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 ~~September 30, 2008~~March 31, 2009

	OR

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

For the transition period from to

Commission File Number 1-15839

ACTIVISION BLIZZARD, 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~~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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large Accelerated Filer x ~~Accelerated Filer~~ o ~~Non-accelerated filer~~ o ~~(Do not check if a smaller reporting company)~~		Accelerated Filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

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

The number of shares of the registrant’s Common Stock outstanding ~~as of October 31, 2008~~at May 1, 2009 was ~~1,324,390,741.~~1,286,763,247.

Table of Contents

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

~~INDEX~~Table of Contents

	Explanatory Note	3

	Cautionary Statement	3

PART I.	FINANCIAL INFORMATION	4

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at March 31, 2009 and December 31, 2008	4

	~~Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007~~	4

	Condensed Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and March 31, 2008 ~~(Unaudited) and September 30, 2007 (Unaudited)~~	5

	Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2009 and March 31, 2008 ~~(Unaudited) and September 30, 2007 (Unaudited)~~	6

	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the ~~nine~~three months ended ~~September 30, 2008 (Unaudited)~~March 31, 2009	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results Ofof Operations	3624

Item 3.	Quantitative and Qualitative Disclosures ~~about~~About Market Risk	5635

Item 4.	Controls and Procedures	5736

PART II.	OTHER INFORMATION	5937

Item 1.	Legal Proceedings	5937

Item 1A.	Risk Factors	6037

Item 4.2.	~~Submission~~Unregistered Sales of ~~Matters to a Vote~~Equity Securities and Use of ~~Security Holders~~Proceeds	6037

Item 6.	Exhibits	6437

~~SIGNATURES~~SIGNATURE	67	38

EXHIBIT INDEX	68	39

CERTIFICATIONS

Table of Contents

EXPLANATORY NOTE

On July 9, 2008, a business combination by and among Activision, Inc., Sego Merger Corporation, a wholly-owned subsidiary of Activision, Inc., Vivendi S.A., (“Vivendi”), VGAC LLC, a wholly-owned subsidiary of Vivendi, ~~S.A.,~~ and Vivendi Games, Inc., a wholly-owned subsidiary of VGAC LLC, was consummated. As a result of the consummation of the business combination, Activision, Inc. was renamed Activision Blizzard, Inc. For accounting purposes, the business combination is treated as a “reverse acquisition,” with Vivendi Games, Inc. deemed to be the acquirer. The historical financial statements of Activision Blizzard, Inc. prior to July 9, 2008 are those of Vivendi Games, Inc. (see Note 1 of ~~consolidated financial statement~~Condensed Consolidated Financial Statements for more details).

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 consist of any statement other than a recitation of historical fact and 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,” “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~~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~~at the date on which ~~they were made,~~this Form 10-Q was first filed, 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 ~~the following:~~ sales levels of ~~Activision Blizzard’s~~our titles, shifts in consumer spending trends, the impact of the current macroeconomic environment, the seasonal and cyclical nature of the interactive game market, ~~Activision Blizzard’s~~any difficulties experienced during the transition of World of Warcraft in China from the current licensee to NetEase, our ability to predict consumer preferences among competing hardware platforms (including next-generation hardware), declines in software pricing, product returns and price protection, product delays, retail acceptance of ~~Activision Blizzard’s~~our products, adoption rate and availability of new hardware and related software, industry competition, rapid changes in technology and industry standards, protection of proprietary rights, litigation against ~~Activision Blizzard,~~us, maintenance of relationships with key personnel, customers, licensees, licensors, vendors and third-party developers, counterparty risks relating to customers, licensees, licensors and manufacturers, domestic and international economic, financial and political conditions and policies, foreign exchange rates, integration of recent acquisitions and the identification of suitable future acquisition opportunities, ~~Activision Blizzard’s~~our success in ~~integrating~~completing the integration of the operations of Activision and Vivendi Games in a timely manner, or at all, and the combined company’s ability to realize the anticipated benefits and synergies of the transaction to the extent, or in the timeframe, anticipated, ~~as well as~~and the other ~~risk~~ factors identified in “Risk Factors” included in Part II, Item 1A of ~~our~~this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the ~~quarter~~year ended ~~June 30,~~December 31, 2008. ~~Except~~The forward-looking statements contained herein are based upon information available to us as ~~otherwise noted (including in connection with~~of the ~~review~~date of this Quarterly Report on Form 10-Q and ~~presentation~~we assume no obligation to update any such forward-looking statements. Forward-looking statements believed to be true when made may ultimately prove to be incorrect. These statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and may cause actual results ~~of operations for the quarter ended September 30, 2008), all references~~ to ~~“we,” “us,” “our,” “Activision Blizzard” or “the Company” in the following discussion and analysis mean Activision Blizzard, Inc. and its subsidiaries~~.differ materially from current expectations.

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in millions, except share data)

	September 30, 2008			December 31, 2007
	(Unaudited)			(As Adjusted)			At March 31, 2009			At December 31, 2008
Assets
Current assets:
Cash and cash equivalents	$	2,842		$	62		$	2,988		$	2,958
Short-term investments	94			3			42			44
Accounts receivable, net of allowances of $96 million and $94 million at September 30, 2008 and December 31, 2007, respectively	316			104
Accounts receivable, net of allowances of $224 million and $268 million at March 31, 2009 and December 31, 2008, respectively							185			1,210
Inventories	377			21			230			262
Software development	226			25			245			235
Intellectual property licenses	10			9			35			35
Deferred income taxes	228			143
Deferred income taxes, net							571			536
Intangible assets, net	51			—			4			14
Other current assets	57			23			210			201

Total current assets	4,201			390			4,510			5,495

Long-term investments	86			—			79			78
Software development	20			51			6			1
Intellectual property licenses	—			8			5			5
Property and equipment, net	168			129			138			149
Deferred income taxes	80			24
Other assets	21			6			23			30
Intangible assets, net	1,462			7			1,244			1,283
Trade name	433			53
Trade names							433			433
Goodwill	7,270			203			7,213			7,227

Total assets	$	13,741		$	871		$	13,651		$	14,701

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	338		$	49		$	163		$	555
Deferred revenues	206			197			647			923
Accrued expenses and other liabilities	557			274			504			842

Total current liabilities	1,101			520			1,314			2,320

Deferred income tax, net	696			—
Deferred income taxes, net							708			615
Other liabilities	169			111			181			239

Total liabilities	1,966			631			2,203			3,174

Commitments and contingencies (Note 15)

Shareholders’ equity:
Common stock, $.000001 par value, 2,400,000,000 shares authorized, 1,323,628,497 shares issued and outstanding at September 30, 2008 and 590,618,180 shares issued and outstanding at December 31, 2007	—			—
Common stock, $.000001 par value, 2,400,000,000 shares authorized, 1,331,364,196 and 1,325,206,032 shares issued at March 31, 2009 and December 31, 2008, respectively							—			—
Additional paid-in capital	12,165			490			12,218			12,170
Net payable to Vivendi and affiliated companies	—			77
Less: Treasury stock, at cost, 44,845,025 and 12,967,265 at March 31, 2009 and December 31, 2008, respectively							(439		)	(126		)
Accumulated deficit	(403		)	(367		)	(285		)	(474		)
Accumulated other comprehensive income	13			40

Accumulated other comprehensive loss							(46		)	(43		)
Total shareholders’ equity	11,775			240			11,448			11,527

Total liabilities and shareholders’ equity	$	13,741		$	871		$	13,651		$	14,701

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in millions, except per share data)

For the three months ended
September 30,

For the nine months ended
September 30,

2008

2007

2008

2007

(As Adjusted)

(As Adjusted)

Net revenues

Product sales

$
413

$
98

$
553

$
246

Subscription, licensing, and other revenues

298

228

834

650

Total net revenues

711

326

1,387

896

Costs and expenses

Cost of sales – product costs

279

31

350

95

Cost of sales – software royalties and amortization

50

5

88

14

Cost of sales – intellectual property licenses

36

1

45

5

Cost of sales – massively, multiplayer, online game

43

40

123

146

Product development

200

117

414

327

Sales and marketing

142

46

220

105

Restructuring costs

61

—

61

(1
)
General and administrative

94

29

172

71

Total costs and expenses

905

269

1,473

762

Operating income (loss)

(194
)
57

(86
)
134

Investment income (loss), net

24

(2
)
28

(5
)

Income (loss) before income tax provision (benefit)

(170
)
55

(58
)
129

Income tax provision (benefit)

(62
)
7

(22
)
(12
)

Net income (loss)

$
(108
)
$
48

$
(36
)
$
141

Net income (loss) per share
Basic and diluted

$
(0.08
)
$
0.08

$
(0.04
)
$
0.24

Number of shares used in computation
Basic and diluted

1,271

591

816

591

	For the three months ended March 31,
	2009		2008

Net revenues
Product sales	$	690	$	61
Subscription, licensing, and other revenues	291		264
Total net revenues	981		325

Costs and expenses
Cost of sales — product costs	296		35
Cost of sales — software royalties and amortization	72		21
Cost of sales — intellectual property licenses	64		2
Cost of sales — massively multi-player online role-playing game (“MMORPG”)	52		49
Product development	117		104
Sales and marketing	83		27
General and administrative	103		24
Restructuring	15		—
Total costs and expenses	802		262

Operating income	179		63

Investment income, net	10		2

Income before income tax expense	189		65

Income tax expense	—		22

Net income	$	189	$	43

Earnings per common share, basic and diluted	$	0.14	$	0.07

Weighted-average shares outstanding
Basic	1,308		591
Diluted	1,359		591

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Table of Contents

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(Amounts in millions)

	For the nine months ended September 30,
	2008			2007			For the three months ended March 31,
				(As Adjusted)			2009			2008
Cash flows from operating activities:
Net income (loss)	$	(36	)	$	141
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net income							$	189		$	43
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	(109		)	(24		)	56			21
Depreciation and amortization	144			45			69			16
Impairment charges	24			—
Loss on disposal of property and equipment	—			1
Amortization and write-offs of capitalized software development costs and intellectual property licenses (1)	120			15
Unrealized gain on auction rate securities classified as trading securities							(3		)	—
Unrealized loss on put option from UBS							3			—
Amortization and write-off of capitalized software development costs and intellectual property licenses (1)							68			22
Stock-based compensation expense (2)	47			77			30			8
Tax benefit associated with employee stock options	2			—
Excess tax benefits from stock option exercises	(17		)	—			(17		)	—
Changes in operating assets and liabilities, net of impact of acquisitions:
Changes in operating assets and liabilities:
Accounts receivable	224			125			1,026			72
Inventories	(135		)	(3		)	32			2
Software development and intellectual property licenses	(119		)	(71		)	(75		)	(19		)
Other assets	(11		)	(3		)	(5		)	(6		)
Deferred revenues	10			88			(276		)	5
Accounts payable	108			(10		)	(392		)	(18		)
Accrued expenses and other liabilities	(127		)	(73		)	(378		)	(50		)

Net cash provided by operating activities	125			308			327			96

Cash flows from investing activities:
Capital expenditures	(24		)	(46		)	(10		)	(6		)
Cash acquired through the business combination, net of cash payments to effect acquisitions	1,137			—
Increase in restricted cash	(35		)	1

Net cash provided by (used in) investing activities	1,078			(45		)
Proceeds from sale of investments							2			—
Proceeds from maturities of investments							1			—
Cash payments to effect acquisitions, net of cash acquired							—			(4		)
Decrease in restricted cash							—			2
Net cash used in investing activities							(7		)	(8		)

Cash flows from financing activities:
Proceeds from issuance of common stock to employees	19			—			7			—
Repurchase of stock through tender offer	(2		)	—
Return of capital to Vivendi	(79		)	—
Issuance of additional common stock related to the business combination	1,731			—
Repurchase of common stock							(313		)	—
Excess tax benefits from stock option exercises							17			—
Net cash transfers to Vivendi and affiliated companies	(79		)	(294		)	—			(107		)
Excess tax benefits from stock option exercises	17			—
Net cash used in financing activities							(289		)	(107		)

Net cash provided by (used in) financing activities	1,607			(294		)

Effect of exchange rate changes on cash	(30		)	3
Effect of foreign exchange rate changes on cash and cash equivalents							(1		)	4

Net increase (decrease) in cash and cash equivalents	2,780			(28		)	30			(15		)

Cash and cash equivalents at beginning of period	62			68			2,958			62

Cash and cash equivalents at end of period	$	2,842		$	40		$	2,988		$	47

~~(1)~~

~~Excludes amortization of stock-based compensation expense.~~

~~(2)~~

(1) Excludes deferral and amortization of stock-based compensation expense.

(2) Includes the net effects of capitalization, deferral, and amortization of stock-based compensation expense.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

For the ~~Nine~~Three Months ended ~~September 30, 2008~~March 31, 2009

(Unaudited)

(Amounts in millions)

Common Stock

Additional
Paid-In

Net Payable to

Accumulated

Accumulated
Other
Comprehensive

Total Shareholders’

Shares

Amount

Capital

Vivendi

Deficit

Income (Loss)

Equity

Balance at December 31, 2007 (As Adjusted)

591

$
—

$
490

$
77

$
(367
)
$
40

$
240

Settlement of payable to Vivendi (see Note 18)

—

—

(2
)
(77
)
—

—

(79
)
Components of comprehensive loss:

Net loss

—

—

—

—

(36
)
—

(36
)
Unrealized depreciation on short-term investments, net of taxes

—

—

—

—

—

(2
)
(2
)
Foreign currency translation adjustment

—

—

—

—

—

(25
)
(25
)
Total comprehensive loss

(63
)
Tender offer (see Note 1)

—

—

(2
)
—

—

—

(2
)
Issuance of additional common stock related to the business combination (see Note 1)

126

—

1,731

—

—

—

1,731

Issuance of common stock pursuant to employee stock options, restricted stock rights, employee stock purchase plans, and warrants

5

—

19

—

—

—

19

Stock-based compensation expense related to employee stock options, restricted stock rights, and employee stock purchase plans

—

—

42

—

—

—

42

Preliminary purchase consideration upon the business combination (see Note 4)

602

—

9,964

—

—

—

9,964

Tax benefit associated with employee stock options

—

—

2

—

—

—

2

Return of capital to Vivendi (see Note 18)

—

—

(79
)
—

—

—

(79
)
Balance at September 30, 2008

1,324

$
—

$
12,165

$
—

$
(403
)
$
13

$
11,775

														Accumulated
				Additional										Other			Total
	Common Stock			Paid-In		Treasury Stock					Accumulated			Comprehensive			Shareholders’
	Shares	Amount		Capital		Shares		Amount			Deficit			Loss			Equity

Balance at December 31, 2008	1,325	$	—	$	12,170	(13	)	$	(126	)	$	(474	)	$	(43	)	$	11,527

Components of comprehensive income:
Net income	—	—		—		—		—			189			—			189
Change in unrealized depreciation on investments, net of taxes	—	—		—		—		—			—			(1		)	(1		)
Foreign currency translation adjustment	—	—		—		—		—			—			(2		)	(2		)
Total comprehensive income																	186
Issuance of common stock pursuant to employee stock options and restricted stock rights	6	—		7		—		—			—			—			7
Stock-based compensation expense related to employee stock options and restricted stock rights	—	—		39		—		—			—			—			39
Issuance of contingent consideration	—	—		2		—		—			—			—			2
Shares repurchased	—	—		—		(32	)	(313		)	—			—			(313		)

Balance at March 31, 2009	1,331	$	—	$	12,218	(45	)	$	(439	)	$	(285	)	$	(46	)	$	11,448

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Table of Contents

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Background and basis of presentation

Business

Activision Blizzard, Inc. and subsidiaries (“Activision Blizzard,” “we,” “us,” the “Company,” or “our”) is a worldwide pure-play online, personal computer (“PC”), console, and hand-held game publisher. Through Activision Publishing, Inc. (“Activision”), we are a leading international publisher of interactive software products and peripherals. Activision develops and publishes video games on various consoles, hand-held platforms and the PC platform through internally developed franchises and license agreements. Activision currently offers games that operate on the Sony Computer Entertainment (“Sony”) PlayStation 2 (“PS2”), Sony PlayStation 3 (“PS3”), Nintendo Co. Ltd. (“Nintendo”) Wii (“Wii”), and Microsoft Corporation (“Microsoft”) Xbox 360 (“Xbox 360”) console systems; the Sony PlayStation Portable (“PSP”) and Nintendo Dual Screen (“NDS”) hand-held devices; the PC; and the new handheld game system Nintendo DSi. Through Blizzard Entertainment, Inc. (“Blizzard”), we are a leader in terms of subscriber base and revenues generated in the subscription-based massively multi-player online role-playing game (“MMORPG”) category. Blizzard internally develops and publishes PC-based computer games and maintains its proprietary online-game related service, Battle.net.

Our Activision business involves the development, marketing, and sale of products directly, by license, or through our affiliate label program with certain third-party publishers. Activision’s products cover diverse game categories including action/adventure, action sports, racing, role-playing, simulation, first-person action, music, and strategy. Activision’s target customer base ranges from casual players to game enthusiasts, and children to adults.

Our Blizzard business involves the development, marketing, sales and support of role playing action and strategy games. Blizzard also develops, hosts, and supports its online subscription-based games in the MMORPG category. Blizzard is the development studio and publisher best known as the creator of World of Warcraft and the multiple award winning Diablo, StarCraft, and Warcraft franchises. Blizzard distributes its products and generates revenues worldwide through various means, including: subscription revenues (which consist of fees from individuals playing World of Warcraft, such as prepaid-cards and other ancillary online revenues); retail sales of physical “boxed” product; electronic download sales of PC products; and licensing of software to third-party companies that distribute World of Warcraft in China, Russia and Taiwan.

Our distribution business consists of operations in Europe that provide warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.

We maintain significant operations in the United States, Canada, the United Kingdom (“UK”), Germany, France, Italy, Spain, Australia, Sweden, South Korea, Norway, Denmark, China, and the Netherlands.

Business Combination

~~We consummated our previously announced~~On July 9, 2008, a business combination (the “Business Combination”) ~~pursuant to the Business Combination Agreement (the “Business Combination Agreement”), dated as of December 1, 2007,~~ by and among Activision, Inc., Sego Merger Corporation, a wholly-owned subsidiary of Activision, Inc., Vivendi S.A. (“Vivendi”), VGAC LLC, a wholly-owned subsidiary of Vivendi, ~~(“VGAC”),~~ and Vivendi Games, Inc., a wholly-owned subsidiary of VGAC ~~(“Vivendi Games”). Up~~onLLC, was consummated. As a result of the ~~closing~~consummation of the Business Combination, ~~which occurred on July 9, 2008,~~ Activision, Inc. was renamed Activision Blizzard, Inc. ~~(“Activision Blizzard”). Activision Blizzard continues to operate as a public company traded on the NASDAQ under the ticker symbol ATVI. Activision Blizzard~~ ~~now conducts the combined business operations of Activision, Inc. and Vivendi Games including its subsidiary, Blizzard Entertainment, Inc. (“Blizzard”). In connection with~~For accounting purposes, the Business Combination we issued approximately 717 million shares of common stock to VGAC including 126 million shares of common stock purchased by Vivendi for approximately $1.7 billion. Immediately following the consummation of the Business Combination, VGAC owned approximately 54% of Activision Blizzard’s issued and outstanding common stock. While Activision, Inc. was the surviving entity in this Business Combination, because the transaction is treated as a “reverse ~~acquisition”,~~acquisition,” with Vivendi Games, isInc. deemed to be the acquirer for accounting purposes. Accordingly, Activision Blizzard applied purchase accounting to the assets and liabilities of Activision, Inc. as of July 9, 2008. Also, for all Exchange Act filings following consummation of the Business Combination, theacquirer. The historical financial statements of Activision Blizzard, ~~for periods~~Inc. prior to ~~the consummation of the Business Combination will be~~July 9, 2008 are those of Vivendi ~~Games.~~Games, Inc. Activision, Inc.’s businesses were included in Activision Blizzard’s financial statements for all periods subsequent to the consummation of the Business Combination only.

~~In accordance with the terms~~ See Note 1 of the ~~Business Combination Agreement, on July 16, 2008, Activision Blizzard commenced a tender offer~~Notes to ~~purchase up to 293 million shares~~Consolidated Financial Statements of ~~its common stock at a price of $13.75 per share. The tender offer expired on August 13, 2008. We purchased 171,832 shares of our common stock as a result of~~ the ~~tender offer. These shares were accounted for using the treasury method and were retired and cancelled.~~

Upon consummation of the Business Combination, the senior unsecured credit agreement with Vivendi (as lender) became effective upon terms substantially similar to those previously disclosed in Note 21 of the consolidated financial statements included in Activision, Inc.’s Annual Report on Form 10-K for the ~~fiscal year ended March 31, 2008. Under that credit agreement, we have access to funds for general corporate purposes as previously disclosed (see Note 16 for details).~~

~~Basis of Presentation~~

The accompanying unaudited Consolidated Financial Statements as of September 30, 2008 and for the three and nine month periods ended September 30, 2008 and 2007 include the accounts of Activision Blizzard, Inc. and its subsidiaries (“Activision Blizzard” or “we”). The information furnished is unaudited and 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 accompanying unaudited Consolidated Financial Statements should be read in conjunction with Vivendi Games, Inc. and its subsidiaries (“Vivendi Games”) audited Consolidated Financial Statements for the year ended December 31, 2007 included in our Form 8-K as filed with the Securities and Exchange Commission (“SEC”) on November 5, 2008. The selection of footnote disclosures appearing in this Quarterly Report on Form 10-Q are those deemed necessary in order to update and make current the financial disclosures presented in the Vivendi Games’ audited financial statements2008 for ~~the year ended December 31, 2007.~~more details.

Certain financial information that is normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles, (“US GAAP”), but is not required for interim reporting purposes, has been condensed or omitted.Activision Blizzard continues to operate as a public company traded on NASDAQ under the ticker symbol ATVI and now conducts the combined business operations of Activision, Inc. and Vivendi Games including its subsidiary, Blizzard Entertainment.

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2.Basis of Presentation~~Accounting changes~~

~~Comparative period~~ ~~– Following~~Activision Blizzard prepared the ~~consummation~~accompanying unaudited Condensed Consolidated Financial Statements in accordance with the rules and regulations of the ~~Business Combination,~~Securities and Exchange Commission for interim reporting. As permitted under those rules and regulations, certain notes or other information that are normally required by accounting principles generally accepted in the ~~historical financial statements~~United States of ~~Activision Blizzard for periods prior to~~America (“U.S. GAAP”) have been condensed or omitted if they substantially duplicate the ~~consummation of~~disclosures contained in the ~~Business Combination are those of Vivendi Games. Activision, Inc.’s businesses were included~~annual audited Consolidated Financial Statements. The unaudited Condensed Consolidated Financial Statements should be read in ~~Activision Blizzard’s financial statements for all periods subsequent to the consummation of the Business Combination only.~~

~~Change in Segment Presentation–~~ In conjunction with the ~~Business Combination, we changed the manner in which senior management assesses the operating performance of,~~audited Consolidated Financial Statements and allocates resources to, its operating segments. As a result, we operate four business segments: (i) Blizzard Entertainment, Inc. and its subsidiaries – publishing of traditional games and online subscription-based games in the massively multiplayer online game (“MMOG”) category (“Blizzard”), (ii) Activision Publishing - publishing interactive entertainment software and peripherals which includes certain studios, assets, and titles previouslynotes thereto included in Vivendi Games’ Sierra Entertainment prior to the Business Combination (“Activision”), (iii) Activision Blizzard Distribution - distribution of interactive entertainment software and hardware products (“Distribution”) (these three business segments form Activision Blizzard’s core operations) and (iv) Activision Blizzard’s non-core exit operations. Activision Blizzard’s non-core exit operations represent legacy Vivendi Games’ divisions or business units that the Company has begun to exit or wind down as part of our restructuring and integration efforts as a result of the Business Combination, but do not meet the criteria for separate reporting of discontinued operations. In accordance with the provisions of Statement of Financial Standards, No. 131, “Disclosures about Segments of an Enterprise and Related Information,” (“SFAS No. 131”), all prior period segment information has been restated, when practical, to conform to this new financial statement presentation (see Note 14 for details).

~~Change in Accounting Principles~~ ~~– In the current quarter, the Company changed the manner in which it recognizes revenue associated with sales of~~ ~~The Burning Crusade~~ ~~expansion pack, released in January 2007 for its massively, multi-player, online game,~~ ~~World of Warcraft. Prior to the Business Combination, Vivendi Games determined that the sale of an expansion pack was a separate deliverable with standalone value apart from the~~ ~~World of Warcraft~~ license and the subscription to the online game. Pursuant to Emerging Issues Task Force No. 00-21 “Revenue Arrangements with Multiple Deliverables” (“EITF No. 00-21”), Vivendi Games recognized revenue from the sale of an expansion pack upon delivery because it had standalone value and there was objective and reliable evidence of fair value for the subscription service. As a result of the consummation of the Business Combination the Company changed its weighting of the factors considered in determining if sales of ~~The Burning Crusade~~ ~~expansion pack have standalone value. After considering the intended functionality of the expansion pack and the necessity of the~~ ~~World of Warcraft~~ license and subscription service to the functionality of the expansion pack, the Company determined that it is preferable to conclude that the expansion packs do not have standalone value and to account for fees from sales of expansion packs over the remaining estimated useful life of the customer. This method recognizes revenue over the period during which the customer is expected to utilize the intended full functionality of the expansion pack. The Company believes that it is preferable to recognize revenue from sales of expansion packs over the estimated remaining useful life of the customer, because this is consistent with the accounting for the ~~World of Warcraft~~ license and the evolution of accounting for on-line enabled video games in the console industry. In accordance with Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), this change has been applied retrospectively to our consolidated financial statements for all prior periods.

In addition to the above, the Company also identified certain ancillary fees charged to World of Warcraft subscribers that had been recognized immediately rather than deferred over the estimated remaining subscription life. Accordingly, the Company has also retrospectively adjusted subscription revenuesAnnual Report on Form 10-K for the year ended December 31, ~~2007,~~2008. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation of our financial position and ~~such adjustments are immaterial to all periods presented.~~results of operations in accordance with U.S. GAAP have been included.

As a result of the changes, cost of sales and amortization of capitalized software costs were also impacted, as cost of sales and software amortization are recognized in relation to the related revenues. We filed a Form 8-K with the SEC on November 5, 2008 which summarizes the effect of the changes to prior periods. The ~~effects of these changes to the numbers in this Form 10-Q were as follows (amounts in millions):~~accompanying unaudited

~~Table of Contents~~Condensed

Three months ended September 30, 2007

As Reported

As Adjusted

Effect of
Change

As Adjusted
(Reclassified)

Consolidated Statement of Operations:

Product sales

$
73

$
106

$
33

$
98

Subscription, licensing and other revenues

221

220

(1
)
228

Cost of sales – product costs

70

72

2

31

Cost of sales – software royalties and amortization

1

3

2

5

Operating income

29

57

28

57

Income (loss) before income tax provision (benefit)

27

55

28

55

Income tax provision (benefit)

(4
)
7

11

7

Net income

$
31

$
48

$
17

$
48

Net income per share
- Basic and diluted

$
0.05

$
0.08

$
0.03

$
0.08

Nine months ended September 30, 2007

As Reported

As Adjusted

Effect of
Change

As Adjusted
(Reclassified)

Consolidated Statement of Operations:

Product sales

$
339

$
284

$
(55
)
$
246

Subscription, licensing and other revenues

624

613

(11
)
650

Cost of sales – product costs

239

234

(5
)
95

Cost of sales – software royalties and amortization

8

7

(1
)
14

Operating income (loss)

193

133

(60
)
134

Income (loss) before income tax provision (benefit)

189

129

(60
)
129

Income tax provision (benefit)

12

(12
)
(24
)
(12
)

Net income (loss)

$
177

$
141

$
(36
)
$
141

Net income per share
- Basic and diluted

$
0.30

$
0.24

$
(0.06
)
$
0.24

December 31, 2007

As Reported

As Adjusted

Effect of
Change

As Adjusted
(Reclassified)

Consolidated Balance Sheets:

Software development

$
1

$
1

$
—

$
25

Deferred income taxes

127

143

16

143

Deferred revenues

137

190

53

197

Accrued expenses and other liabilities

374

362

(12
)
274

Accumulated deficit

(343
)
(367
)
(24
)
(367
)

Nine months ended September 30, 2007

As Reported

As Adjusted

Effect of
Change

As Adjusted
(Reclassified)

Consolidated Statement of Cash Flows:

Net income (loss)

$
177

$
141

$
(36
)
$
141

Adjustments to reconcile net income to net cash provided by operating activities:

Deferred income taxes

—

(24
)
(24
)
(24
)
Amortization and write-offs of capitalized software development costs and intellectual property licenses

8

7

(1
)
15

Changes in operating assets and liabilities:

Deferred revenues

8

83

75

88

Accrued expenses and other liabilities

44

30

(14
)
(73
)

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As adjusted (reclassified) reflects certain reclassification adjustments made to prior periods to be consistent with the current period presentation. There is no change on retained earnings as of January 1, 2007 as a result of the change in accounting principle.

~~Stock Split~~ - In July 2008, the Board of Directors approved a two-for-one split of our outstanding common shares effected in the form of a stock dividend (“the split”). The split was paid September 5, 2008 to shareholders of record as of August 25, 2008. The par value of our common stock was maintained at the pre-split amount of $.000001 per share. The Consolidated Financial Statements include the accounts and ~~Notes thereto, including all share~~operations of Activision Blizzard. All intercompany accounts and ~~per share data,~~transactions have been ~~restated as if the split had occurred as of the earliest period presented.~~

~~Reclassifications~~ ~~- Certain reclassifications~~eliminated. The Condensed Consolidated Financial Statements have been ~~made to prior year financial statements to conform to the current period presentation.~~

3.~~Summary of significant accounting policies~~

~~Significant Accounting Assumptions and Estimates~~

prepared in conformity with U.S. GAAP. The preparation of ~~financial statements~~the Condensed Consolidated Financial Statements in conformity with USU.S. GAAP requires management to make estimates and assumptions that affect the amounts reported ~~amounts of assets and liabilities and~~in the ~~disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.~~Condensed Consolidated Financial Statements. Actual results could differ from ~~those~~these estimates and assumptions.

~~Principles of Consolidation~~Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

The Consolidated Financial Statements include the accounts of Activision Blizzard, Inc., a Delaware corporation, and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

~~Cash, Cash Equivalents, and Investments~~

~~Cash and cash equivalents include cash, money markets, and short-term investments with original maturities~~2. Summary of ~~not more than 90 days.~~

Short-term investments generally mature between three and thirty months. Investments with maturities beyond one year may be classified as short-term based on their liquid nature and because such securities represent the investment of cash that is available for current operations. All other investments that are not classified as short-term are classified as long-term investments. All of our investments are classified as available-for-sale and are carried at fair market value with unrealized appreciation (depreciation) reported, net of taxes, as a component of accumulated other comprehensive income (loss) in shareholders’ equity. The specific identification method is used to determine the cost of securities disposed with realized gains and losses reflected in investment income, net.

