**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-K/A**

**(MarkOne)**

**x** ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended March 31, 2006

**OR**

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

**Forthe transition period from _____ to _____**

**Commissionfile number 0-18813**

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**THQ INC.**

(Exact Name of Registrantas Specified in Its Charter)

| **Delaware**                              |   | **13-3541686**       |
|-------------------------------------------|--------|----------------------|
| (State or Other  Jurisdiction of          |   | (I.R.S. Employer     |
| Incorporation or  Organization)           |   | Identification  No.) |
| **29903 Agoura Road**                     |   | ** **           |
| **Agoura  Hills, CA**                     |   | **91301**            |
| (Address of principal  executive offices) |   | (Zip Code)           |

 

Registrant’s telephone number, including area code: **(818) 871-5000**

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Securities registeredpursuant to Section 12(g) of the Act: None.

Securities registeredpursuant to Section 12(b) of the Act:

**Common Stock,  $.01 par value**

**Preferred Stock Purchase Rights**

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes  o  No  þ

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes  o  No  þ

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

| Large accelerated filer þ |   | Accelerated  filer o |   | Non-accelerated  filer o |
|-------------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Act). Yes  o  No  þ

The aggregate market valueof the voting stock held by non-affiliates of the registrant as of the lastbusiness day of the registrant’s second fiscal quarter, September 30, 2005was approximately $1.3 billion (based on the closing sales price of theregistrant’s common stock on September 30, 2005). The number of sharesoutstanding of the registrant’s common stock as of January 12, 2007 wasapproximately 65,462,878.

**DOCUMENTSINCORPORATED BY REFERENCE**

The 2006 Notice of AnnualMeeting of Stockholders and Proxy Statement are incorporated by reference into Part IIIherein.

 

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**THQ INC.**

**INDEX TO ANNUALREPORT ON FORM 10-K/A**

**FILED WITH THESECURITIES AND EXCHANGE COMMISSION**

**FORTHE FISCAL YEAR ENDED MARCH 31, 2006**

**ITEMSIN FORM 10-K/A**
|                  | ** ** | ** **                                                                                                                      | ** ** | PAGE   | ** ** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|--------|------------|
|             | ** ** | **Part I**                                                                                                                 | ** ** |   |       |
| Explanatory Note |       | 3                                                                                                                               |       |
| Item 1.          |       | Business                                                                                                                        |       | 7      |       |
| Item  1A.        |       | Risk Factors                                                                                                                    |       | 15     |       |
| Item 1B.         |       | Unresolved Staff Comments                                                                                                       |       | 23     |       |
| Item 2.          |       | Properties                                                                                                                      |       | 23     |       |
| Item  3.         |       | Legal Proceedings                                                                                                               |       | 23     |       |
| Item 4.          |       | Submission of Matters to a Vote of Security Holders                                                                             |       | 25     |       |
| ** **       | ** ** | **Part II**                                                                                                                |       |   |       |
| Item 5.          |       | Market for the Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities          |       | 26     |       |
| Item 6.          |       | Selected Consolidated Financial Data                                                                                            |       | 27     |       |
| Item 7.          |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations       |       | 32     |       |
| Item 7A.         |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                     |       | 57     |       |
| Item 8.          |       | Consolidated Financial Statements and Supplementary  Data                                                                       |       | 58     |       |
| Item 9.          |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                  |       | 95     |       |
| Item 9A.         |       | Controls and Procedures                                                                                                         |       | 95     |       |
| Item  9B.        |       | Other  Information                                                                                                              |       | 97     |       |
| ** **       | ** ** | **Part III**                                                                                                               | ** ** |   |       |
| Item 10.         |       | Directors and Executive Officers of the Registrant                                                                              |       | 100    |       |
| Item 11.         |       | Executive Compensation                                                                                                          |       | 100    |       |
| Item 12.         |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                  |       | 100    |       |
| Item 13.         |       | Certain Relationships and Related Transactions                                                                                  |       | 100    |       |
| Item 14.         |       | Principal Accounting Fees and Services                                                                                          |       | 100    |       |
| ** **       | ** ** | **Part IV**                                                                                                                | ** ** |   |       |
| Item 15.         |       | Exhibits and Consolidated Financial Statement Schedules                                                                         |       | 101    |       |
| Signatures       |       | 106                                                                                                                             |       |
| Certifications   |       |                                                                                                                            |       |

 

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**This Annual Report on Form 10-K/Acontains, or incorporates by reference, certain forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995.Such statements include, but are not limited to, (1) projections of revenues,expenses, income or loss, earnings or loss per share, cash flow projections andother financial items; (2) statements of our plans and objectives,including those relating to product releases; (3) statements of futureeconomic performance; and (4) statements of assumptions underlying suchstatements. We generally use words such as “anticipate,” “believe,” “could,” “estimate,”“expect,” “forecast,” “future” “intend,” “may,” “plan,” “positioned,” “potential,”“project,” “scheduled,” “set to,” “subject to,” “upcoming” and other similarexpressions to help identify forward-looking statements. These forward-lookingstatements are subject to business and economic risk, reflect management’scurrent expectations, estimates and projections about our business, and areinherently uncertain and difficult to predict. Our actual results could differmaterially. The forward-looking statements contained herein speak only as ofthe date on which they were made, and we disclaim any obligation to update anyforward-looking statements to reflect events or circumstances after the date ofthis Annual Report. Risks anduncertainties that may affect our future results include, but are not limitedto, those discussed under the heading “Risk Factors,” included in Item 1Aherein. All references to “we,” “us,” “our,” “THQ,” or the “Company” inthe following discussion and analysis mean THQ Inc. and its subsidiaries.**

**EXPLANATORY NOTE**

**Restatement ofConsolidated Financial Results**

We are amending our annual report on Form 10-Kfor the fiscal year ended March 31, 2006, as filed on June 7, 2006(the “Original Filing”), to reflect the restatement of our consolidatedfinancial statements and the related disclosures resulting from the previouslydisclosed investigation of historical stock option grant practices. In thisamended annual report on Form 10-K/A for the year ended March 31,2006 (“2006 Form 10-K/A”), we are restating our consolidated balancesheets as of March 31, 2006 and 2005, and the related consolidatedstatements of operations, stockholders’ equity, and cash flows for each of thefiscal years ended March 31, 2006, 2005, and 2004, and each of thequarters in fiscal years 2006 and 2005. The 2006 Form 10-K/A alsoincludes the restatement of Item 6, Selected Consolidated Financial Datafor the fiscal years ended March 31, 2006, 2005, 2004 and 2003, as well asthe three months ended March 31, 2003 and the fiscal year ended December 31,2002.

We have not amended our previously-filed AnnualReports on Form 10-K or Quarterly Reports on Form 10-Qfor all of the periods affected by this restatement. Instead, the financialinformation that has been previously filed or otherwise reported for theseperiods is superseded by the information in this 2006 Form 10-K/A,and the financial information contained in such previously-filed reports shouldno longer be relied upon.

On August 4, 2006, we received an informalinquiry from the Securities and Exchange Commission (“SEC”) requesting certaindocuments and information relating to our stock option grant practices from January 1,1996 to the present (the “Period”). We publicly announced this inquiry on August 7,2006. Prior to August 4, 2006, we were already conducting an internalreview of our historical stock option grant practices with the assistance ofoutside counsel. We initiated the internal review following extensive newscoverage and analyst reports about the option practices of numerous companiesacross several different industries.

Upon receipt of the notice of informal inquiry fromthe SEC, our Board of Directors (the “Board”) formed a special committee of oneoutside director (the “Special Committee”) to conduct an independent andcomprehensive investigation of our historical stock option grant practices andto oversee our response to the SEC. The Special Committee retained independentoutside legal counsel and forensic accountants (the “Investigative Team”) toaid in its investigation.

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**Special CommitteeFindings**

The Investigative Team reviewed the facts andcircumstances surrounding stock option grants made during the period from January 1996through September 2006 (the “Period”), which included grants made on 426dates. The Investigative Team conducted an extensive investigation, incurringover 11,000 person-hours searching millions of physical and electronicdocuments and interviewing more than 35 current and former directors, officers,employees, and advisors. As part of its investigation, the Special Committeeevaluated whether the correct measurement dates had been used under applicableaccounting principles for the options granted during the Period. Themeasurement date as defined under Accounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*(“APB 25”) and related interpretations, is the first date on which all of thefollowing are known: (1) the individual employee who is entitled toreceive the option grant, (2) the number of options that an individual employeeis entitled to receive, and (3) the option’s exercise price.

The Special Committee concluded its investigation andreported its findings to the full Board on December 2, 2006. The SpecialCommittee concluded that there was no evidence of fraud or misconduct by anyperson with respect to the Company’s historical stock option grant practices. TheSpecial Committee identified instances where documentation of certain optiongrants was lacking. The Special Committee also determined that an incorrectmeasurement date for financial accounting purposes was used on a number ofoccasions. These errors resulted primarily from misapplication of accountingstandards related to certain measurement date selection methods discussedbelow, which in a number of occasions resulted in employees receiving optionswith stated exercise prices lower than the market prices as measured based uponthe measurement dates as determined by the applicable accounting standards. Mostof the additional stock-based compensation expense related to these incorrectmeasurement dates pertained to grants made to non-executive employees. Inconnection with the conclusion of its review, the Special Committee recommendedto the Board, and its Compensation Committee, that the Board and CompensationCommittee consider and adopt certain remedial measures related to the issuesraised in the Special Committee’s investigation. See Item 9A. “Controls andProcedures” for a complete discussion of our material weakness in internalcontrols surrounding our stock option grant practices. The Special Committeeand its Investigative Team reported the Special Committee’s findings andremedial measures to the SEC on January 8, 2007.

As a result of the internal review and based on theconclusions of the Special Committee following the independent investigation,we have concluded that incorrect measurement dates were previously used forfinancial accounting and reporting purposes on a number of occasions. Therefore,we have recorded additional non-cash stock-based compensation expense andrelated tax effects with regard to past stock option grants and we arerestating previously filed financial statements in this 2006 Form 10-K/A.These adjustments, after tax, aggregate to $10.8 million for the period from January 1,1996 through March 31, 2006. The adjustments, after tax, for fiscal years2006, 2005 and 2004 were $2.2 million, $1.4 million and $1.8 million,respectively.

The nature of our accounting errors were primarily inone of the following three categories of option grants:

*Company-Wide Stock OptionGrants not Determined with Finality.*   The SpecialCommittee determined that, in connection with certain company-wide stock optiongrants that we made to non-executive employees in various years, we usedincorrect measurement dates for accounting and reporting purposes because thelist of grantees and the options awarded to each grantee was not determinedwith finality until a date subsequent to the measurement dates we previouslyused. In most such situations, our practice was to set the exercise price forthe option at the closing price of our common stock on the date theCompensation Committee of the Board delegated authority to our Chief ExecutiveOfficer to award up to a specified aggregate number of options, which was priorto the date that the list of grantees and the 

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options awarded to eachgrantee was finalized by the Chief Executive Officer. We have recognizedadditional stock-based compensation expense of $6.7 million for the period fromJanuary 1, 1996 through March 31, 2006 related to this type of error.

*Stock Option Grants Pricedusing Previous Day Closing Price.**  *The Special Committee determinedthat in three instances throughout 1998 and 1999, the exercise price was set atthe closing price of our common stock on the day prior to the CompensationCommittee meeting where such grants were made. Our option plans in effect atthe time stated that the grant price could not be less than the fair marketvalue of the option on the date of grant, which was defined in the plans as theclosing price of our common stock on the date of grant.  The Special Committee therefore determinedthat the measurement date used for accounting purposes should be the date ofthe meeting. We have recognized additional stock-based compensation expense of$1.8 million for the period from January 1, 1996 through March 31,2006 related to this type of error.

*Incorrect MeasurementDates for New Hire Stock Option Grants.**  *The Special Committee alsoidentified accounting errors related to our new hire stock option grantpractices. The Special Committee determined that our new hire stock option grantingpractice, primarily for our international employees, resulted in a measurementdate for accounting purposes that was subsequent to the date that we hadpreviously used for accounting purposes. These errors occurred because thedetails of stock option grants to international employees were not contained inoffer letters and in most cases the number of options the individual wasentitled to receive was determined after his or her start date. There were alsosome instances where grants were made to employees prior to the date theystarted providing services to the Company, generally because the employee hadaccepted an employment offer and his or her name was placed on a grant listthat was then approved prior to his or her actual start date. We haverecognized additional stock-based compensation expense of $1.6 million for theperiod from January 1, 1996 through March 31, 2006 related to thesetypes of errors.

The incremental impact, per fiscal year, fromrecognizing additional stock-based compensation expense and related payroll taxexpenses resulting from the investigation of our historical stock option grantpractices is as follows (in thousands):

| **Fiscal Year**      | ** ** | ** ** | ** ** | **Pre-Tax  Expense** | ** ** | **After Tax  Expense** | ** ** |
|---------------------------|------------|------------|------------|----------------------|------------|-----------------------------|------------|
| 1996                      |       | $          | 52         |                 | $          | 52                          |       |
| 1997                      |       | 273        |       | 229                  |       |
| 1998                      |       | 817        |       | 578                  |       |
| 1999                      |       | 767        |       | 555                  |       |
| 2000                      |       | 861        |       | 654                  |       |
| 2001                      |       | 1,739      |       | 1,293                |       |
| 2002                      |       | 2,440      |       | 1,802                |       |
| Transition  2003(1)       |       | 408        |       | 304                  |       |
| Total 1996 - 2003  impact |       | 7,357      |       | 5,467                |       |
| 2004                      |       | 2,101      |       | 1,767                |       |
| 2005                      |       | 1,362      |       | 1,393                |       |
| 2006                      |       | 2,442      |       | 2,163                |       |
|                      |       | $          | 13,262     |                 | $          | 10,790                      |       |

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Notes:

(1)          Effective January 1,2003, we changed our fiscal year end from December 31 to March 31.The change resulted in a three-month transitional period ended March 31,2003. References to Transition 2003, unless otherwise indicated, refer to thethree-month transitional period ended March 31, 2003. The incrementalimpact for the fiscal year ended March 31, 2003 (unaudited) fromrecognizing additional 

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stock-based compensationexpense resulting from the investigation of historical stock option grantpractices is as follows (in thousands): $2,159 pre-tax expense and $1,567 after tax expense.

Additionally, we have restated the pro forma expenseunder Statement of Financial Accounting Standards (“SFAS”) No. 123 in Note1 of the Notes to Consolidated Financial Statements of this 2006 Form 10-K/Ato reflect the impact of these adjustments.

For the convenienceof the reader, this 2006 Form 10-K/A sets forth the Original Filingin its entirety, as modified and superseded where necessary to reflect therestatement. The following items have been amended principally as a result of,and to reflect, the restatement, and no other information in the OriginalFiling has been updated since the filing of the Original Filing or is amendedhereby as a result of the restatement:

·       Part I—Item 1—Business(amended solely to restate certain financial data included therein)

·       Part I—Item 1A—RiskFactors

·       Part I—Item 3—LegalProceedings

·       Part II—Item 6—SelectedConsolidated Financial Data

·       Part II—Item 7—Management’sDiscussion and Analysis of Financial Condition and Results of Operations

·       Part II—Item 8—ConsolidatedFinancial Statements and Supplementary Data

·       Part II—Item 9A—Controlsand Procedures

·       Part IV—Item 15—Exhibitsand Consolidated Financial Statement Schedules

 

Other than as stated above, this 2006 Form 10-K/Adoes not reflect events occurring after the filing of the Original Filing, ormodify or update those disclosures affected by subsequent events. This 2006 Form 10-K/Acontinues to speak as of the date of the Original Filing, and does not modifyor update any other item or disclosures in the Original Filing.

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**PART I**

**Item1. Business**

**Introduction**

We are a leadingworldwide developer and publisher of interactive entertainment software for allpopular game systems, including:(1)

·       Home video game consolessuch as Sony PlayStation 2, Microsoft Xbox, and Nintendo GameCube, and thenext-generation consoles Sony PlayStation 3, Microsoft Xbox 360 and NintendoWii;

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(1)          Nintendo®, Dual Screen, GameBoy® Advance, GameCube® (“GameCube”) and Wii are trademarks and/or registeredtrademarks of Nintendo of America Inc. (“Nintendo”). “PlayStation” and the “PS” family logo are registered trademarks ofSony Computer Entertainment Inc., and “PSP” is a trademark of Sony ComputerEntertainment Inc. (“Sony”). Microsoft, Xbox® (“Xbox”) and Xbox 360TM aretrademarks and/or registered trademarks of Microsoft Corporation (“Microsoft”).Microsoft, Nintendo and Sony are referred to herein collectively as the“platform manufacturers” or the “manufacturers.”

·       Handheldplatforms such as Nintendo Game Boy Advance, Nintendo Dual Screen, PSP portableentertainment system (“PSP system”), wireless devices; and

·       Personalcomputers.

Our titles span a wide range of categories, includingaction, adventure, fighting, racing, role-playing, simulation, sports andstrategy. We have created, licensed and acquired a group of highly recognizablebrands, which we market to a variety of consumer demographics ranging fromproducts targeted at children and the mass-market to products targeted at coregamers. Our portfolio of licensed properties includes the Disney/Pixarproperties*Finding Nemo*, *The Incredibles*, and*Cars,*(which is expected to be released globally beginningin North America in June 2006); WorldWrestling Entertainment®; Nickelodeon properties such as SpongeBobSquarePantsTM, Avatar, Fairly OddParentsTM and Nicktoons; BratzTM; Power Rangers; Warhammer® 40,000; andScooby-Doo!TM; as well asothers. We also have licenses to create wireless products based on *Star Wars* and major sports leagues. In addition to licensedproperties, we also publish games based upon owned intellectual properties,including *Company of Heroes, Destroy AllHumans!**TM, JuicedTM, MX*and*Saints RowTM*.

We develop our games using both internal and externalresources. We currently have 14 internal development studios located in theUnited States, Australia, the UK and Canada. We also contract with leadingthird-party developers around the world to develop our products for us.

Our global sales network includes offices throughoutNorth America, Europe and Asia Pacific. In the U.S. and Canada we market anddistribute games directly to mass merchandisers, consumer electronic stores,discount warehouses and other national retail chain stores. Internationally wemarket and distribute games on a direct-to-retail basis and to a lesser extentthrough third-party distribution and licensing arrangements. We also globallymarket and distribute games and other content for wireless devices throughmajor wireless carriers.

We were originallyincorporated in New York in 1989 as Trinity Acquisition Corporation, whichchanged its name in 1991 to T.HQ, Inc. following a merger with THQ, Inc.,a California corporation. We were reincorporated in Delaware as THQ Inc. in1997. Our principal executive offices are located at 29903 Agoura Road, AgouraHills, California 91301, and our telephone number is (818) 871-5000. Ourinternet address is http://www.thq.com.(2)

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**Narrative Description of Business**

Our corporate goal is toexpand our market share while increasing profitability. Our business strategyand a detailed summary of our business operations are detailed below and shouldbe read in conjunction with our “Risk Factors,” included in Item 1A herein.

**Strategy**

In order to maximizemarket share we believe it is important to offer a broad portfolio of titlesfor all ages that are playable on all popular platforms. We are also focused onincreasing the profitability of our titles. We intend to do this by executingon the following strategies:

·                     ***Increase sales and profits by leveraging ourleading portfolio of mass-market franchises***

We have grown and diversified our products targeted atthe mass-market by securing key content licenses, and have leveraged ourlicensed brands by introducing new products and through sales of our catalog ofexisting products. Our license with Pixar Animation Studios (“Pixar”) grants usthe exclusive interactive

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(2)          THQ,THQ Wireless and their respective logos are trademarks and/or registeredtrademarks of THQ Inc.

rights to the next fourPixar animated feature films beginning with the first release following *Cars.*Our license agreement with World WrestlingEntertainment (“WWE”) through our joint venture with JAKKS Pacific, Inc.,grants us the exclusive rights to publish games based on WWE across all viablegame systems through 2014. Our license agreement with Nickelodeon grants us theexclusive right to publish games based on all existing and future Nickelodeonanimated television and movie properties targeting kids ages 6-14 acrossall viable game systems through 2010. Additionally, we have a content licensewith MGA for their Bratz brand.

In order to increase salesand profits, our goal is to continue building high quality products based onour leading portfolio of mass-market franchises, market them aggressively andshift more development to our internal development studios. In fiscal 2006, ourkey Disney/Pixar and Nickelodeon titles were developed by our internal studios.

In the fiscal year ending March 31,2007 (“fiscal 2007”) and beyond, we plan to execute on this strategy byshipping mass-market titles for the current and next generation of console andhandheld platforms, and PC, including the following games based upon our keylicenses: Disney/Pixar’s *Cars*, *WWE SmackDown vs. Raw 2007, SpongeBob SquarePants: Creature from theKrusty Krab, Avatar: The Last Airbender*and*Bratz:Forever Diamonds*.

·                     ***Expand our core gamer market share***

We plan to grow our marketshare by expanding our products targeted to core gamers. We have worked tocreate and acquire our own brands and content and to secure licenses fororiginal intellectual properties that appeal to the core gamer. In fiscal 2006we released our popular street racing property, *Juiced*,which has shipped more than 1.5 million units to date, and we released ouroriginal owned title, *Destroy All Humans!,*whichshipped nearly 1.5 million units. Also in fiscal 2006 we released our firstXbox 360 title, the owned and internally developed property, *The OutfitTM*.In fiscal 2007 we plan to release a sequel to *Destroy AllHumans!* on current-generation console platforms and *Saints Row* on Xbox 360. In fiscal 2007 we also intend torelease several core gamer titles on PC including:  *Company of Heroes*,*Titan QuestTM*, *Warhammer*®*40,000:**Dawn of War: Dark CrusadeTM, Supreme Commander*and *S.T.A.L.K.E.R.:Shadow of Chernobyl*.

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·                     ***Increase internal development capabilities andowned intellectual property***

In order to increaseprofitability, we believe it is important for us to expand our internaldevelopment capabilities, increase ownership of development tools andtechnology, and create and acquire new intellectual property. We plan tocontinue expanding our internal development capabilities by selectivelyacquiring and establishing development studios and through internal growth ofour existing studios. During fiscal 2006, we expanded our internal StudioSystem with the acquisitions of Juice Games, located in the UK, Vigil Games,located in Austin, Texas, and with the formation of two new studios, KaosStudios in New York City and Incinerator Games, located near San Diego,California. With the addition of these studios, we now have 14 studios, whichare staffed by producers, game designers, software engineers, artists,animators and game testers. Our worldwide product development operations havegrown and now include approximately 1,200 people, an increase of 300 peopleover the prior fiscal year. Some of the releases in fiscal 2006 that weredeveloped by our Studio System included *The Incredibles: Rise ofthe Underminer*, *MX v. ATV: On the Edge,SpongeBob Square PantsTM: Lights, Camera, Pants*, *NicktoonsUnite*, *The Outfit*and *Warhammer® 40,000: Dawn of War: Winter AssaultTM*. We are dedicating significantinternal development resources to developing software for next-generationconsole platforms and we expect to release games throughout the growth of theinstalled base of the hardware.

·                     ***Expand international business***

In calendar 2005, weincreased our market share in both Europe and Australia. As the global gamingmarket continues to grow, we believe that international markets represent asignificant growth opportunity for us. We distribute our products in more than75 countries and territories outside of North America. We operate internationaloffices in the United Kingdom, Australia, France, Germany, Spain, Korea,Austria and in fiscal 2006 we established sales offices in the Netherlands,Denmark and Japan. In fiscal 2007 we will look to expand our direct sales forcein Eastern Europe and Italy. In order to leverage our portfolio of popularbrands and increase profitability, we plan to continue acquiring and developingcontent that sells well internationally (*e.g.*,Disney/Pixar, World WrestlingEntertainment, and *Juiced*).

·                     ***Expand wireless interactive entertainment marketshare***

In fiscal 2006, THQreported $36.1 million in net sales on the wireless platform, an increase ofapproximately 50% over fiscal 2005. We view the wireless platform as along-term growth area for THQ as we continue to leverage our mass-marketfranchises, core gamer titles, wireless sports licenses and other exclusivewireless licenses, such as *Star Wars*onthis platform. In fiscal 2007, we plan to re-align our product portfolio toemphasize more casual game content to position ourselves for wireless platformshare gains in the future.

·                     ***Pursue emerging revenue opportunities***

As the interactiveentertainment industry continues to evolve, new revenue streams are emergingthat are expected to develop over the next five years. These opportunitiesinclude in-game advertising, downloadable content/micro-transactions, andonline casual gaming. In fiscal 2006, we entered into agreements with twoleading in-game advertising enabling companies to facilitate in-gameadvertising in future games. We also started to explore an online casual gamesite. Beginning in fiscal 2007, we plan to offer downloadable content onnext-generation console systems from Microsoft and Sony.

**Industry Overview**

As a publisher ofinteractive entertainment software, we consider ourselves to be part of the entertainmentindustry. At the most fundamental level, our products compete with other formsof entertainment, such as motion pictures, television and music, for theleisure time and discretionary spending of consumers. We believe that videogames have increasingly become a mainstream entertainment choice for bothchildren and adults. According to the International Development Group, Inc.(“IDG”), an independent consulting and advisory services company that analyzesthe consumer electronics and interactive entertainment 

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industries, sales of PC,console and handheld games (excluding wireless) reached $7.5 billion in NorthAmerica, and $6.5 billion in Europe in 2005. We look toward an expanding marketfor interactive entertainment software over the next several years due to theintroduction of the next generation of console systems. We believe thatimproved graphics, greater online functionality and expanded artificialintelligence capabilities of the new platforms will enhance game play and helpgrow our industry significantly. In addition, new revenue opportunities fromwireless gaming, in-game advertising and online console gaming are expected togrow to $5 billion in 2009 from $1 billion in 2005, according to DFCIntelligence and Montgomery & Co.

The first modern platformwas introduced by Nintendo in 1985. Advances in technology over the past 20years have resulted in continuous increases in the processing power of thechips that power both the consoles and PC. For the past several years, Sony hasbeen the leader in the console market (with its PlayStation and PlayStation 2consoles); however, Microsoft and Nintendo are large and viable competitors. In2005, Microsoft introduced its next-generation console, Xbox 360, and both Sonyand Nintendo have announced plans to release their next-generation consoleslater in 2006. Nintendo has been the dominant manufacturer of handheldplatforms with its Game Boy Advance. In fiscal 2005 two new handheld platformswere introduced, Nintendo DS and Sony PSP. PCs continue to be a viableinteractive game platform and over the past few years, wireless devices, suchas mobile phones, have become a viable gaming platform.

We currently develop andpublish products for all major platforms, and this diversification continues tobe a cornerstone of our strategy. In fiscal 2006, our product releases were forthe Sony PlayStation 2, Microsoft Xbox and Xbox 360, Nintendo GameCube, PC,Game Boy Advance, Nintendo DS, PSP and wireless devices. As Sony and Nintendolaunch their next-generation consoles, we expect to release games on eachplatform at or near their launch.

**Products**

Wedevelop, market and sell video games and other interactive software and contentfor console platforms, handheld platforms and PCs. In fiscal 2006, we publishedten titles that shipped more than one million units. The following listidentifies games that generated a significant portion of our sales during thefiscal years ended March 31, 2006, 2005 and 2004:

·       Infiscal 2006, WWE® SmackDown®  vs. Raw®2006, Juiced, Destroy All Humans!, SpongeBob SquarePants: Lights, Camera,PANTS! and The Incredibles: Rise of the Underminer;

·       Infiscal 2005, Disney/Pixar’s The Incredibles, The SpongeBob SquarePantsTM Movie,and WWE SmackDown vs. Raw; and

·       Infiscal 2004, Disney/Pixar’s Finding Nemo, SpongeBob SquarePantsTM: Battle forBikini BottomTM, and WWE SmackDown! Here Comes the PainTM.

All of our games are basedon intellectual property that is either wholly-owned by us or licensed fromthird parties. We develop our games using both internal development resourcesand external development resources working for us pursuant to contractualagreements. Whether a game is developed internally or externally, upon completionof development we extensively play-test each game, and if required, send thegame to the manufacturer for its review and approval. Other than games that werelease for PCs or wireless devices, the manufacturers or their authorizedvendors manufacture our products for us. We then market and distribute ourgames for sale throughout the world.

**Intellectual Property**

Our business processbegins with the creation of intellectual property or acquisition ofintellectual property rights. Traditionally, most of our titles were based uponlicensed properties that have attained a high level 

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of consumer recognition oracceptance. We have relationships with many well-known licensors, includingDisney/Pixar, Nickelodeon, World Wrestling Entertainment, Warner Bros. and MGAEntertainment.

Our intellectual propertylicenses usually grant us the exclusive use of the property for specifiedtitles, on specified platforms, within a defined territory and during thelicense term. All of our licenses are of varying duration and we pay royaltiesto our property licensors based on our net sales of the title which includesthe licensor’s intellectual property. We typically advance payments againstminimum guaranteed royalties over the license term. Royalty rates are generallyhigher for properties with proven popularity and less perceived risk ofcommercial failure.

Our original intellectualproperty is created either by one of our 14 development studios or by athird-party developer that we contract with, in which instance, we retain allownership rights in the intellectual property. In other instances, wherein athird-party developer creates the intellectual property and develops the game,we obtain a license that is typically exclusive and we try to retain rights toany future products based on the intellectual property.

**Platform Licenses**

Inaddition to obtaining licenses to develop intellectual property, our businessis dependent upon entering into license agreements with the platformmanufacturers, which allow us the right to develop, publish and distributetitles for use on such manufacturer’s platform. Our key platform licensescurrently include:

·       licenseswith Nintendo to develop games for GameCube, Game Boy Advance and DS;

·       licenseswith Sony to develop games for PlayStation 2 and PlayStation Portable; and

·       licenseswith Microsoft to develop games for Xbox and Xbox 360.

Each license is for afixed term, and as each license expires, we generally enter into a newagreement or an amendment with the licensor to extend the term of theagreement. Certain agreements, such as the licenses with Sony and Microsoft forPlayStation 2 and Xbox 360, respectively, automatically renew each year unlesseither party gives notice by the applicable date that it intends to terminatethe agreement. Additionally, each agreement designates a territory in which wecan publish and distribute titles. We currently are licensed to publish anddistribute titles on all platforms that are currently sold in the United Statesand Canada. We are licensed to publish and distribute titles for GameCube,PlayStation 2, PlayStation Portable, Xbox, Xbox 360 and Dual Screen in variousadditional territories, including Europe, Australia and New Zealand, parts ofAsia and Central and South America. We expect to enter into additional platformlicenses and extend current licenses as new platforms are launched or ourcurrent agreements expire.

The platform licenses arenot exclusive and require that each title be approved by the manufacturer priorto development of the software, and once developed, manufactured solely by suchmanufacturer or a designated vendor of the manufacturer. The licenses establishthe fees that we must pay to the manufacturer for each cartridge or disc made.Nintendo charges us a fixed amount for each Game Boy Advance cartridgemanufactured. This amount varies based, in part, on the memory capacity of thecartridge. Our Nintendo, Sony and Microsoft console agreements include a chargefor every disc manufactured. The amounts charged by the manufacturers for bothconsole discs and handheld cartridges include a manufacturing, printing andpackaging fee as well as a royalty for the use of the manufacturer’s name,proprietary information and technology, and are subject to adjustment by themanufacturers at their discretion. The manufacturers have the right to review,evaluate and approve a prototype of each title and the title’s packaging.

In addition, we mustindemnify the manufacturers with respect to all loss, liability and expenseresulting from any claim against the manufacturer involving the development,marketing, sale, or use of our games, including any claims for copyright ortrademark infringement brought against the manufacturer. As a 

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result, we bear a riskthat the properties upon which the titles are based, or that the informationand technology licensed from others and incorporated in the products, mayinfringe the rights of third parties. Conversely, our agreements with ourthird-party software developers and property licensors typically provide for usto be indemnified with respect to certain matters. If any claim is brought by amanufacturer against us for indemnification, however, our developers orlicensors may not have sufficient resources to, in turn, indemnify us.Furthermore, these parties’ indemnification of us may not cover the matter thatgives rise to the manufacturer’s claim.

Each platform license maybe terminated by the manufacturer if a breach or default by us is not curedafter we receive written notice from the manufacturer, or if we becomeinsolvent. Upon termination of a platform license for any reason other than ourbreach or default, we have a limited period of time to sell any existingproduct inventory remaining as of the date of termination. The length of thissell-off period varies between 90 and 180 days, depending upon the platformagreement. We must destroy any such inventory remaining after the end of thesell-off period. Upon termination as a result of our breach or default, we mustdestroy any remaining inventory.

**Product Development**

We develop our productsusing both internal and external development resources. The internal resourcesconsist of producers, game designers, software engineers, artists, animatorsand game testers located within our 14 internal studios and corporateheadquarters. The external development resources consist of third-partysoftware developers and other independent resources such as artists. We referto this collective group of development resources as our Studio System.

We make the decision as towhich development resources to use based upon the creative and technicalchallenges of the product, whether the intellectual property which is beingdeveloped into a game is licensed, an original concept that we created, or anoriginal concept created by a third-party developer. Once we determine where aproduct will be developed, our internal product development team oversees theinternal or external resources in its design, technical assessment andconstruction of each game.

The development cycle fora new game depends on the platform and the complexity of the game.Additionally, when developing an intellectual property into a game which issimultaneously being made into a motion picture, our development schedule isdesigned to ensure that our games are commercially available by the motionpicture’s release. The development cycle for games on current generationconsole platforms, PC games and the Sony PSP system generally ranges from 12 to24 months, Game Boy Advance ranges from 6 to 9 months, Nintendo DS ranges from9 to 12 months and wireless games range from 6 to 9 months. The developmentcycle for the next generation of games on Microsoft Xbox 360 can range from 12to 36 months depending on the overall complexity and scope of the game, and weanticipate a similar development cycle for the next generation of games on SonyPlayStation 3 and Nintendo Wii. These relatively long development cyclesrequire that we assess whether there will be adequate retailer and consumerdemand for a game well in advance of its release. The investments in suchdevelopment, prior to reaching technological feasibility, are recorded asproduct development expenses in our consolidated statement of operations. Wehad product development expenses of $85.3 million in fiscal 2006, $73.6 millionin fiscal 2005 (as restated) and $37.8 million in fiscal 2004 (as restated).

Upon completion ofdevelopment, each game is extensively play-tested by us to ensure compatibilitywith the appropriate hardware systems and configurations and to minimize thenumber of bugs and other defects found in the products. If required, we alsosend the game to the manufacturer for its review and approval. To support ourproducts after release, we provide online access to our customers on a 24 hourbasis as well as operator help lines during regular business hours. Thecustomer support group tracks customer inquiries, and we use this data to helpimprove the development and production processes.

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**Manufacturing**

Other than games that we release for sale on PCs orwireless devices, our video games are manufactured for us by the platformmanufacturers or their authorized vendors. We contract with various PCreplicators for the manufacturing of our PC products.

The platform game manufacturing process begins withour placing a purchase order with a manufacturer. We then send the softwarecode and a prototype of the game to the manufacturer (together with relatedartwork, user instructions, warranty information, brochures and packagingdesigns) for approval, defect testing, and manufacture.

We are required by ourplatform licenses to provide a standard defective product warranty on all ofthe products sold. Generally, we are responsible for resolving, at our ownexpense, any warranty or repair claims. We have not experienced any materialwarranty claims, but there is no guarantee that we will not experience suchclaims in the future.

**Marketing and Sales**

Our marketing activities vary depending upon whether avideo game title is based upon a licensed or an original property. A licensedproperty has pre-existing brand popularity and thus often requires less initialeffort by us to promote. Our marketing efforts for titles based upon originalproperties begin well in advance of a title’s release and focus on buildingpositive awareness of our game concepts with consumers and retailers. Weconduct consumer and retail research, which provides us with feedback toposition a title prior to its release. Our public relations promotionalactivities for original titles in fiscal 2006 included coverage in broadcast,print and online media targeting enthusiast, lifestyle and major mainstreamoutlets. Additionally, we continue to increase our corporate public relationsefforts by establishing relationships with leading technology and businessreporters.

Our marketing efforts for products released in fiscal2006 covered a broad range of media including, television, print, in-theater,radio, internet advertising and promotional events. Most of our major newreleases in fiscal 2006 received television support. Our games were alsosupported by promotional activities such as trailers, demo discs, over-sizedboxes, standees, posters, pre-sell giveaways at retail stores, game kiosks atsporting and outdoor events, rebates and contests with national packaged goodscompanies and fast food restaurants, and co-marketing efforts with the hardwaremanufacturers. Our games are promoted to retailers by display at trade showssuch as the annual Electronic Entertainment Expo (E3) and select retailerspecific trade shows. We also conduct print and cooperative retail advertisingcampaigns for most titles and prepare a range of promotional sales andmarketing materials to increase awareness among retailers.

We strive to create global brand awareness for ourproducts. Consistent with our strategy to build and maintain franchiseproperties with global appeal, our international marketing efforts includelocalization of products to conform to consumer preferences and languages inthe countries in which each title is distributed. This structure is designed tomaximize market performance in all territories.

*North American Sales.*   InNorth America, our products are primarily sold directly to mass merchandisers,consumer electronics stores, discount warehouses and national retail chainstores. Our products are also sold to smaller, regional retailers, as well asdistributors who, in turn, sell our products to retailers that we do notservice directly, such as grocery and drug stores. Our domestic salesactivities are led by our national sales team, which has representatives inmost major markets in the United States.

We utilize electronic data interchange with most ofour major North American customers in order to (i) efficiently receive,process, and ship customer product orders and (ii) accurately track andforecast sell-through of products to consumers in order to determine whether toorder additional products from the manufacturers. We believe that the directrelationship model we use in North America allows us to better 

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manage inventory, merchandise and communications. Weship most of our products to our domestic customers from warehouses located inCanada, Michigan and Minnesota.

The domestic retail prices for our titles currentlyrange between: (i) $15 and $35 for handheld platforms; (ii) $15 and$65 for console platforms; and (iii) $10 and $55 for PC games. Thedomestic retail price for our wireless games currently range between $5 and $8for a one time purchase and between $2 and $4 for a monthly subscription.

*International Sales.*   Ourinternational sales activities operate via our offices in the United Kingdom,Australia, France, Germany, Korea, Japan, Spain, Austria, Denmark and TheNetherlands. International offices market and distribute direct-to-retailcustomers and through sub-distributors in both their home territories and toapproximately 70 additional territories.

Our largest customersworldwide include Best Buy, GameStop, Target, Toys “R” Us and Wal-Mart. We alsosell our products to other national and regional retailers, discount storechains and specialty retailers. Our largest customer, Wal-Mart, accounted for19% of our worldwide sales in fiscal 2006. A substantial reduction, terminationof purchases, or business failure by any of our largest customers would have amaterial adverse effect on us.

**Seasonality**

The interactiveentertainment software market is highly seasonal, with sales typicallysignificantly higher during the third quarter of our fiscal year, due primarilyto the increased demand for interactive games during the year-end holidaybuying season.

**Competition**

The video game industry is intensely competitive. Itis characterized by the continuous introduction of new titles and thedevelopment of new technologies. Our business is driven by hit titles, whichrequires us to invest significantly in production and in marketing. Competitionin the video games segment is also based on product quality and features,timing of product releases, brand-name recognition, access to distributionchannels, and effectiveness of marketing and price.

We compete both for licenses to properties and thesale of interactive entertainment software with Sony, Microsoft and Nintendo,each of which is a large developer and marketer of software for its ownplatforms. Each of these competitors also has the financial resources towithstand significant price competition and to implement extensive advertisingcampaigns, particularly for prime-time television spots. In addition to themanufacturers, our competitors include publishers and developers of interactiveentertainment software, such as Activision, Atari, Electronic Arts, LucasArts,Namco, Sega, Take-Two Interactive Software, Ubisoft, and Vivendi Games.

In addition, some of ourcompetitors are very large, diversified corporations that have begun to developgames based upon their own highly recognizable brands, and, as a result, standto become more direct competitors. Disney’s Buena Vista games division recentlyexpanded its internal software game publishing efforts and Viacom has expandedits efforts in interactive entertainment software publishing.

**Employees**

As of March 31, 2006,we employed approximately 1,600 people, of whom over 600 were outside theUnited States. We believe that our ability to attract and retain qualifiedemployees is a critical factor in the successful development of our productsand that our future success will depend, in large measure, on our ability tocontinue to attract and retain qualified employees. None of our employees arerepresented by a labor union or covered by a collective bargaining agreementand we consider our relations with employees to be favorable.

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**FinancialInformation About Geographic Areas**

See Item 7 “ManagementDiscussion and Analysis of Financial Condition and Results of Operations” andNote 19 of notes to consolidated financial statements included in Item 8.

**AvailableInformation**

We file annual, quarterlyand current reports, proxy statements and other information with the Securitiesand Exchange Commission (“SEC”). Our SEC filings, including our annual reporton Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K, and any amendments to those reports filed orfurnished pursuant to Section 13(a) of the Exchange Act are availableto the public free of charge over the internet at our website athttp://www.thq.com or at the SEC’s web site at http://www.sec.gov. Our SECfilings will be available on our website as soon as reasonably practicableafter we have electronically filed or furnished them to the SEC. Informationcontained on our website is not incorporated by reference into this annualreport on Form 10-K/A. You may read and copy any materials we filewith the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W.,Washington D.C. 20549. You may obtain information on the operation of thePublic Reference Room by calling the SEC at 1-800-SEC-0330.You can view our Code of Business Conduct and Ethics and our Code of Ethics forExecutive Officers and Other Senior Financial Officers free of charge on thecorporate governance section of our website. If we make any substantiveamendments to our Code of Ethics for Executive Officers and Other SeniorFinancial Officers or if any waivers of such code are granted, we will postthem on our web site.

**Item 1A.** RiskFactors

Ourbusiness is subject to many risks and uncertainties which may affect our futurefinancial performance. Some of those important risks and uncertainties whichmay cause our operating results to vary or which may materially and adverselyaffect our operating results are as follows:

**Our industry is in a transition phase and theintroduction of new platforms could materially impact the sales of ourproducts.**

In recent years, we have successfully developed videogames for the Microsoft Xbox, Nintendo GameCube and Sony PlayStation 2. In late2005, Microsoft launched its new console, the Xbox 360. Sony has announcedplans to launch the PlayStation 3 and Nintendo has announced plans to launchthe Wii in late 2006. When new platforms are announced or introduced into themarket, consumers typically reduce their purchases of entertainment softwareproducts for current platforms in anticipation of new platforms becomingavailable. During these periods, sales of our game console entertainmentsoftware products may be expected to slow or even decline until new platformsare introduced and achieve wide consumer acceptance. If sales of our productsunexpectedly decline due to slowing consumer demand during this transition,this could materially impact our financial results.

