25th Anniversary

2004 Annual ReportFinancial Highlights
2004

2003

2002

$947,656
109,81777,7150.54$864,116
94,847
66,1800.43$786,434
80,57452,2380.39

In thousands of dollars, except per share data

Net revenues
Operating income
Net earnings
Diluted earnings per share

Net Revenues

Net Earnings

in millions of dollars

Diluted Earnings

in millions of dollars

per common share

$78

$948

$0.54

$864
$66

$786

$0.43
$0.39

$52

‘02

‘03

‘04

‘02

‘03

‘04

‘02

‘03

‘04

Activision, Inc. — 2004 Annual Report

Robert A. Kotick

Brian G. Kelly

Ronald Doornink

To our shareholders:
Two thousand and four marks a milestone in Activision’s history—25 years of delivering
quality interactive entertainment experiences to consumers worldwide. Few companies
have created a business model that laid the foundation for a multi-billion dollar industry.
Activision can rightfully make this claim and we are proud to be at the helm of such a
tradition-rich enterprise.
Throughout Activision’s evolution, our goal has been to create a company that is wellintegrated and capable of delivering long-term value to our shareholders. We haveworked diligently to build a company that has the flexibility to seize opportunities, yet
maintains the foresight to anticipate challenges and plan for its future. In fiscal 2004,
our vision translated into the most successful year in our history.
We delivered our 12th consecutive year of revenue growth, posted record earnings andincreased our operating margin. Our results represent a five-year compound annual
revenue growth rate of 17% and compound annual earnings growth rate of 39%. We
further enhanced our balance sheet ending the year with $588 million in cash andshort-term investments, low days sales outstanding, a solid inventory position and $833
million in shareholder equity.
We successfully created two wholly owned game properties— Call of Duty and True
Crime: Streets of L.A.—and introduced a new direction for the Tony Hawk brand,
resulting in three franchises from which we can develop a variety of games for multiple
platforms. According to NPD, Chart Track, GfK and Media Control, each of thesegames has sold more than one million units with life to date revenues from the Tony
Hawk franchise exceeding $800 million worldwide.
During the fiscal year, we substantially strengthened our business and remained focusedon three key initiatives—developing and expanding our intellectual property portfolio,building our development capabilities and strengthening our market presence. In addition
to creating three original game properties, we expanded our relationships withDreamWorks, LucasArts Entertainment Company and Columbia Pictures/Marvel
Enterprises, Inc. These activities will not only increase our range of product offerings but
should also enhance the consistency and predictability of our future financial results.
Under our agreement with DreamWorks, we acquired the rights to publish games basedon the blockbuster film “Shrek 2” as well as DreamWorks’ next three animated featurefilms, “Shark Tale,” “Madagascar” and “Over the Hedge.” We expanded our role with
LucasArts Entertainment Company to publish and distribute LucasArts’ video game
console and PC products in more than 60 countries in Europe and Africa. Additionally,
we recently expanded our agreement with Columbia Pictures/Marvel Enterprises, Inc. topublish games based on the upcoming feature film “Spider-Man 3,” which is set for
release in May 2007.

page 1

Activision, Inc. — 2004 Annual Report

We added resources to our internal development studios through the acquisition ofInfinity Ward which created Call of Duty, the #1 best-selling PC game in the U.S.
during the holiday season. Additionally, we expanded our relationships with retailers andincreased our shelf space around the world.
Earlier this year, we announced a strategic alliance with Nielsen Entertainment to work
together to create a reliable measurement of the effectiveness of in-game advertising.
We believe that there will be exciting opportunities in the future to leverage the billions ofhours that consumers spend playing games annually into advertising revenues. The firststep in this initiative is a Nielsen research study to better understand the demographic
makeup of U.S. households with a video game console and/or PC gaming system;an analysis of the relationship between video gaming and television viewing; and an
investigation into how the video game playing community perceives in-game advertising.
Nielsen will be developing a standardized methodology to measure advertising metrics invideo games, in the same manner that they have created standardized measurement
metrics for other forms of media including television and in-theater advertising. Nielsen
will be able to provide advertisers with the tools to gauge effectively everything fromin-game ad exposure, reach and frequency, to audience recall. They will develop these
metrics in a language that makes it possible for media buyers to evaluate in-gameadvertising the same way they evaluate other media opportunities.
We also announced our support for two new hand-held platforms—the Nintendo DS
and Sony’s PlayStation Portable (PSP). We expect to have games available at thelaunch of these systems. Hand-held gaming has been a popular form of entertainment
since the introduction of the Game Boy in 1989 and we expect that these newdevices will continue to broaden its appeal.
While our primary focus is increasing the sales of our titles, there are new and exciting
opportunities for growth in the future. We are especially enthusiastic about threedevelopments—online interaction, broadband penetration and increased production values.
Online interaction will create more personal interest and engagement. Today, the majority
of console game playing takes place alone. The second most popular way to play is in thesame room with a sibling or friend. Playing with others over the Internet through Xbox
Live or the PlayStation2 is a relatively new concept, but it is a big part of the future.
The maturity of broadband will make this interaction possible. The telecom industry continues to provide substantial incentives for investment in broadband meaning critical infrastructure growth is on the way. We believe the tipping point for industry-changing playerinteraction could occur when broadband reaches 50 to 60 percent of households.
Penetration today is about 45 percent, so we are getting closer.
And as the presence of broadband increases, especially wireless broadband, we will
deliver games to more platforms and more devices including cell phones, tablet computersand even PDAs.

page 2

Activision, Inc. — 2004 Annual Report

Production values, the way games look and sound, continue to increase as console
technology advances and we expect that the production values of the next generationof console systems will approximate those of movies and TV. In 1981, “ER” and “Jurassic
Park” creator Michael Crichton made a movie called “Looker,” about a scheme toreplace actors with computer-generated images indistinguishable from real people. It
seemed fantasy then, but today’s computer-made imagery does look real enough to foolthe casual observer.
The technology that makes possible these visual advances (and audio advances, too,
which already approximate reality) also allows us to move beyond linear storytelling toplayer-controlled development of characters and plots. Players will transcend the standard
video game quest experience to affect the plot of the story, character behavior,settings and background, and even the nature and degree of interaction itself.
We think of it as a shift from re-creating a part in an action movie, to actually taking on
the role in a virtual arena, defining and experiencing it through players’ own choices.
For the past 25 years, Activision has been at the forefront of the video game industry.
Today, our business, the business of creating quality interactive entertainment experiencesand distributing them worldwide, spans the most dynamic part of the digital economy
with high prospects of continued expansion.
Activision’s strength and purpose reside in the shared values that bring so many extraordinarily talented employees here and cause them to invest their abilities, artistry andtime in our company. We believe that by seeking a broad diversity of talent and ambition, we make ourselves stronger. We carry out this belief inside the company through theway that we hire, promote and compensate our employees and outside the company inour commitment to community building initiatives. This year, our support for community
involvement has never been stronger. We forged an alliance with the Tomorrow’s Leaders
program which provides more than 4,000 youths with a strong foundation for academic,
social and technological success. Many of our employees are involved with the program’s
volunteer activities that aim to help participants learn about positive peer interaction,complete their homework and teach them computer skills.
As we look ahead, we are determined that Activision will remain focused on innovation,
imagination and finding new ways to better serve our customers and reward our
employees and shareholders. We will always seek to stand for quality entertainment, andwe are more confident than ever that we will meet this responsibility and be tomorrow
what we have been for the past 25 years, one of the world’s leading interactive
entertainment companies.
Sincerely,

Robert A. Kotick
Chairman and CEO

Brian G. Kelly
Co-Chairman

Ronald Doornink
President

page 3

Activision, Inc. — 2004 Annual Report

Activision, Inc. — 2004 Annual ReportCapitalizing on 25 Years

page 4of Achievement

page 5

Twenty-fiveyears of delivering quality &choiceCan fun be serious business? At Activision we think so. Every day, millions of people aroundthe world are entertained by our games. Over the past quarter century, we have built oneof the largest portfolios of recognized brands and in fiscal 2005 expect to release ourstrongest game slate ever. The company’s lineup is comprised of high-profile entertainment
properties and titles created by some of the industry’s premier development talent.
Our release schedule includes games based on such highly anticipated movies as “Shrek 2”;“Spider-Man 2”; “DreamWorks’ Shark Tale”; and “Lemony Snicket’s A Series of
Unfortunate Events”; as well as id Software’s gripping 3D action game DOOM 3;Tony Hawk’s Underground 2, the sequel to the best-selling action sports game;
X-Men Legends, the first 3D action role-playing game based on the renowned Marvel
X-Men characters; The Creative Assembly’s award-winning real-time strategy game
Rome: Total War; the newest installment in the award-winning Call of Duty series,
Call of Duty: Finest Hour; and Vampire: the Masquerade Bloodlines, an action roleplaying game based on the popular White Wolf book series.

Innovative

marketing programs that drive

sales

Aggressive marketing is not a new concept at Activision. In support of our fiscal year
2004 holiday titles, we increased our trade and consumer marketing programs and raised
awareness for our products through in-store merchandising, as well as in-theater, print,
online and television advertising. This strategy drove sales of our key titles at launch andfor several months post launch.
In fiscal year 2005, the company will continue to focus on initiatives that will broaden
consumer awareness of our games. We are partnering with our retailers on new programs
that mark a series of firsts for our company and the industry. This year we introduced
pre-order programs at several key accounts and were successful in having our products
removed from glass cases and showcased in floor displays at our top retail accounts.

Developing

the games that audiencescrave

In video games, great gameplay rules. The foundation for Activision’s success has been
our ability to develop franchises from which we can produce high-quality entertainment
products year after year. Innovation, technical achievements and compelling gameplay
experiences have made us a leading developer for the PC and console platforms. At thecore of our success is our proprietary “Greenlight Process,” a disciplined methodology forthe selection, development, production and quality assurance of our titles.
With our recent acquisition of Infinity Ward, we now have eight wholly owned studios andemploy more than 700 of the best artists, programmers, designers and storytellers in theindustry. In addition to our own studio operations, we have forged long-term partnerships
with some of the premier independent developers including id Software, Peter Molyneaux’s
Lionhead Studios and The Creative Assembly. Each of these extraordinarily talented
development teams continues to revolutionize the game development process throughtheir technical mastery and originality.

Activision, Inc. — 2004 Annual Report

Financial Review

Selected Consolidated Financial Data

13

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

14

Report of Independent Registered Public Accounting Firm

41

Consolidated Balance Sheets

42

Consolidated Statements of Operations

43

Consolidated Statements of Changes in Shareholders’ Equity

44

Consolidated Statements of Cash Flows46

Notes to Consolidated Financial Statements

47

Market for Registrant’s Common Equity, Related Stockholder Mattersand Issuer Purchases of Equity Securities

74

page 12

Activision, Inc. — 2004 Annual Report

Selected Consolidated Financial Data
The following table summarizes certain selected consolidated financial data, which should be read in conjunction with
our Consolidated Financial Statements and Notes thereto and with Management’s Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere herein. The selected consolidated financial data presented
below as of and for each of the fiscal years in the five-year period ended March 31, 2004 are derived from our
audited consolidated financial statements. The Consolidated Balance Sheets as of March 31, 2004 and 2003 andthe Consolidated Statements of Operations and Consolidated Statements of Cash Flows for each of the fiscal years
in the three-year period ended March 31, 2004, and the reports thereon, are included elsewhere in this Annual Report.
Restated(1)(In thousands, except per share data)

2004(2)

2003(2)

2002(2)

2001

2000

$947,656
475,541$ 864,116
440,977$786,434
435,725$620,183
324,907$572,205
319,422

91,606
109,817

124,196
94,84799,00680,57489,70239,807

91,238(30,325)

115,992
77,7150.58
0.54

103,407
66,1800.46
0.43

83,12052,2380.46
0.39

32,54420,5070.24
0.22(38,736)(34,088)(0.41)(0.41)

133,249

144,359

113,966

83,921

83,334

144,893

155,483

133,775

92,475

83,334

Operating activities
Investing activities
Financing activities

67,403(15,169)
117,569

90,975(155,101)
64,090111,792(8,701)50,402

81,565(8,631)
2,547

2,883
(25,041)
42,028

As of March 31,

2004(2)

2003(2)

2002(2)

2001

2000

$675,796$ 422,500$333,199$182,980$158,225

587,649

406,954

279,007

125,550

49,985

135,201
76,493968,817—
832,738

107,92168,019704,816
2,671
597,740

56,74235,992556,8873,122
430,091

42,205
10,316359,957
63,401
181,306

40,80812,347309,737
73,778132,009

Year ended March 31,
Statement of Operations Data:

Net revenues
Cost of sales—product costs
Cost of sales—intellectual property licenses
and software royalties and amortization
Income (loss) from operations
Income (loss) before income tax provision(benefit)
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Basic weighted average common shares
outstanding
Diluted weighted average common shares
outstanding
Cash Provided by (Used in):

Balance Sheet Data:

Working capitalCash, cash equivalents and short-term
investments
Capitalized software development andintellectual property licenses
Goodwill
Total assets
Long-term debt
Shareholders’ equity(1) Consolidated financial information for fiscal years 2003–2000 has been restated for the effect of our three-for-two stock split effected in the form of a 50% stock
dividend to shareholders of record as of February 23, 2004, paid March 15, 2004.
(2) Effective April 1, 2001, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangibles.”
SFAS No. 142 addresses financial accounting and reporting requirements for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill isdeemed to have an indefinite useful life and should not be amortized but rather tested at least annually for impairment. In accordance with SFAS No. 142, wehave not amortized goodwill during the years ended March 31, 2004, 2003 and 2002.

page 13

Activision, Inc. — 2004 Annual ReportManagement’s Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Our BusinessWe are a leading international publisher of interactive entertainment software products. We have built a company
with a diverse portfolio of products that spans a wide range of categories and target markets and that is used on avariety of game hardware platforms and operating systems. We have created, licensed and acquired a group of highly
recognizable brands, which we market to a variety of consumer demographics.
Our products cover game categories such as action/adventure, action sports, racing, role-playing, simulation,
first-person action and strategy. Our target customer base ranges from game enthusiasts and children to massmarket consumers and “value” buyers. We currently offer our products primarily in versions that operate on the SonyPlayStation 2 (“PS2”), Nintendo GameCube (“GameCube”) and Microsoft Xbox (“Xbox”) console systems, Nintendo
Game Boy Advance (“GBA”) hand-held device and the personal computer (“PC”). The installed base for this current
generation of hardware platforms is significant and growing. We believe recent price cuts in calendar 2004 on theXbox and PS2 hardware should continue to drive the growth of the installed base of these two platforms. We also
expect the installed base of the other current-generation platforms to continue to grow. In addition, Sony announced
that it would be entering the hand-held hardware market with the introduction of its hand-held gaming device,
PlayStation Portable (“PSP”). PSP is currently expected to be released in the United States toward the end of the firstquarter of calendar 2005. Nintendo has also announced that it plans to launch a new dual-screened, portable gamesystem, Nintendo Dual Screen (“NDS”), before the end of calendar 2004. We are currently developing titles for the
PSP and the NDS with the objective of having one or more titles at launch for each of these platforms. We are alsoplanning to develop titles for the next-generation console systems expected to be developed by Sony, Microsoft andNintendo for release in the next two to three years. Though there are still many unknowns relating to these newplatforms, our aim is to have a significant presence at the launch of each new platform while being careful not to moveaway too quickly from the current generation platforms given their large and growing installed base.
Our publishing business involves the development, marketing and sale of products directly, by license or through ouraffiliate label program with certain third-party publishers. In the United States, we primarily sell our products on a direct
basis to mass-market retailers, consumer electronics stores, discount warehouses and game specialty stores. We conduct
our international publishing activities through offices in the United Kingdom (“UK”), Germany, France, Italy, Australia,
Sweden, Canada and Japan. Our products are sold internationally on a direct-to-retail basis, through third-party
distribution and licensing arrangements and through our wholly-owned European distribution subsidiaries. Our distribution business consists of operations located in the UK, the Netherlands and Germany that provide logistical and sales
services to third-party publishers of interactive entertainment software, our own publishing operations and manufacturersof interactive entertainment hardware.
Our profitability is directly affected by the mix of revenues from our publishing and distribution businesses. Operating
margins realized from our publishing business are substantially higher than margins realized from our distribution business.
Operating margins in our publishing business are affected by our ability to release highly successful or “hit” titles. Thoughmany of these titles have substantial production or acquisition costs and marketing budgets, once a title recoups
these costs, incremental net revenues directly and positively impact our operating margin. Operating margins in our
distribution business are affected by the mix of hardware and software sales, with software producing higher margins
than hardware.
Our Focus

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

page 14

Activision, Inc. — 2004 Annual Report

A number of our fiscal 2005 “big propositions” will include well-established brands, which are backed by highprofile intellectual property and/or highly anticipated motion picture releases. Examples of these brands are our
superheroes and skateboarding brands. We have a long-term relationship with Marvel Enterprises through an exclusive
licensing agreement that expires in 2009. This agreement grants us the exclusive rights to develop and publish video
games based on Marvel’s comic book franchises Spider-Man, X-MEN, Fantastic Four and Iron Man. Through our
long-term relationship with Spider-Man Merchandising, LLP, we have completed the development of the video game
Spider-Man 2: The Movie, the sequel to the highly successful Spider-Man: The Movie, a key fiscal 2003 title release thathas continued to perform strongly into fiscal 2004. The video game release of Spider-Man 2: The Movie is scheduled
to coincide with the “Spider-Man 2” theatrical release in June 2004. We also recently announced that through ourlicensing agreement with Spider-Man Merchandising, LLP, we will be developing and publishing video games based on
Columbia Pictures/Marvel Enterprises, Inc.’s upcoming feature film “Spider-Man 3,” which is expected to be released in
May 2007. In addition, we have an exclusive licensing agreement with professional skateboarder Tony Hawk that
continues until 2015. The agreement grants us exclusive rights to develop and publish video games using Tony Hawk’s
name and his likeness. Through fiscal 2004, we have released five successful titles in the Tony Hawk franchise withcumulative net revenues of over $800.0 million, including the most recent, Tony Hawk’s Underground, which was
released in the third quarter of fiscal 2004. We will continue to promote our skateboarding franchise with the releasein fiscal 2005 of the sequel to the very successful Tony Hawk’s Underground.
We will also continue to develop new intellectual properties such as True Crime: Streets of L.A. and Call of Duty, whichwere originally released in the third quarter of fiscal 2004. These highly successful titles were both ranked by third-party
sales tracking agencies as among the top-five selling games for the holiday season. We expect to develop a variety ofgames on multiple platforms based on these two new original properties and hope to establish them as a sourceof recurring revenues. For example, in fiscal 2005, we are scheduled to release Call of Duty: Finest Hour which will be
released on multiple console platforms.
We will also continue to evaluate emerging brands that we believe have potential to become successful gamefranchises. For example, we have a multi-year, multi-property publishing agreement with DreamWorks SKG that grants
us the exclusive rights to publish video games based on DreamWorks SKG’s theatrical release “Shrek 2,” as well as
upcoming computer-animated films, “Shark Tale,” “Madagascar” and “Over the Hedge,” and their sequels. We also havean exclusive licensing agreement to develop and publish video games for the best-selling children’s book series, Lemony
Snicket’s A Series of Unfortunate Events, which is being developed for a feature film by Paramount Pictures,
Nickelodeon Movies and DreamWorks SKG.
In addition to acquiring or creating high profile intellectual property, we have also continued our focus on establishingand maintaining relationships with talented and experienced software development teams. We have strengthened ourinternal development capabilities through the acquisition in prior fiscal years of a number of talented and experienced
development companies. Most recently, in October 2003, we exercised our option to acquire the remaining 70%of the outstanding capital of Infinity Ward, the developer of our PC title, Call of Duty. We had acquired the initial
30% of Infinity Ward’s outstanding capital stock in May 2002. We also have development agreements with othertop-level, third-party developers such as id Software, Valve Corporation, Spark Unlimited, Lionhead Studios and The
Creative Assembly.
We are utilizing these developer relationships, new intellectual property acquisitions, new original intellectual property
creations and our existing library of intellectual property to further focus our game development on product lines thatwill deliver significant, lasting and recurring revenues and operating profits.

page 15

Activision, Inc. — 2004 Annual ReportManagement’s Discussion and Analysis of Financial Condition
and Results of Operations
Critical Accounting Policies

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 ourreported and expected financial results. For a detailed discussion on the application of these and other accounting
policies, see Note 1 to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Revenue Recognition. We recognize revenue from the sale of our products upon the transfer of title and risk of loss
to our customers. Revenue from product sales is recognized after deducting the estimated allowance for returns andprice protection. With respect to license agreements that provide customers the right to make multiple copies inexchange for guaranteed amounts, revenue is recognized upon delivery of such copies. Per copy royalties on sales thatexceed the guarantee are recognized as earned. In addition, in order to recognize revenue for both product sales andlicensing transactions, persuasive evidence of an arrangement must exist and collection of the related receivable must
be probable. Revenue recognition also determines the timing of certain expenses, including cost of sales—intellectual
property licenses and cost of sales—software royalties and amortization.
Allowances for Returns, Price Protection, Doubtful Accounts and Inventory Obsolescence. In determining the appropriate

unit shipments to our customers, we benchmark our titles using historical and industry data. We closely monitor andanalyze the historical performance of our various titles, the performance of products released by other publishers andthe 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 thedemands 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
Activision with respect to open and/or future invoices. The conditions our customers must meet to be granted the rightto return products or price protection are, among other things, compliance with applicable payment terms, delivery to us
of weekly inventory and sell-through reports, and consistent participation in the launches of our premium title releases.
We may also consider other factors, including the facilitation of slow-moving inventory and other market factors.
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 priceprotection for a particular title: historical performance of titles in similar genres, historical performance of the hardware
platform, historical performance of the brand, console hardware lifecycle, Activision sales force and retail customer feedback, industry pricing, weeks of on-hand retail channel inventory, absolute quantity of on-hand retail channel inventory,
Activision 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

page 16

Activision, Inc. — 2004 Annual Reportother 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.
Historically, total actual returns and price protection have not exceeded our allowance estimates. 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 acompetitor, 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 management makes different judgments or utilizes
different estimates in determining the allowances for returns and price protection.
Similarly, management must make estimates of the uncollectibility of our accounts receivable. In estimating theallowance 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 impact 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 theretail 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 ourinventory provision.
Software Development Costs. Software development costs include payments made to independent software developers
under development agreements, as well as direct costs incurred for internally developed products.