~~Restricted Cash – Compensating Balances~~significant accounting policies

We have restricted cash of $87 million as of September 30, 2008 and $3 million as of December 31, 2007. Most of the restricted cash as of September 30, 2008 relates to the standby letter of credit required by one of our inventory manufacturers to qualify for payment terms on our inventory purchases. Under the terms of this arrangement, we are required to maintain with the issuing bank a compensating balance, restricted as to use, of not less than the sum of the available amount of the letter of credit plus the aggregate amount of any drawings under the letter of credit that have been honored thereunder but not reimbursed. Restricted cash is included in short-term investments.

Financial Instruments

The estimated fair values of financial instruments have been determined using available market information and valuation methodologies described below. However, considerable judgment is required in interpreting market data to develop ~~the~~ estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

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The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses are a reasonable approximation of fair value due to their short-term nature. Short-term investments are carried at fair value with fair values estimated based on quoted market prices. Long-term investments, ~~are~~ comprised of student loan backed taxable auction rate securities, ~~(see note 13 for details)~~are carried at fair value with fair values estimated using an income-approach model (discounted cash-flow analysis).

~~We account for derivative instruments in accordance with~~Derivative Financial Instruments

On January 1, 2009, we adopted Statement of Financial Accounting ~~Standards~~Standard (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS No. 161”). The adoption of SFAS No. 161 had no financial impact on our Condensed Consolidated Financial Statements and only required additional financial statement disclosures. We have applied the requirements of SFAS No. 161 on a prospective basis. Accordingly, disclosures related to interim periods prior to the date of adoption have not been presented.

Foreign Currency Forward Contracts Not Designated as Hedges

We transact business in various currencies other than the U.S. dollar and have significant international sales and expenses denominated in currencies other than the U.S. dollar, subjecting us to currency exchange rate risks. To mitigate our risk from foreign currency fluctuations we periodically enter into currency derivative contracts, principally swaps and forward contracts with maturities of twelve months or less with Vivendi as our principal counterparty. We do not hold or purchase any foreign currency contracts for trading or speculative purposes and we do not designate these forward contracts or swaps as hedging instruments pursuant to FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging ~~Activities~~Activities.”~~, SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities~~”~~, an amendment~~ Accordingly, we report the fair value of ~~SFAS No. 133 and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities~~”~~. SFAS No. 133, 138, and 149 require that all derivatives, including foreign exchange contracts, be recognized in the balance sheet in other assets or liabilities at their fair value.~~

~~We utilize forward~~these contracts in order to reduce financial market risks. These instruments are used to hedge foreign currency exposures of underlying assets, liabilities, or cash flows. Our accounting policies for these instruments are based on whether they meet the criteria for designation as hedging transactions. Changesour Condensed Consolidated Balance Sheet with changes in fair value ~~of derivatives that are designated as cash flow hedges, are highly effective, and qualify as hedging instruments, are~~ recorded in ~~other comprehensive income, if any, until the underlying hedged item is recognized in earnings. Any ineffective portion~~our Condensed Consolidated Statement of a derivative’s change in fair value is immediately recognized in earnings. Changes in fair value of derivatives that do not qualify as hedging instruments are recorded in earnings. The fair value of foreign currency contracts is estimated based on the prevailing exchange rate of the various hedged currencies as of the end of the period.Operations.

~~Software Development Costs and Intellectual Property Licenses~~

~~Software development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products.~~

We account for software development costs in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”, (“SFAS No. 86”). Software development costs are capitalized once the technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses both technical design documentation and game design documentation. Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established. For products where proven technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product basis. Prior to a product’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.

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 for the specific product, generally resulting in an amortization period of six months or less.

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

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

We evaluate the future recoverability of capitalized software development costs and intellectual property licenses on a quarterly basis. For products that have been released in prior periods, the primary evaluation criterion is actual title performance. For products that are scheduled to be released in future periods, recoverability is evaluated based on the expected performance of the specific products to which the costs relate or in which the licensed trademark or copyright is

129

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~~to be used. Criteria used to evaluate expected product performance include: historical performance~~The effects of ~~comparable products developed with comparable technology; orders for the product prior to its release; and, for any sequel product, estimated performance based~~derivative instruments on ~~the performance of the product on which the sequel is based. Further, as many of~~ our intellectual property licenses extend for multiple products over multiple years, we also assess the recoverability of capitalized intellectual property license costs based on certain qualitative factors, such as the success of other products and/or entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical releases or television series based on the intellectual property, and the rights holder’s continued promotion and exploitation of the intellectual property.

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.

~~Inventories~~

~~Inventories are valued at the lower of cost (first-in, first-out or weighted average) or market.~~

~~Long-Lived Assets~~

~~Property and Equipment.~~ Property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the shorter of the estimated useful lives or the lease term: buildings, 25 to 33 years; computer equipment, office furniture and other equipment, 2 to 5 years; leasehold improvements, the shorter of 5 years or the life of the lease. When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed and any resulting gains or losses are included in the accompanying consolidated statements of operations.

~~Goodwill and Other Indefinite-Lived Assets.~~ We account for goodwill using the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). Under SFAS No. 142, goodwill is considered to have an indefinite life, and is carried at cost. In addition acquired trade names were assessed as indefinite lived assets because there is no foreseeable limit on the period of time over which they are expected to contribute cash flows. Goodwill and acquired trade names are not amortized but are subject to an annual test for impairment and in between annual tests when events or circumstances indicate that the carrying value may not be recoverable.

~~Amortizable Intangible Assets.~~ Intangible assets subject to amortization are carried at cost less accumulated amortization. Amortizable intangible assets consist of internally developed franchises, acquired developed software, acquired game engines, favorable leases and distribution agreements, and other intangibles related primarily to licensing activities and retail customer relationships. Intangible assets subject to amortization are amortized over the estimated useful life in proportion to the pattern in which the economic benefits are consumed. Long-lived assets including amortizable intangible assets are reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS No. 144”) whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets and amortizable intangible assets is based on the amount by which the carrying value exceeds the fair value of the asset.

~~Revenue Recognition~~

~~Product sales~~

We recognize revenue from the sale of our products upon the transfer of title and risk of loss to our customers, and once any performance obligations have been completed. Certain products are sold to customers with a street date (the earliest date these products may be sold by retailers). For these products we recognize revenue on the later of the street date or the

~~Table of Contents~~

~~sale date. Revenue from product sales is recognized after deducting the estimated allowance for returns and price protection.~~

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 recognize revenue related to products containing these limited online features upon the transfer of title and risk of loss to our customer. In instances where online features or additional functionality is considered a substantive deliverable in addition to the software product, we take this into account when applying our revenue recognition policy. This evaluation is performed for each software product together with any online transactions, such as electronic downloads of titles of product add-ons when it is released. When we determine that a software title 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, we consider that our performance obligations for this title extend beyond the sale of the game. 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 recognize all of the revenue from the sale of the title ratably over an estimated service period. In addition, we defer the costs of sales for this title to match revenues. Cost of sales includes: manufacturing costs, software royalties and amortization, and intellectual property licenses.

~~We recognize revenues for the massively, multiplayer, online game~~ ~~World of Warcraft~~~~, its expansion packs and other ancillary services in accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition in~~Condensed Consolidated Financial Statements ~~(“SAB No. 101”), as amended by Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”).~~

~~We consider the~~ ~~World of Warcraft~~ boxed product including expansion packs and other ancillary revenues as a single deliverable with the total arrangement consideration combined and recognized ratably as revenue over the estimated customer life beginning upon activation of the software and delivery of the services. Revenues attributed to the sale of ~~World of Warcraft~~ boxed software and related expansion packs are classified as product sales and revenues attributable to subscription and other ancillary services are classified as subscription, licensing and other revenues.

With respect to online transactions, such as electronic downloads of titles or product add-ons that do not include a more-than-inconsequential separate service deliverable, revenue is recognized when the fee is paid by the online customer to purchase online content and we are notified by the online retailer that the product has been downloaded. In addition, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable.

Sales incentives or other consideration given by us to our customers are accounted for in accordance with EITF Issue 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” In accordance with EITF Issue 01-09, 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 to 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.

~~Subscription Revenues~~

~~Subscription revenues are recognized in accordance with SAB No. 101, as amended by SAB No. 104. Subscription revenues are derived from~~ ~~World of Warcraft~~~~, a game that is playable through Blizzard’s servers on a subscription-only basis. After the first month of free usage that is included with the boxed software, the~~ ~~World of Warcraft~~ end user may enter into a subscription agreement for additional access. Subscription revenues received are deferred and recognized as subscription revenues ratably over the subscription period. Revenue from the sale of prepaid cards, sold through retail outlets and other stores, is deferred and recognized as subscription revenue ratably beginning when the cards are first activated. Revenue from Internet gaming rooms in Asia is recognized upon usage of the time packages sold. Ancillary revenues associated with subscriptions are recognized ratably over the estimated customer life.

~~Licensing Revenues~~

~~Third-party licensees in China and Taiwan distribute and host Blizzard’s~~ ~~World of Warcraft~~ game in their respective countries under license agreements with Blizzard. The licensees paid certain minimum, non-refundable, generally recoupable guaranteed royalties when entering into the licensing agreements. Upon receipt of the recoupable advances, we defer their recognition and recognize the revenues in subsequent periods as these advances are recouped by the licensees. As the licensees pay additional royalties above and beyond those initially advanced, we recognize these additional royalties as revenues based on activation of the underlying prepaid time by the end users.

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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 a master copy. Per copy royalties on sales that exceed the guarantee are recognized as earned. In addition, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable.

~~Other revenues~~

Other revenues primarily include ancillary sales of non-software related products. It includes licensing activity of intellectual property other than software (such as characters) to third-parties. Revenue is recorded upon receipt of licensee statements, or upon the receipt of cash, provided the license period has begun.

~~Allowances for Returns, Price Protection, Doubtful Accounts, and Inventory Obsolescence~~

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

We may permit product returns from, or grant price protection to, our customers under certain conditions. In general, price protection refers to the circumstances when we elect to decrease the wholesale price of a product by a certain amount and, when granted and applicable, allows customers a credit against amounts owed by such customers to us with respect to open and/or future invoices. The conditions our customers must meet to be granted the right to return products or price protection include, among other things, compliance with applicable payment terms, and consistent delivery to us of inventory and sell-through reports. We may also consider other factors, including the facilitation of slow-moving inventory and other market factors. Management must make estimates of potential future product returns and price protection related to current period product revenue. We estimate the amount of future returns and price protection for current period product revenue utilizing historical experience and information regarding inventory levels and the demand and acceptance of our products by the end consumer. The following factors are used to estimate the amount of future returns and price protection for a particular title: historical performance of titles in similar genres; historical performance of the hardware platform; historical performance of the franchise; console hardware life cycle; 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 September 30, 2008 allowance for returns and price protection would impact net revenues by $2 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.

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.

~~Shipping and Handling~~

~~Shipping and handling costs, which consist primarily of packaging and transportation charges incurred to move finished goods to customers, are included in “cost of sales—product costs.”~~

~~Table of Contents~~

~~Income Taxes~~

We account for income taxes using Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Under SFAS No. 109, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

~~Foreign Currency Translation~~

~~The~~ functional currencies of our foreign subsidiaries are their local currencies. All assets and liabilities of our foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the end of the period, and revenue and expenses are translated at average exchange rates during the period. The resulting translation adjustments are reflected as a component of accumulated other comprehensive income (loss) in shareholders’ equity.

~~Earnings (Loss) Per Common Share~~

Basic earnings (loss) per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for all periods. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding, increased by common stock equivalents. Common stock equivalents are calculated using the treasury stock method and represent incremental shares issuable upon exercise of our outstanding options and warrants. However, potential common shares are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded. Earnings (loss) per share for periods prior to the Business Combination are retrospectively adjusted to reflect the number of split adjusted shares received by Vivendi, former parent company of Vivendi Games.

~~Stock-Based Compensation~~

We account for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R requires companies to estimate the fair value of share-based payment awards on the measurement date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statement of Operations.

Stock-based compensation expense recognized 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 Statement of Operations for the three and nine months ended September 30, 2008 included compensation expense for share-based payment awards granted by Activision, Inc. prior to, but not yet vested as of July 9, 2008, based on the revalued fair value estimated as of July 9, 2008 (see note 17), and compensation expense for the share-based payment awards granted subsequent to July 9, 2008 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. Stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest and 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.

We estimate the value of employee stock options on the date of grant using a binomial-lattice model (see Note 17). 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.

Prior to the Business Combination, Vivendi Games had equity incentive plans that are equity-settled and cash-settled. Equity-settled award includes stock options and restricted shares plans from Vivendi, and the cash-settled award includes stock appreciation rights and restricted stock units from Vivendi, and the Blizzard Equity Plan (“BEP”). In accordance with SFAS No. 123R, for cash-settled awards, the Company recorded a liability and recognized changes in fair value of the liability that occur during the period as compensation cost over the requisite service period. Changes in the fair value of the liability that occur after the end of the requisite service period are compensation cost of the period in which the changes occur. Any differences between the amount for which the liability is settled and its fair value at the settlement date as estimated in accordance with SFAS No. 123R is an adjustment of compensation cost in the period of settlement.

~~Table of Contents~~

4.~~Acquisitions~~

~~Reverse acquisition~~

The Business Combination (see Note 1) is accounted for as a reverse acquisition under the purchase method of accounting. For this purpose, Vivendi Games was deemed to be the accounting acquirer and Activision, Inc. was deemed to be the accounting acquiree.

~~The preliminary purchase price of Activision, Inc. consists of the following items (amounts in millions):~~

Fair market value of Activision, Inc.’s outstanding common stock immediately prior to the Business Combination at the closing price

$
9,102

Fair value of Activision, Inc.’s existing vested and unvested stock awards at the closing price*

861

Transaction expenses

1

Total consideration

$
9,964

* The fair value of the existing vested and unvested stock award is comprised of the following (amounts in millions):

Fair value of Activision, Inc. existing vested stock awards

$
713

Fair value of Activision, Inc. unvested stock awards

296

Less: Unearned stock-based compensation

(148
)

$
861

The fair value of Activision, Inc.’s stock awards was determined using fair value of Activision, Inc.’s common stock of $15.04 per share, which is the closing price as of July 9, 2008 a binomial-lattice model and the following assumptions: (a) varying volatility ranging from 42.38% to 51.50%, (b) a risk free interest rate of 3.97%, (c) an expected life ranging from approximately 3.22 years to 4.71 years, (d) risk adjusted stock return of 8.89%, and (e) an expected dividend yield of 0.0%.

~~The Company’s allocation of the preliminary purchase price of Activision, Inc. is~~were as follows (amounts in millions):

Amount

Working capital, excluding inventories

$
1,194

Inventories

221

Property and equipment

64

Deferred tax asset

62

Other long term assets

128

Estimated useful
life

Intangible assets:

License agreements

3 - 10 years

207

Developed software

Less than 1 year

68

Game engines

2 - 5 years

128

Internally developed franchises

5 - 12 years

1,124

Retail customer relationships

Less than 1 year

40

Favorable leases

1 – 2 years

5

Distribution agreements

4 years

17

Activision trade name

Indefinite

386

Goodwill

Indefinite

7,085

Long term liabilities

(24
)
Deferred tax liability

(741
)
Total consideration

$
9,964

Fair Value of Derivative Instruments in Condensed Consolidated Balance Sheet	Fair Value At March 31, 2009		Balance Sheet Location
Foreign currency swaps and forward contracts not designated as hedges	$	1	Accrued expenses and other liabilities

Goodwill arises from the Business Combination due to the acquired work force of Activision, Inc., and the expected synergies from the Business Combination. The following table presents the gross and net balances, and accumulated amortization of the components of our purchased amortizable intangible assets acquired in the Business Combination as of September 30, 2008 (amounts in millions):

~~Table of Contents~~

Accumulated

Gross

Amortization

Net

License agreements

$
207

$
(8
)
$
199

Developed software

68

(21
)
47

Game engines

128

(6
)
122

Internally developed franchises

1,124

(16
)
1,108

Retail customer relationships

40

(36
)
4

Favorable leases

5

(1
)
4

Distribution agreements

17

(1
)
16

Total

$
1,589

$
(89
)
$
1,500

Intangibles and goodwill are not tax deductible. The estimated future after-tax decreases to net income from the amortization of the finite-lived intangible assets are the following amounts (amounts in millions):

Year ending December 31,

Amount

2008 (remaining three months)

$
222

2009

284

2010

198

2011

141

2012

119

Thereafter

536

The following table summarizes unaudited pro forma financial information assuming the Business Combination (see Note 1) had occurred at the beginning of the periods presented. This pro forma financial information is for informational purposes only and does not reflect any operating efficiencies or inefficiencies which may result from the Business Combination and therefore is not necessarily indicative of results that would have been achieved had the businesses been combined during the periods presented (amounts in millions, except per share data).

For the three months ended
September 30,

For the nine months ended
September 30,

2008

2007

2008

2007

Pro forma net revenues

$
764

$
644

$
2,698

$
2,022

Pro forma net loss

(121
)
(9
)
(166
)
(103
)

Pro forma net loss per share

- basic and diluted

(0.09
)
(0.01
)
(0.13
)
(0.08
)

~~Freestyle Games, Ltd.~~

On September 11, 2008, we completed an acquisition of Freestyle Games, Ltd., a premier United Kingdom based video game developer specializing in music based games. The acquisition is expected to be immaterial to current year earnings (loss) 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.

~~Table of Contents~~

Effect of Derivative Instruments on Condensed Consolidated Statement of Operations	Amount of Net Realized and Unrealized Gain (Loss) Recognized in Income on Derivatives for the Three Months Ended March 31, 2009		Income Statement Location
Foreign currency swaps and forward contracts not designed as hedges	$	2	Investment income, net

5.3. Inventories~~Inventories~~

~~We value inventories at the lower of cost (first-in, first-out or weighted average) or market.~~ Our inventories consist of the following (amounts in millions):

	September 30, 2008		December 31, 2007		At March 31, 2009		At December 31, 2008
Finished goods	$	353	$	19	$	220	$	251
Purchased parts and components	24		2		10		11

	$	377	$	21	$	230	$	262

6.4. Goodwill~~Goodwill~~

The changes in the carrying amount of goodwill by ~~reportable segments, (see Notes 2 and 14 for details)~~operating segment for the ~~nine~~three months ended ~~September 30, 2008~~March 31, 2009 are as follows (amounts in millions):

Blizzard

Activision

Distribution

Activision
Blizzard’s
Core
Operations

Activision
Blizzard’s
Non-core
Exit
Operations

Total

Balance as of December 31, 2007

$
178

$
—

$
—

$
178

$
25

$
203

Goodwill acquired during the period

—

7,080

12

7,092

—

7,092

Re-assigned goodwill

—

7

—

7

(7
)
—

Issuance of contingent consideration

—

—

—

—

6

6

Impairment charge (see Note 10)

—

—

—

—

(16
)
(16
)
Tax benefit credited to goodwill

—

(15
)
—

(15
)
—

(15
)

Balance as of September 30, 2008

$
178

$
7,072

$
12

$
7,262

$
8

$
7,270

	Activision			Blizzard		Distribution		Total

Balance at December 31, 2008	$	7,037		$	178	$	12	$	7,227
Issuance of contingent consideration	2			—		—		2
Purchase accounting adjustment	1			—		—		1
Tax benefit credited to goodwill	(17		)	—		—		(17		)

Balance at March 31, 2009	$	7,023		$	178	$	12	$	7,213

~~Goodwill acquired~~Issuance of contingent consideration consists of additional purchase consideration paid during ~~the period represents goodwill of $7.1 billion related~~2009 in relation to the acquisition of Activision, Inc. (see Note 4). As a result of the Business Combination, goodwill affected by the reorganization/integration was reassigned to the reporting units affected using a relative fair value approach.previous acquisitions. The tax benefit credited to goodwill represents the tax deduction resulting from the exercise of stock options that were outstanding and vested at the consummation of the Business Combination and included in the purchase price of Activision, Inc. to the extent that the tax deduction does not exceed the fair value of those options.

7.~~Intangible assets~~

~~Intangible assets consist of the following (amounts in millions):~~

September 30, 2008

Estimated
Useful
Lives

Gross
carrying
amount

Accumulated
amortization

Impairment
charge
(See Note
10)

Net

Acquired definite-lived intangible assets:

License agreements

3-10 years

$
207

$
(8
)
$
—

$
199

Developed software

1-2 years

283

(233
)
—

50

Game engines

2-5 years

136

(6
)
—

130

Internally developed franchises

11-12 years

1,124

(16
)
—

1,108

Retail customer relationships

Less than 1 year

40

(36
)
—

4

Favorable leases

1-4 years

5

(1
)
—

4

Distribution agreements

4 years

17

(1
)
—

16

Other intangibles

0-2 years

14

(12
)
—

2

Acquired indefinite-lived intangible assets:

Activision trademark

Indefinite

386

—

—

386

Acquired trade names

Indefinite

52

—

(5
)
47

Total

$
2,264

$
(313
)
$
(5
)
$
1,946

1910

Table of Contents

December 31, 2007

Estimated
Useful
Lives

Gross
carrying
amount

Accumulated
amortization

Impairment
charge

Net

Acquired definite-lived intangible assets:

Developed software

2 yrs

$
215

$
(210
)
$
—

$
5

Other intangibles

0-2 yrs

14

(11
)
—

3

Acquired indefinite-lived intangible assets:

Acquired trade names

Indefinite

52

—

—

52

Total

$
281

$
(221
)
$
—

$
60

5. Intangible assets, net

Intangible assets, net consist of the following (amounts in millions):

	At March 31, 2009
	Estimated useful lives	Gross carrying amount		Accumulated amortization			Net carrying amount
Acquired finite-lived intangible assets:
License agreements	3 - 10 years	$	207	$	(16	)	$	191
Developed software	1 - 2 years	286		(281		)	5
Game engines	2 - 5 years	134		(50		)	84
Internally developed franchises	11 - 12 years	1,124		(171		)	953
Favorable leases	1 - 4 years	5		(2		)	3
Distribution agreements	4 years	17		(6		)	11
Other intangibles	0 - 2 years	5		(4		)	1
Total finite-lived intangible assets		1,778		(530		)	1,248
Acquired indefinite-lived intangible assets:
Activision trademark	Indefinite	385		—			385
Acquired trade names	Indefinite	48		—			48
Total		$	2,211	$	(530	)	$	1,681

	At December 31, 2008
	Estimated useful lives	Gross carrying amount		Accumulated amortization			Net carrying amount
Acquired finite-lived intangible assets:
License agreements	3 - 10 years	$	207	$	(12	)	$	195
Developed software	1 - 2 years	286		(272		)	14
Game engines	2 - 5 years	134		(42		)	92
Internally developed franchises	11 - 12 years	1,124		(145		)	979
Favorable leases	1 - 4 years	5		(1		)	4
Distribution agreements	4 years	17		(5		)	12
Other intangibles	0 - 2 years	5		(4		)	1
Total finite-lived intangible assets		1,778		(481		)	1,297
Acquired indefinite-lived intangible assets:
Activision trademark	Indefinite	385		—			385
Acquired trade names	Indefinite	48		—			48
Total		$	2,211	$	(481	)	$	1,730

Amortization expense of intangible assets for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008 was ~~$90~~$49 million and ~~$92 million, respectively. Amortization expense of intangible assets for the three and nine months ended September 30, 2007 was~~ $1 ~~million and $3~~ million, respectively.

8.~~Income Taxes~~

~~The income tax benefit~~At March 31, 2009, future amortization of $62 million for the three months ended September 30, 2008 reflects our effective income tax rate benefit for the quarter of 36.5%. The significant items that generate the variance between our effective rate for the three-months ended September 30, 2008 and our statutory rate of 35% were the result of the state income taxes provided, net of federal benefit, foreign income taxes, goodwill impairment and California research and development tax credits.finite-lived intangible assets is estimated as follows (amounts in millions):

For the nine months ended September 30, 2008 our effective tax rate benefit of 37.9% differs from the effective tax rate benefit of 9.3% for the nine months ended September 30, 2007. The difference is due to the recognition of the California Research and Development tax credit and IRC 199 Domestic Production Deduction in the third quarter of 2008 and ~~tax benefits from net operating losses surrendered at September 30, 2007.~~

2009 (remaining nine months)	$	251
2010	208
2011	144
2012	120
2013	104
Thereafter	421

Total	$	1,248

The income tax benefit of $12 million for the nine months ended September 30, 2007 reflects our effective income tax rate benefit of 9.3%, which differs from our effective tax rate benefit of 30% for the year ended December 31, 2007 due to the recognition of research and development tax credits in the fourth quarter of 2007 and the release of additional valuation allowance on deferred tax assets and net operating losses surrendered when compared to those estimated at September 30, 2007, as a result of meeting the more likely than not recognition criteria in the fourth quarter of 2007.

We adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”) an interpretation of SFAS No. 109 on January 1, 2007. At December 31, 2007, we had $14 million of unrecognized tax benefits. As a result of the Business Combination, an additional $74 million of unrecognized tax benefits was added, resulting in a balance of $88 million at September 30, 2008. It is reasonably possible there will be an $11 million decrease of our unrecognized tax benefits within the next twelve months due to the completion of certain income tax audits.

2011

Table of Contents

6. Income taxes

The tax rate reported for the three months ended March 31, 2009 is based on our projected annual effective tax rate for 2009, and also includes certain discrete tax benefits recorded during the period. Our tax expense of less than a million dollars for the three months ended March 31, 2009 reflects an effective tax rate of 0% which differs from our effective tax rate of 34% for the three months ended March 31, 2008. The effective tax rate of 0% for the three months ended March 31, 2009 differs from the statutory rate of 35% primarily due to foreign income taxes provided at lower rates and certain discrete tax benefits recorded during the period related to the release of valuation allowances on foreign net operating losses and the impact of changes to the state of California tax laws. The effective rate for the three months ended March 31, 2009 differs from the same period in 2008 primarily due to the discrete tax benefits recorded in the three months ended March 31, 2009 and the foreign income tax rate differential mentioned above.

In accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), we evaluate our deferred tax assets, including net operating losses, to determine if a valuation allowance is required. SFAS No. 109 requires that companies assess whether a valuation allowance should be established or released based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. At December 31, 2008, we had a valuation allowance relating to foreign net operating loss carryforwards of $23 million. The ultimate realization of the net operating losses depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. We currently expect to realize these net operating losses through taxable income; therefore, during the first quarter of 2009, we released the valuation allowance against our deferred tax assets.

California Senate Bill No.15 was enacted in February 20, 2009 and contains significant changes to the state of California tax landscape. In accordance with SFAS No. 109, when there is an enacted change in tax laws or rate, we adjust our deferred tax liabilities and assets to reflect the change. During the first quarter of 2009, we reduced our net deferred tax liabilities and tax provision by $9 million.

We recognize interest and penalties related to uncertain tax positions in the income tax expense. ~~As of September 30, 2008,~~At March 31, 2009, we had ~~approximately $1~~$3 million of accrued interest related to uncertain tax positions. For the ~~nine~~three months ended ~~September 30, 2008,~~March 31, 2009, we recorded ~~approximately~~ $1 million of interest expense related to uncertain tax positions.

~~On July 9, 2008, Activision Blizzard entered into a Tax Sharing Agreement (the “Tax Sharing Agreement”) with Vivendi. The Tax Sharing Agreement generally governs Activision Blizzard’s~~7. Software development costs and Vivendi’s respective rights, responsibilities and obligations with respect to the ordinary course of business taxes. Under the Tax Sharing Agreement, with certain exceptions, Activision Blizzard generally is responsible for the payment of U.S. and certain non-U.S. income taxes that are required to be paid to tax authorities on a stand-alone Activision Blizzard basis. In the event that Activision Blizzard joins Vivendi in the filing of a group tax return, Activision Blizzard will pay its share of the tax liability for such group tax return to Vivendi, and Vivendi will pay the tax liability for the entire group to the appropriate tax authority. Vivendi will indemnify Activision Blizzard for any tax liability imposed upon it due to Vivendi’s failure to pay any group tax liability. Activision Blizzard will indemnify Vivendi for any tax liability imposed on Vivendi (or any of its subsidiaries) due to Activision Blizzard’s failure to pay any taxes it owes under the Tax Sharing Agreement.intellectual property licenses

9.~~Software Development Costs and Intellectual Property Licenses~~

~~As of September 30, 2008,~~At March 31, 2009, capitalized software development costs included ~~$180~~$187 million of internally developed software costs and ~~$66~~$64 million of payments made to third-party software developers. ~~As of~~At December 31, ~~2007,~~2008, capitalized software development costs included $1$173 million of internally developed software costs and ~~$75~~$63 million of payments made to third-party software developers. Capitalized intellectual property licenses were ~~$10~~$40 million ~~and $17 million as~~at each of ~~September 30, 2008~~March 31, 2009 and December 31, ~~2007, respectively.~~2008. Amortization ~~and write-offs~~ of capitalized software development costs and intellectual property licenses for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ was ~~$81~~$72 million and $1 million, ~~$120~~respectively. Write-offs and impairments was less than a million dollars and ~~$15~~$21 million for the three months ended March 31, 2009 and 2008, respectively.

~~10.~~8. Restructuring~~Restructuring~~

The Company has ~~implemented an~~been implementing its organizational restructuring plan as a result of the Business Combination described in Note 1.1 of the Notes to Condensed Consolidated Financial Statements. This organizational restructuring ~~is to integrate~~plan includes the integration of different operations to ~~create~~streamline the ~~streamlined~~combined organization of Activision Blizzard.

The primary goals of the organizational restructuring were to rationalize the title portfolio and consolidate certain corporate functions so as to realize the synergies of the Business Combination.

Table of Contents

Since the consummation of the Business Combination, the Company has commenced the organizational restructuring activities, focusing first on North American staff, redundant premises and related redundant equipment assets. We have communicated to the North America, Canada, and Australia redundant employees and ceased use of certain offices under operating lease contracts. Impairment of goodwill and other intangibles and write-offs of prepaid royalties and intellectual licenses were also recorded as a result. The following table details the ~~amount of~~changes in restructuring reserves included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets at ~~September 30, 2008~~March 31, 2009 (amounts in millions):

Asset

Contract

Facilities

write-

termination

Severance(1)

costs(1)

downs(2)

costs(1)

Total

Balance as of December 31, 2007

$
—

$
—

$
—

$
—

$
—

Original restructuring charges (charges to expenses)

32

2

24

3

61

Utilization (cash paid or otherwise settled)

(9
)
—

(24
)
(2
)
(35
)

Balance at September 30, 2008

$
23

$
2

$
—

$
1

$
26

	Severance(1)			Facilities costs(1)			Total
Balance at December 31, 2008	$	37		$	7		$	44
Costs charged to expense	15			—			15
Costs paid or otherwise settled	(11		)	(1		)	(12		)
Foreign exchange and other	(2		)	(1		)	(3		)
Balance at March 31, 2009	$	39		$	5		$	44

(1) Accounted for in accordance with ~~Statement of Financial Accounting Standards~~SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”).

