~~Lego Star Wars II: The Original Trilogy~~~~. This compares to the third quarter of fiscal 2006 where we had the biggest release slate in our history with worldwide Xbox releases of~~ ~~Tony Hawk’s American Wasteland, Shrek SuperSlam, Call of Duty 2: Big Red One, GUN,~~~~True Crime: New York City,~~ ~~and~~ ~~Cabela’s Dangerous Hunts 2~~ ~~as well as, internationally,~~ ~~Ultimate Spider-Man~~ ~~and~~ ~~X-Men Legends II~~~~. For the nine months ended December 31, 2005, Xbox net revenues were driven by strong performance of the first quarter fiscal 2006 release of the Xbox exclusive~~ ~~Doom 3~~~~. In the first nine months of fiscal 2007, there were no comparable Xbox exclusive titles.~~

Nintendo Wii Net Revenues (in thousands)

December 31,

% of
Publishing

December 31,

% of
Publishing

Increase/

Percent

2006

Net Revenues

2005

Net Revenues

(Decrease)

Change

Three Months Ended

$
44,669

7
%
$
—

—
%
$
44,669

n/m

Nine Months Ended

44,669

5
%
—

—
%
44,669

n/m

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 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. Due to extremely strong consumer demand for the Wii over the holiday season, we experienced strong sales on our five launch titles. In addition, according to the NPD Group, for the third quarter of fiscal 2007 we had three of the top ten titles for the Wii: Call of Duty 3, Marvel: Ultimate Alliance, and Tony Hawk’s Downhill Jam.

Nintendo GameCube Net Revenues (in thousands)

December 31,

% of
Publishing

December 31,

% of
Publishing

Increase/

Percent

2006

Net Revenues

2005

Net Revenues

(Decrease)

Change

Three Months Ended

$
3,152

1
%
$
46,430

7
%
$
(43,278
)
(93
)%
Nine Months Ended

19,882

2
%
74,475

7
%
(54,593
)
(73
)%

Net revenues from sales of titles for the Nintendo GameCube decreased 93% from $46.4 million and 7% of publishing net revenues for the three months ended December 31, 2005 to $3.2 million and 1% of publishing net revenues for the three months ended December 31, 2006. The decrease in absolute dollars and as a percentage of publishing net revenues is primarily due to the decrease in the number of new releases on the GameCube combined with a gradual slowdown in sales on the GameCube platform as customers transition over to the next-generation console from Nintendo, the Wii. In the third quarter of fiscal 2007 we released one title for the GameCube, ~~Shrek Smash n’ Crash Racing~~ ~~as compared to six worldwide major releases and two additional international releases in the third quarter of fiscal 2006.~~ ~~In addition, net revenue for the quarter was affected by pricing declines on catalog titles due to the effects of the console transition.~~

~~Net revenues from sales of titles for the Nintendo GameCube decreased 73% from $74.5~~$30.1 million for the ~~nine~~six months ended ~~December 31, 2005~~September 30, 2006 to ~~$19.9~~$208.7 million for the ~~nine~~six months ended ~~December 31, 2006. The decrease was a result of fewer title releases in the second and third quarters of fiscal 2007 where the only title release was our European affiliate title, LucasArts’~~ ~~Lego Star Wars II: The Original Trilogy~~~~. This compares to the second quarter of fiscal 2006 where we released~~ ~~Ultimate Spider-Man~~ ~~and~~ ~~X-Men Legends II~~ ~~on the GameCube and experienced strong catalog sales from~~ ~~Madagascar~~ ~~and~~ ~~Fantastic Four.~~ ~~These decreases were partially offset by the strength of our first quarter fiscal 2007 releases~~September 30, 2007. of ~~Over the Hedge~~ ~~and~~ ~~X-Men: The Official Game,~~ ~~which outperformed the two titles released for the GameCube in the first quarter of fiscal 2006,~~ ~~Madagascar~~ ~~and~~ ~~Fantastic Four.~~

Hand-Held Net Revenues (in thousands)

December 31,

% of
Publishing

December 31,

% of
Publishing

Increase/

Percent

2006

Net Revenues

2005

Net Revenues

(Decrease)

Change

Three Months Ended

$
71,339

11
%
$
74,032

11
%
$
(2,693
)
(4
)%
Nine Months Ended

121,125

13
%
143,650

14
%
(22,525
)
(16
)%

Net revenues from sales of titles for hand-held platforms for the three months ended December 31, 2006 decreased 4% from the prior fiscal year, from $74.0 million or 11% of publishing net revenues to $71.3 million or 11% of publishing net revenues. The decrease in absolute dollars is primarily due to a 42% decline over the same period in net revenues on the GBA hand-held platform as we released fewer titles on that platform and had slower GBA catalog sales due to wider acceptance of the NDS platform. During the third quarter of fiscal 2007, the key titles contributing to GBA net revenues were ~~Tony Hawk’s Downhill Jam~~, ~~Over the Hedge: Hammy Goes Nuts!, Barbie in the 12 Dancing Princesses, Marvel: Ultimate Alliance, Spider-Man: Battle for New York,~~ ~~and LucasArts’~~ ~~Lego Star Wars II: The Original Trilogy.~~ ~~This compares to the third quarter of fiscal 2006 where the key titles contributing to GBA net revenues were~~ ~~Madagascar Operation Penguin, Shrek SuperSlam, Madagascar, Ultimate Spider-Man, Tony Hawk’s American Sk8land,~~ ~~and~~ ~~Shrek 2.~~ The decrease in GBA net revenues was partially offset by increases of 67% and 12% on the NDS and PSP, respectively, in the third quarter of fiscal 2007 when compared to the third quarter of fiscal 2006. The increase in NDS net revenues quarter over quarter is primarily due to wider consumer acceptance of the platform and an increase in new releases on the platform. For the quarter ending December 31, 2006, we released ~~Tony Hawk’s Downhill Jam, Spider-Man: Battle for New York, Other the Hedge: Hammy Goes Nuts!,~~ ~~and~~ ~~Barbie in the 12 Dancing Princesses~~ ~~and had continued strong catalog sales from~~ ~~Over the Hedge, Madagascar,~~ ~~and a European affiliate title, LucasArts’~~ ~~Lego Star Wars II: The Original Trilogy.~~ ~~New releases for the NDS in the third quarter of fiscal 2006 were~~ ~~Tony Hawk’s American Sk8land, Shrek SuperSlam,~~ ~~and~~ ~~Ultimate Spider-Man.~~ The increase in net revenues from sales of titles for the PSP platform relates primarily to an increase in the number of titles released in the third quarter of fiscal 2007 when compared to the third quarter of fiscal 2006. In the third quarter of fiscal 2007, we released ~~Marvel: Ultimate Alliance, Tony Hawk’s Project 8, GUN Showdown,~~ ~~and~~ ~~Activision Hits Remixed.~~ ~~This compares to the release of one European affiliate title on the PSP in the third quarter of fiscal 2006, LucasArts’~~ ~~Star Wars Battlefront II.~~

~~Net revenues from sales of titles for hand-held platforms for the nine months ended December 31, 2006 decreased 16% from the prior fiscal year, from $143.7 million to $121.1 million.~~ As a percentage of publishing net revenues, net revenues from the sale of titles for ~~hand-held platforms also decreased~~the Xbox360 increased from 14% to 23% for the ~~nine~~quarter ended September 30, 2006 and 2007, respectively, and from 12% to 31% for the six months ended ~~December 31, 2005 to 13% for the nine months ended December 31, 2006.~~September 30, 2006 and 2007, respectively. The ~~decreases in both absolute dollars and as a percentage of net revenues is a result~~significant growth of the ~~decrease~~installed base since the introduction of the Xbox360 and our successful title releases contributed to the increase in Xbox360 net revenues. The increase in net revenues on the ~~GBA platform~~Xbox360 is the result from our Xbox360 release of ~~40%~~TRANSFORMERS: The Game in Europe in the second quarter of fiscal 2008 and ~~a decrease in~~the continued net revenues from Guitar Hero II released in the first quarter of fiscal 2008. This compares to the release of theEuropean affiliate title release of LucasArts’ Lego Star Wars II: The Original Trilogy in the second quarter of fiscal 2007. We continued to increase our presence in the Xbox360 by publishing Guitar Hero II (game and accessories), Spider-Man 3, Shrek the Third, and TRANSFORMERS: The Game during the first two quarters of fiscal 2008. For the same period of fiscal 2007, we released X-Men: The Official Game and Lego Star Wars II: The Original Trilogy.

Microsoft announced reduction of the retail price of Xbox360 by $50 in the United States market and by 50 euros in European markets on ~~the PSP platform of 27%~~August 2007. It is uncertain how this price reduction will impact consumer demand for the ~~nine months ended December 31, 2006. The decrease in~~platform. However, we expect net revenues ~~for the nine months ended December 31, 2006~~ from sales of titles for the ~~GBA is~~Xbox360 to increase significantly in fiscal 2008 as compared to fiscal 2007 due to ~~slower GBA~~the growing installed base and our strong slate of Xbox360 titles.

Nintendo Wii Net Revenues (in thousands)

	September 30, 2007		% of Publishing Net Revenues		September 30, 2006	% of Publishing Net Revenues		Increase/ (Decrease)		Percent Change

Three Months Ended	$	13,115	5	%	—	—	%	$	13,115	n/a
Six Months Ended	45,814		7	%	—	—	%	45,814		n/a

The Nintendo Wii was released in November 2006 and quickly gained strong consumer acceptance due to its innovative technology and mass market appeal. We released TRANSFORMERS: The Game in Europe and a value title Hot Wheels: Beat That! for the Wii in the second quarter of fiscal 2008 which are the primary revenue drivers for the three months ended September 30, 2007. For the six months ended September 30, 2007, net revenues were derived from Spider-Man 3, Shrek the Third, TRANSFORMERS: The Game, Hot Wheels: Beat That! and continued catalog sales due to wider acceptance of the NDS platform and a decrease in the number of titles released on that platform from 10 to 9. The decrease in net revenues for the nine months ended December 31, 2006 from sales of titles for the PSP is due to a strong comparable base period in which we not only had a stronger release slate, but also had stronger sales due to consumer excitement surrounding the initial release of the PSP platform in March 2005 in North America and in September 2005 in Europe. In the first nine months of fiscal 2006 we had some of our strongest titles release on the PSP with releases of Tony Hawk’s Underground 2, Spider-Man: The Movie 2, X-Men Legends 2, World Series of Poker, and two strong performing affiliate titles in Europe. This compares to the first nine months of fiscal 2007 where our key newthird quarter releases, were MarvelCall of Duty 3, Marvel: Ultimate Alliance, Tony Hawk’s Project 8, Gun Showdown, Activision Hits Remixed, Cabela’s Dangerous Hunts, Cabela’s African Safari, MTX: Mototrax 2006, World Series of Poker: Tournament of Champions, Rapala Tournament Fishing, and one European affiliate title which was outperformed by each of the affiliate titles released in the first nine months of fiscal 2006, Tony Hawk’s Downhill Jam.The decreases on the PSP and GBA platforms were

~~partially offset by an increase in~~We expect net revenues from sales of titles for the Wii to significantly increase with the growth of the installed based and our strong slate of key titles for fiscal 2008.

Hand-Held Net Revenues (in thousands)

	September 30,		% of Publishing		September 30,		% of Publishing		Increase/		Percent
	2007		Net Revenues		2006		Net Revenues		(Decrease)		Change

Three Months Ended	$	39,070	15	%	$	23,202	19	%	$	15,868	68	%
Six Months Ended	95,686		14	%	49,786		19	%	45,900		92	%

Net revenues from sales of titles for hand-held platforms for the three and six months ended September 30, 2007 increased 68% and 92% from the same period of prior fiscal year. Net revenues increased from $23.2 million and $49.8 million for the three and six months ended September 30, 2006, respectively, to $39.1 million and $95.7 million for the three and six months ended September 30, 2007, respectively. The increase in absolute dollars is primarily due to the fiscal 2008 second quarter European releases of two products, TRANSFORMERS: Decepticon and TRANSFORMERS: Autobots exclusively on the NDS, TRANSFORMERS: The Game on the PSP, and the release of ~~74% as~~several value titles, Animal Genius, Puppy Luv Spa & Resort, and Jewel Quest Expedition on the ~~platform has continued~~NDS. Further, we released Spider-Man 3, Shrek the Third, and two products, TRANSFORMERS: Decepticon and TRANSFORMERS: Autobots exclusively on the NDS and TRANSFORMERS: The Game on the PSP in North America and Asia in the first quarter of fiscal 2008. This compares to ~~gain consumer acceptance~~the second quarter of fiscal 2007, when we had new releases of World Series of Poker: Tournament of Champions and ~~market share, as well as~~ ~~particularly strong performance of~~Rapala Trophies in North America on the PSP and our European affiliate title, LucasArts’ Lego Star Wars II: The Original Trilogy on the NDS and the GBA, and our first quarter fiscal 2007 releases of Over the Hedgeand ~~X-Men~~: X-Men: The Official Gameon the PSP and GBA.

