**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON, D.C. 20549

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**FORM 10-K/A**

**(AmendmentNo. 2)**

**(Mark One)**

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

**Forthe fiscal year ended March 31, 2006**

**OR**

**o** TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from _____ to _____**

**Commissionfile number 0-18813**

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**THQINC.**

(Exact Name of Registrant asSpecified 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 areacode: **(818) 871-5000**

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Securities registered pursuant toSection 12(b) of the Act:

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

**Preferred Stock Purchase Rights**

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

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Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct.  Yes  o  No  þ

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of theAct.  Yes  o  No  þ

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(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 if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K.  o

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

 

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

 

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

The aggregate market value of the voting stock heldby non-affiliates of the registrant as of the last business day of theregistrant’s second fiscal quarter, September 30, 2005 was approximately$1.3 billion (based on the closing sales price of the registrant’s common stockon September 30, 2005). The number of shares outstanding of the registrant’scommon stock as of May 25, 2007 was approximately 66,913,074.

**DOCUMENTS INCORPORATED BY REFERENCE**

The 2006 Notice of AnnualMeeting of Stockholders and Proxy Statement are incorporated by reference intoPart III herein.

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**THQ INC.INDEX TO ANNUAL REPORT ON FORM 10-K/AFILED WITH THE SECURITIES AND EXCHANGE COMMISSIONFOR THE FISCAL YEAR ENDED MARCH 31, 2006**

**ITEMS IN AMENDMENT NO. 2ON FORM 10-K/A**
|                   | ** **                                                                                                              | ** ** | **PAGE** |
|-------------------|-------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **Part I**   |
| ** **        |
| Explanatory  Note |                                                                                                                    | 3          |
| Item  1.          | Business                                                                                                                |       | 8        |
| Item  1A.         | Risk  Factors                                                                                                           |       | 15       |
| Item 1B.          | Unresolved  Staff Comments                                                                                              |       | 22       |
| Item  2.          | Properties                                                                                                              |       | 22       |
| Item 3.           | Legal Proceedings                                                                                                       |       | 22       |
| Item 4.           | Submission  of Matters to a Vote of Security Holders                                                                    |       | 23       |
|              |                                                                                                                    |       |     |
| **Part II**  |
| ** **        |
| Item 5.           | Market for  the Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |       | 24       |
| Item 6.           | Selected  Consolidated Financial Data                                                                                   |       | 25       |
| Item 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             |       | 29       |
| Item 7A.          | Quantitative  and Qualitative Disclosures About Market Risk                                                             |       | 51       |
| Item 8.           | Consolidated  Financial Statements and Supplementary Data                                                               |       | 52       |
| Item 9.           | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                                   |       | 90       |
| Item 9A.          | Controls and  Procedures                                                                                                |       | 90       |
| Item 9B.          | Other Information                                                                                                       |       | 92       |
|              |                                                                                                                    |       |     |
| **Part III** |
| ** **        |
| Item 10.          | Directors and  Executive Officers of the Registrant                                                                     |       | 95       |
| Item 11.          | Executive  Compensation                                                                                                 |       | 95       |
| Item 12.          | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        |       | 95       |
| Item 13.          | Certain  Relationships and Related Transactions                                                                         |       | 95       |
| Item 14.          | Principal  Accounting Fees and Services                                                                                 |       | 95       |
|              |                                                                                                                    |       |     |
| **Part IV**  |
| ** **        |
| Item 15.          | Exhibits  and Consolidated Financial Statement Schedules                                                                |       | 96       |
| Signatures        |                                                                                                                    |       |     |
| Certifications    |                                                                                                                    |       |     |

 

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**This Annual Report, Amendment No. 2 onForm 10-K/A contains, or incorporates by reference, certainforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Such statements include, but are not limited to,(1) projections of revenues, expenses, income or loss, earnings or lossper share, cash flow projections and other financial items; (2) statementsof our plans and objectives, including those relating to product releases;(3) statements of future economic performance; and (4) statements ofassumptions underlying such statements. We generally use words such as “anticipate,”“believe,” “could,” “estimate,” “expect,” “forecast,” “future” “intend,” “may,”“plan,” “positioned,” “potential,” “project,” “scheduled,” “set to,” “subjectto,” “upcoming” and other similar expressions to help identify forward-lookingstatements. These forward-looking statements are subject to business andeconomic risk, reflect management’s current expectations, estimates andprojections about our business, and are inherently uncertain and difficult topredict. Our actual results could differ materially. The forward-lookingstatements contained herein speak only as of the date on which they were made,and we disclaim any obligation to update any forward-looking statements toreflect events or circumstances after the date of this Annual Report. Risks and uncertainties thatmay affect our future results include, but are not limited to, those discussedunder the heading “Risk Factors,” included in Item 1A herein. Allreferences to “we,” “us,” “our,” “THQ,” or the “Company” in the followingdiscussion and analysis mean THQ Inc. and its subsidiaries.**

**EXPLANATORYNOTE**

THQ Inc. is filingthis Amendment No. 2 on Form 10-K/A (“Amendment No. 2”) to the Annual Report onForm 10-K for the fiscal year ended March 31, 2006, which was originally filedwith the Securities and Exchange Commission (the “Commission”) on June 7, 2006,and amended on Form 10-K/A, which was filed with the Commission on January 19,2007 (as so amended, the “Original Filing”).

This Amendment No.2 does not change any previously reported financial results.  For the convenience of the reader, thisAmendment No. 2 restates the Original Filing in its entirety.  Except for the matters described below, thisAmendment No. 2 does not reflect events occurring after the filing of theOriginal Filing, or modify or update those disclosures affected by subsequentevents.  This Amendment No. 2 continuesto speak as of the date of the Original Filing, and does not modify or updateany other item or disclosures in the Original Filing.

In response to acomment letter from the Securities and Exchange Commission’s Division ofCorporation Finance, we have made the following amendments to our disclosure:

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

We clarified therisk described as “Pending civil litigation relating to our stock optiongranting practices could have a material adverse effect on the Company.”  This change was made to Part I, Item 1A, RiskFactors.

*Cost ofsales caption*

We included in ourconsolidated statements of operations the caption, “Cost of sales,” to describeour product costs, software amortization and royalties, license amortizationand royalties and venture partner expense and we have reordered thepresentation of these line items.  Inaddition, we have specifically stated that our accrued payments to JAKKSPacific are classified as “Cost of sales – venture partner expense”in the statements of operations.  Thesechanges appear in:

·                  Item 6, SelectedConsolidated Financial Data, the consolidated statements of operations;

·                  Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations, under the heading “Costs and Expenses, Interest Income, OtherIncome, Income Taxes and Minority Interest;”

·                  Item8, Consolidated Financial Statements and Supplementary Data, in theconsolidated statements of operations and “Note 17 - Agreement with JAKKSPacific, Inc.”

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*Accountingfor the December 2006 stock option modification*

We expanded ourdisclosure of the December 2006 stock option modification, specifically toinclude the $0.7 million of additional compensation cost incurred due to theincrease in the fair value of the modified options as a result of the cashpayment. We also clarified the amount of additional expense, $0.9 million, werecognized based on our plan to compensate individuals who had exercisedaffected options prior to December 2006 for certain adverse consequences underSection 409A of the Internal Revenue Code. This change appears in:

·                 Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations, under the heading “Restatement of Consolidated FinancialStatements,” and

·                 Item8, Consolidated Financial Statements and Supplementary Data, “Note 21 -Subsequent Events Related to the Special Committee and Company Investigationsand the Restatement.”

*Accountsreceivable allowances*

We expanded ourdescription of our accounts receivable allowances to specifically state thatincluded in our accounts receivable allowances is our allowance forco-operative advertising costs and we expanded the description of ouradvertising activities to include these co-operative advertising activities.  We also changed the naming of this allowancefrom “Allowance for Price Protection, Returns and Doubtful Accounts” to “AccountsReceivable Allowances.” Additionally, we have presented a table that clarifiesthe three categories in which we currently and have historically managed ouraccounts receivable allowances.  Thesechanges appear in:

·                 Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations, under the headings “Critical Accounting Estimates” and “Key BalanceSheet Accounts;”

·                 Item 8,Consolidated Financial Statements and Supplementary Data,

–                “Note1 - Description of Business and Summary of Significant Accounting Policies”(specifically “Accounts Receivable Allowances” and “Advertising”) and

–                “Note 4 - Allowancefor Price Protection, Returns and Doubtful Accounts.”

*Presentationand disclosure of the incremental stock-based compensation expense and therelated payroll tax expenses resulting from the investigation of our historicalstock option grant practices*

We expanded ourdisclosure of the incremental impact, per fiscal year, from recognizingadditional expenses resulting from the investigation of our historical stockoption grant practices to separately state the impact from additionalstock-based compensation expense, the related payroll tax expenses and thepreviously reported stock-based compensation expense.  We have also expanded our description of theadditional payroll tax expense that was recognized.  These changes appear in Item 8, ConsolidatedFinancial Statements and Supplementary Data, “Note 2 - Restatement ofConsolidated Financial Statements.”

*Quarterlybalance sheet line item adjustments for fiscal 2005 and 2006*

We have presentedthe impact of our prior restatement on the individual balance sheet line itemsin addition to the individual consolidated statements of operations lineitems.  This change appears in Item 8,Consolidated Financial Statements and Supplementary Data, “Note 20 - QuarterlyFinancial Data (Unaudited)”.

We have included,as exhibits, currently dated certifications from our Chief Executive Officerand Chief Financial Officer, Sections 302 and 906 of the Sarbanes-Oxley Act of2002. These appear in Item 15, Exhibits and Consolidated Financial StatementSchedules.

The first amendment (the “First Amendment”) to theOriginal Filing, filed on Form 10-K/A on January 19, 2007, was filed to reflectthe restatement of our consolidated financial statements and the relateddisclosures resulting from the previously disclosed investigation of historicalstock option grant practices.  In theFirst Amendment, we restated our consolidated balance sheets as of March 31,2006 and 2005, and the related consolidated statements of operations,stockholders’ equity, and cash flows for each of the fiscal years ended March31, 2006, 2005, and 2004, and each of the quarters in fiscal years 2006 and2005. The First Amendment also included the restatement of Item 6,Selected

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Consolidated Financial Data for the fiscal years endedMarch 31, 2006, 2005, 2004 and 2003, as well as the three months ended March31, 2003 and the fiscal year ended December 31, 2002.

We did not amend our previously-filed Annual Reportson Form 10-K or Quarterly Reports on Form 10-Q for all of the periods affectedby the restatement.  Instead, thefinancial information that has been previously filed or otherwise reported forthese periods was superseded by the information in the First Amendment, and thefinancial information contained in such previously-filed reports should nolonger be relied upon.

On August 4, 2006, we received an informal inquiryfrom the Securities and Exchange Commission (“SEC”) requesting certaindocuments and information relating to our stock option grant practices fromJanuary 1, 1996 to the present (the “Period”). We publicly announced this inquiry on August 7, 2006.  Prior to August 4, 2006, we were alreadyconducting an internal review of our historical stock option grant practices withthe assistance of outside counsel. We initiated the internal review followingextensive news coverage and analyst reports about the option practices ofnumerous companies across 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.  TheSpecial Committee retained independent outside legal counsel and forensicaccountants (the “Investigative Team”) to aid in its investigation.

**Special Committee Findings**

The Investigative Team reviewed the facts andcircumstances surrounding stock option grants made during the period fromJanuary 1996 through September 2006 (the “Period”), which included grants madeon 426 dates.  The Investigative Teamconducted an extensive investigation, incurring over 11,000 person-hourssearching millions of physical and electronic documents and interviewing morethan 35 current and former directors, officers, employees, and advisors.  As part of its investigation, the SpecialCommittee evaluated whether the correct measurement dates had been used underapplicable accounting 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* (“APB25”) and related interpretations, is the first date on which all of thefollowing are known: (1) the individual employee who is entitled to receive theoption grant, (2) the number of options that an individual employee is entitledto 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 Special Committee concluded that therewas no evidence of fraud or misconduct by any person with respect to theCompany’s historical stock option grant practices.  The Special Committee identified instanceswhere documentation of certain option grants was lacking. The Special Committeealso determined that an incorrect measurement date for financial accountingpurposes was used on a number of occasions. 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 accountingstandards.  Most of the additionalstock-based compensation expense related to these incorrect measurement datespertained to grants made to non-executive employees.  In connection with the conclusion of itsreview, the Special Committee recommended to the Board, and its CompensationCommittee, that the Board and Compensation Committee consider and adopt certainremedial measures related to the issues raised in the Special Committee’sinvestigation.  See Item 9A. “Controlsand Procedures” for a complete discussion of our material weakness in internalcontrols surrounding our stock option grant practices.  The Special Committee and its InvestigativeTeam reported the Special Committee’s findings and remedial measures to the SECon 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 additionalnon-cash stock-based compensation expense and related tax effects with regardto past stock option grants and restated previously filed financial statementsin the First Amendment.  Theseadjustments, after tax, aggregate to $10.8 million for the period from January1, 1996 through March 31, 2006.  Theadjustments, after tax, for fiscal years 2006, 2005 and 2004 were $2.2 million,$1.4 million and $1.8 million, respectively.

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

*Company-Wide Stock Option Grants not Determinedwith Finality*.The Special Committee determined that, in connection with certain company-widestock option grants that we made to non-executive employees in various years,we used incorrect measurement dates for accounting and reporting purposesbecause the list of grantees and the options awarded to each grantee was notdetermined with finality until a date subsequent to the measurement dates wepreviously used.  In most suchsituations, our practice was to set the exercise price for the option at theclosing price of our common stock on the date the Compensation Committee of theBoard delegated authority to our Chief Executive Officer to award up to aspecified aggregate number of options, which was prior to the date that thelist of grantees and the options awarded to each grantee was finalized by theChief Executive Officer.  We haverecognized additional stock-based compensation expense of $6.7 million for theperiod from January 1, 1996 through March 31, 2006 related to this type oferror.

*Stock Option Grants Priced usingPrevious Day Closing Price.*The Special Committee determined that in three instancesthroughout 1998 and 1999, the exercise price was set at the closing price ofour common stock on the day prior to the Compensation Committee meeting wheresuch grants were made.  Our option plansin effect at the time stated that the grant price could not be less than thefair market value of the option on the date of grant, which was defined in theplans as the closing 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 recognizedadditional stock-based compensation expense of $1.8 million for the period fromJanuary 1, 1996 through March 31, 2006 related to this type of error.

*Incorrect Measurement Dates for NewHire Stock Option Grants. * The Special Committee also identifiedaccounting errors related to our new hire stock option grant practices.  The Special Committee determined that our newhire stock option granting practice, primarily for our international employees,resulted in a measurement date for accounting purposes that was subsequent tothe date that we had previously used for accounting purposes.  These errors occurred because the details ofstock option grants to international employees were not contained in offerletters and in most cases the number of options the individual was entitled toreceive was determined after his or her start date. There were also someinstances where grants were made to employees prior to the date they startedproviding services to the Company, generally because the employee had acceptedan employment offer and his or her name was placed on a grant list that wasthen approved prior to his or her actual start date.  We have recognized additional stock-basedcompensation expense of $1.6 million for the period from January 1, 1996through March 31, 2006 related to these types of errors.

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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):

|                                | ** ** | ** **                        | ** ** | ** **           | ** ** | ** **               | ** ** | ** **                    | ** ** | ** **      | ** ** | **Previously**   | ** ** |
|--------------------------------|------------|-----------------------------------|------------|----------------------|------------|--------------------------|------------|-------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                     | ** ** | ** **                        | ** ** | ** **           | ** ** | ** **               | ** ** | ** **                    | ** ** | ** **      | ** ** | **Reported**     | ** ** |
| ** **                     | ** ** | **Stock-Based Compensation** | ** ** | ** **           | ** ** | **Total**                | ** ** | **Stock-Based**               | ** ** |
| ** **                     | ** ** | ** **                        | ** ** | ** **           | ** ** | ** **               | ** ** | **Related**                   | ** ** | **Incremental** | ** ** | **Compensation** | ** ** |
| ** **                     | ** ** | ** **                        | ** ** | **Payroll Tax** | ** ** | **Impact, Net**     | ** ** | **Expense, Net of** | ** ** |
| **Fiscal Year**           | ** ** | **Pre-tax**                       | ** ** | **Tax Effect**  | ** ** | **Net of Tax** | ** ** | **Expense**                   | ** ** | **of Tax** | ** ** | **Tax (2)** | ** ** |
| 1996                           |       | $                                 | 52         |                 | $          | -                        |       | $                             | 52         |            | $          | -                |       | $ | 52 |   | $ | - |   |
| 1997                           |       |                              | 273        |                 |       | (44                      | )          |                          | 229        |            |       | -                |       |   | 229 |   |   | - |   |
| 1998                           |       |                              | 817        |                 |       | (239                     | )          |                          | 578        |            |       | -                |       |   | 578 |   |   | - |   |
| 1999                           |       |                              | 767        |                 |       | (212                     | )          |                          | 555        |            |       | -                |       |   | 555 |   |   | - |   |
| 2000                           |       |                              | 861        |                 |       | (207                     | )          |                          | 654        |            |       | -                |       |   | 654 |   |   | - |   |
| 2001                           |       |                              | 1,739      |                 |       | (446                     | )          |                          | 1,293      |            |       | -                |       |   | 1,293 |   |   | 182 |   |
| 2002                           |       |                              | 2,435      |                 |       | (638                     | )          |                          | 1,797      |            |       | 5                |       |   | 1,802 |   |   | 104 |   |
| Transition 2003  (1)           |       |                              | 383        |                 |       | (104                     | )          |                          | 279        |            |       | 25               |       |   | 304 |   |   | 119 |   |
| Total 1996 –  2003 Impact |       |                              | 7,327      |                 |       | (1,890                   | )          |                          | 5,437      |            |       | 30               |       |   | 5,467 |   |   | 405 |   |
| 2004                           |       |                              | 1,680      |                 |       | (334                     | )          |                          | 1,346      |            |       | 421              |       |   | 1,767 |   |   | 54 |   |
| 2005                           |       |                              | 806        |                 |       | 31                       |       |                          | 837        |            |       | 556              |       |   | 1,393 |   |   | - |   |
| 2006                           |       |                              | 1,555      |                 |       | (279                     | )          |                          | 1,276      |            |       | 887              |       |   | 2,163 |   |   | 1,153 |   |
|                           |       | $                                 | 11,368     |                 | $          | (2,472                   | )          | $                             | 8,896      |            | $          | 1,894            |       | $ | 10,790 |   | $ | 1,612 |   |

 

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Notes:

(1)   Effective January 1, 2003, we changedour fiscal year end from December 31 to March 31. The change resultedin a three-month transitional period ended March 31, 2003. References toTransition 2003, unless otherwise indicated, refer to the three-monthtransitional period ended March 31, 2003. The incremental impact for the fiscal year ended March 31, 2003(unaudited) from recognizing additional stock-based compensation expense resultingfrom the investigation of historical stock option grant practices is as follows(in thousands):  $2,159 pre-tax expenseand $1,567 after tax expense.

(2)   Represents previously reported stock-basedcompensation expense as determined under APB 25 and used in disclosurespursuant to FAS 123.

Additionally, we restated the pro forma expense underStatement of Financial Accounting Standards (“SFAS”) No. 123 in Note 1 of theNotes to Consolidated Financial Statements to reflect the impact of theseadjustments.

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**PART I**

**Item1. Business**

**Introduction**

We are a leading worldwide developer and publisher ofinteractive entertainment software for all popular 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;

·      Handheld platforms such asNintendo Game Boy Advance, Nintendo Dual Screen, PSP portable entertainmentsystem (“PSP system”), wireless devices; and

·      Personal computers.

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 from productstargeted at children and the mass-market to products targeted at core gamers.Our portfolio of licensed properties includes the Disney/Pixar properties*Finding Nemo*, *The Incredibles*, and*Cars,*(whichis expected to be released globally beginning in North America inJune 2006); World WrestlingEntertainment®; Nickelodeon properties such as SpongeBob SquarePantsTM,Avatar, Fairly OddParentsTM and Nicktoons; BratzTM; Power Rangers; Warhammer® 40,000; and Scooby-Doo!TM; as well as others. We also havelicenses to create wireless products based on *Star Wars*and major sports leagues. In addition to licensed properties, we also publishgames based upon owned intellectual properties, including *Company of Heroes, Destroy All Humans!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 leading third-party developers around the world todevelop 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 originally incorporated in New York in 1989 asTrinity Acquisition Corporation, which changed its name in 1991 to T.HQ, Inc.following a merger with THQ, Inc., a California corporation. We were reincorporatedin Delaware as THQ Inc. in 1997. Our principal executive offices are located at29903 Agoura Road, Agoura Hills, California 91301, and our telephone number is(818) 871-5000. Our internet address is http://www.thq.com.(2)

**NarrativeDescription of Business**

Our corporate goal is to expand our market share whileincreasing profitability. Our business strategy and a detailed summary of ourbusiness operations are detailed below and should be read in conjunction withour “Risk Factors,” included in Item 1A herein.