~~(2)Accounted for in accordance with SFAS No. 144 and SFAS No. 142.~~

~~Table of Contents~~

Utilization represents the amount of cash paid to settle restructuring liabilities incurred ($9 million of severance and $2 million of contract termination costs) and non-cash asset write-down charges of which $3 million relates to fixed assets disposal, $5 million relates to impairment of acquired trade name, and $16 million relates to impairment of goodwill.

The total restructuring reserve balance ~~as of September 30, 2008~~ and the net restructuring charges ~~for the three and nine months periods then ended~~ are presented below by reporting ~~segments~~segment (amounts in millions):

	Restructuring charges						Restructuring Reserve Balance				Restructuring Charges
	Ending balance		Three months ended		Nine months ended		At		At		Three months ended
	September 30, 2008		September 30, 2008		September 30, 2008		March 31, 2009		December 31, 2008		March 31, 2009

Activision	$	—	$	1	$	1	$	5	$	—	$	7
Blizzard	—		—		—		—		—		—
Distribution	—		—		—		3		—		3
Activision Blizzard’s core operations	—		1		1		8		—		10
Activision Blizzard’s non- core exit operations	26		60		60		36		44		5
Total	$	26	$	61	$	61	$	44	$	44	$	15

~~For the next nine months, we anticipate incurring between $75 million and $100 million of additional before tax~~The expected restructuring charges ~~and after tax cash restructuring charges between $45 million and $60 million relating~~to be incurred principally by Activision Blizzard’s non-core exit operations related to the Business ~~Combination. Overall, including charges incurred through September 30, 2008, we expect to incur cash and non-cash before tax restructuring charges between $135 million and $160 million by~~Combination during the three months ending June 30, 2009 ~~with an after tax cash impact between $70 million and $90 million.~~ are presented below (amounts in millions):

	Low		High
Expected future restructuring costs, before tax	$	16	$	22

Expected future restructuring costs, after tax	9		13

The total expected restructuring charges related to the Business Combination from the Business Combination date through June 30, 2009 are presented below (amounts in millions):

	Low		High
Total expected restructuring costs, before tax	$	124	$	130

Total expected restructuring costs, after tax	74		78

The after tax cash charges are expected to consist primarily of employee-related severance cash costs (approximately $55 million), facility exit cash costs (approximately ~~$25~~$5 million) and cash contract terminations costs (approximately ~~$10~~$18 million). Separately, through March 31, 2009 these restructuring charges ~~are expected to be~~were partially offset by ~~approximately between $30 million and $50 million of~~ cash proceeds of approximately $33 million from asset disposals and ~~cash~~ after tax cash benefits related to the streamlining of the Vivendi Games title portfolio.

~~11.~~~~Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)~~

~~Comprehensive Income (loss)~~

~~The components of comprehensive income (loss) for the three and nine months ended~~ ~~September 30, 2008 and 2007 were as follows (amounts in millions):~~

Three months ended September 30,

Nine months ended September 30,

2008

2007

2008

2007

Net income (loss)

$
(108
)
$
48

$
(36
)
$
141

Other comprehensive income (loss):

Foreign currency translation adjustment

(26
)
7

(25
)
2

Unrealized depreciation on short-term investments, net of taxes

(2
)
—

(2
)
—

Other comprehensive income (loss)

(28
)
7

(27
)
2

Comprehensive income (loss)

$
(136
)
$
55

$
(63
)
$
143

2213

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9. Comprehensive income and accumulated other comprehensive loss

Comprehensive Income

The components of comprehensive income for the three months ended March 31, 2009 and 2008 were as follows (amounts in millions):

	Three months ended March 31,
	2009			2008

Net income	$	189		$	43

Other comprehensive income (loss):
Foreign currency translation adjustment	(2		)	3
Change in unrealized depreciation on investments, net of taxes	(1		)	—

Other comprehensive income (loss)	(3		)	3

Comprehensive income	$	186		$	46

Accumulated Other Comprehensive ~~Income (Loss)~~Loss

For the ~~nine~~three months ended ~~September 30, 2008~~March 31, 2009 the components of accumulated other comprehensive ~~income (loss)~~loss were as follows (amounts in millions):

Unrealized

Accumulated

appreciation

other

Foreign

(depreciation)

comprehensive

currency

on investments

income

Balance as of December 31, 2007

$
40

$
—

$
40

Other comprehensive loss

(25
)
(2
)
(27
)

Balance as of September 30, 2008

$
15

$
(2
)
$
13

	Foreign currency translation adjustment			Unrealized depreciation on investments			Accumulated other comprehensive loss

Balance at December 31, 2008	$	(41	)	$	(2	)	$	(43	)
Other comprehensive loss	(2		)	(1		)	(3		)

Balance at March 31, 2009	$	(43	)	$	(3	)	$	(46	)

Other comprehensive ~~income (loss)~~loss is presented net of tax benefits related to the change in unrealized depreciation on our investments for the ~~nine~~three months ended ~~September 30, 2008.~~March 31, 2009. Income taxes were not provided for foreign currency translation items as these are considered indefinite investments in non-U.S. subsidiaries.

~~12.~~10. Investment ~~Income (Loss), Net~~income, net

Investment income, ~~(loss),~~ net is comprised of the following (amounts in millions):

Three months ended September 30,

Nine months ended September 30,

2008

2007

2008

2007

Interest income (expense), net

$
17

$
(2
)
$
22

$
(3
)
Net realized gain on investments

4

—

4

—

Net unrealized gain (loss) on foreign exchange contracts

3

—

2

(2
)

Investment income (loss), net

$
24

$
(2
)
$
28

$
(5
)

	Three months ended March 31,
	2009			2008
Interest income	$	9		$	3
Interest expense	(1		)	—
Unrealized gain on trading securities	3			—
Unrealized loss on put option from UBS	(3		)	—
Net realized and unrealized gain (loss) on foreign exchange contracts	2			(1		)

Investment income, net	$	10		$	2

~~In 2007, Vivendi provided Vivendi Games access to centralized cash management pool from which Vivendi Games was able to borrow or lend on a daily basis at market rates. From the consummation~~14

Table of ~~the Business Combination, we managed our own investment portfolio.~~Contents

~~13.~~11. Fair ~~Value Measurements~~value measurements

As of January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS No. 157”) for financial assets and liabilities. SFAS No. 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value are as follows:

· Level 1 –— Quoted prices in active markets for identical assets or liabilities.

· Level 2 –— Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets ~~that are not active~~ or other inputs that are observable or can be corroborated by observable market data.

· Level 3 –— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

~~Table of Contents~~

The ~~table~~tables below ~~segregates~~segregate all ~~financial~~ assets and liabilities that are measured at fair value on a recurring basis (which ~~for purposes of SFAS No. 157,~~ means they are so measured at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement ~~date. Financial Statement Position FAS 157-2 delayed the effective~~ date for the application of SFAS No. 157 for all nonfinancial assets and liabilities until January 1, 2009, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (amounts in millions):

	September 30, 2008		Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)				Fair Value Measurements at Reporting Date Using
									At March 31, 2009		Quoted Prices in Active Markets for Identical Financial Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance Sheet Classification
Financial assets:
Money market funds	$	2,673	$	2,673	$	—	$	—	$	2,866	$	2,866	$	—	$	—	Cash and cash equivalents
Asset-backed securities	7		—		7		—
Mortgage backed securities									5		—		5		—		Short-term investments
Auction rate securities	86		—		—		86		79		—		—		79		Long-term investments
Put option from UBS									7		—		—		7		Other assets—non-current
Total financial assets at fair value	$	2,766	$	2,673	$	7	$	86	$	2,957	$	2,866	$	5	$	86

Financial liabilities:
Foreign exchange contract derivatives									$	1	$	—	$	1	$	—	Other liabilities—current
Other financial liability									31		—		—		31		Other liabilities—non-current
Total financial liabilities at fair value									$	32	$	—	$	1	$	31

									At December 31, 2008		(Level 1)		(Level 2)		(Level 3)		Balance Sheet Classification
Financial assets:
Money market funds									$	2,609	$	2,609	$	—	$	—	Cash and cash equivalents
Mortgage backed securities									7		—		7		—		Short-term investments
Auction rate securities									78		—		—		78		Long-term investments
Put option from UBS									10		—		—		10		Other assets—non-current
Foreign exchange contract derivatives									5		—		5		—		Other assets—current
Total financial assets at fair value									$	2,709	$	2,609	$	12	$	88

Financial liabilities:
Foreign exchange contract derivatives									$	2	$	—	$	2	$	—	Other liabilities—current
Other financial liability									31		—		—		31		Other liabilities—non-current
Total financial liabilities at fair value									$	33	$	—	$	2	$	31

Other financial liability represents the earn-out liability from a previous acquisition. The earn-out liability was recorded at fair value at the date of the Business Combination as it will be settled by a variable number of shares of our common stock based on the average closing price for the five business days immediately preceding issuance of the shares. When estimating the fair value, we considered our projection of revenues from the related titles under the earn-out provisions. For the three months ended March 31, 2009, there was no change in our fair value estimate of this financial liability.

Table of Contents

The following table provides a reconciliation of the beginning and ending balances ~~for~~of our ~~investment in auction rate securities,~~financial assets and financial liabilities classified as ~~these assets are measured at fair value using significant unobservable inputs (Level 3)~~Level 3 (amounts in millions):

Level 3

Balance as of January 1, 2008

$
—

Transfers in and/or (out) of Level 3

—

Purchases via the business combination

88

Total losses realized/unrealized included in earnings

—

Total losses included in other comprehensive income (a)

(2
)
Purchases, sales, issuances, and settlements, net

—

Interest received

—

Balance as of September 30, 2008

$
86

	Level 3
Balance at December 31, 2008, net	$	57
Total losses realized/unrealized included in earnings (a) (b)	(1		)
Total losses included in other comprehensive income (a)	(1		)
Balance at March 31, 2009, net	$	55

(a) Due to uncertainties surrounding the timing of liquidation of our auction rate securities, we classify these instruments as long-term investments in our ~~consolidated balance sheets as of September 30, 2008.~~Condensed Consolidated Balance Sheet at March 31, 2009. Liquidity for these auction rate securities is typically provided by an auction process which allows holders to sell their notes and resets the applicable interest rate at pre-determined intervals, usually every 7 to 35 days. On an industry-wide basis, many auctions have failed, and there is, as yet, no meaningful secondary market for these instruments. Each of the auction rate securities in our investment portfolio ~~as of September 30, 2008~~at March 31, 2009 has experienced a failed auction and there is no assurance that future auctions for these securities will succeed. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers. In the event that there is a failed auction, the indenture governing the security requires the issuer to pay interest at a contractually defined rate that is generally above market rates for other types of similar instruments. The securities for which auctions have failed will continue to earn interest at the contractual rate and be auctioned every 7 to 35 days until the auction succeeds, the issuer calls the securities or they mature. As a result, our ability to liquidate and fully recover the carrying value of our auction rate securities in the near term may be limited or not exist.

Consequently, fair value measurements have been estimated using an income-approach model (discounted cash-flow analysis). When estimating the fair value, we consider both observable market data and non-observable factors, including credit quality, duration, insurance wraps, collateral composition, maximum rate formulas, comparable trading instruments, and likelihood of redemption. Significant assumptions used in the analysis include estimates for interest rates, spreads, cash flow timing and amounts, and holding periods of the securities. ~~Assets measured at fair value using significant unobservable inputs (Level 3) represent approximately 3%~~See Notes 3 and 6 of the Notes to Consolidated Financial Statements of our ~~financial assets measured~~Annual Report on Form 10-K for the year ended December 31, 2008 for additional information regarding our auction rate securities.

(b) Put option from UBS represents an offer from UBS AG (“UBS”) providing us with the right to require UBS to purchase our auction rate securities held through UBS at ~~fair~~par value (see Note 3 of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2008 for more details). To value the put option, we considered a ~~recurring basis.~~number of factors including its intrinsic value, interest rates, the maturity of the option, and our assessment of the credit quality of UBS.

12. Operating segments and geographic regions

~~Table of Contents~~
~~14.~~~~Operations by Reportable Segments and Geographic Area~~
Our ~~reportable~~operating segments are in accordance with our internal organizational structure, the manner in which our operations are reviewed and managed by our Chief Executive Officer, our Chief Operating Decision Maker (“CODM”), the manner in which operating performance is assessed and resources are allocated, and the availability of separate financial information.

Prior to the Business Combination, Vivendi Games managed its business in two main divisions: Blizzard Entertainment and Sierra Entertainment (along with Sierra online and Vivendi Games Mobile). As a result of the Business Combination, we provide our CODM financial information based upon management’s new organizational structure.

~~Based upon our current organizational structure,~~Currently, we operate under four ~~business~~operating segments: (i) ~~Blizzard Entertainment, Inc. and its subsidiaries – publishing of traditional games and online subscription-based games in the MMOG category (“Blizzard”), (ii)~~ Activision ~~Publishing - publishing of~~Publishing—publishes interactive entertainment software and peripherals, which includes businesses operated by Activision, Inc. prior to the Business Combination and certain studios, assets, and titles previously included in Vivendi ~~Games~~Games’ Sierra Entertainment operating segment prior to the Business Combination (“Activision”), (ii) Blizzard Entertainment, Inc. and its subsidiaries—publishes traditional games and online subscription-based games in the MMORPG category (“Blizzard”), (iii) Activision Blizzard ~~Distribution - distribution~~Distribution—distributes of interactive entertainment software and hardware products (“Distribution”) (these three ~~business~~operating segments form Activision Blizzard’s core operations) and (iv) Activision Blizzard’s non-core exit ~~operations.~~operations (“Non-Core”). Activision Blizzard’s non-core exit operations represent legacy Vivendi Games’ divisions or business units that ~~the Company has begun to exit~~we have exited or ~~wind~~are winding down as part of our restructuring and integration efforts as a result of the Business Combination, but do not meet the criteria for separate reporting of discontinued operations. In accordance with the provisions of SFAS No. 131, “Disclosure About Segments of an Enterprise and Related Information,” (“SFAS No. 131”) all prior period segment information has been restated ~~when practical,~~ to conform to this new ~~financial statement~~segment presentation.
16

Table of Contents

The consummation of the Business Combination resulted in ~~Activision and Distribution~~ net revenues and segment income (loss) from ~~operations being included from~~ the ~~date of~~businesses operated by Activision, Inc. prior to the Business Combination being included for the quarter ended March 31, 2009, but not for ~~prior periods.~~the same period in 2008. Also, the Activision ~~in prior periods included~~operating segment includes Vivendi Games titles retained after the Business Combination.

The CODM reviews segment performance exclusive of the impact of the ~~deferral of~~deferred net revenues and related cost of sales, stock-based compensation expense, restructuring expense, amortization of intangible assets and purchase price accounting related adjustments, and integration and transaction costs. Information on the ~~reportable~~operating segments and reconciliations of total net revenues and total segment income (loss) from operations to consolidated net revenues and operating income (loss) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ are presented below (amounts in millions):

Three months ended September 30,

2008

2007

2008

2007

Net revenues

Segment income (loss) from
operations

Activision

$
364

$
43

$
(26
)
$
(19
)
Blizzard

297

249

146

132

Distribution

56

—

2

—

Activision Blizzard’s core operations

717

292

122

113

Activision Blizzard’s non-core exit operations

6

3

(110
)
(40
)
Reportable segments total

723

295

12

73

Reconciliation to consolidated net revenues / operating income (loss):

Net effect from deferral of net revenues and cost of sales

(12
)
31

(12
)
28

Stock-based compensation expense

—

—

(26
)
(43
)
Restructuring expense

—

—

(61
)
—

Amortization of intangible assets and purchase price accounting related adjustments

—

—

(90
)
(1
)
Integration and transaction costs

—

—

(17
)
—

Consolidated net revenues / operating income (loss)

$
711

$
326

$
(194
)
$
57

25

~~Table of Contents~~

Nine months ended September 30,

2008

2007

2008

2007

Net revenues

Segment income (loss) from
operations

Activision

$
457

$
108

$
(61
)
$
(79
)
Blizzard

866

856

447

447

Distribution

56

—

3

—

Activision Blizzard’s core operations

1,379

964

389

368

Activision Blizzard’s non-core exit operations

16

9

(251
)
(86
)
Reportable segments total

1,395

973

138

282

Reconciliation to consolidated net revenues / operating income (loss):

Net effect from deferral net revenues and cost of sales

(8
)
(77
)
(7
)
(67
)
Stock-based compensation expense

—

—

(47
)
(77
)
Restructuring expense

—

—

(61
)
(1
)
Amortization of intangible assets and purchase price accounting related adjustments

—

—

(92
)
(3
)
Integration and transaction costs

—

—

(17
)
—

Consolidated net revenues / operating income (loss)

$
1,387

$
896

$
(86
)
$
134

Total assets as of September 30, 2008 for Activision Blizzard’s core operations were $13.7 billion, of which $12.9 billion relates to Activision, $539 million to Blizzard, and $209 million to Distribution. Total assets as of September 30, 2008 of Activision Blizzard’s non-core exit operations were $47 million. We have not provided total assets as of September 30, 2007 to our CODM comparable data based on the new organizational structure as it is not practical because prior to the Business Combination, Vivendi Games did not maintain accounting records that allocate assets or liabilities for reportable segments.

Three months ended March 31,

2009

2008

2009

2008

Net revenues

Segment income (loss) from
operations

Activision

$
348

$
38

$
(27
)
$
(19
)
Blizzard

291

280

143

154

Distribution

85

—

3

—

Activision Blizzard’s core operations

724

318

119

135

Activision Blizzard’s non-core exit operations

1

5

(4
)
(65
)
Operating segments total

725

323

115

70

Reconciliation to consolidated net revenues / operating income (loss):

Net effect from deferral of net revenues and related cost of sales

256

2

167

2

Stock-based compensation expense

—

—

(28
)
(8
)
Restructuring expense

—

—

(15
)
—

Amortization of intangible assets and purchase price accounting related adjustments

—

—

(46
)
(1
)
Integration and transaction costs

—

—

(14
)
—

Consolidated net revenues / operating income

$
981

$
325

$
179

$
63

Geographic information for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ is based on the location of the selling entity. ~~Revenues~~Net revenues from external customers by geographic ~~regions~~region were as follows (amounts in millions):

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

2008

2007

2008

2007

2009

2008

Net revenues by geographic region

North America

$
295

$
147

$
591

$
422

$
524

$
139

Europe

348

122

627

374

307

136

Asia Pacific

62

54

153

91

64

45

Total territory revenues

705

323

1,371

887

Total geographic region net revenues

895

320

Distribution net revenues

85

—

Activision Blizzard’s non-core exit operations

6

3

16

9

1

5

Total consolidated net revenues

$
711

$
326

$
1,387

$
896

$
981

$
325

~~Revenues~~Net revenues by platform were as follows (amounts in millions):

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

2008

2007

2008

2007

2009

2008

MMOG

271

269

828

746

MMORPG

$
314

$
275

Console

272

16

335

53

503

22

Hand-held

81

7

102

21

32

11

PC

25

31

50

67

PC and other

46

12

Total platforms revenues

649

323

1,315

887

Total platform net revenues

895

320

Distribution

56

—

56

—

85

—

Activision Blizzard’s non-core exit operations

6

3

16

9

1

5

Total consolidated net revenues

$
711

$
326

$
1,387

$
896

$
981

$
325

2617

Table of Contents

We did not have a single external customer that accounted for 10% or more of consolidated net revenues for the three ~~and nine~~ month periods ended ~~September 30, 2008~~March 31, 2009 and ~~2007.~~2008.

~~15.~~13. Computation of ~~Earnings (Loss) Per Share~~earnings per share
The following table sets forth the computation of basic and diluted earnings per common share (amounts in millions, except per share data):

Three months ended March 31,

2009

2008

Numerator:

Consolidated net income

$
189

$
43

Net income allocated to unvested share-based awards in accordance with FSP EITF 03-6-1

(1
)
—

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

$
188

$
43

Denominator:

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

1,308

591

Effect of potential dilutive common shares under treasury stock method:

Employee stock options

51

—

Denominator for diluted earnings per common share - weighted-average common shares outstanding plus dilutive effect of employee stock options

1,359

591

Basic earnings per common share

$
0.14

$
0.07

Diluted earnings per common share

$
0.14

$
0.07

On January 1, 2009, we adopted the Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) on the FASB’s Emerging Issues Task Force (“EITF”) Issue No. 03-06-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” (“FSP EITF 03-06-1”). Under FSP EITF 03-06-1, unvested share-based awards which include the right to receive nonforfeitable dividends or dividend equivalents are considered to participate with common stock in undistributed earnings. Companies that issue share-based awards considered to be participating securities under FSP EITF 03-06-1 are required to calculate basic and diluted earnings per common share amounts under the two-class method. The two-class method excludes from earnings per common share calculations any dividends paid or owed to participating securities and any undistributed earnings considered to be attributable to participating securities. FSP EITF 03-06-1 requires retrospective application to all prior-period earnings per share data presented. Our unvested restricted stock rights (including restricted stock units, restricted stock awards, and performance shares) are considered participating securities since these securities have non-forfeitable rights to dividends or dividend equivalents during the contractual period of the share-based payment award. Since the unvested restricted stock rights are considered participating securities, we are required to use the two-class method in our computation of basic and diluted net earnings per common share. For the three months ended March 31, 2009, we had outstanding unvested restricted stock rights with respect to 10 million shares of common stock on a weighted-average basis. The adoption did not change the calculated basic or diluted earnings per common share amounts for the three months ended March 31, 2009 or 2008.
18

Table of Contents
On July 9, 2008, Vivendi obtained control of Activision, Inc. through acquisition of the majority of the outstanding common stock of Activision, Inc. For accounting purposes, Vivendi Games is deemed to be the acquirer (reverse acquisition — see ~~note 1)~~Note 1 of the Notes to Condensed Consolidated Financial Statements). The historical financial statements prior to July 9, 2008, are those of Vivendi Games. Further, earnings ~~(loss)~~ per common share for periods prior to the Business Combination are retrospectively adjusted to reflect the number of split adjusted shares received by Vivendi, former parent of Vivendi Games. ~~The following table sets forth the computations of net income (loss) per share on a basic and diluted basis (amounts in millions, except per share data):~~

Three months ended September 30,

Nine months ended September 30,

2008

2007

2008

2007

Numerator:

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

$
(108
)
$
48

$
(36
)
$
141

Denominator:

Denominator for basic and diluted earnings (loss) per share - weighted-average common shares outstanding

1,271

591

816

591

Net income (loss) per share
Basic and diluted

$
(0.08
)
$
0.08

$
(0.04
)
$
0.24

Equity incentive awards consisting of stock options, restricted stock units and restricted stock with respect to an aggregate of 55 million shares of common stock for the three and nine months ended September 30, 2008, respectively, ~~were not included in the calculation of diluted earnings per share because their effect would be antidilutive.~~ Potential common shares are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be ~~anti-dilutive, such as~~anti-dilutive. Therefore, stock-based awards consisting of stock options with respect to 23 million shares of common stock for the three months ended March 31, 2009 were not included in ~~a period in which a net loss is recorded.~~the calculation of diluted earnings per share because their effect would be anti-dilutive.

~~16.~~14. Capital transactions~~Commitments and Contingencies~~
~~Credit Facilities~~Repurchase Program

~~We have revolving credit facilities with~~On November 5, 2008, we announced that our ~~Centresoft subsidiary located in the UK (the “UK Facility”) and our NBG subsidiary located in Germany (the “German Facility”). The UK Facility provided Centresoft with the ability to borrow~~Board of Directors authorized a stock repurchase program under which we may repurchase up to ~~GBP 12~~$1 billion of our common stock. Under this program, we may repurchase our common stock from time to time on the open market or in private transactions, including structured or accelerated transactions. We will determine the timing and amount of repurchases based on our evaluation of market conditions and other factors. The repurchase program may be suspended or discontinued by the Company at any time.
Under the repurchase program, we repurchased 32 million ~~($22 million), including issuing letters~~shares of ~~credit, on a revolving basis as of September 30,~~our common stock for $313 million during the three months ended March 31, 2009. At March 31, 2009, we had $561 million available for utilization under the repurchase program.
15. Commitments and contingencies
We did not have any significant changes to our commitments since December 31, 2008. ~~The UK Facility bore interest at the London Inter-bank Offer Rate (“LIBOR”) plus 2.0% as of September 30, 2008, is collateralized by substantially all~~See Note 18 of the ~~assets~~Notes to Consolidated Financial Statements included in Item 8 of the subsidiary and will expire in February 2009. The UK Facility contains various covenants that require the subsidiary to maintain specified financial ratios related to, among others, fixed charges. The German Facility provided for revolving loans up to approximately EUR 1 million ($1 million) as of September 30, 2008, bore interest at a Eurocurrency rate plus 2.5%, 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 September 30, 2008.
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As of September 30, 2008, we maintained an $85 million irrevocable standby letter of credit. The standby letter of credit is required by one of our inventory manufacturers to qualify for payment termsAnnual Report on our inventory purchases. Under the terms of this arrangement, we are required to maintain on deposit with the bank a compensating balance, restricted as to use, of not less than the sum of the available amount of the letter of credit plus the aggregate amount of any drawings under the letter of credit that have been honored thereunder but not reimbursed. At September 30, 2008, the $85 million deposit is included in short-term investments as restricted cash. The letter of credit was undrawn as of September 30, 2008.
As of September 30, 2008, our publishing subsidiary located in the UK maintained a EUR 25 million ($37 million) irrevocable standby letter of credit. The standby letter of credit is required by one of our inventory manufacturers to qualify for payment terms on our inventory purchases. The standby letter of credit does not require a compensating balance and is collateralized by substantially all of the assets of the subsidiary and expires in February 2009. No borrowings were outstanding as of September 30, 2008.
On April 29, 2008, Activision, Inc. entered a senior unsecured credit agreement with Vivendi (as lender). Borrowings under the agreement became available upon consummation of the Business Combination. As of September 30, 2008, the credit agreement provides for a revolving credit facility of up to $475 million, bearing interest at LIBOR plus 1.20% per annum. Any unused amount under the revolving credit facility is subject to a commitment fee of 0.42% per annum. No borrowings were outstanding as of September 30, 2008.
~~Commitments~~
~~In the normal course of business, we enter into contractual arrangements with third parties for non-cancelable operating lease agreements for our offices,~~Form 10-K for the ~~development of products, and~~year ended December 31, 2008 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 rights 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 September 30, 2008 are scheduled to be paid as follows (amounts in millions):

Contractual Obligations(1)

Facility and

Developer

Equipment Leases

and IP

Marketing

Total

For the year ending December 31,

2008 (remaining three months)

$
12

$
43

$
26

$
81

2009

40

62

45

147

2010

35

40

4

79

2011

23

17

13

53

2012

21

22

—

43

Thereafter

64

38

—

102

Total

$
195

$
222

$
88

$
505

~~(1) We have omitted FIN 48 liabilities from this table due to the inherent uncertainty~~more information 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. As of September 30, 2008, we had $88 million of unrecognized tax benefits.our commitments.

Legal Proceedings

On February 8, 2008, the Wayne County Employees’ Retirement System filed a lawsuit challenging the Business Combination in the Delaware Court of Chancery. The suit is a putative class action filed against the parties to the Business Combination Agreement as well as certain current and former members of our Board of Directors. The plaintiff
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alleges, among other things, that our current and former directors named therein failed to fulfill their fiduciary duties with regard to the Business Combination by “surrendering” the negotiating process to “conflicted management,” that those breaches were aided and abetted by Vivendi and those of its subsidiaries named in the complaint, and that the preliminary proxy statement filed by the Company on January 31, 2008 contains certain statements that the plaintiff alleges are false and misleading. The plaintiff seeks an order from the court that, among other things, certifies the case as a class action, enjoins the Business Combination, requires the defendants to disclose all material information, declares that the Business Combination is in breach of the directors’ fiduciary duties and therefore unlawful and unenforceable, awards the plaintiff and the putative class damages for all profits and special benefits obtained by the defendant in connection with the Business Combination and tender offer, and awards the plaintiff its cost and expense, including attorney’s fees.

After various initial motions were filed and ruled upon, on May 8, 2008, the plaintiff filed an amended complaint that, among other things, added allegations relating to a revised preliminary proxy statement filed by the Company on April 30, 2008. Additional motions were then filed, including a motion for preliminary injunction filed by the plaintiff and a motion to dismiss filed by Vivendi and its subsidiaries. On June ~~24,~~14, 2008, the plaintiff filed a motion for leave to file a second amended complaint. On June 30, 2008, the court granted Vivendi and its subsidiaries’ motion to dismiss, aspursuant to ~~them.~~ Ona stipulation with the plaintiff, and on July 1, 2008, denied the ~~court denied~~ plaintiff’s motion for preliminary injunction. ~~The Company intends to defend itself vigorously.~~
In July 2006, individuals and/or entities claiming to be our stockholders filed derivative lawsuits, purportedly on our behalf, against certain current and former members of our Board of Directors as well as several of our current and former officers. Three derivative actions were filed in Los Angeles Superior Court: Vazquez v. Kotick, et al ., L.A.S.C. Case No. BC355327 (filed July 12, 2006); Greuer v. Kotick, et al. L.A.S.C. Case No. SC090343 (filed July 12, 2006); and Amalgamated Bank v. Baker, et al., L.A.S.C. Case No. BC356454 (filed August 3, 2006). These actions were consolidated by the court under the caption In re Activision Shareholder Derivative Litigation, L.A.S.C. Master File No. SC090343 (West, J.). Four derivative actions were 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); Hamian v. Kotick, et al., C.D. Cal. Case No. CV06-5375 MRP (JLTx) (filed August 25, 2006); Abdelnur vs. Kotick et al., C.D. Cal. Case No. CV07-3575 AHM (PJWx) (filed June 1, 2007); and Scarborough v. Kotick et al., C.D. Cal. Case No. CV07-4602 SVW (PLAx) (filed July 18, 2007). These actions were also 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 alleged, among other things, purported improprieties in our issuance of stock options. Plaintiffs sought various relief on our behalf, 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. We expect that defense expenses associated with the matters will be covered by our directors and officers insurance, subject to the terms and conditions of the applicable policies.