With the installed base of the PSP and NDS ~~and GBA and continued strong catalog sales of~~ ~~Madagascar~~ ~~on the GBA and NDS.~~continuing to increase, we expect that fiscal 2008 hand-held net revenues will 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 ~~and~~for the ~~introduction of new hardware~~next-generation platforms, as well as the performance of ~~our~~ key product releases. According to the NPD Group, Activision was the #2 third party publisher in the United States on next-generation platforms for the six months ended September 30, 2007. We expect that net revenues from console titles will continue to represent the largest component of our publishing net revenues with ~~PS2~~Xbox360 having the largest percentage of ~~console~~that business in ~~the short term while the~~fiscal 2008 due to its larger installed ~~base of the next generation consoles continues to increase. As the NDS and PSP platforms continue to build their installed~~hardware base and ~~gain popularity, we~~our strong slate of titles. We expect ~~to see~~significant growth in net revenues from PS3, Xbox360 and Wii next-generation console systems and a ~~long term increase~~decrease in ~~our hand-held~~the percentage of PS2 business in ~~line with the growth in the installed base.~~fiscal 2008. Our net revenues from PC and hand-held 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, so revenues and profits are significantly affected by our ability to release highly successful “hit” titles. For example, for the three months ended ~~December 31, 2006, 42%~~September 30, 2007, 58% of our consolidated net revenues and ~~53%~~72% of ~~worldwide~~ publishing net revenues were derived from net revenues from the releases of~~Call of Duty 3,~~ Guitar Hero 2,II (including Guitar Hero: Rocks the 80s), Spider-Man 3, Shrek the Thirdand ~~Marvel: Ultimate Alliance.~~TRANSFORMERS: The Game. For the ~~nine~~six months ended ~~December 31, 2006, 29%~~September 30, 2007, 67% of our consolidated net revenues and ~~38%~~80% of ~~worldwide~~ publishing net revenues were derived from net revenues from those same titles. 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 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 also seen that lower console hardware prices put downward pressure on software pricing. ~~While~~However, we expect console software launch pricing for the Xbox360 and PS3 ~~titles~~ to ~~be $59.99~~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 ~~Wii titles~~the greater product capability and value of next generation titles. We continue to ~~be $49.99, we are seeing~~expect software pricing ~~declines~~ on the current-generation console systems. Additionally, when new console platforms are announced or introduced into the market, such as the November 2006 releases of the Wii and, in North America, the PS3, consumers typically reduce their purchases of game console entertainment software products for current console platforms as they upgradePS2 to ~~the new platforms. During these periods, sales of our game console entertainment software products may be expected to slow or even decline until new platforms achieve wide consumer acceptance.~~hold at $39.99 with continued momentum on this platform.

Distribution Net Revenues (in thousands)

December 31,

% of
Consolidated

December 31,

% of
Consolidated

Increase/

Percent

2006

Net Revenues

2005

Net Revenues

(Decrease)

Change

Three Months Ended

$
174,462

21
%
$
148,742

18
%
$
25,720

17
%
Nine Months Ended

290,537

24
%
251,417

20
%
39,120

16
%

	September 30,		% of Consolidated		September 30,		% of Consolidated		Increase/		Percent
	2007		Net Revenues		2006		Net Revenues		(Decrease)		Change

Three Months Ended	$	63,987	20	%	$	62,768	33	%	$	1,219	2	%
Six Months Ended	130,220		16	%	116,075		31	%	14,145		12	%

Distribution net revenues for the three months ended ~~December 31, 2006~~September 30, 2007 increased ~~17%~~2% from the same period of the prior fiscal ~~year, from $148.7 million or 18% of consolidated net revenues to $174.5 million or 21% of consolidated~~

~~net revenues.~~year. For the ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 distribution net revenues increased ~~16%~~12% from the same period of prior fiscal ~~year, from $251.4 million and 20% of consolidated~~year. Distribution net revenues to $290.5 million and 24% of consolidated net revenues. The increases for both the three and nine month periods ended December 31, 2006, was primarily the result of strong performance of our title releases during the third quarter of fiscal 2007, ~~strong release schedules for certain third-party publishers, increased hardware sales due to strong sales of NDS, PSP, and Xbox360 hardware platforms,~~ ~~and the addition of a significant new customer in the second quarter of fiscal 2007. In addition to these increases, the growth~~ as a percentage of consolidated net revenues ~~was also~~decreased from 33% and 31% for the three and six months ended September 30, 2006, respectively, to 20% and 16% for the three and six months ended September 30, 2007, respectively, primarily due to the ~~decline~~significant increase in publishing net ~~revenues from our international publishing business as discussed above. Further contributing to the increase was a year over year strengthening of the EUR and GBP in relation to the USD.~~revenues. Foreign exchange rates increased reported distribution net revenues by approximately ~~$15.2~~$4.7 million and ~~$16.8~~$9.8 million for the three months and ~~nine~~six months ended ~~December 31, 2006,~~September 30, 2007, respectively. Excluding the impact of changing foreign currency rates, distribution net revenues decreased 5% and increased ~~7% and 9%~~4% year over year from the three and six months ended September 30, 2006, respectively. The increase in absolute dollars of distribution net revenues for the three and ~~nine~~six months ended ~~December 31, 2006, respectively.~~September 30, 2007 is primarily due to the acquisition of a significant new customer and the effect of foreign currency rates, more than offsetting the termination of a significant customer at the end of July.

The mix of distribution net revenues between hardware and software sales varied slightly year over year with approximately 20% of distribution net revenues from hardware sales in the first two quarters of fiscal 2008 as compared to 16% in the prior year first two quarters. Prior year results included sales for the PSP, NDS, and Xbox360 hardware platforms. Current year first and second quarters net revenues included PS3, NDS, Wii, and Xbox360 hardware sales. The mix of future distribution net revenues will be driven by a number of factors including ~~our title release slate, the introduction of new hardware platforms,~~ the occurrence of further hardware price reductions instituted by hardware manufacturers, and our ability to establish and maintain distribution agreements with hardware manufacturers, ~~and~~ third-party software ~~publishers.~~publishers and retail customers. For the remainder of fiscal 2008, we expect distribution net revenues to decrease in absolute dollars and as a percentage of consolidated net revenues when compared to fiscal 2007. This is a result of having exited a line of distribution business that was not meaningful to earnings and the strong growth of our publishing business.

Costs and Expenses

Cost of Sales —– Product Costs (in thousands)

% of

% of

December 31,

Consolidated

December 31,

Consolidated

Increase/

Percent

2006

Net Revenues

2005

Net Revenues

(Decrease)

Change

Three Months Ended

$
382,165

46
%
$
367,685

45
%
$
14,480

4
%
Nine Months Ended

618,162

52
%
617,021

48
%
1,141

—

			% of				% of
	September 30,		Consolidated		September 30,		Consolidated		Increase/		Percent
	2007		Net Revenues		2006		Net Revenues		(Decrease)		Change

Three Months Ended	$	151,996	48	%	$	127,374	68	%	$	24,622	19	%
Six Months Ended	369,225		45	%	235,997		63	%	133,228		56	%

“Cost of sales —– product costs” represented ~~46%~~48% and ~~45%~~68% of consolidated net revenues for the three months ended ~~December 31,~~September 30, 2007 and 2006, ~~and 2005,~~ respectively. ~~In absolute dollars,~~$0.4 million was not included in the “cost of sales —– product costs” ~~increased 4% from $367.7 million at December 31, 2005 to $382.2 million at December 31, 2006.~~for the three months ended September 30, 2007 as a result of deferring “cost of sales – product costs.” The ~~primary factors contributing to the increase~~decrease in “cost of sales —– product costs” ~~are:~~

· A shift in the mix of business between our publishing and distribution segments. Distribution net revenues as a percentage of consolidated net revenues increased from 18% in the third quarter of fiscal 2006 to 21% in the third quarter of fiscal 2007. Our distribution business typically has higher “cost of sales — product costs” than our publishing business as it is a lower margin business.

· ~~An increase in net revenues in our North American publishing business due primarily to the release of~~ ~~Guitar Hero 2. Guitar Hero 2~~ ~~carries a higher “cost of sales — product costs” due to the bundled guitar controller.~~

· A shift in the product mix versus the third quarter of fiscal 2006. PC net revenues represented 17% of publishing net revenues in the third quarter of fiscal 2006 compared to 5% in the third quarter of fiscal 2007. PC titles typically have significantly lower product costs associated with them as we do not pay royalty rates to platform licensors.

“Cost of sales — product costs” represented 52% and 48% of consolidated net revenues for the nine months ended December 31, 2006 and 2005, respectively. In absolute dollars, “cost of sales — product costs” remained relatively flat increasing only $1.1 million as compared to the first nine months of fiscal 2006. ~~The~~

~~increase~~ as a percentage of consolidated net revenues is partially due to a ~~shift~~higher percentage of net revenues for the three months ended September 30, 2007 relating to our publishing business which in general carries a lower percentage “cost of sales – product costs” than our distribution business. Further, the second quarter of fiscal 2008 publishing net revenues included a larger mix of next-generation product sales which carries a higher gross margin than the other console platforms. Net revenues from our publishing business were 80% of total net revenues for the three months ended September

30, 2007 as compared to 67% for the three months ended September 30, 2006. In absolute dollars, “cost of sales – product costs” increased 19% from $127.4 million for the three months ended September 30, 2006 to $152.0 million for the three months September 30, 2007. “Cost of sales – product costs” increased with the mix of ~~business between~~our revenue growth in our publishing and distribution ~~segments, a shift~~businesses.

“Cost of sales – product costs” represented 45% and 63% of consolidated net revenues for the six months ended September 30, 2007 and 2006, respectively. $0.4 million was not included in the “cost of sales – product ~~mix versus~~costs” for the ~~first nine~~six months ended September 30, 2007 as a result of ~~fiscal 2006, and reduced pricing on current generation title releases and a number~~deferring “cost of ~~catalog titles. Distribution net revenues~~sales – product costs”. The decrease in “cost of sales – product costs” as a percentage of consolidated net revenues ~~increased from 20%~~is partially due to a higher percentage of net revenues for the six months ended September 30, 2007 being attributable to our publishing business which in general carries a lower percentage “cost of sales – product costs” than our distribution business. Further, the first ~~nine~~six months of fiscal ~~2006~~2008 publishing net revenues included a larger mix of next-generation product sales which carries a higher gross margin than the other console platforms. Net revenues from our publishing business composed 84% of total net revenues for the six months ended September 30, 2007 as compared to ~~24% in~~69% of total net revenues for the six months ended September 30, 2006. In absolute dollars, “cost of sales – product costs” increased by $133.2 million as compared to the first ~~nine~~six months of fiscal 2007. ~~As mentioned above,~~“Cost of sales – product costs” increased with the mix of our revenue growth in our publishing and distribution ~~business is a significantly lower margin business as it typically has higher~~businesses.

We expect “cost of sales —– product costs” ~~than our publishing business. In addition, PC net revenues represented 8%~~as a percentage of ~~publishing~~consolidated net revenues for fiscal 2008 to be lower than fiscal 2007 due to a larger portion of our business being derived from the ~~nine months ended December 31, 2006 compared~~publishing segment and the continued migration of consumers to ~~15% for the nine months ended December 31, 2005. PC titles typically have significantly lower product costs associated with them.~~next generation products.

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

% of

% of

December 31,

Publishing

December 31,

Publishing

Increase/

Percent

2006

Net Revenues

2005

Net Revenues

(Decrease)

Change

Three Months Ended

$
77,449

12
%
$
104,264

16
%
$
(26,815
)
(26
)%
Nine Months Ended

106,058

12
%
139,267

14
%
(33,209
)
(24
)%

			% of				% of
	September 30,		Publishing		September 30,		Publishing		Increase/		Percent
	2007		Net Revenues		2006		Net Revenues		(Decrease)		Change

Three Months Ended	$	38,427	15	%	$	9,348	7	%	$	29,079	311	%
Six Months Ended	116,679		17	%	28,609		11	%	88,070		308	%

“Cost of sales —– software royalties and amortization” as a percentage of publishing net revenues ~~decreased~~increased from ~~16%~~7% for the three months ended ~~December 31, 2005~~September 30, 2006 to ~~12%~~15% for the three months ended ~~December 31, 2006~~September 30, 2007 and from ~~14%~~11% for the ~~nine~~six months ended ~~December 31, 2005~~September 30, 2006 to ~~12%~~17% for the ~~nine~~six months ended ~~December 31, 2006.~~September 30, 2007. In absolute dollars, “cost of sales —– software royalties and amortization” ~~decreased~~increased 311% from ~~the prior fiscal year, from $104.3~~$9.3 million ~~to $77.4 million or 26%~~ for the three months ended ~~December 31,~~September 30, 2006 to $38.4 million for the three months ended September 30, 2007. For the six months ended September 30, 2007 “cost of sales – software royalties and ~~from $139.3 million~~amortization” increased to ~~$106.1~~$116.7 million or ~~24% for the nine months ended December 31, 2006~~by 308% compared to the same ~~periods ended December 31, 2005. The decreases are mainly due to:~~

· ~~A decrease~~period of fiscal 2007. $4.0 million was not included in the ~~number~~“cost of ~~titles released in~~sales – software royalties and amortization” for the three and ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 as a result of deferring “cost of sales – software royalties and amortization.” The increase in absolute dollars and the increase as a percentage of publishing net revenues, for the three and six months ended September 30, 2007, is primarily driven by a larger slate of titles in our publishing business versus the same period of prior year. For the first six months of fiscal 2008, we launched Spider-Man 3, Guitar Hero II for the Xbox360, Shrek the Third, and TRANSFORMERS: The Game, as compared to the ~~three~~first quarter fiscal 2007 releases of Over the Hedge and ~~nine months ended December 31, 2005. Our fiscal 2006 launch schedule for~~X-Men: The Official Game, and the three and nine months ended December 31, 2005 was the largest slate of new releases in our history. This compares to the three and nine months ended December 31, 2006, where we had a much more focused title slate in order to more properly align ourselves with the market uncertainty that was involved in the transition to the next-generation console systems.

· ~~Impairment charges and recoverability write-offs of $11.7 million taken in the third~~second quarter of fiscal ~~2006~~2007 release of Lego Star Wars II: The Original Trilogy in Europe. Additionally, our publishing business was a larger portion of our overall consolidated net revenues in relation to our distribution business, which drove a higher level of “cost of sales – software royalties and amortization”, given that this is a significant cost component of our publishing business.

For fiscal 2008, we expect “costs of sales – software royalties and amortization” as a ~~result~~percentage of ~~a detailed review of capitalized costs for released titles and future recoverability of capitalized amounts on titles~~publishing net revenues to be in ~~development. We did not incur any impairment and recoverability write-offs in the three or nine months ended December 31, 2006.~~line with fiscal 2007 levels.