Additionally, delays inthe launch of the platforms, hardware shortages, technical problems or lack ofconsumer acceptance of the next generation platforms could adversely affect oursales of products for these platforms, adversely affecting sales of products wedevelop and publish for the platforms.

**During the platform transition, pricing for ourproducts may decline, materially impacting our revenues and profitability.**

As demand for games on thecurrent generation of platforms declines, the prices of our games may alsodecline. Reduced pricing of our products may result in credits or allowances toour customers, which could materially affect our profitability.

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**Platform transitions are generally marked byescalating development costs, which could materially affect our profitability.**

New platforms havehistorically required the development of new software and also have the effectof undermining demand for products based on older technologies. Because productdevelopment cycles are difficult to predict, we must make substantial productdevelopment and other investments in technologies for a particular platformwell in advance of introduction of the platform. If the platforms for which wedevelop new software products or modify existing products are not released on atimely basis or do not attain significant market penetration, or if we developproducts for a delayed or unsuccessful platform, our business and financialresults could be significantly harmed.

**We must continue todevelop and sell new titles in order to remain profitable.**

Ourprofitability has directly resulted from our ability to develop and sellsuccessful new titles for use on multiple platforms. Consumer preferences forgames are difficult to predict, and even the most successful titles remainpopular for only limited periods of time, often less than six months. The lifecycle of a game generally consists of a relatively high level of sales duringthe first few months after introduction, followed by a decline in sales. Insome instances, a sales decline may also be accompanied by decreasing salesprices, which may result in credits or allowances to our customers.

**We rely on arelatively small number of licensed brands for a significant portion of oursales.**

Games we develop based upon a small number of licensedbrands make up a substantial portion of our sales each year. In fiscal 2006,sales of titles for our three top-selling brands, Disney / Pixar, Nickelodeonand World Wrestling Entertainment (“WWE”) comprised 47% of our net sales; infiscal 2005, 52% of our net sales were based on titles from such brands; and infiscal 2004, 50% of our net sales were based on titles from such brands. Alimited number of licensed brands may continue to produce a disproportionatelylarge amount of our sales. Due to this dependence on a limited number ofbrands, the failure of one or more products based on these brands to achieveanticipated results or the loss of a license pursuant to which we develop gamesfor such brands may significantly harm our business and financial results.

We are currently involvedin litigation with the WWE with respect to our video game license. Since WWEtitles make up a significant portion of our sales, our inability to retain thelicense could harm us. See, Item 3 “Legal Proceedings” for a more detaileddiscussion of this litigation.

**Our inability toacquire or create intellectual property rights which have a high level ofconsumer recognition or acceptance could harm us.**

A significant portion of our net sales in fiscal 2006,fiscal 2005 and fiscal 2004 were derived from products based on popularlicensed properties. A decrease in the popularity of the underlying property ofour licenses could negatively impact our ability to sell products based on suchlicenses.

We also generate revenuefrom wholly-owned intellectual property. The success of our internal brandsdepends on our ability to create original ideas which appeal to the avid gamer.Titles based on wholly-owned intellectual property can be expensive to developand market since they do not have a built-in consumer base or licensor support.Our inability to create new products targeted at the core gamer could impactour operations.

**Our inability toenter into agreements with the manufacturers to develop, publish and distributetitles on their platforms could seriously impact our operations.**

We are dependent on the platformmanufacturers (Microsoft, Nintendo and Sony) and our non-exclusive licenseswith them, both for the right to publish titles for their platforms and for themanufacture of our products for their platforms. Our existing platform licensesrequire that we obtain approval for the 

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publication of new games on atitle-by-title basis. As a result, the number of titles we are able to publishfor these platforms, and our sales from titles for these platforms, may belimited. Should any manufacturer choose not to renew or extend our licenseagreement at the end of its current term, or if any license was terminated, wewould be unable to publish additional titles for that manufacturer’s platform,which could negatively affect our operating results.

Additionally,since each of the manufacturers publishes games for its own platform, and alsomanufactures products for all of its other licensees, a manufacturer may give priorityto its own products or those of other publishers in the event of insufficientmanufacturing capacity. Unanticipated delays in the delivery of products couldalso negatively affect our operating results.

**Video game productdevelopment schedules are difficult to predict and can be subject to delays.Postponements in shipments can substantially impact our earnings in any givenquarter.**

Our ability to meetproduct development schedules is affected by a number of factors, including thecreative processes involved, the coordination of large and sometimesgeographically dispersed development teams required by the increasingcomplexity of our products, and the need to refine and tune our products priorto their release. We have in the past experienced development delays forseveral of our products. Failure to meet anticipated production schedules maycause a shortfall in our expected sales and profitability and cause ouroperating results to be materially different from expectations. Delays thatprevent release of our products during peak selling seasons or in conjunctionwith specific events, such as the release of a related movie, could adverselyaffect our financial performance. Further, since we haven’t developed orreleased a game for the Sony PlayStation 3 or the Nintendo Wii, and since theMicrosoft Xbox 360 is new to the market, product development schedules for thenext generation platforms may be difficult to predict and may cause us to delaythe launch of certain products.

**Werely on external developers for the development of some of our titles.**

Some ofour titles are developed by third-party developers. We have no direct controlover the business, finances and operational practices of these externaldevelopers. A delay or failure to complete the work performed by externaldevelopers may result in delays in, or cancellations of, product releases. Thefuture success of externally developed titles will depend on our continuedability to maintain relationships and obtain developer agreements on favorable termswith skilled external developers. Our competitors may acquire thebusinesses of key developers or sign them to exclusive developmentarrangements. In either case, we would not be able to continue to engage suchdevelopers’ services for our products, except for those that they arecontractually obligated to complete for us. Wecannot guarantee that we will be able to establish or maintain suchrelationships with external developers and failure to do so could result in amaterial adverse effect on our business and financial results.

**Defectsin our game software could harm our reputation or decrease the marketacceptance of our products.**

Our gamesoftware may contain defects. In addition, because we do not manufacture ourgames for console platforms, we may not discover defects until after ourproducts are in use by retail customers. Any defects in our software coulddamage our reputation, cause our customers to terminate relationships with usor to initiate product liability suits against us, divert our engineeringresources, delay market acceptance of our products, increase our costs or causeour revenue to decline.

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**We rely on a smallnumber of customers that account for a significant amount of our sales.**

Our largest singlecustomer, Wal-Mart, accounted for 19% of our gross sales in fiscal 2006, 14% ofour gross sales in fiscal 2005 and 19% of our gross sales in fiscal 2004. A substantial reduction, termination of purchases, orbusiness failure by any of our largest customers would have a material adverse effecton us.

**Increased sales ofused video game products could lower our sales.**

Some of our customers,such as Blockbuster and Hollywood Video, specialize in renting video games.These customers also may sell video games that have been rented by their customersafter a certain period of time following each title’s release. Increased salesof used video games, which are generally priced lower than new video games,could negatively affect our sales of new titles and thus our revenues.

**A significantportion of our revenue is derived from our international operations, which maysubject us to economic, political, regulatory and other risks.**

In fiscal 2006 we derived 39% of our revenues from ourinternational operations, up from 38% in fiscal 2005. We intend to continueexpanding our international operations, which may subject us to many risks,including: differentconsumer preferences, unexpected changes in regulatory requirements, tariffsand other barriers, difficulties in staffing and managing foreign operations,and possible difficulties collecting foreign accounts receivable. These factorsor others could have an adverse effect on our future foreign sales or theprofits generated from these sales.

Salesgenerated by our international offices will generally be denominated in thecurrency of the country in which the sales are made. To the extent our foreignsales are not denominated in U.S. dollars, our sales and profits could bematerially and adversely affected by foreign currency fluctuations.

**Competitionin the interactive software entertainment industry may lead to reduced sales ofour products and reduced market share.**

Our industry is intenselycompetitive. We compete for both licenses to properties and the sale of gameswith the platform manufacturers and other publishers. As a result of theircommanding positions in the industry, the manufacturers may have betterbargaining positions with respect to retail pricing, shelf space and retaileraccommodations than do any of their licensees, including us. Some of ourcompetitors have greater name recognition among consumers and licensors ofproperties, a broader product line, or greater financial, marketing and otherresources than we do. Accordingly, these competitors may be able to markettheir products more effectively or make larger offers or guarantees inconnection with the acquisition of licensed properties.

Ascompetition for popular properties increases, our cost of acquiring licensesfor such properties may increase, resulting in reduced margins. In addition, ascompetition for retail shelf space becomes more intense, we may need toincrease our marketing expenditures to maintain sales of our titles. Prolongedprice competition, increased licensing costs or reduced profit margins wouldhave a negative effect on our business and financial results.

**Competitionwith emerging forms of home-based entertainment may reduce sales of ourproducts.**

We alsocompete with other forms of entertainment and leisure activities. For example,we believe the overall growth in the use of the internet and online services byconsumers may pose a competitive threat if customers and potential customersspend less of their available time using interactive entertainment software andmore using the internet and online services.

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**Competitionfor qualified personnel is intense in the interactive software entertainmentindustry and failure to hire and retain qualified personnel could seriouslyharm our business.**

We relyto a substantial extent on the management, marketing, sales, technical andsoftware development skills of a limited number of employees to formulate andimplement our business plan. Our success depends to a significant extent uponour ability to attract and retain key personnel. Competition for employees canbe intense and the process of locating key personnel with the right combinationof skills is often lengthy. The loss of services of key personnel could have amaterial adverse effect on us.

**Consolidationin the interactive software entertainment industry presents challenges withrespect to resources and integration of acquired businesses.**

Consistent with our strategy toexpand our internal development capabilities and distribution channels, weintend to continue to pursue acquisitions of companies, intellectual propertyrights and other assets that can be acquired on acceptable terms and which webelieve can be operated or exploited profitably. As our industry continues toconsolidate, we face significant competition in making acquisitions, which mayconstrain our ability to complete suitable transactions.

Further,as we acquire companies, we are faced with additional challenges. Theintegration of newly acquired companies’ operations with our existingoperations takes management time and effort. Additionally, there is a risk ofloss of key employees, customers and vendors of the recently-acquiredcompanies. Also, if we issue equity securities to pay for an acquisition, theownership percentage of our existing stockholders would be reduced and thevalue of the shares held by our existing stockholders could be diluted. If weuse cash to pay for an acquisition, the payment could significantly reduce thecash that would be available to fund our operations or to use for otherpurposes. Acquisition financing may not be available on favorable terms or atall. We may also be required to amortize significant amounts of identifiableintangible assets in connection with future acquisitions, which could adverselyaffect our reported earnings. Future acquisitions may also require us to assumecontingent liabilities that could have a negative effect on our future resultsof operations.

**Emergingtechnologies, such as games for wireless devices, require capital investmentsand present many unknown risks.**

Wireless network and mobile phone technologies areundergoing rapid innovation. New mobile phones with more advanced processorsand supporting advanced programming languages continue to be introduced in themarket. We have no control over the demand for, or success of, these products.However, if we fail to anticipate and adapt to these and other technologicalchanges, our market share and our operating results may suffer. Our futuresuccess in providing wireless games and other content will depend on ourability to adapt to rapidly changing technologies, develop applications toaccommodate evolving industry standards and improve the performance andreliability of our applications. In addition, the widespread adoption ofnetworking or telecommunications technologies or other technological changescould require substantial expenditures to modify or adapt our entertainmentapplications.

The markets for ourapplications are also characterized by frequent new mobile phone modelintroductions and shortening mobile phone model life cycles. The development ofnew, technologically advanced applications to match the advancements in mobilephone technology is a complex process requiring significant research anddevelopment expense, as well as the accurate anticipation of technological andmarket trends. As the life cycle of mobile phone models and other wirelessdevices shortens, we will be required to develop and adapt our existingapplications and create new applications more quickly. These efforts may not besuccessful. Any failure or delay in anticipating technological advances ordeveloping and marketing new applications that respond to any significantchange in 

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technology or customerdemand could limit the available channels for our applications and limit orreduce our sales.

**We may not be ableto protect our intellectual property rights against piracy, infringement of ourpatents by third parties, or declining legal protection for intellectualproperty.**

We defend our intellectualproperty rights and combat unlicensed copying and use of software and intellectualproperty rights through a variety of techniques. Preventing unauthorized use orinfringement of our rights is difficult. Unauthorizedproduction occurs in the computer software industry generally, and were asignificant amount of unauthorized production of our products to occur, itcould materially and adversely affect our results of operations. We holdcopyrights on the products, manuals, advertising and other materials owned byus and we maintain certain trademark rights. We regard our titles, includingthe underlying software, as proprietary and rely on a combination of trademark,copyright and trade secret laws as well as employee and third-partynondisclosure and confidentiality agreements, among other methods to protectour rights. We include with our products a “shrink-wrap” or “click-wrap”license agreement or limitations on use of the software. It is uncertain towhat extent these agreements and limitations are enforceable, especially inforeign countries. Policing unauthorized use of our products isdifficult, and software piracy is a persistent problem, especially in someinternational markets. Further, the laws of some countries where our productsare or may be distributed either do not protect our products and intellectualproperty rights to the same extent as the laws of the United States, or arepoorly enforced. Legal protection of our rights may be ineffective in suchcountries. We cannot be certain that existing intellectual property laws willprovide adequate protection for our products.

**Thirdparties may claim we infringe their intellectual property rights.**

Although we believe thatwe make reasonable efforts to ensure that our products do not violate theintellectual property rights of others, from time to time we receive noticesfrom others claiming we infringe their intellectual property rights. The numberof these claims may grow. Responding to these claims may require us to enterinto royalty and licensing agreements on less favorable terms, require us tostop selling or to redesign affected products, or to pay damages or to satisfyindemnification commitments with our customers including contractual provisionsunder various license arrangements. If we are required to enter into suchagreements or take such actions, our operating margins may decline as a result.

**Our reportedfinancial results could be affected by changes in current accountingprinciples.**

Recent actions and publiccomments from the Securities and Exchange Commission have focused on theintegrity of financial reporting generally. Similarly, Congress has considereda variety of bills that could affect certain accounting principles. TheFinancial Accounting Standards Board and other regulatory accounting agencieshave recently introduced several new or proposed accounting standards, such asaccounting for stock options, some of which represent a significant change fromcurrent practices. Changes in our accounting for stock options will materiallyincrease our reported expenses when we adopt Statement of Financial AccountingStandard No. 123R in the first quarter of fiscal 2007.

**We cannot becertain of the future effectiveness of our internal controls over financialreporting or the impact of the same on our operations or the market price forour common stock.**

Pursuant to Section 404of the Sarbanes-Oxley Act of 2002, we are required to include in our AnnualReport on Form 10-K our assessment of the effectiveness of ourinternal controls over financial reporting. Furthermore, our independentregistered public accounting firm is required to audit our assessment of theeffectiveness of our internal controls over financial reporting and separatelyreport on whether it believes we maintain, in all material respects, effectiveinternal controls over financial reporting. Although we believe that wecurrently have adequate internal controls procedures in place except for thosesurrounding 

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our stock option grantpractices, we cannot be certain that future material changes to our internalcontrols over financial reporting will be effective. If we cannot adequatelymaintain the effectiveness of our internal controls over financial reporting,we might be subject to sanctions or investigation by regulatory authorities,such as the Securities and Exchange Commission. Any such action could adverselyaffect our financial results and the market price of our common stock.

**Fluctuations in ourquarterly operating results due to seasonality in the interactive softwareentertainment industry could result in substantial losses to investors.**

Wehave experienced, and may continue to experience, significant quarterlyfluctuations in sales and operating results. The interactive softwareentertainment market is highly seasonal, with sales typically significantlyhigher during the year-end holiday buying season. Other factors that causefluctuations include:

·       the timing of our release of new titles as well as therelease of our competitor’s products;

·       the popularity of both new titles and titles releasedin prior periods;

·       the profit margins for titles we sell;

·       the competition in the industry for retail shelfspace;

·       fluctuations in the size and rate of growth ofconsumer demand for titles for different platforms; and

·       the timing of the introduction of new platforms andthe accuracy of retailers’ forecasts of consumer demand.

Webelieve that quarter-to-quarter comparisons of our operating results are not agood indication of our future performance. We may not be able to maintainconsistent profitability on a quarterly or annual basis. It is likely that insome future quarter, our operating results may be below the expectations ofpublic market analysts and investors and as a result of the factors describedabove and others described throughout this “Risk Factors” section, the price ofour common stock may fall or significantly fluctuate.

**Ratingsystems and future legislation may make it difficult to successfully market andsell our products.**

Currently, the interactive softwareentertainment industry is self-regulated and rated by the EntertainmentSoftware Rating Board. Our retail customers take the Entertainment SoftwareRating Board rating into consideration when deciding which of our products theywill purchase. If the Entertainment Software Rating Board or a manufacturerdetermines that a product should have a rating directed to an older or moremature consumer, we may be less successful in our marketing and sales of aparticular product.

Recently,legislation has been introduced at the local, state and federal levels for theestablishment of a government mandated rating and governing system in theUnited States and in foreign countries for our industry. Various foreigncountries already allow government censorship of interactive entertainmentproducts. We believe that if our industry were to become subject to agovernment rating system, our ability to successfully market and sell ourproducts could be adversely affected.

**Anysignificant downturn in general economic conditions which results in areduction in discretionary spending could reduce demand for our products andharm our business.**

Our product sales are affected by theretail customer’s ability and desire to spend disposable income on the purchaseof our games. Any significant downturn in general economic conditions whichresults in a reduction in discretionary spending could result in a reduction indemand for our products and could harm 

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our business. Such industry downturnshave been, and may continue to be, characterized by diminished product demandand subsequent erosion of average selling prices.

Becauseof these and other factors affecting our operating results and financialcondition, past financial performance should not be considered a reliableindicator of future performance, and investors should not use historical trendsto anticipate results or trends in future periods.

**RiskFactors Related to the Special Committee and Company Investigations and theRestatement**

**The Staff of theSecurities and Exchange Commission has notified us that it is conducting aninformal inquiry concerning our historical stock option grant practices andthis inquiry could require us to expend significant resources and could resultin an unfavorable outcome.**

On August 7,2006, THQ announced that we had received an informal inquiry from theSecurities and Exchange Commission (“SEC”) requesting certain documents andinformation relating to our stock option grant practices from January 1,1996 to the present. We do not know when this inquiry will be resolved or whatactions, if any, the SEC may take as a result of this inquiry. Responding tothis inquiry could require the expenditure of significant financial resources. Anunfavorable outcome could require us to pay damages or penalties, or result inother remedies imposed upon us, any of which could have a material adverse affecton our business, results of operations, financial position and cash flows.

**Our common stock issubject to potential delisting from the NASDAQ Stock Market as a result of ourinability to timely file our Quarterly Report on Form 10-Q with theSecurities and Exchange Commission.**

On November 13,2006, THQ filed a Form 12b-25 with the SEC to report that we wouldnot timely file our Quarterly Report on Form 10-Q for the quarterended September 30, 2006. On November 22, 2006 we announced that wereceived a NASDAQ Staff Determination letter on November 16, 2006indicating that, as a result of our inability to timely file the Form 10-Q,we were not in compliance with the requirements for the continued listing ofour common stock as set forth in NASDAQ Marketplace Rule 4310(c)(14), andthat our common stock is, therefore, subject to delisting from the NASDAQGlobal Select Market. We requested and have been granted a hearing before aNASDAQ Listing Qualifications Panel (“Panel”) to review the Staff Determination.Our oral hearing is scheduled for February 1, 2007 and the delistingaction has been stayed pending a final written decision by the Panel. There canbe no assurance that the Panel will grant the Registrant’s request forcontinued listing.

**As a result of ourdelayed filing of our Form 10-Q for the quarter ended September 30,2006, our inability to maintain our Form S-3 eligibility mayadversely affect our ability to raise future capital or complete acquisitions.**

As aresult of our delayed filing of our Form 10-Q for the quarter ended September 30,2006, we will be ineligible to register our securities on Form S-3for sale by us or resale by other security holders until we have timely filedall periodic reports under the Securities Exchange Act of 1934 for one yearfrom the date the Form 10-Q for the quarter ended September 30,2006 was due. In the meantime, we have the ability to use Form S-1to raise capital or complete acquisitions, which could increase the transactioncosts and adversely affect our ability to raise capital or completeacquisitions of other companies during this period.

**Pending civillitigation relating to our stock option granting practices could have amaterial adverse effect on the Company.**

We andcertain of our directors and current and former officers are defendants inthree shareholder derivative actions relating to our stock option grantingpractices. See Note 21, “Subsequent Events Related to the Special Committee andCompany Investigations and the Restatement” in the Notes to ConsolidatedFinancial Statements for a more detailed description of these proceedings. Theseactions are in their 

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preliminarystages, and we intend to vigorously defend ourselves. These lawsuits coulddivert management time and attention from day-to-day operations, result insignificant legal expenses, and result in an outcome that could have a materialadverse effect on our business, financial condition, results of operations andcash flows.

**Item 1B.** UnresolvedStaff Comments

None.

**Item 2.** Properties

Thefollowing is a summary of the principal leased offices maintained by us as of May 26,2006:
| Purpose                      | ** ** | ** ** | ** ** | **North America** | ** ** | **Europe** | ** ** | **Asia Pacific** | ** ** | **Total** | ** ** |
|------------------------------|------------|------------|------------|------------------------|------------|------------|------------|-----------------------|------------|-----------|------------|
| Sales and  administrative    |       |       | 138,800    |                   |       | 50,100     |       |                  | 10,600     |      |       | 199,500 |   |
| Product  development         |       |       | 249,400    |                   |       | 6,100      |       |                  | 18,400     |      |       | 273,900 |   |
| Total leased  square footage |       |       | 388,200    |                   |       | 56,200     |       |                  | 29,000     |      |       | 473,400 |   |

 

In addition to the leased facilities listed above, wealso lease office space in various countries outside of the U.S. in order tosupport the international sales, marketing and administrative efforts of ourwireless platform. The majority of these leased facilities are occupied byMinick Holdings AG and its subsidiaries, of which we have a 50% ownershipinterest.

We also own 10,820 squarefeet of space in Phoenix, Arizona which serves as our data center and motioncapture studio.

**Item 3.** LegalProceedings

*World WrestlingEntertainment.*

On October 19, 2004, World WrestlingEntertainment, Inc. (“WWE”) filed a lawsuit in the United States DistrictCourt for the Southern District of New York (the “Court”) against JAKKS Pacific, Inc.(“JAKKS”), THQ, the THQ/JAKKS joint venture, and others, alleging, among otherclaims, improper conduct by JAKKS, certain executives of JAKKS, an employee ofthe WWE and an agent of the WWE in granting the WWE video game license to theTHQ/JAKKS joint venture. The complaint seeks various forms of relief, includingmonetary damages and a judicial determination that, among other things, theTHQ/JAKKS video game license is void. On March 30, 2005, WWE filed anamended complaint, adding both new claims and THQ’s president and chiefexecutive officer, Brian Farrell, as a defendant. In August 2005, theCourt directed the parties to file briefs on the three federal law claimsalleged by the Plaintiffs (*i.e.*,Robinson-Patman, and Sherman Act, and a threshold issue concerning thePlaintiff’s RICO claim). The motions to dismiss the amended complaint based onthese issues were fully briefed and argued and, on March 31, 2006, theCourt granted the defendants’ motion to dismiss the Robinson-Patman Act andSherman Act claims and denied the defendants’ motion seeking to dismiss theRICO claims on the basis of the threshold “enterprise” issue that was briefed(the “March 31 Order”). On April 7, 2006, the Company and the otherdefendants sought certification to appeal from the portion of the March 31Order denying the motion to dismiss the RICO claim on the one ground that wasbriefed. Shortly thereafter, WWE filed a motion for re-argument with respect tothe portion of the March 31 Order that dismissed the Sherman Act claimand, alternatively, sought judgment with respect to the Sherman Act claim sothat it could pursue an immediate appeal. At a court hearing on April 26,2006, the Court deferred a ruling on the requests for partial judgment and forcertification and set briefing schedules with respect to the remaining groundsfor defendants’ motion to dismiss the RICO claim, currently the sole remainingbasis for federal jurisdiction in this action, that were not the subject of thefirst round of briefing. The Court also 

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established a briefing schedule for WWE’s motion forre-argument of the dismissal of the Sherman Act claim. The briefing andargument of these motions is scheduled to be completed by September 2006.Discovery in this action remains stayed. On June 2, 2006, we filed a motionto dismiss the RICO claims against THQ and Brian Farrell. THQ believes thatneither it, nor Brian Farrell, is primarily accused of any wrongdoing in thecomplaint or the amended complaint, and believes that either there is no basisfor terminating the license with THQ, or that THQ will be made whole by thosewhose conduct is eventually found to be unlawful. We intend to vigorouslyprotect our rights and, if necessary, pursue appropriate claims against thirdparties.

On March 30, 2006, WWE’s counsel wrote a letterto our counsel and counsel for JAKKS, alleging breaches by the THQ/JAKKS jointventure of the video game license related to the manner of distribution andpayment of royalties to the WWE with respect to sales of the WWE video games inJapan. WWE demanded that the alleged breaches be cured within the time periodsprovided in the video game license, while reserving all of its rights,including its alleged right of termination of the video game license. On April 28,2006, our counsel responded on behalf of the THQ/JAKKS joint venture,asserting, among other things, that the WWE had been aware and had consented tothe manner of distribution in Japan and the payment of royalties with respectto such sales and, in addition, had separately released the joint venture fromany claims with respect to such matter as a result of a settlement of a royaltyaudit of the THQ/JAKKS joint venture. We have also provided documentation tothe WWE’s counsel in support of our position. WWE’s counsel has subsequentlyresponded by letter, reiterating its claims and reservation of all rights, andhas requested additional information regarding sales of WWE video games inJapan and certain other Asian countries. We are currently developing ourresponse to WWE’s counsel’s most recent communications. We believe we haveseveral bases for defending any claim of breach of the video game licenseagreement resulting from the manner of distribution of WWE-licensed products in****Japan and other Asian territories.

Due to the early status ofthis litigation with WWE we cannot estimate a possible loss, if any. Games wedevelop based upon our WWE license have contributed to approximately 15% of ournet sales during each of the three years in the period ended March 31,2006. The loss of the WWE license would have a negative impact on our futurefinancial results.

*RegulatoryProceedings*

Update on 2003 SECinquiry. On July 11, 2003 we were informed by the staff of the Securitiesand Exchange Commission (the “SEC”) that the SEC was conducting a non-publicformal investigation entitled “In the Matter of Certain Video GameManufacturers and Distributors.”  Inconnection with the investigation, the SEC requested information from us andinformed us that other companies in the video game industry had receivedsimilar requests for information. The investigation was focused on certainaccounting practices, with specific emphasis on revenue recognition. The SECadvised us that its investigation is non-public and should not be construed asan indication from the SEC or its staff that any violations of the law haveoccurred, nor should it reflect negatively upon any person, entity or security.We cooperated fully with the SEC in its investigation into this matter.Recently, we were advised by the SEC staff that they have concluded theirinquiry with respect to THQ and have no present intention to make anenforcement recommendation.

*Other*

Additionally, we are involved in routine litigationarising in the ordinary course of our business. In the opinion of our management,none of this pending routine litigation will have a material adverse effect onour consolidated financial condition or results of operations.

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See Note21, “Subsequent Events Related to the Special Committee and CompanyInvestigations and the Restatement” in the Notes to Consolidated FinancialStatements for more information regarding legal and regulatory proceedings thatarose following March 31, 2006.

**Item 4.** Submissionof Matters to a Vote of Security Holders

There were no matters submitted to a vote of securityholders during the fourth quarter of the fiscal year covered by this AnnualReport.

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**PART II**

**Item 5.**         Market for the Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities

THQ’scommon stock is quoted on the NASDAQ National Market under the symbol “THQI.”The following table sets forth, for the periods indicated, the high and lowclosing sales prices of our common stock as reported by the NASDAQ NationalMarket:

| ** **                                   | ** ** | **Closing  Sales Prices** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **High**                       | ** ** | **Low** | ** ** |
| **Fiscal Year Ended  March 31, 2006**   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Fourth Quarter ended March 31, 2006     |       | 27.62                          |       | 23.81 |   |
| Third Quarter ended December 31, 2005   |       | 24.58                          |       | 19.14 |   |
| Second Quarter ended September 30, 2005 |       | 23.97                          |       | 19.49 |   |
| First Quarter ended June 30, 2005       |       | 20.67                          |       | 16.81 |   |
| **Fiscal Year Ended  March 31, 2005**   |       |                           |       |   |   |
| Fourth Quarter ended March 31, 2005     |       | 19.77                          |       | 13.41 |   |
| Third Quarter ended December 31, 2004   |       | 15.78                          |       | 11.29 |   |
| Second Quarter ended September 30, 2004 |       | 14.97                          |       | 11.85 |   |
| First Quarter  ended June 30, 2004      |       | 15.33                          |       | 12.25 |   |

 

The last reported price ofour common stock on May 26, 2006, as reported by NASDAQ National Market, was$23.10 per share.

**Holders**

As of May 26, 2006there were approximately 287 holders of record of our common stock.

**Dividend Policy**

We have never paid cashdividends on our common stock. We currently intend to retain future earnings,if any, to finance the growth and development of our business and, therefore,we do not anticipate paying any cash dividends in the future. Our principalcredit facility agreement provides that we will not pay any cash dividendswithout consent of the bank.

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**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

Information for our equity compensation plans ineffect as of March 31, 2006 is as follows (amounts in thousands, exceptper share amounts):

| ** **                                                   | ** ** | **(a)**    | ** ** | **(b)**                                                                                                                                          | ** ** | **(c)**                                                                                                     | ** ** |
|--------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                       | ** ** | ** ** | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
| Equity compensation  plans approved by security holders |       |       | 8,247,411  |                                                                                                                                             |       |                                                                                                        | $          | 16.49 |   |   |   | 2,007,949 |   |   |
| Equity compensation  plans not approved by security holders  |       |       | 1,237,442  | (1)                                                                                                                                              |       |                                                                                                        | $          | 11.59 |   |   |   | 237,031 |   |   |
| Total                                                        |       |       | 9,484,853  |                                                                                                                                             |       |                                                                                                        | $          | 15.85 |   |   |   | 2,244,980 |   |   |
|                                                              |            |            |            |                                                                                                                                                  |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |

----

(1)          Represents the aggregatenumber of shares of THQ common stock to be issued upon exercise of individualcompensation arrangements with employee and non-employee option and warrantholders. The outstanding options were primarily granted under the Company’sThird Amended and Restated Non-executive Employee Stock Option Plan (the “NEEPPlan”). For a description of the material features of the NEEP Plan, see “Note15—Stock-based Compensation” in the notes to the consolidated financialstatements.

**Securities Issuedin Private Transactions**

In fiscal 2005 we granted240,000 warrants to third parties to purchase up to 240,000 shares of ourcommon stock at an exercise price of $13.49 per share in connection with alicense agreement that allows us to utilize intellectual property owned by suchthird parties. The warrants vested upon grant and have a six-year term. Thefair value of the warrants was determined using the Black-Scholes pricingmodel, assuming a risk-free rate of 2.9%, a volatility factor of 67% and thesix-year term as noted above. The fair value of these warrants was $2.0million.

**Purchases of EquitySecurities by the Issuer and Affiliated Purchases**

There were no repurchasesof our common stock by the Company during the three months ended March 31,2006.

**Item 6.**        Selected ConsolidatedFinancial Data

The following table summarizes certain selectedconsolidated financial data, which should be read in conjunction with ourconsolidated financial statements and Notes thereto and with Management’s Discussionand Analysis of Financial Condition and Results of Operations includedelsewhere herein. Effective January 1, 2003, we changed our fiscal yearend from December 31 to March 31. The change resulted in athree-month transitional period ended March 31, 2003. References toTransition 2003, unless otherwise indicated, refer to the three-monthtransitional period ended March 31, 2003. Since the change in fiscal yearend affects the comparability of the information reflected in the selectedfinancial data, we have included unaudited results for the period from April 1,2002 through March 31, 2003. Other than this unaudited period, theselected consolidated financial data presented below as of and for each of thefiscal years and Transition 2003 in the five-year period ended March 31,2006 are derived from our audited consolidated financial statements. Theconsolidated balance sheets as of March 31, 2006, and 2005, and theconsolidated statements of operations for the fiscal years ended March 31,2006, 2005 and 2004, and the report thereon are included elsewhere in this Form 10-K/A.The information presented in the following 

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tables has been adjusted to reflect the restatement ofour financial results, which is more fully described in the “Explanatory Note”immediately preceding Part I, Item 1 and in Note 2, “Restatement ofConsolidated Financial Statements” in Notes to Consolidated FinancialStatements of this Form 10-K/A. The adjustments, after tax, forfiscal years 2006, 2005, 2004, 2003, Transition 2003 and fiscal 2002 were $2.2million, $1.4 million, $1.8 million, $1.6 million, $304,000 and $1.8 million,respectively.

Other than as included inthis Form 10-K/A, we have not amended our previously-filed AnnualReports on Form 10-K or Quarterly Reports on Form 10-Qfor the periods affected by this restatement. The financial information thathas been previously filed or otherwise reported for these periods is supersededby the information in this Annual Report on Form 10-K/A, and thefinancial information contained in such previously-filed reports should nolonger be relied upon.

**STATEMENT OF OPERATIONS DATA(In thousands, except per share data)**

| ** **                                               | ** ** | **Fiscal Year Ended March 31,** | ** ** | **Transition**          | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                            | ** ** | **2005(a)**             | ** ** | **2004(b)**                            | ** ** | **2003(c)(d)** | ** ** | **2003(c)** | ** ** | **2002(d)** | ** ** |
| ** **                                               | ** ** | **As restated(1)**                             | ** ** | **As restated(1)** | ** ** | **As restated(1)**                | ** ** | **As restated(2)** | ** ** | **As restated(2)** | ** ** | **As restated(2)** | ** ** |
| ** **                                               | ** ** | ** **                                          | ** ** | ** **              | ** ** | ** **                             | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                |       |                                                | $          | 806,560                 |       |                                   |       | $ | 756,731 |   |   |   | $ | 640,846 |   |   |   | $ | 467,647 |   |   |   | $ | 66,800 |   |   |   | $ | 480,529 |   |   |
| Costs and expenses:                                      |       |                                                |       |                    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales                                            |       |                                                | 287,946    |                    |       |                                   | 255,187    |   |   |   | 234,574 |   |   |   | 181,532 |   |   |   | 27,158 |   |   |   | 188,559 |   |   |
| License amortization and royalties                       |       |                                                | 80,508     |                    |       |                                   | 85,926     |   |   |   | 71,132 |   |   |   | 38,988 |   |   |   | 5,576 |   |   |   | 40,476 |   |   |
| Software development amortization                        |       |                                                | 116,371    |                    |       |                                   | 93,622     |   |   |   | 105,632 |   |   |   | 84,916 |   |   |   | 12,018 |   |   |   | 83,698 |   |   |
| Product development                                      |       |                                                | 85,323     |                    |       |                                   | 73,637     |   |   |   | 37,758 |   |   |   | 37,520 |   |   |   | 9,077 |   |   |   | 35,801 |   |   |
| Selling and marketing                                    |       |                                                | 123,926    |                    |       |                                   | 110,727    |   |   |   | 87,664 |   |   |   | 68,227 |   |   |   | 13,618 |   |   |   | 64,005 |   |   |
| Payment to venture partner                               |       |                                                | 12,572     |                    |       |                                   | 9,774      |   |   |   | 9,675 |   |   |   | 9,218 |   |   |   | 644 |   |   |   | 10,146 |   |   |
| General and administrative                               |       |                                                | 68,336     |                    |       |                                   | 55,153     |   |   |   | 47,609 |   |   |   | 37,470 |   |   |   | 8,565 |   |   |   | 35,795 |   |   |
| Total costs and expenses                                 |       |                                                | 774,982    |                    |       |                                   | 684,026    |   |   |   | 594,044 |   |   |   | 457,871 |   |   |   | 76,656 |   |   |   | 458,480 |   |   |
| Income (loss) from operations                            |       |                                                | 31,578     |                    |       |                                   | 72,705     |   |   |   | 46,802 |   |   |   | 9,776 |   |   |   | (9,856 | ) |   |   | 22,049 |   |   |
| Interest income                                          |       |                                                | 8,212      |                    |       |                                   | 4,188      |   |   |   | 2,333 |   |   |   | 4,829 |   |   |   | 875 |   |   |   | 5,272 |   |   |
| Other income (expense)                                   |       |                                                | —     |                    |       |                                   | —     |   |   |   | 4,000 |   |   |   | (12,409 | ) |   |   | (2,403 | ) |   |   | (10,006 | ) |   |
| Income (loss) before income taxes and minority  interest |       |                                                | 39,790     |                    |       |                                   | 76,893     |   |   |   | 53,135 |   |   |   | 2,196 |   |   |   | (11,384 | ) |   |   | 17,315 |   |   |
| Income taxes                                             |       |                                                | 7,621      |                    |       |                                   | 15,235     |   |   |   | 19,063 |   |   |   | 1,220 |   |   |   | (3,394 | ) |   |   | 6,123 |   |   |
| Income (loss) before minority interest                   |       |                                                | 32,169     |                    |       |                                   | 61,658     |   |   |   | 34,072 |   |   |   | 976 |   |   |   | (7,990 | ) |   |   | 11,192 |   |   |
| Minority interest                                        |       |                                                | (63        | )                       |       |                                   | (261       | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Net income (loss)                                        |       |                                                | $          | 32,106                  |       |                                   |       | $ | 61,397 |   |   |   | $ | 34,072 |   |   |   | $ | 976 |   |   |   | $ | (7,990 | ) |   |   | $ | 11,192 |   |   |
| Net income (loss) per share—basic                   |       |                                                | $          | 0.51                    |       |                                   |       | $ | 1.05 |   |   |   | $ | 0.59 |   |   |   | $ | 0.02 |   |   |   | $ | (0.14 | ) |   |   | $ | 0.19 |   |   |
| Net income (loss) per share—diluted                 |       |                                                | $          | 0.49                    |       |                                   |       | $ | 1.02 |   |   |   | $ | 0.58 |   |   |   | $ | 0.02 |   |   |   | $ | (0.14 | ) |   |   | $ | 0.18 |   |   |
| Shares used in per share calculation—basic          |       |                                                | 62,615     |                    |       |                                   | 58,545     |   |   |   | 57,279 |   |   |   | 58,527 |   |   |   | 57,479 |   |   |   | 58,805 |   |   |
| Shares used in per  share calculation—diluted       |       |                                                | 65,520     |                    |       |                                   | 60,367     |   |   |   | 58,605 |   |   |   | 60,881 |   |   |   | 57,479 |   |   |   | 61,872 |   |   |

 

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**BALANCESHEET DATA(In thousands)**

| ** **                | ** ** | **Fiscal Year Ended March 31,** | ** ** | **Transition**          | ** ** | **Year Ended  December 31,** | ** ** |                    |
|---------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|-------------------------|
| ** **                | ** ** | **2006**                                            | ** ** | **2005**                | ** ** | **2004**                               | ** ** | **2003**                | ** ** | **2003** | ** ** | **2002** | ** ** |   |
| ** **                | ** ** | **As restated(1)**                             | ** ** | **As restated(1)** | ** ** | **As restated(1)**                | ** ** | **As restated(2)** | ** ** | **As restated(2)** | ** ** | **As restated(2)** | ** ** |   |
| Working capital           |       |                                                | $          | 459,558                 |       |                                   |       | $                       | 400,063 |   |   |   | $ | 309,633 |   |   |   | $ | 286,899 |   |   |   | $ | 286,899 |   |   |   | $ | 320,588 |   |   |
| Total assets              |       |                                                | $          | 848,468                 |       |                                   |       | $                       | 746,606 |   |   |   | $ | 527,901 |   |   |   | $ | 473,867 |   |   |   | $ | 473,867 |   |   |   | $ | 537,500 |   |   |
| Stockholders’ equity |       |                                                | $          | 627,751                 |       |                                   |       | $                       | 547,758 |   |   |   | $ | 437,879 |   |   |   | $ | 397,309 |   |   |   | $ | 397,309 |   |   |   | $ | 409,816 |   |   |

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Notes:

(a)           Net income includes a $7.8 million benefit for researchand development income tax credits claimed for prior years.

(b)          Net income includes a $4.0 million benefit for asettlement of a dispute with directors’ and officers’ insurance carrier, net oftax.

(c)           Net income includes a charge of $1.8 million due to theother than temporary impairment of our investment in Yuke’s Co., Ltd. (See “Note9—Other Long-Term Assets” in Notes to Consolidated Financial Statements). Wealso changed our fiscal year end from December 31 to March 31,effective January 1, 2003.

(d)          Net income includes a charge of $7.9 million, net oftax, for the cancellation of 20 SKUs as well as a charge of $4.6 million, net oftax, related to the settlement of a class action lawsuit and a charge of $1.1million, net of tax, related to the write-off of inventory and softwaredevelopment for “WWF” branded games that we had been prevented from shippingpursuant to an action by the World Wide Fund for Nature against World WrestlingEntertainment, Inc. and a charge of $2.8 million, net of tax, related tothe discontinuation of our online joint venture in the United Kingdom (NetworkInteractive Sports, Ltd.).

Notes related torestatement:

(1)          See the “Explanatory Note” immediately preceding Part I,Item 1 and in Note 2, “Restatement of Consolidated Financial Statements” inNotes to Consolidated Financial Statements of this Form 10-K/A.