On ~~July 22,~~December 23, 2008, the plaintiff filed an amended motion for leave to file a second amended complaint. The court granted the motion on January 14, 2009 and ~~July 28, 2008, all~~the second amended complaint was deemed filed on the same date. The second amended complaint asserts claims similar to the ones made in the ~~consolidated stock options dating-related shareholder derivative~~original complaint, challenging Activision’s Board of Directors’ actions pending in the U.S. District Court for the Central District of California and in Los Angeles Superior Court, respectively, were dismissed with prejudice pursuant to the District Court’s order finally approving the Stipulation of Settlement entered into by all parties to the actions. In entering into the Stipulation of Settlement, neither we nor any of the settling parties admitted to any liability or wrongdoing. Under the terms of the court-approved Stipulation of Settlement, we are required to adopt, implement and/or maintain certain corporate governance and internal control measures, relating principally to the following: board composition, structure and practices, director independence standards, stock ownership and compensation, and education; shareholder proposal evaluation process; nomination procedures for shareholder-nominated directors; shareholder meeting procedures; executive compensation policies and procedures; insider trading controls; and stock option granting procedures. We agreed to keep these measures in place for a period of three years, subject to certain exceptions. The Stipulation of Settlement also addresses matters relating to the agreements by certain of our current and former directors and officers to reimburse the Company in connection with the receipt of options that required measurement date corrections. In the case of options already exercised, the agreements allowed reimbursement to be made either by cancellation of vested but unexercised options with a value equivalent to the additional exercise price or by payment of additional exercise price. In the case of options not yet exercised, the exercise price to be paid upon future exercise of those options is increased. In the aggregate, settling defendants have elected to cancel options to acquire approximately 800,000 shares of our common stocknegotiation and have agreed to increases in the exercise prices of approximately 16.1 million options. The modification of these options did not result in any incremental compensation expense. The Stipulation of Settlement also provides for the forgiveness of approximately $2 million in legal fees previously billed to us by former outside corporate counsel. In addition, the Stipulation of Settlement provides for us to pay $10 million to plaintiffs’ attorneys for their fees and expenses, subject to court approval of ~~such fees and expenses and subject~~the Business Combination, as well as disclosures made to our ~~reservation of all rights against our directors~~shareholders and officers (“D&O”) insurers, reinsurers and co-insurers. The Company paid the $10 million during the current quarter. The Stipulation of Settlement also provides that plaintiffs’ attorneys will also be entitled to 15% (up to $750,000) of any payments made by our D&O insurers to the

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~~Company~~certain amendments made to our certificate of incorporation in connection ~~with~~therewith. In addition, the ~~settlement,~~second amended complaint asserts that Activision’s Board of Directors breached its fiduciary duties in approving and recommending those amendments to the ~~extent such payments constitute reimbursement~~certificate of ~~amounts above and beyond covered defense costs incurred in connection with~~incorporation. Among other things, the ~~options matters. We have entered into settlement agreements with our first and second level excess D&O insurers (our primary D&O insurer having exhausted its policy limits prior~~plaintiff seeks certification of the action as a class action, a declaration that amendments made to the ~~parties’ entry into~~certificate of incorporation are invalid and unenforceable, a declaration that our directors breached their fiduciary duties, rescission of the ~~Stipulation of Settlement). We have not yet reached agreements with our third level excess D&O insurer or our D&O insurer providing “Side A/Difference in Conditions” coverage.~~Business Combination and related transactions, and damages, interest, fees and costs.

On ~~July 24, 2006, we received a letter~~February 13, 2009, the Company filed its opening brief in support of ~~informal inquiry from~~its motion to dismiss all claims in the ~~SEC requesting certain documents~~complaint. The plaintiff filed its opposition on April 7, 2009 and ~~information relating~~the Company filed its reply on May 5, 2009. No hearing date has yet been set on the motion to ~~our historical stock option grant practices. Thereafter, in early June 2007, the SEC issued a formal order of non-public investigation, pursuant~~dismiss. The Company intends to ~~which it subpoenaed documents from us related~~continue to the investigation, and testimony and documents from certain current and former directors, officers and employees of ours. We were recently advised by the SEC Staff in Los Angeles that they have decided to conclude this investigation without recommending any enforcement action.defend itself vigorously.

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.

~~17.~~16. ~~Stock-Based Compensation and Employee Benefit Plans~~Stock-based compensation
~~Equity Incentive Plans~~
On July 28, 2008, our Board of Directors adopted the Activision 2008 Incentive Plan, subject to shareholder approval, and, on September 24, 2008, that plan was approved by our shareholders and became effective. It was subsequently amended by the Board of Directors (as so amended, the “2008 Plan”). The 2008 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 2008 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 Blizzard and its subsidiaries.
While the Compensation Committee has broad discretion to create equity incentives, our equity-based compensation program currently primarily utilizes a combination of options and restricted stock units. Such awards generally have time-based vesting 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 2008 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 the award is granted, as reported on the NASDAQ.
Upon the effective date of the 2008 Plan, we ceased to make awards under the following equity incentive plans (collectively, the “Prior 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; (vii) Activision, Inc. 2003 Incentive Plan, as amended; and (viii) Activision, Inc. 2007 Incentive Plan.
As of the date it was approved by our shareholders, there were approximately 15 million shares available for issuance under the 2008 Plan. The number of shares of our common stock reserved for issuance under the 2008 Plan may be further increased from time to time by: (i) the number of shares relating to awards outstanding under any Prior 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 Prior Plan is, or the tax withholding requirements with respect to any award outstanding under any Prior Plan are, satisfied by withholding shares otherwise then
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~~deliverable in respect of the award or the actual or constructive transfer to the Company of shares already owned, the number of shares equal to the withheld or transferred shares.~~ As of September 30, 2008, we had approximately 15 million shares of our common stock reserved for future issuance under the 2008 Plan. Shares issued in connection with awards made under the 2008 Plan are generally issued as new stock issuances.
~~Modification of Awards through Business Combination~~
As a result of the reverse acquisition accounting treatment for the Business Combination, Activision, Inc. previously issued stock options and restricted stock awards granted to employees and directors, and warrants that were outstanding and unvested at the date of the Business Combination, are accounted for as an exchange of awards. The fair value of the outstanding vested and unvested awards was measured on the date of the acquisition, and for unvested awards which require service subsequent to the date of the Business Combination, a portion of the awards’ fair value has been allocated to future service and will be recognized over the remaining future requisite service period.

Restricted Stock ~~Units and Restricted Stock~~Rights
We grant restricted stock units and restricted stock (collectively referred to as “restricted stock rights”) under the 2008 Plan to employees around the world, and we have assumed as a result of the Business Combination the restricted stock rights granted by Activision, Inc. Restricted stock units entitle the holders thereof to receive shares of our common stock at the end of a specified period of time or otherwise upon a specified occurrence. 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 contingent upon the holders’ continued employment with us and may be subject to other conditions. If the vesting conditions are not met, unvested restricted stock rights will be forfeited.

The following table summarizes our restricted stock rights (including restricted stock units, restricted stock, and performance shares) activity for the ~~nine~~three months ended ~~September 30, 2008~~March 31, 2009 (amounts in thousands, except per share amount):

Restricted Stock
Rights

Weighted-
Average Grant
Date Fair Value

Balance as of January 1, 2008

—

$
—

Activity for the nine months ended September 30, 2008:

Acquired from the Business Combination

7,676

14.91

Granted

2,291

16.48

Vested

(15
)
17.07

Forfeited

(9
)
20.29

Balance as of September 30, 2008

9,943

$
15.26

Restricted Stock
Rights

Weighted-
Average Grant
Date Fair Value

Balance at December 31, 2008

10,267

$
14.52

Granted

23

9.96

Vested

(109
)
9.48

Forfeited

(4
)
17.51

Balance at March 31, 2009

10,177

13.21

~~As of September 30, 2008, $70~~At March 31, 2009, $66 million of total unrecognized compensation cost related to Activision Blizzard restricted stock rights is expected to be recognized over a weighted-average period of ~~2.14~~1.96 years.

~~Non-Plan Employee~~ Stock ~~Options~~Option Activities

~~In connection with prior employment agreements~~Stock option activities for the three months ended March 31, 2009 are as follows (amounts in millions, except number of shares in thousands and per share amounts):

Shares

Weighted-average
exercise price

Weighted-average
remaining contractual
term

Aggregate
intrinsic value

Outstanding at December 31, 2008

97,841

$
6.53

Granted

69

9.96

Exercised

(5,961
)
1.38

Forfeited

(108
)
8.21

Outstanding at March 31, 2009

91,841

6.87

5.88

$
396

Vested and expected to vest at March 31, 2009

87,077

$
6.61

5.25

$
391

Exercisable at March 31, 2009

53,122

4.35

4.28

335

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e. the difference between ~~Activision, Inc. and Robert A. Kotick,~~ our ~~Chief Executive Officer, and Brian G. Kelly, our Co-Chairman, Mr. Kotick and Mr. Kelly were previously granted options to purchase common~~closing stock ~~of Activision, Inc. These awards were assumed as a result~~price on the last trading day of the ~~Business Combination~~period and ~~accounted for as an exchange~~the exercise price, times the number of shares for options ~~to purchase our common stock. As of September 30, 2008, non-plan options to purchase approximately 16 million shares under such grants were outstanding with a weighted-average~~where the exercise price is below the closing stock price) that would have been received by the option holders had all option holders exercised their options on that date. This amount changed based on the fair market value of ~~$1.02.~~our stock. Total intrinsic value of options actually exercised was $52 million for the three months ended March 31, 2009.

~~Performance Shares~~
~~In connection with the consummation of the Business Combination, on July 9, 2008,~~Mr. Kotick received a grant of 2,500,000 performance shares, which will vest in 20% increments on each of the first, second, third, and fourth anniversaries of the date of grant, with another 20% vesting on December 31, 2012, the expiration date of Mr. Kotick’s employment agreement with the Company, in each case subject to the Company attaining the specified compound annual total shareholder return target for that vesting period. If the Company does not achieve the performance target for a vesting period, no performance shares will vest for that vesting period. If, however, the Company achieves a performance target for a
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~~subsequent vesting period, then all of the performance shares that would have vested on the previous vesting date will vest on the vesting date where the performance targets were achieved.~~
The fair value of these shares was determined using a binomial lattice model which takes into consideration, among other factors, the probability of the performance targets being met. As of September 30, 2008, $20At March 31, 2009, $88 million of total unrecognized compensation cost related to ~~the performance shares~~stock options is expected to be recognized over a weighted-average period of ~~approximately 5~~1.4 years.

~~Employee Stock Purchase Plan~~
~~Effective October 1, 2005,~~Net cash proceeds from the ~~Board~~exercise of ~~Directors~~stock options were $7 million for the three months ended March 31, 2009. Income tax benefit from stock option exercises was $17 million for the three months ended March 31, 2009. In accordance with SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), we present excess tax benefits from the exercise of Activision, Inc. approved the Activision, Inc. Third Amended and Restated 2002 Employee Stock Purchase Plan and the Activision, Inc. Second Amended and Restated 2002 Employee Stock Purchase Plan for International Employees (together, the “ESPP”). Under the ESPP, up to an aggregate of 4,000,000 shares of Activision, Inc. common stock may be purchased by eligible employees during two six-month offering periods that commence each April 1 and October 1 (the “Offering Period”). Common stock is purchased by the ESPP participants at a price per share generally equal to 85% of the lower of the fair market value of our common stock on the first day of the Offering Period and the fair market value of 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 foroptions, if any, ~~two purchases within the same calendar year. As a result of the Business Combination the offering period in effect at the time of the Business Combination was assumed by us, and on~~ October 1, 2008, employees purchased 262,002 shares of our common stock at a purchase price of $11.65 per share under the ESPP. The ESPP has been terminated by the Board of Directors and there will be no further purchases thereunder.as financing cash flows rather than operating cash flows.

~~BEP~~Blizzard Equity Plan (“BEP”)

In 2006, Blizzard implemented the BEP, an equity incentive plan denominated in U.S. dollars. Under the BEP, restricted shares of Blizzard stock and other cash settled awards were granted to certain key executives and employees of Blizzard.

Under the provisions of the BEP and the Business Combination Agreement, the consummation of the Business Combination is deemed a change in control, which automatically triggered cash payments to the beneficiaries for the portion of awards that were vested at the closing date of the Business Combination. Upon closing of the Business Combination, we paid $106 million under the BEP to employees. The determination of the value of Blizzard shares upon a change in control is equal to the transaction value under the provisions of the BEP. The outstanding non-vested rights became immediately vested upon the closing of the Business Combination, cancelled and extinguished and converted into a new right to receive an amount in cash eighteen months after the closing upon the terms and subject to the conditions set forth in the BEP and in the Business Combination Agreement, including continued employment through the payment date. As of September 30, 2008,At March 31, 2009, unrecognized compensation expense under the BEP was ~~approximately $24~~$14 million which will be recognized over the ~~remaining fifteen~~following nine months. ~~As of September 30, 2008,~~At March 31, 2009, accrued expenses and other ~~non-current~~ liabilities in the ~~consolidated balance sheet includes approximately $65~~Condensed Consolidated Balance Sheet included $74 million related to this plan.

Vivendi Corporate Plan

Prior to the Business Combination, Vivendi Games had equity incentive plans that were equity-settled and cash-settled. Equity-settled awards include stock options and restricted share plans from Vivendi, and the cash-settled award includes stock appreciation rights and restricted stock units from Vivendi. There were no new grants from Vivendi during the ~~nine~~three months ended ~~September 30, 2008.~~ March 31, 2009. During the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2008~~March 31, 2009 there were no material ~~movements within~~changes to the components of equity-settled and cash-settled instruments. ~~As of September 30, 2008 and December~~At March 31, ~~2007,~~2009, we have recorded in ~~our consolidated balance sheets non-current~~the Condensed Consolidated Balance Sheet other liabilities of ~~approximately $10~~$7 million ~~and approximately $33 million, respectively,~~ relating to the Vivendi Corporate Plan.
~~Stock-based Compensation Expense~~
The following table sets forth the total stock-based compensation expense (amounts in millions) resulting from stock options, restricted stock rights, ESPP, the BEP, and the Vivendi Corporate Plan included in our Consolidated Statements of Operations in accordance with SFAS No. 123R for the three and nine months ended September 30, 2008, and 2007:

Three months ended
September 30, 2008

Nine months ended
September 30, 2008

Cost of sales—software royalties and amortization

$
—

$
1

Product development

7

34

Sales and marketing

4

6

General and administrative

15

6

Stock-based compensation expense before income taxes

26

47

Income tax benefit

(10
)
(19
)
Total stock-based compensation expense, net of income tax benefit

$
16

$
28

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Three months ended
September 30, 2007

Nine months ended
September 30, 2007

Cost of sales—software royalties and amortization

$
1

$
1

Product development

35

55

Sales and marketing

3

5

General and administrative

3

16

Stock-based compensation expense before income taxes

42

77

Income tax benefit

(17
)
(30
)
Total stock-based compensation expense, net of income tax benefit

$
25

$
47

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 and nine months ended September 30, 2008, stock-based compensation costs in the amount of $15 million was capitalized. The following table summarizes stock-based compensation included in our Consolidated Balance Sheets as a component of software development (amounts in millions):

Software
development

Balance as of January 1, 2008

$
—

Stock-based compensation expense capitalized during period

15

Amortization of capitalized stock-based compensation expense

—

Balance as of September 30, 2008

$
15

Method and Assumptions on Valuation of Stock Options

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~~We have ~~attempted to reflect~~estimated the expected future changes in model inputs during the option’s contractual term. The inputs required by our binomial-lattice model include expected volatility, risk-free interest rate, risk-adjusted stock return, dividend yield, contractual term, and vesting schedule, as well as measures of employees’ forfeiture, exercise, and post-vesting termination behavior. Statistical methods were used to estimate employee ~~rank- specific~~rank-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 rank-specific estimates of Expected Time-To-Exercise (“ETTE”) were used to reflect employee exercise behavior. ETTE was estimated by using statistical procedures to first estimate the conditional probability of exercise occurring during each time period, conditional on the option surviving to that time period and then using those probabilities to estimate ETTE. The model was calibrated by adjusting parameters controlling exercise and post-vesting termination behavior so that the measures output by the model matched values of these measures that were estimated from historical data. The weighted-average estimated value of employee stock options granted during the three ~~and nine~~ months ended ~~September 30, 2008~~March 31, 2009 was ~~$6.59~~$4.92 per share, using the binomial-lattice model with the following weighted-average assumptions:

Employee and director
options and warrants

Employee stock
purchase plan

For three and nine months
ended September 30, 2008

For three and nine months
ended September 30, 2008

Expected life (in years)

5.01

0.5

Risk free interest rate

4.03
%
1.53
%
Volatility

50.61
%
35.75
%
Dividend yield

—

—

Weighted-average fair value at grant date

$
6.59

$
3.36

Upon consummation of the Business Combination described in Note 4, and in accordance with the guidance of SFAS No. 123R, the fair value of Activision, Inc.’s stock awards was determined using the fair value of Activision, Inc.’s common stock of $15.04 per share, which is the closing price as of July 9, 2008 and a binomial-lattice model with the following assumptions: (a) varying volatility ranging from 42.38% to 51.50%, (b) a risk free interest rate of 3.97%, (c) an expected life
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~~ranging from approximately 3.22 years to 4.71 years, (d) risk adjusted stock return of 8.89%, and (e) an expected dividend yield of 0.0%.~~

Employee and director
options and warrants
for three months
ended March 31, 2009

Expected life (in years)

6.20

Risk free interest rate

3.15
%
Volatility

53.79
%
Dividend yield

—

Weighted-average fair value at grant date

$
4.92

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, “Share-Based Payment” (“SAB No. 107”). These methods include the implied volatility
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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 Blizzard’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 ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, the expected stock price volatility ranged from ~~46.15%~~53.60% to ~~51.42%~~56.00%, with a weighted-average volatility of ~~50.61%~~53.79%.

As is 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.”~~rate”). Since we do not currently pay dividends and are not expected to pay them in the future, we have assumed that the dividend yield is zero.

The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is ~~as required by SFAS No. 123R,~~ an output byfrom the binomial-lattice model. The expected life of employee stock options depends on all of the underlying assumptions and calibration of our model. A binomial-lattice model can be viewed as assuming that employees will exercise their options when the stock price equals or exceeds an exercise boundary. The exercise boundary is not constant, but continually declines as one approaches the option’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 compensation expense recognized in the Condensed Consolidated Statement of Operations for the three ~~and nine~~ months ended ~~September 30, 2008~~March 31, 2009 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ~~SFAS No. 123R requires forfeitures to be~~Forfeitures are 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

We developed the assumptions used in the binomial-lattice model, including model inputs and measures of employees’ exercise and post-vesting termination behavior. Our ability to accurately estimate the fair value of share-based payment awards ~~as of~~at the grant date depends upon the accuracy of the model and our ability to accurately forecast model inputs as long as ten years into the future. These inputs include, but are not limited to, expected stock price volatility, risk-free rate, dividend yield, and employee termination rates. Although the fair value of employee stock options is determined in accordance with SFAS No. 123R and SAB No. 107 using an option-pricing model, the estimates that are produced by this model may not be indicative of the fair value observed between a willing ~~buyer/~~buyer and a willing seller. Unfortunately, it is difficult to determine if this is the case, because markets do not currently exist that permit the active trading of employee stock option and other share-based instruments.

~~Stock Option Activities~~Stock-based Compensation Expense

~~We have assumed~~The following table sets forth the total stock-based compensation expense resulting from stock options, restricted stock rights, the BEP, and the Vivendi Corporate Plan included in our Condensed Consolidated Statements of Operations for the three months ended March 31, 2009, and 2008 (amounts in millions):

Three months ended March 31,

2009

2008

Cost of sales—software royalties and amortization

$
5

$
1

Product development

9

18

Sales and marketing

3

1

General and administrative

11

(12
)
Restructuring

2

—

Stock-based compensation expense before income taxes

30

8

Income tax benefit

(12
)
(3
)
Total stock-based compensation expense, net of income tax benefit

$
18

$
5

As a result of the reverse acquisition accounting treatment for the Business Combination, previously issued Activision, Inc. stock options and restricted stock awards granted to employees and directors, byand Activision, Inc. warrants outstanding and unvested at the date of the Business Combination, were accounted for as an exchange of awards. The fair value of the outstanding vested and unvested awards was measured on the date of the acquisition, and for unvested awards which required service subsequent to the date of the Business Combination, a portion of the awards’ fair values was allocated to future service and will be recognized over the remaining future requisite service period. As a result of ~~the Business Combination. Stock option activities for the nine-months ended September 30, 2008 are as follows (amounts in millions, except number~~this fair value measurement of ~~shares in thousands and per share amounts):~~stock-based payment awards on the

Shares

Weighted-average
exercise price

Weighted-average
remaining contractual
term

Aggregate
intrinsic value

Outstanding at January 1, 2008

—

$
—

Acquired via the Business Combination

96,075

5.76

Granted

5,612

16.55

Exercised

(3,646
)
5.09

Forfeited

(286
)
4.47

Outstanding at September 30, 2008

97,755

6.41

6.01

$
888,804

Vested and expected to vest at September 30, 2008

91,376

$
6.07

5.24

$
860,386

Exercisable at September 30, 2008

54,292

$
3.36

4.07

$
655,429

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~~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~~date of the ~~period and the exercise price, times the number~~acquisition, we estimate that we incurred an additional $9 million of shares for options where the exercise price is below the closing stock price) that would have been received by the option holders had all option holders exercised their options on that date. This amount changes based on the fair market value of our stock. Total intrinsic value of options actually exercised was approximately $43 millionstock-based compensation expense for the ~~three and nine months~~quarter ended ~~September 30, 2008.~~March 31, 2009.

~~As of September 30, 2008, $123 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 1.5 years.~~
~~Net cash proceeds from the exercise of stock options were $19 million for the three and nine months ended September 30, 2008. Income tax benefit from stock~~Stock option ~~exercises was $17 million for the three and nine months ended September 30, 2008, of which $15 million and $2 million was credited to goodwill and additional paid~~expenses are capitalized in ~~capital, respectively. In~~ accordance with SFAS No. ~~123R, we present excess tax benefits from~~86, “Accounting for the ~~exercise~~Costs of ~~stock options, if any,~~Computer Software to Be Sold, Leased, or Otherwise Marketed,” as ~~financing cash flows rather than operating cash flows.~~discussed in Note 3 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. The following table summarizes stock-based compensation included in our Consolidated Balance Sheets as a component of software development (amounts in millions):

Software
development

Balance at December 31, 2008

$
36

Stock-based compensation expense capitalized during period

12

Amortization of capitalized stock-based compensation expense

(5
)
Balance at March 31, 2009

$
43

~~18.~~17. Related ~~Parties Transactions~~parties transactions
Treasury ~~Related Administration~~
Prior to the Business Combination, Vivendi maintained a centralized cash management pool from which Vivendi Games borrowed and loaned cash on a daily basis. Net cash transfers, under the cash pooling agreement, were included in owner’s equity as part of net transfers to Vivendi. Vivendi charged Vivendi Games interest on the cumulative net cash transfers and such charges are included in investment income (loss), net in the accompanying consolidated statements of operations. Net interest earned from Vivendi for the three and nine months ended September 30, 2008 was $- million and $5 million, respectively. Net interest expense for the three and nine months ended September 30, 2007 was $2 million and $3 million, respectively.
In addition, in accordance with the terms of the Business Combination Agreement, Vivendi Games settled its payable to Vivendi S.A. and distributed its excess cash on hand as defined in the Business Combination Agreement immediately prior to the close of the transaction, resulting in cash payments of $79 million to settle its payable and $79 million to distribute its excess cash to Vivendi.

Our foreign currency risk policy seeks to reduce risks arising from foreign currency fluctuations. ~~In connection with this, we~~We use derivative financial instruments, primarily currency forward contracts and swaps, with Vivendi as our principal counterparty. ~~As of September 30, 2008 and December 31, 2007, the net~~The notional ~~amount~~amounts of outstanding forward foreign exchange contracts ~~was approximately $32~~and foreign exchange swaps were less than a million dollars and $227 million, respectively, at March 31, 2009. The notional amounts of outstanding forward foreign exchange contracts and foreign exchange swaps were $126 million and ~~$14~~$118 million, ~~respectively.~~respectively, at December 31, 2008. A pre-tax net unrealized gain of ~~approximately $3 million and~~ $2 million ~~for the three and nine months ended September 30, 2008, respectively,~~ and a pre-tax net unrealized loss of ~~approximately $- million and $2~~$1 million for the three ~~and nine~~ months ended ~~September 30, 2007,~~March 31, 2009 and 2008, respectively, resulted from the foreign exchange contracts and swaps with Vivendi and were recognized in the Condensed Consolidated ~~Statement~~Statements of Operations.

Others

Activision Blizzard has entered into various transactions and agreements, including treasury management services, investor agreement, internal group reporting services, credit facilities arrangement ~~(see Note 16 for more details),~~ and music ~~royalties~~royalty agreements with Vivendi and its subsidiaries and affiliates. None of these services, transactions and agreements with Vivendi and its subsidiaries and affiliates is material either individually or in the aggregate to the Condensed Consolidated Financial Statements as a whole.

~~19.~~18. ~~Subsequent event~~Recently issued accounting pronouncements
On November 5, 2008, we announced that our Board of Directors authorized a stock repurchase program under which we may repurchase up to $1 billion of our common stock. Under this program, we may repurchase our common stock from time to time on the open market or in private transactions, including structured or accelerated transactions. We will determine the timing and amount of repurchases based on our evaluation of market conditions and other factors. The repurchase program may be suspended or discontinued by the Company at any time.

35On April 9, 2009, the FASB issued the following three Final Staff Positions (“FSPs”) intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities:
FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides guidance on how to determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased and re-emphasizes that the objective of a fair value measurement remains an exit price.
FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires companies to disclose the fair value of financial instruments within interim financial statements, adding to the current requirement to provide those disclosures annually.
FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” modifies the requirements for recognizing other-than-temporary-impairment on debt securities and significantly changes the impairment model for such securities. Under FSP FAS 115-2 and 124-2, a security is considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference being defined as the credit loss) or if the fair value of the security is less than the security’s amortized cost basis and the investor intends, or more-likely-than-not will be required, to sell the security before recovery of the security’s amortized cost basis. If an other-than-temporary impairment exists, the charge to earnings is limited to the amount of credit loss if the investor does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost is recognized in other comprehensive
23

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income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. The FSP also modifies the presentation of other-than-temporary impairment losses and increases related disclosure requirements.
The FSPs are effective for interim and annual periods ending after June 15, 2009, but entities may early adopt the FSPs for the interim and annual periods ending after March 15, 2009. The adoption of these standards is not expected to have a material impact on our results of operations or financial position.

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

Business Overview

~~The following overview~~Activision Blizzard, Inc. is a ~~top-level discussion of our operating results as well as some of~~worldwide pure-play online, personal computer (“PC”), console and hand-held game publisher. The terms “Activision Blizzard,” the trends and drivers that affect our business. Management believes that an understanding of these trends and drivers is important in order to understand our results for the quarter ended and nine month period ended September 30, 2008, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Form 10-Q, including the remainder of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,“Company,” “we,” “us,” or ~~the Consolidated Financial Statements~~“our” are used to refer collectively to Activision Blizzard, Inc. and ~~related notes.~~its subsidiaries. Based upon our organizational structure, we operate four operating segments as follows:

~~Our Business~~Activision Publishing, Inc.

~~The~~ Activision ~~Blizzard group of companies~~Publishing, Inc. (“Activision”) is a leading international publisher of interactive ~~entertainment~~ software products and ~~peripheral products. Through Blizzard, we are the leader in terms of subscriber base and revenues generated in the subscription-based MMOG category.~~peripherals. Activision develops and publishes video games on various consoles, hand-held platforms and the PC platform through internally developed franchises and license agreements. ~~Our companies~~Activision currently ~~offer our products primarily in versions~~offers games that operate on the Sony Computer Entertainment (“Sony”) PlayStation 2 (“PS2”), Sony PlayStation 3 (“PS3”), Nintendo Co. Ltd. (“Nintendo”) Wii (“Wii”), and Microsoft Corporation (“Microsoft”) Xbox 360 (“~~Xbox360”~~Xbox 360”) console ~~systems,~~systems; the Sony PlayStation Portable (“PSP”), and Nintendo Dual Screen (“NDS”) hand-held ~~devices,~~devices; the PC; and ~~PCs.~~

the new handheld game system Nintendo DSi. Our Activision business involves the development, marketing, and sale of products directly, by license, or through our affiliate label program with certain third-party publishers. Activision’s products cover diverse game categories including action/adventure, action sports, racing, role-playing, simulation, first-person action, music, and strategy. Activision’s target customer base ranges from casual players to game enthusiasts, and children to adults. ~~During calendar 2008, Activision plans to release~~ ~~Guitar Hero World Tour~~, ~~Call of Duty: World at War~~~~, and continue to expand its licensed titles such as~~ ~~Madagascar: Escape 2 Africa~~, ~~Spider-Man: Web of Shadows,~~ ~~its first James Bond title,~~ ~~Quantum of Solace~~~~, and several other titles. Activision is currently in development of~~ ~~Wolfenstein~~ ~~from id Software,~~ ~~Marvel Ultimate Alliance 2: Fusion~~ ~~from Vicarious Visions,~~ ~~Prototype~~ ~~from Radical,and~~ ~~Singularity~~ ~~from Raven Software, among other titles.~~

Blizzard Entertainment, Inc.

Blizzard Entertainment, Inc. (“Blizzard”) is a leader in terms of subscriber base and revenues generated in the subscription-based massively multi-player online role-playing game (“MMORPG”) category. Blizzard internally develops and publishes PC-based computer games and maintains its proprietary online-game related service, Battle.net. Our Blizzard business involves the development, marketing, sales and support of ~~traditional games~~role playing action and strategy games. Blizzard also develops, hosts, and supports its online subscription-based games in the ~~MMOG~~MMORPG category. Blizzard ~~is headquartered in Irvine, California and~~ is the development studio and publisher best known as the creator of World of Warcraft, which is played by more than 11.5 million subscribers worldwide, and the ~~multi~~multiple award winning Diablo,, StarCraft, and Warcraft franchises. Blizzard distributes its products and generates revenues worldwide through various means, including: subscription revenues (which consist of fees from individuals playing World of Warcraft, such as prepaid-cards and other ancillary online revenues); retail sales of physical “boxed” ~~product;~~products; electronic download sales of PC products; and licensing ~~revenues from~~of software to third-party companies ~~who~~that distribute ~~World of Warcraft~~ ~~in China and Taiwan. During calendar 2008, Blizzard plans to release~~ World of Warcraft ~~Wrath of the Lich King,~~ ~~the second expansion pack of~~ ~~World of Warcraft~~.in China, Russia, and Taiwan. Blizzard is currently ~~in development of, among other~~developing new games, including sequels to the StarCraft II and Diablo. franchises.

~~Our distribution business~~Activision Blizzard Distribution

Activision Blizzard Distribution (“Distribution”) consists of operations in Europe that provide warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.