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(1)           Nintendo®, Dual Screen,Game Boy® Advance, GameCube® (“GameCube”) and Wii are trademarks and/orregistered trademarks of Nintendo of America Inc. (“Nintendo”). “PlayStation” and the “PS” family logo areregistered trademarks of Sony Computer Entertainment Inc., and “PSP” is atrademark of Sony Computer Entertainment Inc. (“Sony”). Microsoft, Xbox®(“Xbox”) and Xbox 360TM are trademarks and/or registered trademarks of MicrosoftCorporation (“Microsoft”). Microsoft, Nintendo and Sony are referred to hereincollectively as the “platform manufacturers” or the “manufacturers.”

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

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**Strategy**

In order to maximize market share we believe it isimportant to offer a broad portfolio of titles for all ages that are playableon all popular platforms. We are also focused on increasing the profitabilityof our titles. We intend to do this by executing on the following strategies:

·       ***Increasesales and profits by leveraging our leading 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 rights to the next four Pixar animated feature filmsbeginning with the first release following *Cars.*Ourlicense agreement with World Wrestling Entertainment (“WWE”) through our jointventure with JAKKS Pacific, Inc., grants us the exclusive rights to publishgames based on WWE across all viable game systems through 2014. Our licenseagreement with Nickelodeon grants us the exclusive right to publish games basedon all existing and future Nickelodeon animated television and movie propertiestargeting kids ages 6-14 across all viable game systems through 2010.Additionally, we have a content license with MGA for their Bratz brand.

In order to increase sales and profits, our goal is tocontinue building high quality products based on our leading portfolio ofmass-market franchises, market them aggressively and shift more development toour internal development studios. In fiscal 2006, our key Disney/Pixar andNickelodeon titles were developed by our internal studios.

In the fiscal year ending March 31, 2007 (“fiscal2007”) and beyond, we plan to execute on this strategy by shipping mass-markettitles for the current and next generation of console and handheld platforms,and PC, including the following games based upon our key licenses: Disney/Pixar’s*Cars*, *WWESmackDown vs. Raw 2007, SpongeBob SquarePants: Creature from the Krusty Krab,Avatar: The Last Airbender*and*Bratz: Forever Diamonds*.

·       ***Expandour core gamer market share***

We plan to grow our market share by expanding ourproducts targeted to core gamers. We have worked to create and acquire our ownbrands and content and to secure licenses for original intellectual propertiesthat appeal to the core gamer. In fiscal 2006 we released our popular streetracing property, *Juiced*, which has shipped morethan 1.5 million units to date, and we released our original owned title, *Destroy All Humans!,*which shipped nearly 1.5 million units.Also in fiscal 2006 we released our first Xbox 360 title, the owned andinternally developed property, *The OutfitTM*. In fiscal 2007 we plan torelease a sequel to *Destroy All Humans!*on current-generation console platforms and *Saints Row* onXbox 360. In fiscal 2007 we also intend to release several core gamer titles onPC including:  *Company ofHeroes*,*Titan QuestTM*,*Warhammer*® *40,000:**Dawn of War: Dark CrusadeTM, Supreme Commander*and *S.T.A.L.K.E.R.: Shadow ofChernobyl*.

·       ***Increaseinternal development capabilities and owned intellectual property***

Inorder to increase profitability, we believe it is important for us to expandour internal development capabilities, increase ownership of development toolsand technology, 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.

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·       ***Expandinternational business***

In calendar 2005, we increased our market share inboth Europe and Australia. As the global gaming market continues to grow, webelieve that international markets represent a significant growth opportunityfor us. We distribute our products in more than 75 countries and territoriesoutside of North America. We operate international offices in the UnitedKingdom, Australia, France, Germany, Spain, Korea, Austria and in fiscal 2006we established sales offices in the Netherlands, Denmark and Japan. In fiscal2007 we will look to expand our direct sales force in Eastern Europe and Italy.In order to leverage our portfolio of popular brands and increaseprofitability, we plan to continue acquiring and developing content that sellswell internationally (*e.g.*,Disney/Pixar, World WrestlingEntertainment, and *Juiced*).

·       ***Expandwireless interactive entertainment market share***

In fiscal 2006, THQ reported $36.1 million in netsales on the wireless platform, an increase of approximately 50% over fiscal2005. We view the wireless platform as a long-term growth area for THQ as wecontinue to leverage our mass-market franchises, core gamer titles, wirelesssports licenses and other exclusive wireless licenses, such as *Star Wars*on this platform. In fiscal 2007, we plan tore-align our product portfolio to emphasize more casual game content toposition ourselves for wireless platform share gains in the future.

·       ***Pursueemerging revenue opportunities***

As the interactive entertainment industry continues toevolve, new revenue streams are emerging that are expected to develop over thenext five years. These opportunities include in-game advertising, downloadablecontent/micro-transactions, and online casual gaming. In fiscal 2006, weentered into agreements with two leading in-game advertising enabling companiesto facilitate in-game advertising in future games. We also started to explorean online casual game site. Beginning in fiscal 2007, we plan to offerdownloadable content on next-generation console systems from Microsoft andSony.

**Industry Overview**

As a publisher of interactive entertainment software,we consider ourselves to be part of the entertainment industry. At the mostfundamental level, our products compete with other forms of entertainment, suchas motion pictures, television and music, for the leisure time anddiscretionary spending of consumers. We believe that video games haveincreasingly become a mainstream entertainment choice for both children andadults. According to the International Development Group, Inc. (“IDG”), anindependent consulting and advisory services company that analyzes the consumerelectronics and interactive entertainment industries, sales of PC, console andhandheld games (excluding wireless) reached $7.5 billion in North America, and$6.5 billion in Europe in 2005. We look toward an expanding market forinteractive 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 DFC Intelligenceand Montgomery & Co.

The first modern platform was introduced by Nintendoin 1985. Advances in technology over the past 20 years have resulted incontinuous increases in the processing power of the chips that power both theconsoles and PC. For the past several years, Sony has been the leader in theconsole market (with its PlayStation and PlayStation 2 consoles); however,Microsoft and Nintendo are large and viable competitors. In 2005, Microsoftintroduced its next-generation console, Xbox 360, and both Sony and Nintendohave announced plans to release their next-generation consoles later in 2006.Nintendo has been the dominant manufacturer of handheld platforms with its GameBoy Advance. In fiscal 2005 two new handheld platforms were introduced, NintendoDS and Sony PSP. PCs continue to be a viable interactive game platform and overthe past few years, wireless devices, such as mobile phones, have become aviable gaming platform.

We currently develop and publish products for allmajor platforms, and this diversification continues to be a cornerstone of ourstrategy. In fiscal 2006, our product releases were for the Sony PlayStation 2,Microsoft Xbox and Xbox 360, Nintendo GameCube, PC, Game Boy Advance, NintendoDS, PSP and wireless devices. As Sony and Nintendo launch their next-generationconsoles, we expect to release games on each platform at or near their launch.

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**Products**

We develop, market and sell video games and otherinteractive software and content for console platforms, handheld platforms andPCs. In fiscal 2006, we published ten titles that shipped more than one millionunits. The following list identifies games that generated a significant portionof our sales during the fiscal years ended March 31, 2006, 2005 and 2004:

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

·      In fiscal 2005, Disney/Pixar’s*The Incredibles, The SpongeBob SquarePants*TM*Movie*, and *WWESmackDown vs. Raw*; and

·      In fiscal 2004, Disney/Pixar’s*Finding Nemo, SpongeBob SquarePants*TM*: Battle for Bikini Bottom*TM, and *WWESmackDown! Here Comes the Pain*TM.

All of our games are based on intellectual propertythat is either wholly-owned by us or licensed from third parties. We developour games using both internal development resources and external developmentresources working for us pursuant to contractual agreements. Whether a game isdeveloped internally or externally, upon completion of development weextensively play-test each game, and if required, send the game to themanufacturer for its review and approval. Other than games that we release forPCs or wireless devices, the manufacturers or their authorized vendorsmanufacture our products for us. We then market and distribute our games forsale throughout the world.

**IntellectualProperty**

Our business process begins with the creation ofintellectual property or acquisition of intellectual property rights.Traditionally, most of our titles were based upon licensed properties that haveattained a high level of consumer recognition or acceptance. We haverelationships with many well-known licensors, including Disney/Pixar,Nickelodeon, World Wrestling Entertainment, Warner Bros. and MGA Entertainment.

Our intellectual property licenses usually grant usthe exclusive use of the property for specified titles, on specified platforms,within a defined territory and during the license term. All of our licenses areof varying duration and we pay royalties to our property licensors based on ournet sales of the title which includes the licensor’s intellectual property. Wetypically advance payments against minimum guaranteed royalties over thelicense term. Royalty rates are generally higher for properties with provenpopularity and less perceived risk of commercial failure.

Our original intellectual property is created eitherby one of our 14 development studios or by a third-party developer that wecontract with, in which instance, we retain all ownership rights in theintellectual property. In other instances, wherein a third-party developercreates the intellectual property and develops the game, we obtain a licensethat is typically exclusive and we try to retain rights to any future productsbased on the intellectual property.

**Platform Licenses**

In addition to obtaining licenses to developintellectual property, our business is dependent upon entering into licenseagreements with the platform manufacturers, which allow us the right to develop,publish and distribute titles for use on such manufacturer’s platform. Our keyplatform licenses currently include:

·       licenses with Nintendo todevelop games for GameCube, Game Boy Advance and DS;

·       licenses with Sony todevelop games for PlayStation 2 and PlayStation Portable; and

·       licenses with Microsoft todevelop games for Xbox and Xbox 360.

Each license is for a fixed term, and as each licenseexpires, we generally enter into a new agreement or an amendment with thelicensor to extend the term of the agreement. Certain agreements, such as thelicenses with Sony and Microsoft for PlayStation 2 and Xbox 360, respectively,automatically renew each year unless either party gives notice by theapplicable date that it intends to terminate the agreement. Additionally, eachagreement designates a territory in which we can publish and distribute titles.We currently are licensed to publish and distribute titles on all platformsthat are currently sold in the United States and Canada. We are licensed to publishand distribute titles for GameCube, PlayStation 2, PlayStation Portable, Xbox,Xbox 360 and Dual Screen in various additional territories,

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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 are not exclusive and requirethat each title be approved by the manufacturer prior to development of thesoftware, and once developed, manufactured solely by such manufacturer or adesignated vendor of the manufacturer. The licenses establish the fees that wemust pay to the manufacturer for each cartridge or disc made. Nintendo chargesus a fixed amount for each Game Boy Advance cartridge manufactured. This amountvaries based, in part, on the memory capacity of the cartridge. Our Nintendo,Sony and Microsoft console agreements include a charge for every discmanufactured. The amounts charged by the manufacturers for both console discsand handheld cartridges include a manufacturing, printing and packaging fee aswell as a royalty for the use of the manufacturer’s name, proprietaryinformation and technology, and are subject to adjustment by the manufacturersat their discretion. The manufacturers have the right to review, evaluate andapprove a prototype of each title and the title’s packaging.

In addition, we must indemnify the manufacturers withrespect to all loss, liability and expense resulting from any claim against themanufacturer involving the development, marketing, sale, or use of our games,including any claims for copyright or trademark infringement brought againstthe manufacturer. As a result, we bear a risk that the properties upon whichthe titles are based, or that the information and technology licensed fromothers and incorporated in the products, may infringe the rights of thirdparties. Conversely, our agreements with our third-party software developersand property licensors typically provide for us to be indemnified with respectto certain matters. If any claim is brought by a manufacturer against us forindemnification, however, our developers or licensors may not have sufficientresources to, in turn, indemnify us. Furthermore, these parties’ indemnificationof us may not cover the matter that gives rise to the manufacturer’s claim.

Each platform license may be terminated by themanufacturer if a breach or default by us is not cured after we receive writtennotice from the manufacturer, or if we become insolvent. Upon termination of aplatform license for any reason other than our breach or default, we have alimited period of time to sell any existing product inventory remaining as ofthe date of termination. The length of this sell-off period varies between 90and 180 days, depending upon the platform agreement. We must destroy any suchinventory remaining after the end of the sell-off period. Upon termination as aresult of our breach or default, we must destroy any remaining inventory.

**ProductDevelopment**

We develop our products using both internal andexternal development resources. The internal resources consist of producers,game designers, software engineers, artists, animators and game testers locatedwithin our 14 internal studios and corporate headquarters. The externaldevelopment resources consist of third-party software developers and otherindependent resources such as artists. We refer to this collective group ofdevelopment resources as our Studio System.

We make the decision as to which development resourcesto use based upon the creative and technical challenges of the product, whetherthe intellectual property which is being developed into a game is licensed, anoriginal concept that we created, or an original concept created by athird-party developer. Once we determine where a product will be developed, ourinternal product development team oversees the internal or external resourcesin its design, technical assessment and construction of each game.

The development cycle for a new game depends on theplatform and the complexity of the game. Additionally, when developing anintellectual property into a game which is simultaneously being made into amotion picture, our development schedule is designed to ensure that our gamesare commercially available by the motion picture’s release. The developmentcycle for games on current generation console platforms, PC games and the SonyPSP system generally ranges from 12 to 24 months, Game Boy Advance ranges from6 to 9 months, Nintendo DS ranges from 9 to 12 months and wireless games rangefrom 6 to 9 months. The development cycle for the next generation of games onMicrosoft Xbox 360 can range from 12 to 36 months depending on the overallcomplexity and scope of the game, and we anticipate a similar development cyclefor the next generation of games on Sony PlayStation 3 and Nintendo Wii. Theserelatively long development cycles require that we assess whether there will beadequate retailer and consumer demand for a game well in advance of itsrelease. The investments in such development, prior to reaching technologicalfeasibility, are recorded as product development expenses in our consolidatedstatement of

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operations. We had product development expenses of$85.3 million in fiscal 2006, $73.6 million in fiscal 2005 (as restated) and$37.8 million in fiscal 2004 (as restated).

Upon completion of development, each game isextensively play-tested by us to ensure compatibility with the appropriatehardware systems and configurations and to minimize the number of bugs andother defects found in the products. If required, we also send the game to themanufacturer for its review and approval. To support our products afterrelease, we provide online access to our customers on a 24 hour basis as wellas operator help lines during regular business hours. The customer supportgroup tracks customer inquiries, and we use this data to help improve thedevelopment and production processes.

**Manufacturing**

Other than games that we release for sale on PCs or wirelessdevices, our video games are manufactured for us by the platform manufacturersor their authorized vendors. We contract with various PC replicators for themanufacturing 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 our platform licenses to provide astandard defective product warranty on all of the products sold. Generally, weare responsible for resolving, at our own expense, any warranty or repairclaims. We have not experienced any material warranty claims, but there is noguarantee that we will not experience such claims in the future.

**Marketing andSales**

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.

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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 manageinventory, merchandise and communications. We ship most of our products to ourdomestic customers from warehouses located in Canada, Michigan and Minnesota.

The domestic retail prices for our titles currentlyrange between: (i) $15 and $35 for handheld platforms; (ii) $15 and $65 forconsole platforms; and (iii) $10 and $55 for PC games. The domestic retail pricefor our wireless games currently range between $5 and $8 for a one timepurchase 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 customers worldwide include Best Buy,GameStop, Target, Toys “R” Us and Wal-Mart. We also sell our products to othernational and regional retailers, discount store chains and specialty retailers.Our largest customer, Wal-Mart, accounted for 19% of our worldwide sales infiscal 2006. A substantial reduction, termination of purchases, or businessfailure by any of our largest customers would have a material adverse effect onus.

**Seasonality**

The interactive entertainment software market ishighly seasonal, with sales typically significantly higher during the thirdquarter of our fiscal year, due primarily to the increased demand forinteractive games during the year-end holiday buying 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 our competitors are very large,diversified corporations that have begun to develop games based upon their ownhighly recognizable brands, and, as a result, stand to become more directcompetitors. Disney’s Buena Vista games division recently expanded its internalsoftware game publishing efforts and Viacom has expanded its efforts ininteractive entertainment software publishing.

**Employees**

As of March 31, 2006, we employed approximately 1,600people, of whom over 600 were outside the United States. We believe that ourability to attract and retain qualified employees is a critical factor in thesuccessful development of our products and that our future success will depend,in large measure, on our ability to continue to attract and retain qualifiedemployees. None of our employees are represented by a labor union or covered bya collective bargaining agreement and we consider our relations with employeesto 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, current reports on Form 8-K, andany amendments to those reports filed or furnished pursuant to Section 13(a) ofthe Exchange Act are available to the public free of charge over the internetat our website at http://www.thq.com or at the SEC’s web site athttp://www.sec.gov. Our SEC filings will be available on our website as soon asreasonably practicable after we have electronically filed or furnished them tothe SEC. Information contained on our website is not incorporated by referenceinto this annual report, Amendment No. 2 on Form 10-K/A. You may read and copyany materials we file with the SEC at the SEC’s Public Reference Room at 450Fifth Street, N.W., Washington D.C. 20549. You may obtain information on theoperation of the Public 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 havesuccessfully developed video games for the Microsoft Xbox, Nintendo GameCubeand Sony PlayStation 2. In late 2005, Microsoft launched its new console, theXbox 360. Sony has announced plans to launch the PlayStation 3 and Nintendo hasannounced plans to launch the Wii in late 2006. When new platforms areannounced or introduced into the market, consumers typically reduce theirpurchases of entertainment software products for current platforms inanticipation of new platforms becoming available. During these periods, salesof our game console entertainment software products may be expected to slow oreven decline until new platforms are introduced and achieve wide consumer acceptance.If sales of our products unexpectedly decline due to slowing consumer demandduring 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 onthe current 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.

**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

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existing products are notreleased on a timely basis or do not attain significant market penetration, orif we develop products for a delayed or unsuccessful platform, our business andfinancial results could be significantly harmed.

**We must continueto develop 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 basedupon a small number of licensed brands make up a substantial portion of oursales each year. In fiscal 2006, sales of titles for our three top-sellingbrands, Disney / Pixar, Nickelodeon and World Wrestling Entertainment (“WWE”)comprised 47% of our net sales; in fiscal 2005, 52% of our net sales were basedon titles from such brands; and in fiscal 2004, 50% of our net sales were basedon titles from such brands. A limited number of licensed brands may continue toproduce a disproportionately large amount of our sales. Due to this dependenceon a limited number of brands, the failure of one or more products based onthese brands to achieve anticipated results or the loss of a license pursuantto which we develop games for such brands may significantly harm our businessand 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 to acquire or create intellectualproperty rights which have a high level of consumer recognition or acceptancecould harm us.**

A significant portion ofour net sales in fiscal 2006, fiscal 2005 and fiscal 2004 were derived fromproducts based on popular licensed properties. A decrease in the popularity ofthe underlying property of our licenses could negatively impact our ability tosell products based on such licenses.

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 to enter into agreements with themanufacturers to develop, publish and distribute titles on their platformscould seriously impact our operations.**

We aredependent on the platform manufacturers (Microsoft, Nintendo and Sony) and ournon-exclusive licenses with them, both for the right to publish titles fortheir platforms and for the manufacture of our products for their platforms.Our existing platform licenses require that we obtain approval for thepublication of new games on a title-by-title basis. As a result, the number oftitles we are able to publish for these platforms, and our sales from titlesfor these platforms, may be limited. Should any manufacturer choose not to renewor extend our license agreement at the end of its current term, or if anylicense was terminated, we would be unable to publish additional titles forthat manufacturer’s platform, which could negatively affect our operatingresults.

Additionally,since each of the manufacturers publishes games for its own platform, and alsomanufactures products for all of its other licensees, a manufacturer may givepriority to its own products or those of other publishers in the event ofinsufficient manufacturing capacity. Unanticipated delays in the delivery ofproducts could also negatively affect our operating results.

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**Video game product development schedules are difficultto predict and can be subject to delays. Postponements in shipments cansubstantially impact our earnings in any given quarter.**

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 favorableterms with 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.

**Defects in our game software couldharm our reputation or decrease the market acceptance 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.

**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 adverseeffect on us.

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

Some of our customers, suchas Blockbuster and Hollywood Video, specialize in renting video games. Thesecustomers 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 significant portion of our revenue is derived fromour international operations, which may subject us to economic, political, regulatoryand other risks.**

In fiscal 2006 we derived39% of our revenues from our international operations, up from 38% in fiscal2005. We intend to continue expanding our international operations, which maysubject us to many risks, including: different consumer preferences, unexpected changes in regulatoryrequirements, tariffs and other barriers, difficulties in staffing and managingforeign operations, and possible difficulties collecting foreign accountsreceivable. These factors or others could have an adverse effect on our futureforeign sales or the profits generated from these sales.

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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.