We account for software development costs in accordance with Statement of Financial Accounting Standard (“SFAS”)
No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” Softwaredevelopment costs are capitalized once 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 andgame design documentation. For products where proven technology exists, this may occur early in the development
cycle. Technological feasibility is evaluated on a product-by-product basis. Prior to a product’s release, we expense,as part of cost of sales—software royalties and amortization, capitalized costs when we believe such amounts are
not recoverable. Capitalized costs for those products that are cancelled or abandoned are charged to productdevelopment expense in the period of cancellation. Amounts related to software development which are not capitalized
are charged immediately to product development expense. We evaluate the future recoverability of capitalized amounts
on a quarterly basis. The recoverability of capitalized software development costs is evaluated based on the expected
performance of the specific products for which the costs relate. Criteria used to evaluate expected product performance
include: historical performance of comparable products using comparable technology; orders for the product prior to
its release; and estimated performance of a sequel product based on the performance of the product on which thesequel is based.
Commencing upon product release, capitalized software development costs are amortized to cost of sales—software
royalties and amortization based on the ratio of current revenues to total projected revenues, generally resulting in an
amortization period of six months or less. For products that have been released in prior periods, we evaluate the future
recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.

page 17

Activision, Inc. — 2004 Annual ReportManagement’s Discussion and Analysis of Financial Condition
and Results of Operations
Significant management judgments and estimates are utilized in the assessment of when technological feasibility isestablished, as well as in the ongoing assessment of the recoverability of capitalized costs. In evaluating the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts andestimates of additional development 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 actual impairment charge may be larger than originally estimated in any given quarter.
Intellectual Property Licenses. Intellectual property license costs represent license fees paid to intellectual property rights

holders for use of their trademarks, copyrights, software, technology or other intellectual property or proprietary rights inthe development of our products. Depending upon the agreement with the rights holder, we may obtain the rights to
use acquired intellectual property in multiple products over multiple years, or alternatively, for a single product.
We evaluate the future recoverability of capitalized intellectual property licenses on a quarterly basis. The recoverabilityof capitalized intellectual property license costs is evaluated based on the expected performance of the specificproducts in which the licensed trademark or copyright is to be used. As many of our intellectual property licenses extend
for multiple products over multiple years, we also assess the recoverability of capitalized intellectual property license
costs based on certain qualitative factors such as the success of other products and/or entertainment vehicles utilizing
the intellectual property, whether there are any future planned theatrical releases or television series based on theintellectual property and the rights holder’s continued promotion and exploitation of the intellectual property. Prior to therelated product’s release, we expense, as part of cost of sales—intellectual property licenses, capitalized intellectual
property costs when we believe such amounts are not recoverable. Capitalized intellectual property costs for those
products that are cancelled or abandoned are charged to product development expense in the period of cancellation.
Criteria used to evaluate expected product performance include: historical performance of comparable products using
comparable technology; orders for the product prior to its release; and estimated performance of a sequel productbased on the performance of the product on which the sequel is based.
Commencing upon the related product’s release, capitalized intellectual property license costs are amortized to cost of
sales—intellectual property licenses based on the ratio of current revenues for the specific product to total projected
revenues for all products in which the licensed property will be utilized. As intellectual property license contracts may
extend for multiple years, the amortization of capitalized intellectual property license costs relating to such contracts may
extend beyond one year. For intellectual property included in products that have been released, we evaluate the future
recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.
Significant management judgments and estimates are utilized in the assessment of the recoverability of capitalized costs.
In evaluating the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted
sales amounts and estimates of additional development costs to be incurred. If revised forecasted or actual productsales are less than and/or revised forecasted or actual costs are greater than the original forecasted amounts utilized in
the initial recoverability analysis, the actual impairment charge may be larger than originally estimated in any given
quarter. Additionally, as noted above, as many of our intellectual property licenses extend for multiple products overmultiple 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 therights holder’s continued promotion and exploitation of the intellectual property. Material differences may result in theamount and timing of charges for any period if management makes different judgments or utilizes different estimates in
evaluating these qualitative factors.

page 18

Activision, Inc. — 2004 Annual Report

Selected Consolidated Statements of Operations Data

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

Year ended March 31,

Net revenues
Costs and expenses:
Cost of sales—product costs
Cost of sales—software royalties
and amortization
Cost of sales—intellectual property
licenses
Product development
Sales and marketing
General and administrative
Total costs and expenses
Income from operations
Investment income, net
Income before income tax provision
Income tax provision
Net income

2004

2003

2002

$947,656

100%$864,116

100%$786,434100%

475,54150

440,97751

435,72556

59,744

6

79,1949

58,892

7

31,86297,859128,22144,61231014
545,002
56,971
100,646
46,4795
7
12
540,11440,96086,16144,0085
5
11
6837,83988

769,26989

705,86090

109,817
6,175

12
—

94,8478,560

11
180,5742,546

10
1115,992
38,27712
4

103,40737,22712
4

83,12030,882

11
4$ 77,715

8%$ 66,1808%$ 52,238

7%$446,812
479,224
21,62047%51
2$432,261
413,125
18,73050%48
2$404,905
368,799
12,73051%47
2$947,656

100%$864,116

100%$786,434100%$508,418
24,945
132,36976%
4
20$466,116
49,96699,89376%
8
16$312,986
119,177
117,34557%22
21665,73270

615,97571

549,50870

223,802
18,361
39,76179
7
14208,505
14,10325,53384
6
10

167,709
39,86529,3527117
12281,92430

248,14129

236,92630$947,656

100%$864,116

100%$786,434100%$ 93,223
16,59410%
2$ 79,139
15,7089%
2$ 68,675
11,8999%
1$109,81712%$ 94,847

11%$ 80,574

10%

Net Revenues by Territory:

United States
EuropeOther
Total net revenues
Net Revenues by Segment/Platform Mix:

Publishing:ConsoleHand-held
PC
Total publishing net revenues
Distribution:
ConsoleHand-held
PC
Total distribution net revenues
Total net revenues
Operating Income by Segment:

Publishing
Distribution
Total operating income

page 19

Activision, Inc. — 2004 Annual ReportManagement’s Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations—Fiscal Years Ended March 31, 2004 and 2003

Net income for the year ended March 31, 2004 was $77.7 million or $0.54 per diluted share, as compared to$66.2 million or $0.43 per diluted share for the year ended March 31, 2003.
Net Revenues

We primarily derive revenue from sales of packaged interactive software games designed for play on video game
consoles (such as the PS2, Xbox and GameCube), PCs and hand-held game devices (such as the GBA). We
also derive revenue from our distribution business in Europe that provides logistical and sales services to third-party
publishers of interactive entertainment software, our own publishing operations and third-party manufacturers of interactive entertainment hardware.
The following table details our consolidated net revenues by business segment and our publishing net revenues by territory
for the years ended March 31, 2004 and 2003 (in thousands):
Year ended March 31,

Publishing Net Revenues
North America
EuropeOther
Total International
Total Publishing Net Revenues
Distribution Net Revenues
Consolidated Net Revenues

2004

2003

Increase/(Decrease)

Percent
Change$446,812$432,261$14,5513%

197,300
21,620164,984
18,73032,316
2,890

20%
15%

218,920

183,71435,206

19%

665,732
281,924

615,975
248,141

49,75733,7838%
14%$947,656$864,116$83,540

10%Consolidated net revenues increased 10% from $864.1 million for the year ended March 31, 2003 to $947.7
million for the year ended March 31, 2004. This increase was generated by both our publishing and distribution
businesses. The increase in consolidated net revenue was driven by the following:• Strong performance of our fiscal 2004 third quarter releases of True Crime: Streets of L.A. and Tony Hawk’s
Underground for the PS2, Xbox and GameCube and Call of Duty for the PC. We continued to see strong salesof these titles through March 2004. In addition, we had strong results from several other titles released during fiscal 2004 including Return to Castle Wolfenstein, X2: Wolverine’s Revenge, Cabela’s Dangerous Hunts, Cabela’s Deer
Hunt 2004 Season, and in select European markets, Jedi Knight: Jedi Academy. We also had strong catalog sales
from a number of our franchises, including Spider-Man. Catalog sales are sales of titles released prior to thecurrent fiscal year.
• Publishing console net revenues increased by 9% from $466.1 million for the year ended March 31, 2003 to$508.4 million for the year ended March 31, 2004. As expected, within the mix of specific consoles, net
revenues from the sale of software for the prior generation console hardware systems, such as PS1, continued to
decline while the net revenues from the sale of software for the current generation of console hardware systems
continued to grow.

page 20

Activision, Inc. — 2004 Annual Report• Net revenues were positively impacted from titles selling at higher average retail prices throughout fiscal 2004 ascompared to fiscal 2003. As a result of the strong performance of our key fiscal 2004 releases, we were able tomaintain the original price points for those titles for an extended period of time.
• International net revenues benefited from the strong year-over-year strengthening of the Euro (“EUR”) and GreatBritish Pound (“GBP”) in relation to the U.S. dollar. We estimate that foreign exchange rates increased reported
net revenue by approximately $52.1 million. Excluding the impact of changing foreign currency rates, our international net revenue increased 4% year-over-year.
• The increase in publishing net revenues was offset by fewer titles released in fiscal 2004 as compared tofiscal 2003.
North America Publishing Net Revenue

March 31,
2004

% of
Consolidated
Net Revenue

March 31,
2003

% of
Consolidated
Net Revenue

Increase/(Decrease)

Percent
Change$446,81247%$432,261

50%$14,551

3%(In thousands)

Domestic publishing net revenues increased 3% from $432.3 million for the year ended March 31, 2003 to $446.8
million for the year ended March 31, 2004. The increase reflects the strong performance of our fiscal 2004 third
quarter releases of True Crime: Streets of L.A. and Tony Hawk’s Underground for the PS2, Xbox and GameCube andCall of Duty for the PC. We continued to see strong sales of these titles through March 2004. The increase in net
revenues was offset by fewer titles released in fiscal 2004 as compared to fiscal 2003.
International Publishing Net Revenue

March 31,
2004

% of
Consolidated
Net Revenue

March 31,
2003

% of
Consolidated
Net Revenue

Increase/(Decrease)

Percent
Change$218,920

23%$183,714

21%$35,206

19%(In thousands)

International publishing net revenues increased by 19% from $183.7 million for the year ended March 31, 2003 to$218.9 million for the year ended March 31, 2004. International publishing also saw strong results from our 2004
releases of True Crime: Streets of L.A. and Tony Hawk’s Underground for the PS2, Xbox and GameCube and Call of
Duty for the PC. We also had strong results from several other titles released during fiscal 2004 including Return toCastle Wolfenstein, X2: Wolverine’s Revenge and Jedi Knight: Jedi Academy. In addition, we had strong catalog sales from anumber of our franchises, including Spider-Man. There also was a positive strengthening of the EUR and the GBP in
relation to the U.S. dollar of approximately $22.2 million. Excluding the impact of changing foreign currency rates, ourinternational publishing net revenue increased 7% year-over-year. The increase in net revenues was offset by fewer titles
released in fiscal 2004 as compared to fiscal 2003.

page 21

Activision, Inc. — 2004 Annual ReportManagement’s Discussion and Analysis of Financial Condition
and Results of Operations
Publishing Net Revenue by Product Line

Publishing net revenues increased 8% from $616.0 million for the year ended March 31, 2003 to $665.7 million
for the year ended March 31, 2004. The following table details our publishing net revenues by platform and as apercentage of total publishing net revenues for the years ended March 31, 2004 and 2003 (in thousands):

Publishing Net Revenues
PC
ConsolePlayStation 2
Microsoft Xbox
Nintendo
GameCube
PlayStation
Other
Total Console
Hand-held
Game Boy AdvanceGame Boy Color
Total Hand-heldTotal Publishing
Net Revenues

Year Ended% ofYear Ended% ofMarch 31,
Publishing
March 31,
Publishing
Increase/
2004
Net Revenues
2003
Net Revenues (Decrease)

Percent
Change$132,369

20%$ 99,893

16%$ 32,476

33%

289,048
145,11143%
22%260,30775,32942%
12%28,741
69,782

11%
93%

52,90920,843
507

8%
3%
—%

74,69452,722
3,064

12%
9%
1%

(21,785)(31,879)(2,557)

(29%)
(60%)
(83%)

508,41876%

466,11676%

42,302

9%24,621324

4%—%44,060
5,906

7%
1%

(19,439)(5,582)

(44%)
(95%)

24,945

4%

49,966

8%(25,021)(50%)$665,732

100%$615,975100%$ 49,757

8%

Personal Computer Net Revenue

March 31,
2004

% of
Publishing
Net Revenue

March 31,
2003

% of
Publishing
Net Revenue

Increase/(Decrease)

Percent
Change$132,369

20%$99,893

16%$32,476

33%(In thousands)

Net revenue from sales of titles for the PC increased 33% from $99.9 million for the year ended March 31, 2003
to $132.4 million for the year ended March 31, 2004. Though the number of premium PC titles released in fiscal
2004 remained relatively consistent with fiscal 2003, certain of our fiscal 2004 releases, Call of Duty, Empires: Dawnof the Modern World and, in select European markets, Jedi Knight: Jedi Academy, performed very well in both the domestic
and international markets. According to NPD Group, a third-party sales tracking agency, Call of Duty was the number
one selling PC title in North America during the quarter of its release, our third quarter of fiscal 2004. We expect
fiscal 2005 PC publishing net revenues to increase as a percentage of total publishing net revenues over fiscal 2004
reflecting the release of more PC titles in fiscal 2005, including the highly anticipated Doom 3.

page 22

Activision, Inc. — 2004 Annual Report

PlayStation 2 Net Revenue

March 31,
2004

% of
Publishing
Net Revenue

March 31,
2003

% of
Publishing
Net Revenue

Increase/(Decrease)

Percent
Change$289,04843%$260,30742%$28,741

11%(In thousands)

Net revenue from sales of titles for the PS2 increased 11% from $260.3 million for the year ended March 31, 2003
to $289.0 million for the year ended March 31, 2004. Though the number of new PS2 titles reduced in fiscal 2004
to 10 from 13 in fiscal 2003, we were able to increase our PS2 sales in both the domestic and international markets.
The increase is primarily due to strong worldwide sales of several of our PS2 titles including True Crime: Streets of L.A.,
Tony Hawk’s Underground, X2: Wolverine’s Revenge, Return to Castle Wolfenstein, Cabela’s Dangerous Hunts and Cabela’s
Deer Hunt 2004 Season. We expect the growth of the installed base of PS2 hardware to be driven by the recent pricecut announced by Sony in May 2004.
Microsoft Xbox Net Revenue

March 31,
2004

% of
Publishing
Net Revenue

March 31,
2003

% of
Publishing
Net Revenue

Increase/(Decrease)

Percent
Change$145,111

22%$75,32912%$69,782

93%(In thousands)

Net revenue from sales of titles for the Xbox increased 93% from $75.3 million for the year ended March 31, 2003
to $145.1 million for the year ended March 31, 2004. Though the number of new Xbox titles remained relatively
consistent from fiscal 2003 to fiscal 2004, we were able to increase our Xbox sales in both the domestic andinternational markets. The increase is primarily due to strong worldwide sales of several of our Xbox titles including
True Crime: Streets of L.A., Tony Hawk’s Underground, Return to Castle Wolfenstein, Soldier of Fortune 2, X2: Wolverine’s
Revenge, Tenchu: Return from Darkness and, in select European markets, Jedi Knight: Jedi Academy. The increase was also
due to an increased installed base of the Xbox. We expect the growth of the installed base of Xbox hardware to be
driven by the recent price cut announced by Microsoft in March 2004.
Nintendo GameCube Net Revenue

March 31,
2004

% of
Publishing
Net Revenue

March 31,
2003

% of
Publishing
Net Revenue

Increase/(Decrease)

Percent
Change$52,9098%$74,69412%$(21,785)(29%)(In thousands)

Net revenue from sales of titles for the Nintendo GameCube decreased 29% from $74.7 million for the year ended
March 31, 2003 to $52.9 million for the year ended March 31, 2004. The decrease is primarily due to a reductionin the number of GameCube new title releases from 9 in fiscal 2003 to 5 in fiscal 2004. The titles that were releasedfor GameCube performed strongly, including Tony Hawk’s Underground and True Crime: Streets of L.A. We expect the
installed base of GameCube hardware to continue to grow at its current low price point.

page 23

Activision, Inc. — 2004 Annual ReportManagement’s Discussion and Analysis of Financial Condition
and Results of Operations
PlayStation Net Revenue

March 31,
2004

% of
Publishing
Net Revenue

March 31,
2003

% of
Publishing
Net Revenue

Increase/(Decrease)

Percent
Change$20,8433%$52,7229%$(31,879)(60%)(In thousands)

Net revenue from sales of titles for the Sony PlayStation console system (“PS1”) for the year ended March 31, 2004
decreased 60% from the prior fiscal year, from $52.7 million to $20.8 million. The decrease was expected due to themarket transition away from the prior generation of hardware platforms, such as PS1, to the current generation console
systems. We expect sales of PS1 products to continue to decline in fiscal 2005.
Game Boy Advance Net Revenue

March 31,
2004

% of
Publishing
Net Revenue

March 31,
2003

% of
Publishing
Net Revenue

Increase/(Decrease)

Percent
Change$24,6214%$44,060

7%$(19,439)(44%)(In thousands)

Net revenue from sales of titles for the GBA for the year ended March 31, 2004 decreased 44% from the priorfiscal year, from $44.1 million to $24.6 million. This is due to a decrease in the number of GBA games released
year-over-year. In fiscal 2003, we released 11 GBA titles, whereas in fiscal 2004 we released 4 GBA titles. We
expect the hand-held installed base to grow with the release of the NDS and PSP which are expected to launchin late calendar year 2004 and early calendar year 2005, respectively. In addition, in fiscal 2005, as the GBA
hardware approaches the peak of its life cycle, we expect to increase our focus on developing GBA games for massmarket consumers.
The platform mix of our future publishing net revenues will likely be impacted by a number of factors, including theability of hardware manufacturers to continue to increase their installed hardware base, the introduction of new hardware platforms, as well as the timing of key product releases from our product release schedule. We expect that net
revenues from console titles will continue to represent the largest component of our publishing net revenues with PS2
having the largest percentage of that business due to its larger installed hardware base. We expect net revenues fromhand-held titles to remain the smallest component of our publishing net revenues. However, if the PSP and/or the NDS
hand-held devices are introduced in fiscal 2005, we may see an increase in our hand-held business in comparison toprior periods. Our net revenues from PC titles will be primarily driven by our product release schedule.
A significant portion of our revenues and profits are derived from a relatively small number of popular titles and brands
each year as revenues and profits are significantly affected by our ability to release highly successful or “hit” titles. For
example, for the year ended March 31, 2004, 28% of our consolidated net revenues and 40% of worldwide
publishing net revenues were derived from net revenues from our Tony Hawk’s Underground and True Crime: Streetsof L.A. titles. Though many of these titles have substantial production or acquisition costs and marketing budgets, oncea title recoups these costs, incremental net revenues directly and positively impact operating profits resulting in a
disproportionate amount of operating income being derived from these select titles. We expect that a limited number of
titles and brands will continue to produce a disproportionately large amount of our net revenues and profits.

page 24

Activision, Inc. — 2004 Annual Report

Two factors that could affect future publishing and distribution net revenue performance are console hardware pricing
and software pricing. As console hardware moves through its life cycle, hardware manufacturers typically enact pricereductions. Reductions in the price of console hardware typically result in an increase in the installed base of hardware
owned by consumers. Price cuts on Xbox and PS2 hardware were announced in March and May 2004, respectively.
Historically, we have also seen that lower console hardware prices put downward pressure on software pricing. While
we expect console software launch pricing for most genres to hold at $49.99 through the calendar 2004 holidays,
we believe we could see additional software price declines thereafter.
Distribution Net Revenue

March 31,
2004

% of
Consolidated
Net Revenue

March 31,
2003

% of
Consolidated
Net Revenue

Increase/(Decrease)

Percent
Change$281,92430%$248,141

29%$33,783

14%(In thousands)