~~Partially offset by:~~

· An increase of $1.8 million and $1.9 million, respectively, for the three and nine months ended December 31, 2006 related to amortization of capitalized stock-based compensation expense as a result of the implementation of SFAS 123R50

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

% of

% of

December 31,

Publishing

December 31,

Publishing

Increase/

Percent

2006

Net Revenues

2005

Net Revenues

(Decrease)

Change

Three Months Ended

$
23,566

4
%
$
26,376

4
%
$
(2,810
)
(11
)%
Nine Months Ended

37,838

4
%
55,765

5
%
(17,927
)
(32
)%

			% of				% of
	September 30,		Publishing		September 30,		Publishing		Increase/		Percent
	2007		Net Revenues		2006		Net Revenues		(Decrease)		Change

Three Months Ended	$	14,533	6	%	$	4,356	3	%	$	10,177	234	%
Six Months Ended	47,012		7	%	14,272		5	%	32,740		229	%

“Cost of sales —– intellectual property licenses” increased 234% from $4.4 million or 3% of publishing net revenues for the three months ended ~~December 31,~~September 30, 2006 ~~decreased in absolute dollars by 11% from $26.4~~to $14.5 million or 6% of publishing net revenues for the three months ended ~~December 31, 2005 to $23.6 million for the three months ended December 31, 2006 while the percentage of “cost~~September 30, 2007. “Cost of sales —– intellectual property licenses” to publishing net revenues remained constant at 4%. The decrease in absolute dollars is mainly due to a decrease in the number of titles released, a decrease of 3% in total publishing net revenues, and a slight shift in the composition of our title slate to one comprised of titles with lower intellectual property costs associated with them. In the quarter ended December 31, 2006, our top two selling titles were ~~Call of Duty 3~~ ~~and~~ ~~Guitar Hero 2,~~ ~~both of which are based upon intellectual property owned by us. In the quarter ended December 31, 2006, title releases which had associated intellectual property costs were~~ ~~Tony Hawk’s Project 8, Tony Hawk’s Downhill Jam, Over the Hedge: Hammy Goes Nuts!, Shrek Smash N’ Crash Racing, Cabela’s African Safari,~~ ~~and~~ ~~Marvel: Ultimate Alliance.~~ ~~In the third quarter of fiscal 2006, our “cost of sales — intellectual property licenses” was driven by intellectual property licenses associated with~~ ~~Ultimate Spider-Man, X-Men Legends II, Shrek SuperSlam, Madagascar, Tony Hawk’s American Wasteland,~~ ~~and~~ ~~Quake 4~~.

~~“Cost of sales — intellectual property licenses” decreased~~increased in both absolute dollars and as a percentage of publishing net revenues from ~~$55.8~~$14.3 million ~~and~~or 5% of publishing net revenues to ~~$37.8~~$47.0 million ~~and 4%~~or 7% of publishing net revenues for the ~~nine~~six months ended ~~December 31,~~September 30, 2006 and ~~2005,~~2007, respectively. $1.4 million was not included in the “cost of sales – intellectual property licenses” for the three and six months ended September 30, 2007 as a result of deferring “cost of sales – intellectual property licenses.”

The ~~decreases~~increases in ~~both~~ absolute dollars for both the three and six month periods ended September 30, 2007 were primarily the result of the releases of TRANSFORMERS: The Game in Europe in the second quarter of fiscal 2008, and amortization of intellectual property licenses expenses relating to Spider-Man 3 and Shrek the Third releasedworldwide in the first quarter fiscal 2008 and TRANSFORMERS: The Game released in North America and Asia in first quarter fiscal 2008. This compares to titles associated with intellectual property released in the first quarter of fiscal 2007, Over the Hedge and X-Men: The Official Game. The increase in “cost of sales – intellectual property licenses” as a percentage of publishing net revenues ~~were mainly~~was due to ~~strong sales~~ the increased number of ~~new releases and catalog~~ titles ~~with~~ no associated intellectual property royalties, the release of fewer titles in the first nine months of the current fiscal year with lower associated intellectual property royalties, and a decrease of 12% in total publishing net revenues. During the first nine months of fiscal 2007, our top two selling titles were ~~Call of Duty 3~~ ~~and~~ ~~Guitar Hero 2,~~ ~~both of which are based upon intellectual property owned by us. In addition, we had lower revenue from releases with associated intellectual property royalties which included,~~ ~~Tony Hawk’s Project 8, Tony Hawk’s Downhill Jam,~~ ~~Over the Hedge: Hammy Goes Nuts!, Shrek Smash N’ Crash Racing, Marvel: Ultimate Alliance, Over the Hedge, X-Men: The Official Game~~, ~~World Series of Poker: Tournament of Champions, Cabela’s African Safari,~~ ~~and~~ ~~Cabela’s Alaskan Adventure.~~ ~~This compares to the key new releases~~ with intellectual property ~~royalties~~costs released in the ~~first nine~~three and six months ~~of fiscal 2006:~~ ~~Madagascar,~~~~Fantastic Four, Ultimate Spider-Man, X-Men Legends II, Shrek SuperSlam, Tony Hawk’s American Wasteland~~, ~~Doom 3~~ ~~for~~periods ended September 30, 2007 when compared to the ~~Xbox~~three and ~~Quake 4~~.six months periods ended September 30, 2006.

Product Development (in thousands)

% of

% of

December 31,

Publishing

December 31,

Publishing

Increase/

Percent

2006

Net Revenues

2005

Net Revenues

(Decrease)

Change

As restated

As restated

Three Months Ended

$
37,162

6
%
$
53,254

8
%
$
(16,092
)
(30
)%
Nine Months Ended

88,395

10
%
99,698

10
%
(11,303
)
(11
)%

			% of				% of
	September 30,		Publishing		September 30,		Publishing		Increase/		Percent
	2007		Net Revenues		2006		Net Revenues		(Decrease)		Change

Three Months Ended	$	33,085	13	%	$	25,608	20	%	$	7,477	29	%
Six Months Ended	65,982		10	%	51,233		20	%	14,749		29	%

Product development expenses for the three months ended ~~December 31, 2006 decreased 30%~~September 30, 2007 increased 29%, from $25.6 million to $33.1 million, as compared to the three months ended ~~December 31, 2005, from $53.3 million to $37.2 million.~~September 30, 2006. For the ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 product development expenses ~~decreased by $11.3~~increased $14.7 million, or ~~11%~~29%, from ~~$99.7~~$51.2 million for the ~~nine~~six months ended ~~December 31, 2005~~September 30, 2006 to ~~$88.4~~$66.0 million for the ~~nine~~six months ended ~~December 31, 2006.~~September 30, 2007. As a percentage of publishing net revenues, product development expenses decreased from 8%20% for the ~~quarter~~three and six months ended ~~December 31, 2005~~September 30, 2006, respectively, to 6%13% and 10% for the ~~quarter~~three and six months ended ~~December 31, 2006 while remaining at 10% of total~~September 30, 2007, respectively. This is primarily due to more consumers migrating to the next-generation console platforms, where we are able to charge premium pricing, and our successful titles in the next-generation console platforms. As a result, the growth in publishing net revenues ~~for~~outweighed the ~~nine month periods ended December 31, 2006~~increase in product development expenses. The increase in absolute dollars primarily resulted from higher development, quality assurance, and ~~2005. The decreases in the three and nine months ended December 31, 2006 are primarily the result of product cancellation charges of $11.1 million, including termination fees,~~outside developer costs incurred during the ~~third quarter~~first two quarters of fiscal ~~2006. The product cancellation charges were based upon a business decision we made~~2008 to ~~cancel development~~support the greater number of certain titles and permanently remove them from our future title slate in order to better align opportunities associated with the next generation console platforms with income potential and risks associated with certain titles in ~~development. There were no~~development and the more technologically advanced nature of those titles.

We expect product ~~cancellation charges during the third quarter of~~development costs for fiscal ~~2007. Additionally,~~2008 to be higher in absolute dollars than fiscal 2007, although lower as a percentage of publishing net revenues, due to the increased costs related to developing more technologically advanced titles for the next-generation console systems offset by the more than proportionate projected increase in publishing net revenues. Over time, we ~~have implemented certain cost control initiatives including sharing~~intend to decrease the development costs of the next-generation console systems by leveraging technologies and tools across multiple platforms, increasing our development schedules to facilitate a longer pre-production phase and more predictable workflow times, and ~~outsourcing certain areas~~increasing the amount of game development toin lower cost service providers. The decreases were partially offset by product development expenses of $1.4 million and $4.1 million for the three and nine months ended December 31, 2006, respectively, related to stock-based compensation expense as a result of the implementation of SFAS 123R.locations.

Sales and Marketing (in thousands)

% of

% of

December 31,

Consolidated

December 31,

Consolidated

Increase/

Percent

2006

Net Revenues

2005

Net Revenues

(Decrease)

Change

As restated

As restated

Three Months Ended

$
87,410

11
%
$
156,013

19
%
$
(68,603
)
(44
)%
Nine Months Ended

156,139

13
%
259,110

20
%
(102,971
)
(40
)%

			% of				% of
	September 30,		Consolidated		September 30,		Consolidated		Increase/		Percent
	2007		Net Revenues		2006		Net Revenues		(Decrease)		Change

Three Months Ended	$	51,868	16	%	$	32,550	17	%	$	19,318	59	%
Six Months Ended	120,580		15	%	68,729		18	%	51,851		75	%

Sales and marketing expenses for the three months ended September 30, 2007 increased 59%, from $32.6 million to $51.9 million, as compared to the three months ended September 30, 2006. For the six months ended September 30, 2007, sales and marketing expenses increased $51.9 million, or 75%, from $68.7 million for the six months ended September 30, 2006 to $120.6 million for the six months ended September 30, 2007. As a percentage of ~~$87.4 million~~publishing net revenues, sales and ~~$156.0 million represented 11%~~marketing expenses decreased from 17% and ~~19%~~18% for the three and six months ended September 30, 2006, respectively, to 16% and 15% for the three and six months ended September 30, 2007, respectively. The increases in absolute dollars were a result of higher spending associated with the larger fiscal 2008 first and second quarter releases which included three major movie-based releases, Spider-Man 3 and Shrek the Third worldwide releases in the first quarter of fiscal 2008, and TRANSFORMERS: The Game released in North America and Asia in the first quarter of fiscal 2008 and in Europe in the second quarter of fiscal 2008. This compares to the same period of the prior fiscal year which included Over the Hedge and X-Men: The Official Game in the first quarter of fiscal 2007, and our European release of Lego Star Wars II: The Original Trilogy in the second quarter of fiscal 2007.

We expect sales and marketing expenses to be higher on both an absolute basis and as a percentage of consolidated net revenues for the ~~three months ended December 31, 2006~~reminder of fiscal 2008 versus the comparable period of fiscal 2007 due to a larger slate and 2005, respectively. For the nine months ended December 31, 2006 and 2005, sales and marketing expenses of $156.1 million and $259.1 million represented 13% and 20% of consolidated net revenues. These decreases ~~were a result of the implementation~~our anticipation of a ~~more targeted media program which worked more efficiently and was helped by the overall strength and high quality of our fiscal 2007 title slate. We also released fewer titles~~highly competitive environment during the ~~three and nine month periods ended December 31, 2006 as compared to the same periods of fiscal 2006,~~ where we had the largest slate of new releases in our history. The decreases were partially offset by expenses of $1.6 million and $3.5 million for the three and nine month periods ended December 31, 2006, respectively, related to stock-based compensation expense as a result of the implementation of SFAS 123R, as well as sales and marketing expenses associated with the addition of the Guitar Hero franchise.upcoming holiday season.

General and Administrative (in thousands)

% of

% of

December 31,

Consolidated

December 31,

Consolidated

Increase/

Percent

2006

Net Revenues

2005

Net Revenues

(Decrease)

Change

As restated

As restated

Three Months Ended

$
43,387

5
%
$
24,757

3
%
$
18,630

75
%
Nine Months Ended

91,647

8
%
67,228

5
%
24,419

36
%

			% of				% of
	September 30,		Consolidated		September 30,		Consolidated		Increase/		Percent
	2007		Net Revenues		2006		Net Revenues		(Decrease)		Change

Three Months Ended	$	37,382	12	%	$	26,346	14	%	$	11,036	42	%
Six Months Ended	73,176		9	%	48,260		13	%	24,916		52	%

General and administrative expenses for the three months ended ~~December 31, 2006~~September 30, 2007 increased ~~$18.6~~42%, from $26.3 million to $37.4 million, as compared to the three months ended September 30, 2006. For the six months ended September 30, 2007, general and administrative expenses increased $24.9 million, or ~~75% over~~52%, from $48.3 million for the ~~same period last year, from $24.8~~six months ended September 30, 2006 to $73.2 million ~~to $43.4 million.~~for the six months ended September 30, 2007, respectively. As a percentage of consolidated net revenues, general and administrative expenses ~~increased~~decreased from ~~3% to 5%~~14% and 13% for the three and six months ended ~~December 31, 2005~~September 30, 2006, respectively, to 12% and ~~2006, respectively. For~~9% for the ~~nine~~three and six months ended December 31, 2006, general and administrative expenses increased $24.4 million or 36% over the same period last year, from $67.2 million to $91.6 million. As a percentage of consolidated net revenues, general and administrative expenses increased from 5% to 8% for the nine months ended December 31, 2005 as compared to the nine months ended December 31, 2006. The increasesSeptember 30, 2007, respectively. Expenses were higher than prior periods primarily due to ~~increased~~an increase in headcount related costs, higher legal and professional fees, ~~relating primarily to our internal review of historical stock option granting practices,~~ the consolidation of RedOctane and DemonWare (acquired in June 2006 and May 2007, respectively) into our results of operations for the quarter, amortization of intangible assets related to the ~~RedOctane acquisition,~~acquisitions and ~~stock-based compensation expense~~the impact of $2.9 million and $9.0 million for the three and nine months ended December 31, 2006, respectively, associated with the implementation of SFAS 123R. These increases were partially offset by the benefits of our cost optimization program launchedchanges in ~~the fourth quarter of fiscal 2006 and gains on~~ foreign ~~currency.~~currency rates.