(2)          The Selected Financial Data for the fiscalyear ended March 31, 2003, Transition 2003 and the year ended December 31,2002 has been restated to reflect adjustments related to stock-basedcompensation expense and the associated tax impacts as further described in the“Explanatory Note” immediately preceding Part I, Item 1 of this Form 10-K/A.As a result of these adjustments, net income was reduced by $1.6 million,$304,000 and $1.8 million for the year ended March 31, 2003, Transition2003 and the year ended December 31, 2002, respectively as follows:

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| ** **                                                         | ** ** | **Fiscal Year Ended March 31, 2003  (Unaudited)** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **(In thousands, except per share data)** | ** ** | ** **                                                                 | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Product  development                                               |       |                                                                       | $          | 36,531 |   |   |   | $ | 989 |   |   |   | $ | 37,520 |   |   |
| Selling and  marketing                                             |       |                                                                       | 67,737     |   |   |   | 490 |   |   |   | 68,227 |   |   |
| General and  administrative                                        |       |                                                                       | 36,794     |   |   |   | 676 |   |   |   | 37,470 |   |   |
| Total costs and  expenses                                          |       |                                                                       | 455,716    |   |   |   | 2,155 |   |   |   | 457,871 |   |   |
| Income from  operations                                            |       |                                                                       | 11,931     |   |   |   | (2,155 | ) |   |   | 9,776 |   |   |
| Interest income                                                    |       |                                                                       | 4,833      |   |   |   | (4 | ) |   |   | 4,829 |   |   |
| Income before  income taxes and minority interest                  |       |                                                                       | 4,355      |   |   |   | (2,159 | ) |   |   | 2,196 |   |   |
| Income taxes                                                       |       |                                                                       | 1,812      |   |   |   | (592 | ) |   |   | 1,220 |   |   |
| Income before  minority interest                                   |       |                                                                       | 2,543      |   |   |   | (1,567 | ) |   |   | 976 |   |   |
| Net income                                                         |       |                                                                       | 2,543      |   |   |   | (1,567 | ) |   |   | 976 |   |   |
| Net income per share—basic                                    |       |                                                                       | $          | 0.04 |   |   |   | $ | (0.02 | ) |   |   | $ | 0.02 |   |   |
| Net income per  share—diluted                                 |       |                                                                       | $          | 0.04 |   |   |   | $ | (0.02 | ) |   |   | $ | 0.02 |   |   |
| Shares used in  per share calculation—basic                   |       |                                                                       | 58,527     |   |   |   | — |   |   |   | 58,527 |   |   |
| Shares used in per share  calculation—diluted                 |       |                                                                       | 60,828     |   |   |   | 53 |   |   |   | 60,881 |   |   |
|                                                                    |            |                                                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                                         | ** ** | **Transition 2003** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------|------------|
| **(In thousands, except per share data)** | ** ** | ** **               | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Product  development                                               |       |                     | $          | 8,899 |   |   |   | $ | 178 |   |   |   | $ | 9,077 |   |   |
| Selling and  marketing                                             |       |                     | 13,514     |   |   |   | 104 |   |   |   | 13,618 |   |   |
| General and  administrative                                        |       |                     | 8,442      |   |   |   | 123 |   |   |   | 8,565 |   |   |
| Total costs and  expenses                                          |       |                     | 76,251     |   |   |   | 405 |   |   |   | 76,656 |   |   |
| Loss from  operations                                              |       |                     | (9,451     | ) |   |   | (405 | ) |   |   | (9,856 | ) |   |
| Interest income                                                    |       |                     | 878        |   |   |   | (3 | ) |   |   | 875 |   |   |
| Loss before  income taxes and minority interest                    |       |                     | (10,976    | ) |   |   | (408 | ) |   |   | (11,384 | ) |   |
| Income taxes                                                       |       |                     | (3,290     | ) |   |   | (104 | ) |   |   | (3,394 | ) |   |
| Loss e before  minority interest                                   |       |                     | (7,686     | ) |   |   | (304 | ) |   |   | (7,990 | ) |   |
| Net loss                                                           |       |                     | (7,686     | ) |   |   | (304 | ) |   |   | (7,990 | ) |   |
| Net loss per share—basic                                      |       |                     | $          | (0.13 | ) |   |   | $ | (0.01 | ) |   |   | $ | (0.14 | ) |   |
| Net loss per  share—diluted                                   |       |                     | $          | (0.13 | ) |   |   | $ | (0.01 | ) |   |   | $ | (0.14 | ) |   |
| Shares used in  per share calculation—basic                   |       |                     | 57,479     |   |   |   | — |   |   |   | 57,479 |   |   |
| Shares used in per share  calculation—diluted                 |       |                     | 57,479     |   |   |   | — |   |   |   | 57,479 |   |   |
|                                                                    |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                                         | ** ** | **Year Ended December 31, 2002** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(In thousands, except per share data)** | ** ** | ** **                                           | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Product development                                                |       |                                                 | $          | 34,696 |   |   |   | $ | 1,105 |   |   |   | $ | 35,801 |   |   |
| Selling and  marketing                                             |       |                                                 | 63,477     |   |   |   | 528 |   |   |   | 64,005 |   |   |
| General and  administrative                                        |       |                                                 | 34,993     |   |   |   | 802 |   |   |   | 35,795 |   |   |
| Total costs and  expenses                                          |       |                                                 | 456,045    |   |   |   | 2,435 |   |   |   | 458,480 |   |   |
| Income from  operations                                            |       |                                                 | 24,484     |   |   |   | (2,435 | ) |   |   | 22,049 |   |   |
| Interest income                                                    |       |                                                 | 5,277      |   |   |   | (5 | ) |   |   | 5,272 |   |   |
| Income before  income taxes and minority interest                  |       |                                                 | 19,755     |   |   |   | (2,440 | ) |   |   | 17,315 |   |   |
| Income taxes                                                       |       |                                                 | 6,761      |   |   |   | (638 | ) |   |   | 6,123 |   |   |
| Income before  minority interest                                   |       |                                                 | 12,994     |   |   |   | (1,802 | ) |   |   | 11,192 |   |   |
| Net income                                                         |       |                                                 | 12,994     |   |   |   | (1,802 | ) |   |   | 11,192 |   |   |
| Net income per share—basic                                    |       |                                                 | $          | 0.22 |   |   |   | $ | (0.03 | ) |   |   | $ | 0.19 |   |   |
| Net income per  share—diluted                                 |       |                                                 | $          | 0.21 |   |   |   | $ | (0.03 | ) |   |   | $ | 0.18 |   |   |
| Shares used in  per share calculation—basic                   |       |                                                 | 58,805     |   |   |   | — |   |   |   | 58,805 |   |   |
| Shares used in per share  calculation—diluted                 |       |                                                 | 61,865     |   |   |   | 7 |   |   |   | 61,872 |   |   |
|                                                                    |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Restatement ofFinancial Results for Periods Prior to Fiscal 2002**

We determined the effects of the restatement onperiods prior to fiscal 2002 to be immaterial and have not restated such yearsseparately. The impact on net income for periods prior to fiscal 2002 arecontained in the table in the “Explanatory Note” immediately preceding Part I,Item 1 of this Form 10-K/A. Previously reported stock-basedcompensation expense in each of the periods prior to fiscal 2002 was nominal.

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**Item 7.** Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**Overview**

The following is adiscussion of our operating results and the primary trends that affect ourbusiness. Certain of these trends and other statements made herein may be “forward-looking”within the meaning of the Private Securities Litigation Reform Act of 1995.Such statements are included herein because management believes that anunderstanding of these trends is important to understand our results for thefiscal year ended March 31, 2006 (“fiscal 2006”), as well as our futureprospects. This summary is not intended to be exhaustive, nor is it intended tobe a substitute for the detailed discussion and analysis provided elsewhere inthis Form 10-K/A, including in the remainder of “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” orthe consolidated financial statements and related notes. The discussion andanalysis herein may be understood more fully by reference to the consolidatedfinancial statements and notes to the consolidated financial statements.Additionally, readers should refer to our cautionary statement on page 1herein as well as “Risk Factors” set forth in Item 1A. All references to “we,” “us,”“our,” “THQ,” or the “Company” in the following discussion and analysis meanTHQ Inc. and its subsidiaries.

**Restatement ofConsolidated Financial Statements**

The following information has been adjusted to reflectthe restatement of our financial results, which is more fully described in the “ExplanatoryNote” immediately preceding Part I, Item 1 and in Note 2, “Restatement ofConsolidated Financial Statements” in Notes to Consolidated FinancialStatements of this Form 10-K/A. The net of tax impact of theadjustments on our results of operations amounted to $2.2 million, $1.4 millionand $1.8 million in fiscal years 2006, 2005 and 2004, respectively.

In addition, options determined to have been grantedwith an exercise price below the fair market value of our common stock on theactual grant date and vesting subsequent to December 2004 result innonqualified deferred compensation for purposes of Section 409A of theInternal Revenue Code, and holders are subject to an excise tax on the value ofthe options in the year in which they vest. We have determined that options topurchase approximately 1.1 million shares of our common stock held by currentand former employees may be subject to adverse tax consequences under Section 409A.

In order to mitigate the unfavorable personal taxconsequences under Section 409A, in December 2006 we unilaterallycorrected the affected options that remain outstanding to increase the exerciseprice to the fair market value of our common stock on the revised measurementdate, and to give the option holders a cash payment equal to the differencebetween the initial exercise price and the increased exercise price (“CashPayment”). We estimate that the Cash Payment will be approximately $2.4 millionand will be made in the fourth quarter of fiscal 2007. We will account for theimpact of the corrected options as a stock option modification under SFAS 123R.

We also plan to compensateindividuals who have exercised options for the consequences of Section 409A.We estimate that we will incur additional compensation expense of $1.6 millionin the third quarter of fiscal 2007 in connection with all the actionsdescribed above.

**Overview of Fiscal2006 Results**

Net sales in fiscal 2006 increased7% over the fiscal year ended March 31, 2005 (“fiscal 2005”), from$756.7 million to $806.6 million. The increase in net sales for fiscal2006 was primarily attributable to worldwide sales of 10 titles that sold morethan one million units. In fiscal 2005, we published six titles which shippedmore than one million units.

In fiscal 2006, our operating margin declined by 570basis points over fiscal 2005, to 4% of net sales. Our operating margindeclined in fiscal 2006 due primarily to (i) higher catalog sales as apercentage of total 

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net sales (ii) a change in development strategyfor our WWE games wherein we ceased internal product development for wrestlinggames and as a result we wrote-off the underlying capitalized softwaredevelopment costs to software development amortization, and (iii) highprice protection and software development amortization for thecurrent-generation title *Full Spectrum Warrior**TM: Ten Hammers*.

Net income for fiscal 2006 (as restated) was $32.1million, or $0.49 per diluted share, compared to net income of$61.4 million, or $1.02 per diluted share, for fiscal 2005 (as restated).Fiscal 2006 results reflect increased investment in development of video gamesfor next generation consoles. Net income for fiscal 2005 was positivelyaffected by $7.8 million, or $0.13 per diluted share, from the recognition ofresearch and development income tax credits claimed for prior years.

Cash provided byoperations was $42.8 million during fiscal 2006, as compared to $60.5 millionin fiscal 2005. The decline in cash provided by operations was primarily due tolower net income, higher spending for software development, and higher paymentsof accrued expenses, partially offset by lower cash spending for licenses.

**Fiscal 2007 Outlook**

We expect net sales in fiscal 2007 to increase 12% to18% as compared to fiscal 2006, resulting in expected net sales of $900 to $950million. Key titles that we expect to release in fiscal 2007 are *Cars*on nine platforms, *Saints Row* onXbox360 and *WWE Smackdown vs. Raw 2007*. We alsoexpect to release titles based on Nickelodeon brands and core gamer PC titlessuch as *Company of Heroes*and *Supreme Commander*. We expect our SKU count in fiscal 2007 toincrease to approximately 70 from 64 in fiscal 2006 and title count to remainflat in fiscal 2007 compared to fiscal 2006. Our catalog sales are expected tobe 25% of our product mix, down from 34% in fiscal 2006.

The following discussionof fiscal 2007 expected results excludes equity based compensation, such as theimpact of expensing stock options under SFAS 123R, “Share-Based Payment” (“SFAS No. 123R”),a revision of SFAS No. 123, that we will adopt in our first quarterof fiscal 2007. We expect cost of sales to decline slightly as a percentage ofnet sales in fiscal 2007 compared to fiscal 2006. License amortization androyalties expense, as a percentage of net sales, are expected to decline infiscal 2007 as we have more original properties in our product mix. Softwaredevelopment amortization, as a percentage of net sales, is expected to increasein fiscal 2007 as compared to fiscal 2006, primarily due to the higherdevelopment costs for games on next-generation platforms and productdevelopment expense is expected to decrease in fiscal 2007 as many nextgeneration titles have reached technological feasibility. General and administrativecosts are expected to remain constant in absolute dollars and decline as apercentage of net sales. We expect operating margins to improve from 4% infiscal 2006 to 8 to 9% in fiscal 2007. The effective tax rate in fiscal 2007 isexpected to be 30% and is subject to change based on changes in geographicalprofits and other factors. Based on an expected fully diluted share count of 68million, we expect earnings per share of $0.90 to $1.00 in fiscal 2007. Forfiscal 2007, we expect the impact of equity based compensation to beapproximately $0.16 per fully diluted share.

**ProspectiveBusiness Trends**

*Transition tonext-generation console systems.**  *Ourindustry is currently in a transition phase as sales of games for the existingplatforms decline and sales of games for new platforms begin to accelerate asnew hardware installed bases grow. Microsoft recently launched Xbox 360; Sonyand Nintendo have announced plans to introduce new console platforms incalendar 2006 and in fiscal 2005 Nintendo and Sony each launched new handheldplatforms. In terms of volume and pricing, sales of interactive entertainmentsoftware have traditionally decreased in transition years, as consumersdecrease their purchases of software for current generation hardware while theywait for the release of the new platforms. Our strategy during this transitionis to: leverage our current brands and catalog titles and selectively introducehigh-potential 

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new franchises for thegrowing installed base of current-generation hardware and the high-end PCmarket; establish unique new intellectual properties early in the cycle onnext-generation platforms; leverage our handheld leadership; continue to growwireless revenues and profitability; and pursue emerging revenue opportunities.

*Increase in developmentcosts.**  *Thenext-generation consoles have increased functionality (e.g., realisticenvironments, artificial intelligence and on-line game play) over their currentgeneration counterparts. The increased functionality delivers a more excitinggaming experience but adds complexity to the development of video games forthese new consoles. This complexity increases the overall cost to develop thesegames and accordingly, during fiscal 2007, we expect our average softwaredevelopment costs to increase as we develop games for these new consoles.

*Software pricing.**  *We expect the average selling price of video games oncurrent generation systems will continue to decline as the industry transitionsto next-generation console systems. Traditionally video game sales havedecreased in transition years, as consumers decrease their purchases ofsoftware for current generation hardware while they wait for the release of thenew platforms. As the installed base of next-generation hardware grows, and asnet sales of video games made for play on those next-generation consoles increases,we expect the average selling price of video games to increase, having apositive impact on our margin.

*Increase in installedbase.**  *With theintroduction of new console platforms, the overall installed base of video gameplatforms has historically increased. Platform manufactures have reducedpricing on their existing consoles and we expect to continue to ship both newtitles and games from our expansive catalog of previously released titles madefor play on these consoles. As the installed base of next-generation consoleplatforms increases, we plan to release titles based on our most popular ownedand licensed franchise games and we’ve already built a substantial line-up ofgames to take advantage of the accelerating market growth which is expected tobegin in calendar 2007.

*International growth.**  *In fiscal 2006, approximately $31 million of ouroverall net sales increase of $50 million was attributable tointernational growth. The international installed base of video game platformscontinues to increase and we are focused on expanding our internationalpresence by identifying territories wherein we see opportunity and establishinga direct sales presence to seize such opportunities. In addition to our salesforce presence, we are focused on releasing and aggressively marketing titleswith international appeal.

**Critical AccountingEstimates**

The Management’s Discussion and Analysis of FinancialCondition and Results of Operations discusses our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of theseconsolidated financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. The estimates discussed below are considered bymanagement to be critical because they are both important to the portrayal ofour financial condition and results of operations and because their applicationplaces the most significant demands on management’s judgment, with financialreporting results relying on estimates about the effect of matters that areinherently uncertain. Specific risks for these critical accounting estimatesare described in the following paragraphs. For all of these estimates,management cautions that actual results may differ materially from theseestimates under different assumptions or conditions.

*Allowances for priceprotection, returns and doubtful accounts.**  *We derive revenue from sales of packaged software forvideo game systems and personal computers and sales of content and services forwireless devices. Product revenue is recognized net of allowances for priceprotection and returns and various 

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customer discounts. Wetypically only allow returns for our personal computer products; however, wemay decide to provide price protection or allow returns for our video gamesystems or personal computer products after we analyze: (1) inventoryremaining in the retail channel, (2) the rate of inventory sell- throughin the retail channel, and (3) our remaining inventory on hand. Wemaintain a policy of giving credits for price protection and returns, but donot give cash refunds.

We establish sales allowances based on estimates offuture price protection and returns with respect to current period productrevenue. We analyze historical price protection granted, historical returns,current sell-through of retailer and distributor inventory of our products,current trends in the video game market and the overall economy, changes incustomer demand and acceptance of our products, and other related factors whenevaluating the adequacy of the price protection and returns allowance. Inaddition, management monitors the volume of our sales to retailers anddistributors and their inventories, because slow-moving inventory in thedistribution channel can result in the requirement for price protection or returnsin subsequent periods. In the past, actual price protection and returns havenot generally exceeded our reserves. However, actual price protection andreturns in any future period are uncertain. While management believes it canmake reliable estimates for these matters, if we changed our assumptions andestimates, our price protection and returns reserves would change, which wouldimpact the net revenue we report. In addition, if actual price protection andreturns were significantly greater than the reserves we have established, theactual results of our reported net sales would decrease. Conversely, if actualprice protection and returns were significantly less than our reserves, ourreported net sales would increase.

Similarly, management must use significant judgmentand make estimates in connection with establishing allowances for doubtfulaccounts in any accounting period. Management analyzes customer concentrations,customer credit-worthiness and current economic trends when evaluating the adequacyof the allowance for doubtful accounts. Material differences may result in theamount and timing of our bad debt expense for any period if management madedifferent judgments or utilized different estimates. If our customersexperience financial difficulties and are not able to meet their ongoingfinancial obligations to us, our results of operations may be adverselyimpacted.

*Licenses.**  *Minimum guaranteed royalty payments for intellectualproperty licenses are initially recorded on our balance sheet as an asset(licenses) and as a liability (accrued royalties) at the contractual amountupon execution of the contract if no significant performance obligation remainswith the licensor. When a significant performance obligation remains with thelicensor, we record royalty payments as an asset (licenses) when payable ratherthan upon execution of the contract. Royalty payments for intellectual propertylicenses are classified as current assets and current liabilities to the extentsuch royalty payments relate to anticipated sales during the subsequent yearand long-term assets and long-term liabilities if such royalty payments relateto anticipated sales after one year.

We evaluate the future recoverability of ourcapitalized licenses on a quarterly basis. The recoverability of capitalizedlicense costs is evaluated based on the expected performance of the specificproducts in which the licensed trademark or copyright is to be used. As many ofour licenses extend for multiple products over multiple years, we also assessthe recoverability of capitalized license costs based on certain qualitativefactors such as the success of other products and/or entertainment vehiclesutilizing the intellectual property, whether there are any future plannedtheatrical releases or television series based on the intellectual property andthe rights holder’s continued promotion and exploitation of the intellectualproperty. Prior to the related product’s release, we expense, as part oflicense amortization and royalties, capitalized license costs when we believesuch amounts are not recoverable.

Licenses are expensed to license amortization androyalties at the higher of (1) the contractual royalty rate based onactual net product sales related to such license or (2) an effective ratebased upon total projected revenue related to such license. When, in management’sestimate, future cash flows will not be sufficient to recover previouslycapitalized costs, we expense these capitalized costs to license amortizationand 

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royalties. If actual revenues or revised forecastedrevenues fall below the initial forecasted revenues for a particular license,the charge to license amortization and royalties expense may be larger thananticipated in any given quarter. As of March 31, 2006, the net carryingvalue of our licenses was $81.5 million. If we were required to write offlicenses, due to changes in market conditions or product acceptance, ourresults of operations could be materially adversely affected.

*Software Development.**  *We utilize both internal development teams andthird-party software developers to develop our software. We account forsoftware development costs in accordance with SFAS No. 86, “Accounting forthe Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.”  We capitalize software development costs oncetechnological feasibility is established and we determine that such costs arerecoverable against future revenues. For products where proven game enginetechnology exists, this may occur early in the development cycle. We capitalizethe milestone payments made to third-party software developers and the directpayroll and overhead costs for our internal development teams. We evaluatetechnological feasibility on a product-by-product basis. Amounts related tosoftware development for which technological feasibility is not yet met arecharged as incurred to product development expense in our consolidatedstatements of operations.

On a quarterly basis, we compare ourunamortized software development costs to net realizablevalue, on a product-by-product basis. The amount by which any unamortizedsoftware development costs exceed their net realizable value is charged tosoftware development amortization. The net realizable value is the estimatedfuture gross revenues from the product, reduced by the estimated futurecosts of completing the product.

Commencing upon product release, capitalized softwaredevelopment costs are amortized to software development amortization based onthe ratio of current revenues to total projected revenues. If actual revenues,or revised projected revenues, fall below the initial projections, the chargeto software development amortization may be larger than anticipated in anygiven quarter. As of March 31, 2006, the net carrying value of oursoftware development was $109.1 million.

The milestone payments made to our third-partydevelopers during their development of our games are typically considerednon-refundable advances against the total compensation they can earn based uponthe sales performance of the products. Any additional compensation earnedbeyond the milestone payments are expensed to software development amortizationas earned.

*Goodwill.**  *We perform our annual review for goodwill impairmentduring the quarters ending June 30, or more frequently if indicators ofpotential impairment exist. We performed our goodwill impairment review for thequarters ended June 30, 2005 and June 30, 2004, and in both reviewswe found no impairment. Our impairment review process is based on a discountedfuture cash flow approach that uses our estimates of revenue for the reportingunits, driven by anticipated success of our products and product release schedules,and estimated costs as well as appropriate discount rates. These estimates areconsistent with the plans and estimates that we use to manage the underlyingbusinesses. We performed similar impairment tests for indefinite-livedintangible assets and found no impairment. The success of our products isaffected by the ability to accurately predict which platforms and whichproducts we develop will be successful. Also, our revenues and earnings aredependent on our ability to meet our product release schedules. Due to theseand other factors described in “Item 1A Risk Factors” we may not realize thefuture net cash flows necessary to recover our goodwill.

Based on these judgments and assumptions, we determinewhether we need to take an impairment charge to reduce the value of thegoodwill and indefinite-lived intangible assets stated on our balance sheets toreflect their estimated fair values. Judgments and assumptions about futurevalues are complex and often subjective. They can be affected by a variety offactors, including, but not limited to, significant negative industry oreconomic trends, significant changes in the manner or use of the acquiredassets or the strategy of our overall business and significant underperformancerelative to expected historical or projected future 

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operating results. Although we believe the judgmentsand assumptions we have made in the past have been reasonable and appropriate,there is nonetheless a high degree of uncertainty and judgment involved.

We continue to encounter the risks and difficultiesfaced with launching or acquiring a new business. When the business is adevelopment studio, we look for ways to maximize the talent and intellectualproperty within the studio. We make judgments and assumptions as to the commercialsuccess and quantity of games developed by a particular studio. Differentjudgments and assumptions could materially impact our reported financialresults. For example, if we do not develop games with the same commercialsuccess or the same number of games as we have estimated, we may need to takean impairment charge against goodwill in the future. More conservativeassumptions of the anticipated future benefits from these businesses wouldresult in lower fair values which could result in impairment charges, whichwould decrease net income and result in lower asset values on our balancesheets. Conversely, less conservative assumptions would result in higher fairvalues which could result in lower impairment charges and higher net income.

*Income taxes.**  *As part of the process of preparing our consolidatedfinancial statements, we are required to estimate our income taxes in each ofthe jurisdictions in which we operate. This process involves: (1) estimatingour current tax exposure in each jurisdiction including the impact, if any, ofchanges or interpretations to applicable tax laws and regulations, (2) estimatingadditional taxes resulting from tax examinations and (3) making judgmentsregarding the recoverability of deferred tax assets. To the extent recovery ofdeferred tax assets is not likely based on our estimates of future taxableincome in each jurisdiction, a valuation allowance is established.

The calculation of our tax liabilities involvesdealing with uncertainties in the application of complex tax regulations. Werecognize liabilities for anticipated tax audit issues in the U.S. and othertax jurisdictions based on our estimate of whether, and the extent to which,additional taxes will be due. Our estimate for the potential outcome for anyuncertain tax issue, including our recent claim for research and developmentincome tax credits, requires judgment. We believe we have adequately providedfor any reasonably foreseeable outcome related to these matters. However, ourfuture results may include favorable or unfavorable adjustments to ourestimated tax liabilities in the period the assessments are made or resolved orwhen statutes of limitation on potential assessments expire.

As a result of the itemsdiscussed above, our actual effective income tax rates can differ from theprojected effective income tax rates used when preparing our consolidatedfinancial statements.

**Recently IssuedAccounting Pronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment”(“SFAS No. 123R”), a revision of SFAS No. 123. SFAS No. 123Rrequires companies to, among other things, measure all employee stock-basedcompensation awards using a fair value method and record the expense in thecompany’s consolidated financial statements. The provisions of SFAS No. 123R,SEC Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment”and other related clarifying pronouncements, are effective no later than thebeginning of the next fiscal year that begins after June 15, 2005. We willadopt the new requirements in our fiscal year beginning April 1, 2006using the modified prospective transition method, wherein prior period amountswill not be restated. In addition to the recognition of expense in thefinancial statements, under SFAS No. 123R, any excess tax benefitsreceived upon exercise of options will be presented as a financing activityinflow rather than as an adjustment of operating activity as currentlypresented. Based on our current analysis and information, management hasdetermined the adoption of SFAS No. 123R will have a material impacton our consolidated results of operations and earnings per share. We expect theadoption of SFAS No. 123R will result in amounts that are similar to ourcurrent pro forma disclosures under SFAS No. 123.

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In November 2005, theFASB issued Staff Position No. FAS 115-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP No. 115-1”).FSP No. 115-1 provides accounting guidance for identifying andrecognizing other-than-temporary impairments of debt and equity securities, aswell as cost method investments in addition to disclosure requirements.FSP No. 115-1 is effective for reporting periods beginningafter December 15, 2005, and earlier application is permitted. We adoptedFSP No. 115-1 in our fiscal fourth quarter beginning January 1,2006, and this adoption did not have a material impact on our consolidatedresults of operations and earnings per share.

**Results ofOperations**

**Comparison ofFiscal 2006 to Fiscal 2005**

Our net income for fiscal2006 (as restated) was $32.1 million, or $0.49 per diluted share, as comparedto $61.4 million, or $1.02 per diluted share in the restated prior fiscal year(as restated). Our restated results did not effect net sales in either fiscal2006 or fiscal 2005.

**Net Sales**

We derive revenue principally from sales of packagedinteractive software games designed for play on video game consoles, handhelddevices and personal computers. We also derive revenue through downloads bymobile phone users of our wireless content.

The following tabledetails our net sales by territory for fiscal 2006 and 2005 (in thousands):

| ** **             | ** ** | **Fiscal Year Ended March 31,** | ** ** | **Increase/** | ** ** | ** **     | ** ** |
|------------------------|------------|-----------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **             | ** ** | **2006**                                            | ** ** | **2005**      | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| North America          |       | $                                                   | 489,945    |          | 60.7       | %              | $          | 470,619 |   | 62.2 | % |   | $ | 19,326 |   |   |   | 4.1 | % |   |
| Europe                 |       | 269,928                                             |       | 33.5          |       | 245,083        |       | 32.4 |   |   | 24,845 |   |   |   | 10.1 | % |   |
| Asia Pacific           |       | 46,687                                              |       | 5.8           |       | 41,029         |       | 5.4 |   |   | 5,658 |   |   |   | 13.8 | % |   |
| International          |       | 316,615                                             |       | 39.3          |       | 286,112        |       | 37.8 |   |   | 30,503 |   |   |   | 10.7 | % |   |
| Consolidated net sales |       | $                                                   | 806,560    |          | 100.0      | %              | $          | 756,731 |   | 100.0 | % |   | $ | 49,829 |   |   |   | 6.6 | % |   |

 

Net sales in fiscal2006 increased 7% over the prior fiscal year, from $756.7 million to $806.6million. The increase in net sales was primarily due to the following:

·       Anincrease in the number of titles that shipped more than one million units inthe fiscal year from six in fiscal 2005 to 10 in fiscal 2006.

·       Higherfiscal 2006 sales of new original, owned properties targeted to the core gamer,*Juiced,**Destroy All Humans!* and *The Outfit*, ourfirst next generation console title, as compared to**coregamer titles released in the prior fiscal year: *FullSpectrum WarriorTM,**The Punisher* and *Warhammer 40,000: Dawn ofWar*.

·       Internationalnet sales increased $30.5 million and 11% in fiscal 2006 as compared to fiscal2005 due to continued sales and marketing expansion in the internationalmarkets as well as the release of games with increased international appeal.

·       Thecontinued sales of games released in prior fiscal years (we refer to this as “catalogsales”).

·       Highersales of games on handheld platforms due to the introduction of Nintendo DualScreen and PlayStation Portable.

·       These items were partiallyoffset by lower fiscal 2006 sales of titles based on two of our key brands: *The Incredibles: Rise of the Underminer*and *SpongeBob SquarePants: Lights, Camera, PANTS!* as 

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compared to fiscal2005 releases: *The Incredibles* and *The SpongeBob SquarePants Movie,* which were released inconjunction with their respective movie releases.

*North America*

Year-over-year net sales growth in North America wasprimarily due to sales of original, owned properties targeted to the coregamer, *Destroy All Humans!*and *Juiced*, sales of games based on our WWE SmackDown vs. Rawfranchise on current generation console platforms as well as the first-timerelease of the WWE SmackDown vs. Raw franchise on PSP. These items werepartially offset by lower fiscal 2006 sales of *TheIncredibles: Rise of the Underminer*and *SpongeBobSquarePants: Lights, Camera, PANTS!* as compared to fiscal 2005releases of *The Incredibles* and *TheSpongeBob SquarePants Movie,* which were released in conjunction withtheir respective movie releases.

While we expect net salesin North America to continue to constitute the largest portion of our net salesin fiscal 2007, we expect net sales for North America as a percentage of totalsales to decrease slightly as we continue to expand our international directsales and product mix.

*International*

Year-over-year international net sales growth wasprimarily due to increased sales of our original, owned properties targeted tothe core gamer, *Juiced* and *Destroy AllHumans!*, as compared to *Full Spectrum Warrior*and *The Punisher* in the prior fiscal year,as well as increased sales of games based on our WWE SmackDown vs. Rawfranchise on current generation console platforms and the first-time release ofthe WWE SmackDown vs. Raw franchise on PSP. These items were partially offsetby lower fiscal 2006 sales of *The Incredibles: Rise ofthe Underminer*and *SpongeBob SquarePants:Lights, Camera, PANTS!* as compared to fiscal 2005 releases of *The Incredibles* and*The SpongeBob SquarePantsMovie*, which were released in conjunction with their respectivemovie releases.

Changes in foreign currency rates reduced reportedinternational net sales by $11.4 million or 3% in fiscal 2006, as compared tothe prior fiscal year. Excluding the impacts of foreign exchange rates,international net sales increased by 15% in fiscal 2006.

We will continue to focuson growing sales internationally in fiscal 2007, as we expand our productportfolio and direct sales forces in the international markets. In early 2006,we established offices in Denmark and Japan to facilitate direct sales of ourproducts into the Nordic territories and the Japanese market. We plan to expandour direct sales force into Italy and Eastern Europe and we continue to exploreopportunities in Asia, especially China.

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**Net Sales byPlatform**

Ourworldwide net sales by platform for fiscal 2006 and fiscal 2005 are as follows(in thousands):

| ** **                  | ** ** | **Fiscal Year Ended March 31,** | ** ** | **Increase/** | ** ** | ** ** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|---------------|------------|------------|------------|
| **Platform**                | ** ** | ** **                                          | ** ** | **2006**      | ** ** | **2005**   | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| **Consoles**                | ** ** | ** **                                          | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Sony PlayStation 2          |       | $                                                   | 296,294    |          | 36.7       | %          | $          | 275,850 |   | 36.5 | % |   | $ | 20,444 |   |   |   | 7.4 | % |   |
| Microsoft Xbox and Xbox 360 |       | 102,660                                             |       | 12.7          |       | 80,623     |       | 10.7 |   |   | 22,037 |   |   |   | 27.3 | % |   |
| Nintendo GameCube           |       | 59,255                                              |       | 7.3           |       | 73,157     |       | 9.7 |   |   | (13,902 | ) |   |   | (19.0 | )% |   |
|                        |       | 458,209                                             |       | 56.7          |       | 429,630    |       | 56.9 |   |   | 28,579 |   |   |   | 6.7 | % |   |
| **Handheld**                | ** ** | ** **                                          | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Nintendo Game Boy Advance   |       | 171,477                                             |       | 21.3          |       | 204,348    |       | 27.0 |   |   | (32,871 | ) |   |   | (16.1 | )% |   |
| Nintendo Dual Screen        |       | 32,855                                              |       | 4.1           |       | 3,110      |       | 0.4 |   |   | 29,745 |   |   |   | 956.4 | % |   |
| Sony PlayStation  Portable  |       | 29,406                                              |       | 3.6           |       | —     |       | — |   |   | 29,406 |   |   |   | 100.0 | % |   |
| Wireless                    |       | 36,112                                              |       | 4.5           |       | 24,613     |       | 3.3 |   |   | 11,499 |   |   |   | 46.7 | % |   |
|                        |       | 269,850                                             |       | 33.5          |       | 232,071    |       | 30.7 |   |   | 37,779 |   |   |   | 16.3 | % |   |
| **PC**                      |       | 77,615                                              |       | 9.6           |       | 86,667     |       | 11.5 |   |   | (9,052 | ) |   |   | (10.4 | )% |   |
| **Other**                   |       | 886                                                 |       | 0.2           |       | 8,363      |       | 0.9 |   |   | (7,477 | ) |   |   | (89.4 | )% |   |
| **Net Sales**               |       | $                                                   | 806,560    |          | 100.0      | %          | $          | 756,731 |   | 100.0 | % |   | $ | 49,829 |   |   |   | 6.6 | % |   |
|                             |            |                                                     |            |               |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Console Platforms**

Net sales for console platforms increased 7% forfiscal 2006 as compared to the prior fiscal year. We released 31 and 30 newconsole SKUs in fiscal 2006 and 2005, respectively.

***Sony PlayStation 2Net Sales (in thousands)***

| **Year Ended  March 31, 2006** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $296,294                                      |       |                              | 36.7       | %                                             |       |                              | $          | 275,850           |       |   |   | 36.5 | % |   |   | 7.4 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

In fiscal 2006, netsales of video games for PlayStation 2 (“PS2”) were primarily driven by the releaseof *WWE SmackDown! vs. Raw 2006*, *Juiced*and *Destroy All Humans!*,as well as catalog sales. In fiscal 2005, net sales of video games for PS2**were primarily driven by the release of *WWE SmackDown! vs. Raw*, *The Incredibles*,and *The SpongeBob SquarePants Movie*, as well as catalog sales. We released 12 and 14 new SKUs infiscal 2006 and 2005, respectively. A SKU is a version of a title designed forplay on a particular platform. Net sales increased $20.4 million in fiscal 2006as compared to the prior fiscal year primarily due to:

·  higher sales of our two new owned, originalproperties targeted to the core gamer: *Juiced*and *Destroy All Humans!*, as compared to core gamer titlesreleased in fiscal 2005: *Full Spectrum Warrior*,*MX v. ATV UnleashedTM* and *The Punisher;*

·  higher sales of *WWESmackDown! vs. Raw 2006*as compared to the prior year release of *WWE SmackDown! vs. Raw;*

·  higher catalog sales mainly attributable toincreases in sales of games based on our WWE and MX franchises, as well asDisney/Pixar’s *The Incredibles* and *The SpongeBob SquarePants Movie*;

·  partially offset by lower fiscal 2006 sales of*The Incredibles: Rise of the Underminer*ascompared to the fiscal 2005 release of *The Incredibles,*which was released in conjunction with its movie release.

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Sony announced it would release its next-generationconsole, PlayStation 3, in November 2006. We expect sales of games forPlayStation 2 to decline in the future as consumer demand shifts to PlayStation3.

***Microsoft Xbox andXbox 360 Net Sales (in thousands)***

| **Year Ended  March 31, 2006** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $102,660                                      |       |                              | 12.7       | %                                             |       |                              | $          | 80,623            |       |   |   | 10.7 | % |   |   | 27.3 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

In fiscal 2006, netsales of video games for Xbox and Xbox 360 were primarily driven by the releaseof *WWE Wrestlemania 21*, *Destroy All Humans!, The Outfit*and *Juiced*.In fiscal 2005 net sales of video games for Xbox were primarily driven by therelease of *Full Spectrum Warrior, The Incredibles*and *The Punisher*. We released 12 and eightnew SKUs in fiscal 2006 and 2005, respectively. Net sales increased by$22.0 million in fiscal 2006 as compared to the prior fiscal yearprimarily due to:

·  the release of *The Outfit*for Xbox 360 whereas there wereno Xbox 360 SKUs released in fiscal 2005;

·  sales of our new release *WWEWrestlemania 21*: there were no WWE titles released on Xbox in fiscal2005;

·  higher sales of our two new owned, originalproperties targeted to the core gamer: *Juiced*and *Destroy All Humans!*, as compared to core gamer titlesreleased in fiscal 2005: *MX v. ATV Unleashed*and *The Punisher;*

·  four additional SKUs released in fiscal 2006as compared to fiscal 2005;

·  partially offset by lower sales of *Full Spectrum Warrior: Ten Hammers*, as compared to *Full Spectrum Warrior* released in fiscal 2005;

·  and partially offset by lower fiscal 2006sales of *The Incredibles: Rise of the Underminer*ascompared to fiscal 2005 wherein we released *The Incredibles*which was released in conjunction with its movie release.

In November 2005, Microsoft launched its next-generationconsole, Xbox 360, in North America, Europe and Japan. We expect to release newSKUs in fiscal 2007 for Xbox 360. As the installed base of Xbox 360 hardwaregrows, we expect to bring more titles to the platform, including games targetedto the core gamer such as our new, owned intellectual property *Saints Row*, titles based on our WWE license and a game based on Disney/Pixar’s*Cars*. We expect sales ofgames for Xbox to decline as consumer demand shifts to games for the Xbox 360.

***Nintendo GameCubeNet Sales (in thousands)***

| **Year Ended  March 31, 2006** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $59,255                                       |       |                              | 7.3        | %                                             |       |                              | $          | 73,157            |       |   |   | 9.7 | % |   |   | (19.0 | )% |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

In fiscal 2006, netsales of video games for GameCube were primarily driven by the release of *WWE Day of Reckoning 2, SpongeBob SquarePants: Lights, Camera, PANTS!*,*Nicktoons: Unite*and  *The Incredibles: Rise ofthe Underminer*, as well as catalog sales. In fiscal 2005, net salesof video games for GameCube were primarily driven by the release of *The Incredibles, WWE Day of Reckoning* and*The SpongeBob SquarePants Movie.*We released seven andeight new SKUs in fiscal 2006 and 2005, respectively. Net sales decreased by$13.9 million in fiscal 2006 as compared to the prior fiscal year primarily dueto:

·  lower sales of our fiscal 2006 releases of *The Incredibles: Rise of the Underminer* and *SpongeBob SquarePants: Lights, Camera, PANTS!*as compared tofiscal 2005 releases of *The**Incredibles* and 

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*The SpongeBob SquarePantsMovie*, both which were released in conjunction with theirrespective movie releases;

·  lower sales of our fiscal 2006 release of *WWE Day of Reckoning 2*, as compared to *WWE Day ofReckoning* in the prior fiscal year;

·  partially offset by sales of our fiscal 2006release of *Bratz: Rock Angelz* with no comparabletitle in the prior fiscal year.

We expect net sales from GameCube products to declinein fiscal 2007, as compared to fiscal 2006, due to a reduced SKU count and theupcoming launch of Nintendo’s next-generation console, Wii. We expect sales ofgames for GameCube to decline in the future as consumer demand shifts to videogames made for Wii.

**Handheld Platforms**

Net sales for handheld platforms increased 16% forfiscal 2006 as compared to the prior fiscal year. We released 22 and 20 newhandheld SKUs in fiscal 2006 and 2005, respectively. Both Nintendo and Sonyhave launched new handheld platforms, Dual Screen (“DS”) and PlayStationPortable (“PSP”), respectively. Consistent with our expectations, net sales ofgames for those new platforms increased in fiscal 2006, while net sales ofgames for Game Boy Advance declined.

***Nintendo Game BoyAdvance Net Sales (in thousands)***

| **Year Ended  March 31, 2006** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $171,477                                      |       |                              | 21.3       | %                                             |       |                              | $          | 204,348           |       |   |   | 27.0 | % |   |   | (16.1 | )% |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

In fiscal 2006, netsales of video games for Game Boy Advance were primarily driven by the releaseof*Bratz: Rock Angelz*, *SpongeBob SquarePants: Lights, Camera, PANTS!*and *The Incredibles: Rise of the Underminer*, as well as sales ofour Game Boy Advance Double Packs. Game Boy Advance Double Packs feature twopreviously released titles on one cartridge, providing us with a way toreintroduce our top selling mass-market titles. In fiscal 2005, net sales ofvideo games for Game Boy Advance were primarily driven by the release of *The Incredibles*, *The SpongeBob SquarePantsMovie* and *Sonic Advance 3*,as well as catalog titles. We released 10 and 19 new SKUs in fiscal 2006 and2005, respectively. Net sales decreased by $32.9 million in fiscal 2006 ascompared to the prior fiscal year primarily due to:

·  lower sales on our fiscal 2006 releases of *The Incredibles: Rise of the Underminer* and *SpongeBob SquarePants: Lights, Camera, PANTS!*as compared tofiscal 2005 releases of *The Incredibles*and *The SpongeBob SquarePants Movie*,both which were released in conjunction with their respective movie releases;

·  strong prior year performance of *Sonic Advance 3*without a comparable game released in fiscal2006;

·  nine fewer SKUs released in fiscal 2006 ascompared to fiscal 2005 and an overall decline in the Game Boy Advance marketdue to the introduction of DS and PSP into the handheld video game market;

·  partially offset by a 21% increase in sales ofcatalog titles, mainly Game Boy Advance Double Packs.

We expect net sales from the Game Boy Advance productsto decline in fiscal 2007, as compared to fiscal 2006, due to a reduced SKUcount as we expand our offerings to DS and PSP.