**Competition in the interactivesoftware entertainment industry may lead to reduced sales of our products andreduced market share.**

Ourindustry is intensely competitive. We compete for both licenses to propertiesand the sale of games with the platform manufacturers and other publishers. Asa result of their commanding positions in the industry, the manufacturers mayhave better bargaining positions with respect to retail pricing, shelf spaceand retailer accommodations than do any of their licensees, including us. Someof our competitors have greater name recognition among consumers and licensorsof properties, a broader product line, or greater financial, marketing andother resources than we do. Accordingly, these competitors may be able tomarket their 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.

**Competition for qualified personnelis intense in the interactive software entertainment industry and failure tohire and retain qualified personnel could seriously harm 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.

**Consolidation in the interactivesoftware entertainment industry presents challenges with respect to resourcesand integration of acquired businesses.**

Consistentwith our strategy to expand our internal development capabilities anddistribution channels, we intend to continue to pursue acquisitions ofcompanies, intellectual property rights and other assets that can be acquiredon acceptable terms and which we believe can be operated or exploitedprofitably. As our industry continues to consolidate, we face significantcompetition in making acquisitions, which may constrain our ability to completesuitable 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.

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**Emerging technologies, such as games for wirelessdevices, require capital investments and present many unknown risks.**

Wireless network andmobile phone technologies are undergoing rapid innovation. New mobile phoneswith more advanced processors and supporting advanced programming languagescontinue to be introduced in the market. We have no control over the demandfor, or success of, these products. However, if we fail to anticipate and adaptto these and other technological changes, our market share and our operatingresults may suffer. Our future success in providing wireless games and othercontent will depend on our ability to adapt to rapidly changing technologies,develop applications to accommodate evolving industry standards and improve theperformance and reliability of our applications. In addition, the widespreadadoption of networking or telecommunications technologies or othertechnological changes could require substantial expenditures to modify or adaptour entertainment applications.

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 significant changein technology or customer demand could limit the available channels for ourapplications and limit or reduce our sales.

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

We defend ourintellectual property rights and combat unlicensed copying and use of softwareand intellectual property rights through a variety of techniques. Preventingunauthorized use or infringement of our rights is difficult. Unauthorized production occurs in the computersoftware industry generally, and were a significant amount of unauthorizedproduction of our products to occur, it could materially and adversely affectour results of operations. We hold copyrights on the products, manuals,advertising and other materials owned by us and we maintain certain trademarkrights. We regard our titles, including the underlying software, as proprietaryand rely on a combination of trademark, copyright and trade secret laws as wellas employee and third-party nondisclosure and confidentiality agreements, amongother methods to protect our rights. We include with our products a “shrink-wrap”or “click-wrap” license agreement or limitations on use of the software. It isuncertain to what extent these agreements and limitations are enforceable,especially in foreign countries. Policing unauthorized use of ourproducts is difficult, and software piracy is a persistent problem, especiallyin some international markets. Further, the laws of some countries where ourproducts are or may be distributed either do not protect our products andintellectual property rights to the same extent as the laws of the UnitedStates, or are poorly enforced. Legal protection of our rights may beineffective in such countries. We cannot be certain that existing intellectualproperty laws will provide 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 materially

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increase our reportedexpenses when we adopt Statement of Financial Accounting Standard No. 123Rin the first quarter of fiscal 2007.

**We cannot be certain of the future effectiveness ofour internal controls over financial reporting or the impact of the same on ouroperations or the market price for our common stock.**

Pursuant toSection 404 of the Sarbanes-Oxley Act of 2002, we are required to includein our Annual Report on Form 10-K our assessment of theeffectiveness of our internal controls over financial reporting. Furthermore,our independent registered public accounting firm is required to audit ourassessment of the effectiveness of our internal controls over financial reportingand separately report on whether it believes we maintain, in all materialrespects, effective internal controls over financial reporting. Although webelieve that we currently have adequate internal controls procedures in placeexcept for those surrounding our stock option grant practices, we cannot becertain that future material changes to our internal controls over financialreporting will be effective. If we cannot adequately maintain the effectivenessof our internal controls over financial reporting, we might be subject tosanctions or investigation by regulatory authorities, such as the Securitiesand Exchange Commission. Any such action could adversely affect our financialresults and the market price of our common stock.

**Fluctuations in our quarterly operating results due toseasonality in the interactive software entertainment industry could result insubstantial losses to investors.**

We haveexperienced, and may continue to experience, significant quarterly fluctuationsin sales and operating results. The interactive software entertainment marketis highly seasonal, with sales typically significantly higher during theyear-end holiday buying season. Other factors that cause fluctuations include:

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

·       the popularity of both new titles and titles released in prior periods;

·       the profit margins for titles we sell;

·       the competition in the industry for retail shelf space;

·       fluctuations in the size and rate of growth of consumer demand fortitles for different platforms; and

·       the timing of the introduction of new platforms and the accuracy ofretailers’ 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 software entertainment industry is self-regulated and rated bythe Entertainment Software Rating Board. Our retail customers take theEntertainment Software Rating Board rating into consideration when decidingwhich of our products they will purchase. If the Entertainment Software RatingBoard or a manufacturer determines that a product should have a rating directedto an older or more mature consumer, we may be less successful in our marketingand sales of a particular 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.

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**Any significant downturn in generaleconomic conditions which results in a reduction in discretionary spendingcould reduce demand for our products and harm our business.**

Ourproduct sales are affected by the retail customer’s ability and desire to spenddisposable income on the purchase of our games. Any significant downturn ingeneral economic conditions which results in a reduction in discretionaryspending could result in a reduction in demand for our products and could harmour business. Such industry downturns have been, and may continue to be,characterized by diminished product demand and subsequent erosion of averageselling 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.

**Risk Factors Related to the Special Committee and Company Investigationsand the Restatement**

**TheStaff of the Securities and Exchange Commission has notified us that it isconducting an informal inquiry concerning our historical stock option grantpractices and this inquiry could require us to expend significant resources andcould result in an unfavorable outcome.**

OnAugust 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, 1996to the present.  We do not know when thisinquiry will be resolved or what actions, if any, the SEC may take as a resultof this inquiry.  Responding to this inquiry could require the expenditureof significant financial resources.  An unfavorable outcome could requireus to pay damages or penalties, or result in other remedies imposed upon us,any of which could have a material adverse affect on our business, results ofoperations, financial position and cash flows.

**Ourcommon stock is subject to potential delisting from the NASDAQ Stock Market asa result of our inability to timely file our Quarterly Report on Form 10-Q withthe Securities and Exchange Commission.**

OnNovember 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 quarter endedSeptember 30, 2006. On November 22, 2006 we announced that we received a NASDAQStaff Determination letter on November 16, 2006 indicating that, as a result ofour inability to timely file the Form 10-Q, we were not in compliance with therequirements for the continued listing of our common stock as set forth inNASDAQ Marketplace Rule 4310(c)(14), and that our common stock is, therefore,subject to delisting from the NASDAQ Global Select Market.  We requested and have been granted a hearingbefore a NASDAQ Listing Qualifications Panel (“Panel”) to review the StaffDetermination.  Our oral hearing isscheduled for February 1, 2007 and the delisting action has been stayed pendinga final written decision by the Panel. There can be no assurance that the Panel will grant the Registrant’srequest for continued listing.

**As aresult of our delayed filing of our Form 10-Q for the quarter endedSeptember 30, 2006, our inability to maintain our Form S-3 eligibility mayadversely affect our ability to raise future capital or complete acquisitions.**

As a result of our delayed filing of our Form 10-Q for thequarter ended September 30, 2006, we will be ineligible to register oursecurities on Form S-3 for sale by us or resale by other security holders untilwe have timely filed all periodic reports under the Securities Exchange Act of1934 for one year from the date the Form 10-Q for the quarter endedSeptember 30, 2006 was due. In the meantime, we have the ability to useForm S-1 to raise capital or complete acquisitions, which could increase thetransaction costs and adversely affect our ability to raise capital or completeacquisitions of other companies during this period.

**Pendingcivil litigation relating to our stock option granting practices could divertmanagement attention and result in significant legal expenses.**

We and certain of our directors and current and formerofficers are defendants in three shareholder derivative actions relating to ourstock option granting practices. See Note 21, “Subsequent Events Related to theSpecial Committee and Company Investigations and the Restatement” in the Notesto Consolidated Financial Statements for a more detailed description of theseproceedings.  These actions are in their preliminary stages, and we intendto vigorously defend ourselves. These lawsuits could divert management time andattention from day-to-day operations, and result

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in significant legal expenses.  While these expenses might negatively affectquarterly results of operations for any given quarter, we do not believe thatthe lawsuits will ultimately have a material adverse effect on our business.

**Item 1B.** UnresolvedStaff Comments

None.

**Item 2.** Properties

The following is asummary 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 leasedfacilities listed above, we also lease office space in various countriesoutside of the U.S. in order to support the international sales, marketing andadministrative efforts of our wireless platform. The majority of these leasedfacilities are occupied by Minick Holdings AG and its subsidiaries, of which wehave a 50% ownership interest.

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

**Item 3.** Legal Proceedings

*WorldWrestling Entertainment.*

On October 19, 2004,World Wrestling Entertainment, Inc. (“WWE”) filed a lawsuit in the UnitedStates District Court for the Southern District of New York (the “Court”)against JAKKS Pacific, Inc. (“JAKKS”), THQ, the THQ/JAKKS joint venture,and others, alleging, among other claims, improper conduct by JAKKS, certainexecutives of JAKKS, an employee of the WWE and an agent of the WWE in grantingthe WWE video game license to the THQ/JAKKS joint venture. The complaint seeksvarious forms of relief, including monetary damages and a judicial determinationthat, among other things, the THQ/JAKKS video game license is void. OnMarch 30, 2005, WWE filed an amended complaint, adding both new claims andTHQ’s president and chief executive officer, Brian Farrell, as a defendant. InAugust 2005, the Court directed the parties to file briefs on the threefederal law claims alleged 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 was briefed.Shortly thereafter, WWE filed a motion for re-argument with respect to theportion of the March 31 Order that dismissed the Sherman Act claim and,alternatively, sought judgment with respect to the Sherman Act claim so that itcould 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 bySeptember 2006. Discovery in this action remains stayed. On June 2, 2006,we filed a motion to dismiss the RICO claims against THQ and Brian Farrell. THQbelieves that neither it, nor Brian Farrell, is primarily accused of anywrongdoing in the complaint or the amended complaint, and believes that eitherthere is no basis for terminating the license with THQ, or that THQ will bemade whole by those whose conduct is eventually found to be unlawful. We intendto vigorously protect our rights and, if necessary, pursue appropriate claimsagainst third parties.

On March 30, 2006,WWE’s counsel wrote a letter to our counsel and counsel for JAKKS, allegingbreaches by the THQ/JAKKS joint venture of the video game license related tothe manner of distribution and payment of royalties to

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the WWE with respect tosales of the WWE video games in Japan. WWE demanded that the alleged breachesbe cured within the time periods provided in the video game license, whilereserving all of its rights, including its alleged right of termination of thevideo game license. On April 28, 2006, our counsel responded on behalf ofthe THQ/JAKKS joint venture, asserting, among other things, that the WWE had beenaware and had consented to the manner of distribution in Japan and the paymentof royalties with respect to such sales and, in addition, had separatelyreleased the joint venture from any claims with respect to such matter as aresult of a settlement of a royalty audit of the THQ/JAKKS joint venture. Wehave also provided documentation to the WWE’s counsel in support of ourposition. WWE’s counsel has subsequently responded by letter, reiterating itsclaims and reservation of all rights, and has requested additional informationregarding sales of WWE video games in Japan and certain other Asian countries.We are currently developing our response to WWE’s counsel’s most recentcommunications. We believe we have several bases for defending any claim ofbreach of the video game license agreement resulting from the manner ofdistribution of WWE-licensed products in****Japanand other Asian territories.

Due to the early statusof this litigation with WWE we cannot estimate a possible loss, if any. Gameswe develop based upon our WWE license have contributed to approximately 15% ofour net 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 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.

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.** Submission of Matters to a Vote ofSecurity Holders

There were no matterssubmitted to a vote of security holders during the fourth quarter of the fiscalyear covered by this Annual Report.

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**PART II**

**Item 5.** Marketfor the Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

THQ’s common stock isquoted on the NASDAQ National Market under the symbol “THQI.”  The following table sets forth, for theperiods indicated, the high and low closing sales prices of our common stock asreported by the NASDAQ National Market:
|                                              | ** ** | **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 priceof our common stock on May 26, 2006, as reported by NASDAQ NationalMarket, 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 ourequity compensation plans in effect as of March 31, 2006 is as follows(amounts in thousands, except per 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 |   |   |
|                                                              |            |            |            |                                                                                                                                                  |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |  |

 

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(1)           Represents theaggregate number of shares of THQ common stock to be issued upon exercise ofindividual compensation arrangements with employee and non-employee option andwarrant holders. The outstanding options were primarily granted under theCompany’s Third Amended and Restated Non-executive Employee Stock Option Plan(the “NEEP Plan”). For a description of the material features of the NEEP Plan,see “Note 15—Stock-based Compensation” in the notes to the consolidatedfinancial statements.

**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 ofEquity Securities 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 Consolidated Financial Data

The following tablesummarizes certain selected consolidated financial data, which should be readin conjunction with our consolidated financial statements and Notes thereto andwith Management’s Discussion and Analysis of Financial Condition and Results ofOperations included elsewhere herein. Effective January 1, 2003, wechanged our fiscal year end from December 31 to March 31. The changeresulted in a three-month transitional period ended March 31, 2003. Referencesto Transition 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 fromApril 1, 2002 through March 31, 2003. Other than this unauditedperiod, the selected consolidated financial data presented below as of and foreach of the fiscal years and Transition 2003 in the five-year period endedMarch 31, 2006 are derived from our audited consolidated financialstatements. The consolidated balance sheets as of March 31, 2006, and2005, and the consolidated statements of operations for the fiscal years endedMarch 31, 2006, 2005 and 2004, and the report thereon are includedelsewhere in this Amendment No. 2 on Form 10-K/A.  The information presented in the followingtables has been adjusted to reflect the restatement of our financial results,which is more fully described in the “Explanatory Note” immediately precedingPart I, Item 1 and in Note 2, “Restatement of Consolidated Financial Statements”in Notes to Consolidated Financial Statements of this Amendment No. 2 on Form10-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.

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Other than as included inthis Amendment No. 2 on Form 10-K/A, we have not amended our previously-filedAnnual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periodsaffected by this restatement.  Thefinancial information that has been previously filed or otherwise reported forthese periods is superseded by the information in this Annual Report, AmendmentNo. 2 on Form 10-K/A, and the financial information contained in suchpreviously-filed reports should no longer be relied upon.

**STATEMENT OF OPERATIONS DATA(In thousands, except per share data)**
|                                                          | ** ** | ** **                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** | **Year Ended**     | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                               | ** ** | **Fiscal Year Ended March 31,** | ** ** | **Transition**          | ** ** | **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 – product costs                       |       |                                                | 287,946    |                    |       | 255,187                 |       |                    | 234,574    |                    |       | 181,532                 |       |   | 27,158 |   |   | 188,559 |   |
| Cost of sales – software amortization and royalties |       |                                                | 116,371    |                    |       | 93,622                  |       |                    | 105,632    |                    |       | 84,916                  |       |   | 12,018 |   |   | 83,698 |   |
| Cost of sales – license amortization and royalties  |       |                                                | 80,508     |                    |       | 85,926                  |       |                    | 71,132     |                    |       | 38,988                  |       |   | 5,576 |   |   | 40,476 |   |
| Cost of sales – venture partner expense             |       |                                                | 12,572     |                    |       | 9,774                   |       |                    | 9,675      |                    |       | 9,218                   |       |   | 644 |   |   | 10,146 |   |
| 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 |   |
| 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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**BALANCE SHEET DATA(In thousands)**
|                           | ** ** | ** **                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** | **Year Ended**     | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **Fiscal Year Ended March 31,** | ** ** | **Transition**          | ** ** | **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 research and development income tax credits claimedfor prior years.

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

(c)             Net income includes acharge of $1.8 million due to the other than temporary impairment of ourinvestment in Yuke’s Co., Ltd. (See “Note 9—Other Long-Term Assets” in Note toConsolidated Financial Statements). We also changed our fiscal year end fromDecember 31 to March 31, effective January 1, 2003.

(d)            Net income includes acharge of $7.9 million, net of tax, for the cancellation of 20 SKUs as well asa charge of $4.6 million, net of tax, related to the settlement of a classaction lawsuit and a charge of $1.1 million, net of tax, related to thewrite-off of inventory and software development for “WWF” branded games that wehad been prevented from shipping pursuant to an action by the World Wide Fundfor Nature against World Wrestling Entertainment, Inc. and a charge of$2.8 million, net of tax, related to the discontinuation of our online jointventure in the United Kingdom (Network Interactive Sports, Ltd.).

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Notes related torestatement:

(1)           Seethe “Explanatory Note” immediately preceding Part I, Item 1 and in Note 2, “Restatementof Consolidated Financial Statements” in Notes to Consolidated FinancialStatements of this Amendment No. 2 on Form 10-K/A.

(2)           TheSelected Financial Data for the fiscal year ended March 31, 2003, Transition2003 and the year ended December 31, 2002 has been restated to reflectadjustments related to stock-based compensation expense and the associated taximpacts as further described in the “Explanatory Note” immediately precedingPart I, Item 1 of this Amendment No. 2 on Form 10-K/A.  As a result of these adjustments, net incomewas reduced by $1.6 million, $304,000 and $1.8 million for the year ended March31, 2003, Transition 2003 and the year ended December 31, 2002, respectively asfollows:
| **(In thousands, except per share data)** | ** ** | **Fiscal Year Ended March 31, 2003  (Unaudited)** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **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 |   |

 

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| **(In thousands, except per share data)** | ** ** | **Transition 2003**         | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **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 |   |

 
| **(In thousands, except per share data)** | ** ** | **Year Ended December 31, 2002** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | **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**

Wedetermined the effects of the restatement on periods prior to fiscal 2002 to beimmaterial and have not restated such years separately.  The impact on net income for periods prior tofiscal 2002 are contained in the table in the “Explanatory Note” immediatelypreceding Part I, Item 1 of this Amendment No. 2 on Form 10-K/A.  Previously reported stock-based compensationexpense in each of the periods prior to fiscal 2002 was nominal.

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**Item 7.** Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

**Overview**

The following is a discussion of our operating resultsand the primary trends that affect our business. Certain of these trends andother statements made herein may be “forward-looking” within the meaning of thePrivate Securities Litigation Reform Act of 1995. Such statements are includedherein because management believes that an understanding of these trends isimportant to understand our results for the fiscal year ended March 31,2006 (“fiscal 2006”), as well as our future prospects. This summary is notintended to be exhaustive, nor is it intended to be a substitute for thedetailed discussion and analysis provided elsewhere in this Amendment No. 2 onForm 10-K/A, including in the remainder of “Management’s Discussionand Analysis of Financial Condition and Results of Operations” or theconsolidated 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.

**Restatementof Consolidated 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 Amendment No. 2 on Form 10-K/A.  The net of tax impact of the adjustments onour results of operations amounted to $2.2 million, $1.4 million and $1.8million in fiscal years 2006, 2005 and 2004, respectively.

As a result of the stock option grant practicesinquiry certain of our stock options were found to have been granted with anexercise price below the fair market value of our common stock on the datedetermined to be the correct measurement date. Those options that vested 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 the options 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. All of the affected options pertained to grants madeto non-executive employees.

In order to mitigate the unfavorable personal taxconsequences under Section 409A, in December 2006 the Compensation Committee ofour Board of Directors, pursuant to the terms and conditions of ourcompensatory stock plans under which our stock options had been granted,unilaterally corrected the exercise price of affected options that remainedoutstanding to increase the exercise price to the fair market value of ourcommon stock on the revised measurement date. In January 2007, the Compensation Committee determined to give eachaffected option holder, subject to certain conditions, a cash payment equal tothe aggregate difference between the initial exercise price and the increasedexercise price of each holder’s affected options (“Cash Payment”).  We estimate the total Cash Payment will beapproximately $2.4 million.  We accountedfor the impact of the corrected options as a stock option modification underFAS 123R.  As a result of this partialcash settlement of these options and the application of the modificationaccounting, in the three months ended December 31, 2006, we recognized $0.7million in additional compensation cost due to the increase in the fair valueof these options and $0.6 million in accelerated compensation cost.

We also plan tocompensate individuals who had exercised affected options prior to December2006 for excise tax liability and certain other adverse consequences underSection 409A.  Based on our plan, werecognized additional compensation expense of $0.9 million in the three monthsended December 31, 2006.

**Overviewof Fiscal 2006 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 

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that sold more than one million units. In fiscal 2005,we published six titles which shipped more 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 net sales (ii) a change in development strategy forour WWE games wherein we ceased internal product development for wrestlinggames and as a result we wrote-off the underlying capitalized softwaredevelopment costs to software amortization and royalties, 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 by operations was $42.8 million duringfiscal 2006, as compared to $60.5 million in fiscal 2005. The decline in cashprovided by operations was primarily due to lower net income, higher spendingfor software development, and higher payments of accrued expenses, partiallyoffset by lower cash spending for licenses.