Distribution net revenues for the year ended March 31, 2004 increased 14% from the prior fiscal year, from $248.1
million to $281.9 million. The increase was primarily due to the positive impact of the year-over-year strengthening of
the EUR and the GBP in relation to the U.S. dollar. Excluding the impact of the changing foreign currency rates, ourdistribution net revenue was in line with our prior fiscal year, with a slight increase of 2% year-over-year. The mix of
distribution net revenues between hardware and software sales varied year-over-year with approximately 28%
hardware in the year ended March 31, 2004 as compared to 38% hardware in the prior fiscal year. This is mainly
attributed to an increase in business with large, mass-market customers that generate a higher percentage of sales fromsoftware. In both fiscal years, hardware sales were principally comprised of sales of console hardware. The mix of future
distribution net revenues will be driven by a number of factors including the occurrence of further hardware price reductions instituted by hardware manufacturers, the introduction of new hardware platforms and our ability to establish andmaintain distribution agreements with hardware manufacturers and third-party software publishers. We are expecting our
fiscal 2005 distribution results to be in line with fiscal 2004.
Costs and Expenses
Cost of Sales—Product Costs

March 31,
2004

% of
Consolidated
Net Revenue

March 31,
2003

% of
Consolidated
Net Revenue

Increase/(Decrease)

Percent
Change$475,541

50%$440,977

51%$34,564

8%(In thousands)

Cost of sales—product costs represented 50% and 51% of consolidated net revenues for the years ended March 31,
2004 and 2003, respectively. In absolute dollars, cost of sales—product costs increased due to higher sales volume infiscal 2004 as compared to fiscal 2003. There were two primary factors that affected cost of sales—product costs asa percentage of consolidated net revenues:• The product mix of our publishing business for the year ended March 31, 2004 reflects a lower proportion of net
revenues from titles for hand-held devices, as compared to the year ended March 31, 2003. Titles for hand-helddevices generally have the highest manufacturing per unit cost of all platforms.
• Due to the lower manufacturing costs for PC titles, we were able to benefit from the strong sales of Call of Dutyfor the year ended March 31, 2004.

page 25

Activision, Inc. — 2004 Annual ReportManagement’s Discussion and Analysis of Financial Condition
and Results of Operations
We expect cost of sales—product costs as a percentage of net revenue to decrease primarily due to a lower percentage of revenue generated from our distribution business in fiscal 2005, which is a lower margin business. We may also
receive a benefit from changes in product mix in fiscal 2005 due to an increase in PC publishing net revenues as apercentage of total publishing net revenues and the focus on “big proposition” titles, for which we could benefit fromvolume discounts.
Cost of Sales—Software Royalties and Amortization

March 31,
2004

% of
Publishing
Net Revenue

March 31,
2003

% of
Publishing
Net Revenue

Increase/(Decrease)

Percent
Change$59,7449%$79,194

13%$(19,450)(25%)(In thousands)

Cost of sales—software royalties and amortization for the year ended March 31, 2004 decreased as a percentageof publishing net revenues from the prior fiscal year, from 13% to 9%. In absolute dollars, cost of sales—software
royalties and amortization for the year ended March 31, 2004 also decreased from the prior fiscal year, from $79.2
million to $59.7 million. The decrease in absolute dollars reflects that there were approximately fifteen major titles
released in fiscal 2004 as compared to over twenty in fiscal 2003. The decrease in the percentage reflects the strong
performance of our internally developed key fiscal 2004 third quarter releases.
Cost of Sales—Intellectual Property Licenses

March 31,
2004

% of
Publishing
Net Revenue

March 31,
2003

% of
Publishing
Net Revenue

Increase/(Decrease)

Percent
Change$31,8625%$45,0027%$(13,140)(29%)(In thousands)

Cost of sales—intellectual property licenses for the year ended March 31, 2004 decreased in absolute dollars and asa percentage of publishing net revenues over the same period last year, from 7% to 5%. The decreases reflect the factthat two of our top performing titles in fiscal 2004, True Crime: Streets of L.A. and Call of Duty, were based on ourwholly-owned original intellectual property. Additionally, during fiscal 2003, we recorded an approximate $7.0 million
charge related to an assessment of the recoverability of certain of our investments in long-term licensing agreements.
We expect cost of sales—intellectual property licenses to increase in fiscal 2005 as compared to fiscal 2004, as we
expect to have more titles releasing with licensed intellectual property.
Product Development

March 31,
2004

% of
Publishing
Net Revenue

March 31,
2003

% of
Publishing
Net Revenue

Increase/(Decrease)

Percent
Change$97,85915%$56,9719%$40,888

72%(In thousands)

Product development expenses for the year ended March 31, 2004 increased as a percentage of publishing net
revenues from the prior fiscal year, from 9% to 15%. In absolute dollars, product development expenses for the year
ended March 31, 2004 also increased from the prior fiscal year, from $57.0 million to $97.9 million. The increase inproduct development as a percentage of publishing net revenues and in absolute dollars resulted from:page 26

Activision, Inc. — 2004 Annual Report• A $21 million game cancellation charge recorded in the fiscal 2004 third quarter. We executed a realignmentof our product portfolio driven by the evolution of the video game market, which is increasingly dominated byhigh quality products that are based on recognizable franchises and supported with big marketing programs. We
completed a comprehensive review of our product portfolio in which we evaluated each product based on anumber of criteria, including: the strength of the franchise, the projected product quality, the potential responsiveness of the product to aggressive marketing support and the financial risk in the event of product failure. As aresult of this review, we believe that we have an extensive slate of high potential properties in development.
However, we found that certain projects had a lower likelihood of achieving acceptable levels of operating
performance and that continued pursuit of these projects would create a substantial opportunity cost as it related
to our slate of high potential projects. Accordingly, in the three months ended December 31, 2003, we cancelled
the development of ten products that we believed were unlikely to produce an acceptable level of return on ourinvestment. In connection with the cancellation of these products, we recorded a pre-tax charge of approximately$21 million.
• Our increased emphasis on product quality and the lengthening of product development schedules. To maintainthe competitiveness of our products and to take advantage of increasingly sophisticated technology associatedwith new hardware platforms, we have increased the amount of time spent play-testing new products, conducted
more extensive product quality evaluations and lengthened product development schedules to allow time to makethe improvements indicated by our testing and evaluations. We are focused on improved game quality, and inmany cases, this has resulted in an increase in product development costs.
• The increase in absolute dollars is also due to an increase in studio employee incentive compensation as a resultof the strong performances of key fiscal 2004 title releases.
Sales and Marketing

March 31,
2004

% of
Consolidated
Net Revenue

March 31,
2003

% of
Consolidated
Net Revenue

Increase/(Decrease)

Percent
Change$128,221

14%$100,646

12%$27,575

27%(In thousands)

Sales and marketing expenses of $128.2 million and $100.6 million represented 14% and 12% of consolidated net
revenues for the years ended March 31, 2004 and 2003, respectively. The increase in sales and marketing expense
dollars and as a percentage of net revenues for the year ended March 31, 2004 from the prior fiscal year was
primarily generated by our publishing business as a result of significant marketing programs, including television andin-theatre ad campaigns and in-store promotions, run in support of our three key fiscal 2004 third quarter title releases,
Tony Hawk’s Underground, and our two new original properties, True Crime: Streets of L.A. and Call of Duty. We expect
to continue to provide significant marketing support for our future “big proposition” titles. Accordingly, we expect fiscal
2005 sales and marketing costs to exceed fiscal 2004 spending levels.
General and Administrative

March 31,
2004

% of
Consolidated
Net Revenue

March 31,
2003

% of
Consolidated
Net Revenue

Increase/(Decrease)

Percent
Change$44,6125%$46,479

5%$(1,867)(4%)(In thousands)

page 27

Activision, Inc. — 2004 Annual ReportManagement’s Discussion and Analysis of Financial Condition
and Results of Operations
General and administrative expenses for the year ended March 31, 2004 decreased $1.9 million over the same
period last year, from $46.5 million to $44.6 million. As a percentage of consolidated net revenues, general andadministrative expenses remained constant at 5%. The decrease in absolute dollars was primarily due to:• Lower bad debt expense of approximately $3.9 million.
• The incurrence in the first quarter of fiscal 2003 of $1.0 million of merger related expenses by our publishingbusiness.
• An approximate $2.0 million charge incurred in fiscal 2003 by our distribution business for the relocation of our
UK distribution facility.
Partially offset by:• A $5.2 million year-over-year increase in general and administrative employee related costs in both our publishingand distribution businesses.
Operating Income(In thousands)

Publishing
Distribution
Consolidated

March 31,
2004

% of
Segment
Net Revs

March 31,
2003

% of
Segment
Net Revs

Increase/(Decrease)

Percent
Change$ 93,223
16,59414%
6$79,139
15,70813%
6$14,084886

18%
6$109,81712%$94,847

11%$14,970

16%

Publishing operating income for the year ended March 31, 2004 increased $14.1 million from the same period lastyear, from $79.1 million to $93.2 million. International publishing operating income for the year ended March 31,
2004 benefited from the positive impact of the year-over-year strengthening of the EUR and the GBP in relation to
the U.S. dollar. Excluding the impact of changes in foreign currency rates, publishing operating income for the year
ended March 31, 2004 increased approximately $7.8 million from the same period last year. This increase is primarily due to:• Strong performance in both the domestic and international markets of our fiscal 2004 third quarter title releases.
Partially offset by:• Increased sales and marketing spending.
• The product development charge recorded in the fiscal 2004 third quarter in connection with the cancellation often products.
Distribution operating income for the year ended March 31, 2004 increased slightly over the same period last year,
from $15.7 million to $16.6 million. Distribution operating income for the year ended March 31, 2004 benefited fromthe positive impact of the year-over-year strengthening of the EUR and the GBP in relation to the U.S. dollar. Excluding
the impact of changes in foreign currency rates, distribution operating income for the year ended March 31, 2004 wasdown slightly by approximately $0.9 million from the same period last year. This decrease is primarily due to an increasein general and administrative employee related costs.
Investment Income, Net

March 31,
2004

% of
Consolidated
Net Revenue

March 31,
2003

% of
Consolidated
Net Revenue

Increase/(Decrease)

Percent
Change$6,175—%$8,5601%$(2,385)(28%)(In thousands)

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Activision, Inc. — 2004 Annual Report

Investment income, net for the year ended March 31, 2004 was $6.2 million as compared to $8.6 million for the year
ended March 31, 2003. The decrease was primarily due to interest rate reductions and the utilization of excess cash
to enter into structured stock repurchase transactions and to purchase treasury stock during the year ended March 31,
2004. Premiums earned on structured stock repurchase transactions are recorded in additional paid-in capital.
Provision for Income Taxes

March 31,
2004

% of
Pre-Tax
IncomeMarch 31,
2003

% of
Pre-Tax
IncomeIncrease/(Decrease)

Percent
Change$38,27733%$37,22736%$1,0503%(In thousands)

The income tax provision of $38.3 million for the year ended March 31, 2004 reflects our effective income tax rateof 33%. The significant items that generated the variance between our effective rate and our statutory rate of 35%
were research and development tax credits and the impact of foreign tax rate differentials, partially offset by anincrease in our deferred tax asset valuation allowance and state taxes. The realization of deferred tax assets depends
primarily on the generation of future taxable income. We believe that it is more likely than not that we will generatetaxable income sufficient to realize the benefit of net deferred tax assets recognized.
Results of Operations—Fiscal Years Ended March 31, 2003 and 2002

Net income for the year ended March 31, 2003 was $66.2 million or $0.43 per diluted share, as compared to$52.2 million or $0.39 per diluted share for the year ended March 31, 2002.
Net Revenues

Net revenues for the year ended March 31, 2003 increased 10% from the prior fiscal year, from $786.4 million to$864.1 million. This increase was generated by our publishing business and, to a lesser degree, our distribution business.
The following table details our consolidated net revenues by business segment and our publishing net revenues by territory for the years ended March 31, 2003 and 2002 (in thousands):
2003

2002

Increase/(Decrease)

Percent
Change$432,261$404,905$27,356

7%

164,984
18,730131,873
12,73033,111
6,000

25%
47%

Total International
Total Publishing Net Revenues
Distribution Net Revenues

183,714

144,603

39,111

27%

615,975
248,141

549,508
236,926

66,467
11,21512%
5%Consolidated Net Revenues$864,116$786,434$77,682

10%

Year ended March 31,

Publishing Net Revenues
North America
EuropeOther

page 29

Activision, Inc. — 2004 Annual ReportManagement’s Discussion and Analysis of Financial Condition
and Results of Operations
Publishing net revenues for the year ended March 31, 2003 increased 12% from the prior fiscal year, from $549.5
million to $616.0 million. The following table details our publishing net revenues by platform as a percentage of total
publishing net revenues for the years ended March 31, 2003 and 2002 (in thousands):

Publishing Net Revenues
PC
ConsolePlayStation 2
Microsoft Xbox
Nintendo
GameCube
PlayStation
Other
Total Console
Hand-held
Game Boy AdvanceGame Boy Color
Total Hand-heldTotal Publishing
Net Revenues

Year Ended% ofYear Ended% ofMarch 31,
Publishing
March 31,
Publishing
Increase/
2003
Net Revenues
2002
Net Revenues (Decrease)

Percent
Change$ 99,893

16%$117,345

21%$ (17,452)(15%)

260,30775,32942%
12%110,120
32,92120%
6%150,187
42,408136%
129%

74,69452,722
3,064

12%
9%
1%

16,773
113,655
39,5173%
21%
7%57,921(60,933)(36,453)

345%
(54%)
(92%)

466,11676%

312,98657%

153,13049%

44,060
5,906

7%
1%

79,16840,00915%
7%(35,108)(34,103)

(44%)
(85%)

49,966

8%

119,17722%(69,211)(58%)$615,975

100%$549,508

100%$ 66,467

12%

There were several factors that affected the fiscal 2003 net revenue performance of our publishing business. First,
positively impacting our performance, was an improvement in console sales. Our publishing console net revenues for theyear ended March 31, 2003 increased 49% from the prior fiscal year, from $313.0 million to $466.1 million. Fiscal
2003 publishing console net revenues reflect the simultaneous cross-platform, multi-national releases of Spider-Man:
The Movie in the first quarter and Tony Hawk’s Pro Skater 4 in the third quarter. In addition, publishing console net
revenue performance was also driven by the following releases: Tenchu: Wrath of Heaven, Street Hoops and Cabela’s Big
Game Hunter for PS2. Second, publishing hand-held net revenues for the year ended March 31, 2003 decreased by
58% from the prior fiscal year, from $119.2 million to $50.0 million. This decrease reflects the fact that the GBA
hardware was launched in June 2001. Our GBA software sales for the year ended March 31, 2002 benefited fromthe related hardware launch. We also released fewer titles for the hand-held platforms in fiscal 2003—11 titles, incomparison to 19 titles in fiscal 2002. Additionally, the average retail price of titles for hand-held devices was lower infiscal 2003 than in fiscal 2002. Third, PC net revenues for the year ended March 31, 2003 decreased 15% fromthe prior fiscal year, from $117.3 million to $99.9 million. Though the number of PC titles released in fiscal 2003 wasrelatively consistent with fiscal 2002, during fiscal 2002, we released Return to Castle Wolfenstein for the PC, which
was one of our top performing titles of fiscal 2002. PC net revenues for the year ended March 31, 2002 reflect that
title’s worldwide strong performance. Lastly, net revenues from our international publishing business for the year ended
March 31, 2003 benefited by approximately $14.1 million from a year-over-year strengthening of
the EUR and the GBP in relation to the U.S. dollar. Excluding the impact of foreign currency fluctuations, our domestic publishing business and our international publishing business experienced similar year-over-year improvements for thereasons detailed above.

page 30

Activision, Inc. — 2004 Annual Report

A significant portion of our revenues and profits are derived from a relatively small number of popular titles and brands
each year as revenues and profits are significantly affected by our ability to release highly successful or “hit” titles. For
example, for the year ended March 31, 2003, 30% of our consolidated net revenues and 43% of worldwide
publishing net revenues were derived from net revenues from our Spider-Man: The Movie and Tony Hawk’s Pro Skater 4
titles. Though many of these titles have substantial production or acquisition costs and marketing budgets, once a title
recoups these costs, incremental net revenues directly and positively impacts operating profits resulting in a disproportionate amount of operating income being derived from these select titles. We expect that a limited number of titles andbrands will continue to produce a disproportionately large amount of our net revenues and profits.
Distribution net revenues for the year ended March 31, 2003 increased 5% from the prior fiscal year, from $236.9
million to $248.1 million. The increase was due to the positive impact of the year-over-year strengthening of the
EUR and the GBP in relation to the U.S. dollar. Distribution console net revenues for the year ended March 31, 2003
also benefited from the international hardware launches of Xbox and GameCube in March 2002 and May 2002,
respectively. It additionally benefited from the price reduction on PS2 hardware that was effective September 2001,
as this resulted in both an increase in sales of PS2 hardware, as well as an increase in sales of PS2 software due tothe corresponding larger installed hardware base. This increase was partially offset by declines in distribution hand-heldand PC net revenues for the reasons detailed in the discussion of publishing net revenues. The mix of distribution net
revenues between hardware and software sales remained relatively constant year-over-year at approximately 38%
hardware and 62% software.
Domestic net revenues increased 7% from $404.9 million for the year ended March 31, 2002 to $432.3 million
for the year ended March 31, 2003 for the reasons detailed above in the discussion of our publishing businessnet revenues. International net revenues increased by 13% from $381.5 million for the year ended March 31, 2002
to $431.9 million for the year ended March 31, 2003 for the reasons detailed above in the discussion of ourpublishing business, as well as the result of the year-over-year strengthening of the EUR and the GBP in relation to the
U.S. dollar.
Costs and Expenses
Cost of Sales—Product Costs

March 31,
2003

% of
Consolidated
Net Revenue

March 31,
2002

% of
Consolidated
Net Revenue

Increase/(Decrease)

Percent
Change$440,977

51%$435,725

56%$5,252

1%(In thousands)

Cost of sales—product costs represented 51% and 56% of consolidated net revenues for the years ended March 31,
2003 and 2002, respectively. There were two primary factors that affected cost of sales—product costs as apercentage of consolidated net revenues. First, the product mix of our publishing business for the year ended March 31,
2003 reflects a lower proportion of net revenues from titles for hand-held devices, as compared to the year ended
March 31, 2002. Titles for hand-held devices generally have the highest manufacturing per unit cost of all platforms.
Second, our manufacturing costs for console titles for the year ended March 31, 2003 benefited from the economies
of scale due to the high volume of Spider-Man: The Movie units manufactured.
Cost of Sales—Software Royalties and Amortization

March 31,
2003

% of
Publishing
Net Revenue

March 31,
2002

% of
Publishing
Net Revenue

Increase/(Decrease)

Percent
Change$79,19413%$58,892

11%$20,302

34%(In thousands)

page 31

Activision, Inc. — 2004 Annual ReportManagement’s Discussion and Analysis of Financial Condition
and Results of Operations
Cost of sales—software royalties and amortization for the year ended March 31, 2003 increased as a percentageof publishing net revenues from the prior fiscal year, from 11% to 13%. In absolute dollars, cost of sales—software
royalties and amortization for the year ended March 31, 2003 also increased from the prior fiscal year, from $58.9
million to $79.2 million. The increases reflect the change in the product mix of our publishing business. Though titles
for hand-held devices generally have the highest per unit manufacturing cost of all platforms, they have the lowest
product development cost structure. In the year ended March 31, 2002 in which titles for hand-held devices
accounted for a higher proportion of publishing net revenues, the related cost of sales—software royalties and amortization was correspondingly low. This is in comparison to the year ended March 31, 2003 in which console titles
accounted for a higher proportion of publishing net revenues. Console titles such as PS2, Xbox and GameCube havehigh product development cost structures, and the release of titles on these platforms will result in a correspondingly
high cost of sales—software royalties and amortization. In addition, we recorded during the fourth quarter of fiscal
2003 approximately $8.0 million related to an assessment of the recoverability of capitalized development costs
pertaining to certain products.
Cost of Sales—Intellectual Property Licenses

March 31,
2003

% of
Publishing
Net Revenue

March 31,
2002

% of
Publishing
Net Revenue

Increase/(Decrease)

Percent
Change$45,0027%$40,1147%$4,88812%(In thousands)

Cost of sales—intellectual property licenses for the year ended March 31, 2003 remained constant as a percentageof publishing net revenues with the prior fiscal year at 7%. In absolute dollars, cost of sales—intellectual property
licenses for the year ended March 31, 2003 increased from the prior fiscal year, from $40.1 million to $45.0 million.
During the fourth quarter of fiscal 2003, we recorded an approximate $7.0 million related to an assessment of therecoverability of certain of our investments in long-term licensing agreements. We recorded additional costs relating tocommon stock warrants issued in connection with those licensing agreements. The impact of these costs was partially
offset by the fact that one of our top performing titles released in fiscal 2002 had a higher intellectual property
royalty rate structure than the majority of the top performing titles released in fiscal 2003.
Product Development

March 31,
2003

% of
Publishing
Net Revenue

March 31,
2002

% of
Publishing
Net Revenue

Increase/(Decrease)

Percent
Change$56,9719%$40,960

7%$16,01139%(In thousands)