~~Management’s Overview of Historical and Prospective Business Trends~~Activision Blizzard’s non-core exit operations

~~Console hardware platforms – In 2005, Microsoft released the Xbox 360~~Activision Blizzard’s non-core exit operations (“Non-Core”) represent legacy Vivendi Games’ divisions or business units that we have exited or are winding down as part of our restructuring and ~~in 2006, Sony and Nintendo introduced their respective hardware platforms, the PlayStation 3 and Wii. Activision’s plan is to continue to build~~integration efforts as a ~~significant presence on the PS3, the Wii and the Xbox360 by expanding the number~~result of ~~titles released on these platforms and hand-held platforms while continuing to market to the PS2 platform as long as economically attractive given its large installed base.~~

Business combination and investments – We have engaged in, evaluated, and expect to continue to engage in and evaluate, a wide array of potential strategic transactions, including acquisitions of companies, businesses, intellectual properties, and other assets. ~~During the three months ended September 30, 2008,~~ ~~we consummated our previously announced business combination (the “Business Combination”) pursuant to~~ the Business Combination, ~~Agreement (the “Business Combination Agreement”), dated as~~but do not meet the criteria for separate reporting of ~~December 1, 2007,~~discontinued operations. On July 9, 2008, a business combination by and among ~~the Company,~~

Table of Contents

Activision, Inc., Sego Merger Corporation, a wholly-owned subsidiary of ~~the Company,~~Activision, Inc., Vivendi S.A. (“Vivendi”), VGAC LLC, a wholly-owned subsidiary of Vivendi, ~~(“VGAC”),~~ and Vivendi Games, Inc., a wholly-owned subsidiary of VGAC ~~(“Vivendi Games”). Upon the closing~~LLC, was consummated. As a result of the ~~Business Combination, which occurred on July 9, 2008,~~consummation of the business combination, Activision, Inc. was renamed Activision Blizzard, Inc. ~~(“Activision Blizzard”). Activision Blizzard continues to operate as a public company traded on~~For accounting purposes, the ~~NASDAQ under the ticker symbol~~

~~Table of Contents~~

~~ATVI. Activision Blizzard now conducts the combined~~ business operations of Activision, Inc. and Vivendi Games including Blizzard Entertainment, Inc. (“Blizzard”). In connection with the Business Combination, we issued approximately 717 million shares of our common stock to VGAC including 126 million shares of common stock purchased by Vivendi for approximately $1.7 billion. Immediately following the consummation of the Business Combination, VGAC owned approximately 54% of Activision Blizzard’s issued and outstanding common stock. While Activision was the surviving entity in this Business Combination, because the transactioncombination is treated as a “reverse acquisition,” with Vivendi Games, isInc. deemed to be the acquirer for accounting purposes. Accordingly, Activision Blizzard applied purchase accounting to the assets and liabilities of Activision as of July 9, 2008. Also, for all Exchange Act filings following consummation of the Business Combination, theacquirer. The historical financial statements of Activision ~~for periods~~Blizzard, Inc. prior to ~~the consummation of the Business Combination~~July 9, 2008 are those of Vivendi ~~Games. Activision,~~Games, Inc. ~~businesses are~~See Note 1 of the Notes to Consolidated Financial Statements included in ~~Activision Blizzard’s financial statements~~Item 8 of the Annual Report on Form 10-K for ~~all periods subsequent to~~ the ~~consummation~~year ended December 31, 2008 for a more complete discussion of the Business Combination only. See Note 1 to the Consolidated Financial Statements for further information. Also, to further strengthen our development resources and underscoring our commitment to the music-based genre, on September 11, 2008, we acquired Freestyle Games, Ltd., a premier United Kingdom-based video game developer specializing in the music-based genre.Combination.

Management’s Overview of Business Trends

Business Highlights

~~International operations –~~In the U.S. and Europe, for the first quarter of 2009, Activision ~~focuses on the growth~~Blizzard had two of the ~~European market through developing localized contents for its~~ top-five best-selling titles across all platforms: Guitar Hero ~~franchises~~World Tour and ~~other franchises or titles in terms~~Call of ~~contents~~Duty: World at War; additionally, Call of Duty and ~~packaging. For the Asian market, Blizzard distributes~~ ~~World of Warcraft~~ ~~through direct operations and licenses. Blizzard licensed with The 9 to distribute~~ ~~World of Warcraft~~ in China and with SoftWorld in Taiwan. Internet game room players and prepaid cards are also very popular in Asia, particularly in South Korea. Recently, Blizzard has licensed Blizzard Entertainment’s ~~StarCraft II~~, ~~Warcraft III: Reign of Chaos~~, ~~Warcraft III: The Frozen Throne~~~~, and Battle.net platform to a company affiliated with NetEase.com, Inc. Blizzard and NetEase have also established a joint venture, which will provide support for the operation~~Guitar Hero remained two of the ~~licensed games~~top-five best-selling franchises in the U.S. and ~~Battle.net platform in China. For the quarter ended September 30, 2008, Blizzard released a Russian language version of~~ ~~World of Warcraft~~ ~~in Russia. Also, Blizzard expanded the sale of support for~~ ~~World of Warcraft~~ ~~into Russia~~Europe according to The NPD Group, Charttrack and ~~Spanish-speaking Latin America.~~Gfk.

Integration and reorganization – Following the Business Combination on July 9, 2008, we have restructured the Vivendi Games businesses to capture cost-synergy to form the streamlined organization of Activision Blizzard. For the remainderOther business highlights for the ~~year 2008~~first quarter of 2009 are as follows:

·Guitar Hero World Tour was the #1 best-selling third-party title in the U.S. across all platforms in dollars, according to The NPD Group.

·In the U.S. and ~~beyond, we expect~~Europe, Guitar Hero World Tour was the #1 best-selling third-party title in dollars for the Wii and the only third-party game to continue to incur a restructuring expense mainly relating to severance payments to interim employees who are currently assisting us to exit our non-core operations and unutilized facilities. We anticipate completely exiting or winding down our non-core operations by June 2009 inclusive of organizational restructuring activitiesrank as a ~~result of~~top-five best seller for the ~~Business Combination. For the next nine months, we anticipate incurring between $75 million~~platform, according to The NPD Group, Charttrack and $100 million of additional before tax restructuring charges, and after tax cash restructuring charges between $45 million and $60 million relating to the Business Combination. Overall, including charges incurred through September 30, 2008, we expect to incur cash and non-cash before tax restructuring charges between $135 million and $160 million by June 30, 2009 with an after tax cash impact between $70 million and $90 million. The after tax cash charges are expected to consist primarily of employee-related severance cash costs (approximately $55 million), facility exit cash costs (approximately $25 million) and cash contract terminations (approximately $10 million). Separately, these restructuring charges are expected to be partially offset by approximately between $30 million and $50 million of cash proceeds from asset disposals and cash after tax benefits related to the streamlining of the Vivendi Games title portfolio.

Console online games – Activision has published games with significant online functionality that constitutes a more-than-inconsequential separate service deliverable in addition to the product, and in which our performance obligations for these titles extends beyond the sale of the game. Vendor-specific objective evidence of fair value (“VSOE”) does not exist for these online features, as we do not separately charge for this component of these titles. As a result, we recognize all of the revenue from the sale of these titles ratably over an estimated service period. In addition, we defer the costs of sales of these titles to match revenue.

Gfk.

~~MMOG online games – Blizzard will publish the second expansion pack of~~· World of ~~Warcraft~~Warcraft: Wrath of the Lich King remained the #1 PC game in dollars in the U.S. for the quarter, according to The NPD Group.

·Activision Blizzard had three of the top-10 best-selling PC titles in dollars in the U.S., ~~in multiple countries in November 2008. We expect this expansion pack will bring Blizzard new subscribers~~according to The NPD Group.

·For the quarter, European revenues for the Guitar Hero franchise grew 84% year over year, according to Charttrack and ~~expand Blizzard’s subscription revenues.~~Gfk.

Impact of deferral revenues and cost of sales – We anticipate that, in calendar 2008, we will likely defer approximately $568 million in net revenues and $199 million in costs of sales from the sale of console and MMOG online games titles into calendar 2009. Since most of these titles are planned for release in the December quarter of calendar 2008, we expect that a majority of revenues and costs of sales for these products will be deferred in the December quarter of calendar 2008, and recognized in calendar year 2009. However, the actual amount of revenues and costs of sales deferred will vary significantly depending upon the timing of the release of these titles and the sales volume of such products.Activision 2009 Scheduled Releases

~~Other revenues –~~During 2009, Activision ~~is continuing development of online capabilities for its games. Activision will~~expects to continue to ~~exploit other revenue sources, including downloadable content and~~build its success in ~~game advertising for its console~~releasing games based on proven franchises such as Call of Duty, Guitar Hero, Transformers, X-Men, Marvel, Tony Hawk, Wolfenstein, and Ice Age. Games released during the quarter ended March 31, 2009 included Guitar Hero: Metallica for the Xbox 360, PS3, and Wii in North America; Monsters vs. Aliens worldwide on multiple platforms; and the first map pack for Call of Duty: World ~~Tour~~at War~~, and GH Tunes as one~~. The more notable games, among other titles, scheduled for release during the remainder of 2009 include: X-Men Origins: Wolverine; Guitar Hero: Smash Hits; Transformers: Revenge of the ~~newly added features to~~Fallen; Ice Age: Dawn of the Dinosaurs; Prototype, a new third-person action game;a new Wolfenstein game;the second map pack for Call of Duty: World at War; Marvel Ultimate Alliance 2; our new wholly owned first-person action game called Singularity; a new game based on the Tony Hawk franchise; a new anticipated racing game titled Blur developed by Bizarre Creations; DJ Hero; Guitar Hero ~~franchise.~~5; Band Hero; Call of Duty: Modern Warfare 2; and a new game based on the breakout hit toy and popular action animated TV series, Bakugan.

Economic ~~conditions –~~ Conditions

We continue to monitor the ~~recent widely reported unfavorable changes in~~adverse economic conditions ~~including the likely slowdown in consumer spending this holiday season,~~ which may have unfavorable impacts on our businesses, such as ~~the pricing~~deterioration of consumer demand, pressure on prices of our products, ~~purchases by our customers, and~~ credit quality of our ~~receivables.~~receivables, and foreign currency exchange rates.

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

~~Table of Contents~~
~~reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, see Note 3 to the Notes to~~Our Condensed Consolidated Financial Statements ~~included~~are prepared in ~~Item 1. The preparation~~accordance with accounting principles generally accepted in the United States of ~~financial statements in conformity with US GAAP requires management~~America (“U.S. GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities at the date of the financial statements ~~and~~as well as the reported amounts of revenues and expenses during the ~~reporting period. Actual~~periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, ~~could differ from those estimates.~~
~~Revenue Recognition~~
~~Product sales~~
~~We recognize revenue from the sale of~~ our ~~products upon the transfer of title and risk of loss to~~financial statements will be affected. The accounting policies that reflect our customers, and once any performance obligations have been completed. Certain products are sold to customers with a street date (the earliest date these products may be sold by retailers). For these products we recognize revenue 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.
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 recognize revenue related to products containing these limited online features upon the transfer of title and risk of loss to our customer. In instances where online features or additional functionality is considered a substantive deliverable in addition to the software product, we take this into account when applying our revenue recognition policy.   This evaluation is performed for each software product together with any online transactions, such as electronic downloads of titles of product add-ons when it is released. When we determine that a software title 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, we consider our performance obligations for this title extend beyond the sale of the game. 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 recognize all of the revenue from the sale of the title ratably over an estimated service period. In addition, we defer the costs of sales for this title to match revenues. Cost of sales includes: manufacturing costs, software royalties and amortization, and intellectual property licenses.
~~We recognize revenues for the massively, multiplayer, online game~~ ~~World of Warcraft~~, its expansion packs and other ancillary services in accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements, (“SAB No. 101”), as amended by Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”).
~~We consider the~~ ~~World of Warcraft~~ boxed product including expansion packs and other ancillary revenues as a single deliverable with the total arrangement consideration combined and recognized ratably as revenue over the estimated customer life beginning upon activation of the software and delivery of the services. Revenues attributed to the sale of ~~World of Warcraft~~ boxed software and related expansion packs are classified as Product Sales and revenues attributable to subscription and other ancillary services are classified as subscription, licensing and other revenues.
With respect to online transactions, such as electronic downloads of titles or product add-ons that do not constitute a more-than-inconsequential separate service deliverable, revenue is recognized when the fee is paid by the online customer to purchase online content and we are notified by the online retailer that the product has been downloaded. In addition, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable.
Sales incentives or other consideration given by us to our customers is accounted for in accordance with 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 to 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.
~~Subscription Revenues~~
~~Subscription revenues are recognized in accordance with SAB No. 101, as amended by SAB No. 104. Subscription revenues are derived from~~ ~~World of Warcraft~~~~, a game that is playable through Blizzard’s servers on a subscription-only basis. After the first month of free usage that is included with the boxed software, the~~ ~~World of Warcraft~~ end user may enter into a subscription agreement for additional access. Subscription revenues received are deferred and recognized as subscription revenues ratably over the subscription period. Revenue from the sale of prepaid cards, sold through retail outlets and other stores, is deferred and recognized as subscription revenue ratably beginning when the cards are first activated. Revenue from Internet gaming rooms in Asia is recognized upon usage of the time packages sold. Ancillary revenues associated with subscriptions are recognized ratably over the estimated customer life.
38

~~Table of Contents~~
~~Licensing Revenues~~
~~Third-party licensees in China and Taiwan distribute and host Blizzard’s~~ ~~World of Warcraft~~ game in their respective countries under a license agreement with Blizzard. The licensees paid certain minimum, non-refundable, generally recoupable guaranteed royalties when entering into the licensing agreements. Upon receipt of the recoupable advances, we defer their recognition and recognize the revenues in subsequent periods as these advances are recouped by the licensees. As the licensees pay additional royalties above and beyond those initially advanced, we recognize these additional royalties as revenues based on activation of the underlying prepaid time by the end users.
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 a master copy. Per copy royalties on sales that exceed the guarantee are recognized as earned. In addition, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable.
~~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 makemore significant estimates, of potential future product returns and price protection related to current period product revenue. We estimate the amount of future returns and price protection for current period product revenue utilizing historical experience and information regarding inventory levels and the demand and acceptance of our products by the end consumer. The following factors are used to estimate the amount of future returns and price protection for a particular title: historical performance of titles in similar genres; historical performance of the hardware platform; historical performance of the brand; console hardware life cycle; Activision Blizzard 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~~assumptions and ~~used in connection with establishing the allowance for returns and price protection in any accounting period. Based upon historical experience~~which we believe are the most critical to aid in fully understanding and evaluating 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,reported financial results include 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 September 30, 2008 allowance for returns and price protection would impact net revenues by $2 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.
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.
~~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.~~
39

~~Table of Contents~~
We account for software development costs in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”. (“SFAS No. 86”) Software development costs are capitalized once the technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses both technical design documentation and game design documentation. Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established. For products where proven technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product basis. Prior to a product’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.
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 for the specific product, generally resulting in an amortization period of six months or less.
Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology, music or other intellectual property or proprietary rights in the development of our products. Depending upon the agreement with the rights holder, we may obtain the rights to use acquired intellectual property in multiple products over multiple years, or alternatively, for a single product. Prior to the related product’s release, we expense, as part of “cost of sales—intellectual property licenses,” capitalized intellectual property costs when we believe such amounts are not recoverable. Capitalized intellectual property costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation.
Commencing upon the related product’s release, capitalized intellectual property license costs are amortized to “cost of sales—intellectual property licenses” based on the ratio of current revenues for the specific product to total projected revenues for all products in which the licensed property will be utilized. As intellectual property license contracts may extend for multiple years, the amortization of capitalized intellectual property license costs relating to such contracts may extend beyond one year.
We evaluate the future recoverability of capitalized software development costs and intellectual property licenses on a quarterly basis. For products that have been released in prior periods, the primary evaluation criterion is actual title performance. For products that are scheduled to be released in future periods, the recoverability of capitalized software development costs is evaluated based on the expected performance of the specific products to which the costs relate or in which the licensed trademark or copyright is to be used. Criteria used to evaluate expected product performance include: historical performance of comparable products developed with comparable technology; orders for the product prior to its release; and for any sequel product, estimated performance based on the performance of the product on which the sequel is based. As many of our intellectual property licenses extend for multiple products over multiple years, we also assess the recoverability of capitalized intellectual property license costs based on certain qualitative factors, such as the success of other products and/or entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical releases or television series based on the intellectual property, and the rights holder’s continued promotion and exploitation of the intellectual property.
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.
~~Amortizable Intangible Assets~~
Intangible assets subject to amortization are carried at cost less accumulated amortization. Amortizable intangible assets consist of internally developed franchises, acquired developed software, acquired game engines, favorable leases and
40

~~Table of Contents~~
distribution agreements, and other intangibles related primarily to licensing activities and retail customer relationships. Intangible assets subject to amortization are amortized over the estimated useful life in proportion to the pattern in which the economic benefits are consumed, which for some intangibles assets are approximated by using the straight-line method. Long-lived assets including amortizable intangible assets are reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS No. 144”) whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets and amortizable intangible assets is based on the amount by which the carrying value exceeds the fair value of the asset.
~~Stock-based Compensation Expense~~
We account for stock-based compensation in accordance with SFAS No. 123R. SFAS No. 123R requires companies to estimate the fair value of share-based payment awards on the measurement date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statement of Operations (see Note 17 to the Consolidated Financial Statements for additional information.)
We estimate the value of employee stock options on the date of grant using a binomial-lattice model. The fair value of a share-based payment as of the grant date estimated by an option pricing model depends upon our future stock price as well as assumptions concerning expected volatility, risk-free interest rate, and risk-adjusted stock return, 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 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 months ended September 30, 2008 was $6.59 per share using the binomial-lattice model with the following weighted-average assumptions:
~~Three months ended~~
~~September 30, 2008~~
~~Expected volatility~~
~~50.61~~
%
~~Risk-free interest rate~~
~~4.03~~
%
~~Expected dividends~~
—
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 Blizzard’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, 2008, the expected stock price volatility ranged from 46.15% to 51.42%, with a weighted-average volatility of 50.61% for options granted during the quarter ended September 30, 2008.
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 do not 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.
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~~Table of Contents~~
Stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
If factors change and we employ different assumptions in the application of SFAS No. 123R in future periods, the compensation expense that we record under SFAS No. 123R may differ significantly from what we have recorded in the current period.
42

~~Table of Contents~~
~~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, and platform, (amounts in millions):

Three months ended September 30,

Nine months ended September 30,

2008

2007

2008

2007

Net Revenues:

Product sales

$
413

58
%
$
98

30
%
$
553

40
%
$
246

27
%
Subscription, licensing, and other revenues

298

42

228

70

834

60

650

73

Total net revenues

711

100

326

100

1,387

100

896

100

Costs and expenses:

Cost of sales – product costs

279

39

31

9

350

25

95

10

Cost of sales – software royalties and amortization

50

7

5

2

88

6

14

2

Cost of sales – intellectual property licenses

36

5

1

—

45

3

5

1

Cost of sales – MMOG

43

6

40

12

123

9

146

16

Product development

200

28

117

36

414

30

327

36

Sales and marketing

142

20

46

14

220

16

105

12

Restructuring costs

61

9

—

—

61

4

(1
)
—

General and administrative

94

13

29

9

172

13

71

8

Total costs and expenses

905

127

269

82

1,473

106

762

85

Operating income (loss)

(194
)
(27
)
57

18

(86
)
(6
)
134

15

Investment income (loss), net

24

3

(2
)
(1
)
28

2

(5
)
(1
)

Income before income tax provision (benefit)

(170
)
(24
)
55

17

(58
)
(4
)
129

14

Income tax provision (benefit)

(62
)
(9
)
7

2

(22
)
(1
)
(12
)
(2
)

Net income (loss)

$
(108
)
(15
)%
$
48

15
%
$
(36
)
(3
)%
$
141

16
%

Net Revenues by Territory:

North America

$
295

41
%
$
147

45
%
$
591

43
%
$
422

47
%
Europe

348

49

122

37

627

45

374

42

Asia Pacific

62

9

54

17

153

11

91

10

Total territory net revenues

705

99

323

99

1,371

99

887

99

Activision Blizzard’s non-core exit operations

6

1

3

1

16

1

9

1

Total net revenues

$
711

100
%
$
326

100
%
$
1,387

100
%
$
896

100
%

Net Revenues by Platform Mix:

MMOG

$
271

38
%
$
269

83
%
$
828

60
%
$
746

84
%
Console

272

38

16

5

335

24

53

6

Hand-held

81

11

7

2

102

7

21

2

PC

25

4

31

9

50

4

67

7

Total platform net revenues

649

91

323

99

1,315

95

887

99

Distribution:

Software

39

6

—

—

39

3

—

—

Hardware and peripherals

16

2

—

—

16

1

—

—

Other

1

—

—

—

1

0

—

—

Total distribution net revenues

56

8

—

—

56

4

—

—

Activision Blizzard’s non-core exit operations

6

1

3

1

16

1

9

1

Total net revenues

$
711

100
%
$
326

100
%
$
1,387

100
%
$
896

100
%
43

~~Table of Contents~~
~~Third quarter highlights~~
~~Operating highlights (amounts in millions)~~

Three months ended September 30,

Nine months ended September 30,

Increase/

Increase/

2008

2007

(Decrease)

2008

2007

(Decrease)

Net revenues:

Activision

$
364

$
43

$
321

$
457

$
108

$
349

Blizzard

297

249

48

866

856

10

Distribution

56

—

56

56

—

56

Activision Blizzard’s core operations

717

292

425

1,379

964

415

Activision Blizzard’s non-core exit operations

6

3

3

16

9

7

Reportable segments total

$
723

$
295

$
428

$
1,395

$
973

$
422

Reconciliation to consolidated net revenues:

Net effect from deferral net revenues

(12
)
31

(8
)
(77
)

Consolidated net revenues

$
711

$
326

$
1,387

$
896

Segment income (loss) from operations:

Activision

$
(26
)
$
(19
)
$
(7
)
$
(61
)
$
(79
)
$
18

Blizzard

146

132

14

447

447

—

Distribution

2

—

2

3

—

3

Activision Blizzard’s core operations

122

113

9

389

368

21

Activision Blizzard’s non-core exit operations

(110
)
(40
)
(70
)
(251
)
(86
)
(165
)

Reportable segments total

$
12

$
73

(61
)
$
138

$
282

(144
)
Reconciliation to consolidated operating income (loss):

Net effect from deferral of net revenues and costs of sales

(12
)
28

(7
)
(67
)

Stock-based compensation expenses

(26
)
(43
)

(47
)
(77
)

Restructuring expenses

(61
)
—

(61
)
(1
)

Amortization of intangible assets and purchase price accounting related adjustments

(90
)
(1
)

(92
)
(3
)

Integration and restructuring costs

(17
)
—

(17
)
—

Total consolidated operating income (loss)

$
(194
)
$
57

$
(86
)
$
134

Total reportable segments net revenues increased by $428 million and $422 million for the three and nine months ended September 30, 2008, respectively, when compared to the same periods ended September 30, 2007. The increase was mainly attributable to:following:

·                  ~~The consummation of the Business Combination, which resulted in revenues from Activision, Inc. being included from the date of the Business Combination but not for prior periods;~~Revenue Recognition

·                  ~~The current quarter release of an affiliated LucasArts’ title,~~ ~~Star Wars: The Force Unleashed~~~~, in Europe and Asia Pacific,~~ ~~The Mummy: Tomb of the Dragon of the Emperor,~~ ~~andseveral other value Wii titles releases such as~~ ~~Little League World Series Baseball 2008~~, ~~Ferrari Challenge Trofeo Pirelli~~~~, and~~ ~~Rapala Fishing Frenzy~~;
·                  ~~The first six months of calendar 2008 releases of~~ ~~Spiderwick~~ ~~and~~ ~~The Bourne Conspiracy~~ ~~versus no new releases for the same periods of calendar 2007;~~
·                  ~~Activision’s catalog sales of~~ ~~Guitar Hero III: Legends of Rock, Guitar Hero: Aerosmith~~, ~~Guitar Hero: On Tour~~, ~~Call of Duty: Modern Warfare~~ ~~and~~ ~~Kung Fu Panda~~ ~~contributed the majority of Activision net revenues for the three months ended September 30, 2008;~~
·                  ~~The worldwide number of~~ ~~World of Warcraft~~ ~~subscribers increased, which is mainly attributable to the release of the first expansion pack of~~ ~~World of Warcraft The Burning Crusade~~ ~~in January 2007 which also led to the higher box sales of~~ ~~World of Warcraft,~~ ~~and additional value added services by Blizzard; and~~
·                  International net revenues were impacted by a year over year weakening of the U.S. Dollar in relation to GBP, EUR and AUD.�� We estimate that foreign exchange rates increased reported consolidated net revenues by approximately $4 million and $9 million for the three and nine months ended September 30, 2008, respectively.
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Table of Contents

~~For the three~~·Allowances for Returns, Price Protection, Doubtful Accounts, and ~~nine months ended September 30, 2007 (which was prior to consummation of the~~ Inventory Obsolescence
·Software Development Costs and Intellectual Property Licenses
·Accounting for Income Taxes
·Fair Value Estimates
·Business ~~Combination), Activision, Inc.’s revenues from its Publishing segment were $254 million~~Combinations
·Goodwill and $892 million, respectively, and Vivendi Games’ revenues from what is now the Company’s Activision segment were $43 million and $108 million, respectively. For the three and nine months ended September 30, 2008, the Company’s Activision segment reported revenues of $364 million, which does not include $35 million of revenues recorded by Activision Inc.’s Publishing segment during the period from July 1, 2008 until consummation of the Business Combination of July 9, 2008 and $1,092 million for the six months ended June 30, 2008. The year-over-year increase in revenue was primarily due to the increased number of skus for Guitar Hero franchises, and the success of ~~Call of Duty: Modern Warfare.~~Intangible Assets — Impairment Assessments
·Stock-Based Compensation

~~For~~During the three ~~and nine~~ months ended ~~September 30, 2007 (which was prior~~March 31, 2009, there were no significant changes in our critical accounting policies and estimates. You should refer to ~~consummation~~Management’s Discussion and Analysis of ~~the Business Combination), Activision, Inc.’s revenues from its Distribution segment were $64 million~~Financial Condition and ~~$234 million, respectively. For the three and nine months ended September 30, 2008, the Company’s Distribution segment reported revenues~~Results of ~~$56 million, which does not include $18 million~~Operations contained in Part II, Item 7 of ~~revenues recorded by Activision Inc.’s Distribution segment during the period from July 1, 2008 until consummation of the Business Combination of July 9, 2008 and $165 million~~our Annual Report on Form 10-K for the ~~six months~~year ended ~~June 30, 2008. The slight increase year-over-year was mainly attributable to~~December 31, 2008 for a ~~year over year weakening of the U.S. Dollar in relation to Euros. The increase in Activision net revenue contributed to the increase, partially offset by approximately $2 million due to foreign exchange rates.~~
~~Total segment operating income for the three and nine months ended September 30, 2008 were driven by the following:~~
·                  ~~The increase in net revenues of Activision Blizzard’s core operations as previously noted; and~~
·                  ~~The consummation of the Business Combination, which resulted in operating income (losses) from Activision, Inc. being included from the date of the Business Combination but not for prior periods.~~
~~Partially offset by~~
·                  ~~The segment operating losses from Activision Blizzard’s non-core exit operations that the Company has begun to exit or wind down; and~~
·                  ~~Write off of capitalized software development costs of totaling $61 million and $71 million for the three and nine months ended September 30, 2008, respectively, as a result of the rationalization~~more complete discussion of our ~~title portfolio.~~
~~Cash Flow Highlights (amounts in millions)~~

For the nine months
ended September 30,
2008

For the nine months
ended September 30,
2007

Increase/
(Decrease)

Cash flows provided by operating activities

$
125

$
308

$
(183
)
Cash flows provided by (used in) investing activities

1,078

(45
)
1,123

Cash flows provided by (used in) financing activities

1,607

(294
)
1,901

~~For the nine months ended September 30, 2008, the following major cash activities occurred:~~
·                  ~~Activision, Inc. cash~~critical accounting policies and ~~cash equivalents of approximately $1.1 billion was transferred to Activision Blizzard upon the Business Combination;~~
·                  Upon the Business Combination, Vivendi purchased 126 million shares of our common stock for $1.7 billion, and as specified in the Business Combination Agreement, Activision Blizzard returned capital to Vivendi of approximately $79 million and settled balances with Vivendi of approximately $79 million in the financing activities;
·                  ~~We have received net proceeds from exercises of stock options and ESPP amounting to $19 million during the current quarter; and~~
·                  ~~We have paid the participants in the BEP $106 million as a result of the Business Combination.~~
On November 5, 2008, we announced that our Board of Directors authorized a stock repurchase program under which we may repurchase up to $1 billion of our common stock. Under this program, we may repurchase our common stock from time
45

~~Table of Contents~~
to time on the open market or in private transactions, including structured or accelerated transactions. We will determine the timing and amount of repurchases based on our evaluation of market conditions and other factors. The repurchase program may be suspended or discontinued by the Company at any time.estimates.

~~Results~~Consolidated Statements of Operations ~~– Three and Nine Months Ended September 30, 2008 and 2007~~Data

Special ~~Note~~Note— - The consummation of the Business Combination has resulted in financial information of the businesses operated by Activision, Inc. prior to the Business Combination being included from the date of the Business Combination (i.e. from July 9, 2008 onwards), but not for prior periods.