**Fiscal2007 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 discussion of fiscal 2007 expectedresults excludes equity based compensation, such as the impact of expensingstock 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. Softwareamortization and royalties, as a percentage of net sales, is expected toincrease in 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 andadministrative costs are expected to remain constant in absolute dollars anddecline as a percentage of net sales. We expect operating margins to improvefrom 4% in fiscal 2006 to 8 to 9% in fiscal 2007. The effective tax rate infiscal 2007 is expected to be 30% and is subject to change based on changes ingeographical profits and other factors. Based on an expected fully dilutedshare count of 68 million, we expect earnings per share of $0.90 to $1.00 infiscal 2007. For fiscal 2007, we expect the impact of equity based compensationto be approximately $0.16 per fully diluted share.

**ProspectiveBusiness Trends**

*Transition to next-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 new franchises for the growing installed base ofcurrent-generation hardware and the high-end PC market; establish unique newintellectual properties early in the cycle on next-generation platforms;leverage our handheld leadership; continue to grow wireless revenues andprofitability; and pursue emerging revenue opportunities.

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*Increase in development costs.**  *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.**  *Weexpect the average selling price of video games on current generation systemswill continue to decline as the industry transitions to next-generation consolesystems. Traditionally video game sales have decreased in transition years, asconsumers decrease their purchases of software for current generation hardwarewhile they wait for the release of the new platforms. As the installed base ofnext-generation hardware grows, and as net sales of video games made for playon those next-generation consoles increases, we expect the average sellingprice of video games to increase, having a positive impact on our margin.

*Increase in installed base.**  *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.**  *Infiscal 2006, approximately $31 million of our overall net sales increase of$50 million was attributable to international growth. The internationalinstalled base of video game platforms continues to increase and we are focusedon expanding our international presence by identifying territories wherein wesee opportunity and establishing a direct sales presence to seize suchopportunities. In addition to our sales force presence, we are focused onreleasing and aggressively marketing titles with international appeal.

**CriticalAccounting Estimates**

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.

*Accounts receivable allowances.**  *Wederive revenue from sales of packaged software for video game systems andpersonal computers and sales of content and services for wireless devices.Product revenue is recognized net of allowances for price protection andreturns and various customer discounts. We typically only allow returns for ourpersonal computer products; however, we may decide to provide price protectionor allow returns for our video game systems or personal computer products afterwe analyze: (1) inventory remaining in the retail channel, (2) therate of inventory sell-through in the retail channel, and (3) ourremaining inventory on hand. We maintain a policy of giving credits for priceprotection and returns, but do not give cash refunds. Included in our accountsreceivable allowances is our allowance for co-operative advertising that weengage in with our retail channel partners.  Our co-operative advertisingallowance is based upon specific contractual commitments and does not involveestimates made by management.

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 and 

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distributors and their inventories, becauseslow-moving inventory in the distribution channel can result in the requirementfor price protection or returns in subsequent periods. In the past, actualprice protection and returns have not generally exceeded our reserves. However,actual price protection and returns in any future period are uncertain. Whilemanagement believes it can make reliable estimates for these matters, if wechanged our assumptions and estimates, our price protection and returnsreserves would change, which would impact the net revenue we report. Inaddition, if actual price protection and returns were significantly greaterthan the reserves we have established, the actual results of our reported netsales would decrease. Conversely, if actual price protection and returns weresignificantly less than our reserves, our reported 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 theadequacy of the allowance for doubtful accounts. Material differences mayresult in the amount and timing of our bad debt expense for any period ifmanagement made different judgments or utilized different estimates. If ourcustomers experience financial difficulties and are not able to meet theirongoing financial obligations to us, our results of operations may be adverselyimpacted.

*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 forintellectual property licenses are classified as current assets and currentliabilities to the extent such royalty payments relate to anticipated salesduring the subsequent year and long-term assets and long-term liabilities ifsuch royalty payments relate to 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 intellectual property.Prior to the related product’s release, we expense, as part of licenseamortization and royalties, capitalized license costs when we believe suchamounts 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 royalties. If actual revenues or revised forecasted revenues fall below theinitial forecasted revenues for a particular license, the charge to license amortizationand royalties expense may be larger than anticipated in any given quarter. Asof March 31, 2006, the net carrying value of our licenses was $81.5million. If we were required to write off licenses, due to changes in marketconditions or product acceptance, our results of operations could be materiallyadversely 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 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 amortization and royalties. The net realizable value is the estimatedfuture gross revenues from the product, reduced by the estimated futurecosts of completing the product.

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Commencing upon product release, capitalized softwaredevelopment costs are amortized to software amortization and royalties 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 amortization and royalties 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 amortization androyalties as earned.

*Goodwill.**  *We perform our annual review for goodwillimpairment during the quarters ending June 30, or more frequently ifindicators of potential impairment exist. We performed our goodwill impairmentreview for the quarters ended June 30, 2005 and June 30, 2004, and inboth reviews we found no impairment. Our impairment review process is based ona discounted future cash flow approach that uses our estimates of revenue forthe reporting units, driven by anticipated success of our products and productrelease schedules, and estimated costs as well as appropriate discount rates.These estimates are consistent with the plans and estimates that we use tomanage the underlying businesses. We performed similar impairment tests forindefinite-lived intangible assets and found no impairment. The success of ourproducts is affected by the ability to accurately predict which platforms andwhich products we develop will be successful. Also, our revenues and earningsare dependent on our ability to meet our product release schedules. Due tothese and other factors described in “Item 1A Risk Factors” we may not realizethe future 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 operating results. Althoughwe believe the judgments and assumptions we have made in the past have beenreasonable and appropriate, there is nonetheless a high degree of uncertaintyand 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 ourconsolidated financial statements, we are required to estimate our income taxesin each of the jurisdictions in which we operate. This process involves:(1) estimating our current tax exposure in each jurisdiction including theimpact, if any, of changes or interpretations to applicable tax laws andregulations, (2) estimating additional taxes resulting from taxexaminations and (3) making judgments regarding the recoverability ofdeferred tax assets. To the extent recovery of deferred tax assets is notlikely based on our estimates of future taxable income in each jurisdiction, avaluation 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.

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As a result of the items discussed above, our actualeffective income tax rates can differ from the projected effective income taxrates used when preparing our consolidated financial statements.

**RecentlyIssued Accounting Pronouncements**

In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), arevision of SFAS No. 123. SFAS No. 123R requires companies to, among otherthings, measure all employee stock-based compensation awards using a fair valuemethod and record the expense in the company’s consolidated financialstatements. The provisions of SFAS No. 123R, SEC Staff Accounting Bulletin (“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 year beginningApril 1, 2006 using the modified prospective transition method, wherein priorperiod amounts will not be restated. In addition to the recognition of expensein the financial 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 impact on ourconsolidated 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.

In November 2005, the FASB issued Staff PositionNo. FAS 115-1, “The Meaning of Other-Than-Temporary Impairmentand 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 beginningJanuary 1, 2006, and this adoption did not have a material impact on ourconsolidated results of operations and earnings per share.

**Resultsof Operations**

**Comparisonof Fiscal 2006 to Fiscal 2005**

Our net income for fiscal 2006 (as restated) was $32.1million, or $0.49 per diluted share, as compared to $61.4 million, or $1.02 perdiluted share in the restated prior fiscal year (as restated).  Our restated results did not effect net salesin either fiscal 2006 or fiscal 2005.

**NetSales**

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 followingtable details our net sales by territory for fiscal 2006 and 2005 (inthousands):
|                        | ** ** | **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 infiscal 2006 increased 7% over the prior fiscal year, from $756.7 million to$806.6 million. The increase in net sales was primarily due to the following:

·       An increase in the numberof titles that shipped more than one million units in the fiscal year from sixin fiscal 2005 to 10 in fiscal 2006.

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·       Higher fiscal 2006 sales ofnew original, owned properties targeted to the core gamer, *Juiced,**DestroyAll Humans!* and *The Outfit*,**our first next generation console title, as comparedto**core gamer titles released in the prior fiscal year: *Full Spectrum WarriorTM,**The Punisher* and *Warhammer40,000: Dawn of War*.

·       International net salesincreased $30.5 million and 11% in fiscal 2006 as compared to fiscal 2005 dueto continued sales and marketing expansion in the international markets as wellas the release of games with increased international appeal.

·       The continued sales ofgames released in prior fiscal years (we refer to this as “catalog sales”).

·       Higher sales of games onhandheld platforms due to the introduction of Nintendo Dual Screen andPlayStation 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 compared tofiscal 2005 releases: *The Incredibles*and *The SpongeBob SquarePants Movie,* whichwere released in conjunction 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 sales in North America to continueto constitute the largest portion of our net sales in fiscal 2007, we expectnet sales for North America as a percentage of total sales to decrease slightlyas we continue to expand our international direct sales 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 focus on growing salesinternationally in fiscal 2007, as we expand our product portfolio and directsales forces in the international markets. In early 2006, we establishedoffices in Denmark and Japan to facilitate direct sales of our products intothe Nordic territories and the Japanese market. We plan to expand our directsales force into Italy and Eastern Europe and we continue to exploreopportunities in Asia, especially China.

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**NetSales by Platform**

Our worldwide netsales by platform for fiscal 2006 and fiscal 2005 are as follows (inthousands):
|                             | ** ** | **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 | % |
|                             |            |                                                     |            |               |            |            |                |  |  |  |  |  |  |  |  |  |  |  |

 

**ConsolePlatforms**

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,net sales of video games for PlayStation 2 (“PS2”) were primarily driven by therelease of *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 newowned, original properties targeted to the core gamer: *Juiced*and*Destroy All Humans!*, as compared to coregamer titles released in fiscal 2005: *Full Spectrum Warrior*,*MX v. ATV UnleashedTM* and *The Punisher;*

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

·       higher catalog sales mainlyattributable to increases in sales of games based on our WWE and MX franchises,as well as Disney/Pixar’s *The Incredibles*and *The SpongeBob SquarePants Movie*;

·       partially offset by lowerfiscal 2006 sales of *The Incredibles: Rise ofthe Underminer*as compared to the fiscal 2005 release of *The Incredibles,* which was released in conjunction with itsmovie release.

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Sony announced itwould release its next-generation console, PlayStation 3, inNovember 2006. We expect sales of games for PlayStation 2 to decline inthe future as consumer demand shifts to PlayStation 3.

***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,net sales of video games for Xbox and Xbox 360 were primarily driven by therelease of *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*forXbox 360 whereas there were no Xbox 360 SKUs released in fiscal 2005;

·       sales of our new release *WWE Wrestlemania 21*: there were no WWE titles released onXbox in fiscal 2005;

·       higher sales of our two newowned, original properties targeted to the core gamer: *Juiced*and*Destroy All Humans!*, as compared to coregamer titles released in fiscal 2005: *MX v. ATV Unleashed*and *The Punisher;*

·       four additional SKUsreleased in fiscal 2006 as compared to fiscal 2005;

·       partially offset by lowersales of *Full Spectrum Warrior: Ten Hammers*, ascompared to *Full Spectrum Warrior* released in fiscal2005;

·       and partially offset bylower fiscal 2006 sales of *The Incredibles: Rise ofthe Underminer*as compared to fiscal 2005 wherein we released *The Incredibles* which was released in conjunction with itsmovie release.

In November 2005, Microsoft launched itsnext-generation console, Xbox 360, in North America, Europe and Japan. Weexpect to release new SKUs in fiscal 2007 for Xbox 360. As the installed baseof Xbox 360 hardware grows, we expect to bring more titles to the platform,including games targeted to the core gamer such as our new, owned intellectualproperty *Saints Row*, titles basedon our WWE license and a game based onDisney/Pixar’s *Cars*. Weexpect sales of games for Xbox to decline as consumer demand shifts to gamesfor 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,net sales 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 of the Underminer*, as well as catalogsales. In fiscal 2005, net sales of video games for GameCube were primarilydriven by the release of *The Incredibles, WWE Dayof Reckoning* and*The SpongeBob SquarePantsMovie.*We released seven and eight new SKUs in fiscal 2006 and 2005,respectively. Net sales decreased by $13.9 million in fiscal 2006 as comparedto the prior fiscal year primarily due to:

·       lower sales of our fiscal2006 releases of *The Incredibles: Rise of the Underminer*and *SpongeBob SquarePants: Lights, Camera, PANTS!*as compared to fiscal 2005 releases of *The Incredibles*and *The SpongeBob SquarePants Movie*, bothwhich were released in conjunction with their respective movie releases;

·       lower sales of our fiscal2006 release of *WWE Day of Reckoning 2*, ascompared to *WWE Day of Reckoning* in the prior fiscalyear;

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

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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.

**HandheldPlatforms**

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,net sales of video games for Game Boy Advance were primarily driven by therelease of*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 fiscal2006 releases of *The Incredibles: Rise of the Underminer*and *SpongeBob SquarePants: Lights, Camera, PANTS!*as compared to fiscal 2005 releases of *The Incredibles*and *The SpongeBob SquarePants Movie*, bothwhich were released in conjunction with their respective movie releases;

·       strong prior yearperformance of *Sonic Advance 3*without acomparable game released in fiscal 2006;

·       nine fewer SKUs released infiscal 2006 as compared to fiscal 2005 and an overall decline in the Game BoyAdvance market due to the introduction of DS and PSP into the handheld videogame market;

·       partially offset by a 21%increase in sales of catalog 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.

***Nintendo Dual ScreenNet 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*.

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***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,net sales 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 PC were primarily driven by the release of *Warhammer 40,000: Dawn of War, The Incredibles, Full Spectrum Warrior*and*The SpongeBob SquarePants Movie*. Wereleased 11 and 12 new titles in fiscal 2006 and 2005, respectively. Net salesdecreased by $9.1 million in fiscal 2006 as compared to the prior fiscal yearprimarily due to:

·       lower sales of our *Warhammer 40,000: Dawn of War: Winter Assault*, an expansionpack to the successful core gamer title *Warhammer 40,000: Dawn ofWar* released in fiscal 2005;

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

·       lower sales of our fiscal2006 releases of *The Incredibles: Rise of the Underminer*and *SpongeBob SquarePants: Lights, Camera, PANTS!*as compared to fiscal 2005 releases of *The Incredibles*and *The SpongeBob SquarePants Movie*, bothwhich were released in conjunction with their respective movie releases;

·       partially offset by a 44%increase in sales of catalog 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*.

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***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.

**Costsand 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 softwareamortization and royalties and (iii) higher price protection and softwaredevelopment amortization for the current-generation title *FullSpectrum Warrior: Ten Hammers*.

***Cost of Sales –Product Costs (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.

***Cost of Sales –Software Amortization and Royalties (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 amortization and royalties consists ofamortization of capitalized payments made to third-party software developersand amortization 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 softwareamortization and royalties 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 amortization and royalties. The increasein amortization and royalties as a percent of net sales is also due to highsoftware amortization and royalties related to the performance of thecurrent-generation title *Full Spectrum Warrior: TenHammers* on Xbox.

***Cost of Sales –License Amortization 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)%            |       |

 

License amortization and royalties expense consists ofroyalty payments due to licensors, which are expensed at the higher of(1) the contractual royalty rate based on actual net product sales forsuch license or (2) an effective rate based upon total projected revenuefor such license. For fiscal 2006, license amortization and royalties as apercentage of net sales decreased by 1.4 points compared to the prior fiscalyear. This is partially due to a $4.0 million write-off of a license in fiscal2005. The decrease is also due to a higher mix of net sales in fiscal 2006 fromgames with lower contractual royalty rates and games based on ownedintellectual properties with no license rate as compared to the prior fiscalyear.

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***Cost of Sales –Venture Partner Expense (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%             |       |

 

Venture partner expense is related to the jointlicense agreement that THQ and JAKKS Pacific, Inc. have with the WWE underwhich our role is to develop, manufacture, distribute, market and sell WWEvideo games. Venture partner expense increased by $2.8 million dollars infiscal 2006 as compared to the prior fiscal year due to increases in net salesof 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.

***ProductDevelopment (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 as comparedto the prior fiscal year. This increase was primarily due to the expansion ofour internal studios with the acquisitions of Juice Games Limited and VigilGames, 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” innotes to the consolidated financial 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 2006 compared to the prior fiscalyear. This increase was primarily due to promotional efforts to support thelaunch of two new owned and original titles: *Juiced* and *Destroy AllHumans!*.

***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.

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***Income Taxes***

The effective income tax rate was 19% for fiscal 2006and 20% for fiscal 2005. The fiscal 2006 effective income tax rate benefitedfrom the following factors: (1) a higher ratio of research and developmenttax credits to pre-tax income and (2) a higher ratio of tax exemptinterest income to overall pre-tax income. If our pretax income was the same asthe last fiscal year our effective tax rate would have been approximately 28%.The fiscal 2005 effective income tax rate benefited from the following factors:(1) the recognition of $7.8 million of research and developmentincome tax credits claimed for prior years and (2) our estimate of fiscal2005 year research and development income tax credits. Excluding the one-timebenefit of $7.8 million, our effective income tax rate for fiscal 2005would have been 30%.

***Minority Interest***

Minority interest reflects the income allocable toequity interests in Minick that are not owned by THQ. We own 50% of Minick’soutstanding common stock and control its board of directors. Minority interestincluded in our consolidated statement of operations was $63,000 for fiscal 2006compared to $261,000 for fiscal 2005.

**Comparisonof Fiscal 2005 to Fiscal 2004**

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

**NetSales**

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 followingtable details our net sales by territory for fiscal 2005 and 2004 (inthousands):
|                        | ** ** | **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:

·       Growth from our establishedlicensed brands and franchises: Disney/Pixar, SpongeBob SquarePants and WWESmackDown!, all performing better than the prior fiscal year. Two of the titlesthis fiscal year, Disney/Pixar’s *The Incredibles*and *The SpongeBob SquarePants Movie*, werebased upon holiday movies.

·       The successful launch of new properties targetedto the core gamer and high-end PC market: *Full Spectrum Warrior*on Xbox, PlayStation2, and PC, *The Punisher* onXbox, PlayStation2 and PC, and *Warhammer 40,000: Dawn ofWar* on PC.

·       International net sales increased 53% in fiscal2005 as compared to fiscal 2004 primarily due to (i) our continued salesand marketing expansion in the international markets, (ii) content thathas 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*.*

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*North America*

Year-over-year net sales growth in North America wasprimarily due to sales of *The SpongeBob SquarePantsMovie* game, which was released in conjunction with the holidaymovie; sales of *Full Spectrum Warrior* and *The Punisher;* and strong sales of our catalog titles infiscal 2005. These items were partially offset by the release of asignificantly 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 fiscal 2004; and stronger sales of our three key original products targetedat the core gamer in fiscal 2005 than our two key titles in fiscal 2004.

In addition to sales of our products, thestrengthening of foreign exchange rates, primarily the Great British Pound (“GBP”)and the European Currency Unit (“Euro”), increased reported international netsales by $19.5 million in fiscal 2005. Excluding the impacts of foreignexchange rates, international net sales increased by 42%.

**NetSales by Platform**

Our worldwide netsales by platform for fiscal 2005 and fiscal 2004 are as follows (inthousands):
|                           | ** ** | **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 console platforms increased by $49.5million, or 13%, for fiscal 2005 compared to fiscal 2004. During fiscal 2005 wereleased 30 console titles, compared to 44 console titles released duringfiscal 2004.

***Sony PlayStation 2Net 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:

·       new releases ofDisney/Pixar’s *The Incredibles*, *TheSpongeBob SquarePants Movie* and *WWE SmackDown! vs. Raw*;

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

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·       catalog sales 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*.

PlayStation 2 netsales in fiscal 2004 were primarily driven by:

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

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

The increase in sales of games for PlayStation 2 infiscal 2005 was primarily attributable to stronger sales of our three keyproducts targeted at the mass-market in fiscal 2005 as well as sales of *The Punisher* and our catalog titles. These increases werepartially offset by the release of fewer games in fiscal 2005; we released 14new SKUs in fiscal 2005 and 17 new SKUs in the prior fiscal year. A SKU is aversion of a title designed for play on a particular 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:

·       sales of originalproperties including *Full Spectrum Warrior*,*MX v. ATV Unleashed* and *The Punisher*;

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

·       strong catalog sales.

Net sales infiscal 2004 were driven by:

·       the release of titles based on our three key mass-market brands: Disney/Pixar’s*Finding Nemo, SpongeBob SquarePants: Battle forBikini Bottom* and *WWE Raw 2*; and

·       sales of *MotoGP 2* and *MX Unleashed*.

The increase in net sales for Xbox in fiscal 2005 fromfiscal 2004 was primarily attributable to sales of *FullSpectrum Warrior,* partially offset by the release of more games infiscal 2004. We released 8 SKUs during fiscal 2005 compared to 16 SKUs duringfiscal 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:

·       sales of mass market titlesincluding Disney/Pixar’s *The Incredibles*, *TheSpongeBob SquarePants Movie*,and *WWE Day of Reckoning*;

·       sales of originalproperties including *Tak 2: The Staff ofDreams;* and

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

Net sales infiscal 2004 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

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·       sales of *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 during fiscal 2005 compared to 11SKUs during fiscal 2004.