Operating Income (Loss) (in thousands)

Three Months
Ended
December 31,
2006

% of
Segment
Net Revs.

Three Months
Ended
December 31,
2005

% of
Segment
Net Revs.

Increase/
(Decrease)

Percent
Change

As restated

As restated

Publishing

$
160,628

25
%
$
65,534

10
%
$
95,094

145
%
Distribution

12,492

7
%
18,359

12
%
(5,867
)
(32
)%
Consolidated

$
173,120

21
%
$
83,893

10
%
$
89,227

106
%

	Three Months Ended September 30, 2007			% of Segment Net Revs.		Three Months Ended September 30, 2006			% of Segment Net Revs.		Increase/ (Decrease)		Percent Change

Publishing	$	(9,667	)	(4	)%	$	(36,607	)	(29	)%	$	26,940	74	%
Distribution	122			—	%	(803		)	(1	)%	925		115	%
Consolidated	$	(9,545	)	(3	)%	$	(37,410	)	(20	)%	$	27,865	74	%

	Nine Months Ended December 31, 2006		% of Segment Net Revs.		Nine Months Ended December 31, 2005		% of Segment Net Revs.		Increase/ (Decrease)			Percent Change		Six Months Ended September 30, 2007		% of Segment Net Revs.		Six Months Ended September 30, 2006			% of Segment Net Revs.		Increase/ (Decrease)		Percent Change
					As restated		As restated
Publishing	$	92,503	10	%	$	21,932	2	%	$	70,571		322	%	$	19,449	3	%	$	(68,125	)	(26	)%	$	87,574	129	%
Distribution	9,758		3	%	19,854		8	%	(10,096		)	(51	)%	1,098		1	%	(2,734		)	(2	)%	3,832		140	%
Consolidated	$	102,261	8	%	$	41,786	3	%	$	60,475		145	%	$	20,547	3	%	$	(70,859	)	(19	)%	$	91,406	129	%

Publishing operating ~~income~~loss for the three months ended ~~December 31, 2006 increased $95.1~~September 30, 2007 decreased $26.9 million or ~~145%~~74% from the same period ~~last~~prior fiscal year, from ~~$65.5~~$36.6 million to ~~$160.6~~$9.7 million, while the percentage of operating ~~income~~loss to segment net revenues ~~increased~~decreased from ~~10%~~29% to ~~25%~~4%. For the ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 publishing operating income increased ~~$70.6~~$87.6 million from the same period ~~last~~prior fiscal year, from ~~$21.9~~an operating loss of $68.1 million to ~~$92.5~~operating income of $19.5 million. These increases in operating income are primarily attributable to:

·• ~~Strong~~Stronger performance of our ~~fiscal 2007 third quarter~~ title ~~slate.~~releases for the first three and six months ended September 30, 2007.

·• ~~Decreased provision for returns~~Faster 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.

Partially offset by:

• Higher “cost of sales – software royalties and ~~price protection in the third quarter~~amortization”and “cost of sales – intellectual property licenses” associated with our larger fiscal ~~2007~~2008 slate of ~~7% and 10% of net revenues~~titles for the three and ~~nine~~six months ended ~~December 31, 2006, respectively, compared to 17%~~September 30, 2007.

• Higher “general and ~~19% of net revenues for the three and nine months ended December 31, 2005. The decrease in reserve requirements is~~administrative” costs due to ~~improved market conditions resulting~~the increased headcount in ~~strong sell through of~~ our ~~fiscal 2007 third quarter releases.~~

· ~~The implementation of a more targeted sales~~international geographies and ~~marketing program which provided significant cost savings while still delivering strong revenue performance.~~

· ~~The implementation of certain cost control initiatives resulting in decreased product development costs and savings in general and administrative expenses.~~

~~Partially offset by:~~

· ~~Higher expenses associated with stock-based compensation expense of $7.7 and $18.4 million for the three and nine months ended December 31, 2006 as a result of the implementation of SFAS 123R,~~at Red Octane, and higher ~~overall general and administrative expenses due to increased~~ legal ~~expenses~~ and professional ~~fees relating primarily to our internal review of historical stock option granting practices, including expenses relating to the informal SEC inquiry and derivative litigation.~~fees.

For the three months ended ~~December 31, 2006~~September 30, 2007 distribution operating income was ~~$12.5~~$0.1 million or 7%0% of segment net revenues, which compares to operating ~~income~~loss of ~~$18.4~~$0.8 million or ~~12%~~(1)% of segment net revenues for the three months ended ~~December 31, 2005.~~September 30, 2006. For the ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 distribution operating income was ~~$9.8~~$1.1 million or 3%1% of segment net revenues, which compares to operating ~~income~~loss of ~~$19.9~~$2.7 million or 8%(2)% of segment net revenues for the ~~nine~~six months ended ~~December 31, 2005.~~September 30, 2006. The ~~decreases are~~results from distribution business have improved primarily due to ~~increased business with large mass-market customers~~the strong performance of Activision titles for the three and six months ended September 30, 2007, lower required reserves for returns and price protection, and a lower percentage of net revenues being comprised of hardware sales, which ~~we earn smaller margins accompanied by increased costs~~is a lower margin category when compared to sales of ~~distributing higher product volumes.~~software.

Investment Income, Net (in thousands)

December 31,
2006

% of
Consolidated
Net Revenues

December 31,
2005

% of
Consolidated
Net Revenues

Increase/
(Decrease)

Percent
Change

Three Months Ended

$
9,724

1
%
$
9,162

1
%
$
562

6
%
Nine Months Ended

26,031

2
%
22,840

2
%
3,191

14
%

			% of				% of
	September 30,		Consolidated		September 30,		Consolidated		Increase/		Percent
	2007		Net Revenues		2006		Net Revenues		(Decrease)		Change

Three Months Ended	$	12,132	4	%	$	8,032	4	%	$	4,100	51	%
Six Months Ended	23,694		3	%	16,307		5	%	7,387		45	%

Net investment income for the three months ended ~~December 31, 2006~~September 30, 2007 was ~~$9.7~~$12.1 million as compared to ~~$9.2~~$8.0 million for the three months ended ~~December 31, 2005.~~September 30, 2006. Net investment income for the ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 increased ~~$3.2~~$7.4 million from ~~$22.8~~$16.3 million for the ~~nine~~six months ended ~~December 31, 2005 as compared~~September 30, 2006 to ~~$26.0~~$23.7 million for the ~~nine~~six months ended ~~December 31, 2006.~~September 30, 2007. The increases in both the three and ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 as compared to the three and ~~nine~~six months ended ~~December 31, 2005~~September 30, 2006 are mainly due to higher interest rates combined with higher average balances of cash and short term investments period over period, a realized gain of $1.8 million on the sale of a common stock investment, partially offset by 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.period.

Provision for Income Taxes (in thousands)

December 31,
2006

% of
Pretax
Income

December 31,
2005

% of
Pretax
Income

Increase/
(Decrease)

Percent
Change

As restated

As restated

Three Months Ended

$
40,024

22
%
$
25,199

27
%
$
14,825

59
%
Nine Months Ended

28,083

22
%
15,247

24
%
12,836

84
%

			% of					% of
	September 30,		Pretax		September 30,			Pretax		Increase/		Percent
	2007		Income		2006			Income		(Decrease)		Change

Three Months Ended	$	1,889	73	%	$	(5,076	)	17	%	$	6,965	137	%
Six Months Ended	15,717		36	%	(11,941		)	22	%	27,658		232	%

The income tax provision of ~~$40.0 million and $28.1~~$1.9 million for the three months ended September 30, 2007 reflects our effective income tax rate for the quarter of 73.0%, and ~~nine~~the income tax provision of $15.7 million for the six months ended September 30~~December 31,~~, 2007 reflects our estimated effective income tax rate of 35.5% for the six months ended September 30, 2007. Due to our relatively small net income before tax provision for the three months ended September 30, 2007, small changes in discrete items resulted in a large impact on our effective income tax rate for the quarter ended September 30, 2007. The significant items that generated the variance between our effective rate for the three months ended September 30, 2007 and our statutory rate of 35% were federal and state research and development tax credits, the impact of foreign tax rate differentials, and the federal deduction for domestic production activities, partially offset by state taxes and the impact of a decrease in the tax benefit of deferred tax assets on the books of our UK affiliates due to the recent enactment of a decrease in the UK statutory tax rate.

The income tax benefit of $5.1 million for the three months ended September 30, 2006 reflects our effective income tax rate for the quarter of 17.3%, which differs from our effective tax rate of 21.9%~~. This is lower than prior~~ for the year ~~as a result~~ended March 31, 2007 due to (1) an increase in the federal research and development credit for the full year ended March 31, 2007 over the amount originally anticipated for the year at September 30, 2006 due to the Congressional reinstatement of ~~improved profitability leading to utilization~~the federal R&D credit in quarter ended December 31, 2006; and (2) the elimination of ~~net operating loss carry forwards and in turn a reduction in~~the valuation ~~allowances related to federal and state~~allowance for research and development tax credits, partially offset by the nondeductible portion of annual cash bonuses determined in the three months ended March 31, 2007 under Section 162(m), and the establishment of tax ~~reserves.~~reserves for these credits and other deferred tax assets. The significant items that generated the variance between our effective rate and our statutory rate of 35% for the three months ended September 30, 2006 were ~~federal and state~~ research and development tax credits for state purposes, and the impact of foreign tax rate differentials, partially offset by 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 (Loss)

Net income for the three months ended ~~December 31, 2006~~September 30, 2007 was ~~$142.8~~$0.7 million or ~~$0.46~~$0.00 per diluted share, as compared to net ~~income~~loss of ~~$67.9~~$24.3 million or ~~$0.23~~$0.09 loss per ~~diluted~~ share for the three months ended ~~December 31, 2005.~~September 30, 2006.

Net income for the ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 was ~~$100.2~~$28.5 million or ~~$0.33~~$0.09 per diluted share, as compared to net ~~income~~loss of ~~$49.4~~$42.6 million or ~~$0.17~~$0.15 loss per ~~diluted~~ share for the ~~nine~~six months ended ~~December 31, 2005.~~September 30, 2006.

Liquidity and Capital Resources

Sources of Liquidity (in thousands)

December 31, 2006

March 31, 2006

Increase/
(Decrease)

Cash and cash equivalents

$
367,910

$
354,331

$
13,579

Short-term investments

437,290

590,629

(153,339
)

$
805,200

$
944,960

$
(139,760
)

Percentage of total assets

43
%
67
%

For the Nine Months
ended December 31,
2006

For the Nine Months
ended December 31,
2005

Increase/
(Decrease)

As restated

Cash flows used in operating activities

$
(125,417
)
$
(83,932
)
$
(41,485
)
Cash flows provided by investing activities

101,967

4,587

97,380

Cash flows provided by financing activities

27,968

37,850

(9,882
)

	September 30, 2007			March 31, 2007			Increase/ (Decrease)
Cash and cash equivalents	$	392,529		$	384,409		$	8,120
Short-term investments	569,231			570,440			(1,209		)
	$	961,760		$	954,849		$	6,911

Percentage of total assets	49		%	53		%

	For the Six Months ended September 30, 2007			For the Six Months ended September 30, 2006			Increase/ (Decrease)

Cash flows provided by (used in) operating activities	$	46,399		$	(169,271	)	$	215,670
Cash flows used in investing activities	(81,900		)	(16,870		)	(65,030		)
Cash flows provided by financing activities	38,403			16,327			22,076

As of ~~December 31, 2006,~~September 30, 2007, our primary source of liquidity is comprised of ~~$367.9~~$392.5 million of cash and cash equivalents and ~~$437.3~~$569.2 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 significant 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 Flows from Financing Activities.” We have not utilized debt financing as a significant source of cash flows. However, we do have credit facilities available at certain of our international locations, which are described below in “Credit Facilities,” that can be utilized if needed.

Our investment portfolio consists of government and corporate securities with effective maturities less than 30 months. The longer the term or holding period of the securities, the more susceptible they are to changes in market rates of interest, yields on bonds, and market price volatility. Investments are reviewed periodically to identify possible impairment. When evaluating the investments, we review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in market value. Gross unrealized losses of $0.8 million and $1.5 million as of September 30, 2007 and March 31, 2007, respectively, were comprised mostly of unrealized losses on U.S. agency issues, commercial paper, corporate bonds, and mortgage-backed securities. 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. We expect to realize the full value of all of these investments upon maturity or sale.

We believe that we have sufficient working capital ($~~1,042.9~~1,053.6 million at ~~December 31, 2006)~~September 30, 2007), in combination with 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.

Cash Flows from Operating Activities

The primary drivers of cash flows from 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. A significant operating use of our cash relates to our continued investment in software development and intellectual property licenses. We spent approximately ~~$117.6~~$88.8 million and ~~$162.8~~$84.6 million in the ~~nine~~six months ended ~~December 31,~~September 30, 2007 and 2006, ~~and 2005,~~ respectively, primarily in connection with ~~the acquisition~~internal development efforts and in support of ~~publishing or distribution rights~~third-party developers 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 internal product development. The decrease period over period is primarily due to significant agreements with ~~DreamWorks Animation SKG and Marvel Enterprises, both signed in the third quarter of fiscal 2006, partially offset by~~ increased product development costs related to the development of fiscal 2007 and fiscal 2008 title releases for the next generation console systems, which are higher than current generation console systems, as well as a new agreement, signed in May 2006, with MGM Interactive and EON Productions Ltd. for the rights to develop and publish interactive entertainment games based on the James Bond license.our business. 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.” Cash flows from operations are affected by our ability to release highly successful, or “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 typically will directly and positively impact cash flows.