~~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, and Wii), PCs, and hand-held game devices (such as the NDS, and PSP) as well as from subscriptions revenues (which consists ~~of fees from individuals playing~~ ~~World of Warcraft,~~ and other ancillary online revenues). 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 ~~shows~~sets forth Consolidated Statements of Operations data for the ~~three months segments~~periods indicated in dollars and as a percentage of total net revenues (amounts in millions):

Three months ended September 30,

Increase/

2008

2007

(Decrease)

Activision

$
364

$
43

$
321

Blizzard

297

249

48

Distribution

56

—

56

Activision Blizzard’s core operations

717

292

425

Activision Blizzard’s non-core exit operations

6

3

3

Reportable segments total

$
723

$
295

$
428

Reconciliation to consolidated net revenues:

Net effect from deferral net revenues

(12
)
31

Consolidated net revenues

$
711

$
326

Three months ended March 31,

2009

2008

Net revenues:

Product sales

$
690

70
%
$
61

19
%
Subscription, licensing, and other revenues

291

30

264

81

Total net revenues

981

100

325

100

Costs and expenses:

Cost of sales — product costs

296

30

35

11

Cost of sales — software royalties and amortization

72

7

21

7

Cost of sales — intellectual property licenses

64

7

2

1

Cost of sales — MMORPG

52

5

49

14

Product development

117

12

104

32

Sales and marketing

83

8

27

8

General and administrative

103

11

24

8

Restructuring costs

15

2

—

—

Total costs and expenses

802

82

262

81

Operating income

179

18

63

19

Investment income, net

10

1

2

1

Income before income tax expense

189

19

65

20

Income tax expense

—

—

22

7

Net income

$
189

19
%
$
43

13
%

~~Segments total net revenues for the three months ended September 30, 2008 increased by $428 million. The increase was primarily due to:~~
·                  ~~The consummation of the Business Combination, which resulted in revenues from Activision, Inc. being included from the date of the Business Combination but not for prior periods;~~
·                  ~~Increase in subscription and licensing revenues as a result of the increased number of~~ ~~World of Warcraft~~ ~~subscribers, and additional value-added services; and~~
·                  ~~Current quarter release of an affiliated LucasArts’ title,~~ ~~Star Wars: The Force Unleashed~~~~, in Europe and Asia Pacific, the release of~~ ~~The Mummy: Tomb of the Dragon Emperor,~~ ~~several other value Wii title releases, such as~~ ~~Little League World Series Baseball 2008~~, ~~Ferrari Challenge Trofeo Pirelli~~~~, and~~ ~~Rapala Fishing Frenzy~~~~, and also the continued momentum of Activision’s catalog sales of~~ ~~Guitar Hero III: Legends of Rock, Guitar Hero: Aerosmith, Guitar Hero: On Tour~~, ~~Call of Duty: Modern Warfare~~ ~~and~~ ~~Kung Fu Panda~~ ~~whichcontributed to the current quarter product sales.~~
~~The following table shows the nine months segments total net revenues (amounts in millions):~~

Nine months ended September 30,

Increase/

2008

2007

(Decrease)

Activision

$
457

$
108

$
349

Blizzard

866

856

10

Distribution

56

—

56

Activision Blizzard’s core operations

1,379

964

415

Activision Blizzard’s non-core exit operations

16

9

7

Reportable segments total

$
1,395

$
973

$
422

Reconciliation to consolidated net revenues:

Net effect from deferral net revenues

(8
)
(77
)

Consolidated net revenues

$
1,387

$
896

4626

Table of Contents

~~Segment total~~First quarter highlights
Operating Highlights (amounts in millions)

Three months ended March 31,

Increase/

2009

2008

(Decrease)

Net revenues:

Activision

$
348

$
38

$
310

Blizzard

291

280

11

Distribution

85

—

85

Activision Blizzard’s core operations

724

318

406

Activision Blizzard’s non-core exit operations

1

5

(4
)

Operating segments total

725

323

$
402

Reconciliation to consolidated net revenues:

Net effect from deferral of net revenues

256

2

Consolidated net revenues

$
981

$
325

Segment income (loss) from operations:

Activision

$
(27
)
$
(19
)
$
(8
)
Blizzard

143

154

(11
)
Distribution

3

—

3

Activision Blizzard’s core operations

119

135

(16
)
Activision Blizzard’s non-core exit operations

(4
)
(65
)
61

Operating segments total

115

70

$
45

Reconciliation to consolidated operating income:

Net effect from deferral of net revenues and related cost of sales

167

2

Stock-based compensation expense

(28
)
(8
)

Restructuring expense

(15
)
—

Amortization of intangible assets and purchase price accounting related adjustments

(46
)
(1
)

Integration and transaction costs

(14
)
—

Consolidated operating income

$
179

$
63

Net Revenues
For the quarter ended March 31, 2009, net revenues ~~for the nine months ended September 30, 2008~~from Activision, Blizzard, and Distribution segments increased ~~by $422 million as~~ compared to the same period ~~of prior year. The increase was mainly due to:~~in 2008. These increases were principally attributable to the following:

·                  ~~The consummation~~As a result of the Business Combination, ~~which resulted in~~net revenues of $330 million from the businesses operated by Activision, Inc. ~~being included from the date of~~prior to the Business Combination were included in the three months ended March 31, 2009, but not for ~~prior periods;~~the same period in 2008;

·                  ~~An increase~~ The catalog sales of Guitar Hero World Tour and Call of Duty: World at War, the new releases of Guitar Hero: Metallica in ~~product sales from~~North America, Monsters vs. Aliens worldwide, and Call of Duty: World at War map pack, and the catalog sales of~~Guitar Hero III: Legends of Rock,~~ ~~Guitar Hero: Aerosmith~~, ~~Guitar Hero: On Tour~~, Call of Duty: Modern Warfare~~and~~ ~~Kung Fu Panda.~~~~Spiderwick~~ ~~and~~ ~~The Bourne Conspiracy~~ ~~also contributed to the product sales for the nine months ended September 30, 2008.This compares to the first nine months of 2007 when product sales were primarily from the “boxed” sales of~~ ~~World of Warcraft~~ ~~and~~ ~~World of Warcraft The Burning Crusade~~~~, as well as sales from the back catalog franchise of~~ ~~F.E.A.R.,~~ ~~and initial sales of the action-strategy game~~ ~~World in Conflict~~; ~~and~~

·                  ~~Increase in subscription and licensing revenues due to increase in~~Sales of the ~~number~~second expansion pack of World of ~~Warcraft~~ Warcraft: Wrath of the Lich King~~subscribers,~~, which continues to be the #1 best selling PC title in dollars in the U.S. for the quarter ended March 31, 2009 according to the NPD Group; and
·As a result of the Business Combination, Distribution net revenues of $85 million were included in the three months ended March 31, 2009, but not for the same period in 2008.
27

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We estimate that changes in foreign exchange rates had an approximately $87 million unfavorable impact to Activision Blizzard’s consolidated net revenues for the three months ended March 31, 2009 compared to the same period in 2008 as the U.S. dollar strengthened in relation to the British pound, euro, Australian dollar, Korean won, and ~~additional value added services.~~Swedish krona.
Segment income (loss) from operations
For the quarter ended March 31, 2009, the increase in total operating segment income compared to the same period in 2008 was principally attributable to the decreases in Non-Core segment operating loss due to the wind down of Vivendi Games’ legacy divisions and business. This was partially offset by the following:
·As a result of the Business Combination, an operating loss of $35 million from the businesses operated by Activision, Inc. prior to the Business Combination was included in the three months ended March 31, 2009, but not in the same period in 2008. Activision’s operating loss for the three months ended March 31, 2009 was primarily driven by significant product development investment for its slate of future titles;
·A decrease in Blizzard’s operating income due to an increase in investments in customer service and marketing support for World of Warcraft.
Cash Flow Highlights (amounts in millions)

For the three months
ended March 31,
2009

For the three months
ended March 31,
2008

Increase/
(Decrease)

Cash flows provided by operating activities

$
327

$
96

$
231

Cash flows used in investing activities

(7
)
(8
)
1

Cash flows used in financing activities

(289
)
(107
)
(182
)
For the three months ended March 31, 2009, the primary drivers of cash flows from operating activities included the collection of customer receivables generated by the sale of our products and our subscription revenues, partially offset by payments to vendors for the manufacture, distribution and marketing of our products, third-party developers, and intellectual property holders, and to our employees. We made capital expenditures of $10 million during the quarter ended March 31, 2009. Cash flows used in financing activities reflect our repurchase of 32 million shares of our common stock for $313 million under the stock repurchase program, partially offset by $7 million of proceeds from issuance of common stock to employees.
Results of Operations — Three Months Ended March 31, 2009 and 2008
Net Revenues

The following table details our consolidated net revenues by ~~territory~~geographic region for the three months ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ (amounts in millions):

Three months ended September
30,

Increase/

Three months ended March 31,

Increase/

2008

2007

(Decrease)

2009

2008

(Decrease)

Territory net revenues

Net revenues by geographic region:

North America

$
295

$
147

$
148

$
524

$
139

$
385

Europe

292

122

170

307

136

171

Asia Pacific

62

54

8

64

45

19

Total Territory net revenues

649

323

326

Total geographic region net revenues

895

320

575

Distribution net revenues

56

—

56

85

—

85

Activision Blizzard’s non-core exit operations

6

3

3

1

5

(4
)

Consolidated net revenues

$
711

$
326

$
385

Total consolidated net revenues

$
981

$
325

$
656

Geographically, all regions recorded an increase in net revenues as compared to the same period of the prior year. ~~The increase was primarily attributable to the following:~~
·                  ~~The consummation~~As a result of the Business Combination, ~~which resulted in~~net revenues of $347 million, $178 million, and $28 million, for the three months ended March 31, 2009 from the businesses operated by Activision, Inc. ~~being included from the date of~~prior to the Business Combination were included in North America, Europe, and Asia Pacific, respectively, but not for ~~prior periods;~~the same period in 2008.

·                  ~~Back catalog sales of~~ ~~Guitar Hero III: Legends of Rock,~~ ~~Guitar Hero: Aerosmith,~~~~Guitar Hero: On Tour~~, ~~Call of Duty: Modern Warfare~~ ~~and~~ ~~Kung Fu Panda;~~
·                  ~~The release of an affiliated LucasArts’ title,~~ ~~Star Wars: The Force Unleashed~~ ~~in the current quarter in Europe and Asia Pacific; and~~
·                  ~~Increase in the number of~~ ~~World of Warcraft~~ ~~subscribers, and additional value added services.~~
4728

Table of Contents
~~The following table details our consolidated net revenues by territory for the nine months ended September 30, 2008 and 2007 (amounts in millions):~~

Nine months ended September 30,

Increase/

2008

2007

(Decrease)

Territory net revenues

North America

$
591

$
422

$
169

Europe

571

374

197

Asia Pacific

153

91

62

Total Territory net revenues

1,315

887

428

Distribution net revenues

56

—

56

Activision Blizzard’s non-core exit operations

16

9

7

Consolidated net revenues

$
1,387

$
896

$
491

~~Geographically, all regions recorded an increase in net revenues as compared to the same period of prior year. The increase was primarily attributable to the following:~~
·                  ~~The consummation of the Business Combination, which resulted in revenues from Activision, Inc. being included from the date of the Business Combination but not for prior periods;~~
·                  ~~Back catalog sales of~~ ~~Guitar Hero III: Legends of Rock,~~ ~~Guitar Hero: Aerosmith,~~~~Guitar Hero: On Tour~~, ~~Call of Duty: Modern Warfare~~ ~~and~~ ~~Kung Fu Panda;~~ ~~and~~
·                  ~~The full nine months net revenues in China since the release of the first expansion pack of~~ ~~World of Warcraft~~~~The Burning Crusade~~ ~~in September 2007, and the release of~~ ~~Battlechest~~ ~~which is a bundle package of original~~ ~~World of Warcraft~~ ~~and~~ ~~World of Warcraft The Burning Crusade~~ ~~in October 2007.~~
~~This compared to the first nine months ended September 30, 2007 when net revenues were driven by the~~ ~~higher performance of~~ ~~World of Warcraft~~~~, including the impact of~~ ~~The Burning Crusade~~ ~~launch in the first quarter of 2007 in North America and Europe, and in the third quarter of 2007 in Asia Pacific.~~

Net Revenues by Platform

The following table details our net revenues by platform and as a percentage of total platform net revenues for the three months ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ (amounts in millions):

Three months
ended
September 30,

% of
total
platform

Three months
ended September
30,

% of
total
platform

Increase/

Three Months
Ended

% of
total
platform

Three months
ended

% of
total
platform

Increase/

2008

net revs.

2007

net revs.

(Decrease)

March 31, 2009

net revs.

March 31, 2008

net revs.

(Decrease)

Platform net revenues

MMOG

$
271

42
%
$
269

83
%
$
2

Platform net revenues:

MMORPG

$
314

35
%
$
275

86
%
$
39

PC

25

4
%

31

10
%

(6
)
PC and other

46

5

12

4

34

Console

Sony PlayStation 3

60

9
%
1

0
%
59

131

15

2

1

129

Sony PlayStation 2

57

9
%
12

4
%
45

40

4

13

4

27

Sony PlayStation

—

—

1

—

(1
)
Microsoft Xbox360

72

11
%
1

0
%
71

198

22

2

1

196

Nintendo Wii

83

13
%
2

1
%
81

134

15

4

1

130

Total Console

272

42
%

16

5
%

256

Total console

503

56

22

7

481

Hand-held

81

12
%

7

2
%

74

32

4

11

3

21

Total Platform net revenues

649

100
%

323

100
%

326

Total platform net revenues

895

100
%
320

100
%
575

Distribution

56

—

56

85

—

85

Activision Blizzard’s non-core exit operations

6

3

3

1

5

(4
)

Total consolidated net revenues

$
711

$
326

$
385

$
981

$
325

$
656

48Net revenues from MMORPG increased primarily due to increases in World of Warcraft subscribers and additional value added services compared to the same period of the prior year.
Net revenues from platforms increased for the first three months of 2009 compared to the same period in 2008 due to the Business Combination as a result of which net revenues of $553 million from the businesses operated by Activision, Inc. prior to the Business Combination were included in the three months ended March 31, 2009, but not for the same period in 2008.
29

Table of Contents
~~Net revenues from MMOG increased mainly due to the increase in~~ ~~World of Warcraft~~ ~~subscribers, and additional value added services when compared to the same period of prior year.~~
Net revenues from various consoles and hand-held platforms increased when compared to the same period of prior year due to the growing installed base for the hardware platforms (in particular, the Wii, PS3 and Xbox360) and increased number of titles and skus available from Activision as compared to the titles and skus released by Vivendi Games. The consummation of the Business Combination resulted in revenues from Activision, Inc. being included from the date of the Business Combination but not for prior periods. Specifically, according to the NPD Group, Gfk and Charttrack, for the quarter ended September 30, 2008, and measured by dollars of net revenues:
·                  ~~Activision was the #1 Third Party publisher on the Wii worldwide;~~
·~~Guitar Hero: On Tour~~ ~~continues to be the #1 title on the NDS hand-held platform worldwide, and Activision continues to be the #2 Third Party publisher on the NDS hand-held platform; and~~
·                  ~~Activision was the #2 Third Party publisher for the PS3 and PS2 worldwide.~~
~~Overall, Activision was the #3 US console, hand-held platforms and PC publisher for the quarter ended September 30, 2008.~~
~~The following table details our net revenues by platform and as a percentage of total platform net revenues for the nine months ended September 30, 2008 and 2007 (amounts in millions):~~

Nine months
ended
September 30,

% of
total
platform

Nine months
ended September
30,

% of
total
platform

Increase/

2008

net revs.

2007

net revs.

(Decrease)

Platform net revenues

MMOG

$
828

63
%
$
746

84
%
$
82

PC

50

4
%

67

8
%

(17
)

Console

Sony PlayStation 3

77

6
%
12

1
%
65

Sony PlayStation 2

80

6
%
30

3
%
50

Microsoft Xbox360

88

6
%
6

1
%
82

Nintendo Wii

90

7
%
5

1
%
85

Total console

335

25
%
53

6
%
282

Hand-held

102

8
%
21

2
%
81

Total Platform net revenues

1,315

100
%
887

100
%
428

Distribution

56

—

56

Activision Blizzard’s non-core exit operations

16

9

7

Total consolidated net revenues

$
1,387

$
896

$
491

49

~~Table of Contents~~
~~Net revenues from MMOG increased mainly due to the increase in~~ ~~World of Warcraft~~ ~~subscribers, and additional value added services when compared to the same period of prior year.~~
Net revenues from various consoles and hand-held platforms increased when compared to the same period of prior year due to the growing installed base for the hardware platforms (in particular, the Wii, the PS3 and the Xbox360) and increased number of titles and skus available from Activision Blizzard as compared to the number of titles and skus released by Vivendi Games. The increase was contributed by the sales of ~~The Bourne Conspiracy, Spiderwick, Crash of the Titans~~ ~~and~~ ~~Spyro the Eternal Night~~ ~~for the nine months ended September 30, 2008 versus primarily F.E.A.R on the PS3 and back catalog sales in the same period of 2007.~~ ~~The consummation of the Business Combination resulted in revenues from Activision, Inc. being included from the date of the Business Combination but not for prior periods.~~ ~~Further, according to the NPD Group, Gfk and Charttrack, for the nine months ended September 30, 2008, and measured by dollars of net revenues:~~
·                  ~~Activision was #1 Third Party publisher on the Wii with~~ ~~Guitar Hero III: Legends of Rock~~ ~~which continued to be the #1 Third Party Wii title; and~~
·~~Call of Duty: Modern Warfare~~ ~~is the #3 title for the Xbox 360, and~~ ~~Guitar Hero III: Legends of Rock~~ ~~is the #5 title for the Xbox 360.~~

Costs and Expenses

Cost of Sales

The following table details ~~our nature~~the components of cost of sales in dollars and as a percentage of total consolidated net revenues for the three months ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ (amounts in millions):

Three months

Three months

Three months

Three months

ended
September 30,

% of
consolidated

ended
September 30,

% of
consolidated

Increase/

ended
March 31,

% of
consolidated

ended
March 31,

% of
consolidated

Increase/

2008

net revenues

2007

net revenues

(Decrease)

2009

net revenues

2008

net revenues

(Decrease)

Product costs

$
279

39
%
$
31

9
%
$
248

$
296

30
%
$
35

11
%
$
261

Software royalties and amortization

50

7
%
5

2
%
45

72

7

21

7

51

Intellectual property licenses

36

5
%
1

0
%
35

64

7

2

1

62

MMOG

43

6
%
40

12
%
3

MMORPG

52

5

49

14

3

For the ~~three months~~quarter ended ~~September 30, 2008,~~March 31, 2009, cost of sales increased compared to the same period of the prior year primarily due ~~to:~~
·                  ~~The~~to the consummation of the Business Combination, which resulted in cost of sales from the businesses operated by Activision, Inc. ~~being included from the date of~~prior to the Business Combination ~~but not for prior periods;~~
·                  ~~The amount~~ of ~~amortization~~$283 million of ~~intangible assets and other purchase price accounting related adjustments of $8 million, $24 million and $22 million included in cost of sales –~~ product costs, ~~cost~~$69 million of ~~sales –~~ software royalties and amortization, and ~~cost~~$64 million of ~~sales –~~ intellectual property licenses ~~respectively;~~
·                  ~~Higher product costs of the release of an affiliated LucasArt’s title~~ ~~Star Wars: The Force Unleashed~~ ~~in Europe and Asia Pacific in the current quarter and catalog title~~ ~~Lego: Indiana Jones the Original Adventures~~~~; and~~
·                  ~~Cost of sales from our back catalog titles~~being included ~~in the current quarter since the Business Combination.~~
~~The following table details our nature of cost of sales and as a percentage of total consolidated net revenues~~ for the ~~nine months~~quarter ended ~~September 30, 2008 and 2007 (amounts in millions):~~
50

~~Table of Contents~~

Nine months

Nine months

ended
September 30,

% of
consolidated

ended
September 30,

% of
consolidated

Increase/

2008

net revenues

2007

net revenues

(Decrease)

Product costs

$
350

25
%
$
95

10
%
$
255

Software royalties and amortization

88

6
%
14

2
%
74

Intellectual property licenses

45

3
%
5

1
%
40

MMOG

123

9
%
146

16
%
(23
)
~~For the nine months ended September 30, 2008, cost of sales increased primarily due to:~~
·                  ~~The consummation of the Business Combination, which resulted in cost of sales from Activision, Inc. being included from the date of the Business Combination~~March 31, 2009, but not for the same period of the prior ~~periods;~~year.

·Amortization of intangible assets and other purchase price accounting related adjustments of $8$2 million, ~~$26~~$17 million, and ~~$22~~$27 million are included in cost of sales –— product costs, cost of sales –— software royalties and amortization, and cost of sales –— intellectual property licenses, ~~respectively;~~
·                  ~~Higher product costs of~~respectively, for the ~~release of an affiliated LucasArt’s title~~ ~~Star Wars: The Force Unleashed~~ ~~in Europe and Asia Pacific in the current quarter and catalog title~~ ~~Lego: Indiana Jones the Original Adventures~~;
·                  ~~Cost of sales from our back catalog titles included in the current quarter upon the Business Combination;~~
·                  ~~Higher royalties expenses for released titles during the nine~~three months ended ~~September 30, 2008, such as~~ ~~The Bourne Conspiracy~~~~; and~~
·                  ~~Pre-release impairments on certain Vivendi Games’ titles of approximately $12 million.~~March 31, 2009.

Product Development (amounts in millions)

% of

% of

September 30,

Activision &
Blizzard

September 30,

Activision &
Blizzard

Increase/

2008

net revenues

2007

net revenues

(Decrease)

Three months ended

$
200

31
%
$
117

36
%
$
83

Nine months ended

414

31
%
327

37
%
87

March 31,

% of consolidated

March 31,

% of consolidated

Increase/

2009

net revenues

2008

net revenues

(Decrease)

Three months ended

$
117

12
%
$
104

32
%
$
13

For the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, product development costs increased as compared to the same ~~periods~~period of the prior year. The increase was primarily attributable to the following:

·                  The consummation of the Business Combination, which resulted in product development ~~expenses~~costs of $72 million from the businesses operated by Activision, Inc. ~~being included from the date of~~prior to the Business Combination being included for the quarter ended March 31, 2009, but not for the same period of prior ~~periods;~~year; and

·                  ~~Write-off~~Continuous product development investment in future titles.
The increase was partially offset by a reduction of ~~capitalized software~~product development costs ~~of canceled titles totaled $61 million and $71 million for the three and nine months ended September 30, 2008~~ as a result of the ~~rationalization~~implementation of our organizational restructuring including title ~~portfolio; and~~
·                  ~~Continuous product development investment for the slate of future titles.~~portfolio rationalization.

Sales and Marketing (amounts in millions)

% of

% of

September 30,

consolidated

September 30,

consolidated

Increase/

2008

net revenues

2007

net revenues

(Decrease)

Three months ended

$
142

20
%
$
46

14
%
$
96

Nine months ended

220

16
%
105

12
%
115

% of

% of

March 31,

consolidated

March 31,

consolidated

Increase/

2009

net revenues

2008

net revenues

(Decrease)

Three months ended

$
83

8
%
$
27

8
%
$
56

5130

Table of Contents

For the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, sales and marketing increased ~~when~~ compared to the same ~~periods~~period of the prior year. The increase in sales and marketing was ~~mainly~~principally the result of:

·                  The consummation of the Business Combination, which resulted in sales and marketing expenses of $66 million from the businesses operated by Activision, Inc. ~~being included from the date of~~prior to the Business Combination being included for the quarter ended March 31, 2009, but not for the same period of the prior ~~periods;~~year; and

·                  ~~Amortization of intangible assets of $36 million for the three and nine months ended September 30, 2008 relating to retail customer relationships; and~~Increased investment in marketing by Blizzard.

·                  ~~Marketing expenses spent on the releases of~~ The ~~Bourne Conspiracy, The Mummy~~~~, and~~ ~~Spiderwick~~ ~~during the first nine months of 2008 versus no new titles released in the same period of 2007.~~
~~The increased spending on these current year titles releases~~increase was partially offset by ~~lower~~a reduction of sales and marketing expenses ~~in Blizzard which were slightly lower during 2008 as compared to 2007 due to the release of~~ ~~World of Warcraft The Burning Crusade~~ ~~in January 2007.~~
~~Restructuring Charges (amounts in millions)~~

% of

% of

September 30,

consolidated

September 30,

consolidated

Increase/

2008

net revenues

2007

net revenues

(Decrease)

Three months ended

$
61

9
%
$
—

0
%
$
61

Nine months ended

61

4
%
(1
)
0
%
62

~~We have implemented an organizational restructuring~~ as a result of the Business Combination in the September quarter of calendar 2008. This organizational restructuring is to integrate different operations to create the streamlined organization of Activision Blizzard. The implementation of ~~the~~our organizational restructuring caused certain staff, related premises and equipment assets to become redundant and have been expensed. We also communicated to the redundant employees and ceased use of certain offices under operating lease contracts. For the current quarter, the majority of the restructuring activities were focused on North America employees and facilities. Impairment of goodwill and other intangibles and write-offs of prepaid royalties and intellectual licenses were also recorded as a result. We anticipate completely exiting or winding down our non-core operations by June 2009 inclusive of the organizational restructuring activities as a result of the Business Combination. For the next nine months, we anticipate incurring between $75 million and $100 million of additional before tax restructuring charges, and after tax cash restructuring charges between $45 million and $60 million relating to the Business Combination. Overall, including charges incurred through September 30, 2008, we expect to incur cash and non-cash before tax restructuring charges between $135 million and $160 million by June 30, 2009, with an after tax cash impact between $70 million and $90 million. The after tax cash charges are expected to consist primarily of employee-related severance cash costs (approximately $55 million), facility exit cash costs (approximately $25 million) and cash contract terminations (approximately $10 million). Separately, these restructuring charges are expected to be partially offset by approximately between $30 million and $50 million of cash proceeds from asset disposals and cash after tax benefits related to the streamlining of the Vivendi Games title portfolio (See Note 10 of the Consolidated Financial Statements for more detail).restructuring.

General and Administrative (amounts in millions)

% of

% of

September 30,

consolidated

September 30,

consolidated

Increase/

2008

net revenues

2007

net revenues

(Decrease)

Three Months Ended

$
94

13
%
$
29

9
%
$
65

Nine Months Ended

172

13
%
71

8
%
101

%��of

% of

March 31,

consolidated

March 31,

consolidated

Increase/

2009

net revenues

2008

net revenues

(Decrease)

Three months ended

$
103

11
%
$
24

8
%
$
79

For the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, general and administrative ~~costs~~expenses increased ~~in absolute amount and as percentage~~compared to the same period of ~~consolidated net revenues.~~the prior year. The increase in general and administrative expenses was ~~mainly attributable to:~~
principally the result of t·                  ~~The~~he consummation of the Business Combination, which resulted in general and administrative expenses of $63 million (including $14 million of integration costs) from the businesses operated by Activision, Inc. prior to the Business Combination being included ~~from~~for the ~~date~~quarter ended March 31, 2009, but not for the same period of the prior year.
Restructuring Charges (amounts in millions)

% of

% of

March 31,

consolidated

March 31,

consolidated

Increase/

2009

net revenues

2008

net revenues

(Decrease)

Three months ended

$
15

2
%
$
—

—
%
$
15

In the third quarter of 2008, we implemented an organizational restructuring as a result of the Business Combination. This organizational restructuring was to integrate different operations and to streamline the combined Activision Blizzard organization. The implementation of the organizational restructuring resulted in the following restructuring charges: severance costs, contract termination costs, fixed asset write-off on disposals, impairment charges on acquired trade names, prepaid royalties, intellectual property licenses, impairment charges on goodwill, and loss on disposal of assets/liabilities. We communicated to the affected employees and ceased use of certain offices under operating lease contracts. We anticipate substantially exiting or winding down our non-core operations and substantially completing the organizational restructuring activities as a result of the Business Combination ~~but not~~by June 2009. See Note 8 of the Notes to Condensed Consolidated Financial Statements for ~~prior periods;~~more detail.

·Investment Income, Net                  ~~Integration and reorganization expenses incurred relating to the Business Combination;~~ (amounts in millions)

·                  ~~Stock option expenses totaled $15 million for the current quarter of grants to general and administrative employees;~~

% of

% of

March 31,

consolidated

March 31,

consolidated

Increase/

2009

net revenues

2008

net revenues

(Decrease)

Three months ended

$
10

1
%
$
2

1
%
$
8

·                  ~~Increased legal fees; and~~
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·                  ~~Increased salary and benefit costs.~~
The increase is partially offset by approximately $7 million and $23 million for the three and nine months ended September 30, 2008, respectively, credit on stock-based compensation, resulting from a lower fair value for the cash-settled awards based on Vivendi’s stock price.
~~Investment Income (Loss), Net~~ ~~(amounts in millions)~~

% of

% of

September 30,

Consolidated

September 30,

Consolidated

Increase/

2008

net revenues

2007

net revenues

(Decrease)

Three months ended

$
24

3
%
$
(2
)
(1
)%
$
26

Nine months ended

28

2
%
(5
)
(1
)%
33

~~Our investment portfolio, comprised primarily of cash and cash equivalents, is approximately $3 billion as of September 30, 2008.~~ Investment income for the three ~~and nine~~ months ended ~~September 30, 2008 were~~March 31, 2009, was primarily derived from the interest income from ~~investment~~investments in money market ~~funds, mark-to-market gains on our outstanding currency forward contracts,~~funds. Investment income increased for the three months ended March 31, 2009 primarily as a result of higher cash and ~~other investment income from~~cash equivalents compared to the ~~sale of one of our previously written-off investments, compared with net interest expense a year ago.~~same period in 2008.

~~Provision (Benefit) for~~ Income ~~Taxes~~Tax Expense (amounts in millions)

% of

% of

September 30,

Pretax

September 30,

Pretax

Increase/

2008

income

2007

income

(Decrease)

Three months ended

$
(62
)
36.5
%
$
7

12.7
%
$
(69
)
Nine months ended

$
(22
)
37.9
%
(12
)
9.3
%
(10
)

% of

% of

March 31,

Pretax

March 31,

Pretax

Increase/

2009

income

2008

income

(Decrease)

Three months ended

$
—

—
%
$
22

34
%
$
(22
)

The ~~income~~ tax ~~benefit of $62 million~~rate reported for the three months ended ~~September 30,~~March 31, 2009 is based on our projected annual effective tax rate for 2009, and also includes certain discrete tax benefits recorded during the period. Our tax expense of less than a million dollars for the three months ended March 31, 2009 reflects an effective tax rate of 0% which differs from our effective tax rate of 34% for the three months ended March 31, 2008. The effective tax rate of 0% for the three months ended March 31, 2009 differs from the statutory rate of 35% primarily due to foreign income taxes provided at lower rates and certain discrete tax benefits recorded during the period related to the release of valuation allowances on net operating losses of $23 million and the credit of $9 million relating to a change of California tax laws.   The effective rate for the three months ended March 31, 2009 differs from the same period in 2008 ~~reflects~~primarily due to the discrete tax credits recorded in the three months ended March 31, 2009 and the foreign income tax differential, each as mentioned above.
The overall effective income tax rate for the year could be different from the tax rates in effect for the three months ended March 31, 2009 and will be dependent on our profitability for the remainder of the year. In addition, our effective income tax ~~rate benefit~~rates for the ~~quarter~~remainder of ~~36.5%. The significant items that generate the variance between our effective rate for the three-months ended September 30, 2008~~2009 and ~~our statutory rate~~future periods will depend on a variety of ~~35% were the result of the state income taxes provided, net of federal benefit, foreign income taxes, goodwill impairment, and California research and development tax credits.~~
For the nine months ended September 30, 2008 our effective tax rate benefit of 37.9% differs from the effective tax rate benefit of 9.3% for the nine months ended September 30, 2007.   The difference is due to the recognition of the California Research and Development tax credit and IRC 199 Domestic Production Deductionfactors, such as changes in the ~~third quarter~~geographic mix of ~~2008,~~income, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax ~~benefits from~~ ~~net operating losses surrendered when compared to those estimated at September 30, 2007, as a result of meeting the more likely that not recognition criteria~~audit and other matters, and variations in the ~~fourth quarter~~estimated and actual level of ~~2007.~~
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~~Table of Contents~~annual pre-tax income or loss.