**HandheldPlatforms**

Another factor that positively impacted net sales forfiscal 2005 was an increase in sales of video games for handheld platforms,which increased 37%, to $232.1 million in fiscal 2005 from $169.0 millionduring 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:

·       strong sales ofDisney/Pixar’s *The Incredibles*, *TheSpongeBob SquarePants Movie*and *Sonic Advance3*;

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

·       strong sales of other keytitles, such as *Finding Nemo: The Continuing 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

·       strong sales of *Banjo Kazooie*, *Scooby-Doo!: MysteryMayhem*, *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”) inDecember 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%            |       |

 

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:

·       strong sales of games basedon major sports leagues, Nickelodeon, and Moto GP;

·       our acquisition of thecontrolling interest in Minick; and

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·       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:

·       sales of products targetedat the core gamer *Full Spectrum Warrior* and *Warhammer 40,000: Dawn of War*;

·       sales of Disney/Pixar’s *The Incredibles* and *The SpongeBob SquarePantsMovie*; and

·       strong catalog 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.

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

Our costs and expenses increased in fiscal 2005 (asrestated) to $684.0 million, from $594.0 million in fiscal 2004 (as restated);however, total costs and expenses as a percentage of net sales decreased from93% of net sales to 90% of net sales. As a percentage of net sales, thegreatest increase in costs were due to product development expenses as we morethan doubled the size of our internal product development organization,aggressively ramped up development of next-generation console games andincreased development of wireless games.

***Cost of Sales –Product Costs (in thousands)***
| 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%              |       |

 

Cost of sales primarily consists of directmanufacturing costs net of manufacturer volume rebates and discounts. Cost ofsales as a percentage of net sales decreased for fiscal 2005 as compared tofiscal 2004, primarily due to lower average manufacturing costs across allplatforms and higher average selling price of Game Boy Advance and PC products.

***Cost of Sales –Software Amortization and Royalties (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 amortization and royalties consists ofamortization of capitalized payments made to third-party software developersand amortization of capitalized internal studio development costs. Softwaredevelopment costs are expensed at the higher of (1) the contractual ratebased on actual net product sales for such software or (2) an effectiverate based upon total projected revenue for such software. For fiscal 2005software amortization and royalties as a percentage of net sales decreased ascompared 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

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to Disney/Pixar’s*Finding Nemo*, which was externally developed. Also, the effectiveamortization rate for *The SpongeBob SquarePants Movie*released in fiscal 2005 was lower as compared to the amortization rate for *SpongeBob SquarePants: Battle for Bikini Bottom*released in fiscal 2004 as we were able to leverage the technology developed onthe fiscal 2004 title. Further, in fiscal 2004 we had high development costsassociated with creating *Sphinx**and the**Cursed Mummy*,an original brand for which we did not develop a title in fiscal 2005.

***Cost of Sales –License Amortization 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 and royalties expense consists ofroyalty payments due to licensors, which are expensed at the higher of(1) the contractual royalty rate based on actual net product sales forsuch license or (2) an effective rate based upon total projected revenuefor such license. For fiscal 2005, license amortization and royalties as a percentageof net sales remained relatively flat as compared to fiscal 2004. This isprimarily due to our top three selling brands—Disney/Pixar, SpongeBobSquarePants and WWE licensing amortization rates by brand remaining relativelyconstant for fiscal 2005 and 2004.

***Cost of Sales –Venture Partner Expense (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%              |       |

 

Venture partnerexpense is related to the joint license agreement that THQ and JAKKSPacific, Inc. have with the WWE under which our role is to develop,manufacture, distribute, market and sell WWE video games. Venture partnerexpense increased slightly in absolute dollars for fiscal 2005 compared tofiscal 2004. The increase is in direct relation to the increases in sales ofgames based upon the WWE license in fiscal 2005 as compared to fiscal 2004.

***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) 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. Forfiscal 2005, product development expenses increased by $35.9 million from fiscal2004. This increase was primarily due to the following factors: (1) asignificant increase in internal development headcount to approximately 900from 400 compared to fiscal 2004 due in part to the acquisitions of Relic andBlue Tongue and the formation of Concrete Games, (2) spending ondevelopment for games for next-generation platforms, and (3) increasedspending on product development for our wireless content as we continue toincrease 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) 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 2005,selling and marketing expenses increased as a percentage of net sales ascompared to fiscal 2004. Selling and 

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marketing expenses increased in absolute dollars by$23.1 million for fiscal 2005 compared to fiscal 2004. This increase wasprimarily due to promotional efforts to support the new releases of originaltitles *The Punisher*and *FullSpectrum Warrior*, as well as Disney/Pixar’s*The Incredibles, The SpongeBob SquarePants Movie,*and*WWESmackDown! vs. Raw*, andother releases.

***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,“Restatement of Consolidated Financial Statements” in notes to the consolidatedfinancial 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 $7.5million for fiscal 2005 as compared to fiscal 2004. Fiscal 2004 included acharge of $7.0 million for doubtful accounts related to KB Toys’ bankruptcyfiling. Excluding this $7.0 million expense, general and administrativeexpenses increased by $14.5 million for fiscal 2005 as compared to fiscal 2004.The increase is primarily attributable to growth in our international andwireless operations, as well as Sarbanes-Oxley compliance and professionalfees. In addition, the increase also includes $1.5 million of amortizationexpense for intangible assets obtained through the fiscal 2005 acquisitions ofRelic and Blue Tongue, and the acquisition of a controlling interest in Minickduring fiscal 2005.

***Other*Income**

Other income for fiscal 2004 consisted of a $4.0million settlement of a dispute we had with our directors’ and officers’insurance carrier related to a previous securities litigation settlement.

***Income Taxes***

The effective income tax rate was 20% for fiscal 2005compared to 36% for fiscal 2004. The fiscal 2005 effective income tax ratebenefited from the following two factors: (1) the recognition of $7.8million of research and development income tax credits claimed for prior yearsand (2) our estimate of current fiscal year research and developmentincome tax credits. Excluding the one-time benefit of $7.8 million, oureffective income tax rate for fiscal 2005 would have been 30%.

***Minority Interest***

Minority interest reflects the income allocable toequity interests in Minick which are not owned by THQ. In April 2004, wepurchased an additional 25% of the outstanding common stock of Minick, bringingus to a 50% ownership interest and control of Minick’s board of directors. As aresult of this transaction, we began consolidating the balance sheet, statementof operations and cash flows of Minick. Minority interest included in ourconsolidated statement of operations was $261,000 for fiscal 2005 compared tozero for fiscal 2004.

**Liquidityand Capital Resources**
| (In thousands)                               | ** ** | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** | **Change** | ** ** |
|---------------------------------------------------|------------|------------|------------------------------|------------|------------------------------|------------|------------|------------|
|                                              |       |       |                         |       |                         |       |       |       |   |
| 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         | %          |       |   |

 

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|                                                       | ** ** | **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 | ) |
|                                                       |            |                                         |            |            |            |  |  |  |  |  |  |  |

 

*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 operating activities decreased byapproximately $17.7 million in fiscal 2006 as compared to fiscal 2005. Thedecrease was mainly due to lower net income in fiscal 2006 as well as higherspending for software development, higher payments of accrued expenses, partiallyoffset by lower cash spending for licenses. We expect to generate positiveoperating 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.

In fiscal 2007, we expect to generate more cash thanwe did in fiscal 2006. The increase in the generation of cash will be primarilyattributable to higher net income.

***Key Balance Sheet Accounts***

*Accounts Receivable.*   Accountsreceivable increased $5.2 million in fiscal 2006, from $73.7 million atMarch 31, 2005 to $78.9 million at March 31, 2006. The increase innet accounts receivable is primarily due the timing of our fourth quarterproduct releases. Accounts receivable allowances were $57.8 million as ofMarch 31, 2006, a $0.3 million increase from March 31, 2005.Allowances for price protection and returns as a percentage of trailing ninemonth 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 millionMarch 31, 2006. The increase in software development is primarily theresult of our investment in next generation titles with higher developmentcosts which are scheduled 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 atMarch 31, 2006 (as restated). The increase in 

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accrued and other currentliabilities is primarily due to movement of accrued royalties from long-terminto short-term as they are expected to be paid out within a year as well as anincrease in amounts due to third-party developers for the production of ourgames.

***Inflation***

Our management currently believes that inflation hasnot had a material impact on continuing operations.

***Financial Condition***

We believe the existing cash, cash equivalents,short-term investments, and cash generated from operations will be sufficientto meet our operating requirements for at least the next twelve months,including working capital requirements, capital expenditures and potentialfuture acquisitions or strategic investments. We may choose at any time toraise additional capital to strengthen our cash position, facilitate expansion,pursue strategic investments or to take advantage of business opportunities asthey arise.

Our ability to maintain sufficient liquidity could beaffected by various risks and uncertainties described in Item 1A “Risk Factors”in this Annual Report, Amendment No. 2 on Form 10-K/A.

***Guarantees and Commitments***

A summary ofannual minimum contractual obligations and commercial commitments as ofMarch 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 and Software 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*.   We have certain minimum advertisingcommitments under most of our major license agreements. These minimumcommitments 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 operating leases withlease termination dates through 2015. Most of our leases contain rentescalations.

(4)             *Letters of Credit*.   As of March 31, 2006, we werein compliance with all the covenants under our credit facility, had outstandingletters of credit of approximately $7.6 million and no borrowings.

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

Other potential future expenditures relate to thefollowing:

*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 

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development, marketing,sale or use of our games, including any claims for copyright or trademarkinfringement brought against such manufacturer. As a result, we bear a risk thatthe properties upon which the titles of our games are based, or that theinformation and technology licensed from others and incorporated into theproducts, may infringe the rights of third parties. Our agreements with ourthird-party software developers and property licensors typically provideindemnification rights for us with respect to certain matters. However, if amanufacturer brings a claim against us for indemnification, the developers orlicensors may not have sufficient 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 specificprocedures and time frames with respect to requests for indemnification andclarify the benefits and remedies available to Directors in the event of anindemnification request.

*Credit Facility.**  *We have a credit agreement that lasts throughNovember 29, 2006 that provides us a maximum monthly facility amount of$40.0 million for each August, September and October, and a maximummonthly facility amount of $12.0 million for every other month. The creditfacility is unsecured and contains customary financial and non-financialcovenants that require us to maintain specified operating profits and liquidityand limits our ability to incur additional indebtedness, sell assets, pay cashdividends and enter into certain mergers or acquisitions. As of March 31,2006, we were in compliance with all the covenants under the credit facilityand had outstanding letters 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 DisclosuresAbout Market Risk**

We are exposed to certain market risks arising fromtransactions in the normal course of business, principally risks associatedwith interest rate and foreign currency fluctuations.

**InterestRate Risk**

We have interest rate risk primarily related to ourinvestment portfolio and to a lesser extent our credit facility. A substantialportion of our portfolio is in short-term investments made up of floating ratesecurities and municipal securities. The value of these investments mayfluctuate with changes in interest rates. However, we believe this risk isimmaterial due to the short-term nature of the investments. The credit facilityis based on variable interest rates. At March 31, 2006, we had outstandingletters of credit of $7.6 million.

**ForeignCurrency Risk**

We transact business in many different foreigncurrencies and are exposed to financial market risk resulting from fluctuationsin foreign currency exchange rates, particularly the Great British Pound (“GBP”)and the Euro, which may result in a gain or loss of earnings to us. Ourinternational business is subject to risks typical of an international business,including, but not limited to, foreign currency exchange rate volatility.Accordingly, our future results could be materially and adversely affected bychanges in foreign currency exchange rates.

Throughout the year, we frequently monitor the volatilityof the GBP and the Euro (and all other applicable currencies). We utilizeforeign exchange forward contracts to mitigate foreign currency risk associatedwith foreign currency denominated assets and liabilities, primarily certaininter-company receivables and payables. Our foreign exchange forward contractsare accounted for as derivatives whereby the fair value of the contracts arereflected as other current assets or other current liabilities and theassociated gains and losses are reflected in general and administrative expensein the consolidated statements of operations. The forward contracts generallyhave a contractual term of less than one month and are transacted nearmonth-end. Therefore, the fair value of the forward contracts generally is notsignificant at each month-end.

Foreign exchange forward contracts are designed tooffset gains and losses on the underlying foreign-currency-denominated assetsand liabilities. Any movement in foreign currency exchange rates resulting in again or loss on our 

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foreign exchange forward contracts would be offset byan opposing gain or loss in the underlying foreign-currency-denominated assetsand liabilities that were hedged and would not have a material impact on ourfinancial position.

As of March 31, 2006, we had foreign exchangeforward contracts in the notional amount of $60.3 million, all with maturitiesof less than one month, consisting primarily of Euros, Great British Pounds,and Canadian Dollars. The counterparties to these forward contracts arecreditworthy multinational commercial and investment banks. The risks ofcounterparty nonperformance associated with these contracts are not consideredto be material. Notwithstanding our efforts to manage foreign exchange risks,there can be no assurances that our mitigating or hedging activities willadequately protect us against the risks associated with foreign currencyfluctuations.

We do not hedge foreign currency translation risk. Ahypothetical 10% adverse change in exchange rates would result in areduction of reported net sales of approximately $31.9million and a reduction of reported income before taxes of approximately$1.0 million. This estimate assumes an adverse shift in all foreigncurrency exchange rates, which do not always move in the same direction; actualresults may differ materially.

**Item 8. Consolidated Financial Statements andSupplementary Data**

The report of Independent Registered Public AccountingFirm, consolidated financial statements and notes to consolidated financialstatements follow below.

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**REPORT OF INDEPENDENTREGISTERED 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 endedMarch 31, 2006. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements 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, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as ofMarch 31, 2006, based on the criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated June 6, 2006(January 19, 2007 as to the effect of the material weakness described inManagement’s Annual Report on Internal Control over Financial Reporting(restated)) expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anadverse opinion on the effectiveness of the Company’s internal control overfinancial reporting.

**DELOITTE & TOUCHE LLP**

LosAngeles, California

June 6, 2006 (January 19, 2007 as to the effects ofthe matters discussed in Note 21 and the effect of the restatement discussed inNote 2 and May 30, 2007 as to Note 4 and the interim balance sheet datapresented in Note 20)

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**THQ INC. ANDSUBSIDIARIESCONSOLIDATED BALANCE 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 |   |

 

(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. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF 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 – product costs                       |       |                                                | 287,946    |   |   | 255,187 |   |   | 234,574 |   |
| Cost of sales – software amortization and royalties |       |                                                | 116,371    |   |   | 93,622 |   |   | 105,632 |   |
| Cost of sales – license amortization and royalties  |       |                                                | 80,508     |   |   | 85,926 |   |   | 71,132 |   |
| Cost of sales – venture partner expense             |       |                                                | 12,572     |   |   | 9,774 |   |   | 9,675 |   |
| Product development                                      |       |                                                | 85,323     |   |   | 73,637 |   |   | 37,758 |   |
| Selling and marketing                                    |       |                                                | 123,926    |   |   | 110,727 |   |   | 87,664 |   |
| 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 |   |

 

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

See notes toconsolidated financial statements.

 

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

**Fiscal Years Ended March 31, 2004, 2005 and2006**
| ** **                                                       | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **Accumulated  Other  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 |   |

 

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

See notes to consolidatedfinancial statements.

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**THQ INC. ANDSUBSIDIARIESCONSOLIDATED 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 consolidatedfinancial statements.

 

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**THQ INC. ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**   Description of Business and Summary ofSignificant Accounting Policies

We develop and publish interactive entertainmentsoftware for all popular game systems, including:

·       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;

·       Handheld platforms such asNintendo Game Boy Advance, Nintendo Dual Screen, PSP portable entertainmentsystem (“PSP system”), wireless devices; and

·       Personal computers.

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 of Consolidation.**  *The consolidatedfinancial statements include the accounts of THQ Inc. and our wholly owned andmajority owned subsidiaries as well as the venture we have with JAKKSPacific, 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 of Estimates.**  *The preparationof financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates. The mostsignificant estimates relate to licenses, software development, accountsreceivable allowances 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 endedMarch 31, 2006, 2005 and 2004 were $5.7 million, $5.1 million and $5.4million, respectively.

*Foreign Currency Translation.**  *Assets andliabilities of foreign operations are translated at current rates of exchangewhile results of operations are translated at average rates in effect for theperiod. Translation gains or losses are shown as a separate component ofaccumulated 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 endedMarch 31, 2006, foreign currency transaction losses were $0.3 million, andfor 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 and Short-Term Investments.**  *We consider allhighly liquid investments with maturities less than three months when purchasedto be cash equivalents. Investments with maturities greater than three months,but less than one year, when purchased are considered short-term investments.Our short-term investments are primarily auction rate securities. These auctionrate securities are variable rate bonds tied to short-term interest rates with

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maturities on the face of the underlying security inexcess of 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 the interestrate determined during the prior auction. Although the securities are issuedand 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.**  *The carryingvalue of certain financial instruments, including cash and cash equivalents,short-term investments held to maturity, accounts receivable, accounts payable,accrued expenses and accrued royalties, approximate fair value based on theirshort-term nature. Short-term investments classified as available for sale arestated at fair value.

We account for our derivative and hedging activitiesunder Statements of Financial Accounting Standards (“SFAS”) No. 133, “Accountingfor Derivative Instruments and Hedging Activities,” as amended. The assets orliabilities associated with our derivative instruments and hedging activitiesare recorded at fair value in other current assets or liabilities,respectively, on our consolidated balance sheets. As discussed below, gains andlosses resulting from changes in fair value are accounted for depending on theuse of the derivative and whether it is designated and qualifies for hedgeaccounting.

We utilize forward contracts in order to reducefinancial market risks. These instruments are used to hedge foreign currencyexposures of underlying assets, liabilities, or certain forecasted foreigncurrency denominated transactions. Our accounting policies for theseinstruments are based on whether they meet the criteria for designation ashedging transactions. Changes in fair value of derivatives that are designatedas cash flow hedges, are highly effective, and qualify as hedging instruments,are recorded in other comprehensive income until the underlying hedged item is recognizedin earnings within the financial statement line item consistent with the hedgeditem. Any ineffective portion of a derivative change in fair value isimmediately recognized in earnings. During each of the periods presented we didnot have any derivatives that qualify for hedge accounting. Changes in the fairvalue of derivatives that do not qualify for hedge accounting treatment arerecorded in earnings. The fair value of foreign currency contracts is estimatedbased on the forward rate of the various hedged currencies as of the end of theperiod. As of March 31, 2006 and 2005, we had foreign exchange forwardcontracts in the notional amount of $60.3 million and $35.1 million,respectively. The net gains recognized from foreign currency contracts infiscal 2006 and fiscal 2005 were $493,000 and $682,000, respectively, and areincluded in general and administrative expense in our consolidatedstatements of operations. We did not have any gains or losses from foreigncurrency contracts in fiscal years prior to 2005.

*Accounts receivable allowances.**  *Wederive revenue from sales of packaged software for video game systems andpersonal computers and sales of content and services for wireless devices.Product revenue is recognized net of allowances for price protection andreturns and various customer discounts. We typically only allow returns for ourpersonal computer products; however, we may decide to provide price protectionor allow returns for our video game systems or personal computer products afterwe analyze: (1) inventory remaining in the retail channel, (2) therate of inventory sell-through in the retail channel, and (3) ourremaining inventory on hand. We maintain a policy of giving credits for priceprotection and returns, but do not give cash refunds. Included in our accountsreceivable allowances is our allowance for co-operative advertising that weengage in with our retail channel partners.  Our co-operative advertisingallowance is based upon specific contractual commitments and does not involveestimates made by management.

*Concentrations of Credit Risk.**  *Financialinstruments which potentially subject us to concentration of credit riskconsist principally of cash and cash equivalents, short-term investments,accounts receivable 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 ofMarch 31, 2006 we did not have any long-term marketable securities. Mostof our sales are made directly to mass merchandisers and national retailers.Due to the increased volume of sales

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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, whichconsists 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.**  *Property andequipment 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 forintellectual property licenses are classified as current assets and currentliabilities to the extent such royalty payments relate to anticipated salesduring the subsequent year and long-term assets and long-term liabilities ifsuch royalty payments relate to 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 planned theatricalreleases or television series based on the intellectual property and the rightsholder’s continued promotion and exploitation of the intellectual property.Prior to the related product’s release, we expense, as part of licenseamortization and royalties, capitalized license costs when we believe suchamounts 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 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.*   We utilize both internal developmentteams and third-party software developers to develop our software. We accountfor software development costs in accordance with SFAS No. 86, “Accountingfor the 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 amortization and royalties. The net realizable value is the estimatedfuture gross revenues from the product, reduced by the estimated futurecosts of completing the product.