For the ~~nine~~six months ended ~~December 31, 2006 and 2005,~~September 30, 2007, cash ~~flows~~flow provided by operating activities was $46.4 million as compared to cash flow used in operating activities ~~were $125.4~~of $169.3 million ~~and $83.9 million, respectively.~~for the six months ended September 30, 2006. The principal components comprising the increased cash flows ~~used in~~from operating activities for the ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 included ~~investment in software development and intellectual property licenses and increases~~a decrease in accounts ~~receivable,~~receivables as a result of stronger collections and an increase in accounts payable partially offset by ~~amortization of capitalized software development costs and intellectual property licenses.~~the increase in inventory for upcoming holiday season releases. An analysis of the change in key balance sheet accounts is below in ~~��Key~~“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 drivers of cash used in investing activities typically have included capital expenditures, acquisitions of privately held interactive software development 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 ~~nine~~six months ended ~~December 31,~~September 30, 2007 and 2006, ~~and 2005,~~ cash flows ~~provided by~~used in investing activities were ~~$102.0~~$81.9 million and ~~$4.6~~$16.9 million, respectively. For the ~~nine~~six months ended ~~December 31, 2006,~~September 30, 2007, cash flows ~~provided by~~used in investing activities were primarily the result of capital expenditures, cash paid for acquisitions, and purchases of short-term investments partially offset by proceeds from sales and maturities of short-term ~~investments partially offset by purchases of short-term investments, capital expenditures, and cash paid for acquisitions.~~investments. We have historically financed our acquisitions through the issuance of shares of our common stock, cash or a combination of our common stock and cash. We will continue to evaluate potential acquisition candidates as to the benefit they bring to us.

Cash Flows from Financing Activities

The primary sources of cash provided by financing activities have historically related to transactions involving our common stock, including the issuance of shares of our common stock to employees. We have not utilized debt financing as a significant source of cash flows. However, we do have available credit facilities at certain of our international locations, which are described below in “Credit Facilities,” that can be utilized if needed.

For the ~~nine~~six months ended ~~December 31,~~September 30, 2007 and 2006, ~~and 2005,~~ cash flows from financing activities were ~~$28.0~~$38.4 million and ~~$37.9~~$16.3 million, respectively. The cash provided by financing activities for the ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 primarily is the result of the issuance of our common stock related to employee stock option and stock purchase plans. The ~~decrease~~increase in cash provided by financing activities is due to ~~suspension of~~increase in stock option exercises during the ~~third quarter of fiscal 2007 due to our internal review of historical stock option granting practices.~~six months ended September 30, 2007.

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 ~~December 31, 2006,~~September 30, 2007, 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.

Key Balance Sheet Accounts

Accounts Receivable

(amounts in thousands)

December 31, 2006

March 31, 2006

Increase/
(Decrease)

Gross accounts receivable

$
563,713

$
127,035

$
436,678

Net accounts receivable

456,589

28,782

427,807

					Increase/
(amounts in thousands)	September 30, 2007		March 31, 2007		(Decrease)

Gross accounts receivable	$	216,344	$	240,112	$	(23,768	)
Net accounts receivable	109,725		148,694		(38,969		)

The ~~increase~~decrease in gross accounts receivable was primarily the result of ~~increased sales volume in both our distribution and publishing businesses due to more titles being released during the third quarter of fiscal 2007 compared~~collecting receivables related to the ~~fourth quarter of fiscal 2006 and higher sales volume due to seasonality~~March 2007 launch of the ~~holiday selling season. Significant shipments were made to customers~~PS3 in ~~November and December and the related receivables were not due prior to quarter end.~~Europe.

~~Reserves for returns, price protection, and doubtful~~The decrease in net accounts ~~increased~~receivable from ~~$98.3~~$148.7 million at March 31, ~~2006~~2007 to ~~$107.1~~$109.7 million at ~~December 31, 2006 largely reflecting increased sales volume and inventory in~~September 30, 2007, was greater than the ~~retail channel and resulting increase~~decrease in gross accounts ~~receivable. The decrease~~receivable due to the increase in ~~the percentage of~~ reserves for returns, price protection, and ~~doubtful accounts as a percentage of gross receivables~~bad debt from ~~77%~~$91.4 million at March 31, ~~2006~~2007 to ~~19%~~$106.6 million at December 31, 2006 reflects an improvement in market conditions during the fiscal 2007 third quarter holiday season, the successful launch of the next generation hardware platforms, and the issuance of credits to customers on previously established reserves related to fiscal 2006 titles.September 30, 2007. Reserves for returns and price protection are a function of the number of units and pricing of titles in retail inventory (see description of Allowances for Returns, Price Protection, Doubtful Accounts, and Inventory Obsolescence in Item 2: Critical Accounting ~~Policies)~~Policies and Estimates).

Inventories

(amounts in thousands)

December 31, 2006

March 31, 2006

Increase/
(Decrease)

Inventories

$
85,680

$
61,483

$
24,197

					Increase/
(amounts in thousands)	September 30, 2007		March 31, 2007		(Decrease)

Inventories	$	189,033	$	91,231	$	97,802

The increase in inventories at ~~December 31, 2006~~September 30, 2007 compared to March 31, ~~2006~~2007 is the result of additional inventories ~~associated with RedOctane and the~~to support third quarter fiscal 2008 title releases such as Guitar Hero products, which was acquired in the first quarter of fiscal 2007, additional Wii inventory in Europe due to the European release of the console late in the third quarter of fiscal 2007, and an increase in inventories at our distribution business related to the addition of a significant new customer in the second quarter of fiscal 2007.III.

Software Development

(amounts in thousands)

December 31, 2006

March 31, 2006

Increase/
(Decrease)

Software development

$
101,807

$
60,619

$
41,188

					Increase/
(amounts in thousands)	September 30, 2007		March 31, 2007		(Decrease)

Software development	$	144,669	$	130,922	$	13,747

Software development increased from ~~$60.6~~$130.9 million at March 31, ~~2006~~2007 to ~~$101.8~~$144.7 million at ~~December 31, 2006.~~September 30, 2007. The effect of deferring “cost of sales – software royalties and amortization” increased software development by $4.0 million. The increase in software development was primarily the result ~~of:~~

· ~~Continued investment~~of an increase in ~~software development for titles being developed for release in~~capitalization of third quarter fiscal 2008 ~~particularly software development costs related to three significant new games slated for release in~~titles releases and stock option expenses which was partially offset by the ~~first quarter~~amortization of ~~fiscal 2008. We incurred approximately $109.4 million in~~our movie-related titles released, such as Spider-Man 3, Shrek the ~~nine~~Third, and TRANSFORMERS: The Game during the six months ended December 31, 2006 in connection with the third party development costs as well as the capitalization of product development costs relating to internally developed products including capitalization of stock based compensation expenses as a result of the implementation of SFAS 123R.September 30, 2007.

~~Partially offset by:~~

· $70.1 million of amortization of capitalized software development costs, including $1.9 million of capitalized stock based compensation expense as a result of the implementation of SFAS 123R, related to our title releases in the first nine months of fiscal 2007.57

Intellectual Property Licenses

(amounts in thousands)

December 31, 2006

March 31, 2006

Increase/
(Decrease)

Intellectual property licenses

$
93,428

$
87,046

$
6,382

					Increase/
(amounts in thousands)	September 30, 2007		March 31, 2007		(Decrease)

Intellectual property licenses	$	81,790	$	100,274	$	(18,484	)

Intellectual property licenses ~~were slightly higher~~decreased from $100.3 million at ~~the end~~March 31, 2007 to $81.8 million at September 30, 2007. The effect of ~~the third quarter~~deferring “cost of ~~fiscal 2007 as a result of:~~

· ~~Continued investment~~sales – intellectual property licenses” increased intellectual property licenses by $1.4 million. The decrease in intellectual property ~~licenses. We spent approximately $15.5 million in~~licenses primarily result from the nine months ended December 31, 2006 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. granting us the rights to develop and publish interactive entertainment games based on the James Bond license.

~~Partially offset by:~~

· ~~$9.1 million of~~ amortization of intellectual property licenses ~~mostly related to new~~upon releases inof titles during the first ~~quarter~~six months of fiscal ~~2007.~~2008.

Accounts Payable

(amounts in thousands)

December 31, 2006

March 31, 2006

Increase/
(Decrease)

Accounts payable

$
193,875

$
88,994

$
104,881

					Increase/
(amounts in thousands)	September 30, 2007		March 31, 2007		(Decrease)

Accounts payable	$	158,059	$	136,517	$	21,542

The increase in accounts ~~payable~~payables of ~~$104.9~~$21.5 million from March 31, ~~2006~~2007 to ~~December 31, 2006~~September 30, 2007 primarily reflects increased inventory purchases to support increased holiday sales volume in both our publishing and ~~distribution~~distributing segments.

Accrued Expenses and Other Liabilities

(amounts in thousands)

December 31, 2006

March 31, 2006

Increase/
(Decrease)

Accrued expenses

$
247,581

$
104,862

$
142,719

					Increase/
(amounts in thousands)	September 30, 2007		March 31, 2007		(Decrease)

Accrued expenses and other liabilities	$	255,266	$	204,652	$	50,614

·The increase in accrued expenses was primarily ~~driven by accruals for increased marketing costs~~ due to the ~~large number~~reclassification of ~~titles released~~a long-term liability to a current liability of $39.0 million of deferred consideration related to the acquisition of RedOctane, Inc. payable before June 6, 2008 in ~~the third quarter~~our common stock, and ~~significant promotional costs on key titles, an~~the increase in ~~deferred income taxes payable,~~accruals for marketing and ~~higher accrued~~ royalties ~~due~~related to ~~higher sales volume in the third~~first quarter ~~of fiscal 2007 compared to the fourth quarter of fiscal 2006. This~~2008 title releases which was partially offset by ~~a decrease in payments~~the payment of ~~payroll accruals and separation and severance costs associated with a less than 7% reduction in workforce in the fourth quarter of fiscal 2006.~~accrued taxes payable.

Credit Facilities

We have revolving credit facilities with our Centresoft ~~distribution~~ subsidiary located in the UK (the “UK Facility”) and our NBG ~~distribution~~ subsidiary located in Germany (the “German Facility”). ~~As of December 31, 2006, the~~The UK Facility provided Centresoft with the ability to borrow up to GBP 12.0 million ($~~23.5~~24.5 million), including issuing letters of credit, on a revolving basis (including the issuance of letters of credit on its behalf). Furthermore, under the UK Facility, Centresoft provided a GBP 0.6 million ($1.2 million) guarantee for the benefit of our CD Contact distribution subsidiary as of ~~December 31, 2006.~~September 30, 2007. The UK Facility bore interest at LIBOR plus 2.0% as of ~~December 31, 2006,~~September 30, 2007, is collateralized by substantially all of the assets of the subsidiary and expires in January ~~2007.~~2008. The UK Facility also contains various covenants that require the subsidiary to maintain specified financial ratios related to, among others, fixed charges. ~~As of December 31, 2006, we were in compliance with these covenants. No borrowings were outstanding against the UK Facility as of December 31, 2006. As of~~

~~December 31, 2006,~~ ~~the~~The German Facility provided for revolving loans up to EUR 0.5 million ($0.7 million) ~~and~~as of September 30, 2007, bore interest at a Eurocurrency rate plus 2.5%~~. The German Facility~~, is collateralized by certain of the subsidiary’s property and equipment and has no expiration date. No borrowings were outstanding against the UK Facility and the German Facility as of ~~December 31, 2006.~~September 30, 2007.

As of ~~December 31, 2006,~~September 30, 2007, we maintained a ~~$7.5~~$40.0 million irrevocable standby letter of credit. The standby letter of credit ~~so that we can~~is required by one of our inventory manufacturers to qualify for ~~certain~~ payment terms on our ~~purchases from one of our~~ inventory ~~manufacturers.~~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 ~~December 31, 2006,~~September 30, 2007, the $40.0 million deposit ~~in the amount of $7.5 million~~ is included in short-term investments as restricted cash. AsNo borrowings were outstanding as of ~~December 31, 2006, we had no borrowing outstanding against this letter of credit.~~September 30, 2007.

As of ~~December 31, 2006,~~September 30, 2007, our publishing subsidiary located in the UK maintained a EUR 4.0 million ($~~5.3~~5.7 million) irrevocable standby letter of credit. The standby letter of credit ~~so that it can qualify for certain payment terms on purchases from~~is required by one of our inventory ~~manufacturers.~~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~~February 2008. No borrowings were outstanding as of September 30, 2007. ~~As of December 31, 2006, we had no borrowings outstanding against this letter of credit.~~

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, and 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. Assuming all contractual provisions are met, the total future minimum commitments for these and other contractual arrangements in place as of ~~December 31, 2006,~~September 30, 2007, are scheduled to be paid as follows (amounts in thousands):

Contractual Obligations

Facility and
Equipment Leases

Developer
and IP

Marketing

Total

Fiscal year ending March 31,

2007 (remaining three months)

$
3,456

$
37,962

$
25

$
41,443

2008

14,069

29,340

40,468

83,877

2009

13,033

28,036

26,496

67,565

2010

11,997

29,586

100

41,683

2011

9,754

30,586

100

40,440

Thereafter

22,959

64,173

—

87,132

Total

$
75,268

$
219,683

$
67,189

$
362,140

	Contractual Obligations(1)
	Facility and		Developer
	Equipment Leases		and IP		Marketing		Total
Fiscal year ending March 31,

2008 (remaining six months)	$	9,268	$	29,080	$	8,741	$	47,089
2009	19,265		55,572		46,015		120,852
2010	17,454		23,036		11,100		51,590
2011	15,045		30,586		13,100		58,731
2012	10,772		16,586		—		27,358
Thereafter	41,879		47,587		—		89,466
Total	$	113,683	$	202,447	$	78,956	$	395,086

Financial Disclosure

We maintain internal controls 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 controls and procedures,” which as defined by the SEC 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 SEC is reported within the time periods specified in the SEC’s rules and forms, and that such information is communicated to management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.