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***Nintendo DualScreen Net Sales (in thousands)***

| **Year Ended  March 31, 2006** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $32,855                                       |       |                              | 4.1        | %                                             |       |                              | $          | 3,110             |       |   |   | 0.4 | % |   |   | 956.4 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

In fiscal 2006, net sales of video games for DS wereprimarily driven by the release of *ZooTycoon, SpongeBob SquarePants: Yellow Avenger*and *TheIncredibles: Rise of the Underminer*. We released eight andone new SKUs in fiscal 2006 and 2005, respectively. Net sales increased by$29.7 million in fiscal 2006 as compared to the prior fiscal year. The increaseis due to the increased number of titles released in fiscal 2006 as compared tothe prior fiscal year.

As the installed base of DS hardware grows, we expectto continue to bring more titles to the platform, including our market-leadingfamily brands, games based on Disney/Pixar’s *Cars*,**and titles based on Nickelodeon properties such as *SpongeBob SquarePants* and *Nicktoons*.

***PlayStationPortable Net Sales (in thousands)***

| **Year Ended  March 31, 2006** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $29,406                                       |       |                              | 3.6        | %                                             |       |                              | $          | —            |       |   |   | — | % |   |   | 100.0 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

In fiscal 2006, net sales of video games for PSP weredriven by the release of *WWE SmackDown vs. Raw 2006*.We released four and zero new SKUs in fiscal 2006 and fiscal 2005,respectively. As the installed base of PSP hardware grows, we expect to bringmore titles to the platform, including our market-leading family brands, gamesbased on Disney/Pixar’s *Cars*,**and titles based on our own Juiced brand.

***Wireless Net Sales(in thousands)***

| **Year Ended  March 31, 2006** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $36,112                                       |       |                              | 4.5        | %                                             |       |                              | $          | 24,613            |       |   |   | 3.3 | % |   |   | 46.7 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

Wireless revenues consist of sales of wireless gamesand other content such as wireless wallpapers and ringtones. Through ourcontrolling interest in Minick Holding AG (“Minick”), we also derive wirelessrevenue by providing infrastructure services for the delivery of wirelesscontent and entertainment.

Wireless net sales increased by $11.5 million duringfiscal 2006 compared to the prior fiscal year. Our product content for wirelessdevices has grown significantly. The increase in wireless net sales reflectedsales of *Star Wars*, *SpongeBobSquarePants* and NFL based content, as well as the continuedgrowth in the installed base of data enabled wireless handsets with gamecapabilities.

We expect wireless net sales to increase in fiscal2007, as compared to fiscal 2006, as the installed base of data enabledwireless handsets with game capabilities continues to grow. In fiscal 2007, weplan to re-align our product portfolio to emphasize more casual game content inorder to position ourselves for wireless platform share gains in the future.

***PC Net Sales (inthousands)***

| **Year Ended  March 31, 2006** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $77,615                                       |       |                              | 9.6        | %                                             |       |                              | $          | 86,667            |       |   |   | 11.5 | % |   |   | (10.4 | )% |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

In fiscal 2006, netsales of video games for PC were primarily driven by the release of *Warhammer 40,000: Dawn of War: Winter Assault*and *Juiced*, as well as catalog titles. In fiscal 2005, net salesof video games for 

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PC were primarilydriven by the release of *Warhammer 40,000: Dawn ofWar, The Incredibles, Full Spectrum Warrior*and *TheSpongeBob SquarePants Movie*. We released 11 and 12 new titles infiscal 2006 and 2005, respectively. Net sales decreased by $9.1 million infiscal 2006 as compared to the prior fiscal year primarily due to:

·  lower sales of our *Warhammer40,000: Dawn of War: Winter Assault*, an expansion pack to thesuccessful core gamer title *Warhammer 40,000: Dawn ofWar* released in fiscal 2005;

·  lower sales of our *FullSpectrum Warrior: Ten Hammers*, as compared to *FullSpectrum Warrior* released in fiscal 2005;

·  lower sales of our fiscal 2006 releases of *The Incredibles: Rise of the Underminer* and *SpongeBob SquarePants: Lights, Camera, PANTS!* as compared tofiscal 2005 releases of *The Incredibles*and *The SpongeBob SquarePants Movie*,both which were released in conjunction with their respective movie releases;

·  partially offset by a 44% increase in sales ofcatalog titles.

We expect PC net sales to increase in fiscal 2007, ascompared to fiscal 2006, mainly due to our focus on releasing high-end PC gamestargeted at the core gamer including:  *Company of Heroes*, *Titan Quest*, *Supreme Commander*, and a mass-market titlebased on Disney/Pixar’s *Cars*.

***Other Net Sales***

Other net sales primarily consist of sales from olderplatforms. Fiscal 2006 and 2005 are primarily made up of sales from SonyPlayStation products.

**Costs and Expenses,Interest Income, Other Income, Income Taxes and Minority Interest**

Our costs and expenses increased by $91.0 million or13% in fiscal 2006 (as restated) compared to the prior fiscal year (asrestated), to $775.0 million, from $684.0 million. Costs and expenses as apercentage of net sales increased by six points to 96% in fiscal 2006 from 90%in the prior fiscal year. The increase in costs and expenses in fiscal 2006were primarily due to (i) higher catalog sales as a percentage of totalnet sales (ii) a change in development strategy for our WWE games whereinwe ceased internal product development for wrestling games and as a result wewrote-off the underlying capitalized software development costs to softwaredevelopment amortization and (iii) higher price protection and softwaredevelopment amortization for the current-generation title *FullSpectrum Warrior: Ten Hammers*.

***Cost of  Sales (in thousands)***

| **Year Ended  March 31, 2006** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $287,946                                      |       |                              | 35.7       | %                                             |       |                              | $          | 255,187           |       |   |   | 33.7 | % |   |   | 12.8 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

Cost of sales primarily consists of directmanufacturing costs net of manufacturer volume rebates and discounts. Cost ofsales as a percentage of net sales increased for fiscal 2006 as compared to theprior fiscal year, due to higher catalog sales as a percentage of total netsales in fiscal 2006, including reduced year over year pricing primarily fromour Game Boy Advanced Dual Packs.

***LicenseAmortization and Royalties (in thousands)***

| **Year Ended  March 31, 2006** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $80,508                                       |       |                              | 10.0       | %                                             |       |                              | $          | 85,926            |       |   |   | 11.4 | % |   |   | (6.3 | )% |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

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License amortization and royalties expense consists ofroyalty payments due to licensors, which are expensed at the higher of (1) thecontractual royalty rate based on actual net product sales for such license or (2) aneffective rate based upon total projected revenue for such license. For fiscal2006, license amortization and royalties as a percentage of net sales decreasedby 1.4 points compared to the prior fiscal year. This is partially due to a$4.0 million write-off of a license in fiscal 2005. The decrease is also due toa higher mix of net sales in fiscal 2006 from games with lower contractualroyalty rates and games based on owned intellectual properties with no licenserate as compared to the prior fiscal year.

***SoftwareDevelopment Amortization (in thousands)***

| **Year Ended  March 31, 2006** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $116,371                                      |       |                              | 14.4       | %                                             |       |                              | $          | 93,622            |       |   |   | 12.4 | % |   |   | 24.3 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

Software development amortization consists of amortizationof capitalized payments made to third-party software developers andamortization of capitalized internal studio development costs. Softwaredevelopment is expensed at the higher of (1) the contractual rate based onactual net product sales for such software or (2) an effective rate basedupon total projected revenue for such software. For fiscal 2006 softwaredevelopment amortization as a percentage of net sales increased by 2 pointsover the prior fiscal year primarily due to a change in our developmentstrategy for our WWE games wherein we ceased internal product development forwrestling games and as a result we wrote-off the underlying capitalizedsoftware development costs to software development amortization. The increasein software development amortization as a percent of net sales is also due tohigh software development amortization related to the performance of thecurrent-generation title *Full Spectrum Warrior: TenHammers* on Xbox.

***Product Development(in thousands, as restated(1))***

| **Year Ended  March 31, 2006** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $85,323                                       |       |                              | 10.6       | %                                             |       |                              | $          | 73,637            |       |   |   | 9.7 | % |   |   | 15.9 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

----

 

(1)   See Note 2,“Restatement of Consolidated Financial Statements” in notes to the consolidatedfinancial statements.

Product development expense primarily consists ofexpenses incurred by internal development studios and payments made to externaldevelopment studios prior to products reaching technological feasibility.Product development expense increased by $11.7 million in fiscal 2006 ascompared to the prior fiscal year. This increase was primarily due to theexpansion of our internal studios with the acquisitions of Juice Games Limitedand Vigil Games, LLC and with the formation of two new studios, Kaos Studios andIncinerator Games. Product development expense also increased due to spendingon development of games for next-generation platforms.

***Selling andMarketing (in thousands, as restated(1))***

| **Year Ended  March 31, 2006** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $123,926                                      |       |                              | 15.4       | %                                             |       |                              | $          | 110,727           |       |   |   | 14.6 | % |   |   | 11.9 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

----

 

(1)   See Note 2,“Restatement of Consolidated Financial Statements” in notes to the consolidatedfinancial statements.

Selling and marketing expense consists ofpersonnel-related costs, advertising and promotional expenses. For fiscal 2006,selling and marketing expenses increased as a percentage of net sales ascompared to the prior fiscal year. Selling and marketing expenses increased inabsolute dollars by $13.2 million for fiscal 

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2006 compared to the prior fiscal year. This increasewas primarily due to promotional efforts to support the launch of two new ownedand original titles:  *Juiced* and *Destroy All Humans!*.

***Payment to VenturePartner (in thousands)***

| **Year Ended  March 31, 2006** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $12,572                                       |       |                              | 1.6        | %                                             |       |                              | $          | 9,774             |       |   |   | 1.3 | % |   |   | 28.6 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

The payment made to venture partner is related to thejoint license agreement that THQ and JAKKS Pacific, Inc. have with the WWEunder which our role is to develop, manufacture, distribute, market and sellWWE video games. Payment to venture partner increased by $2.8 million dollarsin fiscal 2006 as compared to the prior fiscal year due to increases in netsales of games based upon the WWE license. In fiscal 2006 we released *WWE SmackDown vs. Raw 2006*on PlayStation 2 and PlayStationPortable and in the prior fiscal year we released *WWESmackDown vs. Raw*on PlayStation 2.

***General andAdministrative (in thousands, as restated(1))***

| **Year Ended  March 31, 2006** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $68,336                                       |       |                              | 8.5        | %                                             |       |                              | $          | 55,153            |       |   |   | 7.3 | % |   |   | 23.9 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

----

 

(1)   See Note 2, “Restatement of Consolidated Financial Statements” innotes to the consolidated financial statements.

General and administrative expenses consist ofpersonnel and related expenses of executive and administrative staff, fees forprofessional services such as legal and accounting, depreciation andamortization, allowances for bad debts, foreign exchange transaction gains andlosses, and facilities. General and administrative expenses increased by $13.2million for fiscal 2006 as compared to the prior fiscal year. The increase infiscal 2006 is primarily due to foreign exchange transactions in the prior fiscalyear, as well as growth in European operations, higher depreciation expense andhigher amortization expense related to prior-year acquisitions.

***Income Taxes***

The effective income taxrate was 19% for fiscal 2006 and 20% for fiscal 2005. The fiscal 2006 effectiveincome tax rate benefited from the following factors: (1) a higher ratioof research and development tax credits to pre-tax income and (2) a higherratio of tax exempt interest income to overall pre-tax income. If our pretaxincome was the same as the last fiscal year our effective tax rate would havebeen approximately 28%. The fiscal 2005 effective income tax rate benefitedfrom the following factors: (1) the recognition of $7.8 million ofresearch and development income tax credits claimed for prior years and(2) our estimate of fiscal 2005 year research and development income taxcredits. Excluding the one-time benefit of $7.8 million, our effectiveincome tax rate for fiscal 2005 would have been 30%.

***Minority Interest***

Minority interest reflectsthe income allocable to equity interests in Minick that are not owned by THQ.We own 50% of Minick’s outstanding common stock and control its board ofdirectors. Minority interest included in our consolidated statement ofoperations was $63,000 for fiscal 2006 compared to $261,000 for fiscal 2005.

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**Comparison ofFiscal 2005 to Fiscal 2004**

Our net income for fiscal2005 (as restated) was $61.4 million, or $1.02 per diluted share, as comparedto $34.1 million, or $0.58 per diluted share in fiscal 2004 (as restated). Ourrestated results did not effect net sales in either fiscal 2005 or fiscal 2004.

**Net Sales**

We derive revenue principally from sales of packagedinteractive software games designed for play on video game consoles, handhelddevices and personal computers. We also derive revenue through downloads bymobile phone users of our wireless games.

The following tabledetails our net sales by territory for fiscal 2005 and 2004 (in thousands):

| ** **             | ** ** | **Fiscal Year Ended March 31,** | ** ** | **Increase/** | ** ** | ** **     | ** ** |
|------------------------|------------|-----------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **             | ** ** | **2005**                                            | ** ** | **2004**      | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| North America          |       | $                                                   | 470,619    |          | 62.2       | %              | $          | 453,426 |   | 70.8 | % | $ | 17,193 |   |   | 3.8 | % |   |
| Europe                 |       | 245,083                                             |       | 32.4          |       | 161,857        |       | 25.2 |   | 83,226 |   |   | 51.4 |   |   |
| Asia Pacific           |       | 41,029                                              |       | 5.4           |       | 25,563         |       | 4.0 |   | 15,466 |   |   | 60.5 |   |   |
| International          |       | 286,112                                             |       | 37.8          |       | 187,420        |       | 29.2 |   | 98,692 |   |   | 52.7 |   |   |
| Consolidated net sales |       | $                                                   | 756,731    |          | 100.0      | %              | $          | 640,846 |   | 100.0 | % | $ | 115,885 |   |   | 18.1 | % |   |

 

Our consolidatednet sales in fiscal 2005 increased 18%over fiscal 2004, from $640.8 million to $756.7 million. The increase innet sales for fiscal 2005 was primarily attributable to the following factors:

·       Growthfrom our established licensed brands and franchises: Disney/Pixar, SpongeBobSquarePants and WWE SmackDown!, all performing better than the prior fiscalyear. Two of the titles this fiscal year, Disney/Pixar’s *TheIncredibles* and *The SpongeBob SquarePantsMovie*, were based upon holiday movies.

·       The successful launch ofnew properties targeted to the core gamer and high-end PC market: *Full Spectrum Warrior* on Xbox, PlayStation2, and PC, *The Punisher* on Xbox, PlayStation2 and PC, and *Warhammer 40,000: Dawn of War* on PC.

·       International net salesincreased 53% in fiscal 2005 as compared to fiscal 2004 primarily due to (i) ourcontinued sales and marketing expansion in the international markets, (ii) contentthat has more international appeal, (iii) growth of the installed base forcurrent generation console and handheld platforms, and (iv) thestrengthening of foreign exchange rates.

·       The continued success ofthe fiscal 2004 releases of Disney/Pixar’s *Finding Nemo*and *SpongeBob SquarePants: Battle for Bikini Bottom*whichshipped two million and one million units, respectively, in fiscal 2005*.*

*North America*

Year-over-year net salesgrowth in North America was primarily due to sales of *TheSpongeBob SquarePants Movie* game, which was released in conjunctionwith the holiday movie; sales of *Full Spectrum Warrior*and *The Punisher;* and strong sales of ourcatalog titles in fiscal 2005. These items were partially offset by the releaseof a significantly fewer number of SKUs in fiscal 2005 than in fiscal 2004.

*International*

Year-over-year international net sales growth wasprimarily due to increased sales of each of our three products targeted at themass-market in fiscal 2005 as compared to sales of titles from the same brandsin 

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fiscal 2004; and stronger sales of our three keyoriginal products targeted at the core gamer in fiscal 2005 than our two keytitles in fiscal 2004.

In addition to sales ofour products, the strengthening of foreign exchange rates, primarily the GreatBritish Pound (“GBP”) and the European Currency Unit (“Euro”), increasedreported international net sales by $19.5 million in fiscal 2005. Excluding theimpacts of foreign exchange rates, international net sales increased by 42%.

**Net Sales byPlatform**

Our worldwide net sales byplatform for fiscal 2005 and fiscal 2004 are as follows (in thousands):

| ** **                | ** ** | **Fiscal Year Ended March 31,** | ** ** | **Increase/** | ** ** | ** ** | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|---------------|------------|------------|------------|
| **Platform**              | ** ** | ** **                                          | ** ** | **2005**      | ** ** | **2004**   | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| **Consoles**              | ** ** | ** **                                          | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Sony PlayStation 2        |       | $                                                   | 275,850    |          | 36.5       | %          | $          | 247,603 |   | 38.6 | % | $ | 28,247 |   |   | 11.4 | % |   |
| Microsoft Xbox            |       | 80,623                                              |       | 10.7          |       | 71,132     |       | 11.1 |   | 9,491 |   |   | 13.3 |   |   |
| Nintendo GameCube         |       | 73,157                                              |       | 9.7           |       | 61,356     |       | 9.6 |   | 11,801 |   |   | 19.2 |   |   |
|                      |       | 429,630                                             |       | 56.9          |       | 380,091    |       | 59.3 |   | 49,539 |   |   | 13.0 |   |   |
| **Handheld**              | ** ** | ** **                                          | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Nintendo Game Boy Advance |       | 204,348                                             |       | 27.0          |       | 162,109    |       | 25.3 |   | 42,239 |   |   | 26.1 |   |   |
| Nintendo Dual Screen      |       | 3,110                                               |       | 0.4           |       | —     |       | — |   | 3,110 |   |   | 100.0 |   |   |
| Wireless                  |       | 24,613                                              |       | 3.3           |       | 6,860      |       | 1.1 |   | 17,753 |   |   | 258.8 |   |   |
|                      |       | 232,071                                             |       | 30.7          |       | 168,969    |       | 26.4 |   | 63,102 |   |   | 37.3 |   |   |
| **PC**                    |       | 86,667                                              |       | 11.5          |       | 74,934     |       | 11.7 |   | 11,733 |   |   | 15.7 |   |   |
| **Other**                 |       | 8,363                                               |       | 0.9           |       | 16,852     |       | 2.6 |   | (8,489 | ) |   | (50.4 | ) |   |
| **Net Sales**             |       | $                                                   | 756,731    |          | 100.0      | %          | $          | 640,846 |   | 100.0 | % | $ | 115,885 |   |   | 18.1 | % |   |
|                           |            |                                                     |            |               |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Consoles**

Net sales for consoleplatforms increased by $49.5 million, or 13%, for fiscal 2005 compared tofiscal 2004. During fiscal 2005 we released 30 console titles, compared to 44console titles released during fiscal 2004.

***Sony PlayStation 2 Net Sales (in thousands)***

| **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2004** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $275,850                                      |       |                              | 36.5       | %                                             |       |                              | $          | 247,603           |       |   |   | 38.6 | % |   |   | 11.4 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

Net sales of videogames for PlayStation 2 increased by $28.2 million for fiscal 2005 as comparedto fiscal 2004. PlayStation 2 net sales in fiscal 2005 were primarily drivenby:

·       newreleases of Disney/Pixar’s*The Incredibles*, *TheSpongeBob SquarePants Movie* and *WWE SmackDown! vs. Raw*;

·       salesof titles based on original properties *Full Spectrum Warrior*,*MX v. ATV Unleashed*, *The Punisher* and *Tak 2: The Staff of Dreams*;

·       catalogsales of *WWE SmackDown! Here Comes The Pain*,Disney/Pixar’s *Finding Nemo*, *SpongeBob SquarePants: Battle for Bikini Bottom*, *Tak and the Power of Juju* and *MX Unleashed*.

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PlayStation 2 netsales in fiscal 2004 were primarily driven by:

·       salesof Disney/Pixar’s *Finding Nemo*, *SpongeBob SquarePants: Battle for Bikini Bottom* and *WWE SmackDown! Here Comes the Pain*; and

·       salesof original titles *MX Unleashed*and *Tak and the Power of Juju*.

The increase in sales ofgames for PlayStation 2 in fiscal 2005 was primarily attributable to strongersales of our three key products targeted at the mass-market in fiscal 2005 aswell as sales of *The Punisher* and our catalogtitles. These increases were partially offset by the release of fewer games infiscal 2005; we released 14 new SKUs in fiscal 2005 and 17 new SKUs in theprior fiscal year. A SKU is a version of a title designed for play on aparticular platform.

***Microsoft Xbox NetSales (in thousands)***

| **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2004** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $80,623                                       |       |                              | 10.7       | %                                             |       |                              | $          | 71,132            |       |   |   | 11.1 | % |   |   | 13.3 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

Net sales of videogames for Xbox increased by $9.5 million for fiscal 2005, as compared to fiscal2004. Net sales in fiscal 2005 were driven by:

·       salesof original properties including *Full Spectrum Warrior*,*MX v. ATV Unleashed* and *The Punisher*;

·       salesof Disney/Pixar’s*The Incredibles* and *TheSpongeBob SquarePants Movie*;and

·       strongcatalog sales.

Net sales in fiscal2004 were driven by:

·       the release of titles based on our three keymass-market brands: Disney/Pixar’s *Finding Nemo, SpongeBobSquarePants: Battle for Bikini Bottom* and *WWE Raw 2*; and

·       salesof *MotoGP 2* and *MX Unleashed*.

The increase in net salesfor Xbox in fiscal 2005 from fiscal 2004 was primarily attributable to sales of*Full Spectrum Warrior,* partially offsetby the release of more games in fiscal 2004. We released 8 SKUs during fiscal2005 compared to 16 SKUs during fiscal 2004.

***Nintendo GameCubeNet Sales (in thousands)***

| **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2004** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $73,157                                       |       |                              | 9.7        | %                                             |       |                              | $          | 61,356            |       |   |   | 9.6 | % |   |   | 19.2 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

Net sales of videogames for GameCube increased by $11.8 million for fiscal 2005, as compared tofiscal 2004. Net sales in fiscal 2005 were driven by:

·       salesof mass market titles including Disney/Pixar’s*The Incredibles*, *The SpongeBob SquarePants Movie*, and *WWEDay of Reckoning*;

·       salesof original properties including *Tak 2: The Staff ofDreams;* and

·       strongcatalog sales, specifically Disney/Pixar’s *Finding Nemo*and *SpongeBob SquarePants: Battle for Bikini Bottom*.

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Net sales in fiscal2004 were driven by:

·       sales of key mass market brands:Disney/Pixar’s *Finding Nemo*, *SpongeBob SquarePants: Battle for Bikini Bottom* and *WWETM Wrestlemania X9®*; and

·       salesof *Tak and the Power of Juju*.

The increase in net sales for GameCube in fiscal 2005was due to increased sales of our three mass market titles as well as strongcatalog sales.

We released 8 SKUs duringfiscal 2005 compared to 11 SKUs during fiscal 2004.

**Handheld Platforms**

Another factor thatpositively impacted net sales for fiscal 2005 was an increase in sales of videogames for handheld platforms, which increased 37%, to $232.1 million in fiscal2005 from $169.0 million during fiscal 2004.

***Nintendo Game BoyAdvance Net Sales (in thousands)***

| **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2004** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $204,348                                      |       |                              | 27.0       | %                                             |       |                              | $          | 162,109           |       |   |   | 25.3 | % |   |   | 26.1 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

Net sales of videogames for Game Boy Advance in fiscal 2005 were primarily driven by:

·       strongsales of Disney/Pixar’s*The Incredibles*, *TheSpongeBob SquarePants Movie*and *SonicAdvance3*;

·       strongcatalog sales, in particular Disney/Pixar’s *Finding Nemo*, *SpongeBob SquarePants: Battle for Bikini Bottom* and *Scooby-Doo! Monsters Unleashed*; and

·       strongsales of other key titles, such as *Finding Nemo: TheContinuing Adventures* and *Tak2: The Staff of Dreams*.

Net sales of videogames for Game Boy Advance in fiscal 2004 were primarily driven by:

·       Disney/Pixar’s*Finding Nemo*and, *SpongeBob SquarePants: Battle for Bikini Bottom*;and

·       strongsales of *Banjo Kazooie*, *Scooby-Doo!:Mystery Mayhem*, *Simpsons Road Rage*,*Sonic Battle* and *Tak and thePower of Juju* as well as strong catalog sales of *Sonic Advance 2*.

The increase in sales of video games for Game BoyAdvance in fiscal 2005 was primarily attributable to increased sales of ourDisney/Pixar and SpongeBob SquarePants brands as compared to sales of thosebrands in fiscal 2004, as well as strong catalog sales in fiscal 2005 ascompared to fiscal 2004. These increases were partially offset by the releaseof fewer titles in fiscal 2005 as compared to fiscal 2004. We released 19 SKUs during fiscal 2005compared to 33 SKUs during fiscal 2004.

***Nintendo Dual Screen.****  *We released *PingPals* for the Nintendo DS portable game system (“Nintendo DS”) in December 2004.

***Wireless Net Sales(in thousands)***

| **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2004** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $24,613                                       |       |                              | 3.3        | %                                             |       |                              | $          | 6,860             |       |   |   | 1.1 | % |   |   | 258.8 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

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Wireless revenues consist primarily of sales ofwireless games, ringtones and wallpapers. Through our controlling interest inMinick, we also derive wireless revenue by providing SMS voting, informationand wireless marketing campaigns.

Wireless net salesincreased by $17.8 million during fiscal 2005 compared to fiscal 2004. Theincrease in wireless net sales was due to:

·       strongsales of games based on major sports leagues, Nickelodeon, and Moto GP;

·       ouracquisition of the controlling interest in Minick; and

·       increased installed base ofwireless handsets with game capabilities in the wireless gaming market.

***PC Net Sales (inthousands)***

| **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2004** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $86,667                                       |       |                              | 11.5       | %                                             |       |                              | $          | 74,934            |       |   |   | 11.7 | % |   |   | 15.7 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

Net sales of PCproducts increased to $86.7 million for fiscal 2005 from $74.9 million infiscal 2004, an increase of 16%. PC sales in fiscal 2005 were primarily drivenby:

·       salesof products targeted at the core gamer *Full Spectrum Warrior*and *Warhammer 40,000: Dawn of War*;

·       salesof Disney/Pixar’s *The Incredibles* and *The SpongeBob SquarePants Movie*; and

·       strongcatalog sales.

The increase in fiscal 2005 compared to fiscal 2004was primarily due to *Full Spectrum Warrior*and*Warhammer 40,000: Dawn of War*. Infiscal 2004, sales were primarily driven by the strong performance of Disney/Pixar’s *Finding Nemo* and  international sales of *Broken Sword3.*

Additionally, we released 67 PC titles published byour ValuSoft division, including *World Poker Championship,*duringfiscal 2005, and we released 52 PC titles published from our ValuSoft divisionin fiscal 2004.

***Other Net Sales.******  ***Other net sales primarilyconsist of sales from older platforms. Fiscal 2005 and 2004 are primarily madeup of sales from Sony PlayStation products.

**Costs and Expenses,Interest Income, Other Income, Income Taxes and Minority Interest**

Our costs and expensesincreased in fiscal 2005 (as restated) to $684.0 million, from $594.0 millionin fiscal 2004 (as restated); however, total costs and expenses as a percentageof net sales decreased from 93% of net sales to 90% of net sales. As apercentage of net sales, the greatest increase in costs were due to productdevelopment expenses as we more than doubled the size of our internal productdevelopment organization, aggressively ramped up development of next-generationconsole games and increased development of wireless games.

***Cost of Sales (inthousands)***

| **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2004** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $255,187                                      |       |                              | 33.7       | %                                             |       |                              | $          | 234,574           |       |   |   | 36.6 | % |   |   | 8.8 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

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Cost of sales primarilyconsists of direct manufacturing costs net of manufacturer volume rebates anddiscounts. Cost of sales as a percentage of net sales decreased for fiscal 2005as compared to fiscal 2004, primarily due to lower average manufacturing costsacross all platforms and higher average selling price of Game Boy Advance andPC products.

***LicenseAmortization and Royalties (in thousands)***

| **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2004** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $85,926                                       |       |                              | 11.4       | %                                             |       |                              | $          | 71,132            |       |   |   | 11.1 | % |   |   | 20.8 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

License amortization androyalties expense consists of royalty payments due to licensors, which areexpensed at the higher of (1) the contractual royalty rate based on actualnet product sales for such license or (2) an effective rate based upontotal projected revenue for such license. For fiscal 2005, license amortizationand royalties as a percentage of net sales remained relatively flat as comparedto fiscal 2004. This is primarily due to our top three selling brands—Disney/Pixar,SpongeBob SquarePants and WWE licensing amortization rates by brand remainingrelatively constant for fiscal 2005 and 2004.

***Software Development  Amortization (in thousands)***

| **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2004** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $93,622                                       |       |                              | 12.4       | %                                             |       |                              | $          | 105,632           |       |   |   | 16.5 | % |   |   | (11.4 | )% |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

Software developmentamortization consists of amortization of capitalized payments made tothird-party software developers and amortization of capitalized internal studiodevelopment costs. Software development costs are expensed at the higher of (1) thecontractual rate based on actual net product sales for such software or (2) aneffective rate based upon total projected revenue for such software. For fiscal2005 software development amortization as a percentage of net sales decreasedas compared to fiscal 2004 primarily due to our strategy of bringing thedevelopment of games based upon our core franchises, such as Disney/Pixar’s*The Incredibles*, in-house, as compared toDisney/Pixar’s*Finding Nemo*,which was externally developed. Also, the effective amortization rate for *The SpongeBobSquarePants Movie* released in fiscal 2005 was lower as compared tothe amortization rate for *SpongeBobSquarePants: Battle for Bikini Bottom* released in fiscal 2004 as wewere able to leverage the technology developed on the fiscal 2004 title.Further, in fiscal 2004 we had high development costs associated with creating *Sphinx**and the**Cursed Mummy*, an original brand for which we did not developa title in fiscal 2005.

***ProductDevelopment  (in thousands, as restated(1))***

| **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2004** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $73,637                                       |       |                              | 9.7        | %                                             |       |                              | $          | 37,758            |       |   |   | 5.9 | % |   |   | 95.0 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

----

(1)          SeeNote 2, “Restatement of Consolidated Financial Statements” in notes to theconsolidated financial statements.

Product developmentexpense primarily consists of expenses incurred by internal development studiosand payments made to external development studios prior to products reachingtechnological feasibility. For fiscal 2005, product development expensesincreased by $35.9 million from fiscal 2004. This increase was primarily due tothe following factors: (1) a significant increase in internal developmentheadcount to approximately 900 from 400 compared to fiscal 2004 due in part tothe acquisitions of Relic and Blue Tongue and the formation of Concrete Games, (2) spendingon development for games for 

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next-generationplatforms, and (3) increased spending on product development for ourwireless content as we continue to increase our wireless product offerings.

***Selling andMarketing (in thousands, as restated(1))***

| **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2004** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $110,727                                      |       |                              | 14.6       | %                                             |       |                              | $          | 87,664            |       |   |   | 13.7 | % |   |   | 26.3 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

----

(1)          SeeNote 2, “Restatement of Consolidated Financial Statements” in notes to theconsolidated financial statements.

Selling and marketingexpense consists of personnel-related costs, advertising and promotionalexpenses. For fiscal 2005, selling and marketing expenses increased as apercentage of net sales as compared to fiscal 2004. Selling and marketingexpenses increased in absolute dollars by $23.1 million for fiscal 2005compared to fiscal 2004. This increase was primarily due to promotional effortsto support the new releases of original titles *The Punisher*and *Full Spectrum Warrior*, as well asDisney/Pixar’s*The Incredibles, TheSpongeBob SquarePants Movie,*and*WWE SmackDown! vs. Raw*, and other releases.

***Payment to VenturePartner (in thousands)***

| **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2004** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $9,774                                        |       |                              | 1.3        | %                                             |       |                              | $          | 9,675             |       |   |   | 1.5 | % |   |   | 1.0 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

 

The payment made to venture partner is related to thejoint license agreement that THQ and JAKKS Pacific, Inc. have with the WWEunder which our role is to develop, manufacture, distribute, market and sellWWE video games. Payment to venture partner increased slightly in absolutedollars for fiscal 2005 compared to fiscal 2004. The increase is in directrelation to the increases in sales of games based upon the WWE license infiscal 2005 as compared to fiscal 2004.

***General andAdministrative (in thousands, as restated(1))***

| **Year Ended  March 31, 2005** | ** ** | **% of net sales** | ** ** | **Year Ended  March 31, 2004** | ** ** | **% of net sales** | ** ** | **% change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|
| $55,153                                       |       |                              | 7.3        | %                                             |       |                              | $          | 47,609            |       |   |   | 7.4 | % |   |   | 15.8 | % |   |
|                                               |            |                                   |            |                                               |            |                                   |            |                   |            |  |  |  |  |  |  |  |  |  |

----

(1)          See Note 2, “Restatementof Consolidated Financial Statements” in notes to the consolidated financialstatements.

General and administrativeexpenses consist of personnel and related expenses of executive andadministrative staff, fees for professional services such as legal andaccounting, depreciation and amortization, allowances for bad debts, foreignexchange transaction gains and losses, and facilities. General andadministrative expenses increased by $7.5 million for fiscal 2005 as comparedto fiscal 2004. Fiscal 2004 included a charge of $7.0 million for doubtfulaccounts related to KB Toys’ bankruptcy filing. Excluding this $7.0 millionexpense, general and administrative expenses increased by $14.5 million forfiscal 2005 as compared to fiscal 2004. The increase is primarily attributableto growth in our international and wireless operations, as well asSarbanes-Oxley compliance and professional fees. In addition, the increase alsoincludes $1.5 million of amortization expense for intangible assets obtainedthrough the fiscal 2005 acquisitions of Relic and Blue Tongue, and theacquisition of a controlling interest in Minick during fiscal 2005.

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***Other* Income**

Other income for fiscal2004 consisted of a $4.0 million settlement of a dispute we had with ourdirectors’ and officers’ insurance carrier related to a previous securities litigationsettlement.

***Income Taxes***

The effective income taxrate was 20% for fiscal 2005 compared to 36% for fiscal 2004. The fiscal 2005effective income tax rate benefited from the following two factors: (1) therecognition of $7.8 million of research and development income tax creditsclaimed for prior years and (2) our estimate of current fiscal yearresearch and development income tax credits. Excluding the one-time benefit of$7.8 million, our effective income tax rate for fiscal 2005 would have been30%.

***Minority Interest***

Minority interest reflectsthe income allocable to equity interests in Minick which are not owned by THQ.In April 2004, we purchased an additional 25% of the outstanding commonstock of Minick, bringing us to a 50% ownership interest and control of Minick’sboard of directors. As a result of this transaction, we began consolidating thebalance sheet, statement of operations and cash flows of Minick. Minorityinterest included in our consolidated statement of operations was $261,000 forfiscal 2005 compared to zero for fiscal 2004.

**Liquidity and Capital Resources**

| ** **                                        | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** | **Change** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|------------|------------|
| **(In thousands)**                           | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  equivalents                        |       |                         | $          | 91,517                       |       |       |       | $ | 98,175 |   |   | $ | (6,658 | ) |
| Short-term  investments                           |       |                         | 280,120    |                         |       |       | 232,998    |   |   | 47,122 |   |
| Cash, cash equivalents and short-term investments |       |                         | $          | 371,637                      |       |       |       | $ | 331,173 |   |   | $ | 40,464 |   |
| Percentage of  total assets                       |       |                         | 44         | %                            |       |       | 44         | % |   |   |   |
|                                                   |            |                              |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |

 

| ** **                                            | ** ** | **Year Ended March 31,** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                            | ** ** | **2006**                                | ** ** | **2005**   | ** ** | **Change** | ** ** |
| **(In thousands)**                               | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash provided by  operating activities                |       | $                                       | 42,789     |       | $          | 60,455 |   | $ | (17,666 | ) |
| Cash used in  investing activities                    |       | (85,882                                 | )          | (77,891    | )          | (7,991 | ) |
| Cash provided by  financing activities                |       | 37,787                                  |       | 33,764     |       | 4,023 |   |
| Effect of  exchange rate changes on cash              |       | (1,352                                  | )          | 605        |       | (1,957 | ) |
| Net increase  (decrease) in cash and cash equivalents |       | $                                       | (6,658     | )          | $          | 16,933 |   | $ | (23,591 | ) |
|                                                       |            |                                         |            |            |            |  |  |  |  |  |  |  |

 

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*Cash Flow from OperatingActivities.**  *Ourprincipal source of cash is from sales of interactive software games designedfor play on video game consoles, handheld devices and personal computers. Ourprincipal uses of cash are for product purchases**of discs and cartridges along with associated manufacturer’sroyalties, payments to external developers and licensors, the costs of internalsoftware development and selling and marketing expenses.

Cash provided by operatingactivities decreased by approximately $17.7 million in fiscal 2006 as comparedto fiscal 2005. The decrease was mainly due to lower net income in fiscal 2006as well as higher spending for software development, higher payments of accruedexpenses, partially offset by lower cash spending for licenses. We expect togenerate positive operating cash flow for the full fiscal year 2007.

*Cash Flow from InvestingActivities.**  *Cashused in investing activities increased by approximately $8.0 million infiscal 2006 as compared to fiscal 2005, primarily due to an increase in theamount of net disbursements from purchases and sales of short-term investments,an increase in purchases of property and equipment, offset by a decrease inacquisition related activity.

*Cash Flow from FinancingActivities.**  *Cashprovided by financing activities increased by approximately $4.0 million infiscal 2006 as compared to fiscal 2005, primarily due to a reduction in theamount paid for repurchases of our common stock offset by a decrease in cashprovided by the exercise of stock options. We did not repurchase any of ourcommon stock in fiscal 2006 and had $9.1 million of stock repurchases in fiscal2005.

Infiscal 2007, we expect to generate more cash than we did in fiscal 2006. Theincrease in the generation of cash will be primarily attributable to higher netincome.

*Key Balance SheetAccounts*

*Accounts Receivable.*   Accountsreceivable increased $5.2 million in fiscal 2006, from $73.7 million at March 31,2005 to $78.9 million at March 31, 2006. The increase in net accountsreceivable is primarily due the timing of our fourth quarter product releases.Allowances for price protection, returns and doubtful accounts were $57.8million as of March 31, 2006, a $0.3 million increase from March 31,2005. Allowances for price protection and returns as a percentage of trailingnine month net sales were 8% and 7% as of March 31, 2006 and 2005,respectively. While the allowance as a percent of trailing nine month net salesincreased in North America due to higher than expected price protection relatedto the release of *Full Spectrum Warrior: Ten Hammers*,this title was not released internationally and the allowance as a percent oftrailing nine month net sales actually decreased internationally. We believeour current reserves are adequate based on historical experience, inventoryremaining in the retail channel and the rate of inventory sell-through in theretail channel.

*Inventory.**  *Inventory increased $4.8 million in fiscal 2006, from$23.8 million at March 31, 2005 to $28.6 million at March 31,2006. The increase in inventory is primarily due to the growth of our businessand to a lesser extent the timing of our product releases and the timing ofproduct reorders.

*Licenses.**  *Licenses decreased $6.5 million in fiscal 2006, from$88.0 million at March 31, 2005 to $81.5 million at March 31,2006. The decrease in licenses is due to license amortization in excess ofnewly acquired licenses during fiscal 2006.

*Software Development.**  *Software development increased $43.8 million infiscal 2006, from $65.3 million March 31, 2005 to $109.1 million March 31,2006. The increase in software development is primarily the result of ourinvestment in next generation titles with higher development costs which arescheduled to be released in fiscal 2007 and beyond.

*Accrued and Other CurrentLiabilities.**  *Accruedand other current liabilities increased $32.5 million in fiscal 2006 (asrestated), from $78.4 million at March 31, 2005 to $110.9 million at March 31,2006 (as 

55

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restated). Theincrease in accrued and other current liabilities is primarily due to movementof accrued royalties from long-term into short-term as they are expected to bepaid out within a year as well as an increase in amounts due to third-partydevelopers for the production of our games.

*Inflation*

Ourmanagement currently believes that inflation has not had a material impact oncontinuing operations.

*Financial Condition*

We believe the existingcash, cash equivalents, short-term investments, and cash generated fromoperations will be sufficient to meet our operating requirements for at leastthe next twelve months, including working capital requirements, capitalexpenditures and potential future acquisitions or strategic investments. We maychoose at any time to raise additional capital to strengthen our cash position,facilitate expansion, pursue strategic investments or to take advantage ofbusiness opportunities as they arise.

Ourability to maintain sufficient liquidity could be affected by various risks anduncertainties described in Item 1A “Risk Factors” in this Annual Report on Form 10-K/A.

*Guarantees andCommitments*

A summary of annual minimum contractual obligationsand commercial commitments as of March 31, 2006 is as follows (inthousands): 

| ** **                                | ** ** | **Contractual Obligations and Commercial Commitments** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **FiscalYears Ending**March 31, | ** ** | ** **                                                                 | ** ** | **License /**SoftwareDevelopment  Commitments(1) | ** ** | **Advertising(2)** | ** ** | **Leases(3)** | ** ** | **Letters of  Credit(4)** | ** ** | **Other(5)** | ** ** | **Total** | ** ** |
| 2007                                      |       |                                                                       | $          | 97,558 |   |   |   | $ | 21,762 |   |   |   | $ | 11,332 |   |   |   | $ | 7,563 |   |   |   | $ | 1,463 |   |   | $ | 139,678 |   |
| 2008                                      |       |                                                                       | 39,102     |   |   |   | 14,616 |   |   |   | 11,595 |   |   |   | — |   |   |   | — |   |   | 65,313 |   |
| 2009                                      |       |                                                                       | 39,613     |   |   |   | 13,184 |   |   |   | 11,189 |   |   |   | — |   |   |   | — |   |   | 63,986 |   |
| 2010                                      |       |                                                                       | 37,000     |   |   |   | 9,777 |   |   |   | 10,812 |   |   |   | — |   |   |   | — |   |   | 57,589 |   |
| 2011                                      |       |                                                                       | 22,000     |   |   |   | 9,777 |   |   |   | 10,137 |   |   |   | — |   |   |   | — |   |   | 41,914 |   |
| Thereafter                                |       |                                                                       | —     |   |   |   | — |   |   |   | 28,779 |   |   |   | — |   |   |   | — |   |   | 28,779 |   |
|                                      |       |                                                                       | $          | 235,273 |   |   |   | $ | 69,116 |   |   |   | $ | 83,844 |   |   |   | $ | 7,563 |   |   |   | $ | 1,463 |   |   | $ | 397,259 |   |
|                                           |            |                                                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          *Licenses andSoftware Development*.   We enter intocontractual agreements with third parties for the rights to intellectualproperty and for the development of products. Under these agreements, we committo provide specified payments to an intellectual property holder or developer.Assuming all contractual provisions are met, the total future minimum contractcommitments for contracts in place as of March 31, 2006 are approximately$235.3 million. License/software development commitments in the table aboveinclude $74.2 million of commitments to licensors that are included in ourconsolidated balance sheet as of March 31, 2006 because the licensors donot have any significant performance obligations to us. These commitments areincluded in both current and long-term licenses and accrued royalties.