Product development expenses for the year ended March 31, 2003 increased as a percentage of publishing net
revenues from the prior fiscal year, from 7% to 9%. In absolute dollars, product development expense for the year
ended March 31, 2003 also increased from the prior fiscal year, from $41.0 million to $57.0 million. These increases
reflect the change in the product mix of titles in development—more console and less hand-held—during fiscal 2003.
The cost to develop titles for current console systems, such as PS2, Xbox and GameCube, is higher than the cost to
develop titles for the legacy console systems and hand-held devices. Additionally, we had more titles in development
during fiscal 2003 than fiscal 2002. Lastly, in the fourth quarter of fiscal 2003, we decided to eliminate certain
smaller and non-core projects from our future development plan. The cost relating to the cancellation of those titles wasapproximately $2.6 million.

page 32

Activision, Inc. — 2004 Annual Report

Sales and Marketing

March 31,
2003

% of
Consolidated
Net Revenue

March 31,
2002

% of
Consolidated
Net Revenue

Increase/(Decrease)

Percent
Change$100,646

12%$86,161

11%$14,485

17%(In thousands)

Sales and marketing expenses of $100.6 million and $86.2 million represented 12% and 11% of consolidated net
revenues for the years ended March 31, 2003 and 2002, respectively. The increase in sales and marketing expense
dollars for the year ended March 31, 2003 from the prior fiscal year was the result of increased costs in both our
publishing and distribution businesses. The increase in sales and marketing expense dollars in our publishing business was
the result of a significant marketing program in support of the simultaneous cross-platform, multinational release of
Spider-Man: The Movie during the first quarter of fiscal 2003, as well as increased TV and print ads in support ofsecond, third and fourth quarter releases such as Street Hoops, Tony Hawk’s Pro Skater 4 and Tenchu: Wrath of Heaven.
Additionally, in the year ended March 31, 2003, we provided sponsorship for select action sports tours/tournaments insupport of our Activision action sports brands. The increase in sales and marketing expense dollars in our distribution
business was due to an increasing percentage of our distribution business being generated from large national accounts.
Such large national accounts generally result in increased sales costs.
General and Administrative

March 31,
2003

% of
Consolidated
Net Revenue

March 31,
2002

% of
Consolidated
Net Revenue

Increase/(Decrease)

Percent
Change$46,4795%$44,0086%$2,471

6%(In thousands)

General and administrative expenses for the year ended March 31, 2003 increased $2.5 million from the prior fiscal
year, from $44.0 million to $46.5 million. As a percentage of consolidated net revenues, general and administrative
expenses remained relatively constant year-over-year at approximately 5% to 6% as a result of our continued focus onbuilding operating efficiencies and controlling costs. The increase in absolute dollars was primarily due to the incurrencein the first quarter of fiscal 2003 of an approximate $2.0 million charge for the relocation of our UK distribution
facility due to the increased growth of our UK distribution and UK publishing businesses.
Operating Income(In thousands)

Publishing
Distribution
Consolidated

March 31,
2003

% of
Segment
Net Revenues

March 31,
2002

% of
Segment
Net Revenues

Increase/(Decrease)

Percent
Change$79,139
15,70813%
6$68,675
11,89912%
5$10,464
3,809

15%
32

$94,84711%$80,57410%$14,273

18%

Operating income for the year ended March 31, 2003 was $94.8 million, compared to $80.6 million in the priorfiscal year. The increase reflects improvements in both our publishing and distribution businesses. Publishing operating
income improvement reflects, as previously discussed, the benefits generated by the release of hit titles, the decrease incost of sales—product costs due to changes in product mix and our continued focus on building operating efficiencies
and controlling costs. Distribution operating income improvement includes the distribution of a very successful third-party
publisher’s title in several countries and reductions in headcount related expenses.

page 33

Activision, Inc. — 2004 Annual ReportManagement’s Discussion and Analysis of Financial Condition
and Results of Operations
Investment Income, Net

March 31,
2003

% of
Consolidated
Net Revenue

March 31,
2002

% of
Consolidated
Net Revenue

Increase/(Decrease)

Percent
Change$8,5601%$2,5461%$6,014236%(In thousands)

Investment income, net for the year ended March 31, 2003 was $8.6 million as compared to $2.5 million for theyear ended March 31, 2002. The increase is primarily due to higher average cash and short-term investment balances
during fiscal 2003, partially offset by lower market rates.
Provision for Income Taxes

March 31,
2003

% of
Pre-Tax
IncomeMarch 31,
2002

% of
Pre-Tax
IncomeIncrease/(Decrease)

Percent
Change$37,227

36%$30,88237%$6,34521%(In thousands)

The income tax provision of $37.2 million for the year ended March 31, 2003 reflects our effective income tax
rate of 36%. The significant items that generated the variance between our effective rate and our statutory rate of
35% were state taxes and an increase in our deferred tax asset valuation allowance, partially offset by research anddevelopment tax credits and the impact of foreign tax rate differentials. The realization of deferred tax assets depends
primarily on the generation of future taxable income. We believe that it is more likely than not that we will generatetaxable income sufficient to realize the benefit of net deferred tax assets recognized.
Quarterly Operating Results

Our quarterly operating results have in the past varied significantly and will likely vary significantly in the future, depending on numerous factors, several of which are not under our control. For a detailed description of these factors see ourForm 10-K filed with the Securities and Exchange Commission. Our business also has experienced and is expected tocontinue to experience significant seasonality, largely due to consumer buying patterns and our product release schedule focusing on those patterns. Net revenues typically are significantly higher during the fourth calendar quarter, primarily due to the increased demand for consumer software during the year-end holiday buying season. Accordingly, we
believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be
relied upon as indications of future performance.
The following table is a comparative breakdown of our quarterly results for the immediately preceding eight quarters(amounts in thousands, except per share data):
Restated(1)Quarter ended

Net revenues
Operating income (loss)
Net income (loss)
Basic earnings (loss)
per share
Diluted earnings (loss)
per share

March 31, Dec. 31,
2004
2003(2)

Sept. 30,
2003

June 30, March 31,
2003
2003(2)

Dec. 31,2002

Sept. 30,
2002

June 30,
2002$162,897 $508,511 $117,523 $158,725 $125,001 $378,685 $169,172 $191,258
4,643 116,961 (16,933)
5,146 (14,444)
66,761
11,334
31,196
6,664
76,981 (10,093)
4,163(7,957)44,347
9,086
20,7040.05

0.58(0.08)

0.03(0.06)

0.30

0.06

0.15

0.04

0.53

(0.08)

0.03(0.06)

0.28

0.06

0.14

(1) Consolidated financial information has been restated for the effect of our three-for-two stock split effected in the form of a 50% stock dividend to shareholders ofrecord as of February 23, 2004, paid March 15, 2004.
(2) See Note 5, “Software Development Costs and Intellectual Property Licenses” of the Notes to the Consolidated Financial Statements included elsewhere inthis Annual Report.
page 34

Activision, Inc. — 2004 Annual Report

Liquidity and Capital Resources
Sources of Liquidity

2004

2003

Increase/(Decrease)$466,552
121,097$ 285,554
121,400$180,998(303)$587,649$ 406,954$180,695

61%$ 67,403(15,169)
117,56958%$ 90,975(155,101)
64,090$ (23,572)
139,932
53,479(In thousands)

As of and for the year ended March 31,

Cash and cash equivalents
Short-term investments
Percentage of total assets
Cash flows provided by operating activities
Cash flows used in investing activities
Cash flows provided by financing activities

As of March 31, 2004, our primary source of liquidity is comprised of $466.6 million of cash and cash equivalents
and $121.1 million of short-term investments. Over the last three years, our primary sources of liquidity have included
cash on hand at the beginning of the year and cash flows generated from continuing operations. We have also generated significant cash flows from the issuance of our common stock to employees through the exercise of options and to
the public through an underwritten public offering in fiscal 2003, as well as from the utilization of structured stock
repurchase transactions, which are described in more detail below in “Cash Flows from Financing Activities.” In recent
years, we have not utilized debt financing as a significant source of cash flows. However, we do have available atcertain of our international locations, credit facilities, which are described below in “Credit Facilities,” that can be utilized
if needed.
In August 2003, we filed with the Securities and Exchange Commission two amended shelf registration statements,
including the base prospectuses therein. The first shelf registration statement, on Form S-3, allows us, at any time, tooffer any combination of securities described in the base prospectus in one or more offerings with an aggregate initialoffering price of up to $500.0 million. Unless we state otherwise in the applicable prospectus supplement, we expect
to use the net proceeds from the sale of the securities for general corporate purposes, including capital expenditures,
working capital, repayment or reduction of long-term and short-term debt and the financing of acquisitions and otherbusiness combinations. We may invest funds that we do not immediately require in marketable securities.
The second shelf registration statement, on Form S-4, allows us, at any time, to offer any combination of securities
described in the base prospectus in one or more offerings with an aggregate initial offering price of up to$250.0 million in connection with our acquisition of the assets, business or securities of other companies whether bypurchase, merger, or any other form of business combination.
We believe that we have sufficient working capital ($675.8 million at March 31, 2004), as well as proceeds available from our international credit facilities, to finance our operational requirements for at least the next twelve months,
including purchases of inventory and equipment, the funding of the development, production, marketing and sale of new
products and the acquisition of intellectual property rights for future products from third parties.
Cash Flows from Operating Activities

In recent years, the primary drivers of cash flows from operating activities typically have included the collection ofcustomer receivables generated by the sale of our products, offset by payments to vendors for the manufacture, distribution and marketing of our products, third-party developers and intellectual property holders and our own employees.
A significant operating use of our cash relates to our continued investment in software development and intellectual
property licenses. We spent approximately $115.2 million and $151.6 million in the years ended March 31, 2004
and 2003, respectively, in connection with the acquisition of publishing or distribution rights for products being developed by third parties, the execution of new license agreements granting us long-term rights to intellectual property ofpage 35

Activision, Inc. — 2004 Annual ReportManagement’s Discussion and Analysis of Financial Condition
and Results of Operations
third parties, as well as the capitalization of product development costs relating to internally developed products. We
expect that we will continue to make significant expenditures relating to our investment in software development andintellectual property licenses. Our future cash commitments relating to these investments are detailed below in“Commitments.” Cash flows from operations are affected by our ability to release highly successful or “hit” titles. Thoughmany of these titles have substantial production or acquisition costs and marketing budgets, once a title recoups thesecosts, incremental net revenues typically will directly and positively impact cash flows.
The principal components comprising cash flows from operating activities for the year ended March 31, 2004
included favorable operating results and increases in accounts payable, partially offset by increases in accounts receivable and our continued investment in software development and intellectual property licenses. See an analysis of thechange in key balance sheet accounts below in “Key Balance Sheet Accounts.” We expect that a primary source of
future liquidity, both short-term and long-term, will be the result of cash flows from continuing operations.
Cash Flows from Investing Activities

In recent years, the primary drivers of cash used in investing activities typically have included capital expenditures,acquisitions of privately held interactive software development companies and the net effect of purchases andsales/maturities of short-term investment vehicles. The goal of our short-term investments is to maximize return while
minimizing risk, maintaining liquidity, coordinating with anticipated working capital needs and providing for prudent
investment diversification.
For the year ended March 31, 2004, cash flows used in investing activities were primarily the result of capital
expenditures and the utilization of approximately $3.5 million of cash to acquire the privately held interactive softwaredevelopment company, Infinity Ward. We have historically financed our acquisitions through the issuance of sharesof common stock or a combination of common stock and cash. We will continue to evaluate potential acquisition
candidates as to the benefit they bring to us.
Cash Flows from Financing Activities

In recent years, the primary drivers of cash provided by financing activities have related to transactions involving ourcommon stock, including the issuance of shares of common stock to employees and the public, the purchase oftreasury shares, as well as the use of structured stock repurchase transactions. In recent years, we have not utilized debt
financing as a significant source of cash flows. However, we do have available at certain of our international locations,credit facilities, which are described below in “Credit Facilities,” that can be utilized if needed.
The cash provided by financing activities for the year ended March 31, 2004 primarily is the result of the maturityof structured stock repurchase transactions, partially offset by cash used to purchase treasury stock and enter into
additional structured stock repurchase transactions. During fiscal 2003, our Board of Directors authorized a buyback
program under which we can repurchase up to $350.0 million of our common stock. Under the program, shares may
be purchased as determined by management and within certain guidelines, from time to time, in the open market or in
privately negotiated transactions, including privately negotiated structured stock repurchase transactions and throughtransactions in the options markets. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time or from time to time without prior notice. In the past, we have entered into structured
stock repurchase transactions that were settled in cash or stock based on the market price of our common stock on thedate of the settlement. Upon settlement, we either had our capital investment returned with a premium or received
shares of our common stock, depending, respectively, on whether the market price of our common stock was above or
below a pre-determined price agreed in connection with each such transaction. As of March 31, 2004, we had
approximately $226.2 million available for utilization under the buyback program and no outstanding structured stock
repurchase transactions. We actively manage our capital structure and balance sheet as a component of our overall

page 36

Activision, Inc. — 2004 Annual Reportbusiness strategy. Accordingly, in the future, when we determine that market conditions are appropriate, we may seek toachieve long-term value for the shareholders through, among other things, new debt or equity financings or refinancings,
share repurchases and other transactions involving our equity or debt securities.
Key Balance Sheet Accounts(Amounts in thousands)

March 31,2004

March 31,
2003

Increase/(Decrease)

Gross accounts receivable
Net accounts receivable$109,605
62,577$73,178
15,822$36,427
46,755

Accounts Receivable

The increase in gross accounts receivable was primarily the result of:• Higher sales in the fourth quarter of fiscal 2004 over the prior year quarter due to the continued strong sales ofour key third quarter fiscal 2004 releases, True Crime: Streets of L.A., Tony Hawk’s Underground and Call of Duty,
and an increase in the number of titles released in the fourth quarter of fiscal 2004 (Tenchu: Return from Darkness
on Xbox and Pitfall: The Lost Expedition and MTX: Mototrax on multiple platforms) over the prior year quarter(Tenchu: Wrath of Heaven on PS2).
• A significant increase in business of our UK distribution facility with large, mass-market customers. Large, massmarket customers typically have longer trading terms than smaller, independent accounts.
Reserves for returns, price protection and bad debt decreased from $57.4 million at March 31, 2003 to $47.0
million at March 31, 2004, primarily due to the strong sell through to end consumers of our key third quarter fiscal
2004 releases.
(Amounts in thousands)

March 31,2004

March 31,
2003

Increase/(Decrease)

Inventories$26,427$19,577$6,850Inventories

The increase in inventories was driven by our distribution business, primarily the result of:• Higher PS2 hardware on hand at March 31, 2004 at our UK distribution facility.
(Amounts in thousands)

March 31,2004

March 31,
2003

Increase/(Decrease)

Software development and intellectual property licenses$135,201$107,921$27,280

Software Development and Intellectual Property Licenses

The increase in software development and intellectual property licenses was primarily the result of:• Continued investment in software development and intellectual property licenses. We spent approximately $115.2
million in the year ended March 31, 2004 in connection with the acquisition of publishing or distribution rights for
products being developed by third parties, the execution of new license agreements granting us long-term rights tointellectual property of third parties, as well as the capitalization of product development costs relating to internallydeveloped products.
Offset by:• $87.9 million of amortization and write-offs of capitalized software development costs and intellectual property licenses.

page 37

Activision, Inc. — 2004 Annual ReportManagement’s Discussion and Analysis of Financial Condition
and Results of Operations(Amounts in thousands)

March 31,2004

March 31,
2003

Increase/(Decrease)

Accounts payable$72,874$45,602$27,272

Accounts Payable

The increase in accounts payable was primarily the result of:• Increased inventory purchases by our publishing business as a result of the increased sales in the fourth quarterof fiscal 2004 over the prior year quarter due to the continued strong sales of our key third quarter fiscal
2004 releases, True Crime: Streets of L.A., Tony Hawk’s Underground and Call of Duty, and an increase in thenumber of titles released in the fourth quarter of fiscal 2004 (Tenchu: Return from Darkness on Xbox and Pitfall:
The Lost Expedition and MTX: Mototrax on multiple platforms) over the prior year quarter (Tenchu: Wrath of Heaven
on PS2).
(Amounts in thousands)

March 31,2004

March 31,
2003

Increase/(Decrease)

Accrued expenses$63,205$58,656$4,549Accrued Expenses

The increase in accrued expenses was primarily driven by:• Marketing support for our key title releases.
• Increased foreign income taxes payable.
• Increased annual bonuses as a result of company performance.
Partially offset by:• A $7.5 million accrual at March 31, 2003 for the settlement of treasury stock purchases.
Credit Facilities

We have revolving credit facilities with 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
up to GBP 8.0 million ($14.6 million), including issuing letters of credit, on a revolving basis as of March 31, 2004.
Furthermore, under the UK Facility, Centresoft provided a GBP 0.3 million ($0.5 million) guarantee for the benefit of
our CD Contact subsidiary as of March 31, 2004. The UK Facility bore interest at LIBOR plus 2.0% as of March
31, 2004, is collateralized by substantially all of the assets of the subsidiary and expires in November 2004. The UK
Facility also contains various covenants that require the subsidiary to maintain specified financial ratios related to,among others, fixed charges. As of March 31, 2004, we were in compliance with these covenants. No borrowings
were outstanding against the UK Facility as of March 31, 2004. The German Facility provided for revolving loans
up to EUR 0.5 million ($0.6 million) as of March 31, 2004, bore interest at a Eurocurrency rate plus 2.5%, iscollateralized by certain of the subsidiary’s property and equipment and has no expiration date. No borrowings were
outstanding against the German Facility as of March 31, 2004.
Commitments

In the normal course of business, we enter into contractual arrangements with third parties for the development of
products, as well as for the rights to intellectual property. Under these agreements, we commit to provide specified
payments to a developer or intellectual property holder, based upon contractual arrangements. Typically, the payments
to third-party developers are conditioned upon the achievement by the developers of contractually specified development milestones. These payments to third-party developers and intellectual property holders typically are deemed tobe advances and are recoupable against future royalties earned by the developer or intellectual property holder basedon the sale of the related game. Additionally, in connection with certain intellectual property right acquisitions anddevelopment 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,

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Activision, Inc. — 2004 Annual Report

the total future minimum commitments for these and other contractual arrangements in place as of March 31, 2004
are scheduled to be paid as follows (amounts in thousands):
Contractual Obligations
Fiscal year ending March 31,

2005
2006
2007
2008
2009
Thereafter
Total

Facility
LeasesDeveloper
and IP

MarketingTotal$ 8,936
7,520
6,870
4,033
2,993
16,222$62,529
17,328
4,545
1,895
3,020
—

$39,919
11,50015,000———$111,384
36,34826,415
5,928
6,013
16,222$46,574$89,317$66,419$202,310

The developer and intellectual property commitments above exclude approximately $9.3 million of commitments
originally scheduled to be paid between fiscal 2004 through fiscal 2007 relating to an intellectual property rights
agreement with a third party. Effective June 30, 2003, we terminated the agreement and filed a breach of contract
suit against the third party.
Financial Disclosure

We maintain internal controls over financial reporting, which generally include those controls relating to the preparationof our financial statements in conformity with accounting principles generally accepted in the United States of America.
We also are focused on our “disclosure controls and procedures,” which, as defined by the Securities and Exchange
Commission, are generally those controls and procedures designed to ensure that financial and non-financial information
required to be disclosed in our reports filed with the Securities and Exchange Commission is reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is communicated to management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
Our Disclosure Committee, which operates under the Board-approved Disclosure Committee Charter and Disclosure
Controls & Procedures Policy, includes senior management representatives and assists executive management in its oversight of the accuracy and timeliness of our disclosures, as well as in implementing and evaluating our overall disclosure
process. As part of our disclosure process, senior finance and operational representatives from all of our corporate
divisions and business units prepare quarterly reports regarding their current quarter operational performance, future
trends, subsequent events, internal controls, changes in internal controls and other accounting and disclosure-relevant
information. These quarterly reports are reviewed by certain key corporate finance representatives. These corporate
finance representatives also conduct quarterly interviews on a rotating basis with the preparers of selected quarterly
reports. The results of the quarterly reports and related interviews are reviewed by the Disclosure Committee. Financerepresentatives also conduct reviews with our senior management team, our external counsel and other appropriate personnel involved in the disclosure process, as appropriate. Additionally, senior finance and operational representatives
provide internal certifications regarding the accuracy of information they provide that is utilized in the preparation of
our periodic public reports filed with the Securities and Exchange Commission. Financial results and other financial
information also are reviewed with the Audit Committee of the board of directors on a quarterly basis. As required byapplicable regulatory requirements, the Chief Executive Officer and the Chief Financial Officer review and makevarious certifications regarding the accuracy of our periodic public reports filed with the Securities and Exchange
Commission, our disclosure controls and procedures, and our internal control over financial reporting. With the assistanceof the Disclosure Committee, we will continue to assess and monitor our disclosure controls and procedures, and ourinternal controls over financial reporting, and will make refinements as necessary.
page 39

Activision, Inc. — 2004 Annual ReportManagement’s Discussion and Analysis of Financial Condition
and Results of Operations
Inflation

Our management currently believes that inflation has not had a material impact on continuing operations.
Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily
include fluctuations in interest rates, foreign currency exchange rates and market prices. Our market risk sensitive instruments are classified as “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 andmarket prices and the timing of transactions.
Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We do not use
derivative financial instruments in our investment portfolio. We manage our interest rate risk by maintaining an investment
portfolio consisting primarily of debt instruments with high credit quality and relatively short average maturities. We also
manage our interest rate risk by maintaining sufficient cash and cash equivalent balances such that we are typicallyable to hold our investments to maturity. As of March 31, 2004, our cash equivalents and short-term investments
included debt securities of $426.2 million.
The following table presents the amounts and related weighted average interest rates of our investment portfolio as ofMarch 31, 2004 (amounts in thousands):

Cash equivalents:
Fixed rate
Variable rate
Short-term investments:
Fixed rate

Average
Interest Rate

Amortized
Cost

Fair
Value

1.12%
0.95

$305,132
60,006$305,132
60,006

1.81%$121,000$121,097

Our short-term investments generally mature between three months and two years.
Foreign Currency Exchange Rate Risk

We transact business in many different foreign currencies and may be exposed to financial market risk resulting fromfluctuations in foreign currency exchange rates, particularly GBP and EUR. The volatility of GBP and EUR (and allother applicable currencies) will be monitored frequently throughout the coming year. When appropriate, we enter into
hedging transactions in order to mitigate our risk from foreign currency fluctuations. We will continue to use hedging
programs in the future and may use currency forward contracts, currency options and/or other derivative financial
instruments commonly utilized to reduce financial market risks if it is determined that such hedging activities are appropriate to reduce risk. We do not hold or purchase any foreign currency contracts for trading purposes. As of March 31,
2004, we had no outstanding hedging contracts.
Market Price Risk

With regard to the structured stock repurchase transactions described in Note 16 in the Notes to the Consolidated
Financial Statements, at those times when we have structured stock repurchase transactions outstanding, it is possiblethat at settlement we could take delivery of shares at an effective repurchase price higher than the then market price.
As of March 31, 2004, we had no structured stock repurchase transactions outstanding.