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Commencing upon product release, capitalized softwaredevelopment costs are amortized to software amortization and royalties 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 amortization and royalties 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 amortization androyalties as earned.

*Goodwill and Other Intangible Assets.**  *In accordancewith our accounting policy, we performed an annual review of goodwill forimpairment during the quarter ended June 30, 2005, and found noimpairment. We will perform a similar review in future quarters endedJune 30, or more frequently if indicators of potential impairment exist.Our impairment review process is based on a discounted future cash flowapproach that uses our estimates of revenue for the reporting units, driven byassumed success of our products and product release schedules, and estimatedcosts as well as appropriate discount rates. These estimates are consistentwith the plans and estimates that we use to manage the underlying businesses.We performed similar impairment tests during the quarter ended June 30,2005 for indefinite-lived intangible assets and found no impairment. Allidentifiable intangible assets with finite lives will continue to be amortizedover their estimated useful lives and assessed for impairment under SFASNo. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.”

*Revenue Recognition.**  *Our revenuerecognition policies are in compliance with American Institute of CertifiedPublic Accountants Statement of Position (“SOP”) 97-2, “Software RevenueRecognition,” 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 inFinancial Statements,” which outlines the basic criteria that must bemet to recognize revenue and provides guidance for presentation of revenue andfor disclosure related to revenue recognition policies in financial statementsfiled with the Securities and Exchange Commission (“SEC”).

Product Sales:   We recognize revenue for packagedsoftware when title and risk of loss transfers to the customer, provided thatno significant vendor support obligations remain outstanding and thatcollection of the resulting receivable is deemed probable by management.Although we generally sell our products on a no-return basis, in certaincircumstances we may allow price protection, returns or other allowances on anegotiated basis. We estimate such price protection, returns or otherallowances based upon management’s evaluation of our historical experience,retailer inventories, the nature of the titles and other factors. Suchestimates are deducted from gross sales. See “Note 4—Accounts ReceivableAllowances.” Software is sold under a limited 90-day warranty againstdefects in material and workmanship. To date, we have not experienced materialwarranty claims.

Software Licenses:   For those agreements thatprovide the customers the right to multiple copies in exchange for guaranteedminimum royalty amounts, revenue is recognized at delivery of the productmaster or the first copy. Per copy royalties on sales that exceed the guaranteeare recognized as earned. Revenue from the licensing of software for the fiscalyears ended March 31, 2006, 2005 and 2004 was $6.3 million, $8.1million and $8.3 million, respectively.

Wireless Revenue:   We recognize wireless revenuesprincipally from the sale or subscription of our applications to wirelesssubscribers under distribution agreements with wireless carriers in the periodin which the applications are purchased by the subscribers, assuming that: feesare fixed and determinable; we have no significant obligations remaining andcollection of the related receivable is reasonably assured. In accordance withthe distribution agreements, the wireless carriers are responsible for billing,collecting and remitting our fees to us. The wireless carriers generally reportthe final sales data to us within 10 to 45 days following the end of eachmonth. When final sales data is not available in a timely manner for reportingpurposes, we estimate our revenues based on available sales data and historicaltrends. We will record differences between estimated revenues and actualrevenues in the next reporting period once the actual amounts are determined.

Also, in accordance with Emerging Issues Task Force (“EITF”)No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as anAgent,” we recognize as revenues the net amount the wireless carrier pays to usupon the sale of our applications, net of any service or other fees earned anddeducted by the wireless carrier.

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*Advertising.**  * Advertising andsales promotion costs are generally expensed as incurred, except for televisionairtime and print media costs associated with media campaigns, which aredeferred and charged to expense in the period the airtime or advertising spaceis used for the first time. We engage in co-operative advertising with some ofour retail channel partners. We accrue the associated costs when revenue isrecognized and such amounts are included in selling and marketing expense ifthere is a separate identifiable benefit for which we can reasonably estimatethe fair value of the benefit identified; otherwise, they are recognized as areduction of net sales. Advertising costs for the fiscal years endedMarch 31, 2006, 2005 and 2004 were $61 million, $57 million and $45.3million, respectively.

*Employee Stock-Based Compensation.**  *Under SFASNo. 123 “Accounting for Stock-Based Compensation,” compensation expense isrecorded for the issuance of employee stock-based compensation, including stockoptions and restricted stock, based on the fair value of the employeestock-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 the recognition and measurementprinciples of APB Opinion No. 25 and related interpretations. Thefollowing table illustrates the effect on net income and earnings per share ifwe had applied the fair value recognition provisions of SFAS No. 123 toemployee stock-based compensation (in thousands, except per 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 |   |

 

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| ** **                                                                                                                                    | ** ** | **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 |   |

 

The fair value of options granted under the stockoption plans during the fiscal years ended March 31, 2006, 2005 and 2004,respectively, has been estimated at the date of grant using a Black-Scholesoption pricing model with the following weighted average assumptions:
|                                           | ** ** | **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 option pricing model requires theinput of highly subjective assumptions, including the expected stock pricevolatility. For purposes of the above pro forma disclosure, the fair value ofemployee stock-based compensation granted is amortized over theperiod(s) in which the related employee services are rendered.Accordingly, the pro forma stock-based compensation cost for any period willtypically relate to awards granted in both the current period and prior periods.

We have granted common stock warrants to non-employeesin connection with the acquisition of licensing rights for intellectualproperty. In accordance with EITF No. 96-18, “Accounting for EquityInstruments that are Issued to Other Than Employees for Acquiring or inConnection with Selling Goods or Services,” the fair value of common stockwarrants granted is determined as of the measurement date and is capitalized,expensed and amortized consistent with our policies relating to license costs.

*Income Taxes.**  *Deferred incometaxes are provided for temporary differences between the financial statementand income tax bases of our assets and liabilities, based on enacted tax rates.A valuation allowance is provided when it is more likely than not that someportion or all of the deferred income tax assets will not be realized.

*Basic and Diluted Earnings Per Share.**  *Basic earningsper share is computed by dividing net income by the weighted average number ofcommon shares outstanding for the period. Diluted earnings per share iscomputed by dividing net income by the weighted average number of common sharesoutstanding for the period, increased by common stock equivalents. Common stockequivalents are calculated using the treasury stock method and representincremental shares issuable upon exercise of our outstanding options andwarrants and, if applicable in the period, conversion of our convertible debt.However, potential common shares are not included in the denominator of thediluted earnings per share calculation when inclusion of such shares would beanti-dilutive, such as in a period in which a net loss is recorded.

*Recently Issued Accounting Pronouncements.**  *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 awards 

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using a fair value method and record the expense intheir consolidated financial statements. The provisions ofSFAS No. 123R, SEC SAB No. 107, “Share-Based Payment” andother 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.

In November 2005, the FASB issued Staff PositionNo. FAS 115-1, “The Meaning of Other-Than-Temporary Impairmentand 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, although earlier application is permitted. Weadopted FSP No. 115-1 in our fiscal fourth quarter beginningJanuary 1, 2006, and this adoption did not have a material impact on ourconsolidated results of operations and earnings per share.

**2. Restatement of ConsolidatedFinancial 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 consolidated statementsof operations, stockholders’ equity, and cash flows for each of the fiscalyears 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 periodfrom January 1, 1996 through March 31, 2006. The aggregate additional non-cash stock-based compensation expense was$11.4 million for the period from January 1, 1996 through March 31, 2006.  Additionally, we recorded $1.9 million inpayroll tax related expenses resulting from the recharacterization of incentivestock options to non-qualified stock options for the period from January 1,2002 through March 31, 2006.  The payrolltax related expenses were determined based on the employees’ gain upon exerciseof impacted options.  The adjustments,after tax, for fiscal years 2006, 2005 and 2004 were $2.2 million, $1.4 millionand $1.8 million, respectively.

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

*Company-Wide Stock Option Grants not Determinedwith Finality*.The Special Committee determined that, in connection with certain company-widestock option grants that we made to non-executive employees in various years,we used incorrect measurement dates for accounting and reporting purposesbecause the list of grantees and the options awarded to each grantee was notdetermined with finality until a date subsequent to the measurement dates wepreviously used.  In most suchsituations, our practice was to set the exercise price for the option at theclosing price of our common stock on the date the Compensation Committee of theBoard delegated authority to our Chief Executive Officer to award up to aspecified aggregate number of options, which was prior to the date that thelist of grantees and the options awarded to each grantee was finalized by theChief Executive Officer.  We haverecognized additional stock-based compensation expense of $6.7 million for theperiod from January 1, 1996 through March 31, 2006 related to this type oferror.

*Stock Option Grants Priced usingPrevious Day Closing Price.*The Special Committee determined that in threeinstances throughout 1998 and 1999, the exercise price was set at the closingprice of our common stock on the day prior to the Compensation Committeemeeting where such grants were made.  Ouroption plans in effect at the time stated that the grant price could not beless than the fair market value of the option on the date of grant, which wasdefined in the plans as the closing price of our common stock on the date ofgrant.   The Special Committee therefore

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determined that the measurement date used foraccounting purposes should be the date of the meeting.  We have recognized additional stock-basedcompensation expense of $1.8 million for the period from January 1, 1996through March 31, 2006 related to this type of error.

*Incorrect Measurement Dates for NewHire Stock Option Grants. * The Special Committee also identifiedaccounting errors related to our new hire stock option grant practices.  The Special Committee determined that our newhire stock option granting practice, primarily for our international employees,resulted in a measurement date for accounting purposes that was subsequent tothe date that we had previously used for accounting purposes.  These errors occurred because the details ofstock option grants to international employees were not contained in offerletters and in most cases the number of options the individual was entitled toreceive was determined after his or her start date. There were also someinstances where grants were made to employees prior to the date they startedproviding services to the Company, generally because the employee had acceptedan employment offer and his or her name was placed on a grant list that wasthen approved prior to his or her actual start date.  We have recognized additional stock-basedcompensation expense of $1.6 million for the period from January 1, 1996through March 31, 2006 related to these types 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):
| ** **                     | ** ** | **Stock-Based Compensation** | ** ** | ** **          | ** ** | **Total **          | ** ** | **Previously   Reported  Stock-Based**        | ** ** |
|--------------------------------|------------|-----------------------------------|------------|---------------------|------------|--------------------------|------------|----------------------------------------------------|------------|
| **Fiscal Year**           | ** ** | **Pre-tax**                       | ** ** | **Tax Effect** | ** ** | **Net of Tax** | ** ** | **Related   Payroll Tax   Expense** | ** ** | **Incremental   Impact, Net   of Tax** | ** ** | **Compensation   Expense, Net of   Tax (2)** | ** ** |
| 1996                           |       | $                                 | 52         |                | $          | -                        |       | $                                                  | 52         |   | $ | - |   | $ | 52 |   | $ | - |   |
| 1997                           |       |                              | 273        |                |       | (44                      | )          |                                               | 229        |   |   | - |   |   | 229 |   |   | - |   |
| 1998                           |       |                              | 817        |                |       | (239                     | )          |                                               | 578        |   |   | - |   |   | 578 |   |   | - |   |
| 1999                           |       |                              | 767        |                |       | (212                     | )          |                                               | 555        |   |   | - |   |   | 555 |   |   | - |   |
| 2000                           |       |                              | 861        |                |       | (207                     | )          |                                               | 654        |   |   | - |   |   | 654 |   |   | - |   |
| 2001                           |       |                              | 1,739      |                |       | (446                     | )          |                                               | 1,293      |   |   | - |   |   | 1,293 |   |   | 182 |   |
| 2002                           |       |                              | 2,435      |                |       | (638                     | )          |                                               | 1,797      |   |   | 5 |   |   | 1,802 |   |   | 104 |   |
| Transition 2003  (1)           |       |                              | 383        |                |       | (104                     | )          |                                               | 279        |   |   | 25 |   |   | 304 |   |   | 119 |   |
| Total 1996 –  2003 Impact |       |                              | 7,327      |                |       | (1,890                   | )          |                                               | 5,437      |   |   | 30 |   |   | 5,467 |   |   | 405 |   |
| 2004                           |       |                              | 1,680      |                |       | (334                     | )          |                                               | 1,346      |   |   | 421 |   |   | 1,767 |   |   | 54 |   |
| 2005                           |       |                              | 806        |                |       | 31                       |       |                                               | 837        |   |   | 556 |   |   | 1,393 |   |   | - |   |
| 2006                           |       |                              | 1,555      |                |       | (279                     | )          |                                               | 1,276      |   |   | 887 |   |   | 2,163 |   |   | 1,153 |   |
|                           |       | $                                 | 11,368     |                | $          | (2,472                   | )          | $                                                  | 8,896      |   | $ | 1,894 |   | $ | 10,790 |   | $ | 1,612 |   |

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Notes:

(1)          Effective January 1, 2003, we changed our fiscalyear end 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.

(2)          Represents previously reported stock-based compensationexpense as determined under APB 25 and used in disclosures pursuant to FAS 123.

Additionally, we haverestated the pro forma expense under Statement of Financial AccountingStandards (“SFAS”) No. 123 in Note 1—“Description of Business and Summary ofSignificant Accounting Policies” to reflect the impact of these adjustments.

The following tables set forth the effects of theadjustments on our Consolidated Balance Sheets as of March 31, 2006 and 2005and our Consolidated Statements of Operations and Consolidated Statements ofCash Flows for the years ended March 31, 2006, 2005 and 2004:

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**CONSOLIDATED BALANCE SHEET DATA**
| **(In thousands, except per share data)** | ** ** | **As of March 31, 2006** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                         | ** ** | **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 |   |
|                                                                    |            |                                              |            |  |  |  |  |  |  |  |  |  |  |

 
| **(In thousands, except per share data)** | ** ** | **As of March 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                         | ** ** | **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 |   |
|                                                                    |            |                                              |            |  |  |  |  |  |  |  |  |  |  |

 

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**CONSOLIDATED STATEMENT OF OPERATIONS DATA**
| **(In thousands, except per share data)** | ** ** | **Fiscal Year Ended March 31, 2006** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **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 |   |

 
| **(In thousands, except per share data)** | ** ** | **Fiscal Year Ended March 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **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 |   |

 

67

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| **(In thousands, except per share data)** | ** ** | **Fiscal Year Ended March 31, 2004** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **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 the adjustments on our CondensedConsolidated Statements of Operations for each of the quarters in fiscal years2006 and 2005 is contained in Note 20 – Quarterly Financial Data (Unaudited).

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**CONSOLIDATED STATEMENT OF CASH FLOWS DATA**
| (In thousands)                                            | ** ** | **Fiscal Year Ended March 31, 2006** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **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 |   |
|                                                                |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |

 
| (In thousands)                                            | ** ** | **Fiscal Year Ended March 31, 2005** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **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 | ) |
|                                                                |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |

 
| (In thousands)                                            | ** ** | **Fiscal Year Ended March 31, 2004** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **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-TermInvestments

Cash, cashequivalents and short-term investments at March 31, 2006 and 2005 consistof 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 |   |

 

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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 of fiscal 2006 we changed thepresentation of our proceeds from sales and maturities of short-terminvestments and purchases of short-term investments in our consolidatedstatements of cash flows. The statements of cash flows presented in thesefinancial statements presents the gross amount of these transactionsduring each of the three years ended March 31, 2006, whereas previouslyreported statements of cash flows presented these activities at a net transactionallevel. As a result, the amounts reported in these financial statements for ourproceeds from sales and maturities of short-term investments and purchasesof short-term investments are higher than previously reported. The change inpresentation does not impact the net proceeds from sales and maturitiesof short-term investments and purchases of short-term investments, ourcash flow from investing activities or our overall change in cash and cashequivalents.

**4.**   Accounts Receivable Allowances
| **(in thousands)**                     | ** ** | **    Balance at      beginning   of period** | ** ** | **    Provisions    ** | ** ** | **    Deductions    ** | ** ** | **Balance at  end of period** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------|------------|
| **Year  ended March 31, 2006**              | ** ** |                                                                                                 |       | ** **                                                     |       |                                                           | ** ** |                                         |       | ** ** |   |   | ** ** |
| Allowance for  Price Protection and Returns |       |                                                                                                 | $          | 46,909                                                         |       |                                                           | $          | 133,756                                      |       |   | $ | (132,442) |   |   | $ | 48,223 |   |
| Allowance for  Co-op Advertising            |       |                                                                                                 | 10,324     |                                                           |       | 33,272                                                         |       |                                         | (35,156)   |   |   | 8,440 |   |
| Allowance for  Doubtful Accounts and Other  |       |                                                                                                 | 887        |                                                           |       | 2,452                                                          |       |                                         | (2,182)    |   |   | 1,157 |   |
| Combined Balance                            |       |                                                                                                 | $          | 58,120                                                         |       |                                                           | $          | 169,480                                      |       |   | $ | (169,780) |   |   | $ | 57,820 |   |
|                                        |       |                                                                                                 |       |                                                           |       |                                                           |       |                                         |       |   |   |   |   |
| **Year  ended March 31, 2005**              | ** ** |                                                                                                 |       | ** **                                                     |       |                                                           | ** ** |                                         |       | ** ** |   |   | ** ** |
| Allowance for  Price Protection and Returns |       |                                                                                                 | $          | 43,608                                                         |       |                                                           | $          | 74,102                                       |       |   | $ | (70,801) |   |   | $ | 46,909 |   |
| Allowance for  Co-op Advertising            |       |                                                                                                 | 6,925      |                                                           |       | 30,739                                                         |       |                                         | (27,340)   |   |   | 10,324 |   |
| Allowance for  Doubtful Accounts and Other  |       |                                                                                                 | 1,893      |                                                           |       | 1,663                                                          |       |                                         | (2,669)    |   |   | 887 |   |
| Combined Balance                            |       |                                                                                                 | $          | 52,426                                                         |       |                                                           | $          | 106,504                                      |       |   | $ | (100,810) |   |   | $ | 58,120 |   |
|                                        |       |                                                                                                 |       |                                                           |       |                                                           |       |                                         |       |   |   |   |   |
| **Year  ended March 31, 2004**              | ** ** |                                                                                                 |       | ** **                                                     |       |                                                           | ** ** |                                         |       | ** ** |   |   | ** ** |
| Allowance for  Price Protection and Returns |       |                                                                                                 | $          | 29,710                                                         |       |                                                           | $          | 88,133                                       |       |   | $ | (74,235) |   |   | $ | 43,608 |   |
| Allowance for  Co-op Advertising            |       |                                                                                                 | 5,640      |                                                           |       | 23,372                                                         |       |                                         | (22,087)   |   |   | 6,925 |   |
| Allowance for  Doubtful Accounts and Other  |       |                                                                                                 | 8,056      |                                                           |       | 9,477                                                          |       |                                         | (15,640)   |   |   | 1,893 |   |
| Combined Balance                            |       |                                                                                                 | $          | 43,406                                                         |       |                                                           | $          | 120,982                                      |       |   | $ | (111,962) |   |   | $ | 52,426 |   |

 

**5.**   Balance Sheet Details

*Inventory.**  *Inventoryat March 31, 2006 and 2005 consists of the 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 |   |

 

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*Property and Equipment.*   Property and equipment atMarch 31, 2006 and 2005 consists of the following (in thousands):
|                                    | ** ** | **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.

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

|                                       | ** ** | **March 31,  2006  As restated(1)** | ** ** | **March 31,  2005  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 |   |

 

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

 

*Other Long-TermLiabilities.**  *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.**   Business Combinations

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;

·       Vigil Games, LLC, locatedin Austin, Texas, a developer of interactive entertainment software for videogame hardware devices.

Goodwill recognized in the above transactions amountedto $4.8 million, none of which is expected to be deductible for income taxpurposes. The preliminary purchase price allocation, including the allocationof goodwill, will be updated as additional information becomes available. Wedid not present pro forma information as these acquisitions were immaterial toour financial position and results of operations.

71

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In 2002, we acquired ValuSoft, Inc. for a totalcost of $14.2 million, which was paid primarily in cash. In addition, we havesince paid the former shareholders of ValuSoft additional consideration in theamount of $7.4 million because ValuSoft reached certain pre-tax income targetsin the three years subsequent to the acquisition. They are still eligible foradditional consideration in the amount of $3.6 million, which may be paid by usin cash or stock, if they reach certain pre-tax income targets over the nexttwo years. Any additional consideration determined to be payable will increasegoodwill in the period such pre-tax income targets are reached. Goodwillrecognized in the original transaction and in the payments of the additionalconsideration has amounted to $19.4 million and is expected to be deductiblefor 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 |   |

 

**8.**   Other Intangible Assets

Intangible assetsinclude licenses, software development and other intangible assets. Intangibleassets are included in other long-term assets, net, except licenses andsoftware development, which are reported separately in the consolidated balancesheets. 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 million and$1.2 million, respectively. Finite-lived other intangible assets are amortized usingthe straight-line method over the lesser of their estimated useful lives or theagreement terms, typically from two to ten years and are assessed forimpairment under SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.”