Liquidity and Capital Resources

Sources of Liquidity (amounts in millions)

September 30, 2008

December 31, 2007

Increase/
(Decrease)

At March 31, 2009

At December 31, 2008

Increase/
(Decrease)

Cash and cash equivalents

$
2,842

$
62

$
2,780

$
2,988

$
2,958

$
30

Short-term investments

94

3

91

42

44

(2
)

$
2,936

$
65

$
2,871

$
3,030

$
3,002

$
28

Percentage of total assets

21
%
7
%

22
%
20
%

For the nine months ended September 30,

Increase/

2008

2007

(Decrease)

Cash flows provided by operating activities

$
125

$
308

$
(183
)
Cash flows provided by (used in) investing activities

1,078

(45
)
1,123

Cash flows provided by (used in) financing activities

1,607

(294
)
1,901

For the three months ended March 31,

Increase/

2009

2008

(Decrease)

Cash flows provided by operating activities

$
327

$
96

$
231

Cash flows used in investing activities

(7
)
(8
)
1

Cash flows used in financing activities

(289
)
(107
)
(182
)

~~As of September 30, 2008,~~In addition to cash flows provided by operating activities, our primary source of liquidity was ~~approximately $2.8 billion of cash on hand and cash equivalents. Through the Business Combination, we have acquired and received capital contributions of approximately $2.8~~$3 billion of cash and cash ~~equivalents.~~equivalents at March 31, 2009. With our ~~liquid investment portfolio,~~cash and cash equivalents and expected cash flows provided by operating activities, we believe that we have sufficient liquidity to meet daily operations in the foreseeable future. We also believe that we have sufficient working capital (approximately ~~$3.1~~$3.2 billion at ~~September 30, 2008)~~March 31, 2009), as well as availability under our 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, to finance the acquisition of intellectual property rights for future products from third parties, the restructuring activities, and to fund the stock repurchase program we announced on November 5, 2008.

On November 5, 2008, we announced that our Board of Directors authorized a stock repurchase program under which we may repurchase up to $1 billion worth of our common stock. Under this program, we may repurchase our common stock from time to time on the open market or in private transactions, including structured or accelerated transactions. We will determine the timing and amount of repurchases based on our evaluation of market conditions and other factors. The repurchase program may be suspended or
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discontinued by the Company at any time. At March 31, 2009, we had $561 million available for utilization under the repurchase program.

Cash Flows from Operating Activities

The primary drivers of cash flows from operating activities have typically included the collection of customer receivables generated by the sale of our products and our subscription revenues, offset by payments to vendors for the manufacture, distribution and marketing of our products, third-party developers, and intellectual property holders, and to our ~~employees.~~workforce. A significant operating use of our cash relates to our continued investment in software development and intellectual property licenses. 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 in Note 16 of the Consolidated Financial Statements.~~
~~For the nine months ended~~ September 30, 2008 and 2007, cash flows provided by operating activities were $125 million and $308 million, respectively. The principal components comprising cash flows provided by operating activities for the nine months ended September 30, 2008 included investment in software development and intellectual property licenses, and decreases in accounts receivable due to the collection of receivables.

Cash Flows from Investing Activities

The primary drivers of cash flows used in investing activities have typically included capital expenditures, acquisitions of privately held interactive software development companies and publishing companies and the net effect of purchases and sales/maturities of short-term investment vehicles. The goal of our short-term investments is to maximize return while minimizing risk, maintaining liquidity, coordinating with anticipated working capital needs, and providing for prudent investment diversification.
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~~For the nine months ended~~ September 30, 2008 and 2007, cash flows provided by investing activities were $1.1 billion and used in investing activities were $45 million, respectively. For the nine months ended September 30, 2008, cash flows provided by investing activities were primarily the result of the reverse acquisition of Activision, Inc., as partially offset by cash paid for capital expenditures, acquisition of Freestyle Games, Ltd., and an increase in restricted cash to qualify for payment terms on our inventory purchases.
Due to uncertainties surrounding the timing of liquidation of our auction rate securities, which are comprised of investment grade debt obligations secured by higher education student loans, all our investments in such securities were classified as long-term investments in our consolidated balance sheets as of September 30, 2008. Liquidity for these auction rate securities is typically provided by an auction process which allows holders to sell their notes and resets the applicable interest rate at pre-determined intervals, usually every 7 to 35 days. On an industry-wide basis, many auctions have failed, and there is, as yet, no meaningful secondary market for these instruments. Each of the auction rate securities in our investment portfolio as of September 30, 2008 has experienced a failed auction and there is no assurance that future auctions for these securities will succeed. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers. In the event that there is a failed auction, the indenture governing the security requires the issuer to pay interest at a contractually defined rate that is generally above market rates for other types of similar instruments. The securities for which auctions have failed will continue to earn interest at the contractual rate and be auctioned every 7 to 35 days until the auction succeeds, the issuer calls the securities or they mature. As a result, our ability to liquidate and fully recover the carrying value of our auction rate securities in the near term may be limited or not exist. In August 2008, certain affiliates of Citigroup, Inc. (“Citi”) and UBS AG (“UBS”), through which we own our auction rate securities, announced agreements in principle with various state regulatory agencies and the Securities and Exchange Commission, to address their clients’ liquidity issues arising from the auction failures. On August 7, 2008, Citi announced that it would use its best efforts to liquidate its institutional investor clients’ auction rate securities by the end of 2009. Citi’s final settlement is still pending. On October 7, 2008, UBS finalized its Auction Rate Securities Rights Offering Settlement, under which institutional investor clients who accept the settlement may sell certain illiquid auction rate securities to UBS at par starting June 30, 2010. The acceptance period ends November 14, 2008, unless extended by UBS. All of our auction rate securities held through UBS are eligible under the settlement and we have elected to participate in the settlement.
The change in fair value of the auction rate securities of approximately $2 million was recorded as a component of comprehensive income (loss) in the Consolidated Statement of Changes in Shareholders’ Equity for the nine months ended September 30, 2008, as the decline in fair value is not considered to be “other-than-temporary.” We have the intent and ability to hold these securities for a period of time sufficient for a recovery of fair value up to (or beyond) the initial cost of the investment.
Based on our other available cash and expected operating cash flows and financing, we do not anticipate the potential lack of liquidity on these investments will affect our ability to execute our current business plan.

Cash Flows from Financing Activities

The primary drivers of cash flows provided by financing activities have historically related to transactions involving our common stock, including the issuance of shares of common stock to employees and the public and the purchase of treasury shares. We have not utilized debt financing as a ~~significant~~ source of cash flows. However, if needed, we may access and utilize the credit facilities that are ~~available at certain of our international locations and are~~ described in “Credit Facilities” in Note 1618 of the Notes to Consolidated Financial ~~Statements.~~Statements included in our Form 10-K for the year ended December 31, 2008.

For the ~~nine~~three months ended ~~September 30, 2008,~~March 31, 2009, cash flows ~~provided by~~used in financing activities ~~were $1.6 billion which was primarily~~included $313 million used to purchase Activision Blizzard stock under the ~~result of capital contribution from Vivendi of $1.7 billion in exchange~~stock repurchase program. Since the inception of the ~~issuance of 126~~$1 billion common stock repurchase program on November 5, 2008, we have repurchased $439 million ~~shares~~worth of our common stock under this program.
Capital Requirements
For the ~~issuance~~year ending December 31, 2009, we anticipate total capital expenditures of ~~common stock related to employee stock options, partially offset by return of capital to Vivendi by Vivendi Games, repurchase of our common stock through the tender offer,~~approximately $100 million. Capital expenditures will be primarily for computer hardware and ~~the repayment of outstanding balances to Vivendi by Vivendi Games.~~software purchases.

Off-balance Sheet Arrangements

~~As of September 30,~~At March 31, 2009 and December 31, 2008, ~~and September 30, 2007,~~ Activision Blizzard had no relationships with unconsolidated entities or financial parties, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, that have or are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operation, liquidity, capital expenditure, or capital resources.

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~~Table of Contents~~
Financial Disclosure

We maintain internal control over financial reporting, which generally includes those controls relating to the preparation of our financial statements in conformity with ~~accounting principles generally accepted in the United States of America.~~U.S. GAAP. 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 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
33

Table of Contents
in internal controls and other accounting and disclosure-relevant information. These quarterly reports are reviewed by certain key corporate finance 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, and make refinements to, our disclosure controls and procedures, and our internal control over financial ~~reporting, and will make refinements as necessary.~~reporting.

Recently Issued Accounting ~~Standards~~Pronouncements

~~In December 2007,~~On April 9, 2009, the FASB issued ~~SFAS No. 141 (revised 2007), “Business Combinations”~~three final Staff Positions (“~~SFAS No. 141(R)”~~FSPs”)~~. SFAS No. 141(R) expands~~ intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities.
FSP FAS 157-4, “Determining Fair Value When the ~~definition~~Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides guidance on how to determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased and re-emphasizes that the objective of a ~~business combination~~fair value measurement remains an exit price.
FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires ~~acquisitions~~companies to disclose the fair value of financial instruments within interim financial statements, adding to the current requirement to provide those disclosures annually.
FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” modifies the requirements for recognizing other-than-temporary-impairment on debt securities and significantly changes the impairment model for such securities. Under FSP FAS 115-2 and 124-2, a security is considered to be ~~accounted for at fair value. These~~other-than-temporarily impaired if the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference being defined as the credit loss) or if the fair value ~~provisions~~of the security is less than the security’s amortized cost basis and the investor intends, or more-likely-than-not will be ~~applied~~required, to ~~contingent consideration, in-process research~~sell the security before recovery of the security’s amortized cost basis. If an other-than-temporary impairment exists, the charge to earnings is limited to the amount of credit loss if the investor does not intend to sell the security, and ~~development~~it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis. Any remaining difference between fair value and ~~acquisition contingencies. Purchase accounting adjustments will be reflected during~~amortized cost is recognized in other comprehensive income, net of applicable taxes. Otherwise, the ~~period in which an acquisition was originally recorded. Additionally,~~entire difference between fair value and amortized cost is charged to earnings. The FSP also modifies the ~~new standard requires transaction costs~~presentation of other-than-temporary impairment losses and ~~restructuring charges to be expensed. SFAS No. 141(R) is~~increases related disclosure requirements.
The FSPs are effective for interim and annual periods ending after June 15, 2009, but entities may early adopt the ~~Company~~FSPs for ~~acquisitions closing during~~the interim and ~~subsequent~~annual periods ending after March 15, 2009. The adoption of these standards is not expected to ~~the first quarter~~have a material impact on our results of ~~2009.~~operations or financial position.

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Table of Contents
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 to manage interest rate risk in our investment portfolio. ~~We manage an~~Our investment portfolio ~~consisting~~consists primarily of debt instruments with high credit quality and relatively short average maturities and money market funds that invest in such securities. Because short-term securities mature relatively quickly and must be reinvested at the then current market rates, interest income on a portfolio consisting of cash, cash equivalents, or short-term securities is more subject to market fluctuations than a portfolio of longer term securities. Conversely, the fair value of such a portfolio is less sensitive to market fluctuations than a portfolio of longer term securities. ~~As of September 30, 2008,~~At March 31, 2009, our cash and cash equivalents, and short-term investments included money market funds and mortgage-backed securities and restricted cash of ~~$2.7 billion,~~$2,988 million and $7$42 million, respectively. We have $79 million in auction rate securities at fair value, which are classified as long-term investments, at March 31, 2009. Most of our investment portfolio is invested in short-term or variable rate securities. Accordingly, we believe that a sharp change in interest rates would not have a material effect on our short-term investment portfolio. ~~We also manage our interest~~
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~~Table of Contents~~
~~rate risk by maintaining sufficient cash and cash equivalent balances. As of September 30, 2008, our investments in auction rate securities of $86 million were classified as long-term investments.~~

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. Currency volatility is monitored frequently throughout the year. ~~When appropriate, we enter into hedging transactions in order to~~To mitigate our risk from foreign currency ~~fluctuations.~~fluctuations we enter into currency forward contracts and swaps with Vivendi, generally with maturities of twelve months or less. We expect to continue to use ~~hedging~~economic hedge programs in the future ~~and may use currency forward contracts, currency options and/or other derivative financial instruments~~ 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.~~
Activision Blizzard’s foreign currency risk policy seeks to reduce risks, via Vivendi, forecasted transaction exposures, resulting primarily from cash flows generated by operations conducted in currencies other than the U.S. dollar and firm commitments, essentially relating to third-party development contracts, denominated in foreign currencies. For this purpose, Activision Blizzard enters into forward contracts with Vivendi, generally with maturities of twelve months or ~~less, in accordance with the following procedures designed to prohibit~~ speculative ~~transactions:~~
·                  ~~Vivendi is the sole counter-party for foreign currency transactions within Activision Blizzard, unless specific regulatory, operational, or other considerations require otherwise; and~~
·purposes. All foreign currency hedging transactions are backed, in amount and by maturity, by an identified economic underlying item.

In addition, Activision Blizzard ~~also hedges~~may hedge foreign currency exposure resulting from foreign currency denominated financial assets and liabilities, consisting primarily of intercompany receivables and payables,. and earnings.

~~As of September 30, 2008 and December 31, 2007, the net~~The notional ~~amount~~amounts of outstanding forward foreign exchange contracts ~~was approximately $32~~and foreign exchange swaps were less than a million dollars and $227 million, respectively, at March 31, 2009. The notional amounts of outstanding forward foreign exchange contracts and foreign exchange swaps were $126 million and ~~$14~~$118 million, ~~respectively.~~respectively, at December 31, 2008. A pre-tax net unrealized gain of ~~approximately $3 million and~~ $2 million ~~for the three and nine months ended September 30, 2008, respectively,~~ and a pre-tax net unrealized loss of ~~approximately $- million and $2~~$1 million for the three ~~and nine~~ months ended ~~September 30, 2007,~~March 31, 2009, and 2008, respectively, resulted from the foreign exchange contracts and swaps with Vivendi and were recognized in the Condensed Consolidated ~~Statement~~Statements of Operations.
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Table of Contents

Item 4. Controls and Procedures

Controls and Procedures

1) Definition and Limitations of Disclosure Controls and Procedures.

Our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including our principal executive officer and principal 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 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 our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures ~~as of September 30, 2008,~~at March 31, 2009, the end of the period covered by this report. Based on this controls evaluation, and subject to the limitations described above, the principal executive officer and principal financial officer concluded that, ~~as of September 30, 2008,~~at March 31, 2009, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files
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~~Table of Contents~~
or submits under the Exchange Act is (i) recorded, processed, summarized, and reported on a timely basis, and (ii) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

Prior to the consummation of the Business Combination, Activision submitted a request to the staff of the SEC for concurrence that Activision Blizzard would be permitted to exclude the business of Vivendi Games from its assessment of internal control over financial reporting in accordance with Section 404 for the year ending December 31, 2008. The Company has been advised by the staff of the SEC that it has no objection to this request. Accordingly, management has elected to exclude Vivendi Games from its December 31, 2008 assessment of and report on internal control over financial reporting. The Company is currently in the process of incorporating the internal controls and procedures of Vivendi Games into the Company’s internal control over financial reporting, and expects to be able to perform an assessment of and report on internal control over financial reporting for the year ending December 31, 2009.
3) Changes in Internal Control Over Financial Reporting.

~~The following~~There have not been any changes ~~to the Company’s~~in our internal control over financial reporting ~~(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)~~ during the most recent fiscal quarter ~~ended September 30, 2008, have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting:~~
On July 9, 2008, Activision and Vivendi Games combined their businesses as a result of the consummation of the Business Combination. See Note 1 to the Consolidated Financial Statements included in Part I of this Form 10-Q for a description of the Business Combination. As a result of the Business Combination, Activision, Inc. was renamed Activision Blizzard, Inc. For accounting purposes, the Business Combination is treated as a “reverse acquisition,” with Vivendi Games, Inc. deemed to be the acquirer. The historical financial statements of Activision Blizzard, Inc. prior to July 9, 2008 are those of Vivendi Games, Inc.
The Company’s management considers the Business Combination material to the Company’s results of operations, cash flows and financial position from the date of the acquisition through September 30, 2008, and believes that the internal control over financial reporting of Vivendi Games has a material effect on the Company’s internal control over financial reporting.
~~Accordingly, there have been changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2008~~ that have materially affected or are reasonably likely to materially affect ~~the Company’s~~our internal control over financial reporting.
Prior to July 9, 2008, Vivendi Games was a wholly owned subsidiary of Vivendi S.A. As a wholly owned subsidiary operating as a business unit within the Vivendi S.A. group, Vivendi Games had not historically prepared financial statements for separate stand-alone purposes, had its taxable income processed within the Vivendi U.S. tax returns and did not maintain an external financial reporting group or tax group. Internal controls were determined to be adequate to comply with Vivendi S.A.’s internal reporting requirements under International Financial Reporting Standards. For purposes of inclusion in Activision’s proxy statement related to the Business Combination, Vivendi Games prepared U.S. GAAP stand-alone financial statements for the fiscal years ended December 31, 2007 and 2006, and these stand-alone financial statements were issued after the announcement of the transaction. It was determined that the following matters constituted material weaknesses as it related to those stand-alone financial statements. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
In connection with the preparation of its financial statements, on a stand-alone U.S. GAAP basis, for the fiscal years ended December 31, 2007 and 2006, Vivendi Games did not properly design and/or operate effective controls to detect certain errors in the preparation, classification and disclosure of its financial statements; additionally, Vivendi Games did not properly design and/or operate effective controls to detect certain errors in the preparation of the stand-alone tax provision and related tax disclosures in its financial statements for the fiscal year ended December 31, 2007.
Activision, Inc.’s management concluded that Activision, Inc.’s internal control over financial reporting was effective as of March 31, 2008. Subsequent to the consummation of the Business Combination on July 9, 2008, Activision, Inc.’s management became responsible for establishing and maintaining the combined Company’s internal control over financial reporting, including financial statement preparation and reporting and tax provision preparation and reporting.
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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

~~On February 8, 2008, the Wayne County Employees’ Retirement System filed a lawsuit challenging the Business Combination~~The discussion in ~~the Delaware Court of Chancery. The suit is a putative class action filed against the parties~~Note 15 to the Business Combination Agreement as well as certain current and former members of our Board of Directors. The plaintiff alleges, among other things, that our current and former directors named therein failed to fulfill their fiduciary duties with regard to the Business CombinationCondensed Consolidated Financial Statements regarding legal proceedings is incorporated herein by “surrendering” the negotiating process to “conflicted management,” that those breaches were aided and abetted by Vivendi and those of its subsidiaries named in the complaint, and that the preliminary proxy statement filed by the Company on January 31, 2008 contains certain statements that the plaintiff alleges are false and misleading. The plaintiff seeks an order from the court that, among other things, certifies the case as a class action, enjoins the Business Combination, requires the defendants to disclose all material information, declares that the Business Combination is in breach of the directors’ fiduciary duties and therefore unlawful and unenforceable, awards the plaintiff and the putative class damages for all profits and special benefits obtained by the defendant in connection with the Business Combination and tender offer, and awards the plaintiff its cost and expense, including attorney’s fees.reference.
After various initial motions were filed and ruled upon, on May 8, 2008, the plaintiff filed an amended complaint that, among other things, added allegations relating to a revised preliminary proxy statement filed by the Company on April 30, 2008. Additional motions were then filed, including a motion for preliminary injunction filed by the plaintiff and a motion to dismiss filed by Vivendi and its subsidiaries. On June 24, 2008, the court granted Vivendi and its subsidiaries’ motion to dismiss as to them. ~~On July 1, 2008, the court denied plaintiff’s motion for preliminary injunction. The Company intends to defend itself vigorously.~~
In July 2006, individuals and/or entities claiming to be our stockholders filed derivative lawsuits, purportedly on our behalf, against certain current and former members of our Board of Directors as well as several of our current and former officers. Three derivative actions were filed in Los Angeles Superior Court: Vazquez v. Kotick, et al ., L.A.S.C. Case No. BC355327 (filed July 12, 2006); Greuer v. Kotick, et al. L.A.S.C. Case No. SC090343 (filed July 12, 2006); and Amalgamated Bank v. Baker, et al., L.A.S.C. Case No. BC356454 (filed August 3, 2006). These actions were consolidated by the court under the caption In re Activision Shareholder Derivative Litigation, L.A.S.C. Master File No. SC090343 (West, J.). Four derivative actions were 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); Hamian v. Kotick, et al., C.D. Cal. Case No. CV06-5375 MRP (JLTx) (filed August 25, 2006); Abdelnur vs. Kotick et al., C.D. Cal. Case No. CV07-3575 AHM (PJWx) (filed June 1, 2007); and Scarborough v. Kotick et al., C.D. Cal. Case No. CV07-4602 SVW (PLAx) (filed July 18, 2007). These actions were also 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 alleged, among other things, purported improprieties in our issuance of stock options. Plaintiffs sought various relief on our behalf, 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. We expect that defense expenses associated with the matters will be covered by our directors and officers insurance, subject to the terms and conditions of the applicable policies.
On July 22, 2008 and July 28, 2008, all claims in the consolidated stock options dating-related shareholder derivative actions pending in the U.S. District Court for the Central District of California and in Los Angeles Superior Court, respectively, were dismissed with prejudice pursuant to the District Court’s order finally approving the Stipulation of Settlement entered into by all parties to the actions. In entering into the Stipulation of Settlement, neither we nor any of the settling parties admitted to any liability or wrongdoing. Under the terms of the court-approved Stipulation of Settlement, we are required to adopt, implement and/or maintain certain corporate governance and internal control measures, relating principally to the following: board composition, structure and practices, director independence standards, stock ownership and compensation, and education; shareholder proposal evaluation process; nomination procedures for shareholder-nominated directors; shareholder meeting procedures; executive compensation policies and procedures; insider trading controls; and stock option granting procedures. We agreed to keep these measures in place for a period of three years, subject to certain exceptions. The Stipulation of Settlement also addresses matters relating to the agreements by certain of our current and former directors and officers to reimburse the Company in connection with the receipt of options that required measurement date corrections. In the case of options already exercised, the agreements allowed reimbursement to be made either by cancellation of vested but unexercised options with a value equivalent to the additional exercise price or by payment of additional exercise price. In the case of options not yet exercised, the exercise price to be paid upon future exercise of those options is increased. In the aggregate, settling defendants have elected to cancel options to acquire approximately 800,000 shares of our common stock and have agreed to increases in the
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exercise prices of approximately 16.1 million options. The modification of these options did not result in any incremental compensation expense. The Stipulation of Settlement also provides for the forgiveness of approximately $2 million in legal fees previously billed to us by former outside corporate counsel. In addition, the Stipulation of Settlement provides for us to pay $10 million to plaintiffs’ attorneys for their fees and expenses, subject to court approval of such fees and expenses and subject to our reservation of all rights against our directors and officers (“D&O”) insurers, reinsurers and co-insurers. The Company paid the $10 million during the current quarter. The Stipulation of Settlement also provides that plaintiffs’ attorneys will also be entitled to 15% (up to $750,000) of any payments made by our D&O insurers to the Company in connection with the settlement, to the extent such payments constitute reimbursement of amounts above and beyond covered defense costs incurred in connection with the options matters. We have entered into settlement agreements with our first and second level excess D&O insurers (our primary D&O insurer having exhausted its policy limits prior to the parties’ entry into the Stipulation of Settlement). We have not yet reached agreements with our third level excess D&O insurer or our D&O insurer providing “Side A/Difference in Conditions” coverage.
On July 24, 2006, we received a letter of informal inquiry from the SEC requesting certain documents and information relating to our historical stock option grant practices. Thereafter, in early June 2007, the SEC issued a formal order of non-public investigation, pursuant to which it subpoenaed documents from us related to the investigation, and testimony and documents from certain current and former directors, officers and employees of ours. We were recently advised by the SEC Staff in Los Angeles that they have decided to conclude this investigation without recommending any enforcement action.
In addition, we are party to other routine claims and suits brought by us and against us in the ordinary course of business, including disputes arising over the ownership of intellectual property rights, contractual claims, employment laws, regulations and relationships, and collection matters. In the opinion of management, after consultation with legal counsel, the outcome of such routine claims and lawsuits will not have a material adverse effect on our business, financial condition, results of operations, or liquidity.

Item 1A. Risk Factors

Various risk factors associated with our business are included in Part ~~II,~~I, Item 1A, “Risk Factors,” of our ~~Quarterly~~Annual Report on Form ~~10-Q~~10-K for the ~~quarter~~fiscal year ended ~~June 30,~~December 31, 2008. In addition, the Company notes the following risk:

~~General economic conditions~~We may ~~affect~~encounter difficulties transitioning World of Warcraft in China to our ~~revenue and harm our business.~~new licensee.

~~As widely reported, financial markets~~We recently announced plans to transition the license for World of Warcraft in China to a new licensee upon expiration of the current license agreement. A number of activities must be completed before the new licensee can begin to offer World of Warcraft in China, including obtaining all required regulatory approvals in China. There can be no assurance that all these transition activities will be timely completed prior to the scheduled expiration of the current license agreement on June 5, 2009. Our ability to complete these transition activities could also be adversely affected by a failure of our current licensee to cooperate in the ~~United States, Europe and Asia have been experiencing extreme disruption in recent months. Unfavorable changes in economic conditions, including declining consumer confidence, inflation, recession~~transition, or ~~other changes, may lead~~any efforts by our ~~customers~~current licensee to ~~delay~~block or ~~reduce purchases of our products and our revenue could be adversely affected. Challenging economic conditions also may impair~~interfere with the ~~ability of our customers or distributors to pay for products they have purchased, and as a result, our reserves for doubtful accounts and write-offs of accounts receivable could increase. We~~transition. If we are unable to ~~predict~~timely complete the ~~likely duration~~transition, World of Warcraft may become unavailable to players in China for a period of time, which would result in lost revenues and ~~severity~~net income during any time the game is unavailable, and could have a longer-term negative effect on our reputation and subscriber base in China. In addition, efforts relating to the transition could distract Blizzard Entertainment’s employees and cause delays of ~~the current disruption in financial markets and adverse economic conditions in the U.S. and~~ other ~~countries.~~
~~Item 4. Submission of Matters to a Vote of Security Holders~~
~~Special Meeting of Stockholders.~~ We held a special meeting of the Company’s stockholders on July 8, 2008 in Beverly Hills, California. At the special meeting, the Company’s stockholders voted on the following four proposals and cast their votes as follows:business initiatives.

~~Proposal No. 1: To approve~~Item 2. Unregistered Sales of ~~the issuance~~Equity Securities and Use of an aggregate of approximately 358.2 million new shares of the Company’s common stock, par value $0.000001 per share, to VGAC and Vivendi, in connection with (a) the merger of a wholly-owned subsidiary of Activision with and into Vivendi Games, and (b) the purchase of shares of the Company’s common stock by Vivendi, in each case, in accordance with the business combination agreement.
For

Against

Abstained

253,415,975

1,446,254

123,062

Proposal No. 2: To approve the amendment and restatement of Activision’s amended and restated certificate of incorporation, subject to completion of the business combination, consisting of the following subproposals:Proceeds

·Issuer Repurchase of Equity Securities                  ~~2A—a proposal to change the combined company’s name from “Activision, Inc.” to “Activision Blizzard, Inc.”.~~

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~~Table of Contents~~
For

Against

Abstained

253,542,898

1,335,933

106,460

·                  ~~2B—a proposal to increase~~The following table provides the number of ~~authorized~~ shares repurchased and average price paid per share during the quarter ended March 31, 2009, and the approximate dollar value of ~~capital~~shares that may yet be purchased under our $1 billion stock ~~from 455,000,000 to 1,205,000,000.~~repurchase program at March 31, 2009 (amounts in millions, except number of shares and per share data).

For

Against

Abstained

251,368,826

3,532,028

84,437

Period

Total number
of shares
repurchased (1)

Average
price paid
per share

Total number of
shares purchased as part
of publicly announced
plans or programs

Approximate dollar value
of shares that may
yet be purchased
under the plan

January 1, 2009—January 31, 2009

—

$
—

—

$
—

February 1, 2009—February 28, 2009

9,422,414

9.51

9,422,414

784

March 1, 2009—March 31, 2009

22,455,346

9.95

22,455,346

561

Total

31,877,760

$
9.82

31,877,760

·                  ~~2C—a proposal to eliminate the Series A Junior Preferred Stock.~~
For

Against

Abstained

253,603,178

1,282,660

99,453

·                  ~~2D—a proposal to include certain quorum requirements for committees of the board of directors under certain circumstances.~~
For

Against

Abstained

253,529,460

1,286,930

168,901

·                  ~~2E—a proposal to require supermajority stockholder approval to amend certain sections of the certificate of incorporation.~~
For

Against

Abstained

236,065,488

18,802,496

117,307

·                  ~~2F—a proposal to limit the power of the board of directors to amend certain provisions of the bylaws without stockholder approval.~~
For

Against

Abstained

252,651,021

2,209,350

124,920

·                  ~~2G—a proposal to grant the directors designated by Vivendi certain voting powers when other Vivendi designees are not present at board or committee meetings.~~
For

Against

Abstained

252,066,841

2,580,087

338,363

·                  ~~2H—a proposal to include limitations on certain business activities in which Vivendi may, directly or indirectly, engage or participate.~~
For

Against

Abstained

253,524,522

1,307,858

152,911

·                  ~~2I—a proposal to establish procedures allocating certain corporate opportunities between Activision Blizzard and Vivendi.~~
For

Against

Abstained

253,465,185

1,368,686

151,420

·                  2J—a proposal to require Vivendi or Activision Blizzard to purchase all of the combined company’s issued and outstanding shares of common stock if and when Vivendi becomes the record owner of more than 90% of the issued and outstanding shares of common stock.
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~~Table of Contents~~
For

Against

Abstained

253,459,668

1,325,497

200,126

·                  ~~2K—a proposal to establish procedures governing affiliate transactions.~~
For

Against

Abstained

253,571,580

1,251,957

161,754

·                  2L—a proposal to cause the combined company to be governed by Section 203 of the Delaware General Corporation Law, a statute which restricts business combinations between corporations and their significant stockholders.
For

Against

Abstained

251,823,830

3,004,282

157,179

Proposal No. 3: To approve of the amendment of Section 7.4(a) of Activision’s third amended and restated bylaws to restrict the amendment of additional sections of the bylaws without stockholder approval, subject to the completion of the business combination.
For

Against

Abstained

252,073,788

2,676,968

234,535

~~Proposal No. 4: To approve any motion to adjourn or postpone the special meeting~~(1) All purchases were made pursuant to a ~~later date or dates, if necessary,~~stock repurchase program, announced on November 5, 2008, authorized by our Board of Directors pursuant to ~~solicit additional proxies if there are insufficient votes at the time~~which we may repurchase up to $1 billion of ~~the special meeting to approve the other three items submitted.~~
For

Against

Abstained

237,060,523

17,802,977

121,791

~~Action Taken by Majority Stockholder.~~ Stockholders of record at the close of business on July 14, 2008 received notice that VGAC, which was the owner of approximately 54% of the Company’s issued and outstanding common stock as of that date, delivered to the Company an executed written consent:
1.               ~~voting in favor of an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of~~our common stock from ~~1,200,000,000~~time to ~~2,400,000,000 for~~time on the ~~purpose~~open market or in private transactions, including structured or accelerated transactions. We will determine the timing and amount of ~~allowing~~repurchases based on our evaluation of market conditions and other factors. We may suspend or discontinue the ~~Company to effect a two-for-one~~ stock ~~split announced on July 11, 2008;~~repurchase program at any time.