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Activision, Inc. — 2004 Annual Report

Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Activision, Inc.:
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial
position of Activision, Inc. and its subsidiaries at March 31, 2004 and 2003, and the results of their operations andtheir cash flows for each of the three years in the period ended March 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

Los Angeles, California
June 8, 2004

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Activision, Inc. — 2004 Annual Report

Consolidated Balance Sheets(In thousands, except share data)

March 31,

2004

2003

$ 466,552
121,097$ 285,554
121,400

62,577
26,42758,32032,115
26,127
18,66015,822
19,577
26,791
8,906
38,29010,565

811,875
28,386
16,38025,5399,064
1,080
76,493526,905
35,281
36,943
22,265
10,322
5,081
68,019$ 968,817$ 704,816$$

AssetsCurrent assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $47,028 and$57,356 at March 31, 2004 and 2003, respectively
Inventories
Software development
Intellectual property licenses
Deferred income taxes
Other current assets
Total current assets
Software development
Intellectual property licenses
Property and equipment, net
Deferred income taxes
Other assets
Goodwill
Total assets
Liabilities and Shareholders’ Equity

Current liabilities:
Current portion of long-term debt
Accounts payable
Accrued expenses
Total current liabilities
Long-term debt, less current portion
Total liabilities
Commitments and contingencies (Note 14)
Shareholders’ equity:
Preferred stock, $.000001 par value, 3,750,000 shares authorized,
no shares issued at March 31, 2004 and 2003
Series A Junior Preferred stock, $.000001 par value, 1,250,000 sharesauthorized, no shares issued at March 31, 2004 and 2003
Common stock, $.000001 par value, 225,000,000 and 125,000,000
shares authorized, 166,876,567 and 161,059,091 shares issued and137,331,242 and 135,126,368 shares outstanding at March 31,
2004 and 2003, respectively
Additional paid-in capital
Retained earnings
Less: Treasury stock, at cost, 29,545,325 and 25,932,723 shares as ofMarch 31, 2004 and 2003, respectively
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
page 42—
72,874
63,205147
45,60258,656

136,079—

104,405
2,671

136,079

107,076

—

—

—

—

—
758,626
208,279—
592,295
130,564(144,128)
9,961(121,685)(3,434)

832,738

597,740$ 968,817$ 704,816

Activision, Inc. — 2004 Annual Report

Consolidated Statements of Operations(In thousands, except per share data)

For the years ended March 31,

Net revenues
Costs and expenses:
Cost of sales—product costs
Cost of sales—software royalties and amortization
Cost of sales—intellectual property licenses
Product development
Sales and marketing
General and administrative
Total costs and expenses
Income from operations
Investment income, net
Income before income tax provision
Income tax provision
Net income
Basic earnings per share
Weighted average common shares outstanding
Diluted earnings per share
Weighted average common shares outstanding—assuming dilution

2004

2003

2002

$947,656$864,116$786,434

475,541
59,744
31,86297,859128,22144,612440,977
79,19445,002
56,971
100,646
46,479435,725
58,892
40,11440,96086,16144,008

837,839769,269

705,860

109,8176,175

94,847
8,560

80,574
2,546

115,992
38,277

103,40737,227

83,12030,882$ 77,715$ 66,180$ 52,238

$

$

$

0.58

133,249$

0.54

144,8930.46
144,359$

0.43
155,483

0.46
113,966$

0.39
133,775

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

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Activision, Inc. — 2004 Annual Report

Activision, Inc. — 2004 Annual Report

Consolidated Statements of Changes in Shareholders’ Equity

AmountAccumulated
Other
Comprehensive
Income (Loss)

Shareholders’EquityFor the years ended March 31, 2004, 2003 and 2002

SharesAmountAdditional
Paid-In
CapitalBalance, March 31, 2001

101,813$—$ 200,786$ 12,146(9,734)$ (20,249)$(11,377)$ 181,306

—
—

—
—

—
—

52,238
—

—
—

—
—

—
(121)

52,238(121)(In thousands)

Components of comprehensive income:Net income for the year
Foreign currency translation adjustment

Common Stock

Treasury Stock

Retained
Earnings

SharesTotal comprehensive income
Issuance of common stock pursuant to warrants and common stock warrants
Issuance of common stock and common stock options to employees
Tax benefit attributable to employee stock options and common stock warrants
Issuance of common stock pursuant to conversion of convertible subordinated notes
Issuance of common stock to effect business combinations
Purchase of treasury shares

2,332
19,740—10,716
2,726
—

—
—
—
—
—
—

1,044
63,05348,51358,651
25,481
—

—
—
—
—
—
—

—
—
—
—
—
(6)

—
—
—
—
—
(74)

—
—
—
—
—
—

1,044
63,05348,51358,651
25,481(74)

Balance, March 31, 2002

137,327—

397,528

64,384(9,740)(20,323)(11,498)

430,091

—
—
—

—
—
—

—
—
—

66,180
—
—

—
—
—

—
—
—

—
134
7,930

66,180134
7,930

52,117

Components of comprehensive income:Net income for the year
Unrealized appreciation on short-term investments
Foreign currency translation adjustment
Total comprehensive income
Issuance of common stock pursuant to underwritten public offering
Issuance of common stock to employees
Issuance of common stock pursuant to warrants and common stock warrants
Tax benefit attributable to employee stock options and common stock warrants
Purchase of structured stock repurchase transactions
Issuance of common stock to effect business combinations
Purchase of treasury shares

16,875
5,999
69
—
—
790
—

—
—
—
—
—
—
—

247,291
20,547
2,184
23,884(110,000)
10,861
—

—
—
—
—
—
—
—

—
—
—
—
—
—
(16,192)

—
—
—
—
—
—
(101,362)

—
—
—
—
—
—
—

247,291
20,547
2,184
23,884(110,000)
10,861(101,362)

Balance, March 31, 2003

161,060—

592,295

130,564(25,932)(121,685)(3,434)

597,740

—
—
—

—
—
—

—
—
—

77,715
—
—

—
—
—

—
—
—

—
(37)
13,432

77,715(37)
13,432Components of comprehensive income:Net income for the year
Unrealized depreciation on short-term investments
Foreign currency translation adjustment
Total comprehensive income
Issuance of common stock to employees
Issuance of common stock pursuant to warrants and common stock warrants
Tax benefit attributable to employee stock options and common stock warrants
Structured stock repurchase transactions
Settlement of structured stock repurchase transactions
Issuance of common stock to effect business combinations
Purchase of treasury shares
Balance, March 31, 2004

74,244

91,110
5,140
419
—
—
—
258
—

—
—
—
—
—
—
—

25,7301,038
12,417(52,621)
176,521
3,246
—

—
—
—
—
—
—
—

—
—
—
—
(1,716)—(1,898)————(10,000)—(12,443)

—
—
—
—
—
—
—

25,7301,038
12,417(52,621)
166,521
3,246(12,443)

166,877$—$ 758,626$208,279(29,546)$(144,128)$ 9,961$ 832,738

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

page 44

page 45

Activision, Inc. — 2004 Annual Report

Consolidated Statements of Cash Flows(In thousands)

For the years ended March 31,

2004

2003

2002

$ 77,715$ 66,180$ 52,238

15,147
10,774

3,355
11,880(23,352)
7,350

87,922
12,417

100,415
23,88462,456
48,513(42,497)(6,850)(115,202)(5,232)
23,005
10,204

61,922
1,159(151,594)
1,836(19,072)(8,990)(2,010)23,152(76,993)(1,753)
3,357
18,834

67,40390,975

111,792(3,480)(11,976)(195,587)
195,874—(21,199)(11,877)(408,175)
287,145(995)—(9,150)——449(15,169)(155,101)(8,701)

26,483——(2,818)—20,547——(720)—

59,836
1,044(8,550)(1,792)(62)—(52,621)
166,521(19,996)

248,072(110,000)—(93,809)

—
—
—
(74)

117,569

64,09050,402

11,195

6,583

(36)

180,998
285,5546,547
279,007

153,457
125,550$ 466,552$ 285,554$279,007

Cash flows from operating activities:

Net income
Adjustments to reconcile net income to net cash provided byoperating activities:
Deferred income taxes
Depreciation and amortization
Amortization and write-offs of capitalized softwaredevelopment costs and intellectual property licenses
Tax benefit of stock options and warrants exercised
Change in operating assets and liabilities (net of effectsof acquisitions):
Accounts receivable
Inventories
Software development and intellectual property licenses
Other assets
Accounts payable
Accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:

Cash used in business acquisitions (net of cash acquired)
Capital expenditures
Purchase of short-term investments
Proceeds from sales and maturities of short-term investments
Other
Net cash used in investing activities
Cash flows from financing activities:

Proceeds from issuance of common stock to employees
Proceeds from issuance of common stock pursuant to warrants
Payment on term loan
Notes payable, net
Redemption of convertible subordinated notes
Proceeds from issuance of common stock pursuant to underwritten
public offering, net of offering costs
Purchase of structured stock repurchase transactions
Settlement of structured stock repurchase transactions
Purchase of treasury stock
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
The accompanying notes are an integral part of these consolidated financial statements.

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Activision, Inc. — 2004 Annual Report

Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Business

Activision, Inc. (“Activision” or “we”) is a leading international publisher of interactive entertainment software products.
We have built a company with a diverse portfolio of products that spans a wide range of categories and target
markets and that is used on a variety of game hardware platforms and operating systems. We have created, licensed
and acquired a group of highly recognizable brands, which we market to a variety of consumer demographics.
Our products cover game categories such as action/adventure, action sports, racing, role-playing, simulation, firstperson action and strategy. Our target customer base ranges from game enthusiasts and children to mass-market consumers and “value” buyers. We currently offer our products primarily in versions that operate on the Sony PlayStation 2(“PS2”), Nintendo GameCube (“GameCube”) and Microsoft Xbox (“Xbox”) console systems, Nintendo Game Boy
Advance (“GBA”) hand-held device and the personal computer (“PC”). In prior years, we have also offered our
products on the Sony PlayStation (“PS1”) and Nintendo 64 (“N64”) console systems and Nintendo Game Boy Color(“GBC”) hand-held device. In addition, Sony announced that it would be entering the hand-held hardware market with
the introduction of its hand-held gaming device, PlayStation Portable (“PSP”). Nintendo also announced that it plans tolaunch a new dual-screened, portable game system Nintendo Dual Screen (“NDS”). We are currently developing titles
for the PSP and NDS. We are also planning to develop titles for the next-generation console systems expected to be
developed by Sony, Microsoft and Nintendo for release in the next two to three years.
Our publishing business involves the development, marketing and sale of products directly, by license or through ouraffiliate label program with certain third-party publishers. Our distribution business consists of operations in Europe thatprovide logistical and sales services to third-party publishers of interactive entertainment software, our own publishing
operations and manufacturers of interactive entertainment hardware.
We maintain operations in the United States, Canada, the United Kingdom (“UK”), Germany, France, Italy, Japan,
Australia, Sweden and the Netherlands. In fiscal year 2004, international operations contributed approximately 53%
of net revenues.
Principles of Consolidation

The consolidated financial statements include the accounts of Activision, Inc., a Delaware corporation, and its whollyowned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Cash, Cash Equivalents and Short-term Investments

Cash and cash equivalents include cash, money markets and short-term investments with original maturities of not morethan 90 days.
Short-term investments generally mature between three months and two years. Investments with maturities beyond one
year may be classified as short-term based on their liquid nature and because such securities represent the investmentof cash that is available for current operations. All of our short-term investments are classified as available-for-sale andare carried at fair market value with unrealized appreciation (depreciation) reported as a component of accumulated
other comprehensive income (loss) in shareholders’ equity. The specific identification method is used to determine thecost of securities disposed with realized gains and losses reflected in investment income, net.
Concentration of Credit Risk

Financial instruments which potentially subject us to concentration of credit risk consist principally of temporary cash
investments and accounts receivable. We place our temporary cash investments with financial institutions. At various
times during the fiscal years ended March 31, 2004 and 2003, we had deposits in excess of the Federal Deposit
Insurance Corporation (“FDIC”) limit at these financial institutions.

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Activision, Inc. — 2004 Annual Report

Notes to Consolidated Financial Statements
Our customer base includes retail outlets and distributors, including mass-market retailers, consumer electronics stores,
discount warehouses and game specialty stores in the United States and countries worldwide. We perform ongoing
credit evaluations of our customers and maintain allowances for potential credit losses. We generally do not require
collateral or other security from our customers. As of and for the years ended March 31, 2004, 2003 and 2002, we
had one customer that accounted for 20%, 16% and 14%, respectively, of consolidated net revenues and 39%,
46% and 22%, respectively, of consolidated accounts receivable, net. This customer was the same customer in all
periods and was a customer of both our publishing and distribution businesses.
Financial Instruments

The estimated fair values of financial instruments have been determined using available market information and valuation methodologies described below. However, considerable judgment is required in interpreting market data to develop
the estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts that we
could realize in a current market exchange. The use of different market assumptions or valuation methodologies may
have a material effect on the estimated fair value amounts.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value due to their short-term nature. Short-term investments are carried at fair value with fair values
being estimated based on quoted market prices.
We account for derivative instruments in accordance with Statement of Financial Accounting Standard (“SFAS”) No.
133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 138, “Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of SFAS 133” and SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS Nos. 133, 138 and 149
require that all derivatives, including foreign exchange contracts, be recognized in the balance sheet in other current
assets or accrued expenses at their fair value.
We utilize forward contracts in order to reduce financial market risks. These instruments are used to hedge foreign
currency exposures of underlying assets, liabilities, or certain forecasted foreign currency denominated transactions. Our
accounting policies for these instruments are based on whether they meet the criteria for designation as hedging transactions. Changes in fair value of derivatives that are designated as cash flow hedges, are highly effective, and qualify
as hedging instruments, are recorded in other comprehensive income until the underlying hedged item is recognized inearnings within the financial statement line item consistent with the hedged item. Any ineffective portion of a derivativechange in fair value is immediately recognized in earnings. Changes in fair value of derivatives that do not qualify as
hedging instruments are recorded in earnings. The fair value of foreign currency contracts is estimated based on the
spot rate of the various hedged currencies as of the end of the period. As of March 31, 2004 and 2003, we hadno outstanding foreign exchange forward contracts.
Equity Investments

From time to time, we may make a capital investment and hold a minority interest in a third-party developer in connection with entertainment software products to be developed by such developer for us. We account for thosecapital investments over which we have the ability to exercise significant influence using the equity method. For thoseinvestments over which we do not have the ability to exercise significant influence, we account for our investment using
the cost method.
Software Development Costs

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

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Activision, Inc. — 2004 Annual Report

We account for software development costs in accordance with SFAS No. 86, “Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed.” Software development costs are capitalized once technologicalfeasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a
product encompasses both technical design documentation and game design documentation. For products where
proven technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a
product-by-product basis. Prior to a product’s release, we expense, as part of cost of sales—software royalties andamortization, capitalized costs when we believe such amounts are not recoverable. Capitalized costs for those productsthat are cancelled or abandoned are charged to product development expense in the period of cancellation. Amounts
related to software development which are not capitalized are charged immediately to product development expense.
We evaluate the future recoverability of capitalized amounts on a quarterly basis. The recoverability of capitalized
software development costs is evaluated based on the expected performance of the specific products for which thecosts relate. Criteria used to evaluate expected product performance include: historical performance of comparable
products using comparable technology; orders for the product prior to its release; and estimated performance of asequel product based on the performance of the product on which the sequel is based.
Commencing upon product release, capitalized software development costs are amortized to cost of sales—software
royalties and amortization based on the ratio of current revenues to total projected revenues, generally resulting in an
amortization period of six months or less. For products that have been released in prior periods, we evaluate the future
recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.
Significant management judgments and estimates are utilized in the assessment of when technological feasibility isestablished, as well as in the ongoing assessment of the recoverability of capitalized costs. In evaluating the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts andestimates of additional development costs to be incurred. If revised forecasted or actual product sales are lessthan and/or revised forecasted or actual costs are greater than the original forecasted amounts utilized in the initialrecoverability analysis, the actual impairment charge may be larger than originally estimated in any given quarter.
Intellectual Property Licenses

Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology or other intellectual property or proprietary rights in the development of our
products. Depending upon the agreement with the rights holder, we may obtain the rights to use acquired intellectual
property in multiple products over multiple years, or alternatively, for a single product.
We evaluate the future recoverability of capitalized intellectual property licenses on a quarterly basis. The recoverabilityof capitalized intellectual property license costs is evaluated based on the expected performance of the specific products in which the licensed trademark or copyright is to be used. As many of our intellectual property licenses extend for
multiple products over multiple years, we also assess the recoverability of capitalized intellectual property license costs
based on certain qualitative factors such as the success of other products and/or entertainment vehicles utilizing theintellectual property, whether there are any future planned theatrical releases or television series based on the intellectual property and the rights holder’s continued promotion and exploitation of the intellectual property. Prior to the related
product’s release, we expense, as part of cost of sales—intellectual property licenses, capitalized intellectual property
costs when we believe such amounts are not recoverable. Capitalized intellectual property costs for those products thatare cancelled or abandoned are charged to product development expense in the period of cancellation. Criteria used
to evaluate expected product performance include: historical performance of comparable products using comparable
technology; orders for the product prior to its release; and estimated performance of a sequel product based on theperformance of the product on which the sequel is based.

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Activision, Inc. — 2004 Annual Report

Notes to Consolidated Financial Statements
Commencing upon the related product’s release, capitalized intellectual property license costs are amortized to cost of
sales—intellectual property licenses based on the ratio of current revenues for the specific product to total projected
revenues for all products in which the licensed property will be utilized. As intellectual property license contracts may
extend for multiple years, the amortization of capitalized intellectual property license costs relating to such contracts may
extend beyond one year. For intellectual property included in products that have been released, we evaluate the future
recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.
Significant management judgments and estimates are utilized in the assessment of the recoverability of capitalized costs.
In evaluating the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted
sales amounts and estimates of additional development costs to be incurred. If revised forecasted or actual productsales are less than and/or revised forecasted or actual costs are greater than the original forecasted amounts utilized
in the initial recoverability analysis, the actual impairment charge may be larger than originally estimated in any
given quarter. 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 therights holder’s continued promotion and exploitation of the intellectual property. Material differences may result in theamount and timing of charges for any period if management makes different judgments or utilizes different estimates in
evaluating these qualitative factors.
Inventories

Inventories are valued at the lower of cost (first-in, first-out) or market.
Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line
method over the shorter of the estimated useful lives or the lease term: buildings, 25 to 33 years; computer equipment,
office furniture and other equipment, 2 to 5 years; leasehold improvements, through the life of the lease. When assets
are retired or disposed of, the cost and accumulated depreciation thereon are removed and any resultant gains orlosses are recognized in current operations.
Goodwill

We account for goodwill using the provisions of SFAS No. 142, “Goodwill and Other Intangibles.” SFAS No. 142
addresses financial accounting and reporting requirements for acquired goodwill and other intangible assets. Under
SFAS No. 142, goodwill is deemed to have an indefinite useful life and should not be amortized but rather tested atleast annually for impairment. An impairment loss should be recognized if the carrying amount of goodwill is not recoverable and its carrying amount exceeds its fair value. In accordance with SFAS No. 142, we have not amortized
goodwill during the years ended March 31, 2004, 2003 and 2002.
Revenue Recognition

We recognize revenue from the sale of our products upon the transfer of title and risk of loss to our customers. Revenue
from product sales is recognized after deducting the estimated allowance for returns and price protection. With respect
to license agreements that provide customers the right to make multiple copies in exchange for guaranteed amounts,
revenue is recognized upon delivery of such copies. Per copy royalties on sales that exceed the guarantee are recognized as earned. In addition, in order to recognize revenue for both product sales and licensing transactions, persuasive
evidence of an arrangement must exist and collection of the related receivable must be probable. Revenue recognition
also determines the timing of certain expenses, including cost of sales—intellectual property licenses and cost of sales—
software royalties and amortization.