(2)          *Advertising*.   Wehave certain minimum advertising commitments under most of our major licenseagreements. These minimum commitments generally range from 2% to 12% of netsales related to the respective license. We estimate that our minimum commitmentfor advertising in fiscal 2007 will be $21.8 million.

(3)          *Leases*.   Weare committed under operating leases with lease termination dates through 2015.Most of our leases contain rent escalations.

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(4)          *Letters ofCredit*.   Asof March 31, 2006, we were in compliance with all the covenants under ourcredit facility, had outstanding letters of credit of approximately $7.6million and no borrowings.

(5)          *Other*.   Thisamount reflects an additional $1.5 million related to the purchase of Relic in April 2004.This amount was paid in April 2006.

Other potential futureexpenditures relate to the following:

*ManufacturerIndemnification.**  *We mustindemnify the platform manufacturers (Microsoft, Nintendo, Sony) of our gameswith respect to all loss, liability and expenses resulting from any claimagainst such manufacturer involving the development, marketing, sale or use ofour games, including any claims for copyright or trademark infringement broughtagainst such manufacturer. As a result, we bear a risk that the properties uponwhich the titles of our games are based, or that the information and technologylicensed from others and incorporated into the products, may infringe therights of third parties. Our agreements with our third-party softwaredevelopers and property licensors typically provide indemnification rights forus with respect to certain matters. However, if a manufacturer brings a claimagainst us for indemnification, the developers or licensors may not havesufficient resources to, in turn, indemnify us.

*Director IndemnityAgreements.**  *We haveentered into indemnification agreements with the members of our Board ofDirectors to provide a contractual right of indemnification to our Directors tothe extent permitted by law against any and all liabilities, costs, expenses,amounts paid in settlement and damages incurred by the Directors as a result ofany lawsuit, or any judicial, administrative or investigative proceeding inwhich the Directors are sued as a result of their service as members of ourBoard of Directors. The indemnification agreements provide specific proceduresand time frames with respect to requests for indemnification and clarify thebenefits and remedies available to Directors in the event of an indemnificationrequest.

*Credit Facility.**  *We have a credit agreement that lasts through November 29,2006 that provides us a maximum monthly facility amount of $40.0 million foreach August, September and October, and a maximum monthly facility amountof $12.0 million for every other month. The credit facility is unsecured andcontains customary financial and non-financial covenants that require us tomaintain specified operating profits and liquidity and limits our ability toincur additional indebtedness, sell assets, pay cash dividends and enter intocertain mergers or acquisitions. As of March 31, 2006, we were incompliance with all the covenants under the credit facility and had outstandingletters of credit of approximately $7.6 million.

*Litigation.**  *For information related to legal proceedings that mayresult in future expenditures to the Company, see “Item 3—Legal Proceedings.”

**Item 7A.Quantitative and Qualitative Disclosures About Market Risk**

We areexposed to certain market risks arising from transactions in the normal courseof business, principally risks associated with interest rate and foreigncurrency fluctuations.

**Interest Rate Risk**

We haveinterest rate risk primarily related to our investment portfolio and to alesser extent our credit facility. A substantial portion of our portfolio is inshort-term investments made up of floating rate securities and municipalsecurities. The value of these investments may fluctuate with changes ininterest rates. However, we believe this risk is immaterial due to theshort-term nature of the investments. The credit facility is based on variableinterest rates. At March 31, 2006, we had outstanding letters of credit of$7.6 million.

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**Foreign CurrencyRisk**

We transact business inmany different foreign currencies and are exposed to financial market riskresulting from fluctuations in foreign currency exchange rates, particularlythe Great British Pound (“GBP”) and the Euro, which may result in a gain orloss of earnings to us. Our international business is subject to risks typicalof an international business, including, but not limited to, foreign currencyexchange rate volatility. Accordingly, our future results could be materiallyand adversely affected by changes in foreign currency exchange rates.

Throughout the year, wefrequently monitor the volatility of the GBP and the Euro (and all otherapplicable currencies). We utilize foreign exchange forward contracts tomitigate foreign currency risk associated with foreign currency denominatedassets and liabilities, primarily certain inter-company receivables andpayables. Our foreign exchange forward contracts are accounted for asderivatives whereby the fair value of the contracts are reflected as othercurrent assets or other current liabilities and the associated gains and lossesare reflected in general and administrative expense in the consolidatedstatements of operations. The forward contracts generally have a contractualterm of less than one month and are transacted near month-end. Therefore, thefair value of the forward contracts generally is not significant at eachmonth-end.

Foreign exchange forwardcontracts are designed to offset gains and losses on the underlyingforeign-currency-denominated assets and liabilities. Any movement in foreigncurrency exchange rates resulting in a gain or loss on our foreign exchangeforward contracts would be offset by an opposing gain or loss in the underlyingforeign-currency-denominated assets and liabilities that were hedged and wouldnot have a material impact on our financial position.

As of March 31, 2006,we had foreign exchange forward contracts in the notional amount of $60.3million, all with maturities of less than one month, consisting primarily ofEuros, Great British Pounds, and Canadian Dollars. The counterparties to theseforward contracts are creditworthy multinational commercial and investmentbanks. The risks of counterparty nonperformance associated with these contractsare not considered to be material. Notwithstanding our efforts to manage foreignexchange risks, there can be no assurances that our mitigating or hedgingactivities will adequately protect us against the risks associated with foreigncurrency fluctuations.

We donot hedge foreign currency translation risk. A hypothetical 10% adverse changein exchange rates would result in a reduction of reported netsales of approximately $31.9 million and a reduction of reportedincome before taxes of approximately $1.0 million. This estimateassumes an adverse shift in all foreign currency exchange rates,which do not always move in the same direction; actual results may differmaterially.

**Item 8.Consolidated Financial Statements and Supplementary Data**

The report of IndependentRegistered Public Accounting Firm, consolidated financial statements and notesto consolidated financial statements follow below.

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders of THQInc.,

Agoura Hills, California

We have audited the accompanying consolidated balancesheets of THQ Inc. and subsidiaries (the “Company”) as of March 31, 2006and 2005, and the related consolidated statements of operations, stockholders’equity and cash flows for each of the three years in the period ended March 31,2006. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with thestandards 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 materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of the Companyas of March 31, 2006 and 2005, and the results of its operations and itscash flows for each of the three years in the period ended March 31, 2006,in conformity with accounting principles generally accepted in the UnitedStates of America.

As discussed in Note 2, the accompanying consolidatedfinancial statements have been restated.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of March 31, 2006, based on the criteriaestablished in *Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission*and our report dated June 6, 2006 (January 19, 2007 as to the effectof the material weakness described in Management’s Annual Report on InternalControl over Financial Reporting (restated)) expressed an unqualified opinionon management’s assessment of the effectiveness of the Company’s internalcontrol over financial reporting and an adverse opinion on the effectiveness ofthe Company’s internal control over financial reporting.

**DELOITTE & TOUCHE LLP**

LosAngeles, California

June 6, 2006 (January 19, 2007 as to theeffects of the matters discussed in Note 21 and the effect of the restatementdiscussed in Note 2)

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**THQ INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands, except share data)**
|                                                                                                                                                                         | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                              | ** ** | **As restated(1)**  | ** ** | **As restated(1)**  | ** ** |
| **ASSETS**                                                                                                                                                              |       |                     |       |                     |       |   |   |   |   |
| Current  assets:                                                                                                                                                        |       |                     |       |                     |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                               |       |                     | $          | 91,517                   |       |   |   | $ | 98,175 |   |   |
| Short-term investments                                                                                                                                                  |       |                     | 280,120    |                     |       |   | 232,998 |   |   |
| Cash, cash equivalents and  short-term investments                                                                                                                      |       |                     | 371,637    |                     |       |   | 331,173 |   |   |
| Accounts receivable, net of  allowances                                                                                                                                 |       |                     | 78,876     |                     |       |   | 73,700 |   |   |
| Inventory                                                                                                                                                               |       |                     | 28,620     |                     |       |   | 23,802 |   |   |
| Licenses                                                                                                                                                                |       |                     | 20,849     |                     |       |   | 12,464 |   |   |
| Software development                                                                                                                                                    |       |                     | 91,843     |                     |       |   | 57,107 |   |   |
| Income taxes receivable                                                                                                                                                 |       |                     | 4,686      |                     |       |   | 8,996 |   |   |
| Prepaid expenses and other  current assets                                                                                                                              |       |                     | 12,420     |                     |       |   | 14,530 |   |   |
| Total current assets                                                                                                                                                    |       |                     | 608,931    |                     |       |   | 521,772 |   |   |
| Property and equipment, net                                                                                                                                             |       |                     | 37,485     |                     |       |   | 26,822 |   |   |
| Licenses, net of current portion                                                                                                                                        |       |                     | 60,623     |                     |       |   | 75,523 |   |   |
| Software development, net of current portion                                                                                                                            |       |                     | 17,236     |                     |       |   | 8,144 |   |   |
| Income taxes receivable, net of current portion                                                                                                                         |       |                     | 10,273     |                     |       |   | 9,513 |   |   |
| Goodwill                                                                                                                                                                |       |                     | 90,872     |                     |       |   | 83,440 |   |   |
| Other long-term assets, net                                                                                                                                             |       |                     | 23,048     |                     |       |   | 21,392 |   |   |
| **TOTAL ASSETS**                                                                                                                                                        |       |                     | $          | 848,468                  |       |   |   | $ | 746,606 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                          |       |                     |       |                     |       |   |   |   |   |
| Current  liabilities:                                                                                                                                                   |       |                     |       |                     |       |   |   |   |   |
| Accounts payable                                                                                                                                                        |       |                     | $          | 34,871                   |       |   |   | $ | 36,499 |   |   |
| Accrued and other current  liabilities                                                                                                                                  |       |                     | 110,924    |                     |       |   | 78,369 |   |   |
| Deferred income taxes                                                                                                                                                   |       |                     | 3,578      |                     |       |   | 6,841 |   |   |
| Total current liabilities                                                                                                                                               |       |                     | 149,373    |                     |       |   | 121,709 |   |   |
| Other long-term liabilities                                                                                                                                             |       |                     | 60,323     |                     |       |   | 72,059 |   |   |
| Deferred income taxes, net of current portion                                                                                                                           |       |                     | 9,681      |                     |       |   | 3,842 |   |   |
| Commitments and contingencies                                                                                                                                           |       |                     | —     |                     |       |   | — |   |   |
| Minority interest                                                                                                                                                       |       |                     | 1,340      |                     |       |   | 1,238 |   |   |
| Stockholders’ equity:                                                                                                                                              |       |                     |       |                     |       |   |   |   |   |
| Preferred stock, par value  $0.01, 1,000,000 shares authorized                                                                                                          |       |                     | —     |                     |       |   | — |   |   |
| Common stock, par value  $0.01, 75,000,000 shares authorized; 64,140,977 and 60,689,622 shares issued  and outstanding as of March 31, 2006 and 2005, respectively |       |                     | 642        |                     |       |   | 607 |   |   |
| Additional paid-in capital                                                                                                                                              |       |                     | 405,425    |                     |       |   | 355,089 |   |   |
| Accumulated other  comprehensive income                                                                                                                                 |       |                     | 10,367     |                     |       |   | 12,851 |   |   |
| Retained earnings                                                                                                                                                       |       |                     | 211,317    |                     |       |   | 179,211 |   |   |
| Total stockholders’ equity                                                                                                                                         |       |                     | 627,751    |                     |       |   | 547,758 |   |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                     |       |                     | $          | 848,468                  |       |   |   | $ | 746,606 |   |   |

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(1)           See Note 2,“Restatement of Consolidated Financial Statements” in notes to theconsolidated  financial statements.

 

See notes to consolidated financial statements.

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**THQ INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTSOF OPERATIONS**

**(In thousands, except per share data)**
|                                                    | ** ** | **Fiscal Year Ended March 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | **As restated(1)**                             | ** ** | **As restated(1)** | ** ** | **As restated(1)** | ** ** |
| Net sales                                          |       |                                                | $          | 806,560 |   |   |   | $ | 756,731 |   |   |   | $ | 640,846 |   |   |
| Costs and expenses:                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Cost of sales                                      |       |                                                | 287,946    |   |   |   | 255,187 |   |   |   | 234,574 |   |   |
| License amortization and royalties                 |       |                                                | 80,508     |   |   |   | 85,926 |   |   |   | 71,132 |   |   |
| Software development amortization                  |       |                                                | 116,371    |   |   |   | 93,622 |   |   |   | 105,632 |   |   |
| Product development                                |       |                                                | 85,323     |   |   |   | 73,637 |   |   |   | 37,758 |   |   |
| Selling and marketing                              |       |                                                | 123,926    |   |   |   | 110,727 |   |   |   | 87,664 |   |   |
| Payment to venture partner                         |       |                                                | 12,572     |   |   |   | 9,774 |   |   |   | 9,675 |   |   |
| General and administrative                         |       |                                                | 68,336     |   |   |   | 55,153 |   |   |   | 47,609 |   |   |
| Total costs and expenses                           |       |                                                | 774,982    |   |   |   | 684,026 |   |   |   | 594,044 |   |   |
| Income from operations                             |       |                                                | 31,578     |   |   |   | 72,705 |   |   |   | 46,802 |   |   |
| Interest income                                    |       |                                                | 8,212      |   |   |   | 4,188 |   |   |   | 2,333 |   |   |
| Other income                                       |       |                                                | —     |   |   |   | — |   |   |   | 4,000 |   |   |
| Income before  income taxes and minority interest  |       |                                                | 39,790     |   |   |   | 76,893 |   |   |   | 53,135 |   |   |
| Income taxes                                       |       |                                                | 7,621      |   |   |   | 15,235 |   |   |   | 19,063 |   |   |
| Income before  minority interest                   |       |                                                | 32,169     |   |   |   | 61,658 |   |   |   | 34,072 |   |   |
| Minority interest                                  |       |                                                | (63        | ) |   |   | (261 | ) |   |   | — |   |   |
| Net income                                         |       |                                                | $          | 32,106 |   |   |   | $ | 61,397 |   |   |   | $ | 34,072 |   |   |
| Net income per  share—basic                   |       |                                                | $          | 0.51 |   |   |   | $ | 1.05 |   |   |   | $ | 0.59 |   |   |
| Net income per  share—diluted                 |       |                                                | $          | 0.49 |   |   |   | $ | 1.02 |   |   |   | $ | 0.58 |   |   |
| Shares used in  per share calculation—basic   |       |                                                | 62,615     |   |   |   | 58,545 |   |   |   | 57,279 |   |   |
| Shares used in per share  calculation—diluted |       |                                                | 65,520     |   |   |   | 60,367 |   |   |   | 58,605 |   |   |

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(1)          See Note 2, “Restatementof Consolidated Financial Statements” in notes to the consolidated financialstatements.        

 

See notes to consolidated financial statements.

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**THQ INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In thousands, except per share data)**

**Fiscal Years Ended March 31, 2004, 2005 and 2006**
|                                                                  | ** ** | ** **            | ** ** | ** **     | ** ** | ** **               | ** ** | **Accumulated**        | ** ** | ** **              | ** ** | ** **              | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------------------|------------|------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | ** **            | ** ** | ** **     | ** ** | ** **               | ** ** | **Other**              | ** ** | ** **              | ** ** | ** **              | ** ** |
| ** **                                                       | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **Comprehensive**        | ** ** | **Retained**           | ** ** | ** **              | ** ** |
| ** **                                                       | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Paid-In Capital** | ** ** | **Income (Loss)** | ** ** | **Earnings**            | ** ** | **Total**               | ** ** |
| ** **                                                       | ** ** | ** **            | ** ** | ** **     | ** ** | **As restated(1)**  | ** ** | ** **             | ** ** | **As restated(1)** | ** ** | **As restated(1)** | ** ** |
| **Balance at March 31, 2003—As previously  reported**  |       | 57,011,819            |       |           | $          | 570                      |       |                   |       | $                       | 305,138    |                    |       |   | $ | 1,496 |   |   |   | $ | 89,209 |   |   |   | $ | 396,413 |   |   |
| Cumulative effect of restatement—Note 2                     |       | —                |       |           | —     |                     |       |                   | 6,363      |                    |       |                    | —     |   |   |   | (5,467 | ) |   |   | 896 |   |   |
| **Balance at March 31, 2003, as restated**                  |       | 57,011,819            |       |           | 570        |                     |       |                   | 311,501    |                    |       |                    | 1,496      |   |   |   | 83,742 |   |   |   | 397,309 |   |   |
| Exercise of options                                              |       | 1,302,285             |       |           | 13         |                     |       |                   | 7,108      |                    |       |                    | —     |   |   |   | — |   |   |   | 7,121 |   |   |
| Issuance of warrants                                             |       | —                |       |           | —     |                     |       |                   | 956        |                    |       |                    | —     |   |   |   | — |   |   |   | 956 |   |   |
| Repurchase of common stock                                       |       | (1,063,637            | )          |           | (10        | )                        |       |                   | (10,984    | )                       |       |                    | —     |   |   |   | — |   |   |   | (10,994 | ) |   |
| Stock-based compensation                                         |       | —                |       |           | —     |                     |       |                   | 1,764      |                    |       |                    | —     |   |   |   | — |   |   |   | 1,764 |   |   |
| Tax benefit related to the exercise of employee stock  options   |       | —                |       |           | —     |                     |       |                   | 845        |                    |       |                    | —     |   |   |   | — |   |   |   | 845 |   |   |
| Comprehensive income:                                            |       |                  |       |           |       |                     |       |                   |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                       |       | —                |       |           | —     |                     |       |                   | —     |                    |       |                    | —     |   |   |   | 34,072 |   |   |   | 34,072 |   |   |
| Other  comprehensive income                                      |       |                  |       |           |       |                     |       |                   |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation gain                                |       | —                |       |           | —     |                     |       |                   | —     |                    |       |                    | 5,431      |   |   |   | — |   |   |   | 5,431 |   |   |
| Unrealized gain on investments                                   |       | —                |       |           | —     |                     |       |                   | —     |                    |       |                    | 1,375      |   |   |   | — |   |   |   | 1,375 |   |   |
| Comprehensive income                                             |       |                  |       |           |       |                     |       |                   |       |                    |       |                    |       |   |   |   |   |   |   |   | 40,878 |   |   |
| **Balance at March 31, 2004, as restated**                  |       | 57,250,467            |       |           | $          | 573                      |       |                   |       | $                       | 311,190    |                    |       |   | $ | 8,302 |   |   |   | $ | 117,814 |   |   |   | $ | 437,879 |   |   |
| Exercise of options                                              |       | 4,189,155             |       |           | 42         |                     |       |                   | 42,803     |                    |       |                    | —     |   |   |   | — |   |   |   | 42,845 |   |   |
| Issuance of warrants                                             |       | —                |       |           | —     |                     |       |                   | 2,422      |                    |       |                    | —     |   |   |   | — |   |   |   | 2,422 |   |   |
| Repurchase of common stock                                       |       | (750,000              | )          |           | (8         | )                        |       |                   | (9,072     | )                       |       |                    | —     |   |   |   | — |   |   |   | (9,080 | ) |   |
| Stock-based compensation                                         |       | —                |       |           | —     |                     |       |                   | 806        |                    |       |                    | —     |   |   |   | — |   |   |   | 806 |   |   |
| Tax benefit related to the exercise of employee stock  options   |       | —                |       |           | —     |                     |       |                   | 6,940      |                    |       |                    | —     |   |   |   | — |   |   |   | 6,940 |   |   |
| Comprehensive income:                                            |       |                  |       |           |       |                     |       |                   |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                       |       | —                |       |           | —     |                     |       |                   | —     |                    |       |                    | —     |   |   |   | 61,397 |   |   |   | 61,397 |   |   |
| Other  comprehensive income                                      |       |                  |       |           |       |                     |       |                   |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation gain                                |       | —                |       |           | —     |                     |       |                   | —     |                    |       |                    | 2,802      |   |   |   | — |   |   |   | 2,802 |   |   |
| Unrealized gain on investments, net of $1.9 million  tax expense |       | —                |       |           | —     |                     |       |                   | —     |                    |       |                    | 1,747      |   |   |   | — |   |   |   | 1,747 |   |   |
| Comprehensive income                                             |       |                  |       |           |       |                     |       |                   |       |                    |       |                    |       |   |   |   |   |   |   |   | 65,946 |   |   |
| **Balance at March 31, 2005, as restated**                  |       | 60,689,622            |       |           | $          | 607                      |       |                   |       | $                       | 355,089    |                    |       |   | $ | 12,851 |   |   |   | $ | 179,211 |   |   |   | $ | 547,758 |   |   |
| Exercise of options                                              |       | 3,187,569             |       |           | 32         |                     |       |                   | 37,755     |                    |       |                    | —     |   |   |   | — |   |   |   | 37,787 |   |   |
| Issuance of restricted stock                                     |       | 263,786               |       |           | 3          |                     |       |                   | 855        |                    |       |                    | —     |   |   |   | — |   |   |   | 858 |   |   |
| Stock-based compensation                                         |       | —                |       |           | —     |                     |       |                   | 2,564      |                    |       |                    | —     |   |   |   | — |   |   |   | 2,564 |   |   |
| Tax benefit related to the exercise of employee stock  options   |       | —                |       |           | —     |                     |       |                   | 9,162      |                    |       |                    | —     |   |   |   | — |   |   |   | 9,162 |   |   |
| Comprehensive income:                                            |       |                  |       |           |       |                     |       |                   |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                       |       | —                |       |           | —     |                     |       |                   | —     |                    |       |                    | —     |   |   |   | 32,106 |   |   |   | 32,106 |   |   |
| Other  comprehensive income (loss)                               |       |                  |       |           |       |                     |       |                   |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation loss                                |       | —                |       |           | —     |                     |       |                   | —     |                    |       |                    | (3,085     | ) |   |   | — |   |   |   | (3,085 | ) |   |
| Unrealized gain on investments, net of $0.4 million  tax expense |       | —                |       |           | —     |                     |       |                   | —     |                    |       |                    | 601        |   |   |   | — |   |   |   | 601 |   |   |
| Comprehensive income                                             |       |                  |       |           |       |                     |       |                   |       |                    |       |                    |       |   |   |   |   |   |   |   | 29,622 |   |   |
| **Balance at March 31, 2006,  as restated**                 |       | 64,140,977            |       |           | $          | 642                      |       |                   |       | $                       | 405,425    |                    |       |   | $ | 10,367 |   |   |   | $ | 211,317 |   |   |   | $ | 627,751 |   |   |

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(1)                See Note 2, “Restatement of ConsolidatedFinancial Statements” in notes to the consolidated financial statements.

1

See notes to consolidated financial statements.

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**THQ INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

| ** **                                                                         | ** ** | **Fiscal Year Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **As restated(1)**                             | ** ** | **As restated(1)** | ** ** | **As restated(1)** | ** ** |
| **OPERATING ACTIVITIES:**                                                          | ** ** |                                                | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income                                                                         |       |                                                | $          | 32,106 |   |   |   | $ | 61,397 |   |   |   | $ | 34,072 |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Minority interest                                                                  |       |                                                | 63         |   |   |   | 261 |   |   |   | — |   |   |
| Depreciation and amortization                                                      |       |                                                | 14,162     |   |   |   | 10,485 |   |   |   | 7,227 |   |   |
| Amortization of licenses and software development                                  |       |                                                | 112,916    |   |   |   | 121,801 |   |   |   | 126,686 |   |   |
| Loss on disposal of property and equipment                                         |       |                                                | 538        |   |   |   | 48 |   |   |   | 258 |   |   |
| Stock-based compensation                                                           |       |                                                | 3,422      |   |   |   | 806 |   |   |   | 1,764 |   |   |
| Tax benefit related to the exercise of employee stock  options                     |       |                                                | 9,162      |   |   |   | 6,940 |   |   |   | 845 |   |   |
| Deferred income taxes                                                              |       |                                                | 2,082      |   |   |   | 7,569 |   |   |   | 2,858 |   |   |
| Changes in operating  assets and liabilities:                                      |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable, net of allowances                                             |       |                                                | (5,902     | ) |   |   | (8,507 | ) |   |   | (21,766 | ) |   |
| Inventory                                                                          |       |                                                | (5,501     | ) |   |   | (1,015 | ) |   |   | 3,427 |   |   |
| Licenses                                                                           |       |                                                | (13,392    | ) |   |   | (107,679 | ) |   |   | (24,072 | ) |   |
| Software development                                                               |       |                                                | (134,943   | ) |   |   | (92,863 | ) |   |   | (80,803 | ) |   |
| Prepaid expenses and other current assets                                          |       |                                                | 1,970      |   |   |   | (4,362 | ) |   |   | 2,318 |   |   |
| Accounts payable                                                                   |       |                                                | (397       | ) |   |   | 11,205 |   |   |   | (343 | ) |   |
| Accrued and other liabilities                                                      |       |                                                | 22,925     |   |   |   | 73,741 |   |   |   | 16,435 |   |   |
| Income taxes                                                                       |       |                                                | 3,578      |   |   |   | (19,372 | ) |   |   | 2,248 |   |   |
| Net cash provided by operating activities                                          |       |                                                | 42,789     |   |   |   | 60,455 |   |   |   | 71,154 |   |   |
| **INVESTING ACTIVITIES:**                                                          | ** ** |                                                | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Proceeds from sales and maturities of short-term  investments                      |       |                                                | 510,555    |   |   |   | 394,965 |   |   |   | 400,957 |   |   |
| Purchase of short-term investments                                                 |       |                                                | (557,677   | ) |   |   | (431,846 | ) |   |   | (419,782 | ) |   |
| Purchases of long-term marketable securities                                       |       |                                                | —     |   |   |   | — |   |   |   | (24,320 | ) |   |
| Other long-term assets                                                             |       |                                                | (3,366     | ) |   |   | (5,125 | ) |   |   | (70 | ) |   |
| Acquisitions, net of cash acquired                                                 |       |                                                | (12,282    | ) |   |   | (19,234 | ) |   |   | (2,300 | ) |   |
| Purchases of property and equipment                                                |       |                                                | (23,112    | ) |   |   | (16,651 | ) |   |   | (7,638 | ) |   |
| Net cash used in investing activities                                              |       |                                                | (85,882    | ) |   |   | (77,891 | ) |   |   | (53,153 | ) |   |
| **FINANCING ACTIVITIES:**                                                          | ** ** |                                                | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Stock repurchase                                                                   |       |                                                | —     |   |   |   | (9,080 | ) |   |   | (10,994 | ) |   |
| Proceeds from exercise of warrants and stock options                               |       |                                                | 37,787     |   |   |   | 42,844 |   |   |   | 7,121 |   |   |
| Net cash provided by (used in) financing activities                                |       |                                                | 37,787     |   |   |   | 33,764 |   |   |   | (3,873 | ) |   |
| Effect of exchange rate changes on cash                                            |       |                                                | (1,352     | ) |   |   | 605 |   |   |   | 4,079 |   |   |
| Net increase (decrease) in cash and cash equivalents                               |       |                                                | (6,658     | ) |   |   | 16,933 |   |   |   | 18,207 |   |   |
| Cash and cash equivalents—beginning of period                                 |       |                                                | 98,175     |   |   |   | 81,242 |   |   |   | 63,035 |   |   |
| Cash and cash equivalents—end of period                                       |       |                                                | $          | 91,517 |   |   |   | $ | 98,175 |   |   |   | $ | 81,242 |   |   |
| **Supplemental cash flow  information:**                                           | ** ** |                                                | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Cash paid during the period for income taxes                                       |       |                                                | $          | 6,037 |   |   |   | $ | 21,825 |   |   |   | $ | 15,625 |   |   |
| Cash paid during  the period for interest                                          |       |                                                | $          | 155 |   |   |   | $ | 199 |   |   |   | $ | 144 |   |   |

 

----

(1)   See Note 2,“Restatement of Consolidated Financial Statements” in notes to the consolidatedfinancial statements.

See notes to consolidated financial statements.

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**THQ INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**   Description ofBusiness and Summary of Significant Accounting Policies

Wedevelop and publish interactive entertainment software for all popular gamesystems, including:

·       Homevideo game consoles such as Sony PlayStation 2, Microsoft Xbox, and NintendoGameCube, and the next-generation consoles Sony PlayStation 3, Microsoft Xbox360 and Nintendo Wii;

·       Handheldplatforms such as Nintendo Game Boy Advance, Nintendo Dual Screen, PSP portableentertainment system (“PSP system”), wireless devices; and

·       Personalcomputers.

Our titles span a wide range of categories, includingaction, adventure, fighting, racing, role-playing, simulation, sports andstrategy. We have created, licensed and acquired a group of highly recognizablebrands, which we market to a variety of consumer demographics ranging fromproducts targeted at children and the mass-market to products targeted at coregamers. Our portfolio of licensed properties includes the Disney/Pixarproperties*Finding Nemo*, *The Incredibles*, and*Cars*(which is expected to be released globally beginningin North America in June 2006); WorldWrestling Entertainment®; Nickelodeon properties such as SpongeBobSquarePantsTM, Avatar, Fairly OddParentsTM and Nicktoons; BratzTM; Power Rangers; Warhammer® 40,000; andScooby-Doo!TM; as well asothers. We also have licenses to create wireless products based on *Star Wars* and major sports leagues. In addition to licensedproperties, we also publish games based upon owned intellectual properties,including *Company of Heroes, Destroy AllHumans!**TM, JuicedTM, MX*and*Saints RowTM*.

*Principles ofConsolidation.**  *Theconsolidated financial statements include the accounts of THQ Inc. and ourwholly owned and majority owned subsidiaries as well as the venture we havewith JAKKS Pacific, Inc. See “Note 17—Agreement with JAKKS Pacific, Inc.”  The results of operations for acquisitions ofcompanies have been included in the consolidated statements of operationsbeginning on the closing date of acquisition. All material intercompanybalances and transactions have been eliminated in consolidation.

*Pervasiveness ofEstimates.**  *Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.The most significant estimates relate to licenses, software development, theallowance for price protection, returns and doubtful accounts and income taxes.

*Reclassifications.**  *Certainreclassifications have been made to the prior periods consolidated financialstatements to conform to current period consolidated financial statements. Inthe fourth quarter of fiscal 2006, we reclassified warehousing expenses fromselling and marketing to cost of sales. Classification of these expenses as acomponent of cost of sales is a practice that is consistent with others withinour industry. The reclassified warehousing expenses for the fiscal years ended March 31,2006, 2005 and 2004 were $5.7 million, $5.1 million and $5.4 million,respectively.

*Foreign CurrencyTranslation.**  *Assetsand liabilities of foreign operations are translated at current rates ofexchange while results of operations are translated at average rates in effectfor the period. Translation gains or losses are shown as a separate componentof accumulated other comprehensive income (loss). Foreign currency transactiongains and losses result from exchange rate changes for transactions denominatedin currencies other than the functional currency. For the fiscal year ended March 31,2006, 

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foreign currency transaction losses were $0.3 million,and for the fiscal years ended March 31, 2005 and 2004, foreign currencytransaction gains were $2.3 million and $1.4 million, respectively, and areincluded in general and administrative expenses in our consolidated statementsof operations.

*Cash, Cash Equivalents andShort-Term Investments.**  *Weconsider all highly liquid investments with maturities less than three monthswhen purchased to be cash equivalents. Investments with maturities greater thanthree months, but less than one year, when purchased are considered short-terminvestments. Our short-term investments are primarily auction rate securities.These auction rate securities are variable rate bonds tied to short-terminterest rates with maturities on the face of the underlying security in excessof 90 days. Auction rate securities have interest rate resets through amodified Dutch auction at predetermined short-term intervals, typically every7, 28, or 35 days. Interest paid during a given period is based upon theinterest rate determined during the prior auction. Although the securities areissued and rated as long-term bonds, they are priced and traded as short-terminstruments because of the liquidity provided through the interest rate reset.We had $280.1 million and $209.4 million of investments in auction ratesecurities as of March 31, 2006 and March 31, 2005, respectively.These short-term investments are classified as available-for-sale and changesin the fair value are included in accumulated other comprehensive income(loss), net of applicable income taxes, in the consolidated financialstatements. At March 31, 2006, we did not have any short-term investmentsclassified as held to maturity, and at March 31, 2005, our short-terminvestments classified as held to maturity were municipal bonds with maturitydates of less than one year.

*Financial Instruments.**  *Thecarrying value of certain financial instruments, including cash and cashequivalents, short-term investments held to maturity, accounts receivable,accounts payable, accrued expenses and accrued royalties, approximate fairvalue based on their short-term nature. Short-term investments classified asavailable for sale are stated at fair value.

We account for ourderivative and hedging activities under Statements of Financial AccountingStandards (“SFAS”) No. 133, “Accounting for Derivative Instruments andHedging Activities,” as amended. The assets or liabilities associated with ourderivative instruments and hedging activities are recorded at fair value inother current assets or liabilities, respectively, on our consolidated balancesheets. As discussed below, gains and losses resulting from changes in fairvalue are accounted for depending on the use of the derivative and whether itis designated and qualifies for hedge accounting.

We utilize forwardcontracts in order to reduce financial market risks. These instruments are usedto hedge foreign currency exposures of underlying assets, liabilities, orcertain forecasted foreign currency denominated transactions. Our accountingpolicies for these instruments are based on whether they meet the criteria fordesignation as hedging transactions. Changes in fair value of derivatives thatare designated as cash flow hedges, are highly effective, and qualify ashedging instruments, are recorded in other comprehensive income until theunderlying hedged item is recognized in earnings within the financial statementline item consistent with the hedged item. Any ineffective portion of aderivative change in fair value is immediately recognized in earnings. Duringeach of the periods presented we did not have any derivatives that qualify forhedge accounting. Changes in the fair value of derivatives that do not qualifyfor hedge accounting treatment are recorded in earnings. The fair value offoreign currency contracts is estimated based on the forward rate of the varioushedged currencies as of the end of the period. As of March 31, 2006 and2005, we had foreign exchange forward contracts in the notional amount of $60.3million and $35.1 million, respectively. The net gains recognized from foreigncurrency contracts in fiscal 2006 and fiscal 2005 were $493,000 and $682,000,respectively, and are included in general and administrative expense inour consolidated statements of operations. We did not have any gains or lossesfrom foreign currency contracts in fiscal years prior to 2005.

*Allowance for PriceProtection, Returns and Doubtful Accounts.**  *Wederive revenues from sales of packaged software for video game systems andpersonal computers and sales of content and services for 

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wireless devices. Product revenue is recognized net ofallowances for price protection and returns and various customer discounts. Wetypically only allow returns for our personal computer products; however, wemay decide to provide price protection or allow returns for our video gamesystems or personal computer products after we analyze: (1) inventoryremaining in the retail channel, (2) the rate of inventory sell-through inthe retail channel, and (3) our remaining inventory on hand. We maintain apolicy of giving credits for price protection and returns, but do not give cashrefunds. Management uses significant judgment and makes estimates in connectionwith establishing allowances for price protection, returns, and doubtfulaccounts in any accounting period.

*Concentrations of CreditRisk.**  *Financialinstruments which potentially subject us to concentration of credit risk consistprincipally of cash and cash equivalents, short-term investments, accountsreceivable and long-term marketable securities. We place cash and cashequivalents and short-term investments with high credit-quality institutionsand limit the amount of credit exposure to any one institution. We believe thisrisk is immaterial due to the short-term nature of such investments. As of March 31,2006 we did not have any long-term marketable securities. Most of our sales aremade directly to mass merchandisers and national retailers. Due to theincreased volume of sales to these channels, we have experienced an increasedconcentration of credit risk, and as a result, may maintain individuallysignificant receivable balances with such mass merchandisers and nationalretailers. We perform ongoing credit evaluations of our customers, maintain anallowance for potential credit losses, and most of our foreign receivables arecovered by credit insurance. As of March 31, 2006 and 2005, approximately25% and 16%, respectively, of our gross accounts receivable outstanding waswith one major customer. Our largest single customer accounted for 19% of ourgross sales in fiscal 2006, 14% of our gross sales in fiscal 2005 and 19% ofour gross sales in fiscal 2004.

*Inventory.**  *Inventory,which consists principally of finished products, is stated at the lower of cost(moving weighted average) or market. We estimate the net realizable value ofslow-moving inventory on a title by title basis, and charge the excess of costover net realizable value to cost of sales.

*Property and Equipment.**  *Propertyand equipment are recorded at cost. Depreciation is computed using thestraight-line method over the estimated useful lives of the assets. Leaseholdimprovements are depreciated over the shorter of their useful lives or theremaining lease term.

*Licenses.**  *Minimum guaranteed royalty payments forintellectual property licenses are initially recorded on our balance sheet asan asset (licenses) and as a liability (accrued royalties) at the contractualamount upon execution of the contract if no significant performance obligationremains with the licensor. When a significant performance obligation remainswith the licensor, we record royalty payments as an asset (licenses) whenpayable rather than upon execution of the contract. Royalty payments for intellectualproperty licenses are classified as current assets and current liabilities tothe extent such royalty payments relate to anticipated sales during thesubsequent year and long-term assets and long-term liabilities if such royaltypayments relate to anticipated sales after one year.

We evaluate the futurerecoverability of our capitalized licenses on a quarterly basis. Therecoverability of capitalized license costs is evaluated based on the expectedperformance of the specific products in which the licensed trademark orcopyright is to be used. As many of our licenses extend for multiple productsover multiple years, we also assess the recoverability of capitalized licensecosts based on certain qualitative factors such as the success of other productsand/or entertainment vehicles utilizing the intellectual property, whetherthere are any future planned theatrical releases or television series based onthe intellectual property and the rights holder’s continued promotion andexploitation of the intellectual property. Prior to the related product’srelease, we expense, as part of license amortization and royalties, capitalizedlicense costs when we believe such amounts are not recoverable.

Licenses are expensed tolicense amortization and royalties at the higher of (1) the contractualroyalty rate based on actual net product sales related to such license or (2) aneffective rate based upon total projected 

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revenue related to such license. When, in management’sestimate, future cash flows will not be sufficient to recover previouslycapitalized costs, we expense these capitalized costs to license amortizationand royalties. If actual revenues or revised forecasted revenues fall below theinitial forecasted revenues for a particular license, the charge to licenseamortization and royalties expense may be larger than anticipated in any givenquarter. As of March 31, 2006, the net carrying value of our licenses was$81.5 million. If we were required to write off licenses, due to changes inmarket conditions or product acceptance, our results of operations could bematerially adversely affected.

*Software Development.*   Weutilize both internal development teams and third-party software developers todevelop our software. We account for software development costs in accordancewith SFAS No. 86, “Accounting for the Costs of Computer Software to beSold, Leased, or Otherwise Marketed.”  Wecapitalize software development costs once technological feasibility isestablished and we determine that such costs are recoverable against futurerevenues. For products where proven game engine technology exists, this mayoccur early in the development cycle. We capitalize the milestone payments madeto third-party software developers and the direct payroll and overhead costsfor our internal development teams. We evaluate technological feasibility on aproduct-by-product basis. Amounts related to software development for whichtechnological feasibility is not yet met are charged as incurred to productdevelopment expense in our consolidated statements of operations.

On a quarterlybasis, we compare our unamortized software development costs to netrealizable value, on a product-by-product basis. The amount by which anyunamortized software development costs exceed their net realizable value ischarged to software development amortization. The net realizable value is the estimatedfuture gross revenues from the product, reduced by the estimated futurecosts of completing the product.

Commencing upon productrelease, capitalized software development costs are amortized to softwaredevelopment amortization based on the ratio of current revenues to totalprojected revenues. If actual revenues, or revised projected revenues, fallbelow the initial projections, the charge to software development amortizationmay be larger than anticipated in any given quarter. As of March 31, 2006,the net carrying value of our software development was $109.1 million.

The milestone paymentsmade to our third-party developers during their development of our games aretypically considered non-refundable advances against the total compensationthey can earn based upon the sales performance of the products. Any additionalcompensation earned beyond the milestone payments are expensed to softwaredevelopment amortization as earned.

*Goodwill and OtherIntangible Assets.**  *Inaccordance with our accounting policy, we performed an annual review ofgoodwill for impairment during the quarter ended June 30, 2005, and foundno impairment. We will perform a similar review in future quarters ended June 30,or more frequently if indicators of potential impairment exist. Our impairmentreview process is based on a discounted future cash flow approach that uses ourestimates of revenue for the reporting units, driven by assumed success of ourproducts and product release schedules, and estimated costs as well asappropriate discount rates. These estimates are consistent with the plans andestimates that we use to manage the underlying businesses. We performed similarimpairment tests during the quarter ended June 30, 2005 for indefinite-livedintangible assets and found no impairment. All identifiable intangible assetswith finite lives will continue to be amortized over their estimated usefullives and assessed for impairment under SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.”

*Revenue Recognition.**  *Ourrevenue recognition policies are in compliance with American Institute ofCertified Public Accountants Statement of Position (“SOP”) 97-2, “SoftwareRevenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions,” whichprovide guidance on generally accepted accounting principles for recognizingrevenue on software transactions, and Staff Accounting Bulletin (“SAB”) No. 104,“Revenue Recognition 

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in Financial Statements,”which outlines the basic criteria that must be met to recognize revenue andprovides guidance for presentation of revenue and for disclosure related torevenue recognition policies in financial statements filed with the Securitiesand Exchange Commission (“SEC”).

Product Sales:   Werecognize revenue for packaged software when title and risk of loss transfersto the customer, provided that no significant vendor support obligations remainoutstanding and that collection of the resulting receivable is deemed probableby management. Although we generally sell our products on a no-return basis, incertain circumstances we may allow price protection, returns or otherallowances on a negotiated basis. We estimate such price protection, returns orother allowances based upon management’s evaluation of our historicalexperience, retailer inventories, the nature of the titles and other factors.Such estimates are deducted from gross sales. See “Note 4—Allowance for PriceProtection, Returns and Doubtful Accounts.” Software is sold under a limited 90-daywarranty against defects in material and workmanship. To date, we have notexperienced material warranty claims.