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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-Term Assets

In addition to other intangible assets See “Note8—Other Intangible Assets,” other long-term assets include our investment inYuke’s. We own less than a 20% interest in a Japanese developer, Yuke’s, whichis publicly traded on the Nippon New Market in Japan. Accordingly, we accountfor this investment under SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”as available-for-sale. Unrealized holding gains and losses are excluded fromearnings and are included as a component of other comprehensive income untilrealized. In fiscal 2006 and 2005, the unrealized holding gains wereapproximately $1.0 million and $3.6 million, respectively. Due to the long-termnature of this relationship, this investment is included in other long-termassets in the consolidated balance sheet. Under separate developmentagreements, Yuke’s creates certain World Wrestling Entertainment wrestlinggames for us.

Other long-termassets as of 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 Stock Transactions

On August 9, 2005, we announced that our Board ofDirectors (“Board”) declared a three-for-two stock split of our shares ofcommon stock to be effected in the form of a 50% stock dividend (the “Dividend”).The Dividend was distributed on September 1, 2005 to stockholders ofrecord as of the close of business on August 19, 2005. Cash was paid inlieu of issuance of fractional shares. The par value of our common stock wasmaintained at the pre-split amount of $0.01. All references in the accompanyingconsolidated financial statements to number of shares, sales price and pershare amounts of our common stock have been retroactively restated to reflectthe increased number of shares of common stock outstanding as of the earliestperiod presented. In addition, stockholders’ equity has been restated to giveretroactive recognition to the Dividend by reclassifying from paid-in capitalto common stock the par value of the additional shares of common stock issuedpursuant to the Dividend. The Dividend did not dilute rights to stockholdersunder the Amended and Restated Rights Agreement between THQ and ComputershareInvestor Services, LLC, as Rights Agent, dated as of August 22, 2001, asamended by the First Amendment 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.

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**11.**   Accumulated Other Comprehensive 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 |   |   |

 

**12.**   Net Income Per Share

The followingtable is a reconciliation of the weighted-average shares used in thecomputation of basic and 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 followingamounts of options and warrants were excluded from the computation of dilutedearnings per share as their exercise prices were in excess of the averagemarket price of the common shares for the periods presented (in thousands,except per share data):
|                                   | ** ** | **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 |   |
|                                   |            |                                                     |            |  |  |  |  |  |  |  |

 

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**13.**   Income Taxes

United States andforeign income before taxes and details of the provision for income tax are asfollows (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 |   |

 

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

 

The differencesbetween the U.S. federal statutory tax rate and our effective tax rate,expressed as a percentage of income before income taxes and minority interest,were as follows: 
| ** **                                                                | ** ** | **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 FinancialStatements”

 

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Deferred incometaxes reflect the net tax effects of temporary differences between the amountsof assets and liabilities for accounting purposes and the amounts used forincome tax purposes. The components of the net deferred income tax asset andliability 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 taxliabilities of $3.6 million and $9.7 million were classified as current andlong-term liabilities, respectively. As of March 31, 2005, net deferredtax liabilities of $6.8 million and $3.8 million were classified as current andlong-term liabilities, respectively. The non-current portion of income taxreceivable is recorded net of an $11.8 million contingent tax liability. Thecontingent tax liability relates to tax positions taken in previously filed taxreturns and similar positions expected to be taken in our current year taxreturns. Moreover, the IRS has commenced a routine examination of our U.S.income tax returns for the fiscal years 2003 and 2004. A portion of thecontingent tax liability relates to the fiscal years under examination. Whilethe ultimate resolution of tax audits involves a degree of uncertainty, webelieve that adequate tax accruals have been provided for any adjustments thatare expected to result for these years.

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

As of March 31, 2006, we have various state netoperating loss carryforwards totaling $17.0 million that expire between 2008and 2013 and foreign net operating loss carryforwards totaling $15.0 millionthat can be carried forward indefinitely. At March 31, 2006, our deferredincome tax asset for net operating loss carryforwards was reduced by avaluation allowance of $3.9 million as compared to $330,000 in the prior fiscalyear. Realization of the deferred tax assets is dependent upon the continuedgeneration of sufficient taxable income prior to the expiration of the netoperating loss carryforwards. Although realization is not assured, managementbelieves it is more likely than not that the net carrying value of the deferredtax asset will be realized.

The tax benefits associated with certain net operatingloss carryovers relate to employee stock options. Pursuant to SFASNo. 109, “Accounting for Income Taxes” (“SFAS No. 109”), net operatinglosses have been reduced by $15.7 million relating to these items which will becredited 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.

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**14.**   Employee Defined Contribution 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-based Compensation

As of March 31, 2006, we utilize two stock optionplans:  the THQ Inc. Amended and Restated1997 Stock Option Plan (the “1997 Plan”) and the THQ Inc. Third Amended andRestated Non-executive Employee Stock Option Plan (the “NEEP Plan”). The 1997Plan provides for the issuance of up to 14,357,500 shares available foremployees, consultants and non-employee directors, and the NEEP plan providesfor the issuance of up to 2,142,000 shares available for non-executiveemployees of THQ of which no more than 20% is available for awards to ournon-executive officers and no more than 15% is available for awards to thenon-executive officers or general managers of our subsidiaries or divisions. Asof March 31, 2006, we had 2,007,949 shares under the 1997 Plan availablefor grant and 237,031 shares under the NEEP Plan available for grant. OnApril 3, 2006 we granted 681,000 options to certain officers of THQ,reducing the amount of options available for grant to 1,564,148.

Stock options granted under the 1997 Plan may beincentive stock options or non-qualified stock options. Stock options may begranted under the 1997 Plan to, in the case of incentive stock options, allemployees (including officers) of THQ; or, in the case of non-qualified stockoptions, all employees (including officers), consultants and non-employeedirectors of THQ. Additionally, under the 1997 Plan, the Company may grantPerformance Accelerated Restricted Stock (“PARS”) or Performance AcceleratedRestricted Stock Units (“PARSUs”) to officers and certain other high-levelemployees of the Company. Other than the right to grant PARS and PARSUs, theNEEP Plan has primarily the same attributes as the 1997 Plan, but participationis reserved for employees who are not executive officers and only non-qualifiedoptions may be granted.

The purchase price per share of common stockpurchasable upon exercise of each option may not be less than the fair marketvalue of such share of common stock on the date that such option is granted.Generally, options granted under these plans become exercisable over threeyears and expire on the fifth anniversary of the grant date. PARS and PARSUsthat have been granted to our officers under the 1997 Plan vest with respect to100% of the shares subject to the award on the fifth anniversary of the grantdate; provided, however, 20% of the shares subject to each award will vest oneach of the first through fourth anniversaries of the grant date if certainperformance targets for the Company are attained each fiscal year. To date, novesting of PARS or PARSUs has been accelerated. PARSUs granted to ournon-employee directors vest one year after their grant date. The fair value ofPARS and PARSUs granted is amortized over the period(s) in which the relatedservices 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 value of the employee stock-basedcompensation granted in the fiscal years ended March 31, 2006, 2005 and2004 was $30.1 million, $23.3 million and $21.4 million, respectively.Additionally, during fiscal 2006 we began issuing PARS and PARSUs. We issued263,786 shares of PARS and 20,250 units of PARSUs with an estimated fair valueof $5.1 million and $0.4 million, respectively, in the fiscal year endedMarch 31, 2006.

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The following table sets forth the weighted-averagegrant-date fair value of options granted during the years 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 |   |

 

The followingtable summarizes 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 prioryears, we have granted stock warrants to third parties in connection with theacquisition of licensing rights for intellectual property. The warrantsgenerally vest upon grant and are exercisable over the term of the warrant. Theexercise price of third-party warrants is equal to their fair market value ofour common stock at the date of grant. No third-party warrants were grantedduring the fiscal year ended March 31, 2006.

In fiscal 2005 we granted 240,000 warrants to thirdparties to purchase up to 240,000 shares of our common stock at an exerciseprice of $13.49 per share in connection with a license agreement that allows usto utilize intellectual property owned by such third parties. The warrantsvested upon grant and have a six-year term. The fair value of the warrants wasdetermined using the Black-Scholes pricing model, assuming a risk-free rate of2.9%, a volatility factor of 67% and the six-year term as noted above. The fairvalue of these warrants was $2.0 million.

In fiscal 2004 we granted 150,000 warrants to a thirdparty to purchase up to 150,000 shares of our common stock at an exercise priceof $10.45 per share in connection with a license agreement that allows us toutilize intellectual property owned by the third party. The warrants vestedupon grant and have a 10-year term. The fair value of the warrants wasdetermined using the Black-Scholes pricing model, assuming a risk-free rate of4.87%, a volatility factor of 87% and the 10-year term as noted above.The fair value of these warrants was $1.4 million.

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 thefair value of the securities on the measurement date. The fair value of eachwarrant is capitalized and amortized to expense when the related product isreleased and the related revenue is recognized. Additionally, as more fullydescribed in Note 1, the recoverability of intellectual property licenses isevaluated on a quarterly basis with amounts determined as not recoverable beingcharged to expense. In connection with the evaluation of capitalizedintellectual property licenses, any capitalized amounts for related third-partywarrants are additionally reviewed for recoverability with amounts determinedas 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.**   Stockholders Rights 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, dated as ofApril 9, 2002 (collectively, the “Rights Agreement”). Pursuant to theRights Agreement, and as adjusted pursuant to 

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Section 11(p) of the Rights Agreement as aresult of the stock splits which occurred on April 9, 2002 and onSeptember 1, 2005, each share of THQ common stock is accompanied byfour-ninths (4/9) of a preferred stock purchase right (“Right”) which entitlesthe registered holder to purchase four nine-thousandths (4/9000) of a share ofSeries A Junior Participating Preferred Stock at an exercise price of$44.44. The Rights become exercisable 10 days after any person or groupacquires, 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 onJune 21, 2010.

Pursuant to the Certificate of Designation, as amended(the “Certificate of Designation”), establishing the Preferred Stock, effectiveas September 1, 2005:  (i) eachshare of Preferred Stock is entitled to quarterly dividends equal to 2,250times the aggregate per share amount of all dividends declared on the commonstock, (ii) each share of Preferred Stock will be entitled to 2,250 voteson all matters submitted to a vote of THQ’s stockholders, (iii) the “adjustmentnumber” (as defined in the Certificate of Designation) used in Section 6of the Certificate of Designation for calculating the liquidation amount forPreferred Stock is 2,250 and (iv) in the event of a consolidation, merger,combination or similar transaction, each share of Preferred Stock will beexchanged or changed into an amount per share equal to 2,250 times the amountof capital stock, securities, cash or other property for which each share ofcommon stock is exchanged or changed. The description of the Rights containedherein does not purport to be complete and is qualified in its entirety byreference to the Rights Agreement and the Certificate of Designation.

**17.**   Agreement with 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 WrestlingEntertainment, Inc. (“WWE”) license. This agreement was amended inJanuary 2002. Our relationship with JAKKS was established to enable THQ todevelop, manufacture, distribute, market and sell video games pursuant to thelicense from WWE. The principal terms of this operating agreement are asfollows:

·       We are responsible forfunding all operations of the venture, including all payments owed to WWE;

·       For the period commencingNovember 16, 1999 and ending June 30, 2006, JAKKS is entitled toreceive a preferred payment equal to the greater of a fixed guarantee, payablequarterly, or specified percentages of the net sales from WWE-licensed games(as defined) in amounts that vary based on the platform. The payment of theseamounts is guaranteed by us. This preferred payment is reflected in ourconsolidated statements of operations in the caption, “Cost of Sales – venturepartner expense.”  We are entitled to theprofits and cash distributions remaining after the payment of these amounts;

·       For periods afterJune 30, 2006, the amount of the preferred payment will be subject torenegotiation between the parties. An arbitration procedure is specified in theevent the parties do not reach agreement; and

·       We are responsible for theday-to-day operations of the venture. We are responsible for development, salesand distribution of WWE-licensed games, and JAKKS is responsible for theapproval process and other relationship matters with 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 throughDecember 31, 2014.

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We are currently involved in litigation with WWE andJAKKS with respect to the license. See “Note 18—Commitments and Contingencies.”  Further, pursuant to the terms of theoperating agreement with JAKKS, we are currently renegotiating the amount ofthe preferred payment for the period subsequent to June 30, 2006, but havenot yet reached an agreement.

**18. Commitments and Contingencies**

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 /  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 and Software Development.*We enter into contractualarrangements with third parties for the rights to intellectual property and forthe development of products. Under these agreements, we commit to providespecified payments to an intellectual property holder or developer. Assumingall 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 wereincluded in both 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 expense was $10.6million, $6.0 million and $4.5 million for the fiscal years endedMarch 31, 2006, 2005 and 2004, respectively.

(4)             *Letters of Credit.* As of March 31, 2006, we were incompliance with all the covenants under our credit facility, had outstandingletters of credit of approximately $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 futureexpenditures relate to the following:

*Manufacturer Indemnification.**  *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.

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*Director Indemnity Agreements.**  *We haveentered into indemnification agreements with the members of our Board toprovide a contractual right of indemnification to our Directors to the extentpermitted by law against any and all liabilities, costs, expenses, amounts paidin settlement and damages incurred by the Directors as a result of any lawsuit,or any judicial, administrative or investigative proceeding in which theDirectors are sued as a result of their service as members of our Board. The indemnification agreements provide specific procedures and timeframes with respect to requests for indemnification and clarify the benefitsand remedies available to Directors in the event of an indemnification request.

*Credit Facility.**  *We havea credit agreement that lasts through November 29, 2006 that provides us amaximum monthly facility amount of $40.0 million for each August, September andOctober, and a maximum monthly facility amount of $12.0 million for every othermonth. The credit facility is unsecured and contains customary financial andnon-financial covenants that require us to maintain specified operating profitsand liquidity and limits our ability to incur additional indebtedness, sellassets, pay cash dividends and enter into certain mergers or acquisitions. Asof March 31, 2006, we were in compliance with all the covenants under thecredit facility and had outstanding letters of credit of approximately $7.6million.

*Litigation.*

*World Wrestling Entertainment.*

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 JAKKSPacific, Inc. (“JAKKS”), THQ, the THQ/JAKKS joint venture, and others,alleging, among other claims, improper conduct by JAKKS, certain executives ofJAKKS, an employee of the WWE and an agent of the WWE in granting the WWE videogame license to the THQ/JAKKS joint venture. The complaint seeks various formsof relief, including monetary damages and a judicial determination that, amongother things, the THQ/JAKKS video game license is void. On March 30, 2005,WWE filed an amended complaint, adding both new claims and THQ’s president andchief executive officer, Brian Farrell, as a defendant. In August 2005,the Court 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 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 bySeptember 2006. Discovery in this action remains stayed. On June 2, 2006,we filed a motion to dismiss the RICO claims against THQ and Brian Farrell. THQbelieves that neither it, nor Brian Farrell, is primarily accused of anywrongdoing in the complaint or the amended complaint, and believes that eitherthere is no basis for terminating the license with THQ, or that THQ will bemade whole by those whose conduct is eventually found to be unlawful. We intendto vigorously protect our rights and, if necessary, pursue appropriate claimsagainst third parties.

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. OnApril 28, 2006, our counsel responded on behalf of the THQ/JAKKS jointventure, asserting, among other things, that the WWE had been aware and hadconsented to the manner of distribution in Japan and the payment of royaltieswith respect to such sales and, in addition, had separately released the jointventure from any claims with respect to such matter as a result of a settlementof an audit of the THQ/JAKKS joint venture. We have also provided documentationto the WWE’s counsel in support of our position. 

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WWE’s counsel has subsequently responded by letter,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 and other 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 WWE licensewould have a negative impact on our future financial results.

See Note 21 for more information regarding legal andregulatory proceedings that arose following March 31, 2006 relating to ourstock option granting practices.

***Other***

Additionally, we are involved in routine litigationarising in the ordinary course of our business. In the opinion of ourmanagement, none of this pending routine litigation will have a materialadverse effect on our consolidated financial condition or results ofoperations.

**19.  Segment and Geographic Information**

We operate in onereportable segment in which we are a developer, publisher and distributor ofinteractive entertainment software for home video game consoles, handheldplatforms and personal computers. The following information sets forthgeographic information on our sales and total assets for the fiscal years endedMarch 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 |   |

 

(1) See Note 2,“Restatement of 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.

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Information aboutTHQ’s net sales by platform for fiscal 2006, 2005 and 2004 is presented below(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.  Quarterly Financial Data (Unaudited)**

We have restated our consolidated financial statementsfor the fiscal years ended March 31, 2006 and 2005 to record additionalnon-cash stock-based compensation and related tax accruals resulting from stockoptions granted during fiscal years 1996 to 2006 that were incorrectlyaccounted for under generally accepted accounting principles in the UnitedStates (See Note 2).  The following tablesummarizes the quarterly impact of these adjustments on our consolidatedstatements of operations and our consolidated balance sheets (in thousands,except per share amounts):

***Twelve Months Ended March 31, 2006***
|                                                    | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **  As restated  ** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|----------------------------------------------|------------|
| **Quarter  Ended June 30, 2005**                   |       |                             |       |            |       |                                         |       |   |   |   |
| 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 |   |

 

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|                                                    | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **  As restated  ** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|----------------------------------------------|------------|
| **Quarter  Ended September 30, 2005**              | ** ** |                             | ** ** | ** **      |       | ** **                                   | ** ** |   | ** ** | ** ** |
| 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 |   |

 
|                                                    | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **  As restated  ** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|----------------------------------------------|------------|
| **Quarter  Ended December 31, 2005**               | ** ** |                             | ** ** | ** **      |       | ** **                                   | ** ** |   | ** ** | ** ** |
| 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 |   |

 
|                                                    | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **  As restated  ** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|----------------------------------------------|------------|
| **Quarter  Ended March 31, 2006**                  | ** ** |                             | ** ** | ** **      |       | ** **                                   | ** ** |   | ** ** | ** ** |
| 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 |   |

 

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| (In thousands)                              | ** ** | **As of June 30, 2005** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                       | ** ** | **As previously  reported**            | ** ** | **Adjustments** | ** ** | **  As restated  ** | ** ** |
| Income taxes  receivable                         |       |                                        | $          | 15,700 |   |   | $ | (923 | ) |   | $ | 14,777 |   |
| Total current  assets                            |       |                                        | 537,895    |   |   | (923 | ) |   | 536,972 |   |
| Total assets                                     |       |                                        | 763,506    |   |   | (923 | ) |   | 762,583 |   |
| Accrued and  other current liabilities           |       |                                        | 79,462     |   |   | 870 |   |   | 80,332 |   |
| Total current  liabilities                       |       |                                        | 129,094    |   |   | 870 |   |   | 129,964 |   |
| Deferred income  taxes, net of current portion   |       |                                        | 4,466      |   |   | (516 | ) |   | 3,950 |   |
| Additional  paid-in capital                      |       |                                        | 359,262    |   |   | 7,621 |   |   | 366,883 |   |
| Retained  earnings                               |       |                                        | 183,878    |   |   | (8,898 | ) |   | 174,980 |   |
| Total  stockholders’ equity                 |       |                                        | 556,951    |   |   | (1,277 | ) |   | 555,674 |   |
| Total liabilities and  stockholders’ equity |       |                                        | 763,506    |   |   | (923 | ) |   | 762,583 |   |
|                                                  |            |                                             |            |  |  |  |  |  |  |  |  |  |  |

 
| (In thousands)                              | ** ** | **As of September 30, 2005** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **As previously  reported**                 | ** ** | **Adjustments** | ** ** | **  As restated  ** | ** ** |
| Income taxes  receivable                         |       |                                             | $          | 20,542 |   |   | $ | (1,553 | ) |   | $ | 18,989 |   |
| Total current  assets                            |       |                                             | 538,323    |   |   | (1,553 | ) |   | 536,770 |   |
| Total assets                                     |       |                                             | 771,494    |   |   | (1,553 | ) |   | 769,941 |   |
| Accrued and  other current liabilities           |       |                                             | 91,283     |   |   | 1,141 |   |   | 92,424 |   |
| Total current  liabilities                       |       |                                             | 132,883    |   |   | 1,141 |   |   | 134,024 |   |
| Deferred income  taxes, net of current portion   |       |                                             | 4,466      |   |   | (467 | ) |   | 3,999 |   |
| Additional  paid-in capital                      |       |                                             | 378,113    |   |   | 7,194 |   |   | 385,307 |   |
| Retained  earnings                               |       |                                             | 182,463    |   |   | (9,421 | ) |   | 173,042 |   |
| Total  stockholders’ equity                 |       |                                             | 573,555    |   |   | (2,227 | ) |   | 571,328 |   |
| Total liabilities and  stockholders’ equity |       |                                             | 771,494    |   |   | (1,553 | ) |   | 769,941 |   |
|                                                  |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |

 
| (In thousands)                              | ** ** | **As of December 31, 2005** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                       | ** ** | **As previously  reported**                | ** ** | **Adjustments** | ** ** | **  As restated  ** | ** ** |
| Income taxes  receivable                         |       |                                            | $          | 6,601 |   |   | $ | (2,090 | ) |   | $ | 4,511 |   |
| Total current  assets                            |       |                                            | 645,631    |   |   | (2,090 | ) |   | 643,541 |   |
| Total assets                                     |       |                                            | 882,843    |   |   | (2,090 | ) |   | 880,753 |   |
| Accrued and  other current liabilities           |       |                                            | 134,674    |   |   | 1,295 |   |   | 135,969 |   |
| Total current  liabilities                       |       |                                            | 184,013    |   |   | 1,295 |   |   | 185,308 |   |
| Deferred income  taxes, net of current portion   |       |                                            | 4,466      |   |   | (560 | ) |   | 3,906 |   |
| Additional  paid-in capital                      |       |                                            | 389,669    |   |   | 7,255 |   |   | 396,924 |   |
| Retained  earnings                               |       |                                            | 230,046    |   |   | (10,080 | ) |   | 219,966 |   |
| Total  stockholders’ equity                 |       |                                            | 632,623    |   |   | (2,825 | ) |   | 629,798 |   |
| Total liabilities and  stockholders’ equity |       |                                            | 882,843    |   |   | (2,090 | ) |   | 880,753 |   |
|                                                  |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |

 

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***Twelve Months Ended March 31, 2005***
|                                                    | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **  As restated  ** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|----------------------------------------------|------------|
| **Quarter  Ended June 30, 2004**                   |       |                             |       |            |       |                                         |       |   |   |   |
| 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 |   |

 
|                                                    | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **  As restated  ** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|----------------------------------------------|------------|
| **Quarter  Ended September 30, 2004**              | ** ** |                             | ** ** | ** **      |       | ** **                                   | ** ** |   | ** ** | ** ** |
| 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 |   |

 
|                                                    | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **  As restated  ** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|----------------------------------------------|------------|
| **Quarter  Ended December 31, 2004***              | ** ** |                             | ** ** | ** **      |       | ** **                                   | ** ** |   | ** ** | ** ** |
| 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 |   |

 

* For the quarter endedDecember 31, 2004, net income included a $7.8 million benefit for researchand development income tax credits claimed for prior years.