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Activision, Inc. — 2004 Annual Report

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

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 thatquantities 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
Activision with respect to open and/or future invoices. The conditions our customers must meet to be granted the rightto return products or price protection are, among other things, compliance with applicable payment terms, delivery to us
of weekly inventory and sell-through reports, and consistent participation in the launches of our premium title releases.
We may also consider other factors, including the facilitation of slow-moving inventory and other market factors.
Management must make estimates of potential future product returns and price protection related to current period
product revenue. We estimate the amount of future returns and price protection for current period product revenue
utilizing historical experience and information regarding inventory levels and the demand and acceptance of our products by the end consumer. The following factors are used to estimate the amount of future returns and price protection
for a particular title: historical performance of titles in similar genres, historical performance of the hardware platform,
historical performance of the brand, console hardware life cycle, Activision sales force and retail customer feedback,industry pricing, weeks of on-hand retail channel inventory, absolute quantity of on-hand retail channel inventory,
Activision 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.
Historically, total actual returns and price protection have not exceeded our allowance estimates. 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 acompetitor, 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 management makes different judgments or utilizes
different estimates in determining the allowances for returns and price protection.
Shipping and Handling

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

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Activision, Inc. — 2004 Annual Report

Notes to Consolidated Financial Statements
Advertising Expenses

We expense advertising as incurred, except for production costs associated with media advertising which are deferredand charged to expense the first time the related ad is run. Advertising expenses for the years ended March 31, 2004,
2003 and 2002 were approximately $76.6 million, $60.0 million and $50.3 million, respectively, and are included
in sales and marketing expense in the consolidated statements of operations.
Investment Income, Net

Investment income, net is comprised of the following, (amounts in thousands):
Year ended March 31,

2004

Interest expense
Interest income
Net realized gain on short-term investments
Investment income, net$ (348) $ (933) $(1,188)
6,502
9,259
3,734
21
234
—
$6,175

2003$8,5602002$ 2,546

Income Taxes

We account for income taxes using SFAS No. 109, “Accounting for Income Taxes.” 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 andliabilities 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 achange 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 foreignsubsidiaries are translated into U.S. dollars at the exchange rate in effect at the end of the period, and revenue andexpenses are translated at weighted average exchange rates during the period. The resulting translation adjustments arereflected as a component of accumulated other comprehensive income (loss) in shareholders’ equity.
Comprehensive Income

Comprehensive income includes net income, unrealized appreciation (depreciation) on short-term investments, foreign
currency translation adjustments, and the effective portion of gains or losses on cash flow hedges that are presented as
a component of accumulated other comprehensive income (loss) in shareholders’ equity.
Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affect the reported amounts of assets andliabilities or the disclosure of gain or loss contingencies at the date of the financial statements and the reported amountsof revenues and expenses during the reporting period. Actual results could differ from those estimates.
Earnings Per Common Share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average
number of common shares outstanding for all periods. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding, increased by common
stock equivalents. Common stock equivalents are calculated using the treasury stock method and represent incremental
shares issuable upon exercise of our outstanding options and warrants and, if applicable in the period, conversion of
our convertible debt. 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.
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Activision, Inc. — 2004 Annual Report

Stock-Based Compensation and Pro Forma Information

Under SFAS No. 123, “Accounting for Stock-Based Compensation,” compensation expense is recorded for theissuance of stock options and other stock-based compensation based on the fair value of the stock options and otherstock-based compensation on the date of grant or measurement date. Alternatively, SFAS No. 123 allows companies
to continue to account for the issuance of stock options and other stock-based compensation in accordance withAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Under APB No. 25,
compensation expense is recorded for the issuance of stock options and other stock-based compensation based on the
intrinsic value of the stock options and other stock-based compensation on the date of grant or measurement date.
Under the intrinsic value method, compensation expense is recorded on the date of grant or measurement date only if
the current market price of the underlying stock exceeds the stock option or other stock-based compensation exercise
price. At March 31, 2004, we had several stock-based employee compensation plans, which are described more fullyin Note 15. We account for those plans under the recognition and measurement principles of APB Opinion No. 25
and related Interpretations. The following table illustrates the effect on net income and earnings per share if we had
applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (amounts inthousands, except per share data):
Year ended March 31,

Net income, as reported
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects
Pro forma net income
Earnings per share
Basic—as reported
Basic—pro forma
Diluted—as reported
Diluted—pro forma

2004

2003

2002

$ 77,715$ 66,180$ 52,238

192

—

—

(18,303)(21,004)(12,622)$ 59,604$ 45,176$ 39,616

$

0.58

$

0.46

$

0.46

$

0.45

$

0.31

$

0.35

$

0.54

$

0.43

$

0.39

$

0.41

$

0.29

$

0.30

The fair value of options granted in the years ended March 31, 2004, 2003 and 2002 has been estimated at thedate of grant using a Black-Scholes option-pricing model with the following weighted average assumptions:
Employee and Director
Options and Warrants

Expected life (in years)
Risk-free interest rate
Volatility
Dividend yield

Employee Stock
Purchase Plan

2004

2003

2002

2004

2003

2002

4
2.01%
49%
—

3
1.51%
69%
—

2
3.24%
70%
—

0.5
1.75%
51%
—

0.5
1.13%
69%
—

0.5
2.16%
70%
—

The Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the expected stock
price volatility. We use the historical stock price volatility of our common stock over the most recent period that is
generally commensurate with the expected option life as the basis for estimating expected stock price volatility. In priorfiscal years, the historical stock price volatility used was based on the daily, low stock price of our common stock, which,in recent years, resulted in an expected volatility ranging from approximately 65% to 70%. For options granted during

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Activision, Inc. — 2004 Annual Report

Notes to Consolidated Financial Statements
each of the quarters in the year ended March 31, 2004, the historical stock price volatility used was based on a
weekly stock price observation, using an average of the high and low stock prices of our common stock, which resulted
in an expected stock price volatility ranging from 47% to 52%. Management believes such amounts are more representative of prospective trends. For purposes of the above pro forma disclosure, the fair value of options granted isamortized to stock-based employee compensation cost over the period(s) in which the related employee services are
rendered. Accordingly, the pro forma stock-based compensation cost for any period will typically relate to options
granted in both the current period and prior periods.
For options granted during fiscal 2004, 2003 and 2002, the per share weighted average fair value of options with
exercise prices equal to market value on the date of grant was $2.77, $4.37 and $3.05, respectively. The per shareweighted average estimated fair value of Employee Stock Purchase Plan shares granted during the years ended March
31, 2004, 2003 and 2002 was $1.50, $2.17 and $1.96, respectively.
The effects on pro forma disclosures of applying SFAS No. 123 are not likely to be representative of the effects on pro
forma disclosures of future years.
Common stock warrants are granted to non-employees in connection with the development of software and acquisitionof licensing rights for intellectual property. In accordance with EITF No. 96-18, “Accounting for Equity Instruments thatare Issued to Other Than Employees for Acquiring or in Connection With Selling Goods or Services,” the fair value ofcommon stock warrants granted is determined as of the measurement date and is capitalized, expensed and amortizedconsistent with our policies relating to software development and intellectual property license costs.
Related Parties

In August 2001, we elected to our Board of Directors an individual who is a partner in a law firm that has provided
legal services to Activision for more than 10 years. For the years ended March 31, 2004, 2003 and 2002, the fees
we paid to the law firm account for less than 1% of the firm’s total revenues. We believe that the fees charged to us
by the law firm are competitive with the fees charged by other law firms.
Reclassifications

Certain amounts in the consolidated financial statements have been reclassified to conform with the current year’s
presentation. These reclassifications had no effect on net income, shareholders’ equity or net increase in cash and cash
equivalents.
2. Stock Splits

In April 2003, the Board of Directors approved a three-for-two split of our outstanding common shares effected in theform of a 50% stock dividend. The split was paid on June 6, 2003 to shareholders of record as of May 16, 2003.
In February 2004, the Board of Directors approved a second three-for-two split of our outstanding common shareseffected in the form of a 50% stock dividend. The split was paid on March 15, 2004 to shareholders of record as ofFebruary 23, 2004. The par value of our common stock was maintained at the pre-split amount of $.000001. The
consolidated financial statements and Notes thereto, including all share and per share data, have been restated as if
the stock splits had occurred as of the earliest period presented.
3. Acquisitions

During the three years ended March 31, 2004, we separately completed the acquisition of six privately held interactive software development companies. We accounted for these acquisitions in accordance with SFAS No. 141,
“Business Combinations.” SFAS No. 141 addresses financial accounting and reporting for business combinations,requiring that the purchase method be used to account and report for all business combinations. These acquisitions

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Activision, Inc. — 2004 Annual Report

have further enabled us to implement our multi-platform development strategy by bolstering our internal product development capabilities for console systems and personal computers and strengthening our position in the first-person
action, action and action sports game categories. A significant portion of the purchase price for all of these acquisitions
was assigned to goodwill as the primary asset we acquired in each of the transactions was an assembled workforce
with proven technical and design talent with a history of high quality product creation. Pro forma consolidated statements of operations for these acquisitions are not shown, as they would not differ materially from reported results.
Fiscal 2004 Transactions
Acquisition of Infinity Ward. In May 2002, we acquired a 30% interest in the outstanding capital stock of Infinity Ward,

Inc. (“Infinity Ward”), a privately held interactive software development company, as well as an option to purchasethe remaining 70% of outstanding capital stock. In October 2003, we exercised our option to acquire the remaining
70% of the outstanding capital stock of Infinity Ward for cash of approximately $3.5 million. Goodwill of approximately $3.8 million has been included in the publishing segment of our business and is non-deductible for tax purposes.
The results of operations of Infinity Ward are included in our consolidated statement of operations beginning October24, 2003.
Fiscal 2003 Transactions
Acquisition of Luxoflux. Effective October 4, 2002, we acquired all of the outstanding ownership interests of Luxoflux,

Inc. (“Luxoflux”), a privately held interactive software development company, in exchange for $9.0 million in cash.
Luxoflux is an experienced, multi-platform, console software developer. In accordance with the original acquisition agreement, approximately 248,000 shares of our common stock may be issued to Luxoflux’s equity holders over the courseof several years, depending on the satisfaction of certain product performance requirements and other criteria. This
contingent consideration will be recorded as an additional element of the purchase price for Luxoflux when thosecontingencies are resolved.
In the fourth quarter of fiscal 2004, certain of these product performance requirements were met and approximately
166,000 of our common shares with an assigned value of approximately $2.0 million were issued to Luxoflux equity
holders. The purchase price of the transaction, including acquisition costs and the contingent consideration issued in
the fourth quarter of fiscal 2004, was approximately $11.0 million and has been allocated to assets acquired andliabilities assumed as follows (amounts in thousands):
Current assets
Property and equipment
Other assets
Goodwill
Current liabilities$ 1,46183
15
12,360(2,892)$11,027

Acquisition of Z-Axis

Effective May 20, 2002, we acquired all of the outstanding ownership interests of Z-Axis, Ltd. (“Z-Axis”), a privately
held interactive software development company, in exchange for $12.5 million in cash and 560,678 shares of ourcommon stock valued at approximately $8.2 million. Z-Axis is an experienced, multi-platform, console software developer. In accordance with the original acquisition agreement, approximately 210,000 additional shares of our common
stock may be issued to Z-Axis’ equity holders over the course of several years, depending on the satisfaction of certain
product performance requirements and other criteria. This contingent consideration will be recorded as an additional
element of the purchase price for Z-Axis when those contingencies are resolved.

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Activision, Inc. — 2004 Annual Report

Notes to Consolidated Financial Statements
In the fourth quarter of fiscal 2004, certain of these product performance requirements were met and approximately
70,000 of our common shares with an assigned value of approximately $1.0 million were issued to Z-Axis equity
holders. The purchase price of the transaction, including acquisition costs and the contingent consideration issued in
the fourth quarter of fiscal 2004, was approximately $21.9 million and has been allocated to assets acquired andliabilities assumed as follows (amounts in thousands):
Current assets
Other intangibles
Property and equipment
Other assets
Goodwill
Current liabilities$ 1,946113
172
20
20,667(1,058)$21,860

For both of the acquisitions, goodwill has been included in the publishing segment of our business and is non-deductible
for tax purposes. The results of operations of Luxoflux and Z-Axis are included in our consolidated statement of operations beginning October 4, 2002 and May 20, 2002, respectively.
Fiscal 2002 Transactions
Acquisition of Shaba. On March 27, 2002, we acquired all of the outstanding ownership interests of Shaba Games,

Inc. (“Shaba”), a privately held interactive software development company, in exchange for 581,897 shares of ourcommon stock. Shaba is an experienced, multi-platform console software developer with a focus on action and action
sports video games. Under the original acquisition agreement, approximately 155,000 additional shares of ourcommon stock may be issued to Shaba’s equity holders over the course of several years, depending on the satisfactionof certain product performance requirements and other criteria. This contingent consideration will be recorded as anadditional element of the purchase price for Shaba when those contingencies are resolved.
In the fourth quarter of fiscal 2004, certain of these product performance requirements were met and approximately
23,000 of our common shares with an assigned value of approximately $0.3 million were issued to Shaba equity
holders. The purchase price of the transaction, including acquisition costs and the contingent consideration issued in the
fourth quarter of fiscal 2004, was approximately $7.6 million with approximately $6.4 million of the purchase pricebeing assigned to goodwill. This goodwill has been included in the publishing segment of our business and is deductible
for tax purposes. The results of operations of Shaba are included in our consolidated statement of operations beginning
March 27, 2002. As of March 31, 2004, approximately 45,000 shares of our common stock remain in escrow andare contingently issuable in accordance with the original Shaba acquisition agreement.
Acquisition of Gray Matter. On December 30, 1999, we acquired a 40% interest in the outstanding capital stock ofGray Matter Interactive Studios, Inc., formerly known as Video Games West (“Gray Matter”), a privately held softwaredevelopment company, as well as an option to purchase the remaining 60% of outstanding capital stock. Effective
January 9, 2002, we exercised our option to acquire the remaining 60% of outstanding capital stock of Gray Matterin exchange for 300,803 shares of our common stock. The purchase price of the transaction, including acquisition
costs, was valued at approximately $3.6 million with $3.3 million of the purchase price being assigned to goodwill. This
goodwill has been included in the publishing segment of our business and is non-deductible for tax purposes. The resultsof operations of Gray Matter are included in our consolidated statement of operations beginning January 9, 2002.

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Activision, Inc. — 2004 Annual Report

Acquisition of Treyarch Effective October 1, 2001, we acquired all of the outstanding ownership interests of Treyarch

Invention, LLC (“Treyarch”), a privately held interactive software development company, in exchange for 1,842,663
shares of our common stock. Treyarch is an experienced, multi-platform console software developer with a focus onaction and action sports video games. As part of the original acquisition agreement, approximately 540,000 additional
shares of our common stock could also be issued to Treyarch’s equity holders and employees over the course of several
years, depending on the satisfaction of certain product performance requirements and other criteria. This contingent
consideration would be recorded as an additional element of the purchase price for Treyarch when those contingencies
were resolved. In July 2002, in connection with the satisfaction of certain of those product performance requirements,
we issued to Treyarch equity holders and employees 228,680 of our common shares with an assigned value of $2.7
million. The purchase price of the transaction, including the contingent consideration issued in July 2002, forgiveness ofa note receivable and acquisition costs, was valued at approximately $18.2 million with approximately $17.2 millionof the purchase price being assigned to goodwill. This goodwill has been included in the publishing segment of ourbusiness and is non-deductible for tax purposes. The results of operations of Treyarch are included in our consolidated
statement of operations beginning October 1, 2001. As of March 31, 2004, all contingencies relating to the issuanceof additional shares as consideration have been resolved.
4. Cash, Cash Equivalents, and Short-Term Investments

The following table summarizes our cash, cash equivalents and short-term investments as of March 31, 2004 (amounts
in thousands):

Cash and cash equivalents:
Cash and time deposits
Money market funds
Commercial paper
Auction rate notes
Cash and cash equivalents
Short-term investments:
Corporate bonds
U.S. agency issues
Asset-backed bonds
Municipal bonds
Short-term investments
Cash, cash equivalents and short-term investments

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
LossesFair
Value$101,414
60,0063,700
301,432

$ —
—
—
—

$ —
—
—
—

$101,414
60,0063,700
301,432

466,552——

466,552

21,047
71,817
23,113
5,023

13
76
74
—

(24)
(4)
(38)
—

21,036
71,88923,1495,023

121,000

163(66)

121,097$587,552

$163

$(66)

$587,649

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Activision, Inc. — 2004 Annual Report

Notes to Consolidated Financial Statements
The following table summarizes our cash, cash equivalents and short-term investments as of March 31, 2003 (amounts
in thousands):

Cash and cash equivalents:
Cash and time deposits
Money market funds
Auction rate notes
Cash and cash equivalents
Short-term investments:
Corporate bonds
Taxable senior debt
U.S. agency issues
Asset-backed bonds
Municipal bonds
Short-term investments
Cash, cash equivalents and short-term investments

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
LossesFair
Value$ 87,348
35,507
162,699

$ —
—
—

$ —
—
—

$ 87,348
35,507
162,699285,554——285,554

16,712
2,253
52,05539,224
11,022

34
—
65
122
—

—
—
(12)
(75)
—

16,746
2,253
52,10839,271
11,022

121,266

221(87)

121,400$406,820

$221

$(87)

$406,954

The following table summarizes the maturities of our investments in debt securities as of March 31, 2004 (amounts
in thousands):
Amortized
Cost

Fair
Value

Due in one year or lessDue after one year through two years$326,694
76,325$326,699
76,381

Asset-backed securities

403,019
23,113403,080
23,149

Total$426,132$426,229

For the year ended March 31, 2004, net realized gains on short-term investments consisted of $25,000 of gross realized gains and $4,000 of gross realized losses. For the year ended March 31, 2003, net realized gains on short-term
investments consisted of $350,000 of gross realized gains and $116,000 of gross realized losses. As of March 31,
2002, we held no short-term investments and had no gross realized gains or losses for the year then ended.
5. Software Development Costs and Intellectual Property Licenses

As of March 31, 2004, capitalized software development costs included $35.3 million of internally developed software costs and $51.5 million of payments made to third-party software developers. As of March 31, 2003, capitalized software development costs included $26.0 million of internally developed software costs and $36.1 million of
payments made to third-party software developers. Capitalized intellectual property licenses were $48.5 million and$45.8 million as of March 31, 2004 and 2003, respectively. Amortization and write-offs of capitalized softwaredevelopment costs and intellectual property licenses, combined, was $87.9 million, $100.4 million and $62.5 million
for the years ended March 31, 2004, 2003 and 2002, respectively.

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Activision, Inc. — 2004 Annual Report

During the three months ended December 31, 2003, we executed a realignment of our product portfolio driven by
the evolution of the video game market, which is increasingly dominated by high quality products that are based on recognizable franchises and supported with big marketing programs. We completed a comprehensive review of our product portfolio in which we evaluated each product based on a number of criteria, including: the strength of the
franchise, the projected product quality, the potential responsiveness of the product to aggressive marketing support andthe financial risk in the event of product failure. As a result of this review, we believe that we have an extensive slateof high-potential properties in development. However, we also found that certain projects had a lower likelihood ofachieving acceptable levels of operating performance and that continued pursuit of these projects would create asubstantial opportunity cost as it related to our slate of high-potential projects. Accordingly, in the three months ended
December 31, 2003, we canceled the development of ten products which we believed were unlikely to produce anacceptable level of return on our investment. In connection with the cancellation of these products, we recorded a
pre-tax charge of approximately $21 million which is included in the consolidated statement of operations in productdevelopment expense.
For the year ended March 31, 2003, amortization and write-offs of capitalized software development costs andintellectual property licenses included approximately $15.0 million recorded in the fourth quarter as the result of theassessment of the recoverability of capitalized development costs relating to certain projects and certain of our investments in long-term licensing agreements.
6. Inventories

Our inventories consist of the following (amounts in thousands):
March 31,

Purchased parts and components
Finished goods

2004

2003

392
26,035$ 1,129
18,448$ 26,427$ 19,577

2004

2003

$

7. Property and Equipment, Net

Property and equipment, net was comprised of the following (amounts in thousands):
March 31,Land
Buildings
Computer equipment
Office furniture and other equipment
Leasehold improvements
Total cost of property and equipment
Less accumulated depreciation
Property and equipment, net

$

557
4,379
34,076
13,687
5,540

$

441
5,029
31,483
9,724
4,893

58,239(32,700)

51,570(29,305)$ 25,539$ 22,265

Depreciation expense for the years ended March 31, 2004, 2003 and 2002 was $10.0 million, $8.1 million and$6.2 million, respectively.