Software Licenses:   Forthose agreements that provide the customers the right to multiple copies inexchange for guaranteed minimum royalty amounts, revenue is recognized atdelivery of the product master or the first copy. Per copy royalties on salesthat exceed the guarantee are recognized as earned. Revenue from the licensingof software for the fiscal years ended March 31, 2006, 2005 and 2004 was$6.3 million, $8.1 million and $8.3 million, respectively.

Wireless Revenue:   Werecognize wireless revenues principally from the sale or subscription of ourapplications to wireless subscribers under distribution agreements withwireless carriers in the period in which the applications are purchased by thesubscribers, assuming that: fees are fixed and determinable; we have nosignificant obligations remaining and collection of the related receivable isreasonably assured. In accordance with the distribution agreements, thewireless carriers are responsible for billing, collecting and remitting ourfees to us. The wireless carriers generally report the final sales data to uswithin 10 to 45 days following the end of each month. When final salesdata is not available in a timely manner for reporting purposes, we estimateour revenues based on available sales data and historical trends. We willrecord differences between estimated revenues and actual revenues in the nextreporting period once the actual amounts are determined.

Also, in accordance withEmerging Issues Task Force (“EITF”) No. 99-19, “Reporting RevenueGross as a Principal Versus Net as an Agent,” we recognize as revenues the netamount the wireless carrier pays to us upon the sale of our applications, netof any service or other fees earned and deducted by the wireless carrier.

*Advertising.**  *Advertisingand sales promotion costs are generally expensed as incurred, except fortelevision airtime and print media costs associated with media campaigns, whichare deferred and charged to expense in the period the airtime or advertisingspace is used for the first time. Advertising costs for the fiscal years ended March 31,2006, 2005 and 2004 were $61 million, $57 million and $45.3 million,respectively.

*Employee Stock-BasedCompensation.**  *UnderSFAS No. 123 “Accounting for Stock-Based Compensation,” compensationexpense is recorded for the issuance of employee stock-based compensation,including stock options and restricted stock, based on the fair value of theemployee stock-based compensation on the date of grant or measurement date.Alternatively, SFAS No. 123 allows companies to continue to account forthe issuance of employee stock-based compensation in accordance with AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees.” Under APB Opinion No. 25, compensation expense is recorded foremployee stock-based compensation based on the intrinsic value of the employeestock-based compensation on the date of grant or measurement date. Under theintrinsic value method, compensation expense is recorded on the date of grantor measurement date only if the current market price of the underlying stockexceeds the employee stock-based compensation exercise price. We account forour employee stock-based compensation under 

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therecognition and measurement principles of APB Opinion No. 25 and relatedinterpretations. The following table illustrates the effect on net income andearnings per share if we had applied the fair value recognition provisions ofSFAS No. 123 to employee stock-based compensation (in thousands, exceptper share data):

| ** **                                                                                                                                    | ** ** | **Fiscal Year Ended March 31, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **As previously  reported**                              | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Net income—as  reported                                                                                                                  |       |                                                          | $          | 34,269 |   |   |   | $ | (2,163 | ) |   |   | $ | 32,106 |   |   |
| Add: Stock-based employee compensation expense  included in reported net income, net of related tax benefit                                   |       |                                                          | 1,153      |   |   |   | 1,243 |   |   |   | 2,396 |   |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax benefit |       |                                                          | (13,389    | ) |   |   | 258 |   |   |   | (13,131 | ) |   |
| Net income—pro  forma                                                                                                                    |       |                                                          | $          | 22,033 |   |   |   | $ | (662 | ) |   |   | $ | 21,371 |   |   |
| Earnings per  share:                                                                                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Basic—as reported                                                                                                                        |       |                                                          | $          | 0.55 |   |   |   | $ | (0.04 | ) |   |   | $ | 0.51 |   |   |
| Basic—pro forma                                                                                                                          |       |                                                          | $          | 0.35 |   |   |   | $ | (0.01 | ) |   |   | $ | 0.34 |   |   |
| Diluted—as reported                                                                                                                      |       |                                                          | $          | 0.52 |   |   |   | $ | (0.03 | ) |   |   | $ | 0.49 |   |   |
| Diluted—pro forma                                                                                                                        |       |                                                          | $          | 0.34 |   |   |   | $ | (0.01 | ) |   |   | $ | 0.33 |   |   |

 

| ** **                                                                                                                                    | ** ** | **Fiscal Year Ended March 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **As previously  reported**                              | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Net income—as  reported                                                                                                                  |       |                                                          | $          | 62,790 |   |   |   | $ | (1,393 | ) |   |   | $ | 61,397 |   |   |
| Add: Stock-based employee compensation expense  included in reported net income, net of related tax benefit                                   |       |                                                          | —     |   |   |   | 595 |   |   |   | 595 |   |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax benefit |       |                                                          | (12,996    | ) |   |   | (4,062 | ) |   |   | (17,058 | ) |   |
| Net income—pro forma                                                                                                                     |       |                                                          | $          | 49,794 |   |   |   | $ | (4,860 | ) |   |   | $ | 44,934 |   |   |
| Earnings per  share:                                                                                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Basic—as reported                                                                                                                        |       |                                                          | $          | 1.07 |   |   |   | $ | (0.02 | ) |   |   | $ | 1.05 |   |   |
| Basic—pro forma                                                                                                                          |       |                                                          | $          | 0.85 |   |   |   | $ | (0.08 | ) |   |   | $ | 0.77 |   |   |
| Diluted—as reported                                                                                                                      |       |                                                          | $          | 1.04 |   |   |   | $ | (0.02 | ) |   |   | $ | 1.02 |   |   |
| Diluted—pro forma                                                                                                                        |       |                                                          | $          | 0.82 |   |   |   | $ | (0.07 | ) |   |   | $ | 0.75 |   |   |

 

| ** **                                                                                                                                    | ** ** | **Fiscal Year Ended March 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **As previously  reported**                              | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Net income—as  reported                                                                                                                  |       |                                                          | $          | 35,839 |   |   |   | $ | (1,767 | ) |   |   | $ | 34,072 |   |   |
| Add: Stock-based employee compensation expense  included in reported net income, net of related tax benefit                                   |       |                                                          | 54         |   |   |   | 1,235 |   |   |   | 1,289 |   |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax benefit |       |                                                          | (14,890    | ) |   |   | (1,553 | ) |   |   | (16,443 | ) |   |
| Net income—pro  forma                                                                                                                    |       |                                                          | $          | 21,003 |   |   |   | $ | (2,085 | ) |   |   | $ | 18,918 |   |   |
| Earnings per share:                                                                                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Basic—as reported                                                                                                                        |       |                                                          | $          | 0.63 |   |   |   | $ | (0.04 | ) |   |   | $ | 0.59 |   |   |
| Basic—pro forma                                                                                                                          |       |                                                          | $          | 0.37 |   |   |   | $ | (0.04 | ) |   |   | $ | 0.33 |   |   |
| Diluted—as reported                                                                                                                      |       |                                                          | $          | 0.61 |   |   |   | $ | (0.03 | ) |   |   | $ | 0.58 |   |   |
| Diluted—pro forma                                                                                                                        |       |                                                          | $          | 0.36 |   |   |   | $ | (0.04 | ) |   |   | $ | 0.32 |   |   |

 

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The fair value of optionsgranted under the stock option plans during the fiscal years ended March 31,2006, 2005 and 2004, respectively, has been estimated at the date of grantusing a Black-Scholes option pricing model with the following weighted averageassumptions:

| ** **                                | ** ** | **Fiscal Year Ended March 31** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Dividend yield                            |       | 0                                                  | %          | 0 | % | 0 | % |
| Anticipated  volatility                   |       | 51                                                 | %          | 57 | % | 69 | % |
| Weighted average  risk-free interest rate |       | 4.11                                               | %          | 3.48 | % | 2.60 | % |
| Expected lives                            |       | 3 years                                            |       | 4 years |   | 4 years |   |

 

The Black-Scholes optionpricing model requires the input of highly subjective assumptions, includingthe expected stock price volatility. For purposes of the above pro formadisclosure, the fair value of employee stock-based compensation granted isamortized over the period(s) in which the related employee services arerendered. Accordingly, the pro forma stock-based compensation cost for anyperiod will typically relate to awards granted in both the current period andprior periods.

We have granted commonstock warrants to non-employees in connection with the acquisition of licensingrights for intellectual property. In accordance with EITF No. 96-18,“Accounting for Equity Instruments that are Issued to Other Than Employees forAcquiring or in Connection with Selling Goods or Services,” the fair value ofcommon stock warrants granted is determined as of the measurement date and iscapitalized, expensed and amortized consistent with our policies relating tolicense costs.

*Income Taxes.**  *Deferredincome taxes are provided for temporary differences between the financialstatement and income tax bases of our assets and liabilities, based on enactedtax rates. A valuation allowance is provided when it is more likely than notthat some portion or all of the deferred income tax assets will not berealized.

*Basic and Diluted EarningsPer Share.**  *Basicearnings per share is computed by dividing net income by the weighted averagenumber of common shares outstanding for the period. Diluted earnings per shareis computed by dividing net income by the weighted average number of commonshares outstanding for the period, increased by common stock equivalents.Common stock equivalents are calculated using the treasury stock method andrepresent incremental shares issuable upon exercise of our outstanding optionsand warrants and, if applicable in the period, conversion of our convertibledebt. However, potential common shares are not included in the denominator ofthe diluted earnings per share calculation when inclusion of such shares wouldbe anti-dilutive, such as in a period in which a net loss is recorded.

*Recently Issued AccountingPronouncements.**  *InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), arevision of SFAS No. 123. SFAS No. 123R requires companiesto, among other things, measure all employee stock-based compensation awardsusing a fair value method and record the expense in their consolidated financialstatements. The provisions of SFAS No. 123R, SEC SAB No. 107,“Share-Based Payment” and other related clarifying pronouncements, areeffective no later than the beginning of the next fiscal year that begins afterJune 15, 2005. We will adopt the new requirements in our fiscal yearbeginning April 1, 2006 using the modified prospective transition method,wherein prior period amounts will not be restated. In addition to therecognition of expense in the financial statements, under SFAS No. 123R,any excess tax benefits received upon exercise of options will be presented asa financing activity inflow rather than as an adjustment of operating activityas currently presented. Based on our current analysis and information,management has determined the adoption of SFAS No. 123R will have amaterial impact on our consolidated results of operations and earnings pershare. We expect the adoption of SFAS No. 123R will result in amounts thatare similar to our current pro forma disclosures under SFAS No. 123.

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In November 2005, the FASB issued Staff Position No. FAS 115-1,“The Meaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments” (“FSP No. 115-1”). FSP No. 115-1provides accounting guidance for identifying and recognizing other-than-temporaryimpairments of debt and equity securities, as well as cost method investmentsin addition to disclosure requirements. FSP No. 115-1 iseffective for reporting periods beginning after December 15, 2005,although earlier application is permitted. We adopted FSP No. 115-1in our fiscal fourth quarter beginning January 1, 2006, and this adoptiondid not have a material impact on our consolidated results of operations andearnings per share.

**2.**   **Restatement of Consolidated Financial Statements**

Subsequent to the issuance of our fiscal 2006consolidated financial statements and as a result of an internal review of ourhistorical stock option grant practices and based on the conclusions of anindependent investigation by a Special Committee of our Board of Directors, wehave concluded that incorrect measurement dates were previously used forfinancial accounting and reporting purposes on a number of occasions.

As a result, we have restated our consolidated balancesheets as of March 31, 2006 and 2005, and the related consolidatedstatements of operations, stockholders’ equity, and cash flows for each of thefiscal years ended March 31, 2006, 2005, and 2004.

We have recorded additional non-cash stock-basedcompensation expense and related tax effects with regard to past stock optiongrants from amounts previously reported. These adjustments, after tax,aggregate to $10.8 million for the period from January 1, 1996 through March 31,2006. The adjustments, after tax, for fiscal years 2006, 2005 and 2004 were$2.2 million, $1.4 million and $1.8 million, respectively.

The nature of our accounting errors were primarily inone of the following three categories of option grants:

*Company-Wide Stock OptionGrants not Determined with Finality.*   The SpecialCommittee determined that, in connection with certain company-wide stock optiongrants that we made to non-executive employees in various years, we usedincorrect measurement dates for accounting and reporting purposes because thelist of grantees and the options awarded to each grantee was not determinedwith finality until a date subsequent to the measurement dates we previouslyused. In most such situations, our practice was to set the exercise price forthe option at the closing price of our common stock on the date theCompensation Committee of the Board delegated authority to our Chief ExecutiveOfficer to award up to a specified aggregate number of options, which was priorto the date that the list of grantees and the options awarded to each granteewas finalized by the Chief Executive Officer. We have recognized additionalstock-based compensation expense of $6.7 million for the period from January 1,1996 through March 31, 2006 related to this type of error.

*Stock Option Grants Pricedusing Previous Day Closing Price.**  *The Special Committee determinedthat in three instances throughout 1998 and 1999, the exercise price was set atthe closing price of our common stock on the day prior to the Compensation Committeemeeting where such grants were made. Our option plans in effect at the timestated that the grant price could not be less than the fair market value of theoption on the date of grant, which was defined in the plans as the closingprice of our common stock on the date of grant.  The Special Committee therefore determinedthat the measurement date used for accounting purposes should be the date ofthe meeting. We have recognized additional stock-based compensation expense of$1.8 million for the period from January 1, 1996 through March 31,2006 related to this type of error.

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*Incorrect MeasurementDates for New Hire Stock Option Grants.**  *The Special Committee alsoidentified accounting errors related to our new hire stock option grantpractices. The Special Committee determined that our new hire stock optiongranting practice, primarily for our international employees, resulted in ameasurement date for accounting purposes that was subsequent to the date thatwe had previously used for accounting purposes. These errors occurred becausethe details of stock option grants to international employees were notcontained in offer letters and in most cases the number of options theindividual was entitled to receive was determined after his or her start date.There were also some instances where grants were made to employees prior to thedate they started providing services to the Company, generally because theemployee had accepted an employment offer and his or her name was placed on agrant list that was then approved prior to his or her actual start date. Wehave recognized additional stock-based compensation expense of $1.6 million forthe period from January 1, 1996 through March 31, 2006 related tothese types of errors.

Theincremental impact, per fiscal year, from recognizing additional stock-basedcompensation expense and related payroll tax expenses resulting from theinvestigation of our historical stock option grant practices is as follows (inthousands):

| **Fiscal Year**      | ** ** | ** ** | ** ** | **Pre-Tax  Expense** | ** ** | **After Tax  Expense** | ** ** |
|---------------------------|------------|------------|------------|----------------------|------------|-----------------------------|------------|
| 1996                      |       | $          | 52         |                 | $          | 52                          |       |
| 1997                      |       | 273        |       | 229                  |       |
| 1998                      |       | 817        |       | 578                  |       |
| 1999                      |       | 767        |       | 555                  |       |
| 2000                      |       | 861        |       | 654                  |       |
| 2001                      |       | 1,739      |       | 1,293                |       |
| 2002                      |       | 2,440      |       | 1,802                |       |
| Transition  2003(1)       |       | 408        |       | 304                  |       |
| Total 1996 - 2003  impact |       | 7,357      |       | 5,467                |       |
| 2004                      |       | 2,101      |       | 1,767                |       |
| 2005                      |       | 1,362      |       | 1,393                |       |
| 2006                      |       | 2,442      |       | 2,163                |       |
|                      |       | $          | 13,262     |                 | $          | 10,790                      |       |

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Notes:

(1)          Effective January 1,2003, we changed our fiscal year end from December 31 to March 31.The change resulted in a three-month transitional period ended March 31,2003. References to Transition 2003, unless otherwise indicated, refer to thethree-month transitional period ended March 31, 2003.

Additionally, we have restated the pro forma expenseunder Statement of Financial Accounting Standards (“SFAS”) No. 123 in Note1.

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Thefollowing tables set forth the effects of the adjustments on our ConsolidatedBalance Sheets as of March 31, 2006 and 2005 and our ConsolidatedStatements of Operations and Consolidated Statements of Cash Flows for theyears ended March 31, 2006, 2005 and 2004:

**CONSOLIDATED BALANCE SHEET DATA**

| ** **                                                         | ** ** | **As of March 31, 2006** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------|------------|
| **(In thousands, except per share data)** | ** ** | ** **                                   | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Income taxes  receivable                                           |       |                                         | $          | 6,832 |   |   |   | $ | (2,146 | ) |   |   | $ | 4,686 |   |   |
| Total current  assets                                              |       |                                         | 611,077    |   |   |   | (2,146 | ) |   |   | 608,931 |   |   |
| Total assets                                                       |       |                                         | 850,614    |   |   |   | (2,146 | ) |   |   | 848,468 |   |   |
| Accrued and other  current liabilities                             |       |                                         | 109,421    |   |   |   | 1,503 |   |   |   | 110,924 |   |   |
| Total current  liabilities                                         |       |                                         | 147,870    |   |   |   | 1,503 |   |   |   | 149,373 |   |   |
| Deferred income  taxes, net of current portion                     |       |                                         | 10,272     |   |   |   | (591 | ) |   |   | 9,681 |   |   |
| Additional  paid-in capital                                        |       |                                         | 397,693    |   |   |   | 7,732 |   |   |   | 405,425 |   |   |
| Retained earnings                                                  |       |                                         | 222,107    |   |   |   | (10,790 | ) |   |   | 211,317 |   |   |
| Total  stockholders’ equity                                   |       |                                         | 630,809    |   |   |   | (3,058 | ) |   |   | 627,751 |   |   |
| Total liabilities and  stockholders’ equity                   |       |                                         | 850,614    |   |   |   | (2,146 | ) |   |   | 848,468 |   |   |
|                                                                    |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                                         | ** ** | **As of March 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------|------------|
| **(In thousands, except per share data)** | ** ** | ** **                                   | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Income taxes  receivable                                           |       |                                         | $          | 9,783 |   |   |   | $ | (787 | ) |   |   | $ | 8,996 |   |   |
| Total current  assets                                              |       |                                         | 522,559    |   |   |   | (787 | ) |   |   | 521,772 |   |   |
| Total assets                                                       |       |                                         | 747,393    |   |   |   | (787 | ) |   |   | 746,606 |   |   |
| Accrued and other  current liabilities                             |       |                                         | 77,532     |   |   |   | 837 |   |   |   | 78,369 |   |   |
| Total current  liabilities                                         |       |                                         | 120,872    |   |   |   | 837 |   |   |   | 121,709 |   |   |
| Deferred income  taxes, net of current portion                     |       |                                         | 4,466      |   |   |   | (624 | ) |   |   | 3,842 |   |   |
| Additional  paid-in capital                                        |       |                                         | 347,462    |   |   |   | 7,627 |   |   |   | 355,089 |   |   |
| Retained earnings                                                  |       |                                         | 187,838    |   |   |   | (8,627 | ) |   |   | 179,211 |   |   |
| Total  stockholders’ equity                                   |       |                                         | 548,758    |   |   |   | (1,000 | ) |   |   | 547,758 |   |   |
| Total liabilities and  stockholders’ equity                   |       |                                         | 747,393    |   |   |   | (787 | ) |   |   | 746,606 |   |   |
|                                                                    |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

73

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**CONSOLIDATED STATEMENT OF OPERATIONS DATA**

| ** **                                                         | ** ** | **Fiscal Year Ended March 31, 2006** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(In thousands, except per share data)** | ** ** | ** **                                                    | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Product development                                                |       |                                                          | $          | 84,242 |   |   |   | $ | 1,081 |   |   |   | $ | 85,323 |   |   |
| Selling and  marketing                                             |       |                                                          | 123,552    |   |   |   | 374 |   |   |   | 123,926 |   |   |
| General and  administrative                                        |       |                                                          | 67,615     |   |   |   | 721 |   |   |   | 68,336 |   |   |
| Total costs and  expenses                                          |       |                                                          | 772,806    |   |   |   | 2,176 |   |   |   | 774,982 |   |   |
| Income from  operations                                            |       |                                                          | 33,754     |   |   |   | (2,176 | ) |   |   | 31,578 |   |   |
| Interest income                                                    |       |                                                          | 8,478      |   |   |   | (266 | ) |   |   | 8,212 |   |   |
| Income before  income taxes and minority interest                  |       |                                                          | 42,232     |   |   |   | (2,442 | ) |   |   | 39,790 |   |   |
| Income taxes                                                       |       |                                                          | 7,900      |   |   |   | (279 | ) |   |   | 7,621 |   |   |
| Income before  minority interest                                   |       |                                                          | 34,332     |   |   |   | (2,163 | ) |   |   | 32,169 |   |   |
| Net income                                                         |       |                                                          | 34,269     |   |   |   | (2,163 | ) |   |   | 32,106 |   |   |
| Net income per share—basic                                    |       |                                                          | $          | 0.55 |   |   |   | $ | (0.04 | ) |   |   | $ | 0.51 |   |   |
| Net income per  share—diluted                                 |       |                                                          | $          | 0.52 |   |   |   | $ | (0.03 | ) |   |   | $ | 0.49 |   |   |
| Shares used in  per share calculation—basic                   |       |                                                          | 62,615     |   |   |   | — |   |   |   | 62,615 |   |   |
| Shares used in  per share calculation—diluted                 |       |                                                          | 65,575     |   |   |   | (55 | ) |   |   | 65,520 |   |   |
|                                                                    |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                                         | ** ** | **Fiscal Year Ended March 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(In thousands, except per share data)** | ** ** | ** **                                                    | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Product development                                                |       |                                                          | $          | 72,959 |   |   |   | $ | 678 |   |   |   | $ | 73,637 |   |   |
| Selling and  marketing                                             |       |                                                          | 110,514    |   |   |   | 213 |   |   |   | 110,727 |   |   |
| General and  administrative                                        |       |                                                          | 54,831     |   |   |   | 322 |   |   |   | 55,153 |   |   |
| Total costs and  expenses                                          |       |                                                          | 682,813    |   |   |   | 1,213 |   |   |   | 684,026 |   |   |
| Income from  operations                                            |       |                                                          | 73,918     |   |   |   | (1,213 | ) |   |   | 72,705 |   |   |
| Interest income                                                    |       |                                                          | 4,337      |   |   |   | (149 | ) |   |   | 4,188 |   |   |
| Income before  income taxes and minority interest                  |       |                                                          | 78,255     |   |   |   | (1,362 | ) |   |   | 76,893 |   |   |
| Income taxes                                                       |       |                                                          | 15,204     |   |   |   | 31 |   |   |   | 15,235 |   |   |
| Income before  minority interest                                   |       |                                                          | 63,051     |   |   |   | (1,393 | ) |   |   | 61,658 |   |   |
| Net income                                                         |       |                                                          | 62,790     |   |   |   | (1,393 | ) |   |   | 61,397 |   |   |
| Net income per share—basic                                    |       |                                                          | $          | 1.07 |   |   |   | $ | (0.02 | ) |   |   | $ | 1.05 |   |   |
| Net income per  share—diluted                                 |       |                                                          | $          | 1.04 |   |   |   | $ | (0.02 | ) |   |   | $ | 1.02 |   |   |
| Shares used in  per share calculation—basic                   |       |                                                          | 58,545     |   |   |   | — |   |   |   | 58,545 |   |   |
| Shares used in per share  calculation—diluted                 |       |                                                          | 60,365     |   |   |   | 2 |   |   |   | 60,367 |   |   |
|                                                                    |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

74

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| ** **                                                         | ** ** | **Fiscal Year Ended March 31, 2004** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(In thousands, except per share data)** | ** ** | ** **                                                    | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Product development                                                |       |                                                          | $          | 36,850 |   |   |   | $ | 908 |   |   |   | $ | 37,758 |   |   |
| Selling and  marketing                                             |       |                                                          | 87,119     |   |   |   | 545 |   |   |   | 87,664 |   |   |
| General and  administrative                                        |       |                                                          | 47,006     |   |   |   | 603 |   |   |   | 47,609 |   |   |
| Total costs and  expenses                                          |       |                                                          | 591,988    |   |   |   | 2,056 |   |   |   | 594,044 |   |   |
| Income from  operations                                            |       |                                                          | 48,858     |   |   |   | (2,056 | ) |   |   | 46,802 |   |   |
| Interest income                                                    |       |                                                          | 2,378      |   |   |   | (45 | ) |   |   | 2,333 |   |   |
| Income before  income taxes and minority interest                  |       |                                                          | 55,236     |   |   |   | (2,101 | ) |   |   | 53,135 |   |   |
| Income taxes                                                       |       |                                                          | 19,397     |   |   |   | (334 | ) |   |   | 19,063 |   |   |
| Income before  minority interest                                   |       |                                                          | 35,839     |   |   |   | (1,767 | ) |   |   | 34,072 |   |   |
| Net income                                                         |       |                                                          | 35,839     |   |   |   | (1,767 | ) |   |   | 34,072 |   |   |
| Net income per share—basic                                    |       |                                                          | $          | 0.63 |   |   |   | $ | (0.04 | ) |   |   | $ | 0.59 |   |   |
| Net income per  share—diluted                                 |       |                                                          | $          | 0.61 |   |   |   | $ | (0.03 | ) |   |   | $ | 0.58 |   |   |
| Shares used in  per share calculation—basic                   |       |                                                          | 57,279     |   |   |   | — |   |   |   | 57,279 |   |   |
| Shares used in per share  calculation—diluted                 |       |                                                          | 58,506     |   |   |   | 99 |   |   |   | 58,605 |   |   |
|                                                                    |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The effects of theadjustments on our Condensed Consolidated Statements of Operations for each ofthe quarters in fiscal years 2006 and 2005 is contained in Note 20—QuarterlyFinancial Data (Unaudited).

**CONSOLIDATED STATEMENT OF CASH FLOWS DATA**

| ** **                                                     | ** ** | **Fiscal Year Ended March 31, 2006** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(In thousands)**                                        | ** ** | ** **                                                    | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| **OPERATING  ACTIVITIES:**                                     | ** ** |                                                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income                                                     |       |                                                          | $          | 34,269 | ** ** |   |   | $ | (2,163 | ) |   |   | $ | 32,106 | ** ** |   |
| Stock-based compensation                                       |       |                                                          | 1,867      | ** ** |   |   | 1,555 |   |   |   | 3,422 | ** ** |   |
| Tax benefit  related to the exercise of employee stock options |       |                                                          | 10,612     | ** ** |   |   | (1,450 | ) |   |   | 9,162 | ** ** |   |
| Deferred income  taxes                                         |       |                                                          | 2,050      | ** ** |   |   | 32 |   |   |   | 2,082 | ** ** |   |
| Accrued and other  liabilities                                 |       |                                                          | 22,259     | ** ** |   |   | 666 |   |   |   | 22,925 | ** ** |   |
| Income taxes                                                   |       |                                                          | 2,218      | ** ** |   |   | 1,360 |   |   |   | 3,578 | ** ** |   |
|                                                                |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                                     | ** ** | **Fiscal Year Ended March 31, 2005** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(In thousands)**                                        | ** ** | ** **                                                    | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| **OPERATING ACTIVITIES:**                                      | ** ** |                                                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income                                                     |       |                                                          | $          | 62,790 |   |   |   | $ | (1,393 | ) |   |   | $ | 61,397 |   |   |
| Stock-based  compensation                                      |       |                                                          | —     |   |   |   | 806 |   |   |   | 806 |   |   |
| Tax benefit  related to the exercise of employee stock options |       |                                                          | 6,640      |   |   |   | 300 |   |   |   | 6,940 |   |   |
| Deferred income  taxes                                         |       |                                                          | 7,442      |   |   |   | 127 |   |   |   | 7,569 |   |   |
| Accrued and other  liabilities                                 |       |                                                          | 73,309     |   |   |   | 432 |   |   |   | 73,741 |   |   |
| Income taxes                                                   |       |                                                          | (19,100    | ) |   |   | (272 | ) |   |   | (19,372 | ) |   |
|                                                                |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

75

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| ** **                                                     | ** ** | **Fiscal Year Ended March 31, 2004** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(In thousands)**                                        | ** ** | ** **                                                    | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| **OPERATING ACTIVITIES:**                                      | ** ** |                                                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income                                                     |       |                                                          | $          | 35,839 | ** ** |   |   | $ | (1,767 | ) |   |   | $ | 34,072 | ** ** |   |
| Stock-based  compensation                                      |       |                                                          | 84         | ** ** |   |   | 1,680 |   |   |   | 1,764 | ** ** |   |
| Tax benefit  related to the exercise of employee stock options |       |                                                          | 2,367      | ** ** |   |   | (1,522 | ) |   |   | 845 | ** ** |   |
| Deferred income  taxes                                         |       |                                                          | 2,464      | ** ** |   |   | 394 |   |   |   | 2,858 | ** ** |   |
| Accrued and other  liabilities                                 |       |                                                          | 16,052     | ** ** |   |   | 383 |   |   |   | 16,435 | ** ** |   |
| Income taxes                                                   |       |                                                          | 1,416      | ** ** |   |   | 832 |   |   |   | 2,248 | ** ** |   |
|                                                                |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**3.**   Cash,Cash Equivalents and Short-Term Investments

Cash,cash equivalents and short-term investments at March 31, 2006 and 2005consist of the following (in thousands):

| ** **                                         | ** ** | **March 31,** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|
| ** **                                         | ** ** | **2006**           | ** ** | **2005** | ** ** |
| Cash and cash  equivalents                         |       | $                  | 91,517     |   | $ | 98,175 |   |
| Short-term  investments:                           |       |               |       |   |   |
| Available-for-sale securities:                     |       |               |       |   |   |
| Corporate notes and bonds                          |       | 19,000             |       | 23,200 |   |
| Municipal securities                               |       | 261,120            |       | 186,178 |   |
|                                               |       | 280,120            |       | 209,378 |   |
| Held-to-maturity securities:                       |       |               |       |   |   |
| Municipal securities                               |       | —             |       | 23,620 |   |
|                                               |       | —             |       | 23,620 |   |
| Total short-term investments                       |       | 280,120            |       | 232,998 |   |
| Cash, cash equivalents  and short-term investments |       | $                  | 371,637    |   | $ | 331,173 |   |

 

As of March 31, 2006 and 2005, we did not haveany unrealized gains or losses on our available-for-sale or held-to-maturitysecurities.

There were no realized gains or (losses) from sales ofavailable-for-sale securities in fiscal 2006, and realized gains from sales ofavailable-for-sale securities were $130,000 and $126,000 for fiscal 2005 and2004, respectively. There were no unrealized gains or (losses) fromavailable-for-sale securities for fiscal 2006, 2005 and 2004 except for Yuke’sCo., Ltd. (“Yuke’s”) which is classified as available-for-sale and is includedin other long-term assets (see “Note 9—Other Long-Term Assets”).

In the fourth quarter offiscal 2006 we changed the presentation of our proceeds from sales andmaturities of short-term investments and purchases of short-terminvestments in our consolidated statements of cash flows. The statements ofcash flows presented in these financial statements presents the grossamount of these transactions during each of the three years ended March 31,2006, whereas previously reported statements of cash flows presented theseactivities at a net transactional level. As a result, the amounts reported inthese financial statements for our proceeds from sales and maturitiesof short-term investments and purchases of short-term investments arehigher than previously reported. The change in presentation does not impact thenet proceeds from sales and maturities of short-term investments andpurchases of short-term investments, our cash flow from investing activities orour overall change in cash and cash equivalents.

76

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**4.**   Allowancefor Price Protection, Returns and Doubtful Accounts

Theallowance for price protection, returns and doubtful accounts at March 31,2006 and 2005 consists of the following (in thousands): 

| ** **                                                             | ** ** | **Fiscal Year Ended March 31,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Beginning balance                                                      |       | $                                                   | (58,120    | ) | $ | (52,426 | ) | $ | (43,406 | ) |
| Provision for  price protection, returns and doubtful accounts         |       | (169,480                                            | )          | (106,504 | ) | (120,982 | ) |
| Actual deductions  for price protection, returns and doubtful accounts |       | 169,780                                             |       | 100,810 |   | 111,962 |   |
| Ending balance                                                         |       | $                                                   | (57,820    | ) | $ | (58,120 | ) | $ | (52,426 | ) |

 

**5.**   BalanceSheet Details

*Inventory.**  *Inventory at March 31, 2006 and 2005 consists ofthe following (in thousands):

| ** **     | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
|----------------|------------|--------------------------|------------|--------------------------|------------|
| Raw material   |       |                     | $          | 1,530                    |       |   |   | $ | 1,825 |   |   |
| Finished goods |       |                     | 27,090     |                     |       |   | 21,977 |   |   |
| Inventory      |       |                     | $          | 28,620                   |       |   |   | $ | 23,802 |   |   |

 

*Propertyand Equipment.*   Propertyand equipment at March 31, 2006 and 2005 consists of the following (inthousands):

| ** **                         | ** ** | **Useful  Lives** | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
|------------------------------------|------------|-------------------|------------|--------------------------|------------|--------------------------|------------|
| Building                           |       | 30  yrs           |       | $                        | 719        |                     | $          | 719 |   |
| Land                               |       | —            |       | 401                      |       | 401                      |       |
| Computer  equipment and software   |       | 3-10  yrs         |       | 44,776                   |       | 45,254                   |       |
| Furniture,  fixtures and equipment |       | 5  yrs            |       | 7,324                    |       | 5,842                    |       |
| Leasehold  improvements            |       | 3-6  yrs          |       | 7,847                    |       | 4,221                    |       |
| Automobiles                        |       | 2-5  yrs          |       | 128                      |       | 162                      |       |
|                               |       |              |       | 61,195                   |       | 56,599                   |       |
| Less: accumulated  depreciation    |       |              |       | (23,710                  | )          | (29,777                  | )          |
|                               |       |              |       | $                        | 37,485     |                     | $          | 26,822 |   |

 

Depreciation expense associated with property andequipment amounted to $11.7 million, $8.6 million and $6.7 million for thefiscal years ended March 31, 2006, 2005 and 2004, respectively.

*Accruedand Other Current Liabilities.**  *Accruedand other current liabilities at March 31, 2006 and 2005 consist of thefollowing (in thousands):

| ** **                            | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
|---------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                            | ** ** | **As restated(1)**  | ** ** | **As restated(1)**  | ** ** |
| Accrued  liabilities                  |       |                     | $          | 34,194                   |       |   |   | $ | 27,173 |   |   |
| Accrued  compensation                 |       |                     | 23,367     |                     |       |   | 17,409 |   |   |
| Accrued payment  to venture partner   |       |                     | 1,419      |                     |       |   | 639 |   |   |
| Accrued royalties                     |       |                     | 51,944     |                     |       |   | 33,148 |   |   |
| Accrued and other current liabilities |       |                     | $          | 110,924                  |       |   |   | $ | 78,369 |   |   |

 

77

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----

(1)          See Note 2, “Restatementof Consolidated Financial Statements”

*OtherLong-Term Liabilities.**  *Otherlong-term liabilities at March 31, 2006 and 2005 consist of the following(in thousands):

| ** **                   | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
|------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Accrued royalties            |       |                     | $          | 58,025                   |       |   |   | $ | 70,000 |   |   |
| Accrued  liabilities         |       |                     | 2,298      |                     |       |   | 2,059 |   |   |
| Other long-term  liabilities |       |                     | $          | 60,323                   |       |   |   | $ | 72,059 |   |   |

 

**6.**   BusinessCombinations

In fiscal 2006, weacquired all of the voting and non-voting equity interests in the following twoentities for a total cost of $7.5 million, which was paid in cash:

·       JuiceGames Ltd., located in Centre Park, Warrington, United Kingdom, a developer ofinteractive entertainment software for video game hardware devices and personalcomputers;

·       VigilGames, LLC, located in Austin, Texas, a developer of interactive entertainmentsoftware for video game hardware devices.

Goodwill recognizedin the above transactions amounted to $4.8 million, none of which is expectedto be deductible for income tax purposes. The preliminary purchase priceallocation, including the allocation of goodwill, will be updated as additionalinformation becomes available. We did not present pro forma information asthese acquisitions were immaterial to our financial position and results ofoperations.

In 2002, we acquiredValuSoft, Inc. for a total cost of $14.2 million, which was paid primarilyin cash. In addition, we have since paid the former shareholders of ValuSoftadditional consideration in the amount of $7.4 million because ValuSoft reachedcertain pre-tax income targets in the three years subsequent to theacquisition. They are still eligible for additional consideration in the amountof $3.6 million, which may be paid by us in cash or stock, if they reachcertain pre-tax income targets over the next two years. Any additionalconsideration determined to be payable will increase goodwill in the periodsuch pre-tax income targets are reached. Goodwill recognized in the originaltransaction and in the payments of the additional consideration has amounted to$19.4 million and is expected to be deductible for income tax purposes.

**7.**   Goodwill

The changes in thecarrying amount of goodwill for the fiscal years ended March 31, 2006 and2005 were as follows (in thousands): 

| Balance at  March 31, 2004                     |   | $      | 59,399 |   |
|-----------------------------------------------------|--------|--------|--------|--------|
| Goodwill acquired                                   |   | 18,168 |   |
| Additional consideration paid for ValuSoft          |   | 2,300  |   |
| Reclassification of initial investment in Minick    |   | 1,959  |   |
| Effect of foreign currency exchange rates           |   | 1,614  |   |
| Balance at  March 31, 2005                     |   | $      | 83,440 |   |
| Goodwill acquired                                   |   | 4,801  |   |
| Additional consideration paid for ValuSoft          |   | 2,800  |   |
| Effect of foreign currency exchange rates and other |   | (169   | )      |
| Balance at  March 31, 2006                     |   | $      | 90,872 |   |

 

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**8.**   OtherIntangible Assets

Intangible assets includelicenses, software development and other intangible assets. Intangible assetsare included in other long-term assets, net, except licenses and softwaredevelopment, which are reported separately in the consolidated balance sheets.Other intangible assets are as follows (in thousands):

| ** **                          | ** ** | ** **        | ** ** | **March 31, 2006** | ** ** | **March 31, 2005**  | ** ** |
|-------------------------------------|------------|-------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                          | ** ** | **Useful  Lives** | ** ** | **Gross  Carrying  Amount**  | ** ** | **Accumulated  Amortization** | ** ** | **Net  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Amount** | ** ** |
| Software  technology                |       | 2-3 years         |       | $                            | 3,055      |                          |       | $ | (2,085 | ) |   |   | $ | 970 |   |   | $ | 2,988 |   |   | $ | (894 | ) |   |   | $ | 2,094 |   |   |
| Trade secrets                       |       | 5 years           |       | 1,800                        |       |                          | (1,530     | ) |   |   | 270 |   |   | 1,800 |   |   | (1,170 | ) |   |   | 630 |   |   |
| Customer list                       |       | 4-5 years         |       | 1,414                        |       |                          | (550       | ) |   |   | 864 |   |   | 1,523 |   |   | (254 | ) |   |   | 1,269 |   |   |
| Trade names                         |       | 3-10 years        |       | 3,196                        |       |                          | (739       | ) |   |   | 2,457 |   |   | 3,055 |   |   | (298 | ) |   |   | 2,757 |   |   |
| Non-compete /  Employment contracts |       | 3-6.5 years       |       | 1,055                        |       |                          | (656       | ) |   |   | 399 |   |   | 967 |   |   | (435 | ) |   |   | 532 |   |   |
| Total                               |       |              |       | $                            | 10,520     |                          |       | $ | (5,560 | ) |   |   | $ | 4,960 |   |   | $ | 10,333 |   |   | $ | (3,051 | ) |   |   | $ | 7,282 |   |   |

 

Amortization of other intangible assets for the fiscalyears ended March 31, 2006, 2005 and 2004 was $2.6 million, $2.0 millionand $1.2 million, respectively. Finite-lived other intangible assets areamortized using the straight-line method over the lesser of their estimateduseful lives or the agreement terms, typically from two to ten years and areassessed for impairment under SFAS No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets.”

The following table summarizes the estimatedamortization expense for each of the next five fiscal years and thereafter (inthousands):

| **Fiscal Years Ending March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                                  |       | $          | 2,080      |       |
| 2008                                                  |       | 980        |       |
| 2009                                                  |       | 592        |       |
| 2010                                                  |       | 237        |       |
| 2011                                                  |       | 237        |       |
| Thereafter                                            |       | 834        |       |
|                                                  |       | $          | 4,960      |       |

 

**9.**   Other Long-TermAssets

In addition to otherintangible assets See “Note 8—Other Intangible Assets,” other long-term assetsinclude our investment in Yuke’s. We own less than a 20% interest in a Japanesedeveloper, Yuke’s, which is publicly traded on the Nippon New Market in Japan.Accordingly, we account for this investment under SFAS No. 115 “Accounting for Certain Investments in Debtand Equity Securities” as available-for-sale. Unrealized holding gainsand losses are excluded from earnings and are included as a component of othercomprehensive income until realized. In fiscal 2006 and 2005, the unrealizedholding gains were approximately $1.0 million and $3.6 million, respectively.Due to the long-term nature of this relationship, this investment is includedin other long-term assets in the consolidated balance sheet. Under separatedevelopment agreements, Yuke’s creates certain World Wrestling Entertainmentwrestling games for us.

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Other long-term assets asof March 31, 2006 and 2005 are as follows (in thousands):

| ** **                            | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
|---------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Investment in  Yuke’s            |       |                     | $          | 9,217                    |       |   |   | $ | 8,244 |   |   |
| Other intangible  assets (see Note 8) |       |                     | 4,960      |                     |       |   | 7,282 |   |   |
| Other                                 |       |                     | 8,871      |                     |       |   | 5,866 |   |   |
| Total other  long-term assets         |       |                     | $          | 23,048                   |       |   |   | $ | 21,392 |   |   |

 

**10.**   Capital StockTransactions

On August 9, 2005, weannounced that our Board of Directors (“Board”) declared a three-for-two stocksplit of our shares of common stock to be effected in the form of a 50% stockdividend (the “Dividend”). The Dividend was distributed on September 1,2005 to stockholders of record as of the close of business on August 19,2005. Cash was paid in lieu of issuance of fractional shares. The par value ofour common stock was maintained at the pre-split amount of $0.01. Allreferences in the accompanying consolidated financial statements to number ofshares, sales price and per share amounts of our common stock have beenretroactively restated to reflect the increased number of shares of commonstock outstanding as of the earliest period presented. In addition,stockholders’ equity has been restated to give retroactive recognition to theDividend by reclassifying from paid-in capital to common stock the par value ofthe additional shares of common stock issued pursuant to the Dividend. TheDividend did not dilute rights to stockholders under the Amended and RestatedRights Agreement between THQ and Computershare Investor Services, LLC, asRights Agent, dated as of August 22, 2001, as amended by the FirstAmendment to the Amended and Restated Rights Agreement, dated as of April 9,2002.