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|                                                    | ** ** | **As previously  reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|----------------------|------------|
| **Quarter  Ended March 31, 2005**                  | ** ** | ** **                       | ** ** | ** **      | ** ** | ** **           | ** ** |
| 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               |       |

 
| (In thousands)                              | ** ** | **As of June 30, 2004** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                       | ** ** | **As previously  reported**            | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Income taxes  receivable                         |       | $                                           | 5,860      |   | $ | (1,635 | ) | $ | 4,225 |   |
| Total current  assets                            |       | 386,412                                     |       | (1,635 | ) | 384,777 |   |
| Total assets                                     |       | 542,549                                     |       | (1,635 | ) | 540,914 |   |
| Accrued and  other current liabilities           |       | 67,976                                      |       | 637 |   | 68,613 |   |
| Total current  liabilities                       |       | 85,556                                      |       | 637 |   | 86,193 |   |
| Deferred income  taxes, net of current portion   |       | 1,149                                       |       | (651 | ) | 498 |   |
| Additional  paid-in capital                      |       | 323,429                                     |       | 6,070 |   | 329,499 |   |
| Retained  earnings                               |       | 121,147                                     |       | (7,691 | ) | 113,456 |   |
| Total  stockholders’ equity                 |       | 453,843                                     |       | (1,621 | ) | 452,222 |   |
| Total liabilities and  stockholders’ equity |       | 542,549                                     |       | (1,635 | ) | 540,914 |   |
|                                                  |            |                                             |            |  |  |  |  |  |  |  |

 
| (In thousands)                              | ** ** | **As of September 30, 2004** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **As previously  reported**                 | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Income taxes  receivable                         |       | $                                                | 11,251     |   | $ | (1,744 | ) | $ | 9,507 |   |
| Total current  assets                            |       | 368,005                                          |       | (1,744 | ) | 366,261 |   |
| Total assets                                     |       | 519,312                                          |       | (1,744 | ) | 517,568 |   |
| Accrued and  other current liabilities           |       | 54,707                                           |       | 651 |   | 55,358 |   |
| Total current  liabilities                       |       | 70,388                                           |       | 651 |   | 71,039 |   |
| Deferred income  taxes, net of current portion   |       | 1,082                                            |       | (714 | ) | 368 |   |
| Additional  paid-in capital                      |       | 318,388                                          |       | 6,300 |   | 324,688 |   |
| Retained  earnings                               |       | 114,793                                          |       | (7,981 | ) | 106,812 |   |
| Total  stockholders’ equity                 |       | 443,046                                          |       | (1,681 | ) | 441,365 |   |
| Total liabilities and  stockholders’ equity |       | 519,312                                          |       | (1,744 | ) | 517,568 |   |
|                                                  |            |                                                  |            |  |  |  |  |  |  |  |

 
| (In thousands)                            | ** ** | **As of December 31, 2004** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | **As previously  reported**                | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Income taxes  payable                          |       | $                                               | 13,015     |   | $ | 1,814 |   | $ | 14,829 |   |
| Accrued and  other current liabilities         |       | 115,789                                         |       | 724 |   | 116,513 |   |
| Total current liabilities                      |       | 174,321                                         |       | 2,538 |   | 176,859 |   |
| Deferred income  taxes, net of current portion |       | 1,388                                           |       | (717 | ) | 671 |   |
| Additional  paid-in capital                    |       | 325,042                                         |       | 6,451 |   | 331,493 |   |
| Retained  earnings                             |       | 177,728                                         |       | (8,272 | ) | 169,456 |   |
| Total stockholders’  equity               |       | 517,570                                         |       | (1,821 | ) | 515,749 |   |
|                                                |            |                                                 |            |  |  |  |  |  |  |  |

 

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Due to rounding and reclassifications, some of thefigures above may differ slightly from the 10-Q’s previously filed.  See Note 1, “Description of Business andSummary of Significant Accounting Policies” for description of certainreclassifications made to the prior period consolidated financial statements toconform to the current period consolidated financial statements.

**21. Subsequent Events Related to the Special Committee and CompanyInvestigations and the Restatement**

*SEC Informal Inquiry.*  On August 4, 2006, we received an informal inquiryfrom the Securities and Exchange Commission (“SEC”) requesting certaindocuments and information relating to our stock option grant practices fromJanuary 1, 1996 to the present.  Wepublicly announced this inquiry on August 7, 2006.  Prior to August 4, 2006, we were alreadyconducting an internal review of our historical stock option grant practiceswith the assistance of outside counsel. We initiated the internal reviewfollowing extensive news coverage and analyst reports about the optionpractices of numerous companies across several different industries.

Upon receipt of thenotice of informal inquiry from the SEC, our Board of Directors (the “Board”)formed a special committee of outside directors (“Special Committee”) toconduct an independent and comprehensive investigation of our stock optionpractices and to oversee our response to the SEC.  The Special Committee retained independentoutside legal counsel and forensic accountants (“Investigative Team”) to aid inits investigation.

The Special Committee concluded its investigation andreported its findings to the full Board on December 2, 2006.  The Special Committee concluded that therewas no evidence of fraud or misconduct by any person with respect to theCompany’s historical stock option grant practices.  The Special Committee identified instanceswhere documentation of certain option grants was lacking. The Special Committeealso determined that an incorrect measurement date for financial accountingpurposes was used on a number of occasions. 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 SpecialCommittee and its Investigative Team reported the Special Committee’s findingsand remedial measures to the SEC on January 8, 2007.  We do not know when this inquirywill be resolved or what actions, if any, the SEC may take as a result of thisinquiry.

*Listing on the NASDAQ Stock Market*.  On November 13, 2006, we filed a Form 12b-25with the SEC to report that we would not timely file our Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. On November 22, 2006 weannounced that we received a NASDAQ Staff Determination letter on November 16, 2006indicating that, as a result of our inability to timely file the Form 10-Q, wewere not in compliance with the requirements for the continued listing of ourcommon stock as set forth in NASDAQ Marketplace Rule 4310(c)(14), and that ourcommon stock is, therefore, subject to delisting from the NASDAQ Global SelectMarket.  We requested and have beengranted a hearing before a NASDAQ Listing Qualifications Panel (“Panel”) toreview the Staff Determination.  Our oralhearing is scheduled for February 1, 2007 and the delisting action has beenstayed pending a final written decision by the Panel.  We intend to be in compliance with theapplicable NASDAQ Marketplace Rules prior to the hearing date.  However, there can be no assurance that thePanel will grant the Registrant’s request for continued listing.

*Lawsuits related to our historical stock optiongranting practices*.** On August 25, 2006, a shareholder actioncaptioned *Ramsey v. Haller et al.* was filedagainst certain of our current and former officers and directors in theCalifornia Superior Court, Los Angeles County. The complaint alleges, among other things, purported improprieties inour issuance of stock options, breach of fiduciary duty and unjust enrichment.  We have been served with one other shareholderderivative complaint, based on substantially the same allegations, which wasfiled in California federal court. A third shareholder derivative complaint,filed in California Superior Court, Los Angeles County, has not yet been servedon the defendants, but we expect to accept service shortly, Although litigationis subject to inherent uncertainties, we do not believe the results of thesepending actions will, individually or in the aggregate, have a material adverseimpact on our consolidated financial position or results of operations.

*Nonqualified deferred compensation underSection 409A of the Internal Revenue Code*.  Options determined to have been granted withan exercise price below the fair market value of our common stock on the actualgrant date and vesting subsequent to December 2004 result in nonqualifieddeferred compensation for purposes of Section 409A of the Internal RevenueCode, and holders are subject to an excise tax on the value of the options inthe year in which the

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options 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 underSection 409A. All of the affected options pertained to grants made to non-executiveemployees.

In order to mitigate the unfavorable personal taxconsequences under Section 409A, in December 2006 the Compensation Committee ofour Board of Directors, pursuant to the terms and conditions of ourcompensatory stock plans under which our stock options had been granted,unilaterally corrected the exercise price of affected options that remainedoutstanding to increase the exercise price to the fair market value of ourcommon stock on the revised measurement date. In January 2007, the Compensation Committee determined to give eachaffected option holder, subject to certain conditions, a cash payment equal tothe aggregate difference between the initial exercise price and the increasedexercise price of each holder’s affected options (“Cash Payment”).  We estimate the total Cash Payment will beapproximately $2.4 million.  We accountedfor the impact of the corrected options as a stock option modification underFAS 123R.  As a result of this partialcash settlement of these options and the application of the modificationaccounting, in the three months ended December 31, 2006, we recognized $0.7million in additional compensation cost due to the increase in the fair valueof these options and $0.6 million in accelerated compensation cost.

We also plan to compensate individuals who hadexercised affected options prior to December 2006 for excise tax liability andcertain other adverse consequences under Section 409A.  Based on our plan, we recognized additionalcompensation expense of $0.9 million in the three months ended December 31,2006.

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**Item 9.    Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

None.

**Item 9A.**                 Controls and Procedures

(a) *Definition andlimitations of disclosure controls*.  Our disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) are controlsand other procedures that are designed to ensure that information required tobe disclosed in our reports filed under the Exchange Act, such as this report,is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms. 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 evaluatesthese controls and procedures on an ongoing basis to determine if improvementsor modifications are necessary.

There are inherent limitations to the effectiveness ofany system of disclosure controls and procedures.  These limitationsinclude the possibility of human error, the circumvention or overriding of thecontrols and procedures and reasonable resource constraints.  In addition,because we have designed our system of controls based on certain assumptions,which we believe are reasonable, about the likelihood of future events, oursystem of controls may not achieve its desired purpose under all possiblefuture conditions.  Accordingly, our disclosure controls and proceduresprovide reasonable assurance, but not absolute assurance, of achieving theirobjectives.

(b) *Evaluation ofdisclosure controls and procedures*.  In connection with theoriginal filing of our annual report for the year ended March 31, 2006 of Form10-K, our management, with the participation of our Chief Executive Officer andChief Financial Officer, evaluated the effectiveness of our disclosure controlsand procedures and our internal control over financial reporting as of March31, 2006 and, based on this evaluation, had previously concluded that ourdisclosure controls and procedures were effective as of March 31, 2006.  As a result of the findings of the SpecialCommittee as well as our internal review of our historical stock optionpractices and our need to restate our fiscal 2006, 2005 and 2004 consolidatedfinancial statements, as described in the “Explanatory Note” immediatelypreceding Part I, Item 1 and in Note 2, “Restatement of Consolidated FinancialStatements” in Notes to Consolidated Financial Statements of this Amendment No.2 on Form 10-K/A, management re-evaluated the effectiveness of our disclosurecontrols and procedures and our internal control over financial reporting as ofMarch 31, 2006 and determined that there was a material weakness, as more fullydescribed below in “Management’s Report on Internal Control Over Financial Reporting(restated)”.  For these reasons, weconcluded that our disclosure controls and procedures and our internal controlover financial reporting were not effective as of March 31, 2006.  We have disclosed this conclusion to theAudit Committee and to our independent registered public accountants.

**Management Report on Internal Control Over FinancialReporting (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 ofMarch 31, 2006 based on the control criteria established in a reportentitled *Internal Control—*

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*Integrated Framework*,issued by the Committee of Sponsoring Organizations of the TreadwayCommission.   A material weakness is acontrol deficiency, or combination of control deficiencies, that results in morethan a remote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected.

In Management’s Report on Internal Control OverFinancial Reporting included in the Annual Report on Form 10-K for the fiscalyear ended March 31, 2006, we had previously concluded that the Company’sinternal control over financial reporting was effective as of March 31,2006.  In connection with the restatementdiscussed under the heading “Explanatory Note” immediately preceding Part I,Item 1 and in Note 2, “Restatement of Consolidated Financial Statements” inNotes to Consolidated Financial Statements, we have subsequently concluded thatthe material weakness described below existed as of March 31, 2006 and as aresult, the Company’s internal control over financial reporting was noteffective as of March 31, 2006. Accordingly, Management’s Report on Internal Control Over FinancialReporting has been restated.

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

·                  We did not design and implement controlsnecessary to provide reasonable assurance that the measurement date for stockoption 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;

·                  We failed to ensure that actions of theCompensation Committee meetings were thoroughly and timely documented; and

·                  We failed to ensure that managers and otherpersonnel involved in the stock option grant process understood theconsequences of timely approval of finalized employee grant lists.

The registeredindependent public accounting firm of Deloitte & Touche LLP, asauditors of the Company’s consolidated financial statements, has issued anattestation 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 of Material 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:

·                  Limiting the granting of equity-basedcompensation to the Board of Directors or the Compensation Committee;

·                  Establishing a set day each year forequity grants to non-employee members of the Board of Directors;

·                  Enhancing processes surroundingCompany-wide annual grants and new hire grants, especially pertaining toadvance planning, approval timelines, documentation and communication;

·                  Immediately documenting CompensationCommittee meetings where stock option grants are approved;

·                  Implementing written policies, proceduresand controls related to stock option grant practices; and

·                  Providing regular training to our accounting, legaland stock administration personnel regarding equity grant accounting rules andproper procedures.

Management alongwith our Board and Compensation Committee is in the process of implementingsuch remedial measures.

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(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 affected our internal control over financialreporting.  The Project Management Systemis a process improvement initiative intended to strengthen the overall designand operating effectiveness of our financial reporting controls and is not inresponse to an identified internal control deficiency.  Other than the Project Management Systemimplementation, there were no changes in our internal control over financialreporting that occurred during our last fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, our internal control overfinancial reporting.  We have continuedto implement additional components of the Project Management System that arereasonably likely to have a material affect on our internal control overfinancial reporting in the first quarter of fiscal 2007.

**Item 9B.**                 Other Information

None.

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders of THQInc.,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 *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internal controlover financial reporting 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 reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and(3) provide reasonable assurance regarding prevention or timely detectionof unauthorized acquisition, use, or disposition of the company’s assets thatcould 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 of compliancewith 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 March31, 2006. The Company subsequently identified a material misstatement in itsannual financial statements, which caused such annual financial statements tobe restated. 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.

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

93

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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 financial reportingas of March 31, 2006, is fairly stated, in all material respects, based onthe 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 *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), the Company’sconsolidated balance sheet as of March 31, 2006 (as restated) and therelated consolidated statements of operations, stockholders’ equity and cashflows for the year then ended. Our report dated June 6, 2006 (January 19,2007 as to the effects of the matters discussed in Note 21 and the effects ofthe restatement discussed in Note 2 and May 30, 2007 as to Note 4 and theinterim balance sheet data presented in Note 20) expressed an unqualifiedopinion on those financial statements.

**DELOITTE &TOUCHE LLP**Los Angeles, California

June 6, 2006(January 19, 2007 as to the effect of the material weakness described inManagement’s Report on Internal Control 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 was filed on June 21, 2006 (the “Proxy Statement”):

·       Information regardingdirectors who are nominated for election is included under the caption “ProposalNumber 1—Election of Directors;”

·       Information regardingexecutive officers is included under the caption “Executive Officers;”

·       Information related toinvolvement in certain legal proceedings is included under the caption “Involvementin Certain Proceedings;”

·       Information regarding theaudit committee and its financial expert is included under the caption “Committeesof the Board of Directors;” and

·       Information regardingSection 16 compliance is included under the caption “Section 16(a) BeneficialOwnership Reporting Compliance.”

Information regarding our code of ethics applicable toour directors, principal executive officer, principal financial officer,principal accounting officer, and other senior financial officers appears underthe caption “Charters, Code of Ethics, and Code of Business Conduct and Ethics.”

**Item 11.***                  *ExecutiveCompensation

The information required under this Item relating toexecutive compensation will be included in the Proxy Statement under theheading “Executive Officers and Executive Compensation,” and is incorporatedherein by reference.

**Item 12.***                  *SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

The information required by Item 12 related tosecurities authorized for issuance under equity compensation plans is includedin Item 5 herein. The information required by Item 12 related to securityownership of certain beneficial owners and management is incorporated herein byreference to the information in the Proxy Statement under the caption “SecurityOwnership of Certain Beneficial Owners and Management.”

**Item 13.***                  *CertainRelationships and Related Transactions

There were no reportable business relationships,transactions with management, or indebtedness of management during the fiscalyear ended March 31, 2006.

**Item 14.***                  *PrincipalAccounting Fees and Services

The information regarding principal accounting feesand services and the Company’s pre-approval policies and procedures for auditand non-audit services provided by the Company’s independent accountant isincorporated by reference to the Proxy Statement under the caption “ProposalNumber 4—Ratification of Independent Registered Public Accounting Firm.”

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**PART IV**

**Item 15.**                   Exhibits and Consolidated FinancialStatement Schedules

***(a) FinancialStatements and Financial Statement Schedules***

The followingfinancial statements of the Company are included in Part II Item 8:
|                                                                                                                                                                                              | ** ** | **Page** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING  FIRM                                                                                                                                     |       | 53       |
|                                                                                                                                                                                         |       |     |
| CONSOLIDATED  FINANCIAL STATEMENTS, AS RESTATED                                                                                                                                              |       |     |
|                                                                                                                                                                                         |       |     |
| Consolidated balance sheets, as  restated—March 31, 2006 and 2005                                                                                                                  |       | 54       |
|                                                                                                                                                                                         |       |     |
| Consolidated statements of operations, as restated,  for the fiscal years ended March 31, 2006, 2005 and 2004                                                                           |       | 55       |
|                                                                                                                                                                                         |       |     |
| Consolidated statements of stockholders’ equity, as  restated, for the fiscal years ended March 31, 2006, 2005 and2004           |       | 56       |
|                                                                                                                                                                                         |       |     |
| Consolidated statements of cash flows, as restated,  for the fiscal years ended March 31, 2006, 2005 and 2004                                                                           |       | 57       |
|                                                                                                                                                                                         |       |     |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                                                                                   |       | 58       |

 

***(b) Exhibits.***

The followingexhibits are filed herewith or are incorporated by reference to exhibitspreviously filed with the SEC. We will furnish copies of the exhibits for areasonable 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).                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 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                                                                                                                                                                                                                                                                  |

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| Exhibit   Number | ** ** | **Title**                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       | (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”)).                                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 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                                                                 |

 

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| Exhibit   Number | ** ** | **Title**                                                                                                                                                                                                                                                                                                                                                                                                               |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       | 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).                                                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 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                                                                                                                                                                                                                                                                                                                                  |

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| Exhibit   Number | ** ** | **Title**                                                                                                                                                                                                                                                                                                                          |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       | 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).                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                                               |
| 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                                                                                                                                                                                                                           |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                     |
| #      |   | Management contract of compensatory plan or  arrangement                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                     |
| +      |   | Portions have been omitted and filed separately with  the Securities and Exchange Commission pursuant to a request for confidential  treatment in accordance with Rule 24b-2 under the Securities  Exchange Act of 1934, as amended |

 

99

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.
| Dated: May 30, 2007 | THQ INC. |
|---------------------|----------|
|                | By:      | /s/ BRIAN J.  FARRELL |   |
|                |     | Brian J. Farrell, Chairman of the Board,   President and Chief Executive Officer |

 
| Dated: May 30, 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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