2.               ~~ratifying and re-approving (as applicable) the actions taken by the stockholders of Company at its 2007 annual meeting, including:~~
·                  ~~ratifying and re-approving the election of the eight directors elected to hold such office;~~
·                  ~~ratifying and re-approving the Activision, Inc. 2007 Incentive Plan;~~
·                  ~~re-ratifying the appointment of PricewaterhouseCoopers LLP as Activision’s independent registered public accounting firm for the fiscal year ended March 31, 2008;~~
·                  ~~ratifying a stockholder proposal regarding a stockholder advisory vote on executive compensation; and~~
·                  ~~voting against a stockholder proposal regarding diversity of the Company’s board of directors.~~
~~Annual Meeting of Stockholders.~~ We held our 2008 annual meeting of the Company’s stockholders on September 24, 2008 in Beverly Hills, California. At the annual meeting, our stockholders voted on the following four proposals and cast their votes as follows:
~~Proposal No. 1: To elect 11 directors to serve until their respective successors are duly elected or appointed and qualified or until the earlier of their death, resignation or removal.~~
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~~Table of Contents~~
Nominee

For

Withheld
Philippe G. H. Capron

507,795,126

121,935,433

Robert J. Corti

473,313,396

156,417,163

Frédéric R. Crépin

499,937,509

129,793,050

Bruce L. Hack

507,805,211

121,925,348

Brian G. Kelly

473,851,917

155,878,642

Robert A. Kotick

477,320,144

152,410,415

Jean-Bernard Lévy

500,100,674

129,629,885

Robert J. Morgado

469,418,295

160,312,264

Douglas P. Morris

502,323,218

127,407,341

René P. Pénisson

500,084,365

129,646,194

Richard Sarnoff

495,017,901

134,712,658
~~Proposal No. 2: To approve the Activision Blizzard, Inc. 2008 Incentive Plan.~~
For

Against

Abstained

Not Voted

549,241,724

53,707,961

97,358

26,683,516

~~Proposal No. 3: To approve a stockholder proposal regarding diversity of our Board of Directors.~~
For

Against

Abstained

Not Voted

17,633,436

540,786,041

44,627,566

26,683,516

~~Proposal No. 4: To approve a stockholder proposal regarding a stockholder advisory vote on executive compensation.~~
For

Against

Abstained

Not Voted

138,478,957

434,546,590

30,021,496

26,683,516

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~~Table of Contents~~
Item 6. Exhibits
The exhibits listed on the accompanying index to exhibits are hereby incorporated by reference into this Form 10-Q.
37

Table of Contents
SIGNATURE
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:     May 8, 2009
ACTIVISION BLIZZARD, INC.

~~2.1~~/s/ Thomas Tippl

Business Combination Agreement, dated as of December 1, 2007, among Activision, Inc., Sego Merger Corporation, Vivendi S.A., VGAC LLC and Vivendi Games, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K, filed December 6, 2007).
Thomas Tippl

Chief Corporate Officer and Chief Financial Officer,

Principal Financial and Accounting Officer of
Activision Blizzard, Inc.
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Table of Contents
EXHIBIT INDEX
Exhibit Number
Exhibit
3.1

Amended and Restated Certificate of Incorporation of Activision Blizzard, Inc., dated July 9, 2008 (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed July 15, 2008).

3.2

Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Activision Blizzard, Inc., dated August 15, 2008 (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed August 15, 2008).

3.3

Amended and Restated By-Laws of Activision Blizzard, Inc., dated July 9, 2008 (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K, filed July 15, 2008).

3.4

First Amendment to the Amended and Restated By-Laws of Activision Blizzard, Inc., dated July 28, 2008 (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed July 31, 2008).

~~10.1~~
~~Notice of Stock Option Award for grants to non-employee directors issued pursuant to the Activision, Inc. 2007 Incentive Plan.~~
~~10.2~~
~~Notice of Stock Option Award for grants to persons other than non-employee directors issued pursuant to the Activision, Inc. 2007 Incentive Plan.~~
~~10.3~~
~~Notice of Restricted Share Award for grants to persons other than non-employee directors issued pursuant to the Activision, Inc. 2007 Incentive Plan.~~
~~10.4~~
~~Notice of Restricted Share Unit Award for grants to officers issued pursuant to the Activision, Inc. 2007 Incentive Plan.~~
~~10.5~~
Notice of Restricted Share Unit Award for grants to independent directors upon their initial election to the board or upon their tenth continuous year of service on the board issued pursuant to the Activision, Inc. 2007 Incentive Plan.
~~10.6~~
Notice of Restricted Share Unit Award for grants to independent directors upon their reelection to the board (other than in connection with 10 years of continuous service) issued pursuant to the Activision, Inc. 2007 Incentive Plan.
~~10.7~~
~~Notice of Restricted Share Unit Award for grants to non-employee directors resident in France issued pursuant to the Activision, Inc. 2007 Incentive Plan.~~
~~10.8~~
~~Notice of Restricted Share Unit Award for grants to persons other than officers or directors issued pursuant to the Activision, Inc. 2007 Incentive Plan.~~
~~10.9~~
~~Addendum to Stock Option Agreement, dated as of June 1, 2006, between Thomas Tippl and Activision, Inc.~~
~~10.10~~10.1*

Amendment, ~~to the Employment Agreement,~~ dated as of ~~July 7, 2008, between Robert A. Kotick and Activision, Inc.~~
~~10.11~~
March 31, 2009, to Employment Agreement ~~dated July 8, 2008, between Ronald Doornink and Activision Publishing, Inc.~~
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~~10.12~~
~~Description of the Non-Employee Director Compensation Program adopted on July 17, 2008.~~
~~10.13~~
~~Investor Agreement, dated as of July 9, 2008, among Activision Blizzard, Inc., Vivendi S.A., VGAC LLC, and Vivendi Games, Inc.~~ ~~(incorporated by reference to Exhibit 10.1 of Activision Blizzard’s Form 8-K, filed July 15, 2008).~~
~~10.14~~
~~Tax Sharing Agreement, dated as of July 9, 2008, among Activision Blizzard, Inc., Vivendi Holding I Corp., Vivendi Games, Inc.~~ ~~(incorporated by reference to Exhibit 10.2 of Activision Blizzard’s Form 8-K, filed July 15, 2008).~~
~~10.15~~
~~Amendment to the Credit Agreement, dated as of July 8, 2008,~~ ~~between Activision Blizzard, Inc. and Vivendi S.A.~~
~~10.16~~
~~Notice of Performance Share Award to Robert A. Kotick, dated as of July 9, 2008.~~
~~10.17~~
~~Notice of Restricted Share Unit Award to Robert A. Kotick, dated as of July 9, 2008.~~
~~10.18~~
~~Notice of Restricted Share Unit Award to Brian G. Kelly, dated as of July 9, 2008.~~
~~10.19~~
~~Employment Agreement, dated as of December 1, 2007,~~ between Michael Morhaime and ~~Vivendi Games, Inc.~~
~~10.20~~
~~Assignment and Assumption of Morhaime Employment Agreement, dated as of July 9, 2008, between Vivendi Games. Inc. and~~ Activision Blizzard, Inc.
~~10.21~~
~~Stock Option Agreement, dated June 15, 2005 and amended and restated as of July 9, 2008, between Michael Griffith and Activision Blizzard, Inc.~~
~~10.22~~
~~Restricted Stock Agreement, dated June 15, 2005 and amended and restated as of July 9, 2008, between Michael Griffith and Activision Blizzard, Inc.~~
~~10.23~~
~~Notice of Share Option Award to Michael Morhaime, dated as of July 9, 2008.~~
~~10.24~~
~~Notice of Share Option Award to Michael J. Griffith, dated as of July 11, 2008.~~
~~10.25~~
~~Notice of Restricted Share Unit Award to Michael J. Griffith, dated as of July 11, 2008.~~
~~10.26~~
~~Notice of Share Option Award to Ronald Doornink, dated as of July 11, 2008.~~
~~10.27~~
~~Notice of Restricted Share Unit Award to Ronald Doornink, dated as of July 11, 2008.~~
~~10.28~~
~~Employment Agreement, dated as of December 1, 2007, between Bruce L. Hack and Vivendi Holding I Corp.~~
~~10.29~~
~~Assignment and Assumption of Hack Employment Agreement, dated as of July 9, 2008, between Vivendi Holding I Corp. and Activision Blizzard, Inc.~~
~~10.30~~
~~Notice of Share Option Award to Bruce L. Hack, dated as of July 14, 2008.~~
~~10.31~~
~~Employment Agreement, dated July 16, 2008, between Jean-François Grollemund and Activision Blizzard, Inc.~~
~~10.32~~
~~Notice of Restricted Share Unit Award to~~ ~~Jean-François Grollemund, dated as of July 21, 2008.~~
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~~Table of Contents~~
~~18.1~~
~~Letter of PricewaterhouseCoopers LLP regarding change in accounting principle (incorporated by reference to Exhibit 99.6 of Activision Blizzard’s Form 8-K, filed November 5, 2008).~~

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 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 Thomas Tippl pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*Indicates a management contract or compensatory plan, contract or arrangement in which a director or executive officer of the Company participates.

6639

~~Table of Contents~~
~~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 10, 2008~~
~~ACTIVISION BLIZZARD, INC.~~
~~/s/ Thomas Tippl~~
~~Thomas Tippl~~
~~Chief Financial Officer,~~
~~Principal Financial and Accounting Officer~~
~~Activision Blizzard, Inc.~~
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~~EXHIBIT INDEX~~
~~2.1~~
Business Combination Agreement, dated as of December 1, 2007, among Activision, Inc., Sego Merger Corporation, Vivendi S.A., VGAC LLC and Vivendi Games, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K, filed December 6, 2007).
~~3.5~~
~~Amended and Restated Certificate of Incorporation of Activision Blizzard, Inc., dated July 9, 2008 (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed July 15, 2008).~~
~~3.6~~
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Activision Blizzard, Inc., dated August 15, 2008 (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed August 15, 2008).
~~3.7~~
~~Amended and Restated By-Laws of Activision Blizzard, Inc., dated July 9, 2008 (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K, filed July 15, 2008).~~
~~3.8~~
~~First Amendment to the Amended and Restated By-Laws of Activision Blizzard, Inc., dated July 28, 2008 (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed July 31, 2008).~~
~~10.1~~
~~Notice of Stock Option Award for grants to non-employee directors issued pursuant to the Activision, Inc. 2007 Incentive Plan.~~
~~10.2~~
~~Notice of Stock Option Award for grants to persons other than non-employee directors issued pursuant to the Activision, Inc. 2007 Incentive Plan.~~
~~10.3~~
~~Notice of Restricted Share Award for grants to persons other than non-employee directors issued pursuant to the Activision, Inc. 2007 Incentive Plan.~~
~~10.4~~
~~Notice of Restricted Share Unit Award for grants to officers issued pursuant to the Activision, Inc. 2007 Incentive Plan.~~
~~10.5~~
Notice of Restricted Share Unit Award for grants to independent directors upon their initial election to the board or upon their tenth continuous year of service on the board issued pursuant to the Activision, Inc. 2007 Incentive Plan.
~~10.6~~
Notice of Restricted Share Unit Award for grants to independent directors upon their reelection to the board (other than in connection with 10 years of continuous service) issued pursuant to the Activision, Inc. 2007 Incentive Plan.
~~10.7~~
~~Notice of Restricted Share Unit Award for grants to non-employee directors resident in France issued pursuant to the Activision, Inc. 2007 Incentive Plan.~~
~~10.8~~
~~Notice of Restricted Share Unit Award for grants to persons other than officers or directors issued pursuant to the Activision, Inc. 2007 Incentive Plan.~~
~~10.9~~
~~Addendum to Stock Option Agreement, dated as of June 1, 2006, between Thomas Tippl and Activision, Inc.~~
~~10.10~~
~~Amendment to the Employment Agreement, dated as of July 7, 2008, between Robert A. Kotick and Activision, Inc.~~
~~10.11~~
~~Employment Agreement, dated July 8, 2008, between Ronald Doornink and Activision Publishing, Inc.~~
68

~~Table of Contents~~
~~10.12~~
~~Description of the Non-Employee Director Compensation Program adopted on July 17, 2008.~~
~~10.13~~
~~Investor Agreement, dated as of July 9, 2008, among Activision Blizzard, Inc., Vivendi S.A., VGAC LLC, and Vivendi Games, Inc.~~ ~~(incorporated by reference to Exhibit 10.1 of Activision Blizzard’s Form 8-K, filed July 15, 2008).~~
~~10.14~~
~~Tax Sharing Agreement, dated as of July 9, 2008, among Activision Blizzard, Inc., Vivendi Holding I Corp., Vivendi Games, Inc.~~ ~~(incorporated by reference to Exhibit 10.2 of Activision Blizzard’s Form 8-K, filed July 15, 2008).~~
~~10.15~~
~~Amendment to the Credit Agreement, dated as of July 8, 2008,~~ ~~between Activision Blizzard, Inc. and Vivendi S.A.~~
~~10.16~~
~~Notice of Performance Share Award to Robert A. Kotick, dated as of July 9, 2008.~~
~~10.17~~
~~Notice of Restricted Share Unit Award to Robert A. Kotick, dated as of July 9, 2008.~~
~~10.18~~
~~Notice of Restricted Share Unit Award to Brian G. Kelly, dated as of July 9, 2008.~~
~~10.19~~
~~Employment Agreement, dated as of December 1, 2007, between Michael Morhaime and Vivendi Games, Inc.~~
~~10.20~~
~~Assignment and Assumption of Morhaime Employment Agreement, dated as of July 9, 2008, between Vivendi Games. Inc. and Activision Blizzard, Inc.~~
~~10.21~~
~~Stock Option Agreement, dated June 15, 2005 and amended and restated as of July 9, 2008, between Michael Griffith and Activision Blizzard, Inc.~~
~~10.22~~
~~Restricted Stock Agreement, dated June 15, 2005 and amended and restated as of July 9, 2008, between Michael Griffith and Activision Blizzard, Inc.~~
~~10.23~~
~~Notice of Share Option Award to Michael Morhaime, dated as of July 9, 2008.~~
~~10.24~~
~~Notice of Share Option Award to Michael J. Griffith, dated as of July 11, 2008.~~
~~10.25~~
~~Notice of Restricted Share Unit Award to Michael J. Griffith, dated as of July 11, 2008.~~
~~10.26~~
~~Notice of Share Option Award to Ronald Doornink, dated as of July 11, 2008.~~
~~10.27~~
~~Notice of Restricted Share Unit Award to Ronald Doornink, dated as of July 11, 2008.~~
~~10.28~~
~~Employment Agreement, dated as of December 1, 2007, between Bruce L. Hack and Vivendi Holding I Corp.~~
~~10.29~~
~~Assignment and Assumption of Hack Employment Agreement, dated as of July 9, 2008, between Vivendi Holding I Corp. and Activision Blizzard, Inc.~~
~~10.30~~
~~Notice of Share Option Award to Bruce L. Hack, dated as of July 14, 2008.~~
~~10.31~~
~~Employment Agreement, dated July 16, 2008, between Jean-François Grollemund and Activision Blizzard, Inc.~~
~~10.32~~
~~Notice of Restricted Share Unit Award to~~ ~~Jean-François Grollemund, dated as of July 21, 2008.~~
69

~~Table of Contents~~
~~18.1~~
~~Letter of PricewaterhouseCoopers LLP regarding change in accounting principle (incorporated by reference to Exhibit 99.6 of Activision Blizzard’s Form 8-K, filed November 5, 2008).~~
~~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 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 Thomas Tippl pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~
70

	Common Stock			Additional Paid-In			Net Payable to			Accumulated			Accumulated Other Comprehensive			Total Shareholders’
	Shares	Amount		Capital			Vivendi			Deficit			Income (Loss)			Equity
Balance at December 31, 2007 (As Adjusted)	591	$	—	$	490		$	77		$	(367	)	$	40		$	240

Settlement of payable to Vivendi (see Note 18)	—	—		(2		)	(77		)	—			—			(79		)
Components of comprehensive loss:
Net loss	—	—		—			—			(36		)	—			(36		)
Unrealized depreciation on short-term investments, net of taxes	—	—		—			—			—			(2		)	(2		)
Foreign currency translation adjustment	—	—		—			—			—			(25		)	(25		)
Total comprehensive loss																(63		)
Tender offer (see Note 1)	—	—		(2		)	—			—			—			(2		)
Issuance of additional common stock related to the business combination (see Note 1)	126	—		1,731			—			—			—			1,731
Issuance of common stock pursuant to employee stock options, restricted stock rights, employee stock purchase plans, and warrants	5	—		19			—			—			—			19
Stock-based compensation expense related to employee stock options, restricted stock rights, and employee stock purchase plans	—	—		42			—			—			—			42
Preliminary purchase consideration upon the business combination (see Note 4)	602	—		9,964			—			—			—			9,964
Tax benefit associated with employee stock options	—	—		2			—			—			—			2
Return of capital to Vivendi (see Note 18)	—	—		(79		)	—			—			—			(79		)
Balance at September 30, 2008	1,324	$	—	$	12,165		$	—		$	(403	)	$	13		$	11,775

	Three months ended September 30, 2007
	As Reported				As Adjusted		Effect of Change				As Adjusted (Reclassified)
Consolidated Statement of Operations:
Product sales	$	73			$	106	$	33			$	98
Subscription, licensing and other revenues	221				220		(1			)	228
Cost of sales – product costs	70				72		2				31
Cost of sales – software royalties and amortization	1				3		2				5

Operating income	29				57		28				57
Income (loss) before income tax provision (benefit)	27				55		28				55
Income tax provision (benefit)	(4			)	7		11				7

Net income	$	31			$	48	$	17			$	48

Net income per share - Basic and diluted	$		0.05		$	0.08	$		0.03		$	0.08

Fair market value of Activision, Inc.’s outstanding common stock immediately prior to the Business Combination at the closing price	$	9,102
Fair value of Activision, Inc.’s existing vested and unvested stock awards at the closing price*	861
Transaction expenses	1
Total consideration	$	9,964

* The fair value of the existing vested and unvested stock award is comprised of the following (amounts in millions):

Fair value of Activision, Inc. existing vested stock awards	$	713
Fair value of Activision, Inc. unvested stock awards	296
Less: Unearned stock-based compensation	(148		)
	$	861

		Amount
Working capital, excluding inventories		$	1,194
Inventories		221
Property and equipment		64
Deferred tax asset		62
Other long term assets		128

	Estimated useful life
Intangible assets:
License agreements	3 - 10 years	207
Developed software	Less than 1 year	68
Game engines	2 - 5 years	128
Internally developed franchises	5 - 12 years	1,124
Retail customer relationships	Less than 1 year	40
Favorable leases	1 – 2 years	5
Distribution agreements	4 years	17
Activision trade name	Indefinite	386
Goodwill	Indefinite	7,085
Long term liabilities		(24		)
Deferred tax liability		(741		)
Total consideration		$	9,964

			Accumulated
	Gross		Amortization			Net
License agreements	$	207	$	(8	)	$	199
Developed software	68		(21		)	47
Game engines	128		(6		)	122
Internally developed franchises	1,124		(16		)	1,108
Retail customer relationships	40		(36		)	4
Favorable leases	5		(1		)	4
Distribution agreements	17		(1		)	16

Total	$	1,589	$	(89	)	$	1,500

Year ending December 31,	Amount
2008 (remaining three months)	$	222
2009	284
2010	198
2011	141
2012	119
Thereafter	536

						Asset			Contract
				Facilities		write-			termination
	Severance(1)			costs(1)		downs(2)			costs(1)			Total
Balance as of December 31, 2007	$	—		$	—	$	—		$	—		$	—
Original restructuring charges (charges to expenses)	32			2		24			3			61
Utilization (cash paid or otherwise settled)	(9		)	—		(24		)	(2		)	(35		)

Balance at September 30, 2008	$	23		$	2	$	—		$	1		$	26

	Three months ended September 30,					Nine months ended September 30,
	2008			2007		2008			2007

Net income (loss)	$	(108	)	$	48	$	(36	)	$	141

Other comprehensive income (loss):
Foreign currency translation adjustment	(26		)	7		(25		)	2
Unrealized depreciation on short-term investments, net of taxes	(2		)	—		(2		)	—

Other comprehensive income (loss)	(28		)	7		(27		)	2

Comprehensive income (loss)	$	(136	)	$	55	$	(63	)	$	143

				Unrealized			Accumulated
				appreciation			other
	Foreign			(depreciation)			comprehensive
	currency			on investments			income

Balance as of December 31, 2007	$	40		$	—		$	40
Other comprehensive loss	(25		)	(2		)	(27		)

Balance as of September 30, 2008	$	15		$	(2	)	$	13

	Level 3

Balance as of January 1, 2008	$	—
Transfers in and/or (out) of Level 3	—
Purchases via the business combination	88
Total losses realized/unrealized included in earnings	—
Total losses included in other comprehensive income (a)	(2		)
Purchases, sales, issuances, and settlements, net	—
Interest received	—
Balance as of September 30, 2008	$	86

	Contractual Obligations(1)
	Facility and		Developer
	Equipment Leases		and IP		Marketing		Total
For the year ending December 31,

2008 (remaining three months)	$	12	$	43	$	26	$	81
2009	40		62		45		147
2010	35		40		4		79
2011	23		17		13		53
2012	21		22		—		43
Thereafter	64		38		—		102

Total	$	195	$	222	$	88	$	505

	Restricted Stock Rights		Weighted- Average Grant Date Fair Value
Balance as of January 1, 2008	—		$	—
Activity for the nine months ended September 30, 2008:
Acquired from the Business Combination	7,676		14.91
Granted	2,291		16.48
Vested	(15	)	17.07
Forfeited	(9	)	20.29
Balance as of September 30, 2008	9,943		$	15.26

	Shares		Weighted-average exercise price		Weighted-average remaining contractual term	Aggregate intrinsic value
Outstanding at December 31, 2008	97,841		$	6.53
Granted	69		9.96
Exercised	(5,961	)	1.38
Forfeited	(108	)	8.21
Outstanding at March 31, 2009	91,841		6.87		5.88	$	396

Vested and expected to vest at March 31, 2009	87,077		$	6.61	5.25	$	391
Exercisable at March 31, 2009	53,122		4.35		4.28	335

	Three months ended September 30, 2008			Nine months ended September 30, 2008
Cost of sales—software royalties and amortization	$	—		$	1
Product development	7			34
Sales and marketing	4			6
General and administrative	15			6
Stock-based compensation expense before income taxes	26			47
Income tax benefit	(10		)	(19		)
Total stock-based compensation expense, net of income tax benefit	$	16		$	28

	Three months ended September 30, 2007			Nine months ended September 30, 2007
Cost of sales—software royalties and amortization	$	1		$	1
Product development	35			55
Sales and marketing	3			5
General and administrative	3			16
Stock-based compensation expense before income taxes	42			77
Income tax benefit	(17		)	(30		)
Total stock-based compensation expense, net of income tax benefit	$	25		$	47

	Software development
Balance as of January 1, 2008	$	—
Stock-based compensation expense capitalized during period	15
Amortization of capitalized stock-based compensation expense	—
Balance as of September 30, 2008	$	15

	Employee and director options and warrants			Employee stock purchase plan
	For three and nine months ended September 30, 2008			For three and nine months ended September 30, 2008
Expected life (in years)	5.01			0.5
Risk free interest rate	4.03		%	1.53		%
Volatility	50.61		%	35.75		%
Dividend yield	—			—
Weighted-average fair value at grant date	$	6.59		$	3.36

	Employee and director options and warrants for three months ended March 31, 2009
Expected life (in years)	6.20
Risk free interest rate	3.15		%
Volatility	53.79		%
Dividend yield	—
Weighted-average fair value at grant date	$	4.92

	~~Three months ended~~ ~~September 30, 2008~~
~~Expected volatility~~	~~50.61~~	%
~~Risk-free interest rate~~	~~4.03~~	%
~~Expected dividends~~	—

	Three months ended September 30,									Nine months ended September 30,
							Increase/									Increase/
	2008			2007			(Decrease)			2008			2007			(Decrease)
Net revenues:
Activision	$	364		$	43		$	321		$	457		$	108		$	349
Blizzard	297			249			48			866			856			10
Distribution	56			—			56			56			—			56
Activision Blizzard’s core operations	717			292			425			1,379			964			415
Activision Blizzard’s non-core exit operations	6			3			3			16			9			7

Reportable segments total	$	723		$	295		$	428		$	1,395		$	973		$	422
Reconciliation to consolidated net revenues:
Net effect from deferral net revenues	(12		)	31						(8		)	(77		)
Consolidated net revenues	$	711		$	326					$	1,387		$	896

Segment income (loss) from operations:
Activision	$	(26	)	$	(19	)	$	(7	)	$	(61	)	$	(79	)	$	18
Blizzard	146			132			14			447			447			—
Distribution	2			—			2			3			—			3
Activision Blizzard’s core operations	122			113			9			389			368			21
Activision Blizzard’s non-core exit operations	(110		)	(40		)	(70		)	(251		)	(86		)	(165		)

Reportable segments total	$	12		$	73		(61		)	$	138		$	282		(144		)
Reconciliation to consolidated operating income (loss):
Net effect from deferral of net revenues and costs of sales	(12		)	28						(7		)	(67		)
Stock-based compensation expenses	(26		)	(43		)				(47		)	(77		)
Restructuring expenses	(61		)	—						(61		)	(1		)
Amortization of intangible assets and purchase price accounting related adjustments	(90		)	(1		)				(92		)	(3		)
Integration and restructuring costs	(17		)	—						(17		)	—

Total consolidated operating income (loss)	$	(194	)	$	57					$	(86	)	$	134

	For the nine months ended September 30, 2008		For the nine months ended September 30, 2007			Increase/ (Decrease)

Cash flows provided by operating activities	$	125	$	308		$	(183	)
Cash flows provided by (used in) investing activities	1,078		(45		)	1,123
Cash flows provided by (used in) financing activities	1,607		(294		)	1,901

	For the three months ended March 31, 2009			For the three months ended March 31, 2008			Increase/ (Decrease)

Cash flows provided by operating activities	$	327		$	96		$	231
Cash flows used in investing activities	(7		)	(8		)	1
Cash flows used in financing activities	(289		)	(107		)	(182		)

	Three months ended September 30,				Increase/		Three months ended March 31,				Increase/
	2008		2007		(Decrease)		2009		2008		(Decrease)
Territory net revenues
Net revenues by geographic region:
North America	$	295	$	147	$	148	$	524	$	139	$	385
Europe	292		122		170		307		136		171
Asia Pacific	62		54		8		64		45		19
Total Territory net revenues	649		323		326
Total geographic region net revenues							895		320		575
Distribution net revenues	56		—		56		85		—		85
Activision Blizzard’s non-core exit operations	6		3		3		1		5		(4		)

Consolidated net revenues	$	711	$	326	$	385
Total consolidated net revenues							$	981	$	325	$	656

	Three months ended September 30,		% of total platform		Three months ended September 30,		% of total platform		Increase/			Three Months Ended		% of total platform		Three months ended		% of total platform		Increase/
	2008		net revs.		2007		net revs.		(Decrease)			March 31, 2009		net revs.		March 31, 2008		net revs.		(Decrease)

Platform net revenues
MMOG	$	271	42	%	$	269	83	%	$	2
Platform net revenues:
MMORPG												$	314	35	%	$	275	86	%	$	39

PC		25	4	%		31	10	%		(6	)
PC and other												46		5		12		4		34

Console
Sony PlayStation 3	60		9	%	1		0	%	59			131		15		2		1		129
Sony PlayStation 2	57		9	%	12		4	%	45			40		4		13		4		27
Sony PlayStation												—		—		1		—		(1		)
Microsoft Xbox360	72		11	%	1		0	%	71			198		22		2		1		196
Nintendo Wii	83		13	%	2		1	%	81			134		15		4		1		130

Total Console		272	42	%		16	5	%		256
Total console												503		56		22		7		481

Hand-held		81	12	%		7	2	%		74		32		4		11		3		21

Total Platform net revenues		649	100	%		323	100	%		326
Total platform net revenues												895		100	%	320		100	%	575
Distribution	56				—				56			85				—				85
Activision Blizzard’s non-core exit operations		6				3				3		1				5				(4		)

Total consolidated net revenues	$	711			$	326			$	385		$	981			$	325			$	656

	Nine months ended September 30,		% of total platform		Nine months ended September 30,		% of total platform		Increase/
	2008		net revs.		2007		net revs.		(Decrease)

Platform net revenues
MMOG	$	828	63	%	$	746	84	%	$	82

PC		50	4	%		67	8	%		(17	)

Console
Sony PlayStation 3	77		6	%	12		1	%	65
Sony PlayStation 2	80		6	%	30		3	%	50
Microsoft Xbox360	88		6	%	6		1	%	82
Nintendo Wii	90		7	%	5		1	%	85

Total console		335	25	%	53		6	%	282

Hand-held		102	8	%	21		2	%	81

Total Platform net revenues		1,315	100	%	887		100	%	428
Distribution		56			—				56
Activision Blizzard’s non-core exit operations		16			9				7

Total consolidated net revenues	$	1,387			$	896			$	491

	Three months				Three months						Three months				Three months
	ended September 30,		% of consolidated		ended September 30,		% of consolidated		Increase/		ended March 31,		% of consolidated		ended March 31,		% of consolidated		Increase/
	2008		net revenues		2007		net revenues		(Decrease)		2009		net revenues		2008		net revenues		(Decrease)

Product costs	$	279	39	%	$	31	9	%	$	248	$	296	30	%	$	35	11	%	$	261
Software royalties and amortization	50		7	%	5		2	%	45		72		7		21		7		51
Intellectual property licenses	36		5	%	1		0	%	35		64		7		2		1		62
MMOG	43		6	%	40		12	%	3
MMORPG											52		5		49		14		3

	Nine months				Nine months
	ended September 30,		% of consolidated		ended September 30,		% of consolidated		Increase/
	2008		net revenues		2007		net revenues		(Decrease)

Product costs	$	350	25	%	$	95	10	%	$	255
Software royalties and amortization	88		6	%	14		2	%	74
Intellectual property licenses	45		3	%	5		1	%	40
MMOG	123		9	%	146		16	%	(23		)

			% of				% of
	September 30,		Activision & Blizzard		September 30,		Activision & Blizzard		Increase/
	2008		net revenues		2007		net revenues		(Decrease)

Three months ended	$	200	31	%	$	117	36	%	$	83
Nine months ended	414		31	%	327		37	%	87

	March 31,		% of consolidated		March 31,		% of consolidated		Increase/
	2009		net revenues		2008		net revenues		(Decrease)

Three months ended	$	117	12	%	$	104	32	%	$	13