Our Disclosure Committee, which operates under the ~~board~~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-relevant information. These quarterly reports are reviewed by certain key corporate finance ~~representatives.~~executives. 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 SEC. 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 principal executive and financial officers review and make various certifications regarding the accuracy of our periodic public reports filed with the SEC, 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 control over financial reporting, and will make refinements as necessary.

Recently Issued Accounting Standards ~~and Laws~~

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 that the adoption of SFAS No. 156 will have a material effect on our financial position or results of operations.

In ~~July 2006, the FASB issued Final Interpretation No. 48 (“FIN 48”) 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.

~~On September 29,~~February 2007, the FASB issued Statement No. ~~158,~~159, ~~Employers’ Accounting~~The Fair Value Option for ~~Defined Benefit Pension~~Financial Assets and ~~Other Postretirement Plans,~~Financial Liabilities — Including an amendment of FASB ~~Statements~~Statement No. ~~87, 88, 106, and 132(R)~~ 115(“ (“SFAS No. ~~158”~~159”). 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~~159 permits entities to ~~fully recognize~~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 ~~their~~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 adopt the ~~obligations associated~~fair value option of SFAS No. 159 and what impact the adoption will have on our Consolidated Financial Statements if we adopt.

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 Development.” EITF 07-03 addresses the diversity which exists with ~~single-employer defined benefit pension plans, retiree healthcare plans, and other postretirement plans. Specifically, it requires a company~~respect to ~~(1) recognize on its balance sheet an asset~~the accounting 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~~non-refundable portion of a ~~plan through comprehensive income~~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 ~~year in which the changes occur.~~effective date. We do not expect ~~that~~ the adoption of ~~SFAS No. 158 will~~EITF 07-03 to have ~~an effect on our financial position or results of operations as we do not maintain any single-employer defined benefit pension plans, retiree healthcare plans, and other postretirement plans.~~

~~Inflation~~

~~Our management currently believes that inflation has not had~~ a material impact on ~~continuing operations.~~our Consolidated Financial Statements.

Factors Affecting Future Performance

In connection with the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”), we are hereby disclosing certain cautionary information to be used in connection with written materials (including this Quarterly Report on Form 10-Q) and oral statements made by or on behalf of our employees and representatives that may contain “forward-looking statements” within the meaning of the Litigation Reform Act. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may,” “expect,” “anticipate,” “estimate,” or “continue” or the negative thereof or other variations thereon or comparable terminology. You are cautioned that all forward-looking statements are necessarily speculative and there are numerous risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. These forward-looking statements are subject to business, economic and ~~economic risk~~legal risks and reflect management’s current expectations and are inherently uncertain and difficult to predict. For a discussion that highlights some of the more important risks identified by management, but which should not be assumed to be the only factors that could affect future performance, see the discussion under the heading “Risk Factors”, included in Part I, Item 1A of our ~~Amended~~ Annual Report on Form ~~10-K/A~~10-K for the fiscal year ended March 31, ~~2006~~2007, which ~~are~~is incorporated herein by reference and subsequent filings with the SEC. You are cautioned that we do not have a policy of updating or revising forward-looking statements, and thus you should not assume that silence by the Company over time means that actual events are bearing out as estimated in such forward-looking statements.

Item 3. 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. All of our market risk sensitive instruments are classified as instruments entered into for purposes “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 and 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 generally between three and thirty months. 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 ~~December 31, 2006,~~September 30, 2007, our cash equivalents and short-term investments included debt securities and certificates of ~~$444.0~~deposit of $724.0 million.

The following table presents the amounts and related weighted average interest rates of our investment portfolio as of ~~December 31, 2006~~September 30, 2007 (amounts in thousands):

Average
Interest Rate

Amortized
Cost

Fair
Value

Cash equivalents:

Fixed rate

5.35
%
$
14,229

$
14,221

Variable rate

5.25
%
96,605

96,605

Short-term investments:

Fixed rate

4.45
%
$
439,469

$
437,290

	Average Interest Rate		Amortized Cost		Fair Value
Cash equivalents:
Fixed rate	5.77	%	$	52,317	$	52,301
Variable rate	5.24	%	143,384		143,384

Short-term investments:
Fixed rate	5.37	%	$	528,828	$	528,318

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 the EUR, GBP and AUD. The volatility of the 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. ~~At December 31, 2006~~As of September 30, 2007, we had outstanding ~~hedging~~foreign currency exchange forward contracts of approximately $33.7 million. In addition, accrued expenses included approximately $677,000 of pre-tax unrealized losses for the ~~purchase~~estimated fair value of ~~approximately $73.7 million.~~outstanding foreign currency exchange forward contracts, which was recorded in earnings as the contracts did not qualify as hedging instruments.

Item 4. 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 ensure that: (i) information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’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~~our Chief Executive Officers and Chief Financial Officer, ~~has~~ evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of ~~December 31, 2006,~~September 30, 2007. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the ~~end~~cost-benefit relationship of ~~the period covered by this report.~~possible controls and procedures. Based on ~~this~~the evaluation of our disclosure controls ~~evaluation,~~ and ~~subject to the limitations described above, the~~procedures as of September 30, 2007, our Chief Executive Officers and Chief Financial Officer concluded that, as of ~~December 31, 2006,~~such date, our disclosure controls and procedures were ~~not~~ effective ~~due solely~~ to ~~and only~~provide reasonable assurance that information required to be disclosed by the ~~extent of, the material weakness in our historical stock option granting and modification practice described below.~~

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

As of December 31, 2006, we did not maintain effective controls over the accounting for and disclosure of stock-based compensation expense. Specifically, effective controls, including monitoring, were not maintained to ensure the accuracy and valuation of our stock-based compensation transactions related to the granting and modification of our stock options. This control deficiency resultedCompany in the ~~misstatement of stock-based compensation expense, income tax expense, retained earnings, additional paid-in capital,~~reports that it files or submits under the Exchange Act is recorded, processed, summarized, and deferred tax asset accounts and related financial disclosures, and in the restatement of our consolidated financial statements for the fiscal years 2006, 2005, and 2004, each of the quarters of fiscal 2006 and 2005, the first quarter of fiscal 2007, and in adjustments to the interim consolidated financial statements for the second, third, and fourth quarters of fiscal 2007. Additionally, this control deficiency could result in misstatements of the aforementioned accounts and disclosures that would result inreported on a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, our management has determined that this control deficiency constitutes a material weakness in our internal control over financial reporting.timely basis.

3) Changes in Internal Control Over Financial Reporting.

There was no change 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 quarter ended ~~December 31, 2006~~September 30, 2007 that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting.

~~4) Plan of Remediation of the Material Weakness.~~

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 will be 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 will be issued until such compliance is established and the grant is approved by the Compensation Committee.

· The Compensation Committee will meet 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 will be effective, and will be priced based on the closing price of our stock, on a date set by the Compensation Committee that will be on or after the date of Compensation Committee action. Details of the grant (including the exercise price) will be communicated to the grantees promptly following approval and pricing.

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

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

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 expired62

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, the Special Subcommittee recommended that Board meetings include more senior executives and that human resources, finance and legal personnel receive additional training on options and compliance issues. Many of these recommendations have already been implemented and we plan to implement the remaining recommendations in our fiscal year that began on April 1, 2007.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In July 2006, individuals and/or entities claiming to be stockholders of the Company ~~have~~ filed derivative lawsuits, purportedly on behalf of the Company, against certain current and former members of the Company’s Board of Directors as well as several current and former officers of the Company. Three derivative actions have been filed in Los Angeles Superior Court: Vazquez v. Kotick, et ~~al.~~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.). Two 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). 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’s issuance of stock options. Plaintiffs seek various relief on 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 expects that defense expenses associated with the matters will be covered by its directors and officers insurance, subject to the terms and conditions of the applicable policies.

The Company filed motions to dismiss in the federal action on June 1, ~~2007, which will be fully briefed by August 15,~~ 2007. A hearing on the motions has been continued to December 3, 2007.

met with members of the staff of the SEC on several occasions, in person and by telephone (as has the Company’s

outside legal counsel), to discuss the progress of the Special Subcommittee’s investigation and ~~on February 28, 2007~~ to brief the SEC staff on the Special Subcommittee’s findings and ~~recommendations following the substantial completion of the Special Subcommittee’s investigation.~~recommendations. A representative of the U.S. Department of Justice has attended certain of these meetings and requested copies of certain documents that we have provided to the staff of the SEC. At this time, the Company has not received any grand jury subpoenas or written requests from the Department of Justice.

Item ~~1A. Risk Factors~~4. Submission of Matters to a Vote of Security Holders

~~Our business is subject~~

We held our 2007 Annual Meeting of the Stockholders on September 27, 2007 in Beverly Hills, California. The following five items were submitted to ~~many risks~~a vote of the stockholders:

1. the election of eight directors to hold office until the next annual meeting of Activision’s stockholders and ~~uncertainties, which may affect~~until their respective successors are duly elected and qualified;

2. the approval of the Activision, Inc. 2007 Incentive Plan;

3. the ratification of the appointment of PricewaterhouseCoopers LLP as our ~~future financial performance, including~~independent registered public accounting firm for the ~~risk factors set forth in Item 1A~~fiscal year ending March 31, 2008;

4. the approval of a stockholder proposal regarding diversity of our ~~Amended Annual Report~~Board of Directors; and

5. the approval of a stockholder proposal regarding a stockholder advisory vote on ~~Form 10-K/A~~executive compensation.

All eight director nominees, each of whom was then a member of the Board of Directors and was recommended by the Board, were elected. Set forth below are the results of the voting,

For

Withheld

Robert A. Kotick

244,668,136

14,158,909

Brian G. Kelly

245,266,960

13,560,085

Ronald Doornink

199,210,084

59,616,961

Robert J. Corti

203,754,925

55,072,120

Barbara S. Isgur

96,455,116

162,371,929

Robert J. Morgado

95,555,580

163,271,465

Peter J. Nolan

104,540,039

154,287,006

Richard Sarnoff

252,327,419

6,499,626

64

The Activision, Inc. 2007 Equity Incentive Plan was approved. Set forth below are the results of the voting.
For

Against

Abstained

Not Voted

149,122,526

84,842,138

410,763

24,451,618

The selection of PricewaterhouseCoopers LLP as our independent auditors for the fiscal year ended March 31, ~~2006 and the risks set~~2008 was approved. Set forth ~~below. 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.~~

In our fiscal year 2007, we began to recognize expense for stock-based compensation related to our employee equity compensation and employee stock purchase programs. The recognition of this expense will significantly lower our reported net income (or increase our reported net loss).

Beginning in our current fiscal year, we adopted SFAS 123R, which requires us to recognize compensation expense for all stock-based compensation based on estimated fair values. As a result, beginning with our first quarter of fiscal 2007, our operating results contain a charge for stock-based compensation related to the equity-based compensation 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.

~~Risk Factors Relating to Results of Special Subcommittee Review of Our Stock Option Granting Practices~~

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

Although a Special Subcommittee of our independent directors has completed its review of our stock option grants and practices in the period between 1992 and 2006, an investigation by the SEC relating to our stock option granting practices remains pending, as does derivative litigation against us and certain of our current and former directors and officers. Although we believe that we have taken appropriate action and made appropriate disclosures and corrections to the consolidated financial statements set forth in this report for matters relating to stock options, the SEC (or the court in the derivative action) may disagree with the findings of the Special 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 need to further restate our prior financial statements, further amend our filings with the SEC, or take other actions not currently

~~contemplated. In addition, these proceedings~~ are 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. These eventualities could materially and adversely affect our business and results of operations. We cannot currently predict the ultimate outcome of these proceedings.

If we do not maintain compliance with Nasdaq listing requirements, our common stock could be delisted, which could, among other things, reduce the price of our common stock and the levels of liquidity available to our stockholders.

In connection with the Special Subcommittee’s review and the restatement of our Consolidated Financial Statements, we have not timely filed certain of our periodic reports with the SEC. As a result, we have not been in compliance with Nasdaq listing requirements. We are filing these reports today and believe that, with these filings, we will regain compliance with Nasdaq listing requirements. Nasdaq has, to date, permitted our securities to remain listed. However, our securities could be delisted in the future if we do not timely file our required reports with the SEC in the future, if we are required to further restate or amend our filings or if we otherwise do not maintain compliance with applicable listing requirements. If our securities are delisted from the Nasdaq Global Select Market, they would subsequently be transferred to the National Quotation Service Bureau, or “Pink Sheets”. The trading of our common stock through the Pink Sheets might reduce the price of our common stock and the levels of liquidity available to our stockholders. In addition, the trading of our common stock through the Pink Sheets could materially and adversely affect our access to the capital markets and our ability to raise capital through alternative financing sources on terms acceptable to us, or to raise capital at all. Securities that trade through the Pink Sheets are no longer eligible for margin loans, and a company trading through the Pink Sheets cannot avail itself of federal preemption of state securities or “blue sky” laws, which adds substantial compliance costs to securities issuances, including pursuant to employee option plans, stock purchase plans and private or public offerings of securities. If we are delisted in the future from the Nasdaq Global Select Market and transferred to the Pink Sheets, we could also be subject to other negative implications, including the potential loss of confidence by suppliers, customers and employees and the loss of institutional investor interest in our securities.

We had a material weakness in internal control over financial reporting and cannot assure you that additional material weaknesses will not be identified in the future. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors 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 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 reporting as of March 31, 2006. Our management has also concluded that this weakness continued to exist as of December 31, 2006. See the discussion included in Part II, Item 9A of our Amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2006 and Part I, Item 4 of this Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2006 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, controls 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 due 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~~the voting.

For		Against		Abstained		Not Voted
256,924,900		1,409,136		493,009		—

The stockholder proposal regarding diversity on our Board of Directors was not approved. Set forth below are the ~~effectiveness of our internal control over financial reporting required under Section 404~~results of the ~~Sarbanes-Oxley Act~~voting.

For		Against		Abstained		Not Voted
22,777,548		193,625,462		17,972,417		24,451,618

The stockholder proposal regarding a stockholder advisory vote on executive compensation was approved. Set forth below are the results of ~~2002~~the voting.