On September 10, 2002, November 21, 2002,and February 5, 2004, we announced that our Board authorized therepurchase of up to $25.0 million of our common stock from time to time on theopen market or in private transactions with a total authorized repurchaseamount of $75.0 million. As of March 31, 2005, we had repurchased3,449,000 shares of our common stock for approximately $52.9 million, andthere were no repurchases in fiscal 2006. At March 31, 2006 there is $22.1million available for future repurchases. There is no expiration date for the authorized repurchases.

**11.**   Accumulated OtherComprehensive Income

The components ofaccumulated other comprehensive income were as follows (amounts in thousands):

| ** **                         | ** ** | **Foreign  Currency  Translation  Gains (Losses)** | ** ** | **Net Unrealized  Gains (Losses)  on Securities** | ** ** | **Net Accumulated  Other Comprehensive  Income (Loss)** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| Balance at  March 31, 2003    |       |                                                    | $          | 1,496                                                            |       |                                                                   |       | $ | — |   |   |   | $ | 1,496 |   |   |
| Other  comprehensive income        |       |                                                    | 5,431      |                                                             |       |                                                                   | 1,375      |   |   |   | 6,806 |   |   |
| Balance at  March 31, 2004    |       |                                                    | 6,927      |                                                             |       |                                                                   | 1,375      |   |   |   | 8,302 |   |   |
| Other  comprehensive income        |       |                                                    | 2,802      |                                                             |       |                                                                   | 1,747      |   |   |   | 4,549 |   |   |
| Balance at  March 31, 2005    |       |                                                    | 9,729      |                                                             |       |                                                                   | 3,122      |   |   |   | 12,851 |   |   |
| Other  comprehensive income (loss) |       |                                                    | (3,085     | )                                                                |       |                                                                   | 601        |   |   |   | (2,484 | ) |   |
| Balance at March 31,  2006    |       |                                                    | $          | 6,644                                                            |       |                                                                   |       | $ | 3,723 |   |   |   | $ | 10,367 |   |   |

 

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**12.**   NetIncome Per Share

The following table is areconciliation of the weighted-average shares used in the computation of basicand diluted earnings per share for the periods presented (in thousands):

| ** **                                                        | ** ** | **Fiscal Year Ended March 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                        | ** ** | **As restated(1)**                             | ** ** | **As restated(1)** | ** ** | **As restated(1)** | ** ** |
| Net income used to  compute basic and diluted earnings per share  |       |                                                | $          | 32,106 |   |   |   | $ | 61,397 |   |   |   | $ | 34,072 |   |   |
| Weighted average number  of shares outstanding—basic         |       |                                                | 62,615     |   |   |   | 58,545 |   |   |   | 57,279 |   |   |
| Dilutive effect of stock  options and warrants                    |       |                                                | 2,905      |   |   |   | 1,822 |   |   |   | 1,326 |   |   |
| Number of shares used to compute earnings per  share—diluted |       |                                                | 65,520     |   |   |   | 60,367 |   |   |   | 58,605 |   |   |

----

(1)   See Note 2, “Restatement of Consolidated Financial Statements”

The following amounts ofoptions and warrants were excluded from the computation of diluted earnings pershare as their exercise prices were in excess of the average market price ofthe common shares for the periods presented (in thousands, except per sharedata):

| ** **                        | ** ** | **Fiscal Year Ended March 31,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Outstanding  options and warrants |       | 738                                                 |       | 3,123 |   | 6,325 |   |
| Average exercise price            |       | $                                                   | 21.18      |   | $ | 17.52 |   | $ | 16.55 |   |
|                                   |            |                                                     |            |  |  |  |  |  |  |  |

 

**13.**   IncomeTaxes

United States and foreignincome before taxes and details of the provision for income tax are as follows(in thousands):

| ** **                                                         | ** ** | **Fiscal Year Ended March 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **As restated(1)**                             | ** ** | **As restated(1)** | ** ** | **As restated(1)** | ** ** |
| Income before income taxes:                                        |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| United States                                                      |       |                                                | $          | 29,753 |   |   |   | $ | 67,826 |   |   |   | $ | 44,420 |   |   |
| Foreign                                                            |       |                                                | 10,037     |   |   |   | 9,067 |   |   |   | 8,715 |   |   |
|                                                               |       |                                                | $          | 39,790 |   |   |   | $ | 76,893 |   |   |   | $ | 53,135 |   |   |
| Provision for income tax expense (benefit):                        |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Current                                                            |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Federal                                                            |       |                                                | $          | (9,877 | ) |   |   | $ | 323 |   |   |   | $ | 10,473 |   |   |
| State                                                              |       |                                                | 1,151      |   |   |   | (3,695 | ) |   |   | 2,621 |   |   |
| Foreign                                                            |       |                                                | 5,325      |   |   |   | 2,593 |   |   |   | 4,495 |   |   |
| Total current                                                      |       |                                                | (3,401     | ) |   |   | (779 | ) |   |   | 17,589 |   |   |
| Deferred                                                           |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Federal                                                            |       |                                                | 8,967      |   |   |   | 7,867 |   |   |   | 2,388 |   |   |
| State                                                              |       |                                                | (5,057     | ) |   |   | 1,393 |   |   |   | 261 |   |   |
| Foreign                                                            |       |                                                | (1,679     | ) |   |   | 1,754 |   |   |   | (2,020 | ) |   |
| Total deferred                                                     |       |                                                | 2,231      |   |   |   | 11,014 |   |   |   | 629 |   |   |
| Add back benefit (expense) recorded to stockholders’  equity: |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Tax benefit related to  stock option exercises                     |       |                                                | 9,162      |   |   |   | 6,940 |   |   |   | 845 |   |   |
| Tax expense related to  unrealized gain on investments             |       |                                                | (371       | ) |   |   | (1,940 | ) |   |   | — |   |   |
| Provision for income tax                                           |       |                                                | $          | 7,621 |   |   |   | $ | 15,235 |   |   |   | $ | 19,063 |   |   |

 

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----

(1)   See Note 2, “Restatement of Consolidated Financial Statements”

The differences betweenthe U.S. federal statutory tax rate and our effective tax rate, expressed as apercentage of income before income taxes and minority interest, were asfollows: 

| ** **                                                                | ** ** | **Fiscal Year Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                | ** ** | **2006**                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                | ** ** | **As restated(1)**                         | ** ** | **As restated(1)** | ** ** | **As restated(1)** | ** ** |
| U.S. federal  statutory tax rate                                          |       |                                            | 35.0       | % |   |   | 35.0 | % |   |   | 35.0 | % |   |
| State taxes, net  of federal benefit and research and development credits |       |                                            | (2.5       | ) |   |   | (2.3 | ) |   |   | 3.5 |   |   |
| Research and  development credits                                         |       |                                            | (5.4       | ) |   |   | (7.9 | ) |   |   | — |   |   |
| Tax exempt  interest income                                               |       |                                            | (5.1       | ) |   |   | (1.1 | ) |   |   | (1.0 | ) |   |
| Rate differences  in foreign taxes and other                              |       |                                            | (2.9       | ) |   |   | (3.9 | ) |   |   | (1.6 | ) |   |
| Effective tax  rate                                                       |       |                                            | 19.1       | % |   |   | 19.8 | % |   |   | 35.9 | % |   |

----

(1)   See Note 2,“Restatement of Consolidated Financial Statements” 

Deferred income taxes reflect the net tax effects oftemporary differences between the amounts of assets and liabilities foraccounting purposes and the amounts used for income tax purposes. Thecomponents of the net deferred income tax asset and liability are as follows(in thousands):

| ** **                                      | ** ** | **March 31,**      | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **As restated(1)** | ** ** | **As restated(1)** | ** ** |
| Deferred income tax  assets:                    |       |                    |       |   |   |   |   |   |   |
| Accruals, reserves and other expenses           |       |                    | $          | 27,816 |   |   |   | $ | 22,988 |   |   |
| Tax credit carryforwards                        |       |                    | 10,123     |   |   |   | — |   |   |
| Net operating loss carryforwards                |       |                    | 4,855      |   |   |   | 1,328 |   |   |
| State income tax                                |       |                    | —     |   |   |   | 1,382 |   |   |
| Total                                           |       |                    | 42,794     |   |   |   | 25,698 |   |   |
| Valuation allowance                             |       |                    | (5,576     | ) |   |   | (2,158 | ) |   |
| Deferred tax asset, net of valuation allowance  |       |                    | 37,218     |   |   |   | 23,540 |   |   |
| Deferred income tax  liabilities:               |       |                    |       |   |   |   |   |   |   |
| Software development costs                      |       |                    | 42,422     |   |   |   | 26,019 |   |   |
| Depreciation and amortization                   |       |                    | 4,441      |   |   |   | 5,122 |   |   |
| Unrealized gain on marketable equity securities |       |                    | 1,632      |   |   |   | 1,290 |   |   |
| Other                                           |       |                    | 1,982      |   |   |   | 1,792 |   |   |
| Total                                           |       |                    | 50,477     |   |   |   | 34,223 |   |   |
| Net deferred tax  liability                     |       |                    | $          | 13,259 |   |   |   | $ | 10,683 |   |   |

----

(1)   See Note 2,“Restatement of Consolidated Financial Statements”

As of March 31, 2006,net deferred tax liabilities of $3.6 million and $9.7 million were classifiedas current and long-term liabilities, respectively. As of March 31, 2005,net deferred tax liabilities of $6.8 million and $3.8 million were classifiedas current and long-term liabilities, respectively. The non-current portion ofincome tax receivable is recorded net of an $11.8 million contingent taxliability. The contingent tax liability relates to tax positions taken inpreviously filed tax returns and similar positions expected to be taken in ourcurrent year tax returns. Moreover, the IRS has commenced a routine examinationof our U.S. income tax returns for the fiscal years 2003 and 2004. A portion ofthe contingent tax liability relates to the fiscal years under examination.While the ultimate resolution of tax audits involves a degree of 

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uncertainty, we believe that adequate tax accrualshave been provided for any adjustments that are expected to result for theseyears.

The tax creditcarryforwards as of March 31, 2006 includes research and development taxcredit carryforwards of $4.2 million and $5.9 million for federal andCalifornia purposes, respectively. The federal tax credit carryforward expiresin 2025, while the California tax credit can be carried forward indefinitely.

As of March 31, 2006,we have various state net operating loss carryforwards totaling $17.0 millionthat expire between 2008 and 2013 and foreign net operating loss carryforwardstotaling $15.0 million that can be carried forward indefinitely. At March 31,2006, our deferred income tax asset for net operating loss carryforwards wasreduced by a valuation allowance of $3.9 million as compared to $330,000 in theprior fiscal year. Realization of the deferred tax assets is dependent upon thecontinued generation of sufficient taxable income prior to the expiration ofthe net operating loss carryforwards. Although realization is not assured,management believes it is more likely than not that the net carrying value ofthe deferred tax asset will be realized.

The tax benefitsassociated with certain net operating loss carryovers relate to employee stockoptions. Pursuant to SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”),net operating losses have been reduced by $15.7 million relating to these itemswhich will be credited to additional paid-in capital when realized.

At March 31, 2006 we had accumulated foreignearnings of $32.1 million. We do not plan to repatriate these earnings,therefore, no U.S. income tax has been provided on the foreign earnings.Additionally, we have not tax effected the cumulative translation adjustment aswe have no intention of repatriating foreign earnings.

**14.**   Employee DefinedContribution Plan

For our United States employees we sponsor a definedcontribution plan under Section 401(k) of the Internal Revenue Code.Commencing January 1, 2005 the plan was amended to allow employees theability to defer up to 60% of their annual compensation (up to the annualmaximum amount allowable by law). The plan also provides that we will make amatching contribution equal to each employee’s deferral, up to 4% of eligiblecompensation. We may also contribute funds to the plan in the form of adiscretionary profit-sharing contribution. Employer contributions under theplan were $3.5 million, $2.7 million and $1.7 million in the fiscal yearsended March 31, 2006, 2005 and 2004, respectively.

**15.**   Stock-basedCompensation

As of March 31, 2006,we utilize two stock option plans:  theTHQ Inc. Amended and Restated 1997 Stock Option Plan (the “1997 Plan”) and theTHQ Inc. Third Amended and Restated Non-executive Employee Stock Option Plan(the “NEEP Plan”). The 1997 Plan provides for the issuance of up to 14,357,500shares available for employees, consultants and non-employee directors, and theNEEP plan provides for the issuance of up to 2,142,000 shares available fornon-executive employees of THQ of which no more than 20% is available forawards to our non-executive officers and no more than 15% is available forawards to the non-executive officers or general managers of our subsidiaries ordivisions. As of March 31, 2006, we had 2,007,949 shares under the 1997Plan available for grant and 237,031 shares under the NEEP Plan available forgrant. On April 3, 2006 we granted 681,000 options to certain officers ofTHQ, reducing the amount of options available for grant to 1,564,148.

Stock options granted underthe 1997 Plan may be incentive stock options or non-qualified stock options.Stock options may be granted under the 1997 Plan to, in the case of incentivestock options, all employees (including officers) of THQ; or, in the case ofnon-qualified stock options, all employees (including officers), consultantsand non-employee directors of THQ. Additionally, under the 1997 Plan, the 

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Company may grant Performance Accelerated RestrictedStock (“PARS”) or Performance Accelerated Restricted Stock Units (“PARSUs”) toofficers and certain other high-level employees of the Company. Other than theright to grant PARS and PARSUs, the NEEP Plan has primarily the same attributesas the 1997 Plan, but participation is reserved for employees who are notexecutive officers and only non-qualified options may be granted.

The purchase price pershare of common stock purchasable upon exercise of each option may not be lessthan the fair market value of such share of common stock on the date that suchoption is granted. Generally, options granted under these plans becomeexercisable over three years and expire on the fifth anniversary of the grantdate. PARS and PARSUs that have been granted to our officers under the 1997Plan vest with respect to 100% of the shares subject to the award on the fifthanniversary of the grant date; provided, however, 20% of the shares subject toeach award will vest on each of the first through fourth anniversaries of thegrant date if certain performance targets for the Company are attained eachfiscal year. To date, no vesting of PARS or PARSUs has been accelerated. PARSUsgranted to our non-employee directors vest one year after their grant date. Thefair value of PARS and PARSUs granted is amortized over the period(s) inwhich the related services are rendered.

| ** **                        | ** ** | **2006**   | ** ** | **2005**                                   | ** ** | **2004**   | ** ** |
|-----------------------------------|------------|------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                        | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding at  beginning of year |       | 9,880,253  |       |                                       | $          | 13.10      |       |   | 10,177,268 |   |   | $ | 11.73 |   |   | 10,906,494 |   |   | $ | 13.19 |   |   |
| Granted                           |       | 3,276,078  |       |                                       | 20.48      |       |       | 4,578,969 |   |   | 13.51 |   |   | 3,621,638 |   |   | 10.73 |   |   |
| Exercised                         |       | (3,187,569 | )          |                                       | 12.03      |       |       | (4,189,155 | ) |   | 10.22 |   |   | (1,302,285 | ) |   | 5.47 |   |   |
| Cancelled                         |       | (894,159   | )          |                                       | 14.44      |       |       | (686,829 | ) |   | 13.17 |   |   | (3,048,579 | ) |   | 18.03 |   |   |
| Outstanding at end  of year       |       | 9,074,603  |       |                                       | $          | 16.00      |       |   | 9,880,253 |   |   | $ | 13.10 |   |   | 10,177,268 |   |   | $ | 11.73 |   |   |
| Exercisable at end of  year       |       | 3,480,265  |       |                                       | $          | 15.20      |       |   | 4,494,209 |   |   | $ | 14.15 |   |   | 5,353,334 |   |   | $ | 11.56 |   |   |

The estimated fair valueof the employee stock-based compensation granted in the fiscal years ended March 31,2006, 2005 and 2004 was $30.1 million, $23.3 million and $21.4 million,respectively. Additionally, during fiscal 2006 we began issuing PARS andPARSUs. We issued 263,786 shares of PARS and 20,250 units of PARSUs with anestimated fair value of $5.1 million and $0.4 million, respectively, in thefiscal year ended March 31, 2006.

The following table setsforth the weighted-average grant-date fair value of options granted during theyears presented:

| ** **                                | ** ** | **Fiscal Year Ended March 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Exercise price  less than market value    |       | $                                                   | 10.61      |   | $ | 6.78 |   | $ | 7.68 |   |
| Exercise price  equal to market value     |       | $                                                   | 8.54       |   | $ | 6.73 |   | $ | 5.64 |   |
| Exercise price  greater than market value |       | $                                                   | 7.78       |   | $ | 6.31 |   | $ | — |   |
|                                      |       | $                                                   | 9.15       |   | $ | 6.74 |   | $ | 5.93 |   |

 

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The following tablesummarizes information about stock options outstanding and exercisable atMarch 31, 2006:

| ** **                                 | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                              | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------------|------------|
| **Range of Exercise Price** | ** ** | ** **                   | ** ** | **Number  Outstanding at  March 31, 2006** | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Shares Exercisable  at March 31, 2006** | ** ** | **Weighted Average  Exercise Price** | ** ** |
| $0.99 - $0.99                              |       |                         | 75,741     |                                                      |       |   | 0.41 |   |   |   | $ | 0.99 |   |   |   | 75,741 |   |   |   | $ | 0.99 |   |   |
| $6.18 - $8.80                              |       |                         | 596,884    |                                                      |       |   | 2.01 |   |   |   | $ | 8.35 |   |   |   | 412,924 |   |   |   | $ | 8.18 |   |   |
| $8.90 - $12.82                             |       |                         | 2,589,325  |                                                      |       |   | 2.93 |   |   |   | $ | 11.82 |   |   |   | 997,415 |   |   |   | $ | 11.67 |   |   |
| $12.84 - $19.00                            |       |                         | 2,788,319  |                                                      |       |   | 3.02 |   |   |   | $ | 16.39 |   |   |   | 1,064,421 |   |   |   | $ | 15.60 |   |   |
| $19.01 - $23.53                            |       |                         | 2,536,444  |                                                      |       |   | 3.30 |   |   |   | $ | 20.43 |   |   |   | 910,638 |   |   |   | $ | 20.21 |   |   |
| $23.55 - $26.96                            |       |                         | 487,890    |                                                      |       |   | 4.59 |   |   |   | $ | 24.53 |   |   |   | 19,126 |   |   |   | $ | 25.43 |   |   |
| ** **                                 |       |                         | 9,074,603  |                                                      |       |   | 3.07 |   |   |   | $ | 16.00 |   |   |   | 3,480,265 |   |   |   | $ | 15.20 |   |   |
|                                            |            |                              |            |                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

* *

*Non-Employee Warrants.*   In prior years, we have granted stockwarrants to third parties in connection with the acquisition of licensingrights for intellectual property. The warrants generally vest upon grant andare exercisable over the term of the warrant. The exercise price of third-partywarrants is equal to their fair market value of our common stock at the date ofgrant. No third-party warrants were granted during the fiscal year endedMarch 31, 2006.

In fiscal 2005 we granted240,000 warrants to third parties to purchase up to 240,000 shares of ourcommon stock at an exercise price of $13.49 per share in connection with alicense agreement that allows us to utilize intellectual property owned by suchthird parties. The warrants vested upon grant and have a six-year term. Thefair value of the warrants was determined using the Black-Scholes pricingmodel, assuming a risk-free rate of 2.9%, a volatility factor of 67% and thesix-year term as noted above. The fair value of these warrants was $2.0million.

In fiscal 2004 we granted150,000 warrants to a third party to purchase up to 150,000 shares of ourcommon stock at an exercise price of $10.45 per share in connection with alicense agreement that allows us to utilize intellectual property owned by thethird party. The warrants vested upon grant and have a 10-year term. Thefair value of the warrants was determined using the Black-Scholes pricingmodel, assuming a risk-free rate of 4.87%, a volatility factor of 87% and the10-year term as noted above. The fair value of these warrants was $1.4million.

At March 31, 2006, we had 390,000 warrantsoutstanding with weighted average exercise price of $12.32. In fiscal 2006,112,500 warrants expired unexercised. At March 31, 2005 we had 502,500warrants outstanding with weighted average exercise price of $13.91.

In accordance with EITF 96-18,we measure the fair value of the securities on the measurement date. The fairvalue of each warrant is capitalized and amortized to expense when the relatedproduct is released and the related revenue is recognized. Additionally, asmore fully described in Note 1, the recoverability of intellectual propertylicenses is evaluated on a quarterly basis with amounts determined as notrecoverable being charged to expense. In connection with the evaluation ofcapitalized intellectual property licenses, any capitalized amounts for relatedthird-party warrants are additionally reviewed for recoverability with amountsdetermined as not recoverable being amortized to expense. For the years ended March 31,2006, 2005 and 2004, $1.3 million, $2.2 million and $932,000, respectively, wasamortized and included in license amortization expense.

**16.**   StockholdersRights Plan

THQ’s stockholders hold their stock subject to anAmended and Restated Rights Agreement dated August 22, 2001, as amended bythe First Amendment to the Amended and Restated Rights Agreement, 

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dated as of April 9, 2002 (collectively, the “RightsAgreement”). Pursuant to the Rights Agreement, and as adjusted pursuant to Section 11(p) ofthe Rights Agreement as a result of the stock splits which occurred on April 9,2002 and on September 1, 2005, each share of THQ common stock is accompaniedby four-ninths (4/9) of a preferred stock purchase right (“Right”) whichentitles the registered holder to purchase four nine-thousandths (4/9000) of ashare of Series A Junior Participating Preferred Stock at an exerciseprice of $44.44. The Rights become exercisable 10 days after any person orgroup acquires, or 10 business days after any person or group has announced itsintention to commence a tender offer for, 15% or more of the outstanding commonstock of THQ. In the event that any person or group acquires 15% or more of ouroutstanding common stock, each holder of a Right (other than such person orgroup) will be entitled to purchase, at the exercise price, the number ofshares of common stock having a current market value equal to two times theexercise price of the Right. If we are acquired in a merger or other businesscombination, each registered holder of a Right will be entitled to purchase, atthe exercise price, a number of shares of common stock of the acquirer having acurrent market value equal to two times the exercise price of the Right.

The Board may redeem the Rights at a redemption priceof $0.001 per Right, subject to adjustment, at any time until 10 days after theacquisition of 15% or more of the common stock of THQ. At any time after aperson or group has acquired 15% or more but less than 50% of the common stock,the Board may exchange all or part of the Rights for shares of common stock atan exchange ratio of 4/9 shares of common stock for each Right or fournine-thousandths (4/9000) of a share of Series A Junior ParticipatingPreferred Stock (“Preferred Stock”) per Right. The Rights expire on June 21,2010.

Pursuant to theCertificate of Designation, as amended (the “Certificate of Designation”),establishing the Preferred Stock, effective as September 1, 2005:  (i) each share of Preferred Stock isentitled to quarterly dividends equal to 2,250 times the aggregate per shareamount of all dividends declared on the common stock, (ii) each share ofPreferred Stock will be entitled to 2,250 votes on all matters submitted to avote of THQ’s stockholders, (iii) the “adjustment number” (as defined inthe Certificate of Designation) used in Section 6 of the Certificate ofDesignation for calculating the liquidation amount for Preferred Stock is 2,250and (iv) in the event of a consolidation, merger, combination or similartransaction, each share of Preferred Stock will be exchanged or changed into anamount per share equal to 2,250 times the amount of capital stock, securities,cash or other property for which each share of common stock is exchanged orchanged. The description of the Rights contained herein does not purport to becomplete and is qualified in its entirety by reference to the Rights Agreementand the Certificate of Designation.

**17.**   Agreementwith JAKKS Pacific, Inc.

In June 1999we entered into an operating agreement with JAKKS Pacific, Inc. (“JAKKS”)that governs our relationship with respect to the World Wrestling Entertainment, Inc.(“WWE”) license. This agreement was amended in January 2002. Ourrelationship with JAKKS was established to enable THQ to develop, manufacture,distribute, market and sell video games pursuant to the license from WWE. Theprincipal terms of this operating agreement are as follows:

·       Weare responsible for funding all operations of the venture, including allpayments owed to WWE;

·       Forthe period commencing November 16, 1999 and ending June 30, 2006,JAKKS is entitled to receive a preferred payment equal to the greater of afixed guarantee, payable quarterly, or specified percentages of the net salesfrom WWE-licensed games (as defined) in amounts that vary based on theplatform. The payment of these amounts is guaranteed by us. We are entitled tothe profits and cash distributions remaining after the payment of theseamounts;

·       Forperiods after June 30, 2006, the amount of the preferred payment will besubject to renegotiation between the parties. An arbitration procedure isspecified in the event the parties do not reach agreement; and

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·       Weare responsible for the day-to-day operations of the venture. We areresponsible for development, sales and distribution of WWE-licensed games, andJAKKS is responsible for the approval process and other relationship matterswith WWE.

For financial reporting purposes, we are deemed tocontrol the venture; therefore, all venture operating results are consolidatedwith our results.

In November 2001, through the venture with JAKKS,we entered into an amendment to expand the WWE license to include exclusiverights to other wrestling content produced by the WWE. In exchange for theserights we paid a minimum guarantee to WWE that recoups through December 31,2014.

We are currently involvedin litigation with WWE and JAKKS with respect to the license. See “Note 18—Commitmentsand Contingencies.”  Further, pursuant tothe terms of the operating agreement with JAKKS, we are currently renegotiatingthe amount of the preferred payment for the period subsequent to June 30,2006, but have not yet reached an agreement.

**18. Commitments andContingencies**

Asummary of annual minimum contractual obligations and commercial commitments asof March 31, 2006 is as follows (in thousands):
|                                             | ** ** | **Contractual Obligations and Commercial Commitments** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **FiscalYears Ending  March 31,** | ** ** | ** **                                                                 | ** ** | **License /  Software  Development  Commitments(1)** | ** ** | **Advertising(2)** | ** ** | **Leases(3)** | ** ** | **Letters of  Credit(4)** | ** ** | **Other(5)** | ** ** | **Total** | ** ** |
| 2007                                        |       |                                                                       | $          | 97,558 |   |   |   | $ | 21,762 |   |   |   | $ | 11,332 |   |   |   | $ | 7,563 |   |   |   | $ | 1,463 |   |   | $ | 139,678 |   |
| 2008                                        |       |                                                                       | 39,102     |   |   |   | 14,616 |   |   |   | 11,595 |   |   |   | — |   |   |   | — |   |   | 65,313 |   |
| 2009                                        |       |                                                                       | 39,613     |   |   |   | 13,184 |   |   |   | 11,189 |   |   |   | — |   |   |   | — |   |   | 63,986 |   |
| 2010                                        |       |                                                                       | 37,000     |   |   |   | 9,777 |   |   |   | 10,812 |   |   |   | — |   |   |   | — |   |   | 57,589 |   |
| 2011                                        |       |                                                                       | 22,000     |   |   |   | 9,777 |   |   |   | 10,137 |   |   |   | — |   |   |   | — |   |   | 41,914 |   |
| Thereafter                                  |       |                                                                       | —     |   |   |   | — |   |   |   | 28,779 |   |   |   | — |   |   |   | — |   |   | 28,779 |   |
|                                        |       |                                                                       | $          | 235,273 |   |   |   | $ | 69,116 |   |   |   | $ | 83,844 |   |   |   | $ | 7,563 |   |   |   | $ | 1,463 |   |   | $ | 397,259 |   |
|                                             |            |                                                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          *Licenses andSoftware Development.*We enter into contractual arrangements withthird parties for the rights to intellectual property and for the developmentof products. Under these agreements, we commit to provide specified payments toan intellectual property holder or developer. Assuming all contractualprovisions are met, the total future minimum contract commitments for contractsin place as of March 31, 2006 are approximately $235.3 million.License/software development commitments in the table above include $74.2million of commitments to licensors that are included in our consolidatedbalance sheet as of March 31, 2006 because the licensors do not have anysignificant performance obligations to us. These commitments were included inboth current and long-term licenses and accrued royalties.

(2)          *Advertising.*We have certain minimumadvertising commitments under most of our major license agreements. Theseminimum commitments generally range from 2% to 12% of net sales related to therespective license. We estimate that our minimum commitment for advertising infiscal 2007 will be $21.8 million.

(3)          *Leases.*We are committed under operatingleases with lease termination dates through 2015. Most of our leases containrent escalations.

Rent xpense was $10.6 million, $6.0 million and $4.5million for the fiscal years ended March 31, 2006, 2005 and 2004,respectively.

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(4)          *Letters ofCredit.* As of March 31, 2006, we were in compliance with allthe covenants under our credit facility, had outstanding letters of credit ofapproximately $7.6 million and no borrowings.

(5)          *Other.*This amount reflects an additional$1.5 million related to the purchase of Relic in April 2004. This amountwas paid in April 2006.

Other potential future expenditures relate to thefollowing:

*Manufacturer Indemnification.**  *We must indemnify the platform manufacturers(Microsoft, Nintendo, Sony) of our games with respect to all loss, liabilityand expenses resulting from any claim against such manufacturer involving thedevelopment, marketing, sale or use of our games, including any claims forcopyright or trademark infringement brought against such manufacturer. As aresult, we bear a risk that the properties upon which the titles of our games arebased, or that the information and technology licensed from others andincorporated into the products, may infringe the rights of third parties. Ouragreements with our third-party software developers and property licensorstypically provide indemnification rights for us with respect to certainmatters. However, if a manufacturer brings a claim against us forindemnification, the developers or licensors may not have sufficient resourcesto, in turn, indemnify us.

*Director Indemnity Agreements.**  *We have entered into indemnificationagreements with the members of our Board to provide a contractual right ofindemnification to our Directors to the extent permitted by law against any andall liabilities, costs, expenses, amounts paid in settlement and damages incurredby the Directors as a result of any lawsuit, or any judicial, administrative orinvestigative proceeding in which the Directors are sued as a result of theirservice as members of our Board. The indemnification agreements providespecific procedures and time frames with respect to requests forindemnification and clarify the benefits and remedies available to Directors inthe event of an indemnification request.

*Credit Facility.**  *We have a credit agreement that lasts through November 29,2006 that provides us a maximum monthly facility amount of $40.0 million foreach August, September and October, and a maximum monthly facility amountof $12.0 million for every other month. The credit facility is unsecured andcontains customary financial and non-financial covenants that require us tomaintain specified operating profits and liquidity and limits our ability toincur additional indebtedness, sell assets, pay cash dividends and enter intocertain mergers or acquisitions. As of March 31, 2006, we were in compliancewith all the covenants under the credit facility and had outstanding letters ofcredit of approximately $7.6 million.

*Litigation.*

*World WrestlingEntertainment.*

On October 19, 2004, World WrestlingEntertainment, Inc. (“WWE”) filed a lawsuit in the United States DistrictCourt for the Southern District of New York (the “Court”) against JAKKS Pacific, Inc.(“JAKKS”), THQ, the THQ/JAKKS joint venture, and others, alleging, among otherclaims, improper conduct by JAKKS, certain executives of JAKKS, an employee ofthe WWE and an agent of the WWE in granting the WWE video game license to theTHQ/JAKKS joint venture. The complaint seeks various forms of relief, includingmonetary damages and a judicial determination that, among other things, theTHQ/JAKKS video game license is void. On March 30, 2005, WWE filed anamended complaint, adding both new claims and THQ’s president and chiefexecutive officer, Brian Farrell, as a defendant. In August 2005, theCourt directed the parties to file briefs on the three federal law claimsalleged by the Plaintiffs (*i.e.*,Robinson-Patman, and Sherman Act, and a threshold issue concerning thePlaintiff’s RICO claim). The motions to dismiss the amended complaint based onthese issues were fully briefed and argued and, on March 31, 2006, theCourt granted the defendants’ motion to dismiss the Robinson-Patman Act andSherman Act claims and denied the defendants’ motion seeking to dismiss theRICO claims on the 

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basis of the threshold “enterprise” issue that wasbriefed (the “March 31 Order”). On April 7, 2006, the Company and theother defendants sought certification to appeal from the portion of the March 31Order denying the motion to dismiss the RICO claim on the one ground that wasbriefed. Shortly thereafter, WWE filed a motion for re-argument with respect tothe portion of the March 31 Order that dismissed the Sherman Act claimand, alternatively, sought judgment with respect to the Sherman Act claim sothat it could pursue an immediate appeal. At a court hearing on April 26,2006, the Court deferred a ruling on the requests for partial judgment and forcertification and set briefing schedules with respect to the remaining groundsfor defendants’ motion to dismiss the RICO claim, currently the sole remainingbasis for federal jurisdiction in this action, that were not the subject of thefirst round of briefing. The Court also established a briefing schedule for WWE’smotion for re-argument of the dismissal of the Sherman Act claim. The briefingand argument of these motions is scheduled to be completed by September 2006.Discovery in this action remains stayed. On June 2, 2006, we filed amotion to dismiss the RICO claims against THQ and Brian Farrell. THQ believesthat neither it, nor Brian Farrell, is primarily accused of any wrongdoing inthe complaint or the amended complaint, and believes that either there is nobasis for terminating the license with THQ, or that THQ will be made whole bythose whose conduct is eventually found to be unlawful. We intend to vigorouslyprotect our rights and, if necessary, pursue appropriate claims against thirdparties.

On March 30, 2006, WWE’s counsel wrote a letterto our counsel and counsel for JAKKS, alleging breaches by the THQ/JAKKS jointventure of the video game license related to the manner of distribution andpayment of royalties to the WWE with respect to sales of the WWE video games inJapan. WWE demanded that the alleged breaches be cured within the time periodsprovided in the video game license, while reserving all of its rights,including its alleged right of termination of the video game license. On April 28,2006, our counsel responded on behalf of the THQ/JAKKS joint venture,asserting, among other things, that the WWE had been aware and had consented tothe manner of distribution in Japan and the payment of royalties with respectto such sales and, in addition, had separately released the joint venture fromany claims with respect to such matter as a result of a settlement of an auditof the THQ/JAKKS joint venture. We have also provided documentation to the WWE’scounsel in support of our position. WWE’s counsel has subsequently responded byletter, reiterating its claims and reservation of all rights, and has requestedadditional information regarding sales of WWE video games in Japan and certainother Asian countries. We are currently developing our response to WWE’scounsel’s most recent communications. We believe we have several bases fordefending any claim of breach of the video game license agreement resultingfrom the manner of distribution of WWE-licensed products in Japan andother Asian territories.

Due to the early status of this litigation with WWE wecannot estimate a possible loss, if any. Games we develop based upon our WWElicense have contributed to approximately 15% of our net sales during each ofthe three years in the period ended March 31, 2006. The loss of the WWElicense would have a negative impact on our future financial results.

See Note 21 for moreinformation regarding legal and regulatory proceedings that arose following March 31,2006 relating to our stock option granting practices.

*Other*

Additionally, we areinvolved in routine litigation arising in the ordinary course of our business.In the opinion of our management, none of this pending routine litigation willhave a material adverse effect on our consolidated financial condition orresults of operations.

**19.   Segmentand Geographic Information**

Weoperate in one reportable segment in which we are a developer, publisher anddistributor of interactive entertainment software for home video game consoles,handheld platforms and personal computers. The 

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followinginformation sets forth geographic information on our sales and total assets forthe fiscal years ended March 31, 2006, 2005 and 2004 (in thousands):
|                                      | ** ** | **North  America**      | ** ** | **Europe** | ** ** | **Asia  Pacific** | ** ** | **Consolidated**        | ** ** |
|--------------------------------------|------------|-------------------------|------------|------------|------------|-------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **As restated(1)** | ** ** | ** ** | ** ** | ** **        | ** ** | **As restated(1)** | ** ** |
| **Year ended March 31, 2006**   | ** ** |                    | ** ** | ** ** |       | ** **        | ** ** | ** **              | ** ** |   | ** ** | ** ** |   |
| Net sales to  unaffiliated customers |       |                    | $          | 489,945    | ** ** |              | $          | 269,928                 |       | $ | 46,687 |   |   | $ | 806,560 | ** ** |   |
| Total assets                         |       |                    | 774,126    | ** ** |       | 62,664            |       | 11,678                  |       |   | 848,468 | ** ** |   |
| **Year  ended March 31, 2005**  | ** ** |                    | ** ** | ** ** |       | ** **        | ** ** | ** **              | ** ** |   | ** ** | ** ** |   |
| Net sales to  unaffiliated customers |       |                    | $          | 470,619    | ** ** |              | $          | 245,083                 |       | $ | 41,029 |   |   | $ | 756,731 | ** ** |   |
| Total assets                         |       |                    | 671,497    | ** ** |       | 64,948            |       | 10,161                  |       |   | 746,606 | ** ** |   |
| **Year  ended March 31, 2004**  | ** ** |                    | ** ** | ** ** |       | ** **        | ** ** | ** **              | ** ** |   | ** ** | ** ** |   |
| Net sales to  unaffiliated customers |       |                    | $          | 453,426    | ** ** |              | $          | 161,857                 |       | $ | 25,563 |   |   | $ | 640,846 | ** ** |   |
| Total assets                         |       |                    | 479,948    | ** ** |       | 41,515            |       | 6,438                   |       |   | 527,901 | ** ** |   |

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(1)          See Note 2, “Restatementof Consolidated Financial Statements”

Our largest single customer accounted for 19% of ourgross sales in fiscal 2006, 14% of our gross sales in fiscal 2005 and 19% ofour gross sales in fiscal 2004.