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Activision, Inc. — 2004 Annual Report

Notes to Consolidated Financial Statements
8. Goodwill

The changes in the carrying amount of goodwill were as follows (amounts in thousands):
Publishing

Distribution

Total

Balance as of March 31, 2002
Goodwill acquired during the year
Issuance of contingent consideration
Adjustment—prior period purchase allocation
Effect of foreign currency exchange rates
Balance as of March 31, 2003
Goodwill acquired during the year
Issuance of contingent consideration
Adjustment—prior period purchase allocation
Effect of foreign currency exchange rates$31,626
29,348
2,668
(448)
—

$4,366———459$35,992
29,348
2,668
(448)
459

63,194
3,763
3,246
695
—

4,825
—
—
—
770

68,019
3,763
3,246
695
770

Balance as of March 31, 2004

$70,898$5,595$76,493

9. Accrued Expenses

Accrued expenses were comprised of the following (amounts in thousands):
March 31,

Accrued royalties payable
Accrual for settlement of treasury stock purchases
Accrued selling and marketing costs
Income tax payable
Accrued bonus and vacation pay
Other
Total

2004

2003

$ 7,218—
11,456
9,897
20,042
14,592$ 6,430
7,553
8,737
6,940
12,287
16,709$63,205$58,656

10. Operations by Reportable Segments and Geographic Area

Based upon our organizational structure, we operate two business segments: (i) publishing of interactive entertainment
software and (ii) distribution of interactive entertainment software and hardware products.
Publishing refers to the development, marketing and sale of products directly, by license or through our affiliate label
program with certain third-party publishers. In the United States, we primarily sell our products on a direct basis tomass-market retailers, consumer electronics stores, discount warehouses and game specialty stores. We conduct ourinternational publishing activities through offices in the UK, Germany, France, Italy, Australia, Sweden, Canada andJapan. Our products are sold internationally on a direct-to-retail basis and through third-party distribution and licensing
arrangements and through our wholly-owned distribution subsidiaries located in the UK, the Netherlands and Germany.
Distribution refers to our operations in the UK, the Netherlands and Germany that provide logistical and sales services
to third-party publishers of interactive entertainment software, our own publishing operations and manufacturers of interactive entertainment hardware.

page 60

Activision, Inc. — 2004 Annual Report

Resources are allocated to each of these segments using information on their respective net revenues and operating
profits before interest and taxes.
The accounting policies of these segments are the same as those described in the Summary of Significant Accounting
Policies. Transactions between segments are eliminated in consolidation.
Information on the reportable segments for the three years ended March 31, 2004 is as follows (amounts in thousands):
Year ended March 31, 2004

Publishing

Distribution

Total

Total segment revenues
Revenue from sales between segments
Revenues from external customers
Operating income
Total assets$665,732(67,859)$281,924
67,859$947,656—$597,873$349,783$947,656$ 93,223$ 16,594$109,817$859,874$108,943$968,817$615,975(57,462)$248,141
57,462$864,116—$558,513$305,603$864,116$ 79,139$ 15,708$ 94,847$619,132$ 85,684$704,816$549,508(50,632)$236,926
50,632$786,434—$498,876$287,558$786,434$ 68,675$ 11,899$ 80,574$455,432$101,455$556,887

Year ended March 31, 2003

Total segment revenues
Revenue from sales between segments
Revenues from external customers
Operating income
Total assets
Year ended March 31, 2002

Total segment revenues
Revenue from sales between segments
Revenues from external customers
Operating income
Total assets

Geographic information is based on the location of the selling entity. Revenues from external customers by geographic
region were as follows (amounts in thousands):
Year ended March 31,

United States
Europe
Other
Total

2004

2003

2002

$446,812
479,224
21,620$432,261
413,125
18,730$404,905
368,799
12,730$947,656$864,116$786,434

page 61Activision, Inc. — 2004 Annual Report

Notes to Consolidated Financial Statements
Revenues by platform were as follows (amounts in thousands):
Year ended March 31,

2004

2003

2002

ConsoleHand-heldPC$732,220
43,306
172,130$674,621
64,069125,426$480,695
159,042
146,697

Total$947,656$864,116$786,434

A significant portion of our revenues is derived from products based on a relatively small number of popular brands
each year. In fiscal 2004, 31% of our consolidated net revenues (44% of worldwide publishing net revenues) was
derived from two brands, one of which accounted for 17% and the other of which accounted for 14% of consolidated
net revenues (24% and 20%, respectively, of worldwide publishing net revenues). In fiscal 2003, 38% of ourconsolidated net revenues (52% of worldwide publishing net revenues) was derived from two brands, one of which
accounted for 20% and the other of which accounted for 18% of consolidated net revenues (27% and 25%, respectively, of worldwide publishing net revenues). In fiscal 2002, 35% of our consolidated net revenues (50% of worldwide publishing net revenues) was derived from two brands, one of which accounted for 31% and the other of which
accounted for 4% of consolidated net revenues (44% and 6%, respectively, of worldwide publishing net revenues).
11. Computation of Earnings Per Share

The following table sets forth the computations of basic and diluted earnings per share (amounts in thousands, except
per share data):
Year ended March 31,

Numerator:
Numerator for basic and diluted earnings per share—
income available to common shareholders
Denominator:
Denominator for basic earnings per share—weighted average common shares outstanding
Effect of dilutive securities:
Employee stock options and stock purchase plan
Warrants to purchase common stock
Potential dilutive common shares
Denominator for diluted earnings per share—weighted averagecommon shares outstanding plus assumed conversions
Basic earnings per share
Diluted earnings per share

2004

2003

2002

$ 77,715$ 66,180$ 52,238

133,249

144,359

113,966

11,042602

10,278846

18,648
1,161

11,644

11,12419,809144,893

155,483

133,775

$

0.58

$

0.46

$

0.46

$

0.54

$

0.43

$

0.39

Options to purchase approximately 9,471,000, 7,799,000 and 237,000 shares of common stock for the years
ended March 31, 2004, 2003 and 2002, respectively, were not included in the calculation of diluted earnings per
share because their effect would be antidilutive.

page 62

Activision, Inc. — 2004 Annual Report

12. Income Taxes

Domestic and foreign income before income taxes and details of the income tax provision are as follows (amounts
in thousands):
Year ended March 31,

Income before income taxes:
Domestic
Foreign
Income tax expense (benefit):
Current:
FederalState
Foreign
Total current
Deferred:FederalState
Foreign
Total deferred
Add back benefit credited to additional paid-in capital:
Tax benefit related to stock option and warrant exercises
Income tax provision

2004

2003

2002

$ 84,339
31,653$ 78,761
24,646$ 67,553
15,567$115,992$103,407$ 83,120

$

$

$

502
311
9,899

1,703
413
7,872

648
20
5,053

10,712

9,988

5,721

14,113
(871)
1,906

1,794
3,065
(1,504)(18,751)(4,555)(46)

15,1483,355(23,352)

12,41723,884

48,513$ 38,277$ 37,227$ 30,882

The items accounting for the difference between income taxes computed at the U.S. federal statutory income tax rate
and the income tax provision for each of the years are as follows:Year ended March 31,

2004

2003

2002

Federal income tax provision at statutory rate
State taxes, net of federal benefit
Research and development credits
Incremental (decremental) effect of foreign tax rates
Increase of valuation allowance
Rate changes
Other

35.0%
2.3
(8.0)
(2.3)
5.8
—
0.2

35.0%
2.4
(6.0)
(0.2)
2.1
0.8
1.9

35.0%
3.5
(1.8)
(1.4)
2.4
—
(0.5)

33.0%

36.0%

37.2%

page 63

Activision, Inc. — 2004 Annual Report

Notes to Consolidated Financial Statements
Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities
for accounting purposes and the amounts used for income tax purposes. The components of the net deferred tax asset
and liability are as follows (amounts in thousands):
March 31,

Deferred asset:
Allowance for doubtful accounts
Allowance for sales returns
Inventory reserve
Vacation and bonus reserve
Amortization and depreciation
Tax credit carryforwards
Net operating loss carryforwards
Other
Deferred asset
Valuation allowance
Net deferred asset
Deferred liability:
Capitalized research expenses
State taxes
Deferred liability
Net deferred asset

2004

2003

634
8,334
385
2,771
5,036
36,59925,851
2,248$ 1,538
10,511
775
2,409
4,794
25,74147,3993,946

81,858(18,857)

97,113(27,606)

63,001

69,50725,252
2,558

18,7752,120

27,81020,895$ 35,191$ 48,612$

The tax benefits associated with certain net operating loss carryovers relate to employee stock options. Pursuant to
SFAS No. 109, net operating losses have been reduced by $12.7 million relating to these items which will be credited to additional paid-in capital when realized.
As of March 31, 2004, our available federal net operating loss carryforward of approximately $62.0 million is
subject to certain limitations as defined under Section 382 of the Internal Revenue Code. The net operating loss
carryforwards expire between 2020 and 2023. We have various state net operating loss carryforwards which are
not subject to limitations under Section 382 of the Internal Revenue Code. We have tax credit carryforwards of $22.8
million and $13.8 million for federal and state purposes, respectively, which begin to expire in 2006.
At March 31, 2004, our deferred income tax asset for tax credit carryforwards and net operating loss carryforwards
was reduced by a valuation allowance of $18.9 million as compared to $27.6 million in the prior fiscal year.
Realization of the deferred tax assets is dependent upon the continued generation of sufficient taxable income prior to
expiration of tax credits and loss carryforwards. Although realization is not assured, management believes it is more likely
than not that the net carrying value of the deferred tax asset will be realized.
Cumulative undistributed earnings of foreign subsidiaries for which no deferred taxes have been provided approximated$52.7 million at March 31, 2004. Deferred income taxes on these earnings have not been provided as these amounts
are considered to be permanent in duration.

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Activision, Inc. — 2004 Annual Report

13. Long-Term Debt
Mortgage Notes Payable

As of March 31, 2003, long-term debt and the current portion of long-term debt of $2.8 million were comprised ofthe mortgage note payable related to the land, office and warehouse facilities of our German subsidiary. The German
mortgage note bore interest at 5.45%, was due in bi-annual installments of Euro (“EUR”) 73,900 ($89,958), wascollateralized by the related assets and was scheduled to mature in December 2018. The German mortgage note was
repaid in full in fiscal 2004.
Credit Facilities

We have revolving credit facilities with 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
up to Great British Pounds (“GBP”) 8.0 million ($14.6 million) and GBP 8.6 million ($13.5 million), including issuing
letters of credit, on a revolving basis as of March 31, 2004 and 2003, respectively. Furthermore, under the UK
Facility, Centresoft provided a GBP 0.3 million ($0.5 million) and a EUR 1.0 million ($1.1 million) guarantee forthe benefit of our CD Contact subsidiary as of March 31, 2004 and 2003, respectively. The UK Facility bore interest at LIBOR plus 2.0% and LIBOR plus 1.5% as of March 31, 2004 and 2003, respectively, is collateralized bysubstantially all of the assets of the subsidiary and expires in November 2004. The UK Facility also contains various
covenants that require the subsidiary to maintain specified financial ratios related to, among others, fixed charges. As of
March 31, 2004 and 2003, we were in compliance with these covenants. No borrowings were outstanding against
the UK Facility as of March 31, 2004 or 2003. The German Facility provided for revolving loans up to EUR 0.5
million ($0.6 million) and EUR 0.8 million ($0.8 million) as of March 31, 2004 and 2003, respectively, boreinterest at a Eurocurrency rate plus 2.5%, is collateralized by certain of the subsidiary’s property and equipment andhas no expiration date. No borrowings were outstanding against the German Facility as of March 31, 2004 or 2003.
Private Placement of Convertible Subordinated Notes

In December 1997, we completed the private placement of $60.0 million principal amount of 63⁄4% convertible
subordinated notes due 2005 (the “Notes”). The Notes were convertible, in whole or in part, at the option of theholder at any time after December 22, 1997 (the date of original issuance) and prior to the close of business on thebusiness day immediately preceding the maturity date, unless previously redeemed or repurchased, into our common
stock at a conversion price of $5.593 per share, subject to adjustment in certain circumstances. During the threemonths ended June 30, 2001, we called for the redemption of the Notes. In connection with that call, holders
converted to common stock approximately $58.7 million aggregate principal amount of their Notes, net of conversion
costs. The remaining Notes were redeemed for cash.
14. Commitments and Contingencies
Developer and Intellectual Property Contracts

In the normal course of business, we enter into contractual arrangements with third parties for the development of
products, as well as for the rights to intellectual property. Under these agreements, we commit to provide specified
payments to a developer, or intellectual property holder, based upon contractual arrangements. Typically, the payments
to third-party developers are conditioned upon the achievement by the developers of contractually specified development milestones. These payments to third-party developers and intellectual property holders typically are deemed to be

page 65

Activision, Inc. — 2004 Annual Report

Notes to Consolidated Financial Statements
advances and are recoupable against future royalties earned by the developer or intellectual property holder based on
the sale of the related game. Assuming all contractual provisions are met, the total future minimum contract commitment
for contracts in place as of March 31, 2004 is approximately $89.3 million, which is scheduled to be paid as follows(amounts in thousands):
Year ended March 31,

2005
2006
2007
2008
2009
Total

$62,529
17,328
4,545
1,895
3,020
$89,317

The commitment schedule above excludes approximately $9.3 million of commitments originally scheduled to be paid
between fiscal 2004 through fiscal 2007 relating to an intellectual property rights agreement with a third party.
Effective June 30, 2003, we terminated the agreement and filed a breach of contract suit against the third party.
Marketing Commitments

In connection with certain intellectual property right acquisitions and development agreements, we will commit to spend
specified amounts for marketing support for the related game(s) which is to be developed or in which the intellectual
property will be utilized. Assuming all contractual provisions are met, the total future minimum marketing commitment forcontracts in place as of March 31, 2004 is approximately $66.4 million, which is scheduled to be paid as follows(amounts in thousands):
Year ended March 31,

2005
2006
2007
Total

$39,919
11,50015,000$66,419

Lease Obligations

We lease certain of our facilities under non-cancelable operating lease agreements. Total future minimum lease commitments as of March 31, 2004 are as follows (amounts in thousands):
Year ended March 31,

2005
2006
2007
2008
2009
ThereafterTotal$ 8,936
7,520
6,870
4,033
2,993
16,222$46,574

Facilities rent expense for the years ended March 31, 2004, 2003 and 2002 was approximately $8.7 million, $7.6
million and $5.3 million, respectively.

page 66

Activision, Inc. — 2004 Annual Report

Legal Proceedings

On March 5, 2004, a class action lawsuit was filed against us and certain of our current and former officers anddirectors. The complaint, which asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of1934 based on allegations that our revenues and assets were overstated during the period between February 1,
2001 and December 17, 2002, was filed in the United States District Court, Central District of California by theConstruction Industry and Carpenters Joint Pension Trust for Southern Nevada purporting to represent a class of purchasers of Activision stock. Five additional purported class actions have subsequently been filed by Gianni Angeloni,
Christopher Hinton, Stephen Anish, the Alaska Electrical Pension Fund, and Joseph A. Romans asserting the same claims.
Five of the six actions have been transferred to the same court where the first-filed complaint was pending. In addition,
on March 12, 2004, a shareholder derivative lawsuit was filed, purportedly on behalf of Activision, which in large
measure asserts the identical claims set forth in the federal class action lawsuit. That complaint was filed in Superior
Court for the County of Los Angeles. We strongly deny these allegations and will vigorously defend these cases.
On July 11, 2003, we were informed by the staff of the Securities and Exchange Commission that the Securities andExchange Commission has commenced a non-public formal investigation captioned “In the Matter of Certain Video
Game Manufacturers and Distributors.” The investigation appears to be focused on certain accounting practices common to the interactive entertainment industry, with specific emphasis on revenue recognition. In connection with thisinquiry, the Securities and Exchange Commission submitted to us a request for information. We responded to this inquiry
on September 2, 2003. To date, we have not received a request from the Securities and Exchange Commission for
any additional information. The Securities and Exchange Commission staff also informed us that other companies in thevideo game industry received similar requests for information. The Securities and Exchange Commission has advised usthat this request for information should not be construed as an indication from the Securities and Exchange Commission
or its staff that any violation of the law has occurred, nor should it reflect negatively on any person, entity or security.
We have cooperated and intend to continue to cooperate fully with the Securities and Exchange Commission in the
conduct of this inquiry.
On June 30, 2003, we terminated our Star Trek Merchandising License Agreement with Viacom Consumer Products,
Inc. and filed a complaint in the Superior Court of the State of California for breach of contract and constructive trust
against Viacom Consumer Products and Viacom International, Inc. (“Viacom”). On August 15, 2003, Viacom filed its
response to our complaint as well as a cross-complaint alleging, among other matters, a breach of contract by
Activision and seeking claimed damages in excess of $50 million. We strongly dispute the claims by Viacom, consider
the damages alleged by Viacom to be speculative and without merit, and intend to defend vigorously and aggressively
against the cross-complaint.
In addition, we are party to other routine claims and suits brought by us and against us in the ordinary course ofbusiness, including disputes arising over the ownership of intellectual property rights, contractual claims and collection
matters. In the opinion of management, after consultation with legal counsel, the outcome of such routine claims will nothave a material adverse effect on our business, financial condition, results of operations or liquidity.
15. Stock Compensation and Employee Benefit Plans
Stock Option Plans

We sponsor several stock option plans for the benefit of officers, employees, consultants and others.

page 67

Activision, Inc. — 2004 Annual Report

Notes to Consolidated Financial Statements
On September 23, 1998, the shareholders of Activision approved the Activision 1998 Incentive Plan, as amended(the “1998 Plan”). The 1998 Plan permits the granting of “Awards” in the form of non-qualified stock options, ISOs,
SARs, restricted stock awards, deferred stock awards and other common stock-based awards to directors, officers,
employees, consultants and others. The total number of shares of common stock available for distribution under the1998 Plan is 10,125,000. The 1998 Plan requires available shares to consist in whole or in part of authorized andunissued shares or treasury shares. There were approximately 11,800 shares remaining available for grant under the1998 Plan as of March 31, 2004.
On April 26, 1999, the Board of Directors approved the Activision 1999 Incentive Plan, as amended (the “1999Plan”). The 1999 Plan permits the granting of “Awards” in the form of non-qualified stock options, ISOs, SARs,
restricted stock awards, deferred share awards and other common stock-based awards to directors, officers, employees,
consultants and others. The total number of shares of common stock available for distribution under the 1999 Plan is
16,875,000. The 1999 Plan requires available shares to consist in whole or in part of authorized and unissued sharesor treasury shares. There were approximately 50,400 shares remaining available for grant under the 1999 Plan as ofMarch 31, 2004.
On August 23, 2001, the shareholders of Activision approved the Activision 2001 Incentive Plan, as amended (the“2001 Plan”). The 2001 Plan permits the granting of “Awards” in the form of non-qualified stock options, ISOs, SARs,
restricted stock awards, deferred stock awards and other common stock-based awards to directors, officers, employees,
consultants and others. The total number of shares of common stock available for distribution under the 2001 Plan is5,062,500. The 2001 Plan requires available shares to consist in whole or in part of authorized and unissued sharesor treasury shares. There were approximately 100,000 shares remaining available for grant under the 2001 Plan asof March 31, 2004.
On April 4, 2002, the Board of Directors approved the Activision 2002 Incentive Plan (the “2002 Plan”). The 2002
Plan permits the granting of “Awards” in the form of non-qualified stock options, ISOs, SARs, restricted stock awards,
deferred share awards and other common stock-based awards to officers (other than executive officers), employees,
consultants, advisors and others. The 2002 Plan requires available shares to consist in whole or in part of authorized
and unissued shares or treasury shares. The total number of shares of common stock available for distribution under the2002 Plan is 9,787,500. There were approximately 2,032,100 shares remaining available for grant under the 2002
Plan as of March 31, 2004.
On September 19, 2002, the shareholders of Activision approved the Activision 2002 Executive Incentive Plan (the“2002 Executive Plan”). The 2002 Executive Plan permits the granting of “Awards” in the form of non-qualified stock
options, ISOs, SARs, restricted stock awards, deferred share awards and other common stock-based awards to officers,
employees, directors, consultants and advisors. The total number of shares of common stock available for distribution
under the 2002 Executive Plan is 5,625,000. The 2002 Executive Plan requires available shares to consist in whole
or in part of authorized and unissued shares or treasury shares. There were approximately 248,600 shares remaining
available for grant under the 2002 Executive Plan as of March 31, 2004.
On December 16, 2002, the Board of Directors approved the Activision 2002 Studio Employee Retention IncentivePlan, as amended (the “2002 Studio Plan”). The 2002 Studio Plan permits the granting of “Awards” in the form of
non-qualified stock options and restricted stock awards to key studio employees (other than executive officers) of
Activision, our subsidiaries and affiliates and to contractors and others. The 2002 Studio Plan requires available shares
to consist in whole or in part of authorized and unissued shares or treasury shares. The total number of shares of common stock available for distribution under the 2002 Studio Plan is 3,375,000. There were approximately 62,300
shares remaining available for grant under the 2002 Studio Plan as of March 31, 2004.