For		Against		Abstained		Not Voted
156,125,135		68,188,924		10,061,368		24,451,618

Item 5. Other Information

Pursuant to an agreement dated September 12, 2007, Nintendo of America Inc. (“Nintendo”) and Activision Publishing, Inc., a wholly owned subsidiary of the Company and the ~~rules promulgated thereunder.~~Company’s principal operating subsidiary, entered into a Confidential License Agreement for the Wii Console (Western Hemisphere), which is filed herewith as Exhibit 10.9. Pursuant to the agreement, Nintendo has granted to Activision Publishing a nonexclusive license to use intellectual property rights of Nintendo to develop, manufacture, advertise, market and sell video game software for the Wii Console until October 12, 2009 (subject to earlier termination in certain events). Under the agreement, Nintendo has the right to approve each game, including the artwork and the printed materials distributed with the game. The ~~existence~~amounts to be paid by Activision Publishing to Nintendo under the agreement will be based on Nintendo’s then current pricing schedule, and will include a royalty for the use of ~~a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us~~Nintendo’s intellectual property rights.

Pursuant to ~~fail to timely meet our reporting obligations~~an amendment dated July 16, 2007, filed herewith as Exhibit 10.6, Activision Publishing and ~~cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.~~

~~As a result~~Nintendo have extended the term of the ~~delayed filing of certain of our periodic reports, we will be ineligible~~parties’ October 11, 2004 Confidential License Agreement for Nintendo DS (Western Hemisphere) for an additional two years, to ~~use Form S-3 or Form S-4 for a period of time. This may adversely affect our ability to engage in certain types of corporate acquisition and capital-raising transactions.~~October 10, 2009.

As a result of our delayed filing of certain of our periodic reports, we will be ineligible to register our securities on Form S-3 or Form S-4 for sale by us or resale by other security holders until we have timely filed all periodic reports under the Securities Exchange Act of 1934 for a period of time. In the meantime, we have the ability 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.

~~The information set forth above should be read in conjunction with the risk factors and information disclosed in our Amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2006.~~65

Item 6. Exhibits

(a) Exhibits

~~Item 6.~~	~~Exhibits~~

~~(a)~~	~~Exhibits~~

3.1		Amended and Restated Certificate of Incorporation of Activision Holdings, ~~Inc.,~~ dated June 9, 2000 (incorporated by reference to Exhibit 2.5 of ~~our Current Report on~~Activision’s Form 8-K, filed on June 16, 2000).

	3.2		Certificate of Amendment of Amended and Restated Certificate of Incorporation of Activision Holdings ~~Inc.,~~ dated as of June 9, 2000 (incorporated by reference to Exhibit 2.7 of ~~our Current Report on~~Activision’s Form 8-K, filed June 16, 2000).

	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 ~~our Quarterly Report on~~Activision’s Form 10-Q for the ~~quarterly period~~quarter ended December 31, ~~2001, filed February 13, 2002)~~2001).

	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 ~~our Current Report on~~Activision’s Form 8-K, filed April 5, 2005).

	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 ~~our Current Report on~~Activision’s Form 8-K, filed August 5, 2005).

	3.6		~~Second~~Third Amended and Restated ~~Bylaws~~By-Laws of Activision, Inc., dated September ~~15, 2005~~27, 2007 (incorporated by reference to Exhibit ~~3.1 of our Current Report~~3.6 to the Company’s Registration Statement on Form ~~8-K,~~S-8, Registration No. 333-146431, filed ~~September 19, 2005)~~October 1, 2007).

	4.1		Rights Agreement dated as of April 18, 2000, between ~~Activision,~~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’s Registration Statement on Form 8-A, Registration No. 001-15839, filed April 19, 2000).

	10.1		Confidential License Agreement for the Nintendo DS (Western Hemisphere), dated as of October 11, 2004, between Nintendo Co., Ltd. and Activision Publishing, Inc.

	10.2		Notice of Share Option Award to Robin Kaminsky, dated as of October 19, 2006.

	10.3		Notice of Share Option Award to Robin Kaminsky, dated as of October 19, 2006.

	10.4		Notice of Restricted Stock Award to Robin Kaminsky, dated as of October 19, 2006.

	10.5		Notice of Restricted Stock Award to Robin Kaminsky, dated as of October 19, 2006.

	10.6		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.

	10.7		Employment Agreement, dated September 11, 2007, between George Rose and Activision Publishing, Inc.

	10.8		Employment Agreement, dated September 12, 2007, between Ann Weiser and Activision Publishing, Inc.

	10.9		Confidential License Agreement for the Wii Console (Western Hemisphere), dated September 12, 2007, between Nintendo of America, Inc. and Activision Publishing, Inc.*

	10.10		Chart of Compensation Paid to Non-Employee Directors.

	10.11		Activision, Inc. 2007 Incentive Plan (incorporated by reference to Exhibit ~~4.1~~99.1 to the Company’s Registration Statement on Form S-8, Registration No. 333-146431, filed October 1, 2007).

	10.12		Notice of ~~our~~Share Option Award to George Rose, dated September 28, 2007.

	10.13		Notice of Restricted Share Unit Award to George Rose, dated September 28, 2007.

	10.14		Notice of Share Option Award to Ann Weiser, dated September 28, 2007.

	10.15		Notice of Restricted Share Unit Award to Ann Weiser, dated September 28, 2007.

	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		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		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		Certification of Robert A. Kotick pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2		Certification of Michael Griffith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.3		Certification of Thomas Tippl pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Portions omitted pursuant to a request for confidential treatment.

SIGNATURES

Pursuant to the requirements 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:	November 7, 2007

ACTIVISION, INC.

/s/ Thomas Tippl
Thomas Tippl
Chief Financial Officer of Activision Publishing, Inc. and
Principal Financial and Accounting Officer of Activision, Inc.

EXHIBIT INDEX

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

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’s Form 8-K, filed June 16, 2000).

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’s Form 10-Q for the quarter ended December 31, 2001).

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’s Form 8-K, filed April 5, 2005).

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’s Form 8-K, filed August 5, 2005).

3.6		Third Amended and Restated By-Laws of Activision, Inc., dated September 27, 2007 (incorporated by reference to Exhibit 3.6 to the Company’s Registration Statement on Form S-8, Registration No. 333-146431, filed October 1, 2007).

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’s Registration Statement on Form 8-A, Registration No. 001-15839, filed April 19, 2000).

10.1		~~Second Amended and Restated 2002 Employee Stock Purchase Plan~~Confidential License Agreement for ~~International Employees, as amended,~~the Nintendo DS (Western Hemisphere), dated as of October ~~20, 2006 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed on October 23, 2006)~~11, 2004, between Nintendo Co., Ltd. and Activision Publishing, Inc.

10.2		~~Employment Agreement~~Notice of Share Option Award to Robin Kaminsky, dated as of October ~~3, 2006 between Brian Hodous and Activision Publishing, Inc.~~19, 2006.

10.3		~~Employment Agreement~~Notice of Share Option Award to Robin Kaminsky, dated as of October 19, ~~2006 between Robin Kaminsky and Activision Publishing, Inc.~~2006.

10.4		~~Agreement~~Notice of Restricted Stock Award to ~~Amend Employment Agreement between the Company and Robert Kotick,~~Robin Kaminsky, dated ~~December 29, 2006 (incorporated by reference~~as of October 19, 2006.

10.5		Notice of Restricted Stock Award to ~~Exhibit 10.1~~Robin Kaminsky, dated as of ~~our Current Report on Form 8-K, filed on January 8, 2007)~~October 19, 2006.

~~10.5~~10.6		First Amendment to Confidential License Agreement ~~to Amend~~ for Nintendo DS (Western Hemisphere), dated as of July 16, 2007, between Nintendo Co., Ltd. and Activision Publishing, Inc.

10.7		Employment Agreement, dated September 11, 2007, between George Rose and Activision Publishing, Inc.

10.8		Employment Agreement, dated September 12, 2007, between Ann Weiser and Activision Publishing, Inc.

10.9		Confidential License Agreement for the ~~Company~~Wii Console (Western Hemisphere), dated September 12, 2007, between Nintendo of America, Inc. and ~~Brian Kelly, dated December 29, 2006~~Activision Publishing, Inc.*

10.10		Chart of Compensation Paid to Non-Employee Directors.

10.11		Activision, Inc. 2007 Incentive Plan (incorporated by reference to Exhibit ~~10.2 of our Current Report~~99.1 to the Company’s Registration Statement on Form ~~8-K,~~S-8, Registration No. 333-146431, filed ~~on January 8,~~October 1, 2007).

10.12		Notice of Share Option Award to George Rose, dated September 28, 2007.

10.13		Notice of Restricted Share Unit Award to George Rose, dated September 28, 2007.

10.14		Notice of Share Option Award to Ann Weiser, dated September 28, 2007.

10.15		Notice of Restricted Share Unit Award to Ann Weiser, dated September 28, 2007.

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		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		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		Certification of Robert A. Kotick pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Michael Griffith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.3		Certification of Thomas Tippl pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~SIGNATURES~~

~~Pursuant~~*Portions omitted pursuant to ~~the requirements 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.~~a request for confidential treatment.

~~Date: June 6, 2007~~

~~ACTIVISION, INC.~~

~~/s/ Thomas Tippl~~
~~Thomas Tippl~~
~~Chief Financial Officer of Activision Publishing, Inc. and~~
~~Principal Financial and Accounting Officer of Activision, Inc.~~

8470

		Cautionary Statement
	~~Explanatory Note~~

PART I.		FINANCIAL INFORMATION

Item 1.		Financial Statements

		Consolidated Balance Sheets as of ~~December 31, 2006~~September 30, 2007 (Unaudited) and March 31, ~~2006~~2007

		Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2007 (Unaudited) and September 30, 2006 (Unaudited) ~~and December 31, 2005, as restated (Unaudited)~~

		Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~December 31,~~September 30, 2007 (Unaudited) and September 30, 2006 (Unaudited) ~~and December 31, 2005, as restated (Unaudited)~~

		Consolidated Statement of Changes in Shareholders’ Equity for the ~~nine~~six months ended ~~December 31, 2006~~September 30, 2007 (Unaudited)

		Notes to Consolidated Financial Statements ~~for the three and nine months ended December 31, 2006~~ (Unaudited)

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

Item 3.		Quantitative and Qualitative Disclosures about Market Risk

Item 4.		Controls and Procedures

PART II.		OTHER INFORMATION

Item 1.		Legal Proceedings

Item ~~1A.~~	~~Risk Factors~~4.		Submission of Matters to a Vote of Security Holders

Item 6.		Exhibits

SIGNATURES

~~CERTIFICATION~~EXHIBIT INDEX

CERTIFICATIONS

	December 31, 2006		March 31, 2006
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	367,910	$	354,331
Short-term investments	437,290		590,629
Accounts receivable, net of allowances of $107,124 and $98,253 at December 31, 2006 and March 31, 2006, respectively	456,589		28,782
Inventories	85,680		61,483
Software development	86,119		40,260
Intellectual property licenses	28,628		4,973
Deferred income taxes	4,266		9,664
Other current assets	17,896		25,933

Total current assets	1,484,378		1,116,055

Software development	15,688		20,359
Intellectual property licenses	64,800		82,073
Property and equipment, net	46,713		45,368
Deferred income taxes	85,552		52,545
Other assets	5,941		1,409
Goodwill	188,398		100,446

Total assets	$	1,891,470	$	1,418,255

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	193,875	$	88,994
Accrued expenses	247,581		104,862

Total current liabilities	441,456		193,856

Other liabilities	41,128		1,776

Total liabilities	482,584		195,632

Commitments and contingencies (Note 14)

Shareholders’ equity:
Preferred stock, $.000001 par value, 3,750,000 shares authorized, no shares issued at December 31, 2006 and March 31, 2006	—		—
Series A Junior Preferred stock, $.000001 par value, 1,250,000 shares authorized, no shares issued at December 31, 2006 and March 31, 2006	—		—
Common stock, $.000001 par value, 450,000,000 shares authorized, 282,934,869 and 277,020,898 shares issued and outstanding at December 31, 2006 and March 31, 2006, respectively	—		—
Additional paid-in capital	948,028		867,297
Retained earnings	442,199		341,990
Accumulated other comprehensive income	18,659		16,369
Unearned compensation (Note 1)	—		(3,033		)

Total shareholders’ equity	1,408,886		1,222,623

Total liabilities and shareholders’ equity	$	1,891,470	$	1,418,255

	For the three months ended December 31,				For the nine months ended December 31,
	2006		2005		2006		2005
			As restated(1)				As restated(1)

Net revenues	$	824,259	$	816,242	$	1,200,500	$	1,279,875

Costs and expenses:
Cost of sales – product costs	382,165		367,685		618,162		617,021
Cost of sales – software royalties and amortization	77,449		104,264		106,058		139,267
Cost of sales – intellectual property licenses	23,566		26,376		37,838		55,765
Product development	37,162		53,254		88,395		99,698
Sales and marketing	87,410		156,013		156,139		259,110
General and administrative	43,387		24,757		91,647		67,228

Total costs and expenses	651,139		732,349		1,098,239		1,238,089

Operating income	173,120		83,893		102,261		41,786

Investment income, net	9,724		9,162		26,031		22,840

Income before income tax provision	182,844		93,055		128,292		64,626

Income tax provision	40,024		25,199		28,083		15,247

Net income	$	142,820	$	67,856	$	100,209	$	49,379

Basic earnings per share	$	0.51	$	0.25	$	0.36	$	0.18

Weighted average common shares outstanding	282,512		274,965		280,499		272,089

Diluted earning per share	$	0.46	$	0.23	$	0.33	$	0.17

Weighted average common shares outstanding assuming dilution	307,175		296,205		304,317		293,397

	For the three months ended			For the nine months ended
	December 31, 2005			December 31, 2005

Net income, as previously reported	$	67,945		$	51,118

Additional compensation expense resulting from improper measurement dates for stock option grants (1)	174			2,286