Informationabout THQ’s net sales by platform for fiscal 2006, 2005 and 2004 is presentedbelow (in thousands):
|                              | ** ** | **Fiscal Year Ended March 31,** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|
| **Platform**                 | ** ** | ** **                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Consoles**                 | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sony PlayStation  2          |       | $                                                   | 296,294    |   | $ | 275,850 |   | $ | 247,603 |   |
| Microsoft Xbox  and Xbox 360 |       | 102,660                                             |       | 80,623 |   | 71,132 |   |
| Nintendo GameCube            |       | 59,255                                              |       | 73,157 |   | 61,356 |   |
|                         |       | 458,209                                             |       | 429,630 |   | 380,091 |   |
| **Handheld**                 | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Nintendo Game Boy  Advance   |       | 171,477                                             |       | 204,348 |   | 162,109 |   |
| Nintendo Dual  Screen        |       | 32,855                                              |       | 3,110 |   | — |   |
| Sony PlayStation  Portable   |       | 29,406                                              |       | — |   | — |   |
| Wireless                     |       | 36,112                                              |       | 24,613 |   | 6,860 |   |
|                         |       | 269,850                                             |       | 232,071 |   | 168,969 |   |
| **PC**                       |       | 77,615                                              |       | 86,667 |   | 74,934 |   |
| **Other**                    |       | 886                                                 |       | 8,363 |   | 16,852 |   |
| **Total Net Sales**          |       | $                                                   | 806,560    |   | $ | 756,731 |   | $ | 640,846 |   |
|                              |            |                                                     |            |  |  |  |  |  |  |  |  |  |

 

**20.   QuarterlyFinancial Data (Unaudited)**

We have restated ourconsolidated financial statements for the fiscal years ended March 31,2006 and 2005 to record additional non-cash stock-based compensation andrelated tax accruals resulting from stock options granted during fiscal years1996 to 2006 that were incorrectly accounted for under generally acceptedaccounting principles in the United States (See Note 2). The following tablesummarizes the quarterly impact of these adjustments on results of operations(in thousands, except per share amounts):

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***Twelve Months EndedMarch 31, 2006***
| **Quarter Ended June 30, 2005** | ** ** | ** ** | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------------------------------|------------|-----------------|------------|----------------------|------------|
| Net sales                                           |       |       | $          | 157,967                          |       |            |       | $                    | —     |   |   |   | $ | 157,967 |   |   |
| Expenses and other                                  |       |       | 163,623    |                             |       |            | 290        |                 |       |   | 163,913 |   |   |
| Loss before  income taxes and minority interest     |       |       | (5,656     | )                                |       |            | (290       | )                    |       |   | (5,946 | ) |   |
| Income taxes                                        |       |       | (1,753     | )                                |       |            | (19        | )                    |       |   | (1,772 | ) |   |
| Loss before  minority interest                      |       |       | (3,903     | )                                |       |            | (271       | )                    |       |   | (4,174 | ) |   |
| Minority interest                                   |       |       | (57        | )                                |       |            | —     |                 |       |   | (57 | ) |   |
| Net loss                                            |       |       | $          | (3,960                           | )          |            |       | $                    | (271       | ) |   |   | $ | (4,231 | ) |   |
| Net loss per  share—basic                      |       |       | $          | (0.06                            | )          |            |       | $                    | (0.01      | ) |   |   | $ | (0.07 | ) |   |
| Net loss per  share—diluted                    |       |       | $          | (0.06                            | )          |            |       | $                    | (0.01      | ) |   |   | $ | (0.07 | ) |   |
| Shares used in  per share calculation—basic    |       |       | 60,929     |                             |       |            | —     |                 |       |   | 60,929 |   |   |
| Shares used in per share  calculation—diluted  |       |       | 60,929     |                             |       |            | —     |                 |       |   | 60,929 |   |   |

 
| Quarter Ended September 30, 2005 | ** ** | ** ** | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------------------------|------------|-----------------|------------|----------------------|------------|
| Net sales                                            |       |       | $          | 142,692                          |       |            |       | $                    | —     |   |   |   | $ | 142,692 |   |   |
| Expenses and other                                   |       |       | 144,747    |                             |       |            | 549        |                 |       |   | 145,296 |   |   |
| Loss before  income taxes and minority interest      |       |       | (2,055     | )                                |       |            | (549       | )                    |       |   | (2,604 | ) |   |
| Income taxes                                         |       |       | (637       | )                                |       |            | (26        | )                    |       |   | (663 | ) |   |
| Loss before  minority interest                       |       |       | (1,418     | )                                |       |            | (523       | )                    |       |   | (1,941 | ) |   |
| Minority interest                                    |       |       | 3          |                             |       |            | —     |                 |       |   | 3 |   |   |
| Net loss                                             |       |       | $          | (1,415                           | )          |            |       | $                    | (523       | ) |   |   | $ | (1,938 | ) |   |
| Net loss per  share—basic                       |       |       | $          | (0.02                            | )          |            |       | $                    | (0.01      | ) |   |   | $ | (0.03 | ) |   |
| Net loss per  share—diluted                     |       |       | $          | (0.02                            | )          |            |       | $                    | (0.01      | ) |   |   | $ | (0.03 | ) |   |
| Shares used in  per share calculation—basic     |       |       | 62,299     |                             |       |            | —     |                 |       |   | 62,299 |   |   |
| Shares used in per share  calculation—diluted   |       |       | 62,299     |                             |       |            | —     |                 |       |   | 62,299 |   |   |

 

 

|  

**Quarter Ended December 31, 2005** | ** ** | ** ** | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|----------------------------------|------------|-----------------|------------|----------------------|------------|
| Net sales                                                       |       |       | $          | 357,848                          |       |            |       | $                    | —     |   |   |   | $ | 357,848 |   |   |
| Expenses and other                                              |       |       | 292,159    |                             |       |            | 786        |                 |       |   | 292,945 |   |   |
| Income before  income taxes and minority interest               |       |       | 65,689     |                             |       |            | (786       | )                    |       |   | 64,903 |   |   |
| Income taxes                                                    |       |       | 18,044     |                             |       |            | (127       | )                    |       |   | 17,917 |   |   |
| Income before  minority interest                                |       |       | 47,645     |                             |       |            | (659       | )                    |       |   | 46,986 |   |   |
| Minority interest                                               |       |       | (62        | )                                |       |            | —     |                 |       |   | (62 | ) |   |
| Net income                                                      |       |       | $          | 47,583                           |       |            |       | $                    | (659       | ) |   |   | $ | 46,924 |   |   |
| Net income per  share—basic                                |       |       | $          | 0.76                             |       |            |       | $                    | (0.01      | ) |   |   | $ | 0.75 |   |   |
| Net income per  share—diluted                              |       |       | $          | 0.72                             |       |            |       | $                    | (0.01      | ) |   |   | $ | 0.71 |   |   |
| Shares used in  per share calculation—basic                |       |       | 62,982     |                             |       |            | —     |                 |       |   | 62,982 |   |   |
| Shares used in per share  calculation—diluted              |       |       | 65,919     |                             |       |            | (151       | )                    |       |   | 65,768 |   |   |

 

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| **Quarter Ended March 31, 2006** | ** ** | ** ** | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------------------------|------------|-----------------|------------|----------------------|------------|
| Net sales                                            |       |       | $          | 148,053                          |       |            |       | $                    | —     |   |   |   | $ | 148,053 |   |   |
| Expenses and other                                   |       |       | 163,799    |                             |       |            | 817        |                 |       |   | 164,616 |   |   |
| Loss before  income taxes and minority interest      |       |       | (15,746    | )                                |       |            | (817       | )                    |       |   | (16,563 | ) |   |
| Income taxes                                         |       |       | (7,754     | )                                |       |            | (107       | )                    |       |   | (7,861 | ) |   |
| Loss before  minority interest                       |       |       | (7,992     | )                                |       |            | (710       | )                    |       |   | (8,702 | ) |   |
| Minority interest                                    |       |       | 53         |                             |       |            | —     |                 |       |   | 53 |   |   |
| Net loss                                             |       |       | $          | (7,939                           | )          |            |       | $                    | (710       | ) |   |   | $ | (8,649 | ) |   |
| Net loss per  share—basic                       |       |       | $          | (0.12                            | )          |            |       | $                    | (0.02      | ) |   |   | $ | (0.14 | ) |   |
| Net loss per  share—diluted                     |       |       | $          | (0.12                            | )          |            |       | $                    | (0.02      | ) |   |   | $ | (0.14 | ) |   |
| Shares used in  per share calculation—basic     |       |       | 63,686     |                             |       |            | —     |                 |       |   | 63,686 |   |   |
| Shares used in per share  calculation—diluted   |       |       | 63,686     |                             |       |            | —     |                 |       |   | 63,686 |   |   |

 

***Twelve Months EndedMarch 31, 2005***

| **Quarter Ended June 30, 2004** | ** ** | ** ** | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------------------------------|------------|-----------------|------------|----------------------|------------|
| Net sales                                           |       |       | $          | 88,194                           |       |            |       | $                    | —     |   |   |   | $ | 88,194 |   |   |
| Expenses and other                                  |       |       | 94,242     |                             |       |            | 436        |                 |       |   | 94,678 |   |   |
| Loss before  income taxes and minority interest     |       |       | (6,048     | )                                |       |            | (436       | )                    |       |   | (6,484 | ) |   |
| Income taxes                                        |       |       | (2,147     | )                                |       |            | 21         |                 |       |   | (2,126 | ) |   |
| Loss before  minority interest                      |       |       | (3,901     | )                                |       |            | (457       | )                    |       |   | (4,358 | ) |   |
| Minority interest                                   |       |       | —     |                             |       |            | —     |                 |       |   | — |   |   |
| Net loss                                            |       |       | $          | (3,901                           | )          |            |       | $                    | (457       | ) |   |   | $ | (4,358 | ) |   |
| Net loss per  share—basic                      |       |       | $          | (0.07                            | )          |            |       | $                    | (0.01      | ) |   |   | $ | (0.08 | ) |   |
| Net loss per  share—diluted                    |       |       | $          | (0.07                            | )          |            |       | $                    | (0.01      | ) |   |   | $ | (0.08 | ) |   |
| Shares used in  per share calculation—basic    |       |       | 57,576     |                             |       |            | —     |                 |       |   | 57,576 |   |   |
| Shares used in per share  calculation—diluted  |       |       | 57,576     |                             |       |            | —     |                 |       |   | 57,576 |   |   |

 

| **Quarter Ended September 30, 2004** | ** ** | ** ** | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------------------------|------------|-----------------|------------|----------------------|------------|
| Net sales                                                |       |       | $          | 96,295                           |       |            |       | $                    | —     |   |   |   | $ | 96,295 |   |   |
| Expenses and other                                       |       |       | 106,328    |                             |       |            | 274        |                 |       |   | 106,602 |   |   |
| Loss before  income taxes and minority interest          |       |       | (10,033    | )                                |       |            | (274       | )                    |       |   | (10,307 | ) |   |
| Income taxes                                             |       |       | (3,774     | )                                |       |            | 16         |                 |       |   | (3,758 | ) |   |
| Loss before  minority interest                           |       |       | (6,259     | )                                |       |            | (290       | )                    |       |   | (6,549 | ) |   |
| Minority interest                                        |       |       | (95        | )                                |       |            | —     |                 |       |   | (95 | ) |   |
| Net loss                                                 |       |       | $          | (6,354                           | )          |            |       | $                    | (290       | ) |   |   | $ | (6,644 | ) |   |
| Net loss per  share—basic                           |       |       | $          | (0.11                            | )          |            |       | $                    | —     |   |   |   | $ | (0.11 | ) |   |
| Net loss per  share—diluted                         |       |       | $          | (0.11                            | )          |            |       | $                    | —     |   |   |   | $ | (0.11 | ) |   |
| Shares used in  per share calculation—basic         |       |       | 58,496     |                             |       |            | —     |                 |       |   | 58,496 |   |   |
| Shares used in per share  calculation—diluted       |       |       | 58,496     |                             |       |            | —     |                 |       |   | 58,496 |   |   |

 

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| **Quarter Ended December 31, 2004*** | ** ** | ** ** | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------------------------|------------|-----------------|------------|----------------------|------------|
| Net sales                                                |       |       | $          | 400,315                          |       |            |       | $                    | —     |   |   |   | $ | 400,315 |   |   |
| Expenses and other                                       |       |       | 319,249    |                             |       |            | 295        |                 |       |   | 319,544 |   |   |
| Income before  income taxes and minority interest        |       |       | 81,066     |                             |       |            | (295       | )                    |       |   | 80,771 |   |   |
| Income taxes                                             |       |       | 18,057     |                             |       |            | (4         | )                    |       |   | 18,053 |   |   |
| Income before  minority interest                         |       |       | 63,009     |                             |       |            | (291       | )                    |       |   | 62,718 |   |   |
| Minority interest                                        |       |       | (74        | )                                |       |            | —     |                 |       |   | (74 | ) |   |
| Net income                                               |       |       | $          | 62,935                           |       |            |       | $                    | (291       | ) |   |   | $ | 62,644 |   |   |
| Net income per  share—basic                         |       |       | $          | 1.08                             |       |            |       | $                    | (0.01      | ) |   |   | $ | 1.07 |   |   |
| Net income per  share—diluted                       |       |       | $          | 1.05                             |       |            |       | $                    | (0.01      | ) |   |   | $ | 1.04 |   |   |
| Shares used in per  share calculation—basic         |       |       | 58,472     |                             |       |            | —     |                 |       |   | 58,472 |   |   |
| Shares used in per share  calculation—diluted       |       |       | 59,875     |                             |       |            | 173        |                 |       |   | 60,048 |   |   |

----

*                    Forthe quarter ended December 31, 2004, net income included a $7.8 millionbenefit for research and development income tax credits claimed for prioryears.

| **Quarter Ended March 31, 2005** | ** ** | ** ** | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------------------------|------------|-----------------|------------|----------------------|------------|
| Net sales                                            |       |       | $          | 171,927                          |       |            |       | $                    | —     |   |   |   | $ | 171,927 |   |   |
| Expenses and other                                   |       |       | 158,657    |                             |       |            | 357        |                 |       |   | 159,014 |   |   |
| Income before  income taxes and minority interest    |       |       | 13,270     |                             |       |            | (357       | )                    |       |   | 12,913 |   |   |
| Income taxes                                         |       |       | 3,068      |                             |       |            | (2         | )                    |       |   | 3,066 |   |   |
| Income before  minority interest                     |       |       | 10,202     |                             |       |            | (355       | )                    |       |   | 9,847 |   |   |
| Minority interest                                    |       |       | (92        | )                                |       |            | —     |                 |       |   | (92 | ) |   |
| Net income                                           |       |       | $          | 10,110                           |       |            |       | $                    | (355       | ) |   |   | $ | 9,755 |   |   |
| Net income per  share—basic                     |       |       | $          | 0.17                             |       |            |       | $                    | (0.01      | ) |   |   | $ | 0.16 |   |   |
| Net income per  share—diluted                   |       |       | $          | 0.16                             |       |            |       | $                    | —     |   |   |   | $ | 0.16 |   |   |
| Shares used in  per share calculation—basic     |       |       | 59,636     |                             |       |            | —     |                 |       |   | 59,636 |   |   |
| Shares used in per share  calculation—diluted   |       |       | 62,502     |                             |       |            | (337       | )                    |       |   | 62,165 |   |   |

 

Due to rounding andreclassifications, some of the figures above may differ slightly from the 10-Q’spreviously filed. See Note 1, “Description of Business and Summary ofSignificant Accounting Policies” for description of certain reclassificationsmade to the prior period consolidated financial statements to conform to thecurrent period consolidated financial statements.

**21.**          SubsequentEvents Related to the Special Committee and Company Investigations and theRestatement

*SEC Informal Inquiry.**  *On August 4, 2006, we received an informalinquiry from the Securities and Exchange Commission (“SEC”) requesting certaindocuments and information relating to our stock option grant practices from January 1,1996 to the present. We publicly announced this inquiry on August 7, 2006.Prior to August 4, 2006, we were already conducting an internal review ofour historical stock option grant practices with the assistance of outsidecounsel. We initiated the internal review following extensive news coverage andanalyst reports about the option practices of numerous companies across severaldifferent industries.

Upon receipt of the notice of informal inquiry fromthe SEC, our Board of Directors (the “Board”) formed a special committee ofoutside directors (“Special Committee”) to conduct an independent and 

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comprehensive investigation of our stock optionpractices and to oversee our response to the SEC. The Special Committeeretained independent outside legal counsel and forensic accountants (“InvestigativeTeam”) to aid in its investigation.

The Special Committee concluded its investigation andreported its findings to the full Board on December 2, 2006. The SpecialCommittee concluded that there was no evidence of fraud or misconduct by anyperson with respect to the Company’s historical stock option grant practices. TheSpecial Committee identified instances where documentation of certain optiongrants was lacking. The Special Committee also determined that an incorrectmeasurement date for financial accounting purposes was used on a number ofoccasions. These errors resulted primarily from misapplication of accountingstandards related to certain measurement date selection methods discussed indetail in Note 2, which in a number of occasions resulted in employeesreceiving options with stated exercise prices lower than the market prices asmeasured based upon the measurement dates as determined by the applicableaccounting standards. The Special Committee and its Investigative Team reportedthe Special Committee’s findings and remedial measures to the SEC on January 8,2007. We do not know when this inquiry will beresolved or what actions, if any, the SEC may take as a result of this inquiry.

*Listing on the NASDAQStock Market.*   On November 13, 2006, wefiled a Form 12b-25 with the SEC to report that we would not timelyfile our Quarterly Report on Form 10-Q for the quarter ended September 30,2006. On November 22, 2006 we announced that we received a NASDAQ StaffDetermination letter on November 16, 2006 indicating that, as a result ofour inability to timely file the Form 10-Q, we were not incompliance with the requirements for the continued listing of our common stockas set forth in NASDAQ Marketplace Rule 4310(c)(14), and that our commonstock is, therefore, subject to delisting from the NASDAQ Global Select Market.We requested and have been granted a hearing before a NASDAQ ListingQualifications Panel (“Panel”) to review the Staff Determination. Our oralhearing is scheduled for February 1, 2007 and the delisting action hasbeen stayed pending a final written decision by the Panel. We intend to be incompliance with the applicable NASDAQ Marketplace Rules prior to thehearing date. However, there can be no assurance that the Panel will grant theRegistrant’s request for continued listing.

*Lawsuits related to ourhistorical stock option granting practices.*   On August 25,2006, a shareholder action captioned *Ramsey v. Haller et al.*was filed against certain of our current and former officers and directors inthe California Superior Court, Los Angeles County. The complaint alleges, amongother things, purported improprieties in our issuance of stock options, breachof fiduciary duty and unjust enrichment. We have been served with one othershareholder derivative complaint, based on substantially the same allegations,which was filed in California federal court. A third shareholder derivativecomplaint, filed in California Superior Court, Los Angeles County, has not yetbeen served on the defendants, but we expect to accept service shortly,Although litigation is subject to inherent uncertainties, we do not believe theresults of these pending actions will, individually or in the aggregate, have amaterial adverse impact on our consolidated financial position or results ofoperations.

*Nonqualified deferredcompensation under Section 409A of the Internal Revenue Code.*   Optionsdetermined to have been granted with an exercise price below the fair marketvalue of our common stock on the actual grant date and vesting subsequent to December 2004result in nonqualified deferred compensation for purposes of Section 409Aof the Internal Revenue Code, and holders are subject to an excise tax on thevalue of the options in the year in which they vest. We have determined thatoptions to purchase approximately 1.1 million shares of our common stock heldby current and former employees may be subject to adverse tax consequencesunder Section 409A.

In order to mitigate the unfavorable personal taxconsequences under Section 409A, in December 2006 we unilaterallycorrected the affected options that remain outstanding to increase the exerciseprice to the fair market value of our common stock on the revised measurementdate, and to give the option holders a cash 

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payment equal to the difference between the initialexercise price and the increased exercise price (“Cash Payment”). We estimatethat the Cash Payment will be approximately $2.4 million and will be made inthe fourth quarter of fiscal 2007. We will account for the impact of thecorrected options as a stock option modification under SFAS 123R.

We also plan to compensateindividuals who have exercised options for the consequences of Section 409A.We estimate that we will incur additional compensation expense of $1.6 millionin the third quarter of fiscal 2007 in connection with all the actionsdescribed above.

**Item 9.**                        Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

None.

**Item 9A.**                Controlsand Procedures

(a) *Definitionand limitations of disclosure controls*. Our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) arecontrols and other procedures that are designed to ensure that informationrequired to be disclosed in our reports filed under the Exchange Act, such asthis report, is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms. Disclosure controls and procedures are also designed to ensure that suchinformation is accumulated and communicated to our management, including theChief Executive Officer and Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure. Our management evaluates thesecontrols and procedures on an ongoing basis to determine if improvements ormodifications are necessary.

There are inherent limitations to the effectiveness ofany system of disclosure controls and procedures. These limitations include thepossibility of human error, the circumvention or overriding of the controls andprocedures and reasonable resource constraints. In addition, because we havedesigned our system of controls based on certain assumptions, which we believeare reasonable, about the likelihood of future events, our system of controlsmay not achieve its desired purpose under all possible future conditions. Accordingly,our disclosure controls and procedures provide reasonable assurance, but notabsolute assurance, of achieving their objectives.

(b) *Evaluation of disclosure controls and procedures*.In connection with the original filing of our annual report for the year ended March 31,2006 of Form 10-K, our management, with the participation of ourChief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of our disclosure controls and procedures and our internalcontrol over financial reporting as of March 31, 2006 and, based on thisevaluation, had previously concluded that our disclosure controls andprocedures were effective as of March 31, 2006. As a result of thefindings of the Special Committee as well as our internal review of ourhistorical stock option practices and our need to restate our fiscal 2006, 2005and 2004 consolidated financial statements, as described in the “ExplanatoryNote” immediately preceding Part I, Item 1 and in Note 2, “Restatement ofConsolidated Financial Statements” in Notes to Consolidated FinancialStatements of this Form 10-K/A, management re-evaluated theeffectiveness of our disclosure controls and procedures and our internalcontrol over financial reporting as of March 31, 2006 and determined thatthere was a material weakness, as more fully described below in “Management’sReport on Internal Control Over Financial Reporting (restated)”. For thesereasons, we have now concluded that our disclosure controls and procedures andour internal control over financial reporting were not effective as of March 31,2006. We have disclosed this conclusion to the Audit Committee and to ourindependent registered public accountants.

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**Management Reporton Internal Control Over Financial Reporting (restated)**

We, as management of THQ Inc. and its subsidiaries(the “Company”), are responsible for establishing and maintaining adequateinternal controls over financial reporting. Pursuant to the rules andregulations of the Securities and Exchange Commission, internal control overfinancial reporting is a process designed by, or under the supervision of, theCompany’s principal executive and principal financial officers, or personsperforming similar functions, and effected by the Company’s board of directors,management and other personnel, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples (GAAP) and includes those policies and procedures that:

Pertain to the maintenance of records that inreasonable detail accurately and fairly reflect the transactions anddispositions of the assets of the Company;

Provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the Company are being made only in accordance withauthorizations of management and directors of the Company; and

Provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use or disposition of the Company’sassets that could have a material effect on the financial statements.

Management has conducted an assessment of theeffectiveness of the Company’s internal control over financial reporting as of March 31,2006 based on the control criteria established in a report entitled *Internal Control—Integrated Framework*,issued by the Committee of Sponsoring Organizations of the Treadway Commission. A material weakness is a controldeficiency, or combination of control deficiencies, that results in more than aremote likelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected.

In Management’s Report on Internal Control OverFinancial Reporting included in the Annual Report on Form 10-K forthe fiscal year ended March 31, 2006, we had previously concluded that theCompany’s internal control over financial reporting was effective as of March 31,2006. In connection with the restatement discussed under the heading “ExplanatoryNote” immediately preceding Part I, Item 1 and in Note 2, “Restatement ofConsolidated Financial Statements” in Notes to Consolidated FinancialStatements of this Form 10-K/A, we have subsequently concluded thatthe material weakness described below existed as of March 31, 2006 and asa result, the Company’s internal control over financial reporting was noteffective as of March 31, 2006. Accordingly, Management’s Report onInternal Control Over Financial Reporting has been restated.

The following is a summary of the material weaknessidentified by management as of March 31, 2006:

·       Wedid not design and implement controls necessary to provide reasonable assurancethat the measurement date for stock option grants was appropriately determined.As a result, the measurement date used for certain option grants was notappropriate and such grants were not accounted for in accordance with GAAP;

·       Wefailed to ensure that actions of the Compensation Committee meetings werethoroughly and timely documented; and

·       Wefailed to ensure that managers and other personnel involved in the stock optiongrant process understood the consequences of timely approval of finalizedemployee grant lists.

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Theregistered independent public accounting firm of Deloitte & ToucheLLP, as auditors of the Company’s consolidated financial statements, has issuedan attestation report on management’s restated assessment of the Company’sinternal control over financial reporting.

| /s/ BRIAN J. FARRELL                                                                                   |   |                                                                                                                     |   | /s/ EDWARD K.  ZINSER |   |   |
|--------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|--------|
| Brian J. Farrell  Chairman of the Board, President and  Chief Executive Officer  January 19, 2007 |   | Edward K. Zinser  Executive Vice President,  Chief Financial Officer and Chief Accounting Officer  January 19, 2007 |

 

**Remediation ofMaterial Weakness**

In connection withthe conclusion of its review, the Special Committee recommended to the Board,and its Compensation Committee, that the Board and Compensation Committeeconsider and adopt certain remedial measures related to the issues raised inthe Special Committee’s investigation, including:

·       Limitingthe granting of equity-based compensation to the Board of Directors or theCompensation Committee;

·       Establishinga set day each year for equity grants to non-employee members of the Board ofDirectors;

·       Enhancingprocesses surrounding Company-wide annual grants and new hire grants, especiallypertaining to advance planning, approval timelines, documentation andcommunication;

·       Immediatelydocumenting Compensation Committee meetings where stock option grants areapproved;

·       Implementingwritten policies, procedures and controls related to stock option grantpractices; and

·       Providingregular training to our accounting, legal and stock administration personnelregarding equity grant accounting rules and proper procedures.

Management along with our Board and CompensationCommittee is in the process of implementing such remedial measures.

(c) *Changes in internal control over financial reporting*.In the fourth quarter of fiscal 2006, we implemented certain components of anew system for project management and project costing (the “Project ManagementSystem”) that enhance our ability to track and allocate the overall costsrelated to the development of our video games. This change materially affectedour internal control over financial reporting. The Project Management System isa process improvement initiative intended to strengthen the overall design andoperating effectiveness of our financial reporting controls and is not inresponse to an identified internal control deficiency. Other than the ProjectManagement System implementation, there were no changes in our internal controlover financial reporting that occurred during our last fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting. We have continued to implementadditional components of the Project Management System that are reasonablylikely to have a material affect on our internal control over financialreporting in the first quarter of fiscal 2007.

**Item 9B.**               OtherInformation

None.

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Tothe Board of Directors and Stockholders of THQ Inc.,

Agoura Hills, California

We have audited management’s assessment, included inthe accompanying Management Report on Internal Control over Financial Reporting(restated), that THQ Inc. and its subsidiaries (the “Company”) did not maintaineffective internal control over financial reporting as of March 31, 2006,because of the effect of the material weakness identified in management’sassessment based on criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our report dated June 6, 2006, we expressed anunqualified opinion on management’s assessment that the Company maintainedeffective internal control over financial reporting and an unqualified opinionon the effectiveness of internal control over financial reporting as of March 31,2006. The Company subsequently identified a material misstatement in its annualfinancial statements, which caused such annual financial statements to berestated. Management subsequently restated its assessment due to theidentification of a material weakness, described in the following paragraph, inconnection with the financial statement restatement. Accordingly, our opinionon the effectiveness of the Company’s internal control over financial reportingas of March 31, 2006 expressed herein is different from that expressed inour previous report.

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A material weakness is a significant deficiency, orcombination of significant deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknesshas been identified and included in management’s restated assessment. TheCompany did not design and implement controls necessary to provide reasonableassurance that historical measurement dates for stock option grants toemployees were appropriately determined; accordingly, the measurement datesused for certain option grants were not appropriate, and the Company’saccounting for those grants was not in accordance with Accounting PrinciplesBoard Opinion 25*, Accounting for Stock Issued to Employees*.This material weakness resulted in the restatement of the Company’s previouslyissued financial statements as described in Note 2 to the consolidatedfinancial statements. This material weakness was considered in determining thenature, timing and extent of audit tests applied in our audit of the Company’sconsolidated financial statements as of and for the year ended March 31,2006 (as restated), and this report does not affect our report on such restatedfinancial statements.

In our opinion, management’s restated assessment thatthe Company did not maintain effective internal control over financialreporting as of March 31, 2006, is fairly stated, in all materialrespects, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Also in our opinion, because of theeffect of the material weakness described above on the achievement of theobjectives of the control criteria, the Company has not maintained effectiveinternal control over financial reporting as of March 31, 2006, based onthe criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the Company’s consolidated balance sheet as of March 31,2006 (as restated) and the related consolidated statements of operations,stockholders’ equity and cash flows for the year then ended. Our report dated June 6,2006 (January 19, 2007 as to the effects of the matters discussed in Note21 and the effects of the restatement discussed in Note 2) expressed anunqualified opinion on those financial statements.

**DELOITTE & TOUCHE LLP**

Los Angeles, California

June 6, 2006 (January 19, 2007 as to theeffect of the material weakness described in Management’s Report on InternalControl over Financial Reporting (restated))

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**PART III**

**Item 10.***                *Directorsand Executive Officers of the Registrant

The followinginformation required by Item 10 is incorporated herein by reference fromour definitive Proxy Statement for the 2006 Annual Meeting of Stockholders,which will be filed within 120 days after the close of our fiscal year (the “ProxyStatement”):

·       Informationregarding directors who are nominated for election is included under thecaption “Proposal Number 1—Election of Directors;”

·       Informationregarding executive officers is included under the caption “Executive Officers;”

·       Informationrelated to involvement in certain legal proceedings is included under thecaption “Involvement in Certain Proceedings;”

·       Informationregarding the audit committee and its financial expert is included under thecaption “Committees of the Board of Directors;” and

·       Informationregarding Section 16 compliance is included under the caption “Section 16(a)Beneficial Ownership Reporting Compliance.”

Information regarding ourcode of ethics applicable to our directors, principal executive officer,principal financial officer, principal accounting officer, and other seniorfinancial officers appears under the caption “Charters, Code of Ethics, andCode of Business Conduct and Ethics.”

**Item 11.***                *Executive Compensation

The information requiredunder this Item relating to executive compensation will be included in theProxy Statement under the heading “Executive Officers and ExecutiveCompensation,” and is incorporated herein by reference.

**Item 12.***                *Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters

The information requiredby Item 12 related to securities authorized for issuance under equitycompensation plans is included in Item 5 herein. The information required byItem 12 related to security ownership of certain beneficial owners andmanagement is incorporated herein by reference to the information in the ProxyStatement under the caption “Security Ownership of Certain Beneficial Ownersand Management.”

**Item 13.***                *Certain Relationships and RelatedTransactions

There were no reportablebusiness relationships, transactions with management, or indebtedness ofmanagement during the fiscal year ended March 31, 2006.

**Item 14.***                *Principal Accounting Fees andServices

The information regardingprincipal accounting fees and services and the Company’s pre-approval policiesand procedures for audit and non-audit services provided by the Company’sindependent accountant is incorporated by reference to the Proxy Statementunder the caption “Proposal Number 4—Ratification of Independent RegisteredPublic Accounting Firm.”

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**PART IV**

**Item 15.**                 Exhibitsand Consolidated Financial Statement Schedules

***(a) Financial Statements and Financial StatementSchedules***

The following financialstatements of the Company are included in Part II Item 8:
|                                                                                                                                               | ** ** | **Page** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| REPORT OF  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                                                      |       |     | 59         |   |   |
| CONSOLIDATED  FINANCIAL STATEMENTS, AS RESTATED                                                                                               |       |     |       |   |   |
| Consolidated balance  sheets, as restated—March 31, 2006 and 2005                                                                   |       |     | 60         |   |   |
| Consolidated  statements of operations, as restated, for the fiscal years ended  March 31, 2006, 2005 and 2004                 |       |     | 61         |   |   |
| Consolidated statements of stockholders’ equity, as  restated, for the fiscal years ended March 31, 2006, 2005 and 2004   |       |     | 62         |   |   |
| Consolidated  statements of cash flows, as restated, for the fiscal years ended  March 31, 2006, 2005 and 2004            |       |     | 63         |   |   |
| NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS                                                                                                   |       |     | 64         |   |   |

 

***(b) Exhibits.***

The following exhibits arefiled herewith or are incorporated by reference to exhibits previously filedwith the SEC. We will furnish copies of the exhibits for a reasonable fee(covering the expense of furnishing copies) upon request:
| Exhibit  Number | ** ** | **Title**                                                                                                                                                                                                                                                                                                                                                 |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |       | Certificate of  Incorporation (incorporated by reference to Exhibit 3.1 to  Post-Effective Amendment No. 1 to the Registration Statement on  Form S-3 filed on January 9, 1998 (File No. 333-32221)  (the “S-3 Registration Statement”)).                                                                         |
| 3.2             |       | Amendment to Certificate of Incorporation (incorporated  by reference to Exhibit 3.2 to Post-Effective Amendment No. 1 to  the S-3 Registration Statement).                                                                                                                                                                                     |
| 3.3             |       | Amendment to Certificate of Incorporation  (incorporated by reference to Exhibit 3.3 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2001).                                                                                                                                                         |
| 3.4             |       | Amended and Restated Bylaws (incorporated by  reference to Exhibit 3 to the Registrant’s Current Report on Form 8-K  filed on June 22, 2000).                                                                                                                                                                                         |
| 3.5             |       | Certificate of Designation of Series A Junior  Participating Preferred Stock of THQ Inc. (incorporated by reference to  Exhibit A of Exhibit 1 of Amendment No. 2 to the Registrant’s  Registration Statement on Form 8-A filed on August 28, 2001  (File No. 001-15959) (the “August 2001 8-A”)). |
| 3.6             |       | Amendment to Certificate of Designation of  Series A Junior Participating Preferred Stock of THQ Inc. (incorporated  by reference to Exhibit 3.6 to the Registrant’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2001).                                                                                   |
| 4.1             |       | Amended and  Restated Rights Agreement, dated as of August 22, 2001 between the  Company and Computershare Investor Services, LLC, as Rights Agent  (incorporated by reference to Exhibit 1 to Amendment No. 2 to the  Registrant’s August 2001 8-A).                                                                            |

 

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| Exhibit  Number | ** ** | **Title**                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.2             |       | First Amendment to  Amended and Restated Rights Agreement, dated April 9, 2002 between the  Company and Computershare Investor Services, LLC, as Rights Agent  (incorporated by reference to Exhibit 2 to Amendment No. 3 to the  Registrant’s Registration Statement on Form 8-A filed on  April 12, 2002 (file No. 000-18813)).                                                                                    |
| 10.1 #          |       | Stock Option  Agreement, dated as of August 28, 1996, between the Company and Brian J.  Farrell (incorporated by reference to Exhibit 10.31 to the Registrant’s  Annual Report on Form 10-K for the fiscal year ended  December 31, 1996).                                                                                                                                                                                     |
| 10.2 #          |       | Stock Option  Agreement dated as of December 23, 1998, between the Company and each of  Messrs. Lawrence Burstein and James Whims (incorporated by reference to  Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 1999).                                                                                                                                                    |
| 10.3 #          |       | Amended and  Restated Employment Agreement, dated as of January 1, 2001 between the  Company and Brian J. Farrell (incorporated by reference to Exhibit 10.1  to the Registrant’s Annual Report on Form 10-K for the fiscal year  ended December 31, 2000).                                                                                                                                                                    |
| 10.4 #          |       | Ed Zinser Offer  Letter dated March 24, 2004 (incorporated by reference to  Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2004 (the “June 2004 10-Q”)).                                                                                                                                                                                                        |
| 10.5 #          |       | Kelly Flock Offer  Letter dated August 11, 2005 (incorporated by reference to  Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended September 30, 2005 (the “September 2005 10-Q”)).                                                                                                                                                                                           |
| 10.6 #          |       | Indemnification  Agreements, dated as of November 30, 2004 between the Company and each  director of the Company, being the following: Lawrence Burstein, Henry  DeNero, Brian P. Dougherty, Brian J. Farrell, and James L. Whims  (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly  Report on Form 10-Q for the quarterly period ended  December 31, 2004 (the “December 2004 10-Q”)). |
| 10.7 #          |       | Indemnification  Agreement, dated as of March 28, 2006 between the Company and Jeffrey W.  Griffiths (the form of which is incorporated by reference to  Exhibit 10.4 to the Registrant’s December 2004 10-Q).                                                                                                                                                                                                                      |
| 10.8 #          |       | THQ Inc. Amended  and Restated 1997 Stock Option Plan, as amended on August 18, 2005  (incorporated by reference to Exhibit 10.2 to the Registrant’s September 2005  10-Q).                                                                                                                                                                                                                                                         |
| 10.9 #          |       | Third Amended and  Restated Non-executive Employee Stock Option Plan (incorporated by reference  to Appendix C to Registrant’s Proxy Statement on Schedule 14A filed  July 3, 2003).                                                                                                                                                                                                                                                          |
| 10.10 #         |       | THQ Inc.  Performance Accelerated Restricted Stock Unit Deferred Compensation Plan,  effective as of August 18, 2005 (incorporated by reference to  Exhibit 10.3 to the Registrant’s September 2005 10-Q).                                                                                                                                                                                                                          |
| 10.11 #         |       | Form of  Severance Agreement with Executive Officers (incorporated by reference to  Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K  for the fiscal year ended December 31, 1998).                                                                                                                                                                                                                                 |
| 10.12 #         |       | Form of  Severance Agreement for Senior Officers, effective January 27, 2005  (incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report  on Form 10-K for the fiscal year ended March 31, 2005 (the  “March 2005 10-K”)).                                                                                                                                                              |

 

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| Exhibit  Number | ** ** | **Title**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.13 #         |       | THQ Inc. Management  Deferred Compensation Plan, effective as of January 1, 2005 (incorporated  by reference to Exhibit 10.1 to the Registrant’s Current Report on  Form 8-K filed on December 23, 2004).                                                                                                                                                                                                                                                                                     |
| 10.14           |       | Amended and  Restated Revolving Credit Agreement, dated as of September 27, 2002 by  and between the Company and Union Bank (incorporated by reference to  Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended September 30, 2002 (the “September 2002 10-Q”)).                                                                                                                                                                              |
| 10.15           |       | First Amendment  to the Amended and Restated Revolving Credit Agreement, dated  November 21, 2002 by and between the Company and Union Bank  (incorporated by reference to Exhibit 10.24 to the Registrant’s Annual  Report on Form 10-K for the fiscal year ended December 31,  2002).                                                                                                                                                                                                       |
| 10.16           |       | Second Amendment  to the Amended and Restated Revolving Credit Agreement and Third Amendment to  the Security Agreement, dated May 30, 2003 by and between the Company  and Union Bank of California, N.A., as sole lender, and Union Bank of  California, N.A., as administrative agent for the Lender (incorporated by  reference to Exhibit 10.35 to the Registrant’s Transitional Annual  Report on Form 10-KT for the transitional period from  January 1, 2003 to March 31, 2003). |
| 10.17           |       | Third Amendment  to the Amended and Restated Revolving Credit Agreement, dated  September 26, 2003 by and between the Company and Union Bank of  California, N.A., as administrative agent for the Lender (incorporated by  reference to Exhibit 10.1 to the Registrant’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2003 (the  “September 2003 10-Q”)).                                                                                               |
| 10.18           |       | Fourth Amendment  - Extension letter dated August 25, 2004, relating to the Credit  Agreement between the Company and Union Bank of California (incorporated by  reference to Exhibit 10.1 of the Registrant’s Current Report on  Form 8-K filed on August 31, 2004).                                                                                                                                                                                                                         |
| 10.19 +         |       | Fifth Amendment  to Amended and Restated Revolving Credit Agreement, dated as of  November 29, 2004 by and between the Company, Union Bank of California,  N.A., a sole lender, and Union Bank of California, N.A., as administrative  agent for the Lender (incorporated by reference to Exhibit 10.3 to the  Registrant’s December 2004 10-Q).                                                                                                                                                   |
| 10.20 +         |       | PlayStation® 2  CD-Rom / DVD-Rom Licensed Publisher Agreement, dated as of April 1, 2000  between Sony Computer Entertainment America Inc. and the Company  (incorporated by reference to Exhibit 10.10 to the Registrant’s  September 2002 10-Q).                                                                                                                                                                                                                                            |
| 10.21 +         |       | Licensed  Publisher Agreement, dated as of August 28, 2002 by and between Sony  Computer Entertainment America Inc. and the Company (incorporated by  reference to Exhibit 10.9 to the Registrant’s September 2002 10-Q).                                                                                                                                                                                                                                                                          |
| 10.22           |       | PlayStation® 2  Licensed Publisher Agreement, dated as of May 21, 2003 between Sony  Computer Entertainment Korea Inc. and THQ Korea Ltd. (incorporated by  reference to Exhibit 10.1 to the Registrant’s Quarterly Report on  Form 10-Q for the quarter ended June 30, 2003 (the  “June 2003 10-Q”)).                                                                                                                                                                    |
| 10.23           |       | PlayStation® 2  Licensed Publisher Agreement, dated as of July 28, 2003 between Sony  Computer Entertainment Europe Limited and THQ International Limited  (incorporated by reference to Exhibit 10.1 to the Registrant’s  September 2003 10-Q).                                                                                                                                                                                                                                              |

 

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| Exhibit  Number | ** ** | **Title**                                                                                                                                                                                                                                                                                                                          |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.24 +         |       | PlayStation® Portable  Licensed Publisher Agreement, dated as of November 17, 2004 between Sony  Computer Entertainment America Inc. and the Company (incorporated by  reference to Exhibit 10.2 to the Registrant’s December 2004 10-Q).                                                                 |
| 10.25 +         |       | Xbox 360  Publisher License Agreement, dated as of October 31, 2005 by and between  Microsoft Licensing, GP and the Company (incorporated by reference to  Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended December 31, 2005).                                      |
| 10.26 +         |       | Microsoft  Corporation XboxTM Publisher License Agreement, dated as of March 20,  2001 between Microsoft Corporation and the Company (incorporated by reference  to Exhibit 10.8 to the Registrant’s September 2002 10-Q).                                                                                 |
| 10.27           |       | Amendment to the  XboxTM Publisher Licensing Agreement (Tiered Royalty Rate Structure and Xbox  Platinum Hits Program), dated as of January 31, 2003 between Microsoft  Licensing, Inc. and the Company (incorporated by reference to  Exhibit 10.2 to the Registrant’s June 200310-Q).               |
| 10.28           |       | Term Extension to  XboxTM Publisher License Agreement, dated October 13, 2004 between the  Company and Microsoft Licensing, GP (incorporated by reference to  Exhibit 10.1 of the Registrant’s Current Report on Form 8-K  filed on October 18, 2004).                                                |
| 10.29           |       | Amendment to the  XboxTM Publisher Licensing Agreement (Platinum Hits Family Programs), dated as  of March 15, 2004 (incorporated by reference to Exhibit 10.30 to  the Registrant’s Annual Report on Form 10-K for the fiscal year  ended March 31, 2004).                                           |
| 10.30 +         |       | Amendment to XboxTM  Publisher License Agreement, effective as of March 1, 2005 and dated  March 9, 2005 by and between Microsoft Licensing, GP and the Company  (incorporated by reference to Exhibit 10.27 to the Registrant’s  March 2005 10-K).                                                   |
| 10.31 +         |       | Confidential  License Agreement for Game Boy Advance (Western Hemisphere), dated as of  July 18, 2001 between Nintendo of America, Inc. and the Company  (incorporated by reference to Exhibit 10.6 to the Registrant’s  September 2002 10-Q).                                                            |
| 10.32           |       | First Amendment  to the Confidential License Agreement for Game Boy Advance, dated as of  July 18, 2004 between Nintendo of America, Inc. and the Company  (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30,  2004). |
| 10.33 +         |       | Confidential  License Agreement for Nintendo GameCube (Western Hemisphere), dated as of  April 5, 2002 between Nintendo of America, Inc. and the Company  (incorporated by reference to Exhibit 10.7 to the Registrant’s  September 2002 10-Q).                                                           |
| 10.34 +         |       | First Amendment  to Confidential License Agreement for Nintendo GameCube, dated as of April 5,  2005 between Nintendo of America, Inc. and the Company (incorporated by  reference to the Registrant’s Quarterly Report on Form 10-Q for  the quarter ended June 30, 2005).                               |
| 10.35 +         |       | Confidential  License Agreement for Nintendo GameCube (Asia), dated as of November 17,  2003 between Nintendo Co., Ltd. and THQ Asia Pacific Pty Ltd. (incorporated  by reference to Exhibit 10.1 to the Registrant’s June 2004 10-Q).                                                                         |
| 10.36 +         |       | Confidential  License Agreement for the Nintendo DS handheld platform, dated as of January 25,  2005 between Nintendo of America, Inc. and the Company (incorporated by  reference to Exhibit 10.32 to the Registrant’s March 2005 10-K).                                                                 |

 

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| Exhibit  Number | ** ** | **Title**                                                                                                                                                                                                                                                                 |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.37           |       | Lease agreement dated  December 22, 2004 between the Company, as Tenant, and FORCE-AGOURA ROAD,  LLC and Dennis D. Jacobsen Family Holdings II, LLC, as Landlord (incorporated  by reference to Exhibit 10.6 to the Registrant’s December 2004 10-Q). |
| 14              |       | Code of Ethics  for Executive Officers and Other Senior Financial Officers, as adopted  May 27, 2004 (incorporated by reference from the Registrant’s  Form 10-K for the fiscal year ended March 31, 2006).                                           |
| 21              |       | Subsidiaries of  the Registrant (incorporated by reference from the Registrant’s Form 10-K  for the fiscal year ended March 31, 2006).                                                                                                                     |
| 23.1*           |       | Consent of  Deloitte & Touche LLP                                                                                                                                                                                                                                |
| 31.1*           |       | Certification of  Brian J. Farrell, Chief Executive Officer, pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                                                                                                                              |
| 31.2*           |       | Certification of  Edward K. Zinser, Chief Financial Officer and Chief Accounting Officer,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                 |
| 32.1*           |       | Certification of  Brian J. Farrell, Chief Executive Officer, pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                                                                              |
| 32.2*           |       | Certification of  Edward K. Zinser, Chief Financial Officer and Chief Accounting Officer,  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                 |

----

*                    Filed herewith

#                 Managementcontract of compensatory plan or arrangement

+                Portions have beenomitted and filed separately with the Securities and Exchange Commissionpursuant to a request for confidential treatment in accordance with Rule 24b-2under the Securities Exchange Act of 1934, as amended

105

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

| Dated: January 19, 2007 | THQ INC. |
|------------------------------|----------|
|                         | By:      | /s/ BRIAN J. FARRELL |
|                         |     | Brian J. Farrell, Chairman of the Board,  President and Chief Executive Officer |

 

| Dated: January 19, 2007 | THQ INC. |
|------------------------------|----------|
|                         | By:      | /s/ EDWARD ZINSER |
|                         |     | Edward Zinser, Executive Vice President,   Chief Financial Officer and Chief   Accounting Officer (Principal Financial   Officer and Principal Accounting Officer) |
|                              |          |  |  |

 

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