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Activision, Inc. — 2004 Annual Report

On April 29, 2003, our Board of Directors approved the Activision 2003 Incentive Plan (the “2003 Plan”).
The 2003 Plan permits the granting of “Awards” in the form of non-qualified stock options, SARs, restricted stock
awards, deferred stock awards and other common stock-based awards to directors, officers, employees, consultants andothers. The 2003 Plan requires available shares to consist in whole or in part of authorized and unissued shares ortreasury shares. The total number of shares of common stock available for distribution under the 2003 Plan is13,500,000. There were approximately 13,353,800 shares remaining available for grant under the 2003 Plan as ofMarch 31, 2004.
The exercise price for Awards issued under the 1998 Plan, 1999 Plan, 2001 Plan, 2002 Plan, 2002 Executive Plan,
2002 Studio Plan and 2003 Plan (collectively, the “Plans”) is determined at the discretion of the Board of Directors(or the Compensation Committee of the Board of Directors, which administers the Plans), and for ISOs, is not to beless than the fair market value of our common stock at the date of grant, or in the case of non-qualified options, must
exceed or be equal to 85% of the fair market value of our common stock at the date of grant. Options typically
become exercisable in installments over a period not to exceed seven years and must be exercised within 10 years ofthe date of grant. However, certain options granted to executives vest immediately. Historically, stock options have been
granted with exercise prices equal to or greater than the fair market value at the date of grant.
Other Employee Stock Options

In connection with prior employment agreements between Activision and Robert A. Kotick, Activision’s Chairman andChief Executive Officer, and Brian G. Kelly, Activision’s Co-Chairman, Mr. Kotick and Mr. Kelly were granted options
to purchase common stock. The Board of Directors approved the granting of these options. Relating to such grants, asof March 31, 2004, approximately 7,816,400 shares were outstanding with a weighted average exercise priceof $2.81.
We additionally have approximately 209,500 options outstanding to employees as of March 31, 2004, with aweighted average exercise price of $6.19. The Board of Directors approved the granting of these options. Such
options have terms similar to those options granted under the Plans.
Director Warrants

During the fiscal year ended March 31, 1997, we issued warrants to purchase 135,000 shares of our common stock,at exercise prices ranging from $3.50 to $4.11 to two of our outside directors in connection with their election to theBoard. Such warrants vested 25% on the first anniversary of the date of grant, and 12.5% each six months thereafterand expire within 10 years from the date of grant. Relating to such warrants, as of March 31, 2004, approximately
67,500 shares with a weighted average exercise price of $4.01 were outstanding.
Employee Stock Purchase Plans

On July 22, 2002, the Board of Directors approved the 2002 Employee Stock Purchase Plan for eligible domestic
employees. The shareholders of Activision subsequently approved the 2002 Employee Stock Purchase Plan on
September 19, 2002. Then, on February 11, 2003, the Board of Directors approved the 2002 Employee Stock
Purchase Plan for International Employees. The primary terms of the 2002 Employee Stock Purchase Plan and the2002 Employee Stock Purchase Plan for International Employees (collectively the “2002 Purchase Plans”) are thesame. Under the 2002 Purchase Plans, up to 1,125,000 shares of our common stock may be purchased by eligible
employees during two overlapping, twelve-month offering periods that commence each April 1 and October 1 (the“Offering Period”). At any point in time, employees may participate in only one Offering Period. The first day of each
Offering Period is referred to as the “Offering Date.” Common stock is purchased by 2002 Purchase Plans participants
at 85% of the lesser of fair market value on the Offering Date for the Offering Period that includes the common stock
purchase date or the fair market value on the common stock purchase date. Employees may purchase shares having avalue not exceeding 15% of their gross compensation during an Offering Period, limited to a maximum of 11,250

page 69

Activision, Inc. — 2004 Annual Report

Notes to Consolidated Financial Statements
common shares per common stock purchase date. During the year ended March 31, 2004, employees purchased
approximately 242,300, 60,000 and 255,300 shares at a price of $5.48, $7.06 and $5.48 per share, respectively, within the 2002 Purchase Plans’ Offering Periods.
Prior to the 2002 Purchase Plans, we had an employee stock purchase plan for all eligible domestic employees (the“Prior Purchase Plan”). Under the Prior Purchase Plan, shares of our common stock could be purchased at six-monthintervals at 85% of the lower of the fair market value on the first or last day of each six-month period. Employees could
purchase shares having a value not exceeding 10% of their gross compensation during each six-month period.
Employees purchased approximately 114,750 and 209,250 shares at a price of $9.47 and $5.57 per share
during the six months ended September 30, 2002 and March 31, 2003, respectively. The Prior Purchase Plan expired
on March 31, 2003.
Activity of Employee and Director Options and Warrants

Activity of all employee and director options and warrants during the last three fiscal years was as follows (amounts inthousands, except weighted average exercise price amounts):
2004

Outstanding at beginning of year
GrantedExercised
Forfeited
Outstanding at end of year
Exercisable at end of year

2003

2002

SharesWtd. Avg.
Ex. Price

SharesWtd. Avg.
Ex. Price

SharesWtd. Avg.
Ex. Price

36,710
6,795(4,585)(2,282)

$6.35
7.22
4.87
8.07

28,943
14,423(5,675)
(981)

$4.17
9.48
3.22
5.77

40,311
9,246(19,533)(1,081)

$2.87
7.25
2.99
3.27

36,638$6.59

36,710$6.35

28,943$4.17

19,600$5.26

17,244$4.29

14,252$3.67

For the years ended March 31, 2004, 2003 and 2002, all options were granted at an exercise price equal to thefair market value on the date of grant.
The following tables summarize information about all employee and director stock options and warrants outstanding asof March 31, 2004 (share amounts in thousands):

Range of exercise prices:$ 1.41 to $ 2.81
$ 2.93 to $ 3.11
$ 3.13 to $ 6.01
$ 6.08 to $ 6.29
$ 6.30 to $ 7.85
$ 7.94 to $10.20$10.30 to $12.27$12.29 to $14.23$14.46 to $14.46$14.77 to $14.77

page 70

Outstanding Options

Exercisable Options

SharesRemaining
Wtd. Avg.
Contractual Life(in years)

Wtd. Avg.
Exercise Price

SharesWtd. Avg.
Exercise Price

3,048
6,205
7,001
5,363
4,277
5,270
4,783
666
18
7

6.08
5.00
6.37
7.45
8.44
8.50
8.11
8.68
8.14
8.18

$ 1.88
3.11
4.89
6.25
7.19
9.79
11.97
13.36
14.46
14.77

2,784
6,119
3,116
3,018
1,129
985
2,285
157
5
2

$ 1.87
3.11
3.95
6.23
7.36
9.77
12.07
13.35
14.46
14.77

36,6387.09$ 6.5919,600$ 5.26

Activision, Inc. — 2004 Annual Report

Non-Employee Warrants

In prior years, we have granted stock warrants to third parties in connection with the development of software and theacquisition of licensing rights for intellectual property. The warrants generally vest upon grant and are exercisable over
the term of the warrant. The exercise price of third-party warrants is generally greater than or equal to the fair market
value of our common stock at the date of grant. No third-party warrants were granted during the year ended March
31, 2004. As of March 31, 2004, 1,539,000 third-party warrants to purchase common stock were outstanding
with a weighted average exercise price of $9.50 per share. During the year ended March 31, 2003, we granted
warrants to a third party to purchase 337,500 shares of our common stock at an exercise price of $13.22 per sharein connection with, and as partial consideration for, a license agreement that allows us to utilize intellectual property
owned by the third party in conjunction with an Activision product. The warrants vested upon grant and have a threeyear term. The fair value of the warrants was determined using the Black-Scholes pricing model, assuming a risk-freerate of 4.18%, a volatility factor of 70% and expected term as noted above. The per share weighted average
estimated fair value of the third-party warrants granted during the year ended March 31, 2003 was $6.47 per share.
As of March 31, 2003, 1,984,500 third-party warrants to purchase common stock were outstanding with a weighted
average exercise price of $6.25 per share. No third-party warrants were granted during the year ended March 31,
2002. As of March 31, 2002, 1,747,500 third-party warrants to purchase common stock were outstanding with aweighted average exercise price of $7.81 per share.
In accordance with EITF 96-18, we measure the fair value of the securities on the measurement date. The fair valueof each warrant is capitalized and amortized to expense when the related product is released and the related revenue
is recognized. Additionally, as more fully described in Note 1, the recoverability of capitalized software development
costs and intellectual property licenses is evaluated on a quarterly basis with amounts determined as not recoverable
being charged to expense. In connection with the evaluation of capitalized software development costs and intellectual
property licenses, any capitalized amounts for related third-party warrants are additionally reviewed for recoverability
with amounts determined as not recoverable being amortized to expense. For the years ended March 31, 2004,
2003 and 2002, $0.2 million, $3.6 million and $1.1 million, respectively, was amortized and included in cost of
sales—software royalties and amortization and/or cost of sales—intellectual property licenses.
Employee Retirement Plan

We have a retirement plan covering substantially all of our eligible employees. The retirement plan is qualified in accordance with Section 401(k) of the Internal Revenue Code. Under the plan, employees may defer up to 15% of theirpre-tax salary, but not more than statutory limits. Effective January 1, 2003, we contribute 20% of each dollar contributed by a participant. Prior to January 1, 2003, we contributed 5% of each dollar contributed by a participant.
Our matching contributions to the plan were approximately $700,000, $320,000 and $82,000 during the years
ended March 31, 2004, 2003 and 2002, respectively.
16. Capital Transactions
Buyback Program

During fiscal 2003, our Board of Directors authorized a buyback program under which we can repurchase up to$350.0 million of our common stock. Under the program, shares may be purchased as determined by management,from time to time and within certain guidelines, in the open market or in privately negotiated transactions, including
privately negotiated structured stock repurchase transactions and through transactions in the options markets.
Depending on market conditions and other factors, these purchases may be commenced or suspended at any time orfrom time to time without prior notice.
Under the buyback program, we repurchased approximately 1.9 million shares of our common stock for $12.4 millionand 16.2 million shares our common stock for $101.4 million, during the years ended March 31, 2004 and 2003,

page 71

Activision, Inc. — 2004 Annual Report

Notes to Consolidated Financial Statements
respectively. In addition, approximately 1.7 million shares of common stock were acquired in the year ended March 31,
2004 as a result of the settlement of $10.0 million of structured stock repurchase transactions entered into in fiscal
2003. Structured stock repurchase transactions are settled in cash or stock based on the market price of our common
stock on the date of the settlement. Upon settlement, we either have our capital investment returned with a premium or
receive shares of our common stock, depending, respectively, on whether the market price of our common stock is above
or below a pre-determined price agreed in connection with each such transaction. These transactions are recorded inshareholders’ equity in the accompanying consolidated balance sheets. As of March 31, 2004, we had approximately$226.2 million available for utilization under the buyback program and no outstanding structured stock repurchasetransactions. In any period, cash provided by or used in financing activities related to common stock repurchasetransactions may differ from the comparable change in shareholders’ equity, reflecting timing differences between therecognition of share repurchase transactions and their settlement for cash.
Shelf Registrations

In August 2003, we filed with the Securities and Exchange Commission two amended shelf registration statements,
including the base prospectuses therein. The first shelf registration statement, on Form S-3, allows us, at any time, tooffer any combination of securities described in the base prospectus in one or more offerings with an aggregate initialoffering price of up to $500.0 million. Unless we state otherwise in the applicable prospectus supplement, we expect
to use the net proceeds from the sale of the securities for general corporate purposes, including capital expenditures,
working capital, repayment or reduction of long-term and short-term debt and the financing of acquisitions and otherbusiness combinations. We may invest funds that we do not immediately require in marketable securities.
The second shelf registration statement, on Form S-4, allows us, at any time, to offer any combination of securities
described in the base prospectus in one or more offerings with an aggregate initial offering price of up to $250.0 million in connection with our acquisition of the assets, business or securities of other companies whether by purchase,
merger, or any other form of business combination.
Shareholders’ Rights Plan

On April 18, 2000, our Board of Directors approved a shareholders’ rights plan (the “Rights Plan”). Under the Rights
Plan, each common shareholder at the close of business on April 19, 2000, received a dividend of one right for eachshare of common stock held. Each right represents the right to purchase one one-hundredths (1/100) of a share of
our Series A Junior Preferred Stock at an exercise price of $40.00. Initially, the rights are represented by our common
stock certificates and are neither exercisable nor traded separately from our common stock. The rights will only become
exercisable if a person or group acquires 15% or more of the common stock of Activision, or announces or commencesa tender or exchange offer which would result in the bidder’s beneficial ownership of 15% or more of our common stock.
In the event that any person or group acquires 15% or more of our outstanding common stock each holder of a right(other than such person or members of such group) will thereafter have the right to receive upon exercise of such right,
in lieu of shares of Series A Junior Preferred Stock, the number of shares of common stock of Activision having a value
equal to two times the then current exercise price of the right. If we are acquired in a merger or other business combination transaction after a person has acquired 15% or more of our common stock, each holder of a right will thereafter have the right to receive upon exercise of such right a number of the acquiring company’s common shares having amarket value equal to two times the then current exercise price of the right. For persons who, as of the close of businesson April 18, 2000, beneficially own 15% or more of the common stock of Activision, the Rights Plan “grandfathers”
their current level of ownership, so long as they do not purchase additional shares in excess of certain limitations.
We may redeem the rights for $.01 per right at any time until the first public announcement of the acquisition of
beneficial ownership of 15% of our common stock. At any time after a person has acquired 15% or more (but before
any person has acquired more than 50%) of our common stock, we may exchange all or part of the rights for sharesof common stock at an exchange ratio of one share of common stock per right. The rights expire on April 18, 2010.
page 72

Activision, Inc. — 2004 Annual Report

17. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) were as follows (amounts in thousands):

Foreign Currency

Unrealized
Appreciation(Depreciation)
on Investments

Accumulated Other
Comprehensive
Income (Loss)

Balance, March 31, 2003
Comprehensive income (loss)$ (3,568)
13,432$134(37)$ (3,434)
13,395

Balance, March 31, 2004

$ 9,864$ 97$ 9,961

The amounts above are shown net of taxes. The income taxes related to other comprehensive income were not significant,as income taxes were not provided for foreign currency translation items as these are considered indefinite investments
in non-U.S. subsidiaries.
18. Supplemental Cash Flow Information

Non-cash investing and financing activities and supplemental cash flow information are as follows (amounts in thousands):
Year ended March 31,

2004

Non-cash investing and financing activities:
Conversion of convertible subordinated notes, net of conversion costs
Subsidiaries acquired with common stock
Issuance of options and common stock warrants
Stock offering costs
Change in unrealized appreciation on short-term investments
Supplemental cash flow information:
Cash paid for income taxes
Cash paid (received) for interest, net

$

2003

2002

— $
—
3,246
10,861
—
2,184
—
781
(37)
134

$58,651
25,481
3,217——$10,463 $ 5,491 $ 3,041(6,213)(7,804)(2,942)

19. Quarterly Financial and Market Information (Unaudited)

Quarter ended(Amounts in thousands, except per share data)

June 30

Sept. 30

Dec. 31Mar. 31

Year
ended

$158,725
5,146
4,163
0.03
0.03

$117,523 $508,511(16,933) 116,961(10,093)
76,981(0.08)
0.58(0.08)
0.53$162,897
4,643
6,664
0.05
0.04

$947,656
109,81777,715
0.58
0.54

16.17
11.38

16.17
6.01

Fiscal 2004:

Net revenues
Operating income (loss)
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Common stock price per share:
High
Low

8.99
6.01

9.58
7.23

12.73
7.71

$191,258
31,196
20,7040.15
0.14$169,172
11,334
9,086
0.06
0.06

$378,685
66,761
44,347
0.30
0.28

15.60
11.70

14.02
9.91

10.61
5.42

Fiscal 2003:

Net revenues
Operating income (loss)
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Common stock price per share:
High
Low

$125,001 $864,116(14,444)
94,847(7,957)
66,180(0.06)
0.46(0.06)
0.43
7.00
5.79

15.60
5.42
page 73

Activision, Inc. — 2004 Annual ReportMarket for Registrant’s Common Equity, Related Stockholder Mattersand Issuer Purchases of Equity Securities
Our common stock is quoted on the Nasdaq National Market under the symbol “ATVI.”The following table sets forth for the periods indicated the high and low reported sale prices for our common stock.
As of May 26, 2004, there were approximately 2,840 holders of record of our common stock.
High

Low

$15.60
14.02
10.61
7.00

$11.70
9.91
5.42
5.79

$ 8.99
9.58
12.73
16.17

$ 6.01
7.23
7.71
11.38

Fiscal 2003

First Quarter ended June 30, 2002
Second Quarter ended September 30, 2002
Third Quarter ended December 31, 2002
Fourth Quarter ended March 31, 2003
Fiscal 2004

First Quarter ended June 30, 2003
Second Quarter ended September 30, 2003
Third Quarter ended December 31, 2003
Fourth Quarter ended March 31, 2004
On May 26, 2004, the last reported sales price of our common stock was $15.88.
Dividends

We paid no cash dividends in 2004 or 2003 nor do we anticipate paying any cash dividends at any time in theforeseeable future. We expect that earnings will be retained for the continued growth and development of the business.
Future dividends, if any, will depend upon our earnings, financial condition, cash requirements, future prospects andother factors deemed relevant by our Board of Directors.
Stock Splits

In April 2003, the Board of Directors approved a three-for-two split of our outstanding common shares effected in theform of a 50% stock dividend. The split was paid on June 6, 2003 to shareholders of record as of May 16, 2003.
In February 2004, the Board of Directors approved a second three-for-two split of our outstanding common shareseffected in the form of a 50% stock dividend. The split was paid on March 15, 2004 to shareholders of record as ofFebruary 23, 2004.

page 74

Activision, Inc. — 2004 Annual Report

Corporate Information
Officers

Transfer Agent

Forward-Looking Statements

Robert A. Kotick

Co-Chairman

Continental Stock Transfer& Trust Company
17 Battery PlaceNew York, New York 10004(212) 509-4000

Ronald Doornink

Auditor

The statements contained in this reportthat are not historical facts are“forward-looking statements.” Thecompany cautions readers of thisreport that a number of importantfactors could cause Activision’s actual
future results to differ materially fromthose expressed in any such forwardlooking statements. These importantfactors, and other factors that could
affect Activision, are describedin Activision’s Annual Report on
Form 10-K for the fiscal year ended
March 31, 2004, which was filedwith the United States Securities andExchange Commission. Readers of thisAnnual Report are referred to this filing.

Chairman andChief Executive Officer

Brian G. Kelly

President, Activision, Inc. and
Chief Executive Officer,
Activision Publishing, Inc.

Kathy P. Vrabeck
President, Activision PublishingBank

William J. Chardavoyne

US Bank
Los Angeles, California

Chief Financial Officer andExecutive Vice President

Michael J. Rowe
Executive Vice President,
Human Resources

Richard A. Steele
President, Activision Distribution
and Executive Vice President,International Distribution

George L. Rose
Senior Vice President, Businessand Legal Affairs, GeneralCounsel and Secretary
Board of Directors

Robert A. Kotick
Chairman andChief Executive Officer

Brian G. Kelly
Co-Chairman

Ronald Doornink
President, Activision, Inc. and
Chief Executive Officer,
Activision Publishing, Inc.

Robert J. Corti
Designed by Curran & Connors, Inc. / www.curran-connors.com

PricewaterhouseCoopers LLP
Los Angeles, California

Chief Financial Officer,
Avon Products, Inc.

Kenneth L. Henderson
Partner, Bryan Cave LLP

Barbara S. Isgur
Former Senior Vice President,
Stratagem

Robert J. Morgado
Chairman, Maroley Media Group

Peter J. Nolan
Managing Partner,
Leonard Green & Partners, L.P.

Corporate Counsel

Bryan Cave LLPNew York, New York
Corporate Headquarters

Activision, Inc.
3100 Ocean Park BoulevardSanta Monica, California 90405(310) 255-2000

World Wide Web Site

http://www.activision.com
E-MailIR@activision.com
Annual Meeting

Domestic Offices

Dallas, Texas
Eagan, Minnesota
Eden Prairie, Minnesota
Encino, California
Hayward, California
Los Angeles, California
Madison, Wisconsin
New York, New YorkSan Francisco, California
Woodland Hills, California
International Offices

Bezons, France
Birmingham, United Kingdom
Breda, The Netherlands
Burglengenfeld, Germany
Legnano, Italy
Madrid, Spain
Ontario, Canada
Slough, United Kingdom
Stockholm, Sweden
Sydney, Australia
Tokyo, Japan
Venlo, The Netherlands

September 21, 2004
The Peninsula Hotel
9882 South Santa Monica Blvd.
Beverly Hills, California 90212
Annual Report on Form 10-K

Activision’s Annual Report on Form 10-K
for the year ended March 31, 2004
is available to shareholders withoutcharge upon request from ourcorporate offices.
Spider-Man and all related Marvel
characters,  & © 2004 Marvel
Characters, Inc. Spider-Man 2, themovie, © 2004 Columbia Pictures
Industries, Inc. All rights reserved.
Shrek is a registered trademark ofDreamWorks L.L.C. Shrek 2, Shrek Ear
Design and Shrek “S”  & © 2004
DreamWorks L.L.C. All rights reserved.
MARVEL, Spider-Man and X-MEN, andthe distinctive likenesses thereof aretrademarks of Marvel Characters, Inc.,and are used with permission. Copyright© 2000 Marvel Characters, Inc. All
rights reserved. www.marvel.com. The
images used in this annual report were
produced under license from Marvel
Characters, Inc.

3100 Ocean Park Boulevard, Santa Monica, CA 90405
phone: (310) 255-2000 fax: (310) 255-2100
www.activision.com