Tax related effects	(85		)	(547		)

Total effect on net income	89			1,739

Net income, as restated	$	67,856		$	49,379

	For the three months ended December 31, 2005
(in thousands, except per share data)	As previously reported		Adjustments			As restated

Net revenues	$	816,242	$	—		$	816,242

Costs and expenses:
Cost of sales – product costs	367,685		—			367,685
Cost of sales – software royalties and amortization	104,264		—			104,264
Cost of sales – intellectual property licenses	26,376		—			26,376
Product development	53,139		115			53,254
Sales and marketing	155,999		14			156,013
General and administrative	24,712		45			24,757

Total costs and expenses	732,175		174			732,349

Operating income	84,067		(174		)	83,893

Investment income, net	9,162		—			9,162

Income before income tax provision	93,229		(174		)	93,055

Income tax provision	25,284		(85		)	25,199

Net income	$	67,945	$	(89	)	$	67,856

Basic earnings per share	$	0.25	$	—		$	0.25

Weighted average common shares outstanding	274,965		—			274,965

Diluted earnings per share	$	0.23	$	—		$	0.23

Weighted average common shares outstanding assuming dilution	298,752		(2,547		)	296,205

	For the nine months ended December 31, 2005
(in thousands)	As previously reported			Adjustments			As restated
Cash flows from operating activities:
Net income	$	51,118		$	(1,739	)	$	49,379
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes	(10,819		)	4,796			(6,023		)
Realized gain on sale of short term investments	(4,295		)	—			(4,295		)
Depreciation and amortization	10,228			—			10,228
Amortization of capitalized software development costs and intellectual property licenses	168,351			—			168,351
Stock-based compensation expense	292			2,214			2,506
Tax benefit of stock options and warrants exercised	26,612			(5,343		)	21,269

Changes in operating assets and liabilities (net of effects of acquisitions):
Accounts receivable	(305,305		)	—			(305,305		)
Inventories	(36,810		)	—			(36,810		)
Software development and intellectual property licenses	(162,793		)	—			(162,793		)
Other assets	321			—			321
Accounts payable	104,895			—			104,895
Accrued expenses and other liabilities	74,273			72			74,345

Net cash used in operating activities	(83,932		)	—			(83,932		)

Cash flows from investing activities:
Capital expenditures	(20,174		)	—			(20,174		)
Cash payments to effect business combinations, net of cash acquired	(7,081		)	—			(7,081		)
Increase in restricted cash	(7,500		)	—			(7,500		)
Purchases of short-term investments	(143,162		)	—			(143,162		)
Proceeds from sales and maturities of short-term investments	182,504			—			182,504

Net cash provided by investing activities	4,587			—			4,587

Cash flows from financing activities:
Proceeds from issuance of common stock to employees	37,850			—			37,850

Net cash provided by financing activities	37,850			—			37,850

Effect of exchange rate changes on cash	(5,044		)	—			(5,044		)

Net decrease in cash and cash equivalents	(46,539		)	—			(46,539		)

Cash and cash equivalents at beginning of period	313,608			—			313,608
Cash and cash equivalents at end of period	$	267,069		$	—		$	267,069

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

	Estimated Useful
	Life
	(in years)	Amount
Finite-lived intangibles:
Trademark	1.3	$	1,000
Other intangibles	0.6-1.6	15,700

Total finite-lived intangibles		$	16,700

	Gross		Accumulated Amortization		Net
Trademark	$	1,000	$	520	$	480
Other intangibles	15,700		9,121		6,579

Total	$	16,700	$	9,641	$	7,059

Fiscal year ending March 31,	Amount
2007 (remaining three months)	$	2,061
2008	4,998
2009	—
2010	—
2011	—
Thereafter	—

Total	$	7,059

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash and cash equivalents:
Cash and time deposits	$	257,084	$	—	$	—		$	257,084
Money market instruments	96,605		—		—			96,605
Commercial paper	14,229		—		(8		)	14,221

Cash and cash equivalents	367,918		—		(8		)	367,910

Short-term investments:
U.S. agency issues	231,511		6		(1,579		)	229,938
Corporate bonds	92,126		5		(216		)	91,915
Commercial paper	44,257		—		(50		)	44,207
Mortgage-backed securities	42,789		—		(322		)	42,467
Asset-backed securities	11,289		3		(20		)	11,272
Certificate of deposit	9,997		—		(6		)	9,991
Restricted cash	7,500		—		—			7,500

Short-term investments	439,469		14		(2,193		)	437,290

Cash, cash equivalents and short-term investments	$	807,387	$	14	$	(2,201	)	$	805,200

	Amortized Cost		Fair Value
Due in one year or less	$	308,320	$	307,005
Due after one year through two years	56,875		56,731
Due after two years through three years	4,022		4,014
Due in three years or more	12,906		12,531
	382,123		380,281
Asset and mortgage-backed securities	54,078		53,739
Certificate of deposit	9,997		9,991

Total	$	446,198	$	444,011

	December 31, 2006		March 31, 2006
Finished goods	$	81,652	$	58,876
Purchased parts and components	4,028		2,607

	$	85,680	$	61,483

	Three months ended December 31,					Nine months ended December 31,
	2006		2005			2006			2005
			As restated						As restated
Net income	$	142,820	$	67,856		$	100,209		$	49,379

Other comprehensive income (loss):
Foreign currency translation adjustment	4,742		(937		)	10,983			(6,925		)
Unrealized appreciation (depreciation) on short-term investments	1,342		(1,432		)	(8,693		)	(2,172		)

Other comprehensive income (loss)	6,084		(2,369		)	2,290			(9,097		)

Comprehensive income	$	148,904	$	65,487		$	102,499		$	40,282

	Nine months ended December 31, 2005
	Publishing			Distribution		Total
	As restated			As restated		As restated

Total segment revenues	$	1,028,458		$	251,417	$	1,279,875
Revenues from sales between segments	(124,530		)	124,530		—

Revenues from external customers	$	903,928		$	375,947	$	1,279,875

Operating income	$	21,932		$	19,854	$	41,786

Total assets	$	1,392,523		$	197,592	$	1,590,115

	Three months ended December 31,				Nine months ended December 31,
	2006		2005		2006		2005
			As restated				As restated

Numerator:
Numerator for basic and diluted earnings per share – income available to common shareholders	$	142,820	$	67,856	$	100,209	$	49,379

Denominator:
Denominator for basic earnings per share- weighted average common shares outstanding	282,512		274,965		280,499		272,089

Effect of dilutive securities:
Employee stock options and stock purchase plan	24,025		20,625		23,222		20,713
Warrants to purchase common stock	638		615		596		595

Potential dilutive common shares	24,663		21,240		23,818		21,308

Denominator for diluted earnings per share - weighted average common shares outstanding plus assumed conversions	307,175		296,205		304,317		293,397

Basic earnings per share	$	0.51	$	0.25	$	0.36	$	0.18

Diluted earnings per share	$	0.46	$	0.23	$	0.33	$	0.17

	Contractual Obligations
	Facility and		Developer
	Equipment Leases		and IP		Marketing		Total
Fiscal year ending March 31,

2007 (remaining three months)	$	3,456	$	37,962	$	25	$	41,443
2008	14,069		29,340		40,468		83,877
2009	13,033		28,036		26,496		67,565
2010	11,997		29,586		100		41,683
2011	9,754		30,586		100		40,440
Thereafter	22,959		64,173		—		87,132
Total	$	75,268	$	219,683	$	67,189	$	362,140

	Three Months Ended December 31, 2006			Nine Months Ended December 31, 2006
Cost of sales - software royalties and amortization	$	1,836		$	1,872
Product development	1,394			4,064
Sales and marketing	1,559			3,488
General and administrative	2,904			9,009

Stock-based compensation expense before income taxes	7,693			18,433
Income tax benefit	(3,008		)	(7,207		)

Total stock-based compensation expense after income taxes	$	4,685		$	11,226

	Software Development
Balance, March 31, 2006	$	—
Stock based compensation expense capitalized during period	6,868
Amortization of capitalized stock-based compensation expense	(1,872		)
Balance, December 31, 2006	$	4,996

	Three Months Ended December 31, 2005			Nine Months Ended December 31, 2005
	As restated			As restated
Net income, as reported	$	67,856		$	49,379
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects	72			1,695
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(4,222		)	(12,188		)

Pro forma net income	$	63,706		$	38,886

Earnings per share

Basic - as reported	$	0.25		$	0.18
Basic - pro forma	$	0.23		$	0.14

Diluted - as reported	$	0.23		$	0.17
Diluted - pro forma	$	0.22		$	0.13

	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	3.36	$	1.05	665	$	1.05
$1.72 to $1.75	8,202	2.22	1.75		8,202	1.75
$1.76 to $3.52	5,357	5.33	3.34		4,699	3.34
$3.54 to $5.00	5,712	5.99	4.04		5,099	4.07
$5.08 to $5.74	4,959	5.61	5.72		4,292	5.72
$5.79 to $7.73	6,607	6.21	7.12		5,800	7.09
$7.75 to $11.10	5,535	7.86	9.78		861	8.80
$11.15 to $13.08	4,930	8.57	12.31		476	12.02
$13.13 to $14.33	4,935	9.25	13.65		61	13.90
$14.37 to $17.21	2,228	9.08	15.36		247	15.49
	49,130	6.18	$	7.08	30,402	$	4.45

	Three Months Ended			% of		Three Months Ended		% of
	December 31,			Publishing		December 31,		Publishing		Increase/			Percent
	2006			Net Revs.		2005		Net Revs.		(Decrease)			Change
Publishing Net Revenues

PC	$	33,388		5	%	$	113,782	17	%	$	(80,394	)	(71	)%

Console
Sony PlayStation 3	28,786			4	%	—		—	%	28,786			n/a
Sony PlayStation 2	290,153			45	%	258,233		39	%	31,920			12	%
Microsoft Xbox 360	145,913			22	%	71,456		11	%	74,457			104	%
Microsoft Xbox	32,401			5	%	103,422		15	%	(71,021		)	(69	)%
Nintendo Wii	44,669			7	%	—		—	%	44,669			n/a
Nintendo GameCube	3,152			1	%	46,430		7	%	(43,278		)	(93	)%
Other	(4		)	—	%	145		—	%	(149		)	(103	)%
Total console	545,070			84	%	479,686		72	%	65,384			14	%

Hand-held	71,339			11	%	74,032		11	%	(2,693		)	(4	)%

Total publishing net revenues	$	649,797		100	%	$	667,500	100	%	$	(17,703	)	(3	)%

	Nine Months Ended			% of		Nine Months Ended		% of
	December 31,			Publishing		December 31,		Publishing		Increase/			Percent
	2006			Net Revs.		2005		Net Revs.		(Decrease)			Change
Publishing Net Revenues

PC	$	69,443		8	%	$	154,735	15	%	$	(85,292	)	(55	)%

Console
Sony Playstation 3	28,786			3	%	—		—	%	28,786			n/a
Sony PlayStation 2	397,498			44	%	388,375		38	%	9,123			2	%
Microsoft Xbox 360	176,019			19	%	71,456		7	%	104,563			146	%
Microsoft Xbox	52,544			6	%	195,382		19	%	(142,838		)	(73	)%
Nintendo Wii	44,669			5	%	—		—	%	44,669			n/a
Nintendo GameCube	19,882			2	%	74,475		7	%	(54,593		)	(73	)%
Other	(3		)	—	%	385		—	%	(388		)	(101	)%
Total console	719,395			79	%	730,073		71	%	(10,678		)	(1	)%

Hand-held	121,125			13	%	143,650		14	%	(22,525		)	(16	)%

Total publishing net revenues	$	909,963		100	%	$	1,028,458	100	%	$	(118,495	)	(12	)%

	Three Months Ended December 31, 2006		% of Segment Net Revs.		Three Months Ended December 31, 2005		% of Segment Net Revs.		Increase/ (Decrease)			Percent Change
					As restated		As restated
Publishing	$	160,628	25	%	$	65,534	10	%	$	95,094		145	%
Distribution	12,492		7	%	18,359		12	%	(5,867		)	(32	)%
Consolidated	$	173,120	21	%	$	83,893	10	%	$	89,227		106	%

	December 31, 2006		% of Consolidated Net Revenues		December 31, 2005		% of Consolidated Net Revenues		Increase/ (Decrease)		Percent Change

Three Months Ended	$	9,724	1	%	$	9,162	1	%	$	562	6	%
Nine Months Ended	26,031		2	%	22,840		2	%	3,191		14	%

	December 31, 2006		% of Pretax Income		December 31, 2005		% of Pretax Income		Increase/ (Decrease)		Percent Change
					As restated		As restated
Three Months Ended	$	40,024	22	%	$	25,199	27	%	$	14,825	59	%
Nine Months Ended	28,083		22	%	15,247		24	%	12,836		84	%

(amounts in thousands)	December 31, 2006		March 31, 2006		Increase/ (Decrease)

Gross accounts receivable	$	563,713	$	127,035	$	436,678
Net accounts receivable	456,589		28,782		427,807

	Contractual Obligations
	Facility and Equipment Leases		Developer and IP		Marketing		Total
Fiscal year ending March 31,

2007 (remaining three months)	$	3,456	$	37,962	$	25	$	41,443
2008	14,069		29,340		40,468		83,877
2009	13,033		28,036		26,496		67,565
2010	11,997		29,586		100		41,683
2011	9,754		30,586		100		40,440
Thereafter	22,959		64,173		—		87,132

Total	$	75,268	$	219,683	$	67,189	$	362,140

	For	Withheld
Robert A. Kotick	244,668,136	14,158,909

Brian G. Kelly	245,266,960	13,560,085

Ronald Doornink	199,210,084	59,616,961

Robert J. Corti	203,754,925	55,072,120

Barbara S. Isgur	96,455,116	162,371,929

Robert J. Morgado	95,555,580	163,271,465

Peter J. Nolan	104,540,039	154,287,006

Richard Sarnoff	252,327,419	6